Teaching general principles of macro

In a couple of hours the Bank of Canada will do what it does eight times a year. It will set a temporary target for the overnight rate of interest. Will it raise it, lower it, or leave it the same? What will its decision depend on? How will its decision affect the Canadian economy?

If I were teaching intro macroeconomics to a bunch of students who were only interested in the here and now, like journalists who would be covering today's decision by the Bank of Canada, this is what I would teach: I would teach the Phillips Curve; some sort of IS curve; and discuss how the Bank of Canada would interpret the data using the Phillips Curve and IS curve and respond to the data to try to keep inflation at its 2% target.

I would teach something very similar to what Simon Wren-Lewis wants to teach.

But university teaching is not just about the here and now.

Where will those students be 60 years from now? Will monetary policy be done the same way and thought of the same way 60 years from now? And what about 60 years before now, or 600 or 6,000 years before now? And what about monetary policy in all the possible worlds that are different from the actual world but that might be better or worse than the actual world? We don't have to do monetary policy the way the Bank of Canada does it here and now. Some other totally different monetary system might be better.

Are there some general principles of macroeconomics that that might also be useful far away, both in time and space, and useful for considering possible changes to the actual world, and not just useful in the here and now of the world as it currently is?

I think there are.

What determines the price of apples, relative to other goods? Demand and supply. What happens if the price of apples is sticky, and doesn't adjust quickly when demand or supply changes? We get shortages or surpluses of apples. A shortage or surplus of apples may affect demand or supply in some other markets.

What determines the price of money, relative to other goods? Demand and supply. What happens if the price of money is sticky, and doesn't adjust quickly when demand or supply changes? We get shortages or surpluses of money. A shortage or surplus of money will affect demand or supply in other markets. Money is different from apples, because money is the medium of exchange and unit of account. And those differences matter. A shortage or surplus of money will affect all markets in which money is traded, and all goods that are priced in money.

These are general principles of (micro and macro) economics. We need to teach those general principles.

Only when we have taught those general principles should we teach the particular details of the here and now and the current operating methods of the Canadian Apple Producers Association. And informed by those general principles, we can discuss whether there might be better ways of allocating apples.

What would the world look like if we used apples as money? Would it be a better or worse world than today's? A student who understood the general principles of macro could explain that a bad apple harvest would cause deflation and recession. A student who understood only how the Bank of Canada sets the overnight rate today could say nothing useful at all.

Comments

[Squeeky Wheel]

My experience teaching university students (IT, not econ) suggests that teaching both concurrently has the best impact. Students are not as bad as journalists, but they also are not philosophers and their sense of time scale is limited (for obvious and understandable reasons). They (at least mine) are far more concerned about their first job than their third promotion, so they tend to want knowledge/skills that are applicable right now (which an apple-economy isn't). On the other hand they need a life long education and they do need the general principles which will get them their third promotion and serve them well in circumstances we can't envision yet. So I find that current events make for great hooks which can be followed with general principles and then analysis of historical and hypothetical scenarios.

[Metatone]

I agree with Squeeky Wheel - esp. for courses that non-major students will take...

[Min]

Why stick with apples? Why not tobacco? Which has been used as currency, and is still being used, both in leaf form and in cigarette form. That gives us real world data to work with. :)

[Nick Rowe]

Squeeky makes sense. But maybe part of our job as profs is to try to expand students' horizons. "What about using Yap stones as money?" And lead them to the more philosophical questions. "Do we even need to use money?" Plus, you can use a basic money supply and demand model to at least get a first draft of an analysis of new stuff like Bitcoin. Where is the Bitcoin equivalent to the Bank of Canada setting interest rates to target 2% inflation?

Min: Where is tobacco still being used as money?

[Hugo André]

This blogpost seems a bit odd since several of the things suggested by Professor Wren-Lewis would force students to do more critical thinking, not less. For example he wants to remove the LM curve(because it doesn't make any sense) and then refrain from replacing it with a monetary policy curve because if you do something like that, "students stop thinking about monetary policy as a choice".

