This post both gives a rundown of what I view as key concepts in economics for undergraduates and discusses how to measure whether students have learned them.

I am proud of my Economics Department here at the University of Colorado Boulder. We have been talking about measuring learning outcomes quite seriously. We have three measurement tools in mind:

1. A department-wide quiz that will be something like 15 multiple choice questions administered in every economics class. Although we are still deciding exactly what it will look like, here are some possible details we talked about so far:

   • We need to do it in classes for logistical reasons: we have no other proctoring machinery at that scale.

   • We want it to be a low-stakes test because we can better measure what the students have in long-term memory if we give no incentive to study for it. Therefore, there will be no consequences for getting the wrong answer.

   • We are deferring any differentiation of the department-wide quiz by which class a student is taking. Initially at least, it will be the same in all economics classes and a mandated part of all economics classes. (One exception: we have not yet thought hard about whether the department-wide quiz should be given in the Principles classes. The argument for is that it would be a learning experience for the students. Also, it would provide some baseline data. But our primary data-collection interest is in learning about our majors.)

   • We haven’t discussed this, but the door is open to having some penalty for not taking a certain number of these quizzes before graduation; that is basically a penalty for low attendance at class. The penalty could simply be going to a special administration of all the quizzes that were given during their years in the major. This make-up quiz would provide valuable evidence about selection in who attends classes.

   • We are OK with students taking the same quiz more than once because taking a test is, itself, a learning experience. See “The Most Effective Memory Methods are Difficult—and That's Why They Work.”

   • The questions will change each semester to rotate through different concepts, so that by the time a student is finished with an Economics degree, we will know how they fared on a reasonably wide range of concepts. Of course, how their knowledge deepens from year to year is also of interest, so some questions are likely to be asked in a higher fraction of semesters.

2. An exit survey will ask students about their experience and measure things that a quiz can’t.

   • In addition to asking about students’ experience with their classes, we can ask about what job they have next.

   • We also talked about the possibility of having at least one essay question on the substance of economics on this survey. (We would then pay some of our graduate students to grade it.) As we are thinking of things now, this, too, would be no-stakes. Nothing would happen to the student if they had a bad essay.

   • In order to get a good response rate, we hope to make completing the exit survey a requirement for graduation.

3. Instructors will report students’ involvement in activities that involve integrative skills. We hope to get data at the student level. For example, with each of these subdivided into “individually” and “in a group”:

   • writing

   • giving presentations

   • analyzing data

   • interpreting data analysis done by others

For the quiz, since I am the only macroeconomist on the committee, I have been thinking about macroeconomic concepts I would want students to know, as well as microeconomic concepts that are especially important to macro where there is some variance in what students are taught. A department-wide quiz meant to measure students’ long-run learning has two somewhat distinct purposes:

• to see if students are learning what we are trying to teach them.

• to nudge faculty to try to teach students important concepts that may be neglected or distorted.

If there is a reason for concern that a concept might be getting neglected in the overall curriculum, it doesn’t need to be quite as important a concept to warrant inclusion in the quiz. If it is concept to which we know a lot of teaching effort is being devoted, then it has to be a very important concept to be included.

Here are some of the concepts that are on my wishlist to test students knowledge of in the department-wide quizzes. First, here are some concepts I worry may be getting neglected or distorted:

1. Positive interest rates are when, overall, the borrower is paying the lender for the use of funds. Negative interest rates are when, overall, the lender is paying the borrower for taking care of funds.

2. Central banks like the Fed change interest rates not only by changing the money supply, but also by directly changing the interest rates they pay and the interest rates at which they lend.

3. Ordinarily, the main job of central banks like the Fed is to keep the economy at the level of output and employment that leaves inflation steady.

4. When central banks cut interest rates it stimulates the economy (a) by shifting the balance of power in terms of what they can afford toward those who want to borrow and spend relatively to those who want to save instead of spend and (b) by giving everyone, both borrowers and lenders, an extra incentive to spend if they can afford to. Raising interest rates does the reverse.

5. Measures other than interest rate changes that affect consumption, investment or government purchases can substitute for interest rate changes in stimulating or reining in spending. These may be important instruments of policy if either (a) they act faster than interest rate changes or (b) interest rates are a matter of concern for reasons beyond their effect on overall spending.

6. A key determinant—may economists argue the key determinant—of the balance of trade is the decisions of the domestic government, firms and households about whether and how much to buy of foreign assets (assets denominated in another currency) and the decisions of foreign governments, firms and households about whether and how much to buy of domestic assets.

7. “Capital requirements” require banks to be getting a certain minimum fraction of their funding from stockholders as opposed to from borrowing. Thus, they could also be called “equity requirements.” Many of the economists concerned about financial stability argue that high levels of bank borrowing that led to low fractions of stockholder equity contributed to the Financial Crisis in 2008 and that higher capital (equity) requirements are an important measure to reduce the chances of another serious financial crisis.

8. The replication argument highlights the fact that any claim of decreasing returns to scale can be seen as one of three things: (a) a factor of production that is being held fixed, or is not scaling up along with everything else, (b) the price of a factor of production going up as production is expanded or (c) something like an integer constraint. See “There Is No Such Thing as Decreasing Returns to Scale.”

I have good reason to worry about the last, number 8. Both in formal classroom visits and informally as I glance in classrooms with open doors, I know enough about what is being taught in the microeconomics classes to think that (in large measure because of the nature of most micro textbooks) they may talk about decreasing returns to scale without being clear about the replication argument. I won’t belabor this here because I have made my case in “There Is No Such Thing as Decreasing Returns to Scale.” But it is something I feel strongly about.

As for important concepts that I have reason to think we put a lot of effort into teaching, but need to see if our efforts are working, let me go with the ten concepts Greg Mankiw lays out in the first chapter of his Principles of Economics textbook. Greg’s words are in bold, my commentary on each one follows.

