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Journal of Social Science Education © JSSE 2010
Volume 9, Number 2, 2010, pp. 16–25 ISSN 1628-5293
16
Walter Otto Ötsch and Jakob Kapeller
Perpetuating the Failure:
Economic Education and the Current Crisis
While the current financial crisis had an overwhelming impact on the global economy, its effect on economics
as an academic discipline has been negligible. This paper explores the relationship between the financial crisis,
mainstream economic theory and the education of economists. In a nutshell it shows that (a) current economic
education leaves students illiterate with respect to events like the financial crisis, (b) mainstream economic
theory is unable to systemically explain the financial crisis and (c) this situation will be unaffected by the recent
events. On the contrary economic education will stay pretty much the same, since it incorporates a set of ideas,
perceived as influential, well-established and important by the economic community.
Content:
1. Introduction
2. Basic problems of economic education
3. The role of textbooks in economics education
4. Failures of neoclassical reasoning
5. Effects of the current financial crisis on the teach-
ing of economics
6. Concluding remarks
Keywords
performativity, paradigm, neoclassical economics,
economic education, financial crisis
1. Introduction
The emergence of the current financial crisis in Sep-
tember 2008 (the bankruptcy of Lehman Brothers fol-
lowed by a successive collapse of the interbank market,
which lead to a decrease in credit-induced demand
and GDP) was a surprise not only for the lay public,
but also for most professional economists and other
experts. Dirk Bezemer (2009), for instance, has identi-
fied only 13 experts, who successfully anticipated the
current crisis in or before 2006. Additionally also the
Bank for International Settlement (BIS) in Basel had
a premonition of the current financial crisis (e.g. Brio
and Lowe 2002).
This collective failure of the economics’ profession
(Colander et al. 2009), which was accompanied by a
no less systemic malfunction of business journalism
(Starkmann 2009), is comprehensible from a critical
viewpoint on established economic theory. In sharp
contrast to other social sciences, economic theory
is, as is well known, arranged around an authorita-
tive theoretical core, commonly termed neoclassical
economics (see: Dobusch and Kapeller 2009). The neo-
classical approach thereby dominates the economics’
profession. Hence, most economists are committed to
one of the several variants of neoclassical economics
(roughly 80% of the economists organized within the
Verein für Sozialpolitik avow themselves to neoclas-
sical economics; see: Frey, Humbert and Schneider
2007). In this spirit one may interpret the failure of
academic economists to predict and thoroughly ana-
lyze the current economic crisis as a severe defect of
the neoclassical paradigm.
2. Basic problems of economics education
While neoclassical economic research is a relatively
broad and manifold domain, at least within certain
paradigmatical boundaries, the teaching of economic
theory suffers from a much narrower perspective. Eco-
nomic education almost always starts with and focus-
es on (variants of) the core of neoclassical theory: the
supply and demand framework and the General Equi-
librium Theory in the tradition of Arrow and Debreu
(both are formally equivalent; see below). The basic
features of these models also define the core elements
of economic education. This self-imposed limitation
characterizes all leading economic textbooks, which
basically serve as an introduction to General Equilib-
rium Theory.
In this sense a basic problem of economic educa-
tion is its nearly exclusive focus on just one theoreti-
cal conception, respectively paradigm. This rather
narrow approach seems somehow tenuous, since the
problems tackled by economics are similar to that
of the other social sciences with respect to the fact
they are contingent in time and space: general laws
or basic propositions holding for all economies at
a given time or for just one economy over all times
seem, thus, improbable to find. This manifoldness
associated with the problems of the social sciences,
including genuine economic problems, demands a
variety of perspectives on these problems and hence
also a variety of theoretical and empirical approaches
in academic teaching and research. In short, while
multidimensional problems would also require multi-
dimensional theoretical answers, modern economics
mainly relies on one unique perspective for analyzing
economic problems, namely the perspective of neo-
classical economics. This lack of pluralism is especially
problematic when it comes to economic education.
This argument corresponds with the citation habits
of leading mainstream journals: theoretical perspec-
tives deviating from the mainstream economists’ at-
titude (like institutional, post-Keynesian or evolution-
Walter Otto Ötsch and Jakob Kapeller Journal of Social Science Education
Perpetuing the Failure: Economic Education and the Current Crisis Volume 9, Number 2, 2010, pp. 16–25
17
ary approaches) are not discussed within neoclassical
research (cf. Kapeller 2010). In contrast, they are near-
ly completely neglected by mainstream economists
leading to tight paradigmatical borders between com-
peting fields of research and, thus, reducing the scope
of the debate within mainstream economics.
