". . . banking policy cannot be validly interpreted in terms of one-way causation."
". . . the velocity of circulation of money is not even approximately constant."
"Every citizen who owns government bonds includes them when drawing up his periodic balance sheet, along with his other assets. But he is a very rare man indeed if he also includes as a present liability the amount of future taxes which he may have to pay to finance government interest payments or debt retirement. He does not even have a way of estimating his share of those taxes."
The above observations were written nearly half a century ago by an economist since characterized as a "formalist" and as one of the key figures in the neoclassical synthesis. They are startling for their reminder that some controversies we think of as contemporary have, in fact, been around for a very long time. For this reason (and others), I have taken these excerpts from the first, 1948 edition of Paul Samuelson's Economics--one of the most revolutionary instant successes in the history of textbooks. Those who go back to it will find many other surprises awaiting them.
Returning to this book (and pondering some of the reasons for its spectacular capture of the market) is an especially worthwhile exercise today, now that the North American economics profession has finally got around to taking a hard, critical look at its teaching curriculum--both graduate and undergraduate. The troubles besetting our curriculum are due in some measure to inconsistencies, quarrels, and other problems in the higher reaches of theory and applications. Yet another cause is our inattention to basic pedagogics, where the questions loom: What are we trying to teach? To whom, and how, and why?
Investigators such as David Colander and Arjo Klamer have established that students themselves are among those thoughtfully aware of something amiss in the curriculum. (See The Making of an Economist in For Further Reading.) Theirs and other commentaries have helped to generate a number of further studies and proposals for reform.
Square one--its importance
I should like to focus here on square one of the post-high school curriculum--the introductory or principles course (usually called "Economics 101"). Having willingly participated in its teaching for more than twenty years, I believe the course is more important than one might think from the condescending references so frequently made to it. I also believe that there has been significant pedagogical retrogression in it since Samuelson 1.
Economics 101 (and its accompanying textbook) is important for four main reasons:
o First, this is the place par excellence where the economics profession is challenged to take a broad, holistic view of itself and its priorities, and to explain to a large public, in reasonably accessible prose, just what it believes itself to be up to, and why society should care.
o Second, Economics 101 exerts a surprisingly pervasive influence long after the final exam. For instance, as noted by Alain Enthoven, its concepts and approaches form much of the substance of day-to-day advice and persuasion (especially when called for in a hurry) by economists to politicians and other lay people. Enthoven wrote:
". . . the tools of analysis that we in defence use are the simplest, most fundamental concepts of economic theory, combined with the simplest quantitative methods. The requirements for success in this line of work are a thorough understanding of and, if you like, belief in the relevance of such concepts as marginal costs and products in complex situations, combined with a good quantitative sense. The economic theory we are using is the theory most of us learned as sophomores. The reason Ph.D.s are required is that many economists do not believe what they have learned until they have gone through graduate school and acquired a vested interest in marginal analysis."
Nothwithstanding subsequent advances in quantitative methods, what Enthoven here says about belief and vested interest retains much truth. I will refer to it again later.
o A third reason for critical examination of 101 is that it is our great, initial recruiting station and boot camp. The easy part of this function is setting things up to weed out quickly the hopelessly unmotivated and unfit. A few whiffs of algebra and semi-log diagrams usually take care of much of this. The hard part is designing the course to attract and retain those most likely to become good economists. This implies a prior decision about what kinds of people we most want in the club: Creative thinkers? Keen observers of reality? Narrow conformists? Passionate friends of humanity, or of the status quo? Bold adventurers into the intellectual unknown? Lovers of intricate but ultimately orderly problems, with unique solutions that resemble crossword puzzles?
o Finally, even for that great majority of 101 students who, while not manifestly unfit, do not subsequently approach the altar and declare for economics as a career, the experience of it can still be important, and can influence how (as future citizens, voters, business people, bureaucrats, and politicians) they will regard our profession and its pronouncements. Our heavy philosophical inheritance of Benthamite utilitarianism--"greatest good of the greatest number"--should warn us against treating this group as relatively unimportant passengers through our transit lounge.
