"Reintroducing Macroeconomics": A Review

As promised, here is my review of Steven Cohn's book: "Reintroducting Macroeconomics, A Critical Approach."

So that you my reader can understand any biases I may have, I offer up a brief background of my thinking as a student of Economics:

As an undergrad, the textbooks for my classes were largely Classical-Keynesian Synthesis in nature, while most of my professors had a very obvious laissez-faire, classical, bent to them. I remember noting to myself early on that there appeared to be a direct correlation to how much math was used in the class to how 'classical' the professor seemed. As it was my game theory professor was the most hardline: every sentence he spoke had the word "rational" in it - and whenever he said the word "irrational" his lips would curl and nostrils would tighten as if he were smelling a skunk.

Here is a quote from my professor, as best as I can recall, from the very first econ class I ever took:

"Economics is about how selfish individuals make decisions under conditions of scarcity. Selfishness is not a bad thing - being selfish makes everyone better off..."

Even in those days I can remember thinking that my professors all had severe bias issues and whenever 'gains from trade' or perfect markets etc. were discussed I remember spending hours and hours later at home trying to rationalize what I had learned with reality. By the time I graduated, I had chosen a personal middle-ground - not quite classical and not quite Keynesian (at the time, those were the only choices I thought I had). When debating with friends though I would always defend the classical position - because it was the one that I knew the best - it was the one I paid to learn - so I felt in defending it, I was defending my decision to learn Economics.

In grad school, most of my macro classes were from a New Classical bent, with real business cycles and dynamic theory based on intergenerational models of perfectly rational agents. Assumptions were just that - and were never discussed. My grad schooling taught me alot about econometrics, simulation economics, and in-depth classical thought, but it also only served to justify my growing opinion that Economics is a growing failure as an authentic science.

Over the last few years I have drifted more and more away from classical ideas taught me throughout my economics education. I still believe much can be learned from neoclassical economics, but ever since that first undergrad class, I've found true scientific rigor to be lacking. Economics classes always seemed like a secret society of conservatives - an indoctrination built on assumptions more than on inquiry and open debate. Certain other fields never seemed any better (the political science department was filled with die-hard liberals that never bothered to see the other side as well), but I had always hoped that Economics would grow to be more holist: to include thoughts of politics, psychology, sociology, etc. But it seems to have grown more and more sheltered since I started my schooling.

As my longing for more holist ideas have grown, so has my thirst to learn more of these ideas. As such, I've been paying closer attention to thoughts espoused by the post-autistics, the post-keynesians, and the behavioral economists.... I purchased Steven Cohn's book so that my students might not have to deal with the same internal struggle I dealt with regarding economic thought. With that, here is my short review:

As an introductory textbook (which is what it espouses to be - either as a supplement to a mainstream book, or as a book for independent study), it fails. First, the book spends too much time denigrating mainstream texts, and not enough time being mainstream's alternative. As such, the text mentions how market failures or group-think can prevent nice long-run market outcomes, or how AD-AS models are often inadequate, but it spends little time presenting a coherant and detailed counterargument. Instead it presents a hodgepodge of arguments from different divisions of heterodox economics: Marxism, feminism, post-keynesian, institutionalist.... Ordinarily that would be good (afterall the whole point of the book is to present economics more holistically), but the problem is, due to space constraints, it makes the book's arguments seem weak, the feeling of being 'all over the place, and more argumentative. Perhaps a more narrow focus on a handful of macrotopics would have been better....

Another dissapointing feature are the endnotes. Chapters end with pages and pages of endnotes(footnotes) - often time more interesting than the text itself. This again is an obvious example of how the author wrote too broadly and felt the need to condense his thought on many topics. I hate endnotes - especially when they belong in the body of the text.

The final reason this fails as a textbook is the lack of visual interest - there are only a couple graphs and they are poor quality. The book is written in book/novel format and would and should be an instant turnoff to most introductory undergrads.

Having said that, some more interested and thoughtful students will find this book insightful. It does a great job of singling out mainstream assumptions and showing how those assumptions can and often fail - and (as mentioned, too briefly) discusses the results of how the macroeconomy differs as those assumptions fail.

Also, the author picks up on what I feel is the major problem with mainstream texts - the tendency to "note but ignore" issues with their assumptions, and markets. In the end, the point of the book works, and that point is that mainstream economics fails to offer a truly holist attitude to economics, and it fails to have an open dialogue with its students, preferring to offer a skewed picture of the world for the sake of simplicity. I view this, however, as a hastily put-together, though useful, working document of heterodoxy. Hopefully one day a more appealing text will arrive on scene.