When it comes to economics education these bor-
ders are even tighter than in economic research (see
also: Wilson and Dixon 2009). Additionally, they are
also more problematic in the context of education
and teaching, since the basic lectures in economics
are delivered to a wide audience of students ranging
from Law to Business Administration and Sociology.
Thus, these basic lectures shape not only the ideas of
future economists, but also those of a broader intel-
lectual elite, which later occupies important positions
in economy and society (like managers, government
officials, business journalists or college teachers).
Most of these students only take a few lectures in
economics before going into business, law, journal-
ism or pedagogics. Regrettably, most of them have
not been exposed to a greater variety of neoclassical
models, not to speak of alternative theoretical concep-
tions, during their economic education. Thus, these
rather parochial basic lectures have a strong impact
on shaping what educated people generally think
about markets, consumption, economic growth or
simply “the economy”.
Moreover, economic teaching is not only exhibiting
a monist attitude when it comes to issues of theoreti-
cal diversity, but neoclassical economics also presents
itself as a primarily ahistorical scientific endeavor
thereby further limiting its conceptual variety. Many
economists are receptive for an ahistorical view on
economic issues, since they themselves have in many
cases only little knowledge on economic history or
the history of economic reasoning.
The common trend that courses devoted to these
fields have been marginalized within the economics
education (Chang 2004) is already reflected in a panel-
survey on the attitudes of German-speaking econo-
mists: While in 1981 85% of the profession believed
that business cycles could only be understood in
conjunction with the general historical development,
in 2006 77% principally agreed on the statement
that “inflation is primarily a monetary phenomenon”
(Frey, Humbert and Schneider 2007, 368-369). This
corresponds to the idea, that business cycles can be
modelled without any reference to historical events
by using the standard equilibrium-approach. Conse-
quently economic history or the history of economic
thought (which do not even appear in any question
of the 2006-survey cited here) is thought to be unin-
spiring or unnecessary for understanding real-world
economic problems.
Moreover, this narrow focus has successively led to
the exclusion of the “big economic questions” from
economics curricula, because the latter are strongly
tied to the economics department’s research practice:
“These include questions such as whether capital-
ism or socialism is preferred, what the appropriate
structure of an economy is, whether the market
alienates people from their true selves […]. These
‘big think’ questions are ones that are worthwhile
to teach, but are generally no longer included in
the economics major because they don’t fit the dis-
ciplinary research focus of the profession.” (Colan-
der and McGoldrick 2009, 6)
Similarly important national and international (pol-
icy-)institutions, like parliaments, central banks, the
IMF, or even financial markets, are mostly neglected
trough-out the economics curriculum. Economic
teaching nowadays instead focuses on mathematical
and statistical training to allow economic apprentices
joining the paradigm-specific debates by embodying
advanced formal and econometric techniques as is put
best by a classic piece on the sociology of economics:
“The young Econ[omist], or ‘grad’, is not admitted
to adulthood until he has made a ‘model’ exhibit-
ing a degree of workmanship acceptable to the el-
ders of the ‘dept’ in which he serves his apprentice-
ship. […] If he fails to do so , he is turned out of the
‘dept’ to perish in the wilderness.” (Leijonhufvud
1973, 329-330)
Consequentially also introductory textbooks further
strengthen this attitude by focusing on economic
models, instead of economic history or (real-world)
economic statistics: most pedagogic examples do
not rely on statistical data but on fictious values in-
vented at the desk of the textbook-author in order to
fit the courageous assumptions necessary for develop-
ing the respective economic model (Benicourt 2005,
Ötsch 2009).
As a result of this increasingly one-sided education
young economists in the German-speaking area have
a much stronger confidence in neoclassical econom-
ics than their older counterparts, who were exposed
to different research paradigms and interdisciplinary
courses on economic history or sociological theory
during their education (Frey, Humbert and Schneider
2007, 362-363). In his recent book David Colander
(2009) argues that the tendency to substitute Europe’s
traditional curricular forms in economics for their US-
counterparts is further narrowing and weakening eco-
nomics as an intellectual endeavour.