Square one--its troubles
So 101 is important, but also in trouble. Gradually, over the past 40-odd years, it has become seriously overweight and otherwise out of condition. Little by little, it has turned into an impossibly crowded and confused cram/survey course--about principles and many other things--that moves at blinding speed. So blinding is the speed of change that the wise student treats it as a largely formalistic hazing-cum-indoctrination rite in which the real game is to memorize a few dozen key diagrams and equations, plus the right answers to two or three hundred multiple-choice questions. Whichever student stops to think--But how do I actually go about maximizing utility in a supermarket with 20,000 items to choose from? Is it as if I mentally process nearly 100 million indifference curves?--is lost. Whichever stops to think about the deeper contradictions of the story line as a whole--"If the transition to a money economy dramatically reduces transaction costs, how can money be neutral in the long run?"--is really lost, and will never catch up! Instructors troubled by the overcrowding are advised to pick and choose chapters and parts of chapters, but those who do this frequently find themselves in a situation similar to that of purchasers of furniture kits who discover, at a late stage of assembly, that one or two key fasteners are missing.
Samuelson's success
How did Samuelson 1, at just over 600 pages of main text--a third less bulky than its typical modem counterparts-succeed in being more manageable and coherent? Ironically, part of the answer lies in the fact that the book was not initially aimed at future economics majors! The preface opens:
"This book is written primarily as a textbook for those who will never take more than one or two semesters of economics but are interested in the subject as part of a general education. It aims at an understanding of the economic institutions and problems of American civilization in the middle of the twentieth century. National income provides the central unifying theme. . . . With the needs of the intelligent layman in mind, the author has been ruthless in omitting completely many of the usual textbook topics and in reducing to more appropriate emphasis the conventional 'marginal' analysis of 'value and distribution' theory. This has released space for an extended presentation of the rich array of quantitative material about economic institutions that has become available only within the past half-dozen years."
Samuelson the institutionalist! Will the Journal of Economic Issues ever publish an article with that title?
But the greatest irony is that, in almost no time at all, future economics majors and their instructors wanted the book too. It almost certainly increased significantly the numbers of students choosing to be majors, and in some cases, later on, economists. A whole, new, right-shifted demand curve appeared to have been sitting out there waiting for this product.
Why such broader-than-intended success? For starters, the ruthless pruning clearly paid off, and resulted in a manageable teaching vehicle, as contrasted with today's junior Palgraves or massive advertising catalogues of too-brief notes on too many distinguishable branches of the subject and its numerous controversies.
The inclusion of an extended, entry-level treatment of the then-new Keynesian national income analysis certainly did Samuelson 1's sales no harm, but it was not unprecedented: Lorie Tarshis' The Elements of Economics had done as much a year earlier.
So we must look for explanations to other path-breaking features as well. One is undoubtedly the prose style--brash, hard-hitting, and 1940s-contemporary--in sharp contrast with the grave, Marshallian locutions previously thought proper for the dismal science. But this is, in some degree, deceptive. The book is a good deal more subtle and complex than it appears to be at first, but it takes a trained economist to spot this. Meanwhile, the argument--subtleties and all--is driven forward by a winning, youthful ebullience. One senses that the author finds fun in economics and, in laid-back, unbuttoned mode, wants to share some of it with a broad public. At a more serious level, he evinces a passionate belief that economics is policy-relevant and otherwise useful. Everybody should know something about it, so that we may better avoid unemployment and depression--and this for more than just economic reasons:
". . . no less important is the fact--clearly to be read from the history of the twentieth century--that the political health of a democracy is tied up in a crucial way with the successful maintenance of stable high employment and living opportunities."
The real world
In 1948, that was a powerful recruitment pitch for economics. By rights, it should be again, as events in Eastern Europe and elsewhere uncomfortably remind us of the links between unsatisfactory economic performance and the rise of racism, xenophobia, and extremist political movements.
Both real-world connections and institutions are constantly emphasized in the book. By the author's expressed intention, few geometric diagrams--especially diagrams with abstract or stylized values along their axes--are provided. Many of the diagrams and most of the tables display official U.S. statistics. There is a lengthy appendix on elementary accounting, about which Samuelson claims: ". . . it is necessary for every student to have some understanding." I say amen! Among other things, it introduces students to stock/flow distinctions--for example, as between balance sheets and income statements.
