Uno | two | three | four1. classical economy
2. neoclassical economy
3. Karl Marx
4. Joseph Schumpeter
5. ordoliberalism
6. keynesianism
7. critical rationalism
8. philosophical criticism
9. monetarism
Uno | two | three | four 1.2 The misery of economics 1.2 The misery of economics Economics is of no use in real life, in other words, outside subsidised "scientific" institutions where discussions papers are produced that are never discussed. It seems that we have arrived at a point in which more discussion papers are produced than read.
Since the author left university, he has done many things like creating websites with almost a million unique visitors a month, teaching informatics, running a language school and many others. However, never was it (save for accounting and related tasks) of any help to have studied economics.
Before starting this project, we reviewed economics textbooks to see if something had changed over the last twenty years. The conclusion was that nothing had really changed. All the mistakes described in this manual, the subsuming of different authors under one economic school (see classic, neoclassic), the unreflecting use of mathematics (see mathematical modeling), the reduction of complex theories to simple concepts and the abstraction of all parameters that are not economic in the narrow sense of the term, can still be found in standard economic textbooks like the one of Gregory Mankiw.
What has really changed and improved a lot is the design. In general, at least in Germany, books by German authors have been substituted by books of American authors, which are generally better written. One possible reason for this can be that American professors depend more than their German counterparts on the estimation of the students. Didactical skills are relevant in the US because students have to pay for their studies. In countries like Germany, professors get this position by publishing in "scientific" journals and, once a position, depend on no one.
Nevertheless and although Milton Friedman tells the opposite, What's Wrong With Our Schools, the mechanism of the free market is not the only possibility to resolve the problem that performance is low when there is no direct relationship between performance and income
The neoliberal solution is very simple, but very often does not work. Neoliberalism supposes that everything should be controlled through market mechanisms and that what cannot be controlled by market mechanisms should not be controlled at all.
There are two problems with this theory. The first one is that, in this conception, there is no need for democratic decision-making processes because, if there is a need to come to an agreement, it can be done through cooperation within a free market context (although in practice this kind of cooperation very often is not really free). This is not pure theory. Milton Friedman and his brother-in-spirit Friedrich Hayek prefer a dictator like Pinochet if they feel he will be a guarantor of the free market.
The second problem is that very often things cannot be controlled through market mechanisms. We will discuss this topic when discussing Milton Friedman.
Public debate about universities is about things like tuition fees, quality of the universities, which universities are the most important ones, the name of the final certificates they deliver and things like that.
These are traditional debates, dating from a time where formal qualifications and certificates were still important because certificates proved that someone was qualified for a certain job (since professional requirements did not change rapidly). To the extent, however, that informal training becomes more important than formal training, the role of universities must change. If the formal training delivered by universities becomes more and more irrelevant because informal training becomes more and more relevant, the role of universities must be questioned. .
The question not only arises with regards to graduates’ integration into the labour market. Even if there is no integration at all, universities can be a useful space for free debate about social issues. This alone is a reason to keep the humanities, philosophy, philology, art and history alive even if this knowledge seems irrelevant from a practical point of view. There are numerous examples of universities contributing in this way. Certain academic philosophers, such as Theodor Adorno, Ernst Bloch, Herbert Markuse had a significant impact on public discussion and initiated important debates.
The situation changes, however, if academics in these disciplines have no impact at all on public debates. For example, there is no longer any need for additional Thomas Aquinas like discussions. Those who are interested in reading the Summa Theologiae can go to a bookshop and buy it.
It is quite evident that some studies, economics, for example, are "book-based studies". The advantage of going to a lecture (see one here: Lecture 7 - Supply and Demand), over reading a book is not always obvious. From a didactical perspective, even a simple book is better. A lecture can only work if the difference between the information emitted and the information the students already have is not too great. In other words, if there is only a smaller gap to fill. If the gap is too large, the lecture must be stopped, though this is only possible on Youtube or similar settings. A book too can be put down at any moment to search for the missing.
The lecturer in the video illustrates the fact that the most expensive something is, the less people will buy it.Taking tuition fees as an example: the more expensive the tuition fees, the fewer the people who will be in the classroom. The author would suggest that students not pay for the lecture, and instead read the book or view a lecture on Youtube. If the students have paid 7000 dollars or more in tuition fees to take part in this lecture, they will never become economists. If someone pays 7.000 dollars for something he can get for 50 dollars at the next bookshop, he has proven that he is not capable of rational thinking.