3. The role of textbooks in
economics education
Economic textbooks are powerful devices, which serve
as the main vehicle for the international standardiza-
tion of economic education. While there exists in prin-
ciple a broad variety of different economic textbooks,
a closer examination shows that the collection of top-
ics covered as well as their specific treatment follow
Walter Otto Ötsch and Jakob Kapeller Journal of Social Science Education
Perpetuing the Failure: Economic Education and the Current Crisis Volume 9, Number 2, 2010, pp. 16–25
18
a rather standardized routine, rather independent of
the concrete author or publisher (Stiglitz 1988, Lee
and Keen 2004, Grimes 2009; for notable exceptions
see section 6) “As a result most new textbooks are,
generally speaking, clones of existing ones.” (Hill and
Myatt 2007, 58)
The typical textbook starts with a discussion of
some fundamental principles and then turns immedi-
ately to the supply and demand framework. The intend-
ed purpose of this model according to its apologists is
to show “how markets work”, i.e. to illustrate the basic
idea of the “market mechanism”. Additionally, the mod-
el of perfect competition is developed mostly by utiliz-
ing three distinct parts: the theory of the household,
the firm and the market. While the supply-demand
scheme is applied to a series of simple examples, sug-
gesting it is a generic tool for an analysis of markets,
the model of perfect competition is presented as a spe-
cial case based on overly narrow assumptions. In fact,
the perfect competition model is a popularization of
the General Equilibrium Theory of Arrow and Debreu.
While the latter is highly formal in nature, the former
represents a simplified, often diagrammatic, textbook-
version of the theory, which can be understood as an
introduction to General Equilibrium Theory.
While most textbooks differentiate between the
supply and demand scheme and the model of per-
fect competition on a rhetorical level, they are, in
fact, formally equivalent. Therefore “both” models
can be depicted by the well-known supply-demand
scheme, it is the main illustration of the neoclassical
paradigm’s core. Generally many neoclassical econo-
mists believe that the supply-demand model and/or
the model of perfect competition resemble the gen-
uine “market-mechanism”, as the single most impor-
tant mechanism working in any economy. Mankiw’s
prominent Principles-textbook, for instance, depicts
the supply-demand schedule 91 times on 850 pages
(Mankiw 2001, reference is made to the German edi-
tion). In none of these 91 cases it is discussed whether
the institutional preconditions regarding the applica-
bility of model are fulfilled, maybe because this ques-
tion is anything but easy to answer (see Ötsch 2009,
Chapter 6). In all textbooks the supply demand model
and/or the model of perfect competition is broadly
applied to markets where the assumptions are plainly
untrue (e.g. to the effect of taxes in cigarettes in USA,
a market with only four firms). Consequently there is
no discussion whether this model can be used at all or
how to evaluate empirical evidence against different
models. In this spirit Hill und Myatt (2007, 58) discuss
an “overemphasis on perfectly competitive markets
in microeconomics principles textbooks”.
Completing the model of perfect competition
marks the halfway point of nearly all textbooks (many
courses don’t spend much time on the second half of
the text-books). Subsequently other types of markets
are discussed, like monopoly or oligopoly and the fi-
nal chapters usually deal with factor markets and oth-
er topics like the role of government. But references
are always made to the model of perfect competition
as a ready-to-use hermeneutical tool and a benchmark
for policy decisions. In this spirit “it is not surpris-
ing that the perfectly competitive framework is seen
by many students as synonymous with the microeco-
nomic analysis of markets” (Hill and Myatt 2007, 60).
The uniform features in economic textbooks dis-
cussed here could have historical reasons as well. The
first prominent textbook in USA after WWII was that
of Paul A. Samuleson (starting in 1948, see also: Col-
ander and McGoldrick 2009, 31-32; Skousen 1997). Eco-
nomic textbooks up to now are mostly structured af-
ter the Samuelsonian archetype, covering very similar
material presented in a very similar mode. The Samu-
elsonian classic focused on presenting simple formal
models of economic mechanisms, which were at the
core of the text, combined with vague and sketchy
real-world examples, to give some intuition about the
supposed explanatory value of the models. Samuel-
son thereby was well aware of the fact that defining
economics’ core knowledge via a widely distributed
standard textbook may have an impressive societal
impact: “I don‘t care who writes a nation‘s laws, or
crafts its treatises, if I can write its economics text-
books.“ (Samuelson, quoted in Skousen 1997, 150)
The Samuelsonian focus on simple diagrammatic
models, in some cases backed up by a little algebra, as
the core and fundament of any economic education
has been perpetuated till the 21st century. Such an ap-
proach is, perfectly compatible with an emphasis on
the simple diagrammatic version of General Equilib-
rium Theory as discussed above, which was forced by
the influential “Chicago School of Economics” as well.