More generally one might doubt that there is anywhere near enough time to consider the various ways of organizing economic institutions that have existed or that might exist in the future. As Squeeky points out, few students have the motivation to even try. Most likely you would simply end up confusing new students and/or leave out important things that they ought to know.

And to answer Nick's question: Min is probably referring to prisons where cigarettes are often used as currency.

[Nick Rowe]

Hugo: "For example he wants to remove the LM curve(because it doesn't make any sense)..."

The LM curve is based on the supply and demand for money. (It need not be based on the assumption that the money supply function is perfectly inelastic with respect to everything). Does he (or you) want to remove any talk of the supply and demand for money from macroeconomics? How would your students even begin to think about cigarette or Bitcoin money? How would you explain how the Bank of Canada is able to influence interest rates and inflation, without talking about money? I can create credit, but I can't create money. How come it's the Bank of Canada, and not me, who is controlling interest rates and inflation?

"...and then refrain from replacing it with a monetary policy curve because if you do something like that, "students stop thinking about monetary policy as a choice"."

That was an interesting point by Simon. I have some sympathy with it. But it's not quite as simple as it appears, because the effect of the Bank of Canada's current actions depend very much on expectations of its future actions, and can only be understood in the context of the Bank's monetary policy rule and inflation target. Monetary policy (like History) is not "just one damned interest rate (fact) after another". Each decision must be understood in the context of the policy rule. (Simon will understand this point of course, but is torn.)

Do prisoners still use cigarettes as money? I thought they had switched to cans of mackerel? Interesting.

[Hugo André]

I bow to your superior understanding of prison currency.

Understanding supply and demand for money is of course very important but why do we feel the need to always show the IS and LM curves together. A simple LM graph does perhaps offer new students a little bit of insight but IS-LM only serves to confuse them. For some reason students have to spend quite a bit of their first course in macroeconomics working with IS-LM and IS-LM-FE (or IS-LM-IP) graphs even though these are only relevant if the central bank is passive.

Policy rules are rarely followed slavishly by central banks. A CB led by a dove will react very differently to economic news compared to one led by a hawk. Perhaps it will react more strongly to inflation that is far below target (because deflation is very dangerous) than when it is equally far above target. For all of these reasons and many others it is a bad idea to present monetary policy as a simple curve. Explaining the policy rule and inflation target can be done without it.

[Hugo André]

Please excuse my sloppy writing in the second paragraph. I really should read through my comments before posting them...

[Min]

Nick Rowe: "Do prisoners still use cigarettes as money? I thought they had switched to cans of mackerel?"

Gee, I dunno. I haven't been to prison lately. ;)

[Lorenzo from Oz]

In A Survey of Primitive Money A. H. Quiggin includes a case of human heads being used as money. If apples are too boring and cigarettes/tobacco too non-PC. Though, the list of things from Quiggin's book used as money would perhaps be a great motivator of why it is just fine to use apples:
Shells (especially cowries), beads (whether made of stone, shell, glass or whatever), salt (including stamped salt cakes), cloth (from silk to wadmal, a coarse wool fabric), tool metals (iron, copper, tin, bronze) in various shapes, die cakes, gold dust, weighted gold, teeth, feather coils, strings of coconut discs, carved stone (also a tool material), animal skins, cattle, grain (notably barley and rice), pigs, coconuts, buffaloes, seeds, slaves, silver in lumps or shaped, tea (including in bricks), plaited palm-fibre rings, tobacco, beeswax, camphor, porcelain jars, human heads, cocoa beans, balls of rubber, coca leaves, logwood (mahogany) …

On teaching macro, would Simon Wran-Lewis's approach be sufficient explaining the Eurozone stagnation? Or Japan's lost decades? Or the difference QE makes in the US compared to the Eurozone? Or why Australia and Israel skipped the Great Recession and are still living in the Great Moderation. If not, it does not even work as here-and-now analysis.

Taking money out bothers me, since that is rather too much of an inherent tendency in economics already.

