Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday 19 September 2017

Undergraduate economics teaching moves into 21st century

The CORE economics curriculum, designed to provide an introduction to economics that reflects economics as it is today rather than as it was decades ago, has won justified praise from John Cassidy. I also think it is brilliant, not just for first year undergraduates but also for interested non-economists. To wet your appetite, read this short account by two of the leading lights behind the project.

Rather than spend the rest of this post singing its praises, I want to ask why first year undergraduate textbooks represent a clear example of market failure. The failure I have in mind is the inability to teach economics as it currently is, rather than as it was decades ago. If you look at the standard first year, Econ 101 textbook, it does contain more modern stuff, but normally in later chapters after presenting the basic models/frameworks which have not changed for 30 years or more. As a result, textbooks tend to be both dull, seemingly irrelevant and much too large. (This is a blanket generalisation and I’m sure there some exceptions.)

Here is my theory, which I will try and explain in plain english rather than with economics jargon. Although the ultimate consumers of textbooks are students, they are chosen by teachers who set the course textbook. So why are Econ 101 teachers not demanding textbooks that are less dull and more up to date?

Suppose someone had written something like the Core material, and a publisher (as publishers do) had sent it out to people currently teaching Econ 101 for comments. The reaction they will have got from a good proportion of Econ 101 teachers would have been ‘that is interesting, but can we include at the start some of the stuff I have taught for the last five years’. They, naturally, do not want to completely rewrite their courses, and I fear in a few cases learn material that is new to them.

The publisher reports back to the author: ‘we cannot publish this as it stands, but if you start with the traditional material then maybe’. It is a market failure because publishers are looking at the current set of Econ 101 teachers, and not those who will one day teach it and would love to have something more up to date. Another force for conservatism is that the big names who dominate the market find it much easier to add new stuff on at the end as extra chapters than rewrite their textbook from scratch.

I could add more, but I have been rude to enough of my colleagues already. Let we add two other specific points about CORE. The first is that it is clearly mainstream: this is not the pluralist text that many heterodox economists would like. That I fear is inevitable: economics is mainly a vocational subject, not a liberal arts subject. (Thats upset a few more.) But I was surprised to see MMT people describe this textbook as not for them. I have, after all, argued that MMT is just standard macro without what I have called the Consensus Assignment. [1] So I had a look.

In the section on government finances (14.8) we get

“When there is a budget deficit, this means the government must borrow to cover the gap between its revenue and its expenditure. The government borrows by selling bonds.”

This is not correct, and nor does it follow modern macro. [2] There we write the government budget constraint to include a term in the change in the stock of high powered money. (If money does not appear, it is because the paper explicitly chooses to work in a moneyless world for simplicity.) In short, the government can finance the gap between revenue and expenditure by creating money. Ignoring money in this section is obviously an oversight, as the discussion in section 10 clearly shows. But it is an oversight that should be corrected. [3]

That apart, I was already a fan of the macro approach adopted in CORE, because it is a simplified version of the Carlin and Soskice textbook. I like the consistent claims approach as a way of talking about inflation. It emphasises the elementary point that you need both wage and price inflation to get sustained increases in inflation, something monetary policy makers seem to keep forgetting right now.

I like, as some may remember, abandoning the LM curve and explicitly talking about central bank policy. I also like the way that banks are now incorporated as part of the monetary transmission mechanism. If there was a clear manifestation of how outdated (at best, we could also say just plain misleading) most textbooks are, it is their continued use of LM curves and the money multiplier.

I really hope that CORE continues to be successful. It is time we stopped boring and confusing first year undergraduates, and started inspiring them with an understanding of the economic ideas that allow them to address the countless real world economic issues that they will have to face.

[1] The Consensus Assignment gives monetary policy the goal of macroeconomic stabilisation and fiscal policy the goal of stabilising government debt.

[2] We can go back to the work inspired by Carl Christ together with Blinder and Solow. I should add that CORE is not alone among textbooks in failing to properly set out the government’s budget constraint.

[3] Now we all know (and as MMT also clearly states) that there are limits to money financing: too much of it is inflationary. But this should not be internalised by teachers to the extent that money financing is ignored. In particular it gives the impression that to finance a deficit a government has to find someone to lend them money, an incorrect belief that can have very misleading consequences if the government controls its own currency. It is more complicated with independent central banks, but again they are not an excuse to ignore money financing.  


  1. CORE: more lipstick on the dead economics pig
    Comment on Simon Wren-Lewis on ‘Undergraduate economics teaching moves into 21st century’

    This is the track record of economics: provably false
    • profit theory, since 200+ years,
    • Walrasian microfoundations (including equilibrium), since 140+ years,
    • Keynesian macrofoundations (including I=S, IS-LM), since 80+ years.

