Stephen Kinsella sends us to a post on economics education by Paul Gregory, author of an Economic Principles text since the 80s, which is now in its seventh edition.  Gregory tells us in the post that "There is no need for a new Economics 101. What we have experienced over the past two years is nothing new. There is nothing unexpected that has happened. Events however should serve as “teachable moments." I think that he's right about some stuff, wrong about others and, more problematically, behaves inconsistently in his approach to different theories.  

First, I agree that Gregory's post is useful in telling us what is wrong with current policy, that is, that some of the theories that economists in the current US administration have about consumers and firms' preferences and behaviour have been falsified.  This is good theory.  However, Gregory then takes the behaviour of firms and consumers as confirming evidence of alternative theories. This is a bad theory.  You can't apply falsifiability to some theories and then use the data you used to falsify those theories as confirming evidence for theories that you prefer.  I could, equivalently, have found falsifying evidence for the theories that he proposes and confirming evidence for the theories that he argues are falsified.  This is bad economics and bad philosophy. I'd be differently inclined were he to take a Bayesian position and say that the evidence alters our priors about the theories that we have and that we should adjust our expectations and our probabilities accordingly, but he doesn't.  Consequently, I would have been more interested had Gregory said, 'These are Keynesian hypotheses that have been falsified' and 'These are Neoclassical hypotheses that have been falsified.' Then he could have said, 'Here are hypotheses (Neoclassical/Keynesian or otherwise) that have not (yet) been falsified.' I suppose he could have put in his comments about the behaviour of the theories in his text at this juncture, but he should have also looked for falsifying evidence of those theories.

Second, his claim that 'Nothing unexpected has happened' (emphasis on expected, that is in anticipation) is outright rubbish.  Many (most) economists did not expect what happened.  We can use economic theory to explain it in hindsight, but saying it was expected by those who learned from textbooks such as his is rather outrageous. They (we) did not expect it, did not anticipate it, and subsequently have bungled much of the management of it. In the future we shall be able to use the data from the crisis and the subsequent policy interventions to create a better understanding of extant theories, but the point would be to do so in a methodologically consistent and coherent manner.

Third, and nevertheless, he makes good points about the teaching of moral hazard, uncertainty and information asymmetry.  I strongly advocate teaching these ideas in economic principles courses and I suspect that we should give them more weight than ever before.  In fact, we should do almost all of our teaching in the understanding that information is almost never perfectly symmetrical, on the contrary it is almost always imperfect.  What would this do to our economics principles course if we assumed that imperfect information was the norm and not the exception.  Well, I would argue that, in opposition to Gregory, we would need a new Economics 101 and that, consequently, we could coherently take the past few years a 'teachable moment' in the understanding that economists themselves are victims of imperfect information and are not exempt from their own theories.    

On Thursday I gave a presentation at the School of Economics at the University of Cape Town about incorporating pop culture and better use of technology into your teaching.  I've been trying to experiment with various things in my teaching recently and I plan to experiment more in the future.

Jonah Lehrer recently wrote about the identifiable victim effect. In the piece he talks about the work of Paul Slovic and identifiable victims. I appreciate the work that Slovic has done. I have met and interacted with some of Slovic's co-authors and think the work is great. The idea behind identifiable victim bias is that people respond differently when they see one 'identifiable' victim rather than a bunch of statistics indicating the 'true' depths of poverty. For example, people give £3.50 in the one case and less than half that in the other. Lehrer says the following about the different reactions that people have:

"Of course, this is a deeply irrational reaction. We are much less interested in helping a victim – we only want to help the victim. (This bias is known as the identifiable victim effect, since it suggests that we react much more strongly when the victim can be specified.) Why do we this? Because human charity is ultimately rooted in our compassionate feelings, and not in some rational, utilitarian calculations. We are not Vulcans."

I've just read this review - by John Gray - of Matt Ridley's book The Rational Optimist.  I originally intended to comment on the article's content, then realised that I had to refer to some commenters who would probably just troll (because, I suspect, their ignorance displays their misunderstanding of the position that they advocate).  Anyway, here's the extended version of the comment I planned to write.  My comment is intended to be about the comments and not so much about the review itself. 

I get the sense when reading the comments on Gray's review that people are misconstruing  as a philosophical point what Gray intended instead as a description of an historic process, i.e. when Gray says "Laissez faire [...] was imposed through state power".  What Gray seems to be saying is that what we mean when we talk about 'laissez faire' occurred not only as a consequence of decentralized decision-making by people, but also because of the application of state power to reinforce and support (an approximation of) laissez faire.  In terms of British, Dutch and US history that makes sense: these countries had people who made decentralized decisions to create and sustain free markets, and then used state power to mobilize the populace to protect these free markets.  So-called laissez faire was not only the result of a decentralized process, but also a consequence of people coming together and asserting the primacy of free markets through state power and democratic systems. 