[Lorenzo from Oz]

To put it another way, a first year macro student should be able to understand why it is a very different thing when the ECB changes interest rates than when the RBA does. It is not conceptually difficult and the world is a clearer place once you grasp that.

[Jciconsult]

I find your comments useful to get the first year student to think. The trouble is many students will take only that one course but will go on to influence policy so some here and now is very vital. I would like to see both you and Simon do posts for some of those policy wonks trained long ago on why Say's law makes no sense because many of them are advising governments on the basis that it holds in all circumstances and is their key policy guidance.

[Nick Rowe]

Hugo: I still can't see any sign of your "sloppy writing". I think your standards are too high!

Suppose we didn't know whether the new central banker is a hawk or a dove. We observe the new central banker cut the interest rate. What does this mean? It might mean he is a dove, and we should raise our expectations of inflation. Or it might mean he is a hawk who has observed a negative shock. There is a rather interesting signalling game going on, if we don't know the central banker's inflation target or policy rule. Here is my old post modelling that signalling game. That sort of signalling equilibrium is too hard to teach in first year. It's easier (but still hard) if we assume everyone knows the policy rule, and then talk about the choice between policy rules.

"For some reason students have to spend quite a bit of their first course in macroeconomics working with IS-LM and IS-LM-FE (or IS-LM-IP) graphs even though these are only relevant if the central bank is passive."

(I teach ISLM in second year.) By "passive" I think you mean "holds Ms constant"? Yes, the LM curve is *normally* taught that way, but it doesn't need to be. We can replace Ms=Mbar with any Ms function we want to assume. The central bank chooses the Ms function. And its choice affects the slopes and shapes of the LM curve, just as the Md function does too. This is how I teach inflation targeting using ISLM.

Lorenzo: lovely variety of different monetary regimes there!

I was never happy with doing "monetary policy without money". But until the financial crisis it seemed to work OK. We could model the Bank of Canada as adjusting the nominal rate of interest to hit the inflation target, and explain what was happening using exactly the same {Phillips Curve; IS curve; interest rate rule} conceptual framework that the Bank of Canada was using to make its decisions. It left some deeper questions unanswered, but it seemed to work OK in practice. And then it didn't.

One of the problems in doing social science is that the social scientist cannot divorce his own theory of the world from the theory of the world held by the people he is studying. Life is much easier if the two theories are the same, as they are under rational expectations. If central bankers, and those who respond to their decisions, think that "monetary policy is interest rate policy", then, to a certain extent, monetary policy *is* interest rate policy. All monetary economics (right down to "this bit of paper is money") is a social construction of reality. It is very hard to create a new construction of reality.

Jci: I think we can only understand why Say's Law is wrong if we talk about money and why money is different from other goods. Money is the medium of exchange. An excess demand for money is qualitatively different, and has very different effects, from an excess demand for any other asset. I have done a number of posts on this. But it is not easy stuff to explain correctly.

[Avon Barksdale]

The main problem is that students don't know enough mathematics. Economics is harder than physics, so why are students in physics expected to know more mathematics than students in economics? To properly understand the micro foundations of macro requires some serious mathematical machinery. University is not about "getting a job", it's about the search for truth. If understanding how to search for truth becomes useful to you in your search for employment, great, but that's not the reason for your education.

I suspect a capture process is at play. A more rigorous education in both mathematics and rhetoric (a typical undergrad essay shows a general inability to write) would seriously reduce the number of students entering economics programs which would reduce the size of economics departments. In addition, the capture market (i.e., rent seeking demand) is constantly looking for "economists" to bless analysis for their political masters (just look at the current election campaign in Ontario). Truth matters little in that market, so why bother teaching how to find it?

I am sure you can see the effects of capture at Carleton - compare the size of the graduating class in physics or mathematics to economics. There is no political market for the top quark, but there is one for subsidizing [insert pet industry here]. Perhaps we should inscribe Plato's message over the door at economics departments: "Let no one ignorant of geometry enter here."

[Avon Barksdale]

"I teach ISLM in second year."???????

Perhaps John Cochrane put it best:

"Nobody has taught ISLM in graduate programs since about 1980 as anything but history of thought, and it's fading out of undergraduate and MBA education as well, especially at the top schools."