The students are there because they wish to obtain a certificate, Bachelor’s or Master's degree. The content of the lecture is nothing exceptional; it is the same as in any university around the globe and can be found in any textbook
(In this case, by the way, the original book, Principles of Economics by Alfred Marshall, from which all that the professor is explaining in the lecture on Supply and Demand drivers, would be of greater use to students because Alfred Marshall distinguishes between the short term and long term, something that makes a very big difference as we will see later.)
Although what is taught is always the same, exams are not always identical, and it can be supposed that students attend lectures in order to obtain more information about the exams. For Economics and other "book-based studies", it would be enough (just as coursera.org already does) for the university to provide lectures for free and then only charge for exams and delivering the certificate. In this case, tuition fees would be roughly 100 dollars in total. The only thing to do would be to standardise the exams or provide examples of previous exams.
Discussions about the role of universities are sometimes funny. People argue that discussion and the possibility to raise questions is necessary. In the video linked above, there is no discussion and nobody raises a question, and this is the norm. However, if such elements are deemed essential, it is easy enough to offer a discussion board.
Seen thus, a rational cost-based tuition fee for the study of Economics would be something like 100 dollars for four years. In this manual, the reader may learn for free the same things as at the university, but he does not receive a certificate. For correcting the exams and delivering the certificate, 100 dollars should suffice.
By the way, if the videos were to be produced professionally (beyond the simple filming of a lecture), for example, with the lecturer shown on the right and a graph on the left, hyperlinks to problematic terms, brief tests or small games illustrating the content, this would cost something. However, if it was done for several millions of students, the costs would be almost zero.
People also often argue that there is a difference between one university and another and that therefore the university as an institution is relevant. It may be true that people who studied at Harvard, Yale, Stanford, etc. earn more money, but it is not clear why. If the tuition fees are very high, only a certain type of people can access the university, and this may result in students having useful contacts for the future. Having such contacts helps at times, but it is not very plausible that the student’s higher earnings have something to do with what is taught, at least not when it comes to the study of Economics.
It can be argued that Gregory Mankiw has very valuable things to say and that Harvard University is paying him enough to preserve the secret and only reveal it to Harvard students. However, this is not very plausible. First of all, because it is doubtful that Mankiw has such deep insights and, secondly, if he had them it would be much more profitable for him to write a book. Harvard would be obliged to pay him a great deal of money to keep the secret (and the students would obviously have to keep the secret as well).
The role of the universities will be questioned more and more in the future. If they have no influence on the public debate, if academic curricula are more and more obsolete, if the product they deliver, certificates, can be produced at a much lower price, if the informal training becomes more important than the formal training, the question arises if and why we need them.
With regards to Economics we can say that if they change the academic plans as described earlier, reduction of the teaching of economics in the narrow sense of the word to two years and two years of specialisation, they are needed. Complex projects, for instance, at an international level, are easier to realise through a university than on a private basis, especially by students who have never previously engaged in these types of projects.
However, it is clear that if it is part of the study of economics to form entrepreneurs, we need a different academic staff. An academic staff which was selected on the basis of discussions papers will not be very helpful. They are not even able to adapt a little bit the academic curricula to nowadays needs, something not very difficult to do. Without programming skills, for instance, an economist will always depend on other people because in almost any projects programming know-how is needed.
One very easy thing to do would have been, for instance, to produce an another book on macroeconomics. However, even that was too complicated for them.
The following is a compulsory, MUST READ: End the University as We Know It as it addresses many of the themes of this manual in a concise way.
To provide another example, instead of summarising what someone said about John Maynard Keynes, based on a summary of what someone else said about Keynes, and so forth, it would have been much more useful to place the original work on the internet, pay a general fee for the copyright to whoever holds it (The General Theory of Employment, Interest and Money will only come into the public domain in 2016) and interpret it sentence by sentence. This would have been much more useful than declaring that it is obscure, as Mankiw does.
