On Average Class Size

Perhaps I should propose this as a way of dealing with budget/class size issues:

by simply making all classes at an institution the same size, one can reduce the average class size experienced by students without actually having to hire more faculty. Say your institution has one class of thirty students and one of sixty. Then if you pick a student uniformly at random, one-third will say “there are thirty students in my class” and two-thirds will say “there are sixty students in my class”, for an average of (1/3)(30)+(2/3)(60)=50. If you rebalance the classes to have forty-five students in each class, then the average class size experienced by students is 45. (The average class size experienced by students, by the way, is always greater than or equal to the average class size experienced by instructors, with equality if and only if all classes are the same size.)

Interview with Judy Klein

From an interview with Judy Klein on the history of economics:

The recent crises in credit markets, economies, and economics have rekindled an interest in the history of economics. Whig history taking the form of a couple of paragraphs in an academic paper detailing the intellectual pedigree of the latest technical advancement no longer satiates. The crisis has inspired a serious examination of how mainstream macroeconomics got to the point where it was difficult to generate foresight of the possibility of a crisis or even in hindsight reasoned explanations of the key problems. There has been a renewed interest in the economic history of past debt /credit crises as well as in the discarded ideas of economists who had incorporated insights on financial markets into their theories.

Is Economic Theory Useful in the Modern World?

Writing for The Atlantic, Bill Davidow tries to make the case that economic theory is outdated and largely obsolete.  While economic theory has its share of problems, Davidow fails to focus on them and instead writes as if things haven’t changed since the 18th century; even then, he mischaracterizes Classical economics by writing, in part:

Much of the economic theory that guides government policies and the actions of business — developed when the world was far less connected than it is today — is out of date. Theories that were once right are now wrong.

 

Adam Smith’s “invisible hand” provided invaluable guidance to markets and did an excellent job of allocating resources in a less connected world. As long as the markets were local, externalities less important, and moral and government authority policed unsavory behavior, there was no better system.

 

Moral authority is the powerful thumb of the invisible hand.

Was the mercantilist world in which Adam Smith wrote about economics really one dominated by “local” markets?  Smith lambasted mercantilist trade policies partly because they were preventing England from fully engaging in the the emerging global marketplace.  The world – at least the nascent market economies in Europe –  had been, even by Smith’ age, far from local.  Thomas Mun, a prominent mercantilist writer, penned a well-known article called “England’s Treasure by Foreign Trade” in 1630.  David Hume’s price-specie flow model appeared in the mid-18th century.  Smith’s own work appeared  roughly a quarter century later and  David Ricardo’s famous model of comparative advantage in 1817.  One would be hard-pressed to read Classical economics and come to the conclusion that their theories applied only to a world of “local” markets.

Moreover, Adam Smith’s “invisible hand”  was much more complex than Davidow suggests: Smith’s metaphor – used once, by the way, in the entire Wealth of Nations - was not really about allocating resources.  In fact, Smith used it in writing about why merchants preferred to invest their capital at home rather than abroad; of course, that had unintended benefits for the economy:

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisiblehand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

Smith was an advocate of a system of natural liberty that would allow self-interest to promote the “progress of opulence,” but the invisible hand has taken on a life of its own since then.  There still seems to be no clear scholarly consensus on just what Smith meant by the phrase, so I’ll leave it aside for now.

Davidow seems to have missed the fact that economic theory has evolved since the 18th century.  It is true that the direction it has evolved has not always been desirable (in fact, his definition of the invisible hand’s allocative functions should be linked not to 1776 but to 1948 when Paul Samuelson converted a metaphor into a mathematical model which had little relation to the original), but it has not remained static.  Davidow has ignored the recent advances in fields such as experimental economics, behavioral economics and economic history.  All of those fields have challenged some of the assumptions that he criticizes and have enlightened our understanding of how the economic world works.  There is, as in any discipline, much more to do but we should not lose sight of the progress and we should try to get the intellectual history right before making sweeping claims about the illegitimacy of the theories.

New Blog from Acemoglu & Robinson

Acemoglu and Robinson have a new blog here.  Let’s see if it slows down (and hope it doesn’t) their impressive research productivity!

Book Review of “Erasing the Invisible Hand”

Gavin Kennedy has a new review of the late Warren Samuels’ book, Erasing the Invisible Hand: Essays on an Elusive and Misused Concept in Economics.  You can find the full review at EH.net