Tuesday, June 10, 2014

How Should Econ 101 Be Taught?

Twenty years ago when I was a young Asst. Professor at Columbia University, I was given the task of teaching Econ 101 to 350+ undergraduates.  I haven't taught this course in recent years but I have a few thoughts about how to do it right.   The appropriate topics and pace of such a course are discussed here.  Let's assume that the Professor teaches for 150 minutes a week for 12 weeks.  What can he/she hope to accomplish?

To simplify the task, I would ignore Keynesian economics and spent no time on accounting identities (C+I+G = Y).

At the start of each class, I would spent 20 minutes on some topic in the New York Times and highlight how the issue at hand is an economic question of tradeoffs, and incentives.  I would discuss my surprise that the Times tends to ignore economic analysis in its journalism and explain how the "economic approach to human behavior" adds insights and anticipates likely unintended consequences.

I start my class talking about Robinson Crusoe and his time allocation when he can't trade with anyone. I then teach comparative advantage by introducing another person who he can trade with.

We then populate the economy with lots of buyers and sellers and markets emerge. I talk about the necessary conditions for markets to emerge (i.e.  a currency of exchange, trust, co-ordinating on what location to meet to exchange the goods, property rights being well defined and enforced).    In each class, I would stress how to use the simple machinery of supply and demand to analyze markets and market behavior.

We would start on the demand side with a brief overview of what is each person's "conception of the good life" and how access to capitalist markets allows different individuals to purchase market goods that help them to achieve their goals.  We would spend a fair bit of time on budget constraints and contrast rich people and poor people and how price changes affect the feasible consumption set.  We would talk about how government policy changes the feasible budget set.

I would tease students who know calculus to think about how the simple graphs we make (of tangencies between indifference curves and budget lines) can be quickly solved for using the calculus.  This gives them a taste of intermediate micro.

I would talk about hard extensions such as introducing time and uncertainty.

We would sketch the perfect competition model and why it is a useful benchmark for studying many markets.

We would then flip over to study the supply side.  At what price will a pizza firm sell you pizza? What costs does a pizza firm incur?  Which of these costs are fixed and which are variable?   If factor input prices change or if there is technological advance, how does this affect the supply side?

Integrating supply and demand into one integrated framework allows me to then study economic incidence issues.  Who gains if immigration leads to lower wages for pizza makers?   How much consumer surplus is gained in this case? What is consumer surplus?

At the backend of the intro course, government is introduced.  Externalities and public goods are defined and explained.  What are the costs and benefits of government intervention in the free market? Who are the winners and losers? Is this a zero sum game or is there deadweight loss?  What is deadweight loss?  We have a philosophical Hayek like talk on whether the competitive equilibrium is a pareto optimum and these esoteric terms are defined.

At the end of the course, I discuss why I don't teach Keynesian Macro.  I say that an economy is not an airplane. With an airplane, when it flies too low we know how to get its altitude back on track.  To view the economy as an airplane and to actively engage in counter-cyclical policy is to entrust the Fed's economists with too much power.  How do we know that they know what they are doing?   I discuss the hard concept of uncertainty and investment under uncertainty with my students.

I end the course talking about how to use the micro tools we have focused on in applied fields such as health economics, urban economics, environmental economics.   In this field experiment age, I would also teach my students how to use randomization to test for causal role that incentives play in determining demand and supply side behavior.  For example, if I pay a person X cents per kwh of electricity below last month's consumption, by how much does a person reduce his electricity consumption?  Choose X at random for different people and keep track of the changes across people in their electricity consumption when they are given an exogenous incentive to conserve.   This experimental design sketches out a supply curve for conserving electricity.

I hope this vision is clear.   This isn't cute stuff.  The good student will take away from this class that economics is a hard but valuable subject that offers a series of tools that can be applied to many real world problems.

Why are poor people poor?
Will China's air pollution improve?
Why do so many kids in public schools receive bad education?
Why do people in the United States drive more than the people in Europe?
Why is obesity rising in the United States?

These are interesting questions and students who take econ 101 are able to provide coherent answers to these questions.  Can you?

I would spend 1.5 weeks of the class on macro but in this case I would focus on growth economics and in particular on long run trends in human capital accumulation at the individual, city and national level.  I would highlight the mistakes in the Malthus logic about unending population growth and instead highlight Becker's work on the economics of fertility and women's opportunities outside of the home.