The core ideas of economics are extremely counterintuitive and are
not accepted by most people. Thus economists face a difficult challenge
in teaching the subject to non-economists. As an analogy, quantum
mechanics seems very counterintuitive to me, and thus I have great
difficulty in understanding the subject. It’s hard work teaching basic
economics.
Most people find the key ideas of behavioral economics to be more
accessible than classical economic theory. If you tell students that
some people have addictive personalities and buy things that are bad for
them, they’ll nod their heads. And it’s certainly not difficult to
explain procrastination to
college students. Ditto for the
claim that investors might be driven by emotion, and that asset prices
might soar on waves of “irrational exuberance.”
Thus my first objection
to the Atlantic piece is that it focuses too much on the number of
pages in a principles textbook that are devoted to behavioral
economics. That’s a misleading metric. One should spend more time on
subjects that need more time, not things that people already believe.
The article suggests that behavioral economics could be very useful
to policymakers. I see little evidence for this claim. The author
mentions the housing bubble, but how would behavioral economics have
helped policymakers in that scenario?
If even the “masters of the
universe” on Wall Street struggle to come up with behavioral finance
theories capable of beating the market, does anyone seriously believe
that bureaucrats in Washington will be able to “market time” well enough
to spot asset price bubbles and regulate accordingly? If so, we should
provide them with a nest egg to invest and tell them that from now on
they’ll earn no salary, rather they’ll have to survive on their profits
from shorting asset price bubbles.
Seriously, the problems in 2008 were due to things like moral hazard
in the financial system and unstable NGDP growth, which are well covered
by conventional, non-behavioral economics. And even if housing prices
in 2006 were a bubble, it certainly didn’t cause the 2008 recession.
The Fed could have offset the effects of the housing slump with easier
money in 2007 and 2008.
Politicians already tend to believe behavioral economic theories.
Indeed there are many public policies that are almost entirely based on
behavioral economics, most notably the war on drugs.
Politicians
believe that people foolishly consume addictive drugs, which is why they
have enacted laws that led to the imprisonment of 400,000 Americans in
an attempt to stop this “irrational behavior”. Has it worked?
Behavioral theories are sometimes used to justify policies that
encourage saving. And indeed some companies now make the adoption of a
company pension the default option for newly hired employees.
Unfortunately, our government actually has a policy of discouraging
saving.
Behavioral economics tells us that public policy should be more
pro-saving, but then so does conventional economics.
Whenever I speak with non-economists, they almost always seem more
enthusiastic when the discussion comes around to behavioral economics.
“That’s what economists should focus on!” They all seem to think that
economists assume too much rationality, and that we should switch to a
more behavioral approach. But here’s the problem.
Non-economists also
tend to reject the central ideas of basic economics, and for reasons
that are not well justified. For the economics profession, our “value
added” comes not from spoon feeding behavioral theories that the public
is already inclined to accept, rather it is in teaching well-established
basic principles of which the public is highly skeptical. Thus we should try to discourage people from believing in the following popular myths:
1. People don’t respond very strongly to economic incentives. (I.e., the demand for life-saving drugs is very inelastic.)
2. Imported goods, immigrant labor, and automation all tend to increase the unemployment rate.
3. Most companies have a lot of control over prices. (I.e. oil companies set prices, not “the market”.)
4. Policy disputes over taxes and regulations are best thought of in terms of who gains and who loses.
5. Experts are smarter than the crowd.
6. Speculators make market prices more unstable.
7. Price gouging hurts consumers.
8. Rent controls help tenants.
These myths are all widely believed by the general public.
Teaching
behavioral economics is not a good way to get people to “think like an
economist”, indeed it gets in the way. Our primary goal should not be
to add new information, it should be to have people
unlearn false ideas
about the world. I’m not knowledgeable enough to have a good overview
of the utility of behavioral economics. But even if it is useful it
doesn’t really belong in a principles of economics course, except as a
way of briefly acknowledging that the rational choice model is a useful
fiction and not a perfect description of human behavior. We first need
to teach basic economic principles.
That doesn’t mean that I agree with the way that economics majors are
currently being taught. Our intermediate level courses are far too
theoretical; they waste students’ time on lots of minor theories that
would only be useful for people planning to do graduate work in
economics. (Most students do not.) Too many homework problems with
Cobb-Douglas utility, Hicksian demand, marginal rates of substitution,
Giffen goods, gross substitutes, indifference curves, etc. Some of that
is appropriate, but all economics courses should focus heavily on
applied economics. Outside of grad school, every course should be
taught as if it’s the last time students will ever encounter those
theories,
because it usually is. Just teach enough theory for students to handle the applied courses in their major.
When I was young, an
intermediate micro textbook by Deirdre McCloskey
was less mathematical than many current books, and did a nice job of
providing an interesting set of applications. When I look at what young
economics students are forced to learn today, I feel sorry for the
millennials.
Indeed we’d probably be better off using principles texts for our
intermediate economics courses. Teach out of the exact same book as in
the principles courses, but do so at a higher intellectual level. Just
as a literary scholar might re-read Hamlet 50 times, each time gaining a
deeper understanding."