Structuring the unstructured: A pluralist economics mud map

In a previous article (“Reforming Economics: The Challenge”), I made the point that organising the jumbled schools of economic thought into a coherent pluralist curriculum faces both a social and a technical challenge. These two challenges go hand in hand to some degree, since the teaching within any discipline largely reflects the sociology of its practitioners. Social conventions are reflected in teaching, and teaching reinforces those social conventions.

In economics, and the undergraduate courses where the majority of students get their complete economics training, this means uniform domination by the neoclassical approach – mirroring its dominance in mainstream journals and research activities. Even the now decades-old behavioural and experimental school is all but ignored in core economic textbooks, reflecting a contested relationship with the mainstream and an inability to escape the fringes of the discipline.

But I hold an optimistic view. There is a feedback loop that can be broken by offering an attractive teaching alternative that presents an array of approaches and allows for conflicting ideas and methodology to be examined side by side. Such an alternative needs a very broad conceptual map on which each school of thought can be placed, and it needs tools to comprehensively understand and assess the validity of each. Such a map can allow a logical positioning of competing methods across domains of economic interest and can illuminate where and when there might be overlaps or conflicts. Such a map could facilitate a broader language of economics by enabling ideas to be accurately communicated between different schools of thought.

Absent a map, teaching a pluralist curriculum faces huge consistency problems. Others have attempted the relatively straightforward task of incorporating behavioural approaches into core economics courses. They find that conflict between ideas is a teaching obstacle and that there is a tendency to pick winners and losers in such circumstances.

…integrating such insights into microeconomics is not easy. One has to tread a fine line between integrating new and important results without making the standard theory look completely useless to students. This is often advanced as an argument not to integrate newer results at all. I tend to disagree with this view. It supposes that students are unable to hold two opposing thoughts in their head, which I find more than a little patronizing.

Readers may agree that standard microeconomic theory is completely useless, but teaching a pluralist approach does require giving credit to the mainstream where it may be relevant. Finding that relevance needs a map.

To illustrate, I’ve drawn a mud-map of the economic terrain in a very broad sense. The boxes on the map below represent islands of interest that are related to each other, but are conceptually different domains that cannot be conflated. Money for example, is not a real resource, or a traded widget, as it is almost universally assumed to be in neoclassical models. It is a set of accounts. It has its own domain. Real resources in the economy are also not the set of legal rights over who owns what. These rights are entirely separate. To be clear, money can be thought of as a type of ownership right, so the money and legal rights domains share a common red ‘ownership’, or `power’, environment in my map.

Welfare is another domain: distinct but related to real resources, the system of legal rights and the monetary environment. It is this domain that provides a moral foundation for the economy. This domain shares its yellow terrain with the real resources, since can both be considered the area in which mainstream economic theory operates, currently being bridged by the rather inadequate welfare theorems.

Outside these economic islands is the sea of the social and political environment. Any economic domain is enclosed within a social environment, and any analysis of economic problems depends crucially on conditions within this environment. Think of this domain as the evolving norms and institutional structures of society.

Floating in this sea are three tools, or ways to interrogate ideas, that can be carried to each economic island to explore and assess different approaches and to guide learning and discussion.

The first tool is timing. We know the world is dynamic, so asking the question of how timing is dealt with in any economic approach is crucial. History is irrelevant in most mainstream models, while the future is certain (though sometimes risky). Equilibrium arises instantly without adjustment. Asking the question of timing provides clarity about what conditions would need to be met in order for an approach to be valid, and why it might break down. It would expose that a number of diverse theoretical approaches have a common ignorance of time, while others (e.g., evolutionary economics) hold it as their core insight.

The next tool is aggregation. At what level of aggregation is analysis taking place? Is it important that individual and aggregate behaviour may differ? This tool is used to avoid the macro-micro distinction and concentrate on relevant economic questions. After all, a single market is already a macro-economy of buyers and sellers. Firms too are aggregates of individuals, and their existence is worthy of discussion in the legal rights domain. Questions about the how and why of aggregation are some of the least-asked but most important in any domain. How can we aggregate welfare or capital? How are rights divided between and within entities? What level of analysis matters in the monetary system?

