Fixing What’s Wrong With Economics 101

(Originally published here.)

Harvard’s most popular course is Ec 10, the introductory class in economics. This fall, 760 undergraduates were enrolled — almost half the school’s freshmen. Economics is the most popular major at HarvardYale and Princeton. Rightly or wrongly, these students and others will have an outsized impact on policy making, so it matters how the subject is taught. Yet many, especially those who only take first-year classes, get a misleading impression of how the economy works. We can do better.

Mike Konczal, a fellow at the Roosevelt Institute, cleverly suggested changing the order in which various topics are introduced. Instead of starting with two people in isolation on an island trading coconuts and bananas, students would learn about the business cycle. Only after those macro concepts have been introduced should college freshmen be asked to think about the legal and cultural institutions that make markets possible. At the end they could worry about how individual firms compete. Princeton economist Paul Krugman likes this proposal but is skeptical that it could ever be introduced. (Harvard’s intensive summer course in first-year economics seems to offer a hybrid approach.)

I have a more radical suggestion. Since economics is the study of a particular set of human interactions, the introductory courses ought to focus on specific historical examples as well as classroom simulations, rather than abstract mathematics. This case study approach would be similar to how business students learn about management and how lawyers learn about the law. It also has the advantage of helping students understand why different ideas became popular and fell out of fashion at different points in time and in different places. (My colleague James Greiff tells me that his introductory course in economics had a heavy emphasis on the history of ideas, with “The Worldly Philosophers” as his textbook. But things have changed since then.)

In my ideal world, introductory economics students would start as I did, by studying Richard Radford’s account of his experience in a German prisoner of war camp during World War II. It’s less than 14 pages and written in clear English, yet it manages to introduce concepts such as the way changes in money and credit cause business cycles, how consensual trade can improve the lot of both parties, and arbitrage. I remember one of the senior people at Bridgewater Associates, the hedge fund where I once worked, telling me and other new recruits that if you truly understood this one essay, you would understand all there is to know about macro.

Joan and Richard Sweeney’s account of their baby-sitting cooperative’s troubles with inflation and deflation during the 1970s is another classic text. Most people rightly focus on how the changes in the total supply of scrip affected the willingness of parents to go out or watch over other children, but there are also important lessons to be learned about the ways taxes and government spending affect the money supply.

One thing I didn’t notice until several years after first reading the Sweeney essay was the importance of its introductory paragraphs. The piece opens by explaining the distinction between simpler cooperatives that used a system of credits and debits and the more complex ones that used scrip. That fits with what anthropologists and historians have found in the real world: Debt was invented before money. Money became popular because it was a more efficient means of settling debts than grain or livestock. Yet many students are first taught as if money was invented as a substitute for pure barter, with credit and debt only emerging later. Who knows what else students could learn from carefully reading and engaging with a historical account that isn’t even five pages long?

Later segments of the ideal introductory course could feature case studies on Argentina’s experiment with its currency board, the panic of 1907, the success and subsequent failure of Japan’s development strategy, Weimar’s hyperinflation, and the Great Depression. Longer readings could include Charles Kindleberger’s “Manias, Panics, and Crashes” and Liaquat Ahamed’s “Lords of Finance.” Students would also play deregulated Monopoly and other games that teach how markets work.

This may sound like a lot for a freshman to learn over the course of a single year, but it should actually be far easier for many 18-year-olds to appreciate the essential concepts and unsolved problems with this practical approach. Which school would like to go first?

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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