Academics cling on to theories now redundant in the world of work. It’s time for a curriculum overhaul
In recent decades, a large proportion of the research output of economists has been empirical. Behavioural economics has become part of the mainstream. Yet as a discipline economics is still accused of lacking a secure connection with the real world – and with some justification. Most notoriously, the macro economic models used by the Bank of England and the Treasury before the 2008 crisis assumed a perfectly efficient financial sector, leaving them blind to the developing storm.
Unreality has featured in discussions of the university curriculum too: economics graduates are perceived as having inadequate knowledge of the world, particularly by employers, and this has led the Bank of England to sponsor a review of teaching. The starting point for this review is that students need a “greater awareness of economic history and current real-world context”.
Instead of focusing on the teaching of models without a real-world context, courses should present evidence of a variety of types – historical, statistical, survey-based, etc – prior to introducing a model. We can then see what has been selected for inclusion in the model, and what has been left out.
There should be an end to the practice of presenting “facts” that are known to conflict with the evidence. In my research area, the capitalist firm, a common assertion is that as the scale of production rises beyond a certain point, costs start to increase. In fact, such diseconomies of scale are unusual in manufacturing – estimates are just 5-11% – whereas economies of scale are commonplace. This has been known for at least 60 years.
It may seem rather trivial whether firms are subject to economies or diseconomies of scale. However, the textbook account is essential to the mainstream theory of the firm, which is why the false version persists. This is not trivial: the real capitalist economy is dominated by firms.
Such conflicts between evidence and theory are not confined to teaching. here is in fact a huge and valuable empirical literature that illustrates the severe deficiencies of the neoclassical theory of the firm, and indeed this applies more broadly to much of mainstream economics – yet this has not prevented it remaining the default mainstream view within our universities.
This situation persists because the discourse among academic economists – even dissident ones – is about competing arguments rather than how well any of them explains reality.
I suggest that the main focus, in teaching as in business, should be on evidence. Economists should be far more willing to allow the evidence to lead to the revision or even the discarding of theory, including core theory, just like our colleagues working in the sciences. This is the link that is missing between academia and industry.
Michael Joffe is professor of economics at Imperial College London