Many publishers of modern textbooks tend to
further enforce this tendency of a self-reproducing
teaching-standard, since most new textbooks are sub-
ject to a thorough peer-review process. In this context
textbook-authors report that already minor changes
in the standard presentation (e.g. terminological
changes), are regarded as conceptual flaws by the re-
viewers (having the standard Samuelsonian-Chicago
conception of a textbook in mind) and causes publish-
ers to demand changes by the authors. If the authors
refuse to make the demanded alterations publishers
reduce the marketing spending associated with a cer-
tain textbook (thereby reducing the authors’ income)
or drop the project as a whole.1
1 At the 2010 ASSA-conference in Atlanta David Colander repor-
ted of heavy objections against his move to change the name
of the „Aggregate Demand Curve“ in his intermediate mac-
roeconomics-textbook to „Aggregate Equilibrium Curve“ for
reasons of consistency (see also: Colander 1995). Consequently
his publisher threatened to „turn the book down“, which lead
Colander to use the traditional label.
Walter Otto Ötsch and Jakob Kapeller Journal of Social Science Education
Perpetuing the Failure: Economic Education and the Current Crisis Volume 9, Number 2, 2010, pp. 16–25
19
Moreover, there are also rather practical reasons for
the popularity of standard economic textbooks: They
are, from an economic perspective, rather cheap, i.e.
“efficient”, when used to prepare economic lectures,
since economists already know the relevant models in
depth and just have to adapt this knowledge to the pre-
sentation in the textbook. Additionally, there is a lot
of auxiliary material accompanying those textbooks,
like ready-made power point slides for presenting the
material in class, specific “teacher-editions” of text-
books or various web-based resources like data-bases
with exam-questions and their respective answers.
Peter Grimes (2009) investigated the question why
the alternative “social issues”-approach to economic
theory, which puts problems instead of models at the
centre of academic teaching, has not succeeded in re-
placing the traditional mode of acquiring economic
skills. His main conclusion (Grimes 2009, 96) is that
“after a while, the marginal cost of preparing to teach
a traditional principles class drops toward zero while
the marginal cost of preparing to teach a social issues
course remains relatively high.” Thus, economic text-
books also function as a kind of “labor-saving device”,
which allows for a reduction of time spent in prepara-
tion for courses. This is, of course, beneficial for the
individual scientist since “when asked about the im-
portance of teaching versus research in promotion de-
cisions at major universities, one hears that practice
dictates 90 to 95 percent of the decision based on
research output.” (Colander and McGoldrick, 2009, 28)
Devoting only a minimal amount of time to teaching
preparation is thus an immediate imperative for the
ambitious researcher, thereby reassuring that the stan-
dard textbook will be her or his preferred choice and
guideline.
4. Failures of neoclassical textbook
reasoning
The neoclassical focus in economic education has a va-
riety of different effects. Among other things it may
illuminate, why economists and similarly educated
professionals (speculators on financial markets, busi-
ness journalists…) were not only unable to predict the
financial crisis, but, moreover, believed that such an
event was possible at all (for the prognoses of German
research institutes, see the list in Nienhaus 2009, 19).
In our opinion, neoclassical textbooks economics lacks
the essential tools to explain why capitalist economies
are, to some extent, prone to crises in general and fi-
nancial crises in particular.
This claim may seem somehow odd, since, as already
mentioned, neoclassical research contains a broad
spectrum of models, some of them especially devoted
to explaining the notoriously unstable behavior of
financial markets (e.g. Hart and Kreps 1986, De Long
et al. 1990). While such contributions are sometimes
even prominently discussed and highly cited, they in-
troduce new assumptions or modify already existing
ones and, thus, deviate from the simple textbook ex-
ample (while preserving many of its core ideas). Hence,
they are (a) not taught within the standard curricu-
lum leaving the vast majority of students unaware of
their implications and (b) only familiar to small circles
within the economic community, which are especially
considered with the instability of prices (on financial
markets).2
But the majority of professional economists follows
those theoretical concepts which are in line with the
standard textbook reasoning. Well-known examples
are the main models in modern finance, like (1) the effi-
cient market hypothesis – it declares financial markets
as always in equilibrium -, (2) the capital asset pricing
model – it defines the main relationship between risk
and return, (3) the Modigliani-Miller theorems – which
say that the way in which a firm finances its real activi-
ties does not affect the cost of capital, i.e. finance can
be separated in some way from production activities
– and (4) the Black-Scholes-Merton option-pricing mod-
els which underlies a broad range of concrete calcula-
tions e.g. in derivative markets. All of them are in line
with the Arrow-Debreu model of General Equilibrium,
the core model of neoclassical textbook economics. In
this context it seems appropriate to illuminate some
of the central deficits in this reasoning.