A lively discussion of "labor problems" is centered on unions and illustrated by an imaginary but realistic cast of a carpenter, an auto worker, a self-made businessman, etc. In the treatment of household finance, considerable advice is proffered on avoiding interest-rate rip-offs on car loans, plus much statistically documented material on the composition of modest investment portfolios. In one of the best chapters of the book, "The Dynamics of Speculation and Risk," the student is made aware of the importance of risk and uncertainty in economic life, and of some of the rational, institutional devices that real-world economic actors have invented to contain them.
In sum, especially in the early chapters, there is an astonishing amount of largely descriptive and institutional material--founded, to be sure, on a discreet subfloor of theory. But for the beginning student, the principal impression is of relevance piled upon relevance, with rarely an opportunity lost to make contact with the more familiar economic problems of ordinary consumers, business people, and politicians. As a result, instead of being thrown directly into a cold bath of assumption-bound abstraction, the student is gradually seduced and motivated to make the growing intellectual effort demanded by the income and allocative analysis of the later chapters. By that time, the need for theory, as a generalizing, explanatory, and pulling-together device, has become clearly manifest.
So, while this cannot be retrospectively tested in any formal manner, among the reasons for the book's success would seem to have been its daring selectivity, its vigorous prose, its optimism, its unabashed insistence on economics as a useful policy study, and its adherence to the good old pedagogical rule of leading the student gradually from the relatively familiar (car loans) to the relatively unfamiliar (most theory). The book also gains coherence from its use of national income as a unifying theme. How is its terse treatment of microeconomics fitted into this? Not by any elaborate neoclassical synthesis, but simply by Keynes's own maneuver of arguing that once full employment was achieved, traditional, allocative microeconomics could come into its own.
Sea changes
Obviously, much has changed, in the world and economics, since 1948. A peripherally updated version of Samuelson 1 clearly would not do today. The latest edition of Samuelson/Nordhaus is certainly a greatly altered product from its landmark progenitor.
Yet there is still much to be learned from those earlier pedagogics: For instance, can all that down-home, institutional detail now safely be dropped or truncated (as much of it has been) on the grounds that today's more sophisticated students can be relied on to pick it up by osmosis? Not in my experience. If anything, beginning students are less economically sophisticated than their parents and grandparents were. The discouraging time-trends of literacy and numeracy test scores are well-known. Far fewer students now regularly read newspapers--a medium still miles ahead of television in its coverage of economic and business matters.
Even fewer students now come from economically instructive family backgrounds in farming and small business. TV and a variety of new household forms and labor-force participations have reduced to a shadow the tradition of the leisurely, discursive, middle-class dinner table. The one area of the economy about which modem students seem better informed is that of part-time and other secondary labor markets, in which they increasingly participate year-round to finance their education.
Now, one could recapture some of the older Samuelsonian virtues simply by making one fairly major change and several lesser ones to the current textbook model. The major change would be to shorten, be more selective, treat fewer topics more intensively, and generally abandon the attempt to crash-survey in two semesters nearly the whole discipline or even the mainstream part of it. Instead, the book would concentrate on introducing the subject--on inviting and seducing students into those parts of it to which they could readily relate via personal observation. This would motivate more of them to crave deeper and more difficult explorations.
Among lesser changes, a larger proportion of the book would be devoted to explaining more fully the historical development and functioning of key economic institutions--the firm, money, spot and forward markets, and financial intermediaries. The purpose of economics as a means of improving human welfare (its highest purpose, according to Marshall), and its status as the policy study that the author who entitled his work Wealth of Nations clearly meant it to be, would be freshly reemphasized. Also reemphasized would be relevance, on a more systematic and continuous basis than sporadic boxes that congratulate the real world for now and again throwing up particularly striking instances of conformance with elementary theory.
Traditionalism redux
All this would be very well, but it would not, I think, endure. Nor would it get to the heart of the problem that originates at higher levels. Although, as Colander observes, a strange disconnect has emerged between undergraduate and graduate curricula so that an undergraduate economics major may be no better a preparation for contemporary graduate studies than, say, a math major, it is in the graduate schools and on upward that the putative core of economics gets defined and undergraduate textbooks get written. And it is there too, where, not long after Samuelson 1 threw its remarkable dash of cold water on the invisible hand, and relegated traditional, full-information microeconomics to a less central position, the forces of tradition (recall Enthoven's point about belief and vested interest) began to recentralize it--in elementary textbooks and elsewhere.
