Teaching of Macroeconomics After the ‘Great Contraction’

  

Anca VoicuRollins College, FL

Somnath SenUniversity of Birmingham, UK

Rollins College, FL

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Motivation of Paper

The Great Contraction of 2008 onwards, which followed the Great Moderation of the previous decade, highlighted the various challenges that macroeconomists face in explaining their subject to undergraduates

The multitude of possible approaches to explaining and solving the Great Contraction puzzle, and the concomitant non-conventional policy measures required, adds a new challenge to the task of teaching macro economics

Both the structured content of a traditional macroeconomics course as well as teaching strategies will prove to be highly important in delivering expected outcomes i.e. teaching to students who wish to understand economic reality but within a structured framework

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Motivation of Paper: Context

Discussion on this issue has been continuing for the last half decade but with little structural change in content and form of macro courses

Informal discussions with colleagues who teach the subject in the UK shows that traditional books such as Mankiw are still the core of the syllabus – nothing much has changed!

Yet, THE JOURNAL OF ECONOMIC EDUCATION, 41(4), 2010 had a series of papers by eminent macroeconomists asking for changes in the intermediate courses for the teaching of macroeconomics

Shiller, Blinder, Friedman all call for a reorientation of macroeconomics teaching in a special issue, edited by David Colander, of this pedagogic journal

In a major conference hosted by the Bank of England in 2012, ‘What Post-Crisis Changes Does the Economics Discipline Need?’ similar sentiments were expressed by European and British economists

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Motivation: what practioners think

The Bank of England conference also discussed with academics, policy makers and employers the need for a re-orientation of macroeconomics courses and syllabi

According to the Royal Economics Society newsletter: The conference reached some shared conclusions about the way young economists are

trained. There was broad agreement that students need: Greater awareness of economic history and current real-world context; Better practical data-handling skills; Greater ability to communicate economics to non-specialists; More understanding of the limitations of modelling and current economic methodology; A more pluralistic approach to economics; A combination of deductive and inductive reasoning. http://www.res.org.uk/view/article7Apr13Features.html http://www.theguardian.com/education/2014/may/04/economics-students-overhaul-subject

-teaching

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So, what is the problem?!

My mnemonics is ‘PPP’ Paradigm shift, do we need to change our whole

model Practical issues and problems in constructing a

course Perspectives and viewpoints, are they reconcilable Let me use a few simple quotations from the papers

from the Journal of Economics Education from eminent macroeconomists to explain what I mean

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Quotes: Paradigm changes

Paradigm? “Five such lessons are that we live in a monetary economy and therefore aggregate demand and policies that affect aggregate demand are determinants of real economic outcomes;

that what actually matters for this purpose is not money but the volume, availability, and price of credit;

that the fact that most lending is done by financial institutions matters as well; that the prices set in our financial markets do not always exhibit the “rationality”

economists normally claim for them; and that both frictions and the uneven impact of economic events prevent us from

adapting to disturbances in the way textbook economics suggests” (Benjamin Friedman)

We could move to the other extreme and explain in terms of heterodox macroeconomics such as in the writings of Godley and Minsky

Necessary pluralism in the economics curriculum: the case for heterodoxy: http://www.res.org.uk/view/art6Oct14Features.html

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Quote: Practical problems

Practicalities? “Two tradeoffs are paramount and must be faced by every

instructor: (1) how much additional complexity must be and can be

introduced in a principles course in which the students are relatively unsophisticated;

and (2) although it is easy to think of new topics that recent events “demand” instructors add, it is much harder to think of topics to delete. Yet economists should understand the necessity of choice forced by (time) budget constraints.”

(Alan Blinder)

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Quote: Perspectives and viewpoints

Perspective: “Then (Great Depression) and now, a good number of students have felt that their

lectures bear little relation to the economic crisis raging outside the halls of academe.