4.1 The concept of the actor
Neoclassical economics rests on two basic concepts: (1)
of man as a fully rational, but socially isolated agent,
and (2) of the “market” as a central coordination de-
vice of economic activities. Both are based on a strict
reductionism: social phenomena as such are, more or
less, inexistent, since they are always explained by
referring to individual behavior (methodological indi-
vidualism, firms are modelled analogous to single per-
sons or households, see: Ötsch 2009, Chapter 5). The
explanatory capability of the neoclassical approach is,
thus, inevitably linked to the suitability of its concep-
tion of the individual actor.
Regrettably the concept of human actor in neoclas-
sical economics is fairly limited. It is considered as
a information processing machine (Mirowski 2002):
data from the outer world, e.g. prices in markets, are
processed by an “inner” program, the results are per-
ceived as “behavior” in the outer world. Therefore, the
agent follows a simple “stimulus-reaction”-scheme
(Blaseio 1986).
Such an approach is only plausible if the “internal
program” is constant and immutable over time. It
serves as a stable transformational field, which guar-
antees the conversion of external data into a unique
and unambiguous result. Thereby the “internal pro-
2 We have to thank one of our reviewers for a hint on this specific
debate.
Walter Otto Ötsch and Jakob Kapeller Journal of Social Science Education
Perpetuing the Failure: Economic Education and the Current Crisis Volume 9, Number 2, 2010, pp. 16–25
20
gram” consists only of a set of preferences and a
processing algorithm (e.g. “maximize”!). Preferences,
thus, occupy a central and decisive role in the neoclas-
sical image-of-man, they define him or her.
But the concept of preferences is based on very
restrictive assumptions (Ötsch 2009, Chapter 4). For
instance, they do not change (neither through time
nor through interaction with others, see: Fullbrook
2005) or they are not subject to any social, societal
or cultural influence (Wolfson 1994). In textbooks
preferences are mostly explained by discussing some
rudimentary assumptions, which are, in turn, illus-
trated by fictitious examples (Benicourt 2005).
Moreover, most of these restrictive assumptions
contradict conventional knowledge concerning hu-
man cognition (as found in cognitive sciences) and
the implications of cultural conditions for individual
behavior (as found in cultural sciences). Individuals
in neoclassical theory act like human calculators or
like computers running a very simple software, which
is stable, exogenously given and does not change in
response to different circumstances. People in neo-
classical basic models cannot alter their models. They
have no ability to reflect themselves, to adapt their
mental models and to learn. “Behavior” of this kind
has nothing to do with real human actions as they ap-
pear in the normal course of life. Additionally, there
is, of course, no self-reflection or reflection about
the world or the economy – the individuals in neo-
classical economic theory have no self-image and no
self-consciousness (they are automata, like animals in
Descartes’ world view).
4.2 The concept of market
The basic idea of the market is represented by the
supply-demand schedule, where the price of a com-
modity is determined by the intersection of supply
and demand (see figure 1(a)). But even this seemingly
simple model is based on a series of far-reaching as-
sumptions, which are well-known to specialists but
not mentioned in almost all introductory textbooks.
A prominent example is the so-called stability prob-
lem. It asks whether a market starting from a situa-
tion where supply (S) does not equal demand (D), e.g.
at price P1 in figure 1(a), can reach equilibrium (Q*) by
itself. In Figure 1(a) this seems no problem. If at price
P1 supply S exceeds demand D then it could be plausi-
bly argued that producers lower the price. This would
induce growing demand and shrinking supply. So the
market would “move” along the arrows and finally ar-
rive at a stable equilibrium. Here we have a price P*
which corresponds with a quantity Q* where supply
equals demand.
Fig.1: (a) a stable, (b) an unstable market for a consumer good
Price
P1
Price
P1
P*
S
Q*
(a) (b)
Quantitiy QQuantitiy
S
D
But the dynamic feature of the market strongly de-
pends on the actual form of the supply and demand
curves. Figure 1(a) represents the “standard case”:
as the market price rises, supply grows and demand
decreases. But the shape of these curves depends on
many further assumptions inside the model. For in-
stance, we have to assume increasing average costs,
which does not hold for many empirical cases, in order
to preserve a well-behaved supply curve as depicted
by figure 1(a). In figure 1(b) we look at a specific de-
mand curve. If at a price P1, where supply exceeds de-
mand, firms lower price then the supply surplus would
rise further and further. Thus, the market shown in
figure 1(b) is notoriously unstable and cannot reach
any equilibrium-state.
