Implications of the Crisis for Introductory Economics

People ask how I think introductory economics teaching should change as a result of the financial crisis. It’s an important question. At the upcoming American Economic Association Annual Meetings, my colleague Bob Hall, next AEA President and Program Director, has included on panel on the topic.

Clearly we need to include more on financial markets, but based on my experience teaching in the two-term introductory course at Stanford, I think the single most important change would be to stop splitting microeconomics and macroeconomics into two separate terms. The split has been common in economics teaching since the first edition of Paul Samuelson’s textbook, which put macro first. Many courses now have micro in the first term and then macro in the second.

But regardless of the order now used, I think a reform that integrates micro and macro throughout is worth considering. There were arguments for doing this before the crisis, including the fact that in research and graduate teaching the tools of micro have now been integrated into macro.

The financial crisis clinches the case for full integration in my view. The crisis is the biggest economic event in decades and it can only be understood with a mix of micro and macro. To understand the crisis one must know about supply and demand for housing (micro), interest rates that may have been too low for too long (macro), moral hazard (micro), a stimulus package (macro) aimed at such things as health care (micro), a new type of monetary policy (macro) that focuses on specific sectors (micro), debates about the size of the multiplier (macro), excessive risk taking (micro), a great recession (macro), and so on. It you look at the 22 items that the Financial Crisis Inquiry Commission has been charged by the Congress to examine, you’ll see that it is a mix of micro and macro. Defining the first term as micro and the second term as macro, or visa versa, is no longer the best way to allocate topics.

Moreover, the introductory course can be integrated in a way that makes economics more interesting for students. This year at Stanford we have been experimenting with such an integration in our principles course, and so far it seems to be working well. (The course, Economics 1, is taught this year by me (1A), Marcelo Clerici-Arias (1B), Gavin Wright (1A), and Michael Boskin (1B)). In 1A, which has been mainly micro until this year, I shuffled in macro concepts at various places. When I talk about aggregate investment demand I said it came right out of the micro demand for capital. Similarly aggregate employment and unemployment can be explained in the context of micro labor supply and demand. The proof that aggregate production (GDP) equals aggregate income can be stated at the time one defines profits as equal to revenues minus cost of labor and capital. In the second term we then go into such topics inter-temporal consumption which is at the heart of both micro and macro and time inconsistency, which has both macro and micro aspects. The demand for money as a function of the interest rate is easily explained with the opportunity cost concept.

Such curriculum changes incur some transition costs. For example, the economics textbooks are not quite ready for this. We are using my textbook with Akila Weerapana this year and it has the usual micro/macro split. But it is not too hard to mix and match pages, and many publishers custom design texts.

This approach also has the advantage that the traditional split does not have. It lends itself to a system where students can take a one term overview course in 1A (mainly non-econ majors) and not have to miss all of micro or all of macro. I hope that others can benefit from this approach and have constructive comments about it.

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