The economics profession seems unusual, when compared with some other professions, in complaints that the teaching is irrelevant to practical lives

Students mostly recognize that their teachers are struggling with the conceptual difficulties that are inherent in the field. Teachers can encourage such recognition and best serve their students if they refer regularly and respectfully to the history of economic thought, conveying the reasons for the theoretical constructs of other times and the tentativeness of current theories (Robert Shiller)

See also the Lindau conference: http://www.theguardian.com/business/economics-blog/2014/aug/24/nobel-winning-economists-challenge-conventional-thinking

International Student Initiative for Pluralism in Economics

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Cartoon

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Cartoon

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Cartoon

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Structuring a core or intermediate macroeconomics course

Use the ‘pedagogic or teaching model’ used by development economists Traditionally, development economists in their teaching methods used what Adelman

called the ‘KISS’ principle, Keep it Simple (Stupid) Simple explanations (often couched in intensive mathematical reasoning) and universally

valid principles Leads to: single cause theories; single (or few) criterion for successful development;

development as an unidirectional or (log)linear process Traditional macro economics uses the ‘R-models’ to again pinpoint few causes of business

cycles and its elimination without major policy interventions The many R’s: Ricardian equivalence (and fiscal neutrality) Real Business Cycle Representative agent Rational Expectations Risk neutrality

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The fallacy of an universalist ‘model’

Rajan calls it the ‘irrelevance theorems’: THE JOURNAL OF ECONOMIC EDUCATION, 41(4), 398–402, 2010

“Using the frictionless representative agent framework, we get a lot of irrelevance theorems both in finance, such as the Modigliani Miller theorem, which shows that the capital structure of firms doesn’t matter; and in macroeconomics, such as the Ricardian equivalence theorem, which suggests that it does not matter whether the government finances its spending by taxes or bonds.

All these irrelevance theorems give one the sense that policy does not matter much.”

Therefore inform the students that there is no universal answer and that a few models will point out the perspectives and principles

There is no mega or encompassing models with specific case studies becoming special cases

After that we need to be eclectic (ad hoc?)

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Macroeconomics course from the lens of ‘Alternative Perspectives’.

To get rid of this universalist mindset, treat each mega-model as one element of an ‘Alternative Perspectives’ framework

So, each mega-model is simply a core paradigm or a fundamental perspective, which may be useful in some institutional circumstances, but not in others

Use a core textbook such as Mankiw, if it is helpful, but warn students there are no ‘general cases’ from which specific cases can be drawn

Do not use terms such as ‘Mother of all models’ Use as many visualization tools, games, websites, newspaper articles, policy

blogs as you can to make the subject interesting Reduce the amount of formal theorizing Stress that policy-making is an ‘art’ and not a ‘science’ Have structured lectures on Classical, Keynesian, Minsky models plus some

historical analysis.

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Why history?

Finance is History! Harold James, Princeton University “A new sensitivity to the significance of historical experience has developed since the

2007 financial crisis. A recent report by the UK Chartered Financial Analyst (CFA) Society castigates “financial amnesia” among individuals, markets and regulators, and argues that “it causes risk to be mispriced, bubbles to develop and crises to break.” The report suggests formal requirements for investment professionals to study financial history as a remedy.

Before the crisis, risk models were usually constructed on the basis of “historical” data that covered only a relatively short time span, ten or often only five years. The reasons are self-evident: beyond that limited range of dates, data comparability becomes a problem; current financial products do not have exact analogues in older trading instruments; regulatory practices have changed; and monetary policy is conducted in different ways. So history is bunk. Financiers thought that they had arrived at the “end of history””

But students need a major dose of perspective and at least in macroeconomics it is important to have a long-term perspective

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An example: Monetary policy

Start with a core monetary policy model, synthesizing classical and Keynesian theories: Mankiw Chapter 3, 4, 11, 12

Use the liquidity trap to show issues of Zero Lower Bound Students play Games for monetary policy, and are monitored on the why and

how: Federal Reserve: http://sffed-education.org/chairman/ http://www.federalreserveeducation.org/resources/detail.cfm?r_id=83165294-5

71e-4940-af70-8939434adb28 

European Central Bank: https://www.ecb.europa.eu/ecb/educational/economia/html/index.en.html Bank of England: http://www.bankofengland.co.uk/education/Pages/resources/inflationtools/ballo

