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Intermediate Macroeconomics: Teaching Business Cycles

Mises Daily: Wednesday, December 30, 2009 by

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I am employed as a professor of economics at a small liberal-arts college. Being the senior professor in my department, I have been able to focus my teaching load on courses that I am most interested in. These include microeconomic principles, the history of economic thought, comparative economic systems, and public choice, for which I am able to use my own book.

Nevertheless, the department is small and I am sometimes asked to teach courses that I am not particularly enthusiastic about. A few years ago, as a result of a number of circumstances, one such course fell to me. Though I had avoided it for several years, I had to teach intermediate macroeconomics.

The thought of having to add this fall-semester course to my annual teaching load was not particularly appealing to me. I had always thought that Keynesianism was just poor economics. Moreover, my studies in Austrian theory since graduate school had led me to reject monetarism and new classicism as well. As such, the thought of introducing students to these ideas seemed like a colossal waste of time. Just the same, the task fell my way, and I decided to take on the challenge.

When I agreed to teach the course, I told the powers that be that I would do it, but that I would do it my way. They agreed and I began looking for a text. I chose a neoclassical text that did a reasonable job of presenting Keynesianism, monetarism, and new classicism. What was missing, of course, was any reference to Austrian theory. But the text suited my purpose well because of its introductory treatment of classical theory.

In particular, the text argues that classical thought was built on three assumptions, namely, that the economy is characterized by

  1. rationally self-interested human actors (basically utility maximization in the narrow neoclassical understanding of the phrase) who
  2. suffer from no money illusion and
  3. live in a world of perfect competition.

On the basis of these assumptions, the authors of the text quickly discount classical thought and move on to introduce the Keynesian approach.

It was the absurd nature of these assumptions that made the text ideal for my purposes. The authors of the text appear wholly ignorant of the fact that these assumptions had nothing to do with the best of classical theory, which has been carried on by the Austrians. In fact, it seemed evident to me that the authors could not conceive of classical thought earlier than the work of Alfred Marshall and the British school, with its focus on equilibrium theory. Moreover, their reference to Jean Baptist Say as a proponent of those three assumptions is just gross ignorance.

Therefore, as a first project for the students, I had them read the text along with the crucial chapter from Say's economic treatise, coupled with several other articles on Say's Law, I then asked them to write a paper explaining how and where the textbook authors' assumptions are found in Say's writing. The task cannot be done, and the students were forced to refute the text's assertions point by point. After the completion of this project I was able to begin to build the Austrian theory of the business cycle and present it side-by-side with the development of the other schools of macroeconomics.

From this starting point, I began to develop the Austrian theory using a variety of articles. These articles range from addressing the problems associated with aggregate analysis, to Rothbard's biography of Keynes. In refuting Keynesian theory, Hans Hermann Hoppe's article, "The Misesian Case against Keynes," is excellent.Download PDF In addition, I have found Roger Garrison's articles to be very helpful in articulating the Austrian theory of the business cycle and in comparing it to the other schools of thought.

Toward the end of the course I assigned Robert Higgs' article, "Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War,"Download PDF which explains well the problems the New Deal created for the economy and why Roosevelt's policies were responsible for keeping recovery from occurring.

Once I have covered the essential material, I have the students write a paper aiming to explain what has happened to the Japanese economy since 1990. In this project, the students must choose which theory best explains the continuing sluggishness of that country's economic fortunes. While I provide them with Ben Powell's article on the subject, by this time in the semester the students are generally convinced that the Austrian theory is the only one that explains the situation.

This teaching approach has worked very well for the past few years. It has been especially effective in the past two years, given the current economic situation in the United States. Indeed, the students' interest in the current economic crisis has served as a source of motivation for them to learn the subject well. At any rate, instead of being a course I dread, it has actually become one of my favorites.

Perhaps other economists can employ the same approach in their classes. In light of the widespread economic ignorance that we face today, it is very much needed.