Stock Market Ups and Downs

Mises Institute has an interesting blog on last week's stock market volatility and dump.

My only concern is that the title of the blog is "The one question you must never ask an economist." However, I don't believe he ever lets the reader in on the question he has in mind.

So I thought I'd offer up my own suggestion:

"How do your assumptions affect the results and forecasts of your model?"

Most economists (IMOP) would likely respond one of two ways:

1. "they wouldn't change a thing - they are just simplifying assumptions."
(if an economist answers thusly you can be sure he/she hasn't given the question much
thought outside of their own box)

2. "What assumptions - this is how things work"
(if an economist answers thusly, you should be scared for your life since the person is obviously posessed by their mathematical formulae and are liable to go all John Nash on you at any moment)

The Chinese Epidemic

This is becoming a weekly occurence.

Bush disses gas tax hike idea

Bush apparently is no pigovian in terms of the gas tax idea....
Granted the idea wouldn't have been revenue neutral (but still, assuming people place good value on bridge safety - it's in a sense giving back to the people...).

US releases Economics Education Report Card

The study conducted by the US. Dept. of Education is the first ever National Assessment of Educational Progress - and is a measure of national knowledge of economics by 12th graders in the US. I saw the Fed Reserve Chair from Minneapolis comment on the results...his assessment is rosier than mine. He says the fact that 42% of the sample were 'proficient' in economics is a "good base." I tend to look at the glass being half empty on this - there's a lot of room for improvement.

About 79% of students scored at the "basic" level - having a rudementary knowlege of some econ concepts. I don't think that is too bad, but again, still a lot of room for growth.

One of the more interesting findings is that males tend to only slightly outperform females in econ. I would expect that to be true given the more mathematical/logical nature of the way econ is often taught. But it's surprising to me how close the genders performed. I would have thought the gap to be much higher. I do think it is meaningful that the gap widens at the higher levels of proficiency - and I would expect this is a foreshadow of college results - as more math is applied to econ in advanced levels, males should tend to increasingly dominate.

The basic "scores" are as follows (discussing micro, macro, and international econ topics):

Market Economy

72% described a benefit and a risk of leaving a full-time job to further one’s education

52% identified how commercial banks use money deposited into customers’ checking accounts

46% interpreted a supply and demand graph to determine the effect of establishing a price control

36% used marginal analysis to determine how a business could maximize its profits

National Economy

60% identified factors that lead to an increase in the national debt

36% identified the federal government’s primary source of revenue

33% explained the effect of an increase in real interest rates on consumers’ borrowing

11% analyzed how a change in the unemployment rate affects income, spending, and production

International Economy

63% determined the impact of a decrease in oil production on oil-importing countries

51% determined a result of removing trade barriers between two countries

40% determined why industries can successfully lobby for tariff protection

32% identified how investment in education can impact economic growth

Download the whole report here.

Are there significant externalities to marijuana smoking?

I comment on this at Mike Moffat's blog (about.com).

I think it's pretty obvious that there are some negative and positive externalities...the question is, which is dominant, and is that dominance substantial? I'd love to hear your thoughts on that....

In general though, Mike is right - people who don't support the carbon tax should either help contribute to a solution to our environmental issues, dependency on gas (to live basically), etc...or, just keep silent. Saying the pigou club is wrong without offering an alternative to our current policies (which doesn't appear to be working) is not particularly useful.

This also though points to a general problem with Pigovian taxation (despite its benefits to efficiency) and that is, we almost never know what the social costs or benefits are to an externality - and often our studies can be biased one way or the other, or grossly miscalculating the benefits or cost...this makes using pigovian taxation tricky.

If you under-tax - you may be adding little benefit to reducing a negative externality at the expense of a higher tax that may or may not be passed back to consumers.

If you over-tax, you are likely doing more harm than good.

Book Review Pending

I am currently reading Steven Cohn's: "Reintroducing Macroeconomics: A Critical Approach."

The book is a heterodox economic critique of mainstream macro thought that is taught in today's classes. I hope to use the book along with Mankiw's mainstream text to help with a point-counterpoint way of teaching this fall.

I can imagine that will be difficult as I tried somewhat last year to broaden the discussion beyond the mainstream (to include some post-keynesinan ideas, contributions of psychology, ran some class experiments...) to some success, but also some confusion by the students.

I still don't know how best to broaden the scope while simultaneously cover all the necessary mainstream topics for the common final exam. It may be impossible; I don't know. Anybody with any thoughts please let me know. Look for my review of Cohn's book in a week or two.