Lastly, there is the tool of prediction. This represents the ‘So what?’ question that needs to be asked of any method of analysis on every economic island. Even if an analytical approach seems to adequately address questions of timing and aggregation, it can’t pass scientific muster unless it provides useful predictions. If different schools of thought generate different predictions, it should be possible to trace backwards through the questions of timing and aggregation and (being clear about which domains are being examined and how they are linked) to find the causes of those different predictions.

It might help here to provide an example of how this map can aid the teaching of different ideas in economics and facilitate communication between schools of thought. The map could be used in two ways; either as a way to structure courses, by exploring domains and tools and incorporating different approaches where relevant, or as a way of structuring inquiry into different schools of thought as they arise in the curriculum.

If one were using this map for structured learning about Godley and Lavoie’s monetary circuit models, students would first learn about the institutional setup that produces the monetary domain, including what exactly money is, and how certain relationships to the legal rights and real resources domains are implied. They would then note the way timing is treated and how and why firms, government, banks and other sectors of the economy are aggregated. Finally, they would explore the types of predictions and how they are linked between the money, legal rights, resources and welfare domains.

Later, when learning about mainstream growth theory, it would be clear that this approach resides in the real resources domain where time is condensed to a single point, while its representative agent (or ‘social planner’) deals with aggregation. Predictions of such growth models vary, but most generate only static equilibrium outcomes unless some external shock hits the system. Both the monetary and legal domains are assumed to allow for the outcomes of the models. In practice, the capital terminology used in these models is often confused for capital in the legal rights domain.

We could dig down further into the neoclassical view to explore the still controversial question of what is capital. Here we would see that in standard growth models capital is a collection of physical objects. Yet because we cannot aggregate quantitative measures of the diverse physical objects, but natural and produces, we end up accounting for them by monetary measure of value that are instead comparative measures of value of property rights, which are constructed by our institutions.



By situating these two approaches on the map, and seeing the differences as to aggregation, timing and predictions, we can more clearly see under what conditions they correspond or conflict. For example, investing in more physical capital generates higher growth in both, but only in a monetary circuit model can we potentially say anything about the adjustment processes in the economy. Further, both take the social and political environment as given and only indirectly relate to the welfare domain through an implicit assumptions about the relationship between aggregate resources and aggregate welfare.

It may take a little work, but this type of structured thinking is helpful.

I am not alone in trying to put some structure around the jumble of economic schools. Ha-Joon Chang has mapped schools of economic thought based on particular domains of interest. In his latest book Economics: The User’s Guide there are many of the same general themes of timing (Economies change through…, The world is…) and aggregation (The economy is made up of…), and also the suggestion that different economic approaches focus on certain areas of the economy, such as production or exchange. 

If we want a viable pluralist economics curriculum, a way to structure ideas from the diverse schools of thought is absolutely crucial, and I hope this mud-map of economic domains can provide a starting point. New pluralist textbooks and teaching materials based on a structured inquiry can demonstrate how diverse ideas can be brought together, without creating conflict and without transforming the exercise into merely a process of selecting a school of thought that aligns with the student’s existing ideologies. I hope this outcome can emerge from the combined efforts of IDEA Economics, Evonomics, Rethinking Economics and other reformers.

First published at IDEA Economics

Reforming economics: The Challenge

And so the debate rages. Economics needs to change. Always does.

The challenge of reforming economics cannot by overstated. Modern mainstream economics has remained dominant in our universities and governments despite overwhelming evidence against most of its core principles, and despite decades of attempted revolutions. The concept of a static equilibrium and the ‘representative agent’ method of aggregation are just two notions that have been repeatedly shown to be internally inconsistent; not just by outsiders, but by many of the leaders in the mainstream. Yet they continue to dominate the discipline.

The core remains unchanged.

Outdated and economically-irrelevant concepts still fill the pages of introductory textbooks. From there they fill the minds of each new generation of students, who pass on these ideas to the next generation of students, and across society more broadly. Breaking the feedback loops in this system is what is required to transform the discipline.

The call for pluralism is an admirable end goal, upon which most reformers agree. But my view is that previous attempts at reforming economics have failed because they avoided, or inadequately understood, the two main barriers to change. While they may at first seem insurmountable, without leveraging change at these points the mainstream will stay locked-in as the dominant approach to economic analysis.