It is not that traditional, allocative economics--whether low-tech or high-tech, or couched in mostly Marshallian or mostly Walrasian form, according to student clienteles--should not be taught, Of course it should! It retains much explanatory power; as a polar case, it helps greatly to illuminate by contrast the broad, real-world middle ground of oligopoly and bounded rationality (see especially the Arrow/ Debreu conditions for full competitive equilibrium). And finally, it is the indispensable admission ticket to much of the greatest and still relevant economic literature of the past.
What is deplorable is the persistent attempt to represent traditional economics as both central and dominant in the discipline--as the ultimate foundation of everything. This is deplorable, first, because the basic model is fundamentally a historical. As a body of economic laws or principles, supposedly valid in all places at all times, it necessarily tends to down-play and spin off to the periphery the broad currents of history and the evolution of economic institutions through time.
Second, with its starting focus on full-information price-clearing, it is basically ill-adapted to explain such highly important phenomena as cyclical fluctuations in output and employment, non-price-clearing mechanisms in labor and other markets, advertising, product and process innovation, and economic development generally.
Attempts to adapt it have indeed been made. They have soaked up incredible amounts of the time and energy of some of the keenest minds in the profession. But because of the inappropriate starting point--with its lingering, heavy undertones of full-information analysis--the results have tended to be clumsy, prolix, implausible, and intellectually resource-wasteful. Old ghosts have returned. Ricardian equivalence stalks the land again, when most of whatever needed to be said about it was summed up in the fourth of the paragraphs of Samuelson 1 cited at the beginning of this article.
In elementary textbooks, one of the areas most damaged by this theoretical counterrevolution has been the treatment of macroeconomics. Students used to enjoy this; now they must venture, much less enjoyably, on to a highly disorienting battleground---one "swept with confused alarms of struggle and flight." The unexceptionable contention that macro-economics should have better microeconomic roots has been crudely reinterpreted to mean that macro must shape up unidirectionally to micro. One of the many pernicious results of this has been to litter the textbooks with retreaded 1920s doctrine, such as the old British "Treasury view"--crowding out is always and everywhere one for one. For this and other reasons, fiscal policy is impotent. As someone antique enough to have witnessed, not only the Reagan tax cuts of the early 1980s, but also the transition from the economy of the Great Depression to that of the Second World War, I cannot, in good conscience, urge students to spend much time on that one. They must learn to endure controversy, but not factitious controversy.
Heisenberg revisited
A key word here is uncertainty--genuine, residual uncertainty--not knowing with any substantial confidence many aspects of what (or how much of what) the future holds. Real-world economic actors, peering ahead in time as they must, do not love uncertainty. But, on the whole, they accept it rationally as a fact of life, and, over time, have invented institutions and precautionary tactics of remarkable ingenuity to shrink it down considerably and otherwise mitigate its negative effects.
For many economists, by contrast, uncertainty is the ultimate Hallowe'en scare-word. Throw it into a theoretical discussion (along with tart citations from Chapter 2 of Schumpeter's Theory of Economic Development and Chapter 12 of Keynes's General Theory ["animal spirits"]), and horrid visions are conjured of a nihilistic economics suddenly stripped of all pretensions to science and reduced to unstructured, pseudosociological chit-chat. After the manner of mid-Victorians confronted with sex, immediate attempts are instituted to cover up or transmute the unwanted intruder--to reduce it to safe, mathematically tractable probability distributions, to treat it as a series of shocks wholly exogenous to the economic system as modeled, or to argue that if people simply do the best they can with the information they do have, the essence of the model remains unscathed.
This is highly irrational. No good can come from treating in such dodgy fashion what real-world actors, all but unanimously, declare to be one of their central economic anxieties. Is not admission of ignorance the beginning of wisdom for actors and observer/analysts alike? For my own part, I cannot envisage a plausible macroeconomics or microeconomics in which uncertainty does not play an important role. In that respect at least, it is micro which should be shaping up to macro--not the reverse.