On a more general level we can ask which condi-
tions must be fulfilled, to exclude the possibility of
“global instability” in a general equilibrium framework
(with all its idiosyncratic assumptions). This question
has been discussed intensely for more than 50 years
(for an overview see Costa 1998, 78ff.) leading to a de-
finitive result: global instability can only be excluded
if we impose further restrictive assumptions on the
structure of preferences, e.g. we must assume (a) that
all households have the same preferences, which im-
plies they are identical, or (b) react in the same way
to changing income (Keen 2002, 45f.). Of course, these
assumptions are not empirically justified. Hence, it is
unsurprising to note that “the results […] concerning
global stability are unquestionable negative.” (Ingrao
Walter Otto Ötsch and Jakob Kapeller Journal of Social Science Education
Perpetuing the Failure: Economic Education and the Current Crisis Volume 9, Number 2, 2010, pp. 16–25
21
and Israel 1990, 361) Neoclassical theory, thus, does
not show “how real markets work”. At its best the sup-
ply and demand framework is an inspiring heuristic
for analyzing price-quantity relations on certain mar-
kets (this can be achieved by dropping all background
assumptions), at its worst it shows an utopian image
of an ideal market with a strong ideological aftertaste.
The stability discussion and its far-reaching conse-
quences are seldomly mentioned in microeconomic
textbooks. A notable exception is the textbook of
Mas-Colell, Whinston and Green (1995). But while it
explains the main theorems of the stability problem,
it drastically understates its importance: “The center
of our science”, the authors argue, is constituted by
“the equations of equilibrium”. “The determination
of dynamic laws of change” on the other hand is the
main feature of “other sciences, such as physics or
even ecology”, i.e. they are not relevant for economics
(1995, 620). But restricting theory only to equilibrium
points permits an explanation how these equilibria
could be reached and, thus, dramatically restricts the
scope of neoclassical equilibrium theory.
But equilibrium points include unresolved puzzles
as well. In the neoclassical model of perfect compe-
tition all agents (households and firms) follow prices
given by “the market”. Nobody determines prices,
this does “the market”. But who is the market? The
“market” in this conception is an impersonal and
anonymous authority, which exists independently
of individual transactions and is not controlled
or directed by any human entity. The condition
“supply=demand”, which holds for market-clearing
prices, is only a theoretical assertion without empiri-
cal confirmation. In fact, it is rather dubious, who or
what determines prices in this context (it is not the
market participants, because these only accept the
given prices). Hence, “equilibrium prices” in economic
models are mostly deduced directly from the relevant
assumptions (e.g. that “markets are in equilibrium”,
an assumption as utilized in theories on financial
markets). What the theoretical concept of the market
means from an empirical or institutional perspective
remains fairly unclear: we simply do not know, what
is meant by the neoclassical idea of the market when
confronted with empirical and institutional settings
of a given economy (it lacks appropriate correspon-
dence terms to translate between theory and reality;
see: Nagel 1963, Ötsch 2009, Chapter 6).
4.3 Relation to the analysis
of the current crisis
The arguments discussed in the two preceding subsec-
tions are a helpful guide to understand the weakness-
es of contemporary economic theory when it comes
to predicting and/or analyzing the current financial
crisis. Neoclassical agents live in a fixed reality. It can
be perceived without any ambiguities. Moreover the
collapse of the interbank-market in September 2008
can be understood as a dramatic change in percep-
tions, interpretations and expectations. The mutual
ideas and views central protagonists (banks, investors,
speculators) had of each other have been drastically
altered. As a result risky assets have been reevaluat-
ed on a broad scale. This sudden cleavage between
planned actions, actual activities and blurry expecta-
tions led to strong imbalances and systematic disequi-
libria on various levels. In this context it is, of course,
regrettable that the standard conception of the mar-
ket is based on the idea of a stable, self-regulated equi-
librium and, thus, unsuitable to analyze situations of
systemic imbalances and irregularities.