Since Keynesian economics is derived, by definition, from the work of John Maynard Keynes, one might suppose that reading Keynes is an important part of Keynesian theorising. In fact, quite the opposite is the case. Few young economists --Keynesian or otherwise -- concern themselves with questions of what "Keynes really meant". New Keynesians view their work as following in the broad tradition that evolved from Keynes, but their goal is to explain the world, not to clarify the views of one particular man. If new Keynesian economics is not an accurate representation of Keynes's views, then so much worse for Keynes The reason for this attitude is clear. Despite its remarkable contribution, The General Theory is an obscure book: I am not sure that even Keynes himself knew completely what he really meant. Moreover, after fifty years of additional progress in economic science, The General Theory is an outdated book. The rigour with which we develop economic theories and the data and statistical techniques with which we test our theories were unknown half a century ago. |
Reading this, we get the impression that a Harvard student spends a great deal of money in tuition fees for nothing. If they pay these tuition fees to establish a useful network, then they ought to try a business network like Linkedin, which is much cheaper.
The first problem with the statement that there is no need to read Keynes is a purely academic one. In the academic world, accuracy is important. If someone affirms that another author said something, it must be proven to be true using a quote. (By the way: This is also a good idea in private life.) However, if he is only interested "in knowing the world" and it does not matter what Keynes said, why does he refer to Keynes? In this case, it would be enough to say "I, Gregory Mankiw, affirm…". If he affirms that he is a 'New Keynesian', then he suggests that his theory is related to Keynesianism. However, if he does not care about what Keynes said, the term is misleading or senseless. He would be better off saying that he is a Mankiwean.
Perhaps in a paper at Harvard University a sentence like "If new Keynesian economics it not a true representation of Keynes's views, then so much worse for Keynes" is possible. However, in other countries, for instance in Germany, even at the very beginning of one’s studies it is impossible to write something like this in a paper. What would be said is obvious: "If new Keynesian economics it not an accurate representation of Keynes's views, then so much worse for New Keynesianism." This is not a scientific argumentation. There is no reasoning in this statement.
Mankiw is also not sure that Keynes himself understood everything he wrote. For Mankiw, there is no need to prove this statement. After having proven in this manner the strong logic of his affirmations, he states that statistical methods have improved so much that Keynes is an outdated book. However, in short, a statistical relationship never, absolutely never, proves anything. A statistical relationship does not permit any conclusion about a causal relationship, and even less so should a statistical relationship permit one to assume that this relationship will be stable into the future. It is completely unclear why students of economics at Harvard University pay tuition fees. They should be paid to be there.
If someone from Harvard is reading this manual, he will find a short introduction to Keynesian theory by downloading the little book from the homepage of this website, or can access a more detailed description (including quotes from The General Theory of Employment, Interest and Money) in the chapter about Keynes. The problem with Mankiw is that he studied the IS-LM model, and he would have done better questioning if this model, which he uses in his textbook, is a correct interpretation of the Keynesian theory.
However, this is not our main point. Instead of making obscure affirmations about the obscurity of The General Theory of Employment, Interest and Money, it would have been much more intelligent to put it on the internet and explain it sentence for sentence so we can determine if it is an obscure book or not.
(By the way, the main conclusion to be drawn from Keynesian theory is NOT, as Mankiw affirms, the need for expansive fiscal policy. The book is called THE GENERAL THEORY ON EMP L O Y M E N T, I N T E R E S T and M O N E Y. And a book about employment, interest and money is about what? Exactly! About bananas, potatoes and strawberries. The book rejects the Classical, and Neoclassical theories of employment, interest and money, and many conclusions can be drawn from the book, for instance, that it is impossible to transfer present consumption to the future by saving. This approach only works at a microeconomic level, but not at a macroeconomic level.)
The example of the academic curricula illustrates a more general problem. Milton Friedman argues that tuition fees are a guarantor for effective academic teaching, see Milton Friedman - Should Higher Education Be Subsidized?.
(We will not deal with the basic error of Milton Friedman’s arguments. The main point is that there is no relationship between tuition fees and the actual costs of higher education and as universities, in general, do not have a product cost controlling system nobody knows how much it costs. If we divide government spending in Germany on universities by the number of students we obtain something like 2.200 dollars a year, more or less 20 percent of the tuition fees paid in the US and as the GDP per capita in Germany is almost as high as the GDP per capita in the US, it is difficult to believe that higher education is worse in Germany. However, in fact, the author does not believe in these 2.200 dollars. First, this is an average, as economics is much cheaper than medicine. Second, there are many ways to cut costs, for example through the use of e-learning. We will, however, focus on a more general problem.)