The first main barrier is social. Economics as a discipline typically rewards tribalism over reconciliation. If you’ve been following economics blogs in recent years you will have a pretty clear understanding of this. But the same dynamic happens in all of academia. Journals are often aligned with particular views on what are acceptable methods and concepts and act as the gatekeepers to the tribe, requiring all comers to offer sacrifices to tribal elders. Moreover, the mainstream represents over 80% of the discipline, so any change promoted by minority groups will be frowned on. This is the social reality.

In essence, the social challenge is to bring the tribes together in a way that makes them all feel like insiders in a new larger group. This means not starting fights with powerful tribes, especially not the current mainstream. It means highlighting any common ground where tribes agree and giving credit to how they contribute to an enhanced view of economics.

I will talk more about social barriers to change in economics at length in the future. For now though, this is enough context to discuss the second main barrier, which is a technical one.

The technical problem is - how do you teach a pluralist program when there is no recognised structure for presenting content from many schools of thought, which can often be contradictory, and when very few academics are themselves sufficiently trained to to so?

Teaching a pluralist curriculum shouldn’t be about presenting the economics discipline as one of feuding tribes. I share Simon Wren-Lewis's fear that a pluralist curriculum could become a one-stop shop for students, who get to browse the tribes before joining the one that most aligns with their existing political ideology.

Instead, I sincerely hope that we can train a generation of economists to be aware of the legacy of each school of thought, but acknowledge the common ground between them.

There is an old saying that if you ask five economists and you'll get five different answers - six if one went to Harvard. Can we teach a pluralist curriculum which would bring economists onto the same page so that when you ask five economists a question, you get one good answer?

Approaching this problem needs a systematic solution. For example, we need to think about how to structure teaching around topics and concepts that allow students to study problems and evaluate potential approaches, and their evidence. We need an alternative textbook, or set of them, that can satisfyingly demonstrate the approach being called for, and ultimately offer a replacement foundation upon which to build a pluralist curriculum.

Presently, even the best mainstream textbooks merely tack on a few comments on alternative approaches. For example, the currently popular experimental or behavioural economics schools, despite being widely being regarded as a revolution in economic thinking and economic science, are given very little credence in the most popular textbooks. After pouring through the text of 25 popular undergraduate microeconomic textbooks, Lombardini-Riipinien and Autio find that

… ten of the 25 textbooks examined make no reference at all to behavioral economics; six dedicate less than 1% of total pages to it, six between 1% and 2.6%, and three between 6% and 11%. When behavioral economics is discussed, the focus tends to be on bounded rationality rather than on bounded self-interest or bounded willpower.

Experimental economics is not discussed at all in ten textbooks, twelve textbooks dedicate less than 0.6% of total pages to it, while three dedicate between 2% and 10% of total pages.

Joan Robinson tried to comprehensively rewrite the core introductory economics textbook with John Eatwell in 1973. While the book does a superb job of putting economic analysis in a philosophical and historical context, it offers no coherent backbone upon which to build an understanding of economics. For example, after reading the book I learnt very little to aid me in answering practical day-to-day questions about the economy. Where does money come from? How do we measure unemployment? How could we assess alternative options for addressing negative externalities? Is the very concept of eternality useful, since it implies the existence of a no-externality world?

What is needed is a way to structure the exploration of economic analysis by arranging around economic problems around some core domains. Approaches from various schools of thought can be brought into the analysis where appropriate, with the common ground and links between them highlighted.

Unless the community of economic reformers can make the effort to reconstruct the way economic is taught, and make the tough decisions about how to structure new core texts, including what to leave in and what to leave out, then change will remain elusive. We can’t call for change in the challenging tribal social environment of economics without offering an attractive alternative - one that embraces the best from each of the schools of thought and finds common ground without creating a new set of outsiders.

Originally published at IDEA Economics

Queensland housing supply

The planning process is often held to be partly to blame for housing prices in Australia. Unfortunately, there is very little data about the planning system in general, and information on the stock of approvals and the number of new approvals is typically even worse.