[Nick Rowe]

Avon: lots of math and physics students switch into economics graduate programs. And that can be a problem. Because they can solve all the equations, but sometimes don't have clue what's going on. Because they never learned basic stuff, like ISLM for example. So they don't even realise they don't understand it.

For example: if we assume that money is roughly super-neutral in the long run, then the real interest rate will be roughly independent of the inflation rate, and the Fisher relation tells us that if the central bank increases the nominal interest rate that will cause the inflation rate eventually to rise by roughly the same amount.

An economist who learned ISLM will recognise there is something very problematic with that above statement. An economist who skipped ISLM (or anything vaguely similar), and who went into an economics graduate program straight from math or physics, may simply look at the equations showing that equilibrium, and won't see the problem.

Like this.

And again here.

These were really really bad mistakes. By someone who is very very smart. And who is in a position to influence economic policy.

[Hugo André]

I removed a couple of sentences from the middle of the second paragraph without changing the remaining ones. That was sloppy.

Sounds like you teach your students a taylor rule curve and varities based on other possible monetary policy rules. Clearly, the LM curve that I'm criticizing is not the same as the one that you're using. As so often happens in economics (and philosophy for that matter!), a large part of the difference between our opinions seems to because of how we define a term(LM). While teaching your students about multiple possible monetary policy curve sounds great (why wasn't I in that class?) might it not be too complicated for beginner macro students? I believe the argument Professor Wren-Lewis makes is that since the only teachable option to beginner students is a 'normal' IS-LM graph, it's best to remove the misleading LM part.
Since it appears that you keep away from IS-LM completely during the first year I guess this debate is pointless - we are discussing very different things.

[Tom Brown]

Avon & Nick, re: ISLM, I thought this was interesting:

http://informationtransfereconomics.blogspot.com/2014/05/limits-of-information-transfer-model.html

"Thus the two big theories of the last century in economics [one of which is ISLM] are specific limits of the information transfer model."

[Richard H. Serlin]

Nick,

The following are my views on this, taken from comments on Noah and Simon's sites, with modification:

I should first note that from my experience and knowledge, although I haven't researched this, it's common in the US for students to be required to take econ 101 and 102. So, "econ 101" is really a three unit introductory micro course and a three unit introductory macro course. So there are six units of student time and effort to work with. You predominantly give just macro.

My opinion on this is that with two required courses, which is all the vast majority of students will ever take, you really want to teach only for what's best for society, basically what will best maximize total societal utils, what will make them the smartest voters, and most help them to be smart and productive in their personal finances and on the job. Thus, here is a (slightly modified) comment I left at Noah's:

1) Noah seems pretty sure that today, at least, micro and macro 101 does actually let students know about monumentally important flaws to the basic classical market model, including externalities, natural monopoly power, asymmetric and just poor information (and it should be expertise too), and so on. But this certainly did not seem true a generation ago, and I'm not so confident as Noah it is true today. That it's in the econ 101 text means very little. These texts are like 1,000 pages long and there's nowhere near enough time to cover everything in them well, or even close, in a mere three unit course. Professors could regularly consider market problems relatively unimportant extra material – amazingly look at the attitude of Chris House – as if ignoring pollution externalities, monopoly, and asymmetric information wouldn't really result in much harm; they're just "exceptions to the rule". Oh, just a cesspool for a planet, with devastated health and quality of life that's decades shorter, monopolies strangling the economy and advancement, little basic scientific or medical research, consumers having to do a dissertation on any purchase to make sure it won't kill their family,… It should be obvious that these "exceptions" are as important as the rule, and that today there's far more harm and inefficiency incurred from erring on the "exceptions" than from erring on the rules.