The argument for tuition fees is that the one who get the benefit from the study pays for it, rather than the taxpayer. This is a complicated issue because higher education leads to more income and more income leads to more taxes. If it is true that higher education "pays", then it can be assumed that the taxpayer would get his money back. If it not true, from a purely economic point of view, then higher education does not make sense in either instance. There is also a second person who profits: the employer. Using the same argumentation one could argue that employers ought to pay for a person’s higher education.
There are thousands of lectures on economics about goals and the necessity to define goals. In these lectures, a distinction is made between monetary and non-monetary goals, between compatible and non-compatible goals, between goals which can be measured quantitatively and goals that can only be described qualitatively, and so on. Normally this kind of discussions seems useless because they are trivial. However, in practice, they are not as trivial as it might seem at first glance. Systems that are not controlled by clear goals that can be measured through concrete parameters sooner or later will end up on the wrong path.
In market economies, prices exert a very efficient, objective and anonymous control; there is even no need for control as the process functions automatically. In areas like jurisprudence or higher education, there is no inherent control. A judge, for example, can argue that he needs two days to make a judgment otherwise the quality of his judgment would be poor.
In fact, we have two different systems of higher education: a system where the universities are largely financed by tuition fees and a system where there are no tuition fees or very limited ones. The argument goes that a system with tuition fees is more similar to a market system and, therefore, more efficient. This raises several questions:
1) Does a tuition fee have a direct impact on the academic plans, performance of the teaching staff, and the way teaching is organised?
2) Assuming that this is the case, are the people responsible for the academic plans able to adapt to the requirements of the labour market?
If the government or the taxpayer finance the studies, then the money is part of a general budget and its redistribution depends on the priorities of the universities. Tuition fees are in this case part of the general budget, and it is unlikely that this budget is redistributed in proportion to the number of students paying the fees. It is even possible that the money is used to cover costs that have nothing to do with teaching. If we assume that the careers of academics depend on the publication of discussion papers, it is more or less certain that most of the money will be spent in producing them. There is no evidence that the academic staff will behave in an altruistic manner. The prestige of a university depends on their publishing activity and not on their teaching. Perhaps tuition fees have the effect that the money is actually spent on what student expect it is spent for: teaching.
However, even if we assume that altruistic aims motivate academics, can we assume that they can improve their efficiency? In other words, are they able to improve their students’ integration into the labour market if they receive more money? What concretely would an economics faculty do with more money to improve the integration of its students into the labour market? Hire more people, of course. This would lead to smaller courses and a better student-teacher interaction. However, would this lead to better integration into the labour market? Perhaps they would only learn irrelevant things better, or perhaps not even that.
In some isolated cases, for instance in biology, it is possible that more money makes a study more effective. If a Biology faculty has more money it can purchase more equipment, for example, a confocal microscope, which can be very helpful in finding a job because it gives students the possibility to become acquainted with the use of this type of microscope.
In other words, if there is a clear signal from the market of what is needed (in Europe, for instance, related to economics, a good knowledge of the SAP system), universities can be substituted by private companies if these were entitled to deliver officially recognised degrees. We already have cases like this; a Microsoft certification, for instance, is in some circumstances more useful than a degree in informatics, and much cheaper. A tuition fee for philology of a modern language would be superfluous if private academies were entitled to deliver degrees that permit their holders to work in public schools. The academies can do this much more cheaply. If we discuss tuition fees, then we also have to discuss alternatives to the universities.
It is common that academics have no substantial working experience, cannot identify skills that are in demand and adapt the academic curricula accordingly even when there are clear signals. Even clear signals are ignored.
Commonly, academics have no substantial working experience and cannot identify skills that are in demand and adapt the academic curricula accordingly even when there are clear signals. Even clear signals are ignored.
Economics faculties are not exceptional: every system tries to escape control. (Not only systems, by the way. We all try to escape control. We like the market only from the perspective of a consumer; we hate it from a producer’s perspective.) Economics faculties are only exceptional in the sense that their lecturers understand the problems very well, in theory, but not in practice.
