Teaching Heterodox Microeconomics to Introductory Students: an Inductive Approach

Contact: Peter Earl & Tim Wakeley
University of Queensland and University of Bath respectively
Published August 2005
"Outside, in the business, government and other non-academic communities, the perception is widespread and growing of economics as a technical and rarefied discipline, of questionable relevance and limited practical use. This widespread opinion is manifest in declining student enrolments on economics degree courses and in a shift towards close substitutes such as business studies." (Hodgson, 1999: 9).

The purpose of this brief note is to suggest how a lecturer who wishes to incorporate a healthy dose of the heterodox microeconomics into her/his introductory level teaching might approach the task. It is based upon our own experiences of teaching heterodox material to various students (ranging from first year undergraduate business students to MBAs) over a number of years, an experience which eventually led us to write a pluralist textbook (Earl & Wakeley, 2005). Core to the approach is the notion that students are better able to grasp economic concepts if they are confronted first with some real-world stories and then asked to draw lessons from these stories; in other words it is an inductive approach to teaching rather than a theory-first approach.

We begin our courses by asking students to read a case study about Richard Branson's early years (i.e. at the time when he was building the foundations of the Virgin empire we see today.) Obviously most (all?) students are familiar with Branson and so this serves two important purposes:

  1. it places the fundamentally important topic of entrepreneurship at the heart of our economics teaching (it is simply impossible to introduce entrepreneurship in a meaningful way in a mainstream-only curriculum.)
  2. it grounds the stories we construct in the classroom in the real world and so helps us to avoid the confusion inherent in the traditional mainstream approach described by Bernstein (2004: 33); 'The everyday appearance of social life provides little in the way of verification for the student of basic economic ideas. The result is an analytical confusion that captivates the student more or less forever...'

As a first step towards opening up the richness of the Branson story, we ask students to think about the opportunities that he perceived, the variety of problems that he faced, the tasks he had to perform, and the people/institutions he had to rely on in order to start the firm. It will be clear that in adopting this approach students will be unlikely to think in terms of all-seeing all-knowing mainstream agents! Out go assumptions that Branson had full information and knowledge when he set out to build Virgin and consequently this is an excellent introduction to the general concepts of bounded rationality, Knightian uncertainty and ignorance. It is well known that the mainstream approach to the analysis of the firm assumes away every single difficulty that would face a real-world entrepreneur by attributing economic agents with, among other things, full knowledge about production technology, costs, and the behaviour of prospective customers. It is little wonder that students who are fed a diet of mainstream-only material tend to adopt a rather jaundiced view of the subject as little more than a technically rarefied discipline of little relevance: '[As an undergraduate student in economics] I had done well in my studies and my department chairman said to me: "It's time to start getting those applications in to graduate school." I looked at him rather astonished, and said, "You don't think I'm going to graduate school do you?" And he said, "Well, of course - you got all As." I replied "I'm interested in economics, I can do it, but I don't believe it."' (Rothschild, 2000: 285)

Where can this first step take us? The answer is into the full richness of the economic analysis of the nature of the competitive process, and we do mean 'process' here i.e. competition as a phenomenon which takes place in real time between boundedly rational heterogeneous agents who dare to commit resources today in the belief/hope that tomorrow they will be rewarded. This is somewhat different from the rather antiseptic concept of perfect competition that forms the usual introductory fare - Bernstein (2004: 34) again: 'Ironically, the perfect competition model suffers not from being an abstraction from reality - indeed all models in all disciplines share that epistemological quality. Rather, the pitfall of utilizing the perfect competition framework as a starting point for economic reasoning is that it makes a logically coherent understanding of what competition is impossible.'

Prior to investigating the nature of competition it is possible to introduce the theory of production in modified form (i.e. by taking account of the informational/knowledge problems faced by entrepreneurs - just where do the quantified relations between inputs and outputs in the production function come from? - the case of James Dyson's early years is illuminating here, and Adam Smith's division of labour can receive full treatment); the theory of costs in a dynamic setting (learning effects and learning curves come to the fore here) and; a meaningful analysis of buyer behaviour (incorporating lifestyles for example). Eventually students will be able to fit all the pieces together and they will gain a deeper understanding of where markets come from, how they work, why they fail, the importance of institutional supports (classroom trading experiments are useful to illuminate these things), and the evolutionary logic which underpins the competitive process. Furthermore they should be able to develop their critical faculties much sooner. But perhaps most important of all, in our experience the subject matter and the inductive approach seems to engage them much better than a mainstream-only diet.

References

Bernstein, M. A. (2004) 'The Pitfalls of Mainstream Economic Reasoning (and Teaching)', pp. 33-40 in Fullbrook, E. (ed.) (2004) A Guide to What's Wrong With Economics, London, Anthem Press.

Earl, P. & Wakeley, T. (2005) Business Economics: A Contemporary Approach. Maidenhead: McGraw-Hill.

Hodgson, G. M. (1999) Evolution and Institutions: On Evolutionary Economics and the Evolution of Economics. Cheltenham: Edward Elgar.

Rothschild, M. (2000) 'Complexity, Business and Biological Metaphors', pp. 285-296 in Colander, D. (ed.) The Complexity Vision and the Teaching of Economics, Cheltenham, Edward Elgar.

Contact Details

Peter Earl
School of Economics, University of Queensland, St. Lucia, Brisbane, QLD 4072, Australia
p.earl@economics.uq.edu.au

Tim Wakeley
School of Management, University of Bath, Claverton Down, Bath, BA2 7AY, UK
mnstw@management.bath.ac.uk

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