Saving the Children—A Rant

Abstract

The conception of economics education implicit in the Voluntary National Content Standards in Economics is fundamentally at odds with what ought to be a primary goal of a liberal education: to teach students of all ages to treat all truth as provisional. Articulate the consensus, but also articulate questions about this consensus, questions coming from the very limitations of the consensus. One limitation is what is omitted—pollution is shortchanged, and sustainability gets nary a mention. Another is the retrogression the document reflects (e.g., the standard that interest rates are determined by flows of saving and investment). For 75 years, a better theory has been available—Keynes's General Theory—a cornerstone of which is that interest rates are determined in markets for stocks of financial assets.

Keywords:

• determination of interest rates
• distribution
• introductory economics
• loanable funds
• pollution
• pre-college teaching
• sustainability

Keywords:

• JEL codes
• A21
• E12
• E43

Notes

1. In favor: Gabriel Chodorow–Reich et al. (2011); James Feyrer and Bruce Sacerdote (2011); Daniel Wilson (2011); Alan Blinder and Mark Zandi (2010); Council of Economic Advisers (2011); Congressional Budget Office (2011). Against: Timothy Conley and Bill Dupor (2011); John Taylor (2011). Inconclusive: Hyunseung Oh and Ricardo Reis (2011).

2. It is not clear whether the appropriate statistic for the stock side of the comparison is wealth defined as net worth, which is the statistic used in the text, or gross household (and nonprofit) assets, which would give an even lower ratio of flow to stock. Currently, gross assets of households and nonprofits are over $70 trillion, and gross saving is around $2 trillion. (Board of Governors of the Federal Reserve System 2011: Flow of Funds, Table F.8 “Saving and Investment by Sector”; Table B.100 “Balance Sheet of Households and Non-Profit Organizations.”)

3. http://www.sifma.org/research/statistics.aspx (accessed November 21, 2011).

4. I have not made an exhaustive search of elementary texts, but the only mainstream text I have found that avoids the loanable funds fallacy is David Colander's. Even in this otherwise exemplary text, loanable funds sneaks in through the back door when Colander discusses crowding out (2006, 735). Colander is also unique in my experience of mainstream economists in his treatment of the demand-supply determination of wages. The conventional Marshallian cross is there (373, figure 16–2), but Colander qualifies the argument by pointing out that demand and supply schedules are not independent when the analysis is applied to an aggregate labor market (377).

5. The course that was rejected (on a virtually unanimous vote) by the Harvard Economics Department was accepted (unanimously) by the college committee charged with approving the offerings for general education. By now I have been teaching the course for close to a decade.

6. My colleagues did have a point. I can attest from personal experience that it is difficult to combine a solid introduction to mainstream economics with a critique. For many students—not all, perhaps not a majority, but many—the insights of standard economics are so counterintuitive that they have trouble getting their heads around these ideas. To be presented with one or more critiques just as they are getting comfortable with, say, the peculiar assumptions of perfect competition or the severe logic of consumer choice, makes for hard going in absorbing both the mainstream and the critiques.

7. The 11th commandment is attributed to Ronald Reagan: “Thou shalt not speak ill of any Republican.”

8. http://www.time.com/time/magazine/article/0,9171,1853302,00.html (accessed January 10, 2011).

9. Actually, not Lucas. Having acknowledged the relevance of Keynes to calamity, he quickly added, “I don't think we are there yet” (Lucas 2008).