A reflection from an economics student and attendee of the Rethinking Finance Conference in Oslo April 2018.
AUTHOR BENEDIKT GOODMAN
What is the economy? What is money? Who creates ‘money’ and how? What are the interlinks and dynamics between business, citizens, government and regulators? What are the implications of debt? What is the relationship between governments, central banks and banks? How does money and capital flow within the banking and financial industry? What is the relevance of the finance industry?
THESE ARE CORE QUESTIONS that many students want answered when enrolling in the study of economics. It seems natural that such questions are a core part of an education that claims to make you an expert on ‘the economy’. And yes, once you start the first year there might be some interesting questions posed in the introductory lectures. In many of the courses offered in the first semester, it seems as though ‘economics’ is actually the study of the economy, and you get some time to explore parts of the institutions and mechanisms that currently shape the world around us.
BUT BY THE TIME you reach the second semester, something changes. The institutions that shape our economy, and the discussions about «how things actually work», take a backseat to rational agents, optimisation puzzles and the operation of linear economic models. From here on, most courses in economics are merely subsequent presentations of the neoclassical reductive method (i). The real world is put aside in order to focus on complicated idealised models and imaginary markets. «Thinking like an economist» they call it.
AS AN ECONOMICS STUDENT, I am worried that I do not learn about some of the most important and complex characteristics of the international economy. I also find that professors that teach macroeconomics in my faculty are not sufficiently informed about the implications of global finance (debt, money and banking) as it works today and the consequences of the increasing share of the financial economy relative to the ‘real economy’.
I ALSO WORRY, that we are sometimes taught things that are empirically incorrect. A good example is how we are told in macroeconomics that banks are only intermediaries of money, turning savings into investments, and that only the central bank can create money. It took an external lecturer, in what is an elective class to many students, to teach us about endogenous money supply. Nonetheless, for the rest of the course we were still going back to models where investments require prior savings. Thus, most students who take classes in macroeconomics will take away a misunderstood impression of how an integral part of the economy works.
HOWEVER, the rest of society expects this sort of knowledge – about money flows and money creation to be a key area of expertise for economists. When people figure out that the emperor is nearly naked it creates a problem for the entire discipline. An infamous example could be found in «The Queen’s question» to the economists at LSE during the 2008 crisis.
“The real world is put aside in order to focus on complicated idealised models and imaginary markets. ‘Thinking like an economist’ they call it.
CONFERENCES like Rethinking Finance have a role to play, addressing the topics not taught in the core education of economics. By providing a platform for conversations about the real-world economy we are providing crucial knowledge for future economists. How money is created, how the financial and banking sectors are regulated, and the challenges posed in the blurry area of shadow banking, are all important questions to answer, in order to understand contemporary economic issues.
IN THE YEARS running up to the 2008 crash, most mainstream economists relied fully upon the neoclassical reductionist equilibrium models to ‘understand’ what was going on. Models that do not serve any tangible explanation of financial instability.
If they had been exposed to frameworks and theories outside the neoclassical box, for example Minsky’s financial instability hypothesis, they would have had more tools to better predict and explain the course of events that took place.
EXPOSURE TO IDEAS currently omitted from the curriculum could be vital for the economist of the 21st century. Student initiatives like Rethinking Economics challenges the dominant view in economics through a bottom-up approach at economics departments worldwide, and tries to change what it means to think like an economist. With a bit of luck, and a lot of hard work, the hope is that a diversity of ideas and perspectives will be included in the core economics curriculum, making the discipline a better servant to society as a whole.
(i) Reductive reasoning stems from latin, Reductio ad absurdum. The litteral translation is “reduction to absurdity”
This article was published in our Rethinking Finance publication, Check out the full magazine here