Economic Misconceptions

Students typically come to an economics class with many misconceptions, not just random errors but systematic biases (see especially Caplan 2002).
Bill Goffe recently (2009) surveyed one of his macro principles classes and found, for example, that the median student believes that 35% of workers earn the minimum wage and a substantial fraction think that a majority of workers earn the minimum wage (Actual rate in 2007: 2.3% of hourly-paid workers and a smaller share of all workers earn the minimum wage, rates are probably somewhat higher today since the min. wage has risen and wages have not).
When asked about profits as a percentage of sales the median student guessed 30% (actual rate, closer to 4%).
When asked about the inflation rate over the last year (survey was in 2009) the median student guessed 11%.  Actual rate: much closer to 0%.  Note, how important such misconceptions could be to policy.
When asked by how much has income per person in the United States changed since 1950 (after adjusting for inflation) the median student said an increase of 25%.  Actual rate an increase of about 248%, thus the median student was off by a factor of 10.
I would add that there are also theoretical misconceptions that are probably even more important than factual misconceptions.  For example, I think it would be useful to ask questions such as:
1.  A number of new furniture manufacturers open in North Carolina, since the new competition forced existing manufacturers to reduce prices the effect of this additional competition was to reduce wages for workers in the furniture industry.
Rate this argument on a 1 to 10 scale from least to most plausible or likely.
2.  Competition from Korean automobile manufacturers caused US manufacturers to cut quality in order to reduce their costs.  Rate this argument on a 1 to 10 scale from least to most plausible or likely.
3.  A law that prevents supermarkets from advertising the prices of their products will reduce the supermarket costs and in turn this will reduce prices to consumers. Rate this argument on a 1 to 10 scale from least to most plausible or likely.
Note that the point here is not to say that an answer is wrong but to understand the implicit models that students are using. It can help a teacher to know what these conceptions and misconceptions are in advance so that they can be addressed.
To further this research, Bill Goffe is putting together a colloborative database on economic misconceptions that teachers are welcome to contribute towards.  See also Bill's page on the large literature on teaching in physics much of which is also relevant to economics.

marginalrevolution.com

What I’ve Been Thinking About

By JUSTIN WOLFERS
A few weeks back, I sat down with the Richmond Fed’s Aaron Steelman for a most enjoyable hour or two talking about my recent research projects and perspectives on economics generally.  If you’re interested in learning more, click here for the full interview.  Regular readers of this blog may even recognize a few themes that I’ve been hammering away at here on these pages.  At the risk of quoting myself, here are a few favorite parts:
On the state of economics:

I still believe that economics is the queen of the social sciences. But the metric that leads me to say that is its influence on the world, which is what I think social science should be about. When it comes to almost any public policy problem, you call the economists. This is true in many areas once thought outside of the domain of economics, such as family policy and understanding politics. Economists have been very successful moving into those fields and have provided many important insights.

Economics and her sister social sciences:

The broader issue — the reason why I believe economics is the queen of the social sciences — is this movement of economics beyond GDP. It is hard not to think of Gary Becker as the founder of that, and this has been a very good thing. In sociology, I think our biggest influences have been on research about family or crime, as economists have done a lot of empirical work on those topics. With political science, on topics from election forecasting to political economy, we tend to see quite good empirical work from economists. That’s not to say that we should ignore other research methods. In fact, I had a sociologist on my dissertation committee, Sandy Jencks. I used to joke with Sandy — and he promised not to be offended — that sociologists have great questions and economists have great answers.

OK, so there’s a touch of hubris there.  But probably at least a kernel of truth, too.  But what about psychology?

What is interesting to think about are the terms of trade between economics and all these other disciplines. We are clearly a net exporter to political science and sociology. But at this point the trade with psychology is almost all one way. We are a near-complete importer. I wonder why we haven’t been bigger exporters to psychology. I think it has to do with the research method. Like political scientists and sociologists, economists are almost all about the analysis of observational data. And then there are second-order differences. Formal political scientists write down a model before they observe data; informal ones don’t. Ethnographers observe four people; survey researchers observe 4,000. But it’s all observational. But when I watch and speak with my friends in psychology, very little of their work is about analyzing observational data. It’s about experiments, real experiments, with very interesting interventions. So they have a different method of trying to isolate causation. I am certain that we have an enormous amount to learn from them. But I am curious why we have not been able to convince them of the importance of careful analysis of observational data.

Plus there’s plenty more, on topics ranging from happiness to prediction markets, discrimination, inflation expectations and political economy.

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Justin Wolfers is a professor of economics at the University of Pennsylvania.

freakonomics.blogs.nytimes.com 

How has the crisis changed the teaching of economics?

How have the financial crisis and recession affected the way economics is taught? How should economic instruction change?

Take a look here