To be sure, uncertainty, like atomic particles, is not directly observable. (Although the University of Michigan's long-running confidence indices come close to measuring something like its reciprocal.) But what people do about uncertainty, such as stocking their economic medicine cabinets with extra amounts of that sovereign remedy against surprise--liquidity--is eminently accessible to measurement and analysis.
Now, assuming parallel revolution at higher levels, let us blue-sky an ideal, new-era introductory textbook. It should capture the old Samuelsonian virtues. It should welcome, not repel, history, institutions, and the evolution of the firm and other institutions through time. Surprisingly much of that evolution is driven by emerging economic imperatives (see Alfred Chandler's masterly The Visible Hand).
Curricular reform
While the marginalists won out in the epic battle between the "historicist" and "marginalist" economists of a hundred-odd years ago, major thinkers have since reminded us that, in the long run, economics repulses history at its peril. Schumpeter observed that the distinguishing mark of scientific economists was their command of history, statistics, and theory. He further asserted that, if he had to start his economic studies all over again, choosing only one of the three, history would be his choice. He also stated in History of Economic Analysis:
". . . teachers or students who attempt to act upon the theory that the most recent treatise is all they need will soon discover that they are making things unnecessarily difficult for themselves. Unless that recent treatise itself presents a minimum of historical aspects, no amount of correctness, originality, rigor, or elegance will prevent a sense of lacking direction and meaning from spreading among the students, or at least the majority of students."
Later, we have this from Sir John Hicks in Is Economics a Science?: "Economics is 'on the edge of science and on the edge of history.' It is on the edge of science, because it can make use of scientific, or quasi-scientific methods; but it is no more than the edge, because the experiences that it analyzes have so much that is nonrepetitive about them. . . . Economics is in time, and therefore in history, in a way that science is not."
There is indeed so much that students need to learn about economic history, and about how much of the present reality of advanced economies can be more fully understood in terms of the stages by which they got there, that we ought to consider a compulsory pairing of introductory courses--one in "Economics" and another in "Economic History," with ample cross-referencing between them.
But what of uncertainty? How do we face this awkward but central fact more squarely and comprehensively in our introductory teaching? Do we thereby, risk destroying time-hallowed continuities and logical structures? What we must first realize is that the time-hallowed model is considerably less coherent and logically secure than we have assumed it has been. Among other things, at the very outset, it posits scarcity as the fundamental fact driving both economies and economics, but does not go on to wholly and convincingly reconcile this with the fact of unemployed human and material resources. Why does this added element of scarcity not self-destruct more promptly and completely?
G.L.S. Shackle, in The Years of High Theory, perceived that the only honest way out of this broken-backed story line was to go from a one-track fundamental-fact model to a two-track one: "Until the 1930s, economics was the science of coping with basic scarcity. After the 1930s, it was the account of how men cope with scarcity and uncertainty." At the time it was written, this was, regrettably, more a prediction than a reality. But things are now creeping in the right direction--towards two tracks--and it is timely to contemplate a franker recognition and implementation of this at the elementary level.
But how, in detail, is this seemingly monumental transition to be effected? The short answer is that the change is already starting to happen. Stiglitz's new introductory Economics makes several moves in the right direction. Even more strikingly, the whole of C.A.E. Goodhart's 1989 senior year/graduate text, Money, Information and Uncertainty, shows what a powerful unifying force a continuous and diligent attention to uncertainties and information asymmetries can be! The micro and macro elements relate much better, and the uncertainty-reducing and risk-spreading functions of the financial sector in the larger economy emerge more convincingly than in any previous text of my acquaintance. No longer do money and the financial sector veer close at times to seeming little more than an unneeded resource-devouring excrescence on a barter economy!
Major curricular reform is demonstrably possible, and has a potential to attract more and brighter students who are coming to economics for the best sorts of reasons. It will still be one of the tougher items in the liberal arts curriculum, and will require, even at the elementary level, stressful initiations into mathematical and theoretical techniques. But, by stipulating oligopoly and bounded rationality as its default settings, and signposting excursions into perfect competition and pure monopoly with appropriate listings of key assumptions, it should lie closer to the real, turn-of-millennium world, and should regain some of that motivating quality that so distinguished Samuelson 1.