2) There's this attitude of teaching econ 101 for econ majors. So you math them up with the classical model and figure later they'll learn the problems, and other important things. But for 99% of students – voting citizens – there is no later. So this is a horribly costly approach for society. 101 and 102 should be 100% made to teach the most important intuitions for society's citizens in two three-credit courses. So you teach only the most necessary math for intuition, get to the intuitions behind the classical model, then get to the intuitions behind all the most important market problems, and yes some empirics to quantify their magnitude and level of certainty. You do this, when all you have is 6 units of student time, and you've done awesome. I would be very wary of putting in much more, as it will take time and effort away from this crucial core, and may really hurt this crucial learning, making students rush through it.

3) Some concepts especially important for smart personal finance and business should be included, like fixed, variable, and sunk cost, opportunity cost, and very basic time value of money.

4) If there's enough time to do the above very well, I'd add the intuition of what good modeling is, and where many economists go wrong, as in this crucial paper from Stanford's Pfliederer, which should be required for anyone getting an econ degree at any level, any school:

https://www.gsb.stanford.edu/sites/default/files/research/documents/Chameleons%20-The%20Misuse%20of%20Theoretical%20Models%20032614.pdf

It basically says what I've always said, "A model is only as good as its interpretation.", but with great specifics and detail, and, of course, crucially, a big name saying it.

[Richard H. Serlin]

And I'll add what I think is a good, illustrative specific here:

My econ 101 and 102, a generation ago, were terrible. Learn the classical model, and problems with it are for intermediate, which few people ever take. In intermediate I finally learned about the income and substitution effects and the backward bending labor supply curve.

Now, when one of our two major parties makes it's supreme goal taxes as low as possible for the rich, then it's important, obviously, for citizens to understand this issue well. So obviously, for compelling civics and utilitarian reasons, we should expect all college graduates to understand the income and substitution effects and the backward bending labor supply curve – and in intuitive terms – You might work 45 hours/week instead of 40, if your pay suddenly went from $8/hour to $12, but if it went from $8/hour to $8 million/hour, you easily might go from 40 hours/week to 40 hours/year, and spend the rest of the year on your island. Higher pay is a double edged sword in incentive to work.

And the empirics of this economic concept are, of course, crucial too. My professor spent about 15 minutes just quickly saying what the consensus in the field was on the empirical evidence. It basically was this quote from MIT's Jonathan Gruber:

"Changes in tax rates appear to have relatively modest effects on total gross income; the total amount of income actually generated through work or savings does not respond in a sizable way to taxation."

– "Public Finance and Public Policy", 2nd edition, 2007, Page 734

Now, this kind of thing is very valuable, and it doesn't require a lot of time learning the massive math of econometrics. It's analogous to global warming. I'm never going to be able to learn enough about climate science to really evaluate the literature in this field. But when pretty much 100% of the top climate scientists in the world say this is real and a catastrophic risk, that's overwhelming evidence that this is a profound risk to take seriously and try to insure against (Do you not buy fire insurance for your home bacause the odds of it burning down are significant, but still not 100%?). But you can survey this evidence pretty quick, and give the consensus of the top experts, and how strong it is. It's like Jonathan Chait said recently (paraphrasing), I'm not a chemical scientist, man, but I don't drink Draino, because the overwhelming consensus of chemical scientists is that this would be catastrophic.

[Richard H. Serlin]

And I think it would be worthwhile if I expand further yet on topics I think are important in maximizing the societal utility of econ 101 and 102 (which is what I think should by and large be the goal):

Let's start with long term growth, which is so important for voting citizens to understand – and again there's no, oh that's not 101, you learn that in a 400 level econ. The vast majority are never taking a 400 level econ; 101 and 102 are the only required ones, and that's all their taking! Yet they have to vote on crucial long-term economic growth related issues all the time, and it's obviously profoundly important to vote well on this.

So, of course we should teach what is most important for long-term growth in a modern high-tech economy, including the need for public investments in basic scientific and medical research, infrastructure, education, including Heckman's early education and development, and so on, and what the empirical research shows about whether we are underinvesting in this, and how to invest smartly in it.