Moreover, this concept of the market is free from
any historical connotations: historical knowledge on
financial crisis (e.g. Kindleberger 1978) or the idea
to distinguish between different historical episodes
with different decisive characteristics (e.g. current
financial capitalism as opposed to fordism) is, thus,
simply inapplicable in the ahistorical model world of
contemporary economics. From this perspective it is
not surprising that mainstream economists couldn’t
foresee the upcoming crisis (they also couldn’t pre-
dict or systemically explain the subprime-crisis,
which started in 2007 with similar, but smaller, ef-
fects as compared to the current crisis). For instance,
the original general equilibrium model does not in-
clude money (it cannot even be integrated into this
approach, see: Ötsch 2009, 269ff), therefore, it shows
a “capitalism” without money. Most macroeconomic
models used for prognoses do not include financial
wealth and banks interacting with real sectors (promi-
nent examples are the Washington University Macro
Model with 600 variables used in US politics, or the
Small Global Forecasting Model used by the OECD, see
Bezemer 2009, 18ff.). Most models dealing with finan-
cial markets follow the efficient market hypothesis. It
says that all relevant information is included in actual
market prices. This implies that nobody could achieve
permanent gains from financial markets and (that’s
included in its strong version) bubbles could not be
possible at all.
In all these widely used models crises do not appear
since the focus is on the self-regulatory capacities of
the market. This habitual overemphasis systematically
blinds economists: they simply do not recognize (any-
more) that crises and bubbles are an essential feature
of capitalist economies and, thus, there is no econom-
ic toolbox to analyze, let alone predict, financial crisis
as the current one.
5. Effects of the current financial crisis
on the teaching of economics
Contrasting the path-dependent aspects explored in
section three with the recent experiences from the
current financial crisis might lead to the conclusion
Walter Otto Ötsch and Jakob Kapeller Journal of Social Science Education
Perpetuing the Failure: Economic Education and the Current Crisis Volume 9, Number 2, 2010, pp. 16–25
22
that this major historical event would also be consid-
ered as a crisis of neoclassical reasoning. While some
economists (and non-economists) have articulated
critical statements against mainstream economic
theory3, this is still a minority position. In spring
2009, for instance, 83, mostly elder, German econo-
mists issued a critical statement for more realism in
analyzing economic policies, thereby arguing against
modern macroeconomics (Frankfurter Allgemeine
Zeitung, April 27, 2009). But the opposite viewpoint
gained support from 188 economists (Handelsblatt,
June 8, 2009) who argued in favor of “internationally
competitive“ economic theories.
The majority of economists do not consider the ac-
tual crisis as a crisis of economics as well. Only some
prominent economists (like Nobel prize winners Jo-
seph Stiglitz and Paul Krugman, see Handelsblatt Jan-
uary 11, 2010) took the economic crisis as an occasion
to criticize established economic reasoning. Evidently
for most economists it is very hard if not impossible
to get distance to their own thinking and detect a
crisis of their paradigm. Their acquired knowledge in
standard economic theory is still highly remunerated
in the scientific community. In media, in prominent
boards and as policy advicers we find the same neo-
classical economists as before the financial crisis, e.g.
in the German expert advisory board on economic
policy (Sachverständigenrat).
In this way there is no general debate on how to
change economic education. In this spirit leading
economic textbook authors comment on the issue as
follows:
„Despite the enormity of recent events, the princi-
ples of economics are largely unchanged. Students
still need to learn about gains from trade, supply
and demand, the efficiency properties of market
outcomes, and so on. These topics will remain the
bread-and-butter of introductory courses.“ (Grego-
ry Mankiw)4
„More economic research (and teaching), not less, is
the best hope of both emerging from the current
crisis and of avoiding future ones.“ (Doug McTag-
gart, Christopher Findley und Michael Parkin)5
So contrary to what one would expect, leading text-
book authors don’t seem to recognize any necessity
to change the basic commitments of economic educa-
tion. Instead, they recommend “more of the same”, i.e.
a more intense education in economics; a claim that
is sometimes even made for extending the existing
3 As summarized by Nienhaus (2009). Collections on the current
debates can be found on www.voxeu.org and www.blicklog.
com/finanzkrise/wissenschaft-und-medien.
4 see „That Freshman course Won’t be quite the same“, New York
Times, [23 May 2009].
5 see entry „The State of Economics“ in East-Asia Forum, Mai 21,
2009 online: http://www.eastasiaforum.org/2009/05/21/the-
state-of- economics/, [10 July 2009].
body of economic education into the sphere of public
schools to facilitate “rational” behavior and, hence, im-
prove economic performance (e.g. in Cassel 2004).