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An example: Monetary policy

Explain and demonstrate: Simple DSGE type models (Mankiw Chapter 15) What are the policy objectives of CBs? Why doesn’t the CB target asset inflation? Can

aggregate demand effects counteract positive and negative supply shocks? Provide a Critique of excessive formalism:

“The Bank of England in 2007 faced the onset of the credit crunch with too much Robert Lucas, Michael Woodford and Robert Merton in its intellectual cupboard.  A drastic but chaotic re-education took place and is continuing. I believe that the Bank has by now shed the conventional wisdom of the typical macroeconomics training of the past few decades.  In its place is an intellectual potpourri of factoids, partial theories, empirical regularities without firm theoretical foundations, hunches, intuitions and half-developed insights.  It is not much, but knowing that you know nothing is the beginning of  wisdom.” Wilhelm Buiter

http://blogs.ft.com/maverecon/2009/03/the-unfortunate-uselessness-of-most-state-of-the-art-academic-monetary-economics/

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Actual short course at Rollins:Research Questions on Teaching Strategy

Why are teaching strategies important and how did their use in the “Great Recession: An Economic Analysis” course influence its outcome?

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Profile of Students Involved

This course was offered intensively (five and a half hours every day) for a week during Intersession in January 2012.

The course gathered junior and senior students from the following majors: Psychology, International Relations, International Business, Economics.

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Challenges

Short course required filtering the vast amount of information to present what is most relevant.

Students from a variety of academic disciplines. Students had varying exposure to the study of

economics. Presenting students with readings and media

resources (e.g. video clips) articulating multiple sides of a familiar debate and ask them to arrive at their own reasoned position on the topic.

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Literature Review

Literature on Teaching Economics (General) Becker & Watts (1996) Colander & McGoldrick, (2009)

Literature on Critical Thinking Ennis (1992) McPeck, (1981) Thoma (1993) Weinstein (2005)

“Starting Point: Teaching and Learning Economics” http://serc.carleton.edu/econ/project/index.html

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What is “Starting Point”?

“This project grew out of recent work by Mark Maier and Scott Simkins (National Science Foundation Grants DUE 00-88303 and 04-11037) investigating pedagogies more commonly used outside of economics and adapting them for our discipline. Their work reveals that there are many pedagogical innovations that economists were unaware of, at least those teaching in the U.S. This project grew out of the recognition that a readily accessible, comprehensive set of resources for a wide range of pedagogical practices was needed.

Starting Point: Teaching Economics is a National Science Foundation funded project (DUE 0817382) that is being developed in collaboration with the Science Education Resource Center (SERC) at Carleton College (MN) and will build on their successful Pedagogic Services framework that makes pedagogical modules accessible to practitioners across disciplines via a central pedagogic database.

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What is “Starting Point”?

Starting Point is an economics pedagogic portal that seeks to: introduce economists to innovative teaching strategies

developed both within and beyond the discipline of economics. We are especially interested in promoting cross-disciplinary adoption and adaptation of research-based teaching/learning practices.

provide instructors with the tools to begin integrating and assessing these teaching strategies in their own classrooms. Each teaching strategy included in the portal will include background knowledge about the strategy and how best to use it, reasons for using the strategy, and examples illustrating the teaching strategy in practice.

promote the sharing of teaching innovations among instructors. The Starting Point site will encourage instructors to submit classroom-based examples illustrating the use of the teaching strategies included on the site for review and cataloging. “

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Course Objectives

To provide students with a set of concepts and an environment to analyze and debate the causes of the recession;

To equip students with the tools and necessary knowledge for them to understand and be able to explain the recession’s unprecedented global extent;

To discuss the various approaches taken by the U.S. and world governments to contain the crisis and repair their economies.

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Course Objectives

To emphasize the impact of the current crisis on the economics profession and discuss the direction that the profession will take from here. In doing so we explained the different approaches to economics such as Keynesian economics, neo-classical vs. heterodox (non-mainstream) economics, as well as behavioral economics and their importance in better understanding that the different explanations for the current recession offered by economists are based on their beliefs and affiliations. This is the reason why various economists offer explanations of the causes and effects of the current recession that are often times in opposition with one another.