Also, we should discuss things that may stimulate short-term growth, but hurt long-term growth, like some tax-cuts. Now, I know, oh my goodness, that's political! We have to be apolitical. Well, we should be; our "bias" should be towards what the science says, put in an accurate, **non-misleading** way. What if there's some scientific disagreement? We should give the sides, and say what the consensus is, and how strong it is. It should be truth-based, and if the truth has a "bias" against one party, so be it. It's what the science says, and how strong the consensus is, and with how much certainty. You don't "Balance" with respect to politics, at the expense of disregarding what the science says, or misleading, otherwise we teach global warming is established science and global warming is a myth equally, evolution and creationism equally.

More: The issue of technological unemployment, and will it be different this time, very important today, and the basic economic issues in healthcare. Now, I see another objection. These things are like a whole course, each one. But to cover the basic important intuitions and empirics does not take that long. All this can be fit in two three-unit courses.

Next issue, it used to be one of the courses was micro and the other macro. When you take a "the most useful economic teaching to society prioritization" it won't fit 50-50 neat like that. So, it should be changed to just introductory economics 1 and 2.

What else? As mentioned a lot of personal finance and business related econ is very useful and important. I noted fixed cost, variable cost, and sunk cost. I'd also include the basic risk-return tradeoff, a basic intuitive explanation of the CAPM and its lessons (modern portfolio theory), basic efficient market hypothesis and it's problems and limitations, and insurance concepts (which should include talking about global warming – insuring against a catastrophic risk, requiring less than the risk-free rate for catastrophic insurance). Now, an objection: This is for finance 101, and other business courses! Again, the big problem, most students never take these courses, and so they and society are really hurt by their resulting lack of knowledge and expertise throughout their lives.

So, you see the idea, relentless pragmatism to make econ 101 and 102 add the most to total societal utils.

[Avon Barksdale]

Richard,

Teaching econ 101 to create an economically informed citizenry is pointless - less than 25% of society goes to university and I would bet far less than half of those who do attend ever take an econ course. I didn't and I didn't even know anyone who did.

University is about instilling critical thinking and in that regard that content is not nearly as important as the methods. For students of econ, they graduate knowing far too little mathematics. Of course, math is necessary, but not sufficient for economics. What most undergraduate (and a lot of graduate) programs create is this fallacy:

"Once upon a time there was a society composed of salt of the earth, but misguided people, and they were poor. Then one day the Prime Minister hired an expert social engineer - an economist even. And then the society transformed into a prosperous place."

It is that nonsense that I want eliminate from econ education and that can only be accomplished if students are armed with enough mathematics to be able to ask the right questions.

Nick, if econ students at the undergrad level where held to the same standard as physics students, you would be able to start teaching from Mas Colell, Whinston, Green in second year.

[Avon Barksdale]

Nick: "...lots of math and physics students switch into economics graduate programs. And that can be a problem. Because they can solve all the equations, but sometimes don't have clue what's going on. Because they never learned basic stuff, like ISLM for example. So they don't even realise they don't understand it."

No, people who understand how physics works know how to ask the right questions. John Cochrane is case in point. I remember when I first picked up his book Asset Pricing. It blew my socks off - I said to myself, wow, this guy writes like a physicist! It's so clear! He organizes the mathematical argument exactly as a physicist would. Later, I found out that his undergraduate degree is in physics from MIT.

Standard Keynesian ISLM is just plain wrong. It is like teaching blood letting in medicine. There is no proper micro foundation, it is not recursive, and it does not have a game theory interpretation. It is a bad fairytale. This stuff was discredited long ago. Not a single policy simulation from a Keynesian model has appeared in a respectable journal since 1980. I see little point in teaching it to undergraduates.

[Steve Roth]

Dear Nick:

This very much brings me back to our Reading Mankiw in Seattle textbook discussion, and my feeling that econ (macro and micro) should start with theories of value, money, utility, price, etc., before getting anywhere close to the topics you recommend above.

On value, you replied that value theory has been replaced by price theory. Like so much of your stuff, that's been rattling around in my head and my studies ever since. And I've come to think that price theory as embodied in contemporary economics is a mental trap. Not all of it, of course -- there's been brilliant empirical work -- but the whole construct that defines how economists are allowed to think.

