Teaching economics after the financial crisis

There are all kinds of reforms happening or expected reforms because of the financial crisis. What about reforms or changes in the way economics is taught? Not much thought has gone into this. This is as important as this is how we are training future thinkers in economics.

Alan Blinder reflects on this in this very useful paper. He looks at new additions/changes in his textbook co-written with William Baumol.

The stunning events of 2007-2009 both shook the world and piqued interest in economics. In the 30-plus years that I have been teaching macro principles, I have never seen the level of interest in students as high as what I observed last year—rapt attention and no sleepers! Interest in economics has grown, and our students will want, expect, and deserve explanations of these events for years to come. This is truly a teaching moment, and that “moment” is going to be a long one. That’s the good news. The bad news is that the current curriculum fails to give students even imperfect answers. This means that the macro principles course will have to be changed. Although we can’t provide beginning students with complete answers, we can do a lot better than we have been doing.

My perspective in this paper is that of a textbook author and teacher of macro principles. The students in such courses are typically young, new to economics, unfamiliar with financial markets, and not well-equipped technically. This means, among other things, that we must simplify enormously, while keeping in mind Einstein’s famous dictum: “Everything should be made as simple as possible, but not simpler.” Today’s textbooks and course syllabi were developed over decades that never witnessed anything remotely close to the events of 2007-2009. So many of the basic pedagogical decisions made over the years—either tacitly or explicitly—need to be reconsidered. I start the paper with four such decisions, and then consider a list of seven new topics that one might want to add to a macro principles course.

What are the 4 decisions which need to be looked at?

  • Relative degree of emphasis on growth versus business cycles – Earlier macro was mainly about business cycles. As US economy went into a growth mode after 1991 crisis, business cycles went out of fashion. Concern moved to long term growth  and factors for it. As we now know business cycles were never out of fashion, time to get back to teaching them
  • How much Keynesian do we make the book? 🙂
  • Most textbooks just look at interest rate as a one interest model. But as this crisis shows interest rates were all over the place. Some declined (like policy rates, Govt Bonds) and others surged (Libor, corporate bonds) surged. We can no more teach this one interest model but cannot go too much into details as it is fairly detailed. So how to balance this?
  • How complex should the models be especially with respect to finance? Most textbooks do not mention finance much. And again here the problem is when you start writing on this, where do you stop?

What are the seven new topics?

  1. risk premium in interest rates – again we can’t teach one interest rate model anymore. So should we talk about risk premium? It is easy to explain that there is risk premium but what drives it etc is difficult. So we can talk about risk premium but may not do a deep dive into it.
  2. asset market bubbles – textbooks do not include things on asset bubbles but needs to cover it now. Though, explaining equity and housing bubbles is easy, bubbles in debt market is tough 
  3. securtization – Again like risk premium we need to talk about securitization but not talk much about it.
  4. leverage – an important lesson from crisis and easy to teach as well
  5. insolvency and illiquidity – How do we differentiate between the two? For simplicity sake, let us not cover illiquidity in the basic course.
  6. Systemic risk and too big too fail – Need to be discussed a bit.
  7. moral hazard – Sixth leads to seventh. Pretty simple to teach as well.

Read the whole thing for more details. Interesting ideas. I would just add economic history to the list. Students need to be aware about economic history as well.

I have actually sat through both kinds of classes. One economics specific and other finance specific. Very few teachers connect the two. In most cases, economics prof would hardly know the developments in finance and finance prof would hardly know things about economics. This is all pretty strange as both are highly connected. Hope all this will change now..

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2 Responses to “Teaching economics after the financial crisis”

  1. Badri Says:

    Link to the paper is broken. Could you please provide an alternative link.

  2. Trent Lagoria Says:

    Economics will never be seen as simplistically I believe.

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