Another interesting occasion for observing the
economic community’s reaction to the current finan-
cial in terms of teaching, was provided at the ASSA-
conference 2010 in Atlanta, where a panel of highly
decorated economists (Benjamin Friedman - Harvard,
Raghuram Rajan – Chicago, Robert Shiller – Yale, Alan
Blinder – Princeton) was assembled in a session titled
“How should the financial crisis change how we teach
economics?” Interestingly, with the exception of Alan
Blinder who presented plans for some minor changes
in his macroeconomic textbook, none of the speakers
made a single concrete suggestion on how to change
economic education, economic curricula or econom-
ics’ basic pedagogical tools (diagrams, textbooks…).
All panelists sticked to general, uncontroversial and
vague statements such as: “economics should be prac-
tically useful for students” or “economics should be
more realistic and care about institutions”. In sum, the
session confirmed the impression that the basic fea-
tures of the economic education will stay as they are.
When looking more specifically for teaching mate-
rial devoted to explain the financial crisis within the
standard economics curriculum one comes across
tools like the “teaching note” of Stinespring and
Kench (2009). This has been downloaded over 300
times and frames the financial crisis as a prisoner’s
dilemma, focusing solely on the interbank loan mar-
ket. In this context the current financial crisis is pre-
sented primarily as a crisis of trust between different
banking institutions, thereby abstracting from the
systemic reasons of the current financial crisis. Thus,
also when it comes to explaining the current crisis to
students, economists prefer to stay within the bound-
aries of standard neoclassical theory even if this, as
in the current case, leads to a drastic oversimplifica-
tion of the matter at hand. So, altogether, the current
financial crisis doesn’t seem to have any decisive im-
pact on the way economics is taught.6
6. Concluding remarks
Based on the arguments presented in the preceding
sections some relatively clear-cut suggestions for the
reform of economics curricula can be delineated. We
will conclude this paper by discussing some major im-
plications of our argument so far.
First, it seems necessary to implement a pluralist ori-
entation within basic economic education: when stu-
6 Similar things can be said about the trends in economic re-
search: The widely disseminated paper of Colander et al. (2009)
on the current crisis and the state of the economics profession
basically recommends „more of the same“, i.e. more advanced
mathematics, more sophisticated statistical techniques, more
complex models and so on (see also the debate in the real-world
economics review, issues 48-50).
Walter Otto Ötsch and Jakob Kapeller Journal of Social Science Education
Perpetuing the Failure: Economic Education and the Current Crisis Volume 9, Number 2, 2010, pp. 16–25
23
dents are introduced to different theoretical approach-
es they may debate their relative merits and develop
an awareness about the weaknesses and strengths of
competing theories and the inherent complexity of
economic activities. In turn, they would possibly be
more inclined (and also more able to) analyze given
problems with methodological and theoretical instru-
ments appropriate to the questions at hand instead of
using an invariable set of methods prescribed by tradi-
tion (for an overview of concrete suggestions for a plu-
ralistic economic education see: Elsner 2006, Reardon
2009 or Rima 2011). Additionally, such a reform would
favor (1) the return of the “big-think questions” to eco-
nomics’ curricula, i.e. those which make economics an
interesting subject, (2) as well as a problem-centered
approach to teaching economics.
Second, an economic education should supplement
its core training by courses in related areas such as
economic history, sociology, political science or phi-
losophy in order to provide students with some con-
text knowledge on economic systems (what is the his-
tory of an economy? where do its institutions come
from? what’s the relation between economy and so-
ciety? …). The history of economic thought should,
from our point of view, return to a central position
within economic education: teaching students about
the curious and idiosyncratic developments in eco-
nomic reasoning broadens their perspective and gives
them a glimpse on the variety of solutions to ques-
tions regarding the “economy” developed over time.
In any case this would be a more balanced treatment
than providing students with extensive textbook-
knowledge, which is presumably based on current
knowledge but in fact lags about 30-50 years behind.
Third, and maybe most important because institu-
tionally decisive, we would argue for the usage of a
more balanced set of basic textbooks incorporating
a broader variety of theoretical approaches (as: Stret-
ton 1999, Lavoie 2009 or Reardon 2009) or at least a
broader perspective on established economic theory
(as: Klamer et al. 2010). An even more recent example
is given by the forthcoming textbook of Elsner et al.
(2011), which is based on evolutionary and institution-
al approaches to microeconomics.
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