I think you know how much I admire, have benefited from, your willingness and ability to think outside the box (and respond to my stupid questions and notions). But I'd like to suggest with great respect that there's a larger and largely hermetic box that you don't think outside of.

I think I can best point to the universe outside that box by pointing to two recent posts by the always-remarkable Steve Randy Waldman, and opening lines from those two posts:

Should markets clear?
http://www.interfluidity.com/v2/5117.html

"David Glasner has a great line: [A]s much as macroeconomics may require microfoundations, microeconomics requires macrofoundations, perhaps even more so."

Welfare economics: the perils of Potential Pareto (part 2 of a series)
http://www.interfluidity.com/v2/5212.html

"When economics tried to put itself on a scientific basis by recasting utility in strictly ordinal terms, it threatened to perfect itself to uselessness."

(My attempt to add something of value to the latter post: http://www.asymptosis.com/the-pernicious-prison-of-the-price-theory-paradigm.html)

Much of contemporary economic thinking only works inside the ordinal-utility-only/distribution-doesn't-matter box. (I would suggest that "demand for money" and "the price of money" are among those pieces.)

This is pedagogically directly related to my musings on North America's singular, and stunningly successful, employment of the liberal-arts model -- which is all about teaching students to think critically in and outside the box, and to see the box, so they can solve problems "60 years from now ...60 years before now, or 600 or 6,000 years before now".

Does the Liberal Arts Model Deliver Life Success? National Success?
http://www.asymptosis.com/does-the-liberal-arts-model-deliver-life-success.html

Economics curricula should, in the best liberal arts tradition, first teach students ways to think about the fundamental concepts that the discipline attempts to explore and explicate, before imposing on them a set of conceptual givens which prevent and preclude them from examining those very givens.

If I was reigning dictator, the standard Econ 101 textbook would be...The Collected [or Selected] Works of Steve Randy Waldman.

[Nick Rowe]

Avon: Here's why I like microfoundations. But here's why I think microfoundations can be misleadingly procustean. It is easy to build a microfounded model that looks something very like ISLM (but hard for me to find my old post where I do just that). Very many modern macro models are really just variants on ISLM, under the surface. If you had learned ISLM you would be able to see that.

Physics was my best subject in hi skool. But I got bored, and switched to philosophy in uni, with econ on the side. As an ex-physics type you will find it easier to understand and appreciate other ex-physics types. Ex-physics types are needed in econ, but so are ex-philosophy types, and ex-lawyers, etc., because we all miss seeing stuff that others can see, from a different perspective. But none of that let's us jump in without getting the basics. Or better yet, getting some understanding of the history of economic thought. (What we call "the basics" is our distillation of what we think is probably worth knowing from the history of thought). Because modern stuff does advance (usually), but it also regresses, by forgetting some of the old ideas that are still valid. For example, like the Old Keynesian multiplier, which is a positive feedback mechanism that shows how small shocks can get amplified and cause big deviations, and that can be microfounded as showing how, in a monetary exchange economy, a constraint on the quantity of goods you are able to sell in one market can spillover and affect your demands in other markets, which in turn exacerbates those original quantity constraints.

You really should learn ISLM. Not as gospel truth, but as a way to broaden your perspective. You can start with understanding the IS curve.

[Nick Rowe]

Steve: Hi!

Any student who has read Mankiw's Intro macro text should be able to give some sort of useful answer to the question: "what would the world look like if we used apples as money?"

It's not so much that price theory replaced value theory. Rather, we changed the name from "value theory" to "price theory". (The theory did change too, in 1871, when we learned about marginal utility.)

Whether and why markets will or will not clear, and how long it will take, and under what conditions, is still one of the main questions in economics. And it is inevitably both a micro and a macro(money) question. My recent post was really about that very subject.

For some questions, ordinal utility is all we need. For others, it isn't. For talking about uncertainty, or welfare economics of redistributing income, it helps to move beyond simple ordinal, and most economists do that. But I don't see where you are going with ordinal/cardinal and money demand/price of money.

SRW thinks many interesting thoughts. But for teaching intro, I still think I will stick to Mankiw, or similar.