In Queensland, the data has become better over the past few years as Council's have begun reporting to the State their approvals activity, and their estimates for the capacity of their planning scheme to provide new dwellings. Councils report that they currently have land zoned for around 660,000 new detached houses. That's about 40 years worth of new detached dwellings able to be built without any changes to zoning laws or any approvals outside the code. To put that in perspective, the total population growth in Queensland is about 70,000 people per year, who require one home per 2.6 people, or 26,000 new homes per year of both apartments (about 10,000) and detached houses (about 16,000).

There are also current approvals for 107,000 new homes, or around 4 year's worth, and 24,000 new approvals being granted each year.

For more fine-grain analysis of the housing supply pipeline, I have created the visualisation below using data from the Queensland Government Statisticians Office. It allows you to see the historical trends in planning approvals for residential dwellings, as well as the stock of current approvals, the lapses of approvals, and so forth. Click on the map to get the historical time series of these indicators for that region. 

Nowhere can I see that councils have hit an approvals limit that might have constrained the rate of supply of new dwellings in an area. 

Reteaching economics in practice

Reforming economics teaching has been a heated topic of debate since the financial crisis. My personal views on this align closely with The University of Manchester’s Post Crash Economics Society (PCES), who have been calling for a pluralist approach that would rid economics teaching of its neoclassical core, and replace it with a critical study of economic questions and the diverse methods and approaches being taken to understand and answer those questions. The group Reteaching Economics has similar aims. Certainly a focus on empirical methods would be elevated to a core element, as the question of how can we know things is a primary concern to critical analysis. In all such an approach is not an excuse to avoid mathematics, but to embrace a the wide range of mathematical tools in use.

Change like this is a difficult task, and will ask a lot of students and teachers alike. But in my view it is also a difficult task to teach and learn the bland, abstract and often irrelevant economics that fills the undergraduate textbooks today. Even very complex concepts can be reduced into small components with memorable analogies that make them digestible. And if done right, a new approach should trigger more of a desire in students to learn and apply these new concepts and tools.

I have tried to shift my own teaching towards this approach. The purpose of this post is to share an example of taking an existing course, and the various constraints that came with it, and shifting it towards a more critical and pluralist teaching approach.

Last year I taught Managerial Economics and The University of Queensland. The student body were not all economics majors, but were drawn from across the university’s disciplines.

One constraint was the prescribed textbook (which I could not change by the time I began teaching). It contained repeated lessons in applying optimal control problems willy-nilly to possible problems that might face a firm manager. Like how should I profit-maximise when I have two goods that are substitutes?

Solving an equation that relies on knowing the cross-price elasticity between your products is actually not very useful. The important questions are much deeper and more critical, like “How do I know the own-price and cross-price elasticities in real life?” I mean, are firms really just changing prices all the time to check on their elasticities? Or “What is the current price and why was it set at this level?”

So what did I change in the course?

I made sure that before they embarked on the “textbook” concepts that they were given a broader outline of the big ideas that are implicit in the textbook view, yet completely hidden. Like “What do prices do?” And, “If prices allocate resources, why do firms exist?” You can download my first week’s notes here (I make lecture notes a seperate reference document and use lecture slides as a tool to build and explore example problems during class). To see my emphasis on providing a pluralist view, this is one of the exam questions I snuck in.

Which is the most accurate comment on the following statement - “Firms maximise profits”?
A. Always, because by definition they are profit maximisers.
B. Never, as profits do not always accurately reflect long run payoffs.
C. Often, and always in preference to potentially conflicting objectives.
D. Sometimes, but they may achieve this through intermediate objectives.

I also cut short many weeks of textbook regurgitation and replaced it with concepts and tools that don’t fit in the paradigm, but are nevertheless quite useful in practice. For example, I introduced a simple analysis of real options in investment decisions, which captures many of the realities of irreversible firm decisions (here). I also included a week on networks and evolution that introduced some simple models to capture some of the more interesting firm and market dynamics (here), and allowed us to have informed discussions on questions like performance pay for individuals or teams, and revisit the reasons firms exist at all. When I cover information problems, I discuss adverse selection, but also beneficial selection, and look at how the data shows the opposite of what the textbooks predict in Australian health insurance markets.

I also changed the assessment items from almost purely multiple choice and short answer exams, to a mix of some multiple choice, short and long answer questions that allow concepts to be applied to real life situations and data, and an assignment.

