INSEAD prof. says it’s time to refocus economics education

INSEAD Prof. Antonio Fatas, in a recent article in INSEAD Knowledge, addresses the increasingly vocal criticism against Economics that says the field of study has lost touch with reality and lacks the tools to predict and solve current day economic crises. The Prof. says the problem isn’t that Economics lacks models but that B-schools simply might not be teaching them. 

Economists failed to predict many aspects of the financial crisis but it was not because we didn’t have the right tools. It was due to where we chose to focus our teaching.

Some interesting views are being shared about how the mainstream economics curriculum needs to be revamped. Mark Thomas and Wren-Lewis are weighing in.

While I am sympathetic to some of the arguments made in these posts and the need for some serious rethinking of the way economics is taught, I would put the emphasis on slightly different arguments. 

First, I  am not sure the recent global crisis should be the main reason to change the economics curriculum. Yes, economists failed to predict many aspects of the crisis but my view is that it was not because of the lack of tools or understanding. We have enough models in economics that explain most of the phenomena that caused and propagated the global financial crisis. There are plenty of models where individuals are not rational, where financial markets are driven by bubbles, with multiple equilibria that one can use to understand the last decade. We do have all these tools but as economics teachers (and researchers) we need to choose which ones to focus on. And here is where we failed. And we did it before and during the crisis but we also did it earlier. Why aren’t we focusing on the right models or methodology? Here is my list of mistakes we make in our teaching, which might also reflect on our research:

Yes, a unified theory would be great, but we need to be realistic. Small ad-hoc models can be a lot more effective to learn about economic issues than the insistence on using the same unrealistic model to explain everything. And in most economics courses we spend all our time building this model and once we are done there is very little time to answer relevant questions. And when asked, we simply argue that “this model cannot capture that” (so back to mistake number 1, too much theory, not enough emphasis on understanding empirics).

A unified theory would be great, but we need to be realistic. Small ad-hoc models can be a lot more effective to learn about economic issues than the insistence on using the same unrealistic model to explain everything. And in most economics courses we spend all our time building this model and once we are done there is very little time to answer relevant questions

4. We teach what our audience wants to hear: We conform too often to social beliefs about how the economy works and we simply support those beliefs with our teaching. Here is one example: when we teach about governments, cracking a few jokes about government inefficiency, bureaucrats and politics is very easy. Using models where government spending plays no productive role feels natural. But when we look at the private sector, we start with the opposite view, one of efficiency and absence of rents given the competitive environment in which firms operate (the famous analogy of no US$100 notes sitting on the sidewalk).

If you want to argue that it is the other way around, be ready to fight a difficult battle. And it is not that we have plenty of empirical evidence to back up these statements. There is very limited research and in some cases with very uncertain results on the role of rents, inequality, market power in modern economies (although this might be changing). But rather than teaching about this uncertainty, we start with models that take a very strong stance on these very fundamental questions. So we are being inconsistent. While in some cases we use uncertainty to criticise certain economic policies, in other cases we use the same argument to support a certain view of the world because it matches either the status quo or the beliefs that most in the audience have.

Antonio Fatas is Professor of Economics at INSEAD. You can follow him on Twitter at @AntonioFatas, and read his blog

Article courtesy INSEAD Knowledge.  Click this link for more perspectives from INSEAD.