    The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the foundational economic concepts profit and income wrong.

    In science, a distinct set of concepts or thought patterns, including theories, research methods, postulates, and standards for what constitutes legitimate contributions to a field is called a paradigm.#1 Because the four main approaches are provably false, that is, materially or/and formally inconsistent, a paradigm shift is an ABSOLUTE necessity.

    Keynes put it thus 80 years ago: “The [neo-]classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight ― as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.”

    In methodological terms, a paradigm shift is “a fundamental change in the basic concepts and experimental practices of a scientific discipline.” The Keynesian paradigm shift, though, failed because Keynes messed up the move from microfoundations to macrofoundations.#2 As a result, economics fell back on the Jevons/Walras/Menger paradigm. As Krugman so nicely put it “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point”.

    The Neoclassical paradigm is defined by methodological individualism = microfoundations, which translates into the neo-Walrasian axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

    These axioms (or slight variations thereof) define the orthodox paradigm. These microfoundations are false in multiple dimensions. This is a methodological fact. By consequence, the necessary paradigm shift consists in fully replacing ALL variants of behavioral microfoundations by systemic macrofoundations.

    As an answer to both fundamental and superficial refutation economists talk much about New Economic Thinking and a new paradigm and more social commitment.#3 The members of the CORE project are no exception.#4

    Fact is, the new CORE textbook does NOT present the urgently needed new paradigm but the maximization-and-equilibrium world in a redesigned user-friendly format that has been worked out by the marketing and PR folks in order to satisfy the demands of the new generation of dull economics students. These students do not want economics as objective scientific truth but as an easy to understand narrative. The new target group does not care about the material and formal consistency of theoretical economics but about the political message of political economics.

    Economics had the bad luck to start as Political Economy. This means that the political agenda had been given and the argumentation had to support the agenda. Theoretical economics (= science) had been hijacked from the very beginning by political economists (= agenda pushers).

    See part 2

  2. This is good news. When I was at Oxford (well over 40 years ago) our main macro text was Gardner Ackley, supplemented by doses of people like Dudley Dillard (or deadly dullard as we then called him). Occasional shafts of light to penetrate the theoretical gloom were provided by the works of Edith Penrose into management.Perhaps much stodgier than even nowadays but anything that can increase understanding of the subject is to be welcomed.

  3. I'm not an economist but seems to me that the modern economy, especially in the U.K., has problems because of the continual financialisation of housing, and rising asset prices, and the freedom we give private banks to create credit. It also seems to me that economic theory still doesn't recognise enough the pro-cyclical nature of asset prices, credit creation and housing, that too much wealth is locked up in rising asset values rather than genuine productive capacity, that banking and finance is treated as neutral or credit extension an unalloyed good. Finally, that these issues are tied to land itself, a non-extendable good, with land treated as just another element of capital, rather that being treated separately.

  4. I am so glad that this is changing, I was an undergraduate (PPE,so not a proper degree....) 30 years ago and gave up Economics after the first year because it was boring, seemed irrelevant, seemed out of touch with political economy and generally dry as dust. Good to see that at last something is changing (took an awful long time though). And maybe the economic illiteracy we have had in government, civil service and media is becasue so many of them are PPEists who followed similar economics curriculum.

  5. While reading the description of CORE in the link you provided it was the following phrases that I suspect will create a war of policy disputes with MMT (Modern Monetary Theory): "Keynes’ contribution is similarly in need of modification. We provide both models and evidence to question his optimism that government demand-management policies could substantially eliminate involuntary unemployment in the long run."

    MMT is advocated primarily to support the goal of using federal purchasing power (deficit spending) to create full employment with the job guarantee acting as a buffer stock. According to Minsky tax policy would have to be designed to prevent inflation in some states of the world. Monetary policy would have to be in place to curb a government-deficit-and-market-credit-fueled inflation as is the case in any event.

    My research in the flow of funds published on SSRN shows that on the period 1980-2007 no new high powered money was injected during a powerful expansion of the financial system - and that Treasury deficits were covered by the net injection of securities without draining any purchasing power from the financial system. During the bailout of 2008 the stock of Treasuries outside the Fed would have gone done as high powered money went up except for the fact that Fed purchased mortgage-backed securities from banks and non-banks. Therefore although it is possible to deficit spend by the issue of high powered money of Treasury securities, it appears that either the Fed or Treasury will pay interest. So if one allows the increase of high powered money to cover a deficit and consolidates the government nothing changes in terms of the government paying interest on its debt and having to manage price stability while using the deficit for public policy purposes. MMT should focus on how to keep inflation at bay as taught by Minsky rather than getting distracted over the governments ability to finance a deficit via a mix of central bank and federal Treasuries which is how the system already operates anyway even if mainstream economists cannot understand law, accounting, and financial dealing customs sufficiently to reject their old ideas.