[Nick Rowe]

Richard: my intro students (we use Mankiw) definitely get externalities and monopoly (and monop comp and oligop). I do a little bit of asym info, (lemons and insurance), but I'm not happy with how I teach it. They get the message that long run growth and productivity is the big picture. But I'm not sure I do the empirics very well. I always get mentally stumped by the K > N problem (not enough degrees of freedom to test all the things that might matter).

We are one of the very few holdouts that do a full year of both micro and macro. But stupidly we still do one term of each, for admin reasons, and I have more spare time now in macro than in micro. I skip indifference curves, which will upset the purists, but I think it's the right decision. Econ majors will learn it in second year, and non econ majors don't really need it much.

[Nick Rowe]

JKH: suppose I hold BMO shares, expecting their price to stay constant forever. Now BMO tells me that they will be doing a 2 for 1 stock split every year, so I should expect the price to fall by 50% every year. I wouldn't care. I wouldn't want to hold either more or less shares today. Nothing happens to the share price today. And nothing happens to BMO's real investment or real profits or anything real.

[Thornton Hall]

Oh well. You could have left up my point that smart doctors spent the last 30 years telling us that eggs are unhealthy and skim milk is good for you, when in fact, the exact opposite is true. It's a cautionary tale.

[Nick Rowe]

Thornton: I did leave it up. You are replying on the wrong post. Check the other one.

Yep, there are many cautionary tales. Smart educated people sometimes get stuff wrong, and the common people were right all along. But the common people don't always agree among themselves, and they get stuff wrong too. Eggs and milk? Climate change? Marxism? Monetarism? How will we figure out which ones we are getting wrong now?

[Avon Barksdale]

Nick: "You really should learn ISLM."

I did, but after reading and working through the permanent income and the recursive macro literature. Keynesian ISLM struck me as entirely naive and just wrong. It's not only wrong from a mirco foundation perspective, it's wrong from a literary or philosophical perspective. This stuff is really dangerous. It's economic snake oil - it tells the public and especially politicians exactly the story they want to hear. I wish water flowed up hill sometimes, too, but alas, it doesn't.

Sorry, but there is no royal road to geometry and for better or worse, the Universe - including economics - speaks the language of mathematics. ISLM is a poor story, a terrible metaphor. David Romer's advanced macro book, which I read carefully, presents a modified version of ISLM in a somewhat favourable light, but even he doesn't bring Keynesian ISLM thinking into his treatment of macro. And work like Woodford's NK economics has nothing to do with standard Keynesian thinking.

Instead having students learn poor debunked fairy tales, perhaps having students learn the basics of dynamic programming would be a better use of their time. Dynamic programming and Kalman filtering is at the heart of so much of modern macro that waiting to grad school to teach this stuff is a disservice to the students. No one teaches the caloric fluid theory of thermodynamics in physics - it would be a waste of time, just like Keynesian ISLM.

[Tom Brown]

"Dynamic programming and Kalman filtering is at the heart of so much of modern macro that waiting to grad school to teach this stuff is a disservice to the students."

Shoot, if that's actually true, maybe I'm not in as bad a shape as I thought with regards to this stuff. I am pretty familiar with Kalman filtering. Where do Kalman filters fit in in your view?

[Nick Rowe]

Avon: "This stuff is really dangerous. It's economic snake oil - it tells the public and especially politicians exactly the story they want to hear."

I agree that teaching the Keynesian Cross in first year, as *the* (only) formal macro model, is very dangerous. Interpreted literally (and it will be interpreted literally) it says that increasing G and cutting T will make us richer, and the reverse will always make us poorer. That is why I don't teach in in first year. The AD/LRAS/SRAS model gives a much more sensible message, if that is the only macro model you will ever learn. "Only the supply side matters in the long run, but watch out for AD fluctuations in the short run."

But the KC multiplier model still gives an important insight. It explains why do small shocks have large consequences.

Your side is winning the war in economics teaching. More and more math and formal modelling. But I will continue to fight my rearguard action.