The assignment was about a real company facing real changing market conditions. Students were expected to determine the relevant data they needed to collect to complete the parts of the assignment, then find it, then use it (run appropriate regressions), then interpret it, and present it all in a professional way. Some of them told me it was the best assignment they had done in their whole course in terms of actually learning something interesting, and producing something they can be proud of. This was a relief. I had spent a lot of time preparing it.

Some of the economics majors said it was the only assignment they had ever been asked to do! This was quite worrying, but completely in consistent with economics courses globally. The PCES survey showed that a fifth of economics subject have multiple choice questions make up more than 90% of the course grade, and in half of subjects they make up over 50% of the grade. As a general rule, economists are trained to solve equations and answer multiple choice questions.

So what is stopping these changes from happening across the board?

First, few academics maintain the connection with the wider business and public policy community to have a ready supply of topical recent examples where economics can be applied. They are so narrow in their research focus, that when teaching outside this area, they simply conform to the standard textbook.

Second, many academics are trained neoclassical economists only. When my exam draft was reviewed by another academic for errors, they noted that they had never heard of real options, nor the evolutionary and network models in my course. This becomes an even more serious problem in courses where completely wrong models still fill the textbooks, such as the case with the money multiplier. I have had to stand up in class and say “Ignore chapter 19 of the textbook, it is simply wrong.” Some economists are too loyal and “profession proud” to say something like that.

Third, it is a lot of work for staff. For my teaching last year I spent about 18 hours preparing each lecture. This meant that I had new examples to use, new data, and updated readings that applied economic ideas to recent events. For the assignment I also had to research and write my own version of the assignment to make sure I was asking something that was possible to do, and that the data would reveal something that wasn't apparent on the surface (in this case that a firm which is often thought of as being "high end" actually sold inferior goods). When you want to have students research relevant recent real-life examples, this is what you have to do.

Fourth, some students prefer to just get the grade and don't like the ambiguity that a more pluralist approach entails. They have learnt how to study for multiple choice exams, how to solve equations, and so forth. Having to actually think, while being uncertain about how your thinking will go in the assessment, becomes a challenge.

I’d be interested to hear how others have gone about improving their economics teaching to be more critical and pluralist, and what constraints they faced.

Land tax becomes respectable part of tax debate

After decades of political pressure that systematically clawed back state and local government’s ability to tax land, the debate has now swung back to this most efficient of taxes.

Land taxes are apparently a hot topic for debate at the years NSW Labor annual conference.

New sweet-talking Prime Minister Malcolm Turnbull even said the formerly unspeakable words on national television over the weekend (at the 6.30minute minute mark). Though he says while it is a great policy economically, it is politically 11 out of 10 in terms of difficulty. No $hit. When your voter based is dominated by homeowners, and your party made up of the country’s wealthiest landowners, you ain’t got a chance.

Let’s do the hypothetical anyway. How much could be raised from state land taxes?

In NSW just the exemptions to the current 1.6% (2% over 2.5million in value) land tax amount to $700million per year.

In Queensland the exemptions to the current land tax regime cost the state $1.3billion in 2014-15, with the components of the costs of the exemptions summarised in the below image.

Yes, you will see a $23million per year land developers concession - at tax with the exact opposite incentives to efficient tax, reducing the cost of not developing land.

In Victoria land tax concessions are forecast to cost $2.9biliion in the current financial year, amongst a bunch of other concessions that amounted to a total of $4.9billion. See the summary from the budget papers below.

So just in these three east coast states we have about $5billion per year just in land tax exemptions, plus many billions in other exemptions, including on gambling. If we remove the land tax concessions and double the land tax rate to around 4%, these three states could raise another $13billion every year.

But that is just the start of the tax concessions for the nation’s wealthiest.

What about another tax loophole? The capital gains tax exemptions. Treasury estimates it costs the country $56billion per year.

Or discounted taxation on super contributions? There’s another $27billion per year.

There are simply billions lying on the table in obvious tax loopholes for the rich, with land tax exemptions just one of many.

We have seen one big change - saying the words land tax has become acceptable for a politician. Now let’s hope this change starts snowballing, and that states can fight the propaganda of vested interests to use their tax powers more wisely and efficiently.