  6. You say: "Now we all know (and as MMT also clearly states) that there are limits to money financing: too much of it is inflationary"

    But isn't this just another way of saying there are 'limits to deficit spending' in general. Within a given sized-deficit/output gap, there is nothing especially more inflationary about financing via zero-interest government debt instruments (physical cash, reserves, zero-interest treasury notes, some new form of digital fiat currency balance) than via positive-interest debt instruments (treasury securities, i.e. "borrowing").

    Indeed, the relative mix of zero vs non-zero interest earning government liabilities is something that is determined as part of monetary policy, not fiscal policy. So "pure money-financed deficit policy + monetary policy" has the same final outcome in terms of the liability structure of government liabilities as "pure treasury security-financed deficit policy + monetary policy", as things like IOER make clear.

  7. People keep saying this about undergrad econ textbooks but after teaching for two plus years this seems really overblown to me. The texts aren't that bad in that respect and depending on which text you use this really isn't an issue at all. And it'd be great to teach economics as it is in 2017 to undergrads, but the cold fact is that most undergrad students in the United States do not have anything remotely approaching the right level of preparation for economics as it really is. At a major state school I'm seeing kids who consistently couldn't do high school level algebra to save their lives, who I pass out of pity and fear of a riot. Some of these kids still struggle with arithmetic.

    You can strip as much math out as possible but you really can't understand something as quantitative in nature as economics without understanding the math.

    My solution to textbook deficiencies is to just explain to them "This is a special case, the reality is more like this but in order to fully understand it you'd need to take a higher level course.

    Also with the current direction of the political pendulum and charlatans like Bernie and The Jezza runing wild I'm starting to think we'd be doing a disservice to students to not teach them about why markets are desirable sometimes.

  8. Thomas Palley shows LM can be resurrected and made more relevant
    "Theory of Endogenous Money & LM Schedule" 2017

  9. To anyone in the Core Econ team reading this: will the latest version of The Economy also be made available as a pdf ebook, with the same layout as the print book? That way users can underline and annotate while reading, unlike in the online ebook version.

  10. Thanks Professor. If only all economists were as reasonable and reality-based as you...

  11. Macro-economists are of little use unless they are able to communicate effectively with nonspecialists. The intermediate level macroeconomic model is perhaps the key vehicle for them to do so. This of course includes university-level teaching. But there are many in the business and policy world who need to know macroeconomics and whose main interface with professional macroeconomists will be an intermediate level model with a familiar graphical portrayal. We should applaud efforts by the profession both to refine the assumptions behind that model and to present that model in an engaging and compelling way. The International Monetary Fund's Institute for Capacity Development (IMF/ICD) is dedicated to doing just that. And, even though our principal audience comprises economic officials from our member countries, our methods and innovations could well be applied to the university classroom as well. In this spirit, I would like to share on this blog one of our efforts. "The Algebraic Galaxy of Simple Macroeconomic Models : A Hitchhiker’s Guide" written by myself (Evan Tanner) presents a spreadsheet based model which (like Carlin/Soskice) favors a Taylor-Rule (rather than an LM) approach. The companion spreadsheets which are available on line can easily be adapted for classroom exercises and discussion. The working paper is available online ( but is also forthcoming in "Open Economies Review." Finally, this post represents my own views -- not necessarily those of the IMF, its management, or its directors. I welcome any comments. Evan Tanner (

  12. I think it would be good if they coverred politics as well. For two reasons. First, not discussing how it all relates to politics is political in itself - it biases people towards more right wing views. Second, it makes it all so much more interesting and helps people to understand the real world effects of economic policy.

  13. Why not teach economics as the study of stocks and flows, with generation and destruction of financial instruments, adjustments to financial data (mark to market asset valuations, writeoff of bad debt, etc.) and intelligent agents making decisions that change the parameters of the stock flow models in dynamical systems?

    Economics is, after all, the study of populations and changing populations, with a special treatment of financial instruments under customs of law and accounting. Although no model would likely capture the dynamical systems with high accuracy it would at least reflect the "reality" of the games being played in the system of private property with finance (markets) and government policy decisions (monetary, fiscal, bankruptcy laws, etc). A house price bubble with overshoot and collapse could easily be demonstrated via feedback into mark-to-market asset prices from debt-finance activity with a slight change in feedback parameter causing the bubble to move from asset price gains to falling asset prices (therefore a realistic model of overshoot and collapse driven by mark to market psychology and aggressive debt financing of assets).

  14. macro-axiomatic eh?

    postmodern critiques are always utter nonsense.

    is that macro-axiomatic enough (in a post-walrasian paradigmatic mode) for you?


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