Also, semantically, laissez faire is not the 'absence of state power' as some commenters assert.  It is the absence of state intervention in industry and the market particularly, rather than the absence of any government intervention or state power generally.  The absence of state power is anarchism, not laissez-faire.  Consequently, it's entirely consistent for state power to support laissez faire market organizations by using state power to prevent state intervention in markets. This is what Gray said.  Moreover, state power is often necessary to ensure that markets remain free.  Adam Smith made this point in The Wealth of Nations when he observed that "People of the same trade seldom meet together [...] but the conversation ends in a conspiracy against the public." (WoN, Book1, Ch 10) Smith argued later in The Wealth of Nations that government would be required to sustain competitive markets against the forces of merchants operating in the market.  Consequently, it is only through the exercise of state power that free markets, that is laissez faire, can be protected and sustained.  Anarcho-capitalism is a pipe dream. 

Some other commenters also seem to suggest that the kind of capitalism used by China is equivalent to a 'free market'.  I suggest that they read their Hayek on the differences between private property (several property) and state property and what sustains liberty in markets (see, for example, The Fatal Conceit).  The point is not that China was a Communist country, but that China now engages in a form of state-sponsored capitalism (also, anyone who claims that the Chinese economy is a free market obviously forgets that the Renminbi is not a floating exchange rate - they need to read their Friedman).  Ridley apparently ignores China as a counter-example.  It appears he also ignores other east Asian State-Owned Enterprises and their roles in these quasi-capitalism economies.  It's the problem that 21st century capitalism may not only be about private property, but about state property and how states dispose of their property in ways that might contravene principles of liberty, yet their policies result in improved material flourishing of their populations.  It's a problem for those, such as myself and Ridley, who advocate a capitalism based on private property.  We need to examine and confront this problem, not ignore the problem as Ridley apparently does.

Independent of these problems in the comments and the massive problems and glossings-over in Ridley's book, Gray gets several things wrong too.  It would take him some time to cover all of them, so I will try to cover one: it appears as though Gray has not read any of the literature on cultural evolution and group selection, often in counterpoint to and contention with gene-level-only selection arguments.  Consider, for example, the work of Robert Boyd and Peter Richerson, or that of Luigi Luca Cavalli-Sforza.  Gray incorrectly labels cultural evolution a 'misleading metaphor'.  He portrays his ignorance of the topic by saying so - it's not only about memes and Susan Blackmore.  Gray is right to call Ridley on Ridley's poor history, Ridley's mis-characterization of cultural evolution as an ultimately teleological force with laissez faire capitalism as its end, and Ridley's attempts to ignore confounding facts like China.  But Gray should have been more careful in his representation of evolutionary theory as he ignored important ideas in contemporary theory that approach the problems in a theoretically well-grounded manner.

I am slowly uploading my lectures from Cooperation and Competition (EC2007S) at the University of Cape Town to
Cooperation and Competition - 1st Lecture 26 July 2010 from Simon Halliday on Vimeo.
">vimeo, a good video sharing site.  You can see the "channel" for the videos here: Cooperation and Competition.  You can subscribe to the RSS feed of the channel if you're interested.   Cooperation and Competition is a course in introductory game theory using the textbook Games of Strategy by Dixit, Skeath and Reiley (which I mentioned recently in this post).  The videos are a combination of a video of me and a screencast - that is a video and audio capture of the slides that I use for my lectures.  The book is great because it covers all the basics of game theory with many good intuitions.  I try to make the content even more intuitive and accessible in my lectures, brushing over a bit of stuff initially though defining it more clearly later.  I only lecture six weeks of the course, going quite in depth into the ideas and applications of strategic form games, games with many players and extensive form games.

I have embedded the first lecture below.  I was quite fortunate to have Helen Zille and Patricia De Lille declare an agreement to cooperate the day before the course started, which meant that I could use that as a starting point for a discussion of agents agreeing to cooperate in political games.  This meant that students could see from the get-go that game theory offers all kinds of interesting insights into various aspects of interactions outside of its immediate purview, that is outside of economics (I'd rather not be accused of 'economics imperialism' here, the idea is for students to see that there are many applications of game theory and then later to develop a more nuanced view of the limits and extensions to the theory once they have a better understanding).

Cooperation and Competition - 1st Lecture 26 July 2010 from Simon Halliday on Vimeo.