Should-Read: Sam Bowles and Wendy Carlin: A new paradigm for the introductory course in economics

Should-Read: Sam Bowles and Wendy Carlin: A new paradigm for the introductory course in economics: “The contributions of Keynes, Hayek, and Nash–aggregate demand, the central economic role of limited information, and strategic interactions modelled by game theory… http://voxeu.org/article/new-paradigm-introductory-course-economics

…have become foundations of economic thinking. Before the end of the 20th century, all three innovations had become standard postgraduate economic instruction…. Things are radically different at the undergraduate level. The Samuelsonian paradigm is basically Marshall plus Keynes…. Asymmetric and local information, and strategic social interactions modelled by game theory are mentioned, if at all, at the end of the introductory course…. Understandably, students think information problems and strategic interaction are simply refinements of the standard model, rather than challenges to two of its foundations–price-taking as the benchmark for competitive behaviour, and complete contracts (and hence market clearing in competitive equilibrium) made possible by complete information. CORE’s introductory text, The Economy, attempts to do for information economics and strategic social interaction what Samuelson did for aggregate demand…. Likewise, behavioural experiments and research on human cognitive capacities call for a more empirically grounded conception of human behaviour….

We replaced the passive price-taker of perfectly competitive equilibrium with the ‘perfect competitor’ (Makowski and Ostroy 2001). This active competitor exploits available (but incomplete) information to appropriate any possible rents that may exist when an economy is not in equilibrium, under some conditions driving the dynamic process to a Pareto-efficient equilibrium, even when there are impediments to competition. The new paradigm not only provides a more convincing story about how an economy might reach a competitive equilibrium, it also fundamentally alters the nature of that outcome. When lenders and borrowers, and employers and employees, are modelled as principals and agents with asymmetric information, who interact under an incomplete contract, credit and labour markets do not clear in competitive equilibrium (Stiglitz 1987). Introducing students to quantity constraints at the outset eliminates the need for ad hoc assumptions to explain the credit constraints underpinning the Keynesian multiplier, persistent unemployment, and other macroeconomic phenomena. Students also get an empirically based perspective on how markets work when reputation, personal loyalty and social norms play an essential role (Brown et al. 2004)….

CORE’s problem-based approach to teaching concepts and models narrows the gap between what the students get and how we do economics in another way as well. Economics has become an increasingly empirical subject…. The data appear… in the CORE…as the basis for defining real economic problems that models should be capable of illuminating…