To expose students to ideas of various economists belonging to different schools of thought and help them realize how diverse these ideas really are and why.

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Teaching Strategies

Socratic method of teaching. Lecturing. Film screening in class (PBS, Inside the

Meltdown). Use of video clips (rather than print sources) of

multiple contemporary economists.

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Sample Video Clips Presented

Joseph Stiglitz: Nobel prize winning economist calls the period between 2001 and 2007 a period of “corporate welfare”.

Ron Paul: well-known politician with a libertarian platform; vocal exponent of laissez-faire capitalism.

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Sample Video Clips Presented

Dan Ariely: proponent of behavioral economics; he proposes behavioral economics as complement for mainstream economics and not as a replacement.

Nouriel Roubini: “Dr. Doom” describes the doomsday scenarios of a recession with long lasting effects which he refers to as a W-shaped recession.

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Sample Video Clips Presented

Nicholas Taleb: former senior Wall Street trader, risk expert and practitioner of mathematical finance. He has been credited with making warnings about the financial crisis.

Barry Schwartz: “The real crisis? We stopped being wise” He claims that everyday wisdom will help rebuild our world. http://www.youtube.com/watch?v=lA-zdh_bQBo

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Teaching Economics Using Media: Hearing From The Experts

– “Teaching economics through media is a response to the work done by William Becker and Michael Watts (1998, 2001, 2003, 2004, 2006) who examined the way that economics was taught at the college level and found that the discipline had been slow to adopt innovative approaches to teaching.

– Preliminary evidence from Girardi (2008) and Raehsler (2009) suggests that using media in introductory courses makes economics more relevant to students, increases class attendance, and raises examination scores.

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Teaching Economics Using Media: Hearing From The Experts

– Using media is especially good for cognitive reasoning. Bloom's (1956) taxonomy lists the following cognitive functions: data recall, comprehension, application, analysis, synthesis, and evaluation. Many media provide the opportunity for instructors to activate all six cognitive domains. “

– Source: http://serc.carleton.edu/econ/media/using_media_enh.html

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Teaching Economics Using Media: Professor’s Experience

Topic immediately engaged students since they saw its significance in their daily lives.

The choice of multiple viewpoints through video clips emphasized the complexity of the issue and the positions on them, moving students away from the fiction that debates invariably have neat pro- and con-divisions.

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More Lessons From A Personal Perspective

The variety of teaching methods used in this course, mostly the non-traditional teaching techniques such as the use of video clips connected to the “Mysterious character” as well as the “Where Do I Stand” exercises that the students had to carry out, increased students in class participation and their interest in the course significantly.

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Lessons From The Students’ Perspective

This strategy paid off in multiple ways as reflected by the student evaluations.

First, it increased the appeal of the presentation and offered opportunities for critical thinking while allowing for extensive use of multimedia.

Second, it made economics less abstract and easier to understand by clearly connecting it to reality.

Third, it allowed students to present a character of their own choice (and theory; one not presented in class) – an eloquent proof of independent critical thinking which has shown that the course has attained its objectives.

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Course & Instructor Evaluation By Students: Narratives

Content related: “The course was very informative about what’s happening in

the world today” and was “very applicable to current events”. “I learned more than I expected in the course of a week”. “The course helped me thoroughly understand the causes and

possible routes the US could take to resolve the problems with our economy”.

“The course made me a more informed citizen”. “I felt much more enlightened after taking this class. I feel like I

am so much more aware of what’s going on in the world because of this course”.

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Conclusion

Overall, the short course was a success. Four factors are responsible for its popularity: Its emphasis on a contemporary topic (the current recession) and using

DVDs and video clips of multiple contemporary economists (rather than print sources).

Its significance to students’ daily lives. Its ability to convey a large amount of up-to-date information in a short

time and a palatable way by using carefully chosen multimedia materials.

Its ability to generate critical thinking by offering students’ the freedom to voice their own opinions and defend them in front of a peer audience.

Can we replicate this for a semester-long course? We will try in the fall of 2015!