Public debate about tuition fees is dominated by academics. Milton Friedman is a typical illustration. He sees many problems: the problem that through taxes lower income groups contribute to higher education although they receive no benefit from their contribution, the limited motivation of students, and so on. He does not question the qualification and commitment of teaching staff. Sometimes he does not want to understand the basic rules of free markets that there is no such thing as tenure in the free market, not even for five years. That is why it works.
Whether universities are financed through public funding or by tuition fees makes no difference to a professor who has tenure. There is no market mechanism in both cases, and no incentive to improve his didactic skills, to update the academic curricula to today's world or to change the organization of teaching. This is the crucial problem.
The argument of Milton Friedman that publicly financed universities are a problem because they redistribute income from the poor to the rich is not very convincing. If more students from lower income groups were to attend university, then there would be a redistribution from the rich to poor. If in the United States the overwhelming majority of the students come from the upper class, there is something wrong with the American educational system. This can be reversed.
However, it is obvious that a publicly financed university serves the public. Such is the rule in a free market society: the one who pays, commands. Therefore, it should be obvious that all publicly financed universities should be obliged to publish on the internet all their lectures financed from public money. In this way, people (including interested students) could quickly obtain an overview of the performance of the universities. Universities financed by tuition fees could then keep their teaching secret in the hopes that there are people who are willing to buy a pig in a poke. They would do this at their own risk as in a free market economy everybody has the right to ruin himself.
Publishing all the lectures on the internet would have a secondary effect. Professors would have a chance to distinguish themselves from their competitors, and their universities would attract more students and more financing.
When the internet began, the following caricature: on the internet nobody knows that you're a dog became very famous. Its meaning was clear: on the internet, a little company can present itself as a global player. The truth, however, is somewhat different. On the internet, there is almost no restriction on whatever someone may want to say, and in whatever way, is possible. However, if an Economics faculty has a website without any content at all, it is clear that it does not have much to say. If they do not show innovative projects, new methods of teaching, topics beyond the mainstream, interesting cooperation with other faculties or other Economics faculties in other countries, and the like, one has to assume that its members are simply waiting for retirement.
If someone has interesting projects, it is likely that he is interested in informing the world about these projects, and the easiest way to do this is through the internet. If nothing happens on the website, it is probable that nothing happens in reality.
The solution given by Neoliberalism to the assumed inefficiency of education systems (see ....when people pay for what they get, they value what they get...) is comprehensible, but far too simple for many reasons. Milton Friedman would not have had a successful academic career by talking about real problems, and he would have been very upset if someone had indeed introduced free market elements, such as those described above, into higher education.
Last but not least, in the future teaching will become more and more irrelevant for universities. Content will be offered in thousands of different ways, for free and at any time, on websites, through downloadable books, through apps, audio books, videos, etc., in any language, for different learner types, from different perspectives and for different uses.
In the long run, universities will even be obliged to participate in this process because if they do not participate the question of why they are needed at all will be raised. If they lead this process and do better than private initiatives, they stand a chance of playing an important role. If they are not part of this process, and private initiatives do better, their relevance will be increasingly questioned.
The function of universities, at least with regards to subjects such as economics will be different in the future. More than any private initiative, they have the possibility to initiate projects. In real life learning by doing is expensive and not always possible. To start a project just to accumulate experience is normally not possible. In real life, this can happen, but it is never voluntary. Only a few people have the time to spend six months only in order to learn how something works without earning any money. A university can try to import green coffee beans, free of customs duties and teach people on a nice website how to toast them. Ethiopians do this, even when they live in Germany. Perhaps there is a market for green coffee beans. Even if it does not work, in the end, the students could learn a lot from the experience. Complex projects always require different people with different qualities.
In the case of the coffee beans project, a designer is needed to produce the website, translators are required to translate it, programmers are required to set up the system of shops, someone who speaks Amharic (the language spoken in Ethiopia) is needed to obtain the beans. If the aim of the project is to provide income in Ethiopia, cooperation with an NGO can be a good idea. In real life, it is impossible to bring all these people together, except of course if someone is willing to invest a lot of money and buy the people needed. A project of this sort would be easier to organise at a university if the students involved would be allowed to obtain credit for their involvement. More can be learned through projects of this kind than by discussing the Solow growth model (the economy never grows because someone puts curves on a piece of paper). To take initiative is something that must be learned, and there is an urgent need for people to be able to do so.