People face tradeoffs. This is truly fundamental to economics. I can’t tell you how many times it helped me think through an issue for a blog post to say “The pluses of this policy are …. The minuses are ….” Besides helping students understand economics, the principle that there are pluses and minuses to almost everything will help them be fairminded. It means one should listen respectfully to others since, even if you ultimately decide they are wrong on a decision overall, they may help identify a minus to the decision you wanted to recommend, which may help you identify what you think is a better choice than your initial idea. (That better choice still may not be the choice they want).

The cost of something is what you give up to get it. I taught this as thinking clearly of two different, mutually exclusive choices and laying out every aspect in which the two situations are different. The cost of one choice is not being able to make other mutually exclusive choices. Part of the art of economics is identifying which other choices should be compared to any given choice.

Rational people think at the margin. I am not altogether happy with Greg’s use of the word “rational” here. The trouble with the word “rational” is that it has too many meanings. It is fine in context. But in a very broad-ranging discussion, “rational” needs to be replaced by “obeys this axiom.” In economics, there are at least as many meanings to the word “rational” as there are attractive axioms for decision-making. For the students, I think it would be much better to say: “For any choice, often some of the most important alternative choices to compare it to are choices that are just a little different. This is called ‘thinking at the margin.’ Thinking at the margin allows us to use the power of calculus, though the basic ideas can be shown graphically, without calculus.”

People respond to incentives. In practical policy discussions, this principle is a great part of the value-added from having an economist in the room. A big share of the practical value of this principle is in identifying side-effects of policies. Economists are good at pointing out the (often unintended) incentives of a policy and the side effects those incentives will create. Intended incentives of policies are also important, but economists love thinking about incentives so much, they may overestimate the size of the effects of those intended incentives in the interval before solid evidence about the effect sizes for those incentives is available.

Trade can make everyone better off. Here, the economic concept is every bit as much about transactions within a country—trade between individuals—as transactions between countries. Logically, those are very similar. The good side of trade definitely needs to be taught. But pecuniary externalities are real. A and B trading can make it so I get a worse deal in trading with A. This doesn’t take away the principle that trade is vital for one’s welfare. (Barring a divided self) I always want to be able to freely trade myself. But to get a better deal in trading myself, I might want to interfere with other people trading. An interesting example of this insight is the minimum wage. It doesn’t serve any purpose for me for me to be subject to the minimum wage; I can already reject job offers whose wage was lower than I am willing to accept. But it might benefit me personally for other people to be subject to the minimum wage so that don’t compete with me and bid down the wage I can get.

Markets are usually a good way to organize economic activity. Here is my take on that, drawn from a cutout from my column “America's Big Monetary Policy Mistake: How Negative Interest Rates Could Have Stopped the Great Recession in Its Tracks.”

John von Neumann, who revolutionized economics by inventing game theory (before going on to help design the first atom bomb and lay out the fundamental architecture for nearly all modern computers), left an unfinished book when he died in 1957: The Computer and the Brain. In the years since, von Neumann’s analogy of the brain to a computer has become commonplace. The first modern economist, Adam Smith, was unable to make a similarly apt comparison between a market economy and a computer in his books, The Theory of Moral Sentiments or in the The Wealth of Nations, because they were published, respectively, in 1759 and 1776—more than 40 years before Charles Babbage designed his early computer in 1822. Instead, Smith wrote in The Theory of Moral Sentiments:

“Every individual … neither intends to promote the public interest, nor knows how much he is promoting it … he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

Now, writing in the 21st century, I can make the analogy between a market economy and a computer that Adam Smith could not. Instead of transistors modifying electronic signals, a market economy has individuals making countless decisions of when and how much to buy, and what jobs to take, and companies making countless decisions of what to buy and what to sell on what terms. And in place of a computer’s electronic signals, a market economy has price signals. Prices, in a market economy, are what bring everything into balance.

Governments can sometimes improve market outcomes. Here, one of the key practical points is that a blanket statement or attitude that government regulations are bad or that government regulations are good is unlikely to hold water. The devil is in the details. Enforcing property rights is fundamental to a free-market economy—and what it takes to enforce property rights can be viewed as a form of regulation. On the other hand, it is easy to find examples of bad regulations. One good way to identify bad regulations is to look for things that both (a) tell people they can’t do something they want to do, and therefore reduce freedom (most regulations do this) and (b) reduce the welfare of the vast majority of people. Many regulations are like this. They can exist because they benefit a small slice of people who influence the government to impose those regulations. (And it is easy to find regulations for which, any reasonable way of totaling up the benefit to that slice minus the cost to the vast majority of people will leave the regulation looking bad. For example, the dollar benefits and costs may make the regulation look bad, and it may benefit relatively rich people at the expense of poorer people.)

A country’s standard of living depends on its ability to produce goods & services. Here the thing I want to add as a key concept for the students is that the ability to produce goods and services has increased dramatically in the last 200 to 250 years, and that technological progress continues now at a rate that rivals the rate at which it improved during the Industrial Revolution. Many voters are grumpy in part because the ability to produce goods and services is not improving as rapidly as it did in the immediate postwar era from 1947–1973 and in the brief period from 1995–2003, but is still improving substantially each decade. The late Hans Rosling has a wonderful four minute video I run in class for my students showing the dramatic improvements in per capita income and health across the world in the last century.

Prices rise when the government prints too much money. My main perspective on this is that I want students to know that central banks are especially responsible for the unit of account function of money. If they do a bad job, money serves as a bad unit of account. I have a blog post giving my views on “The Costs of Inflation.” One small point: I always stress to students that the Fed doesn’t literally print money. What it does is to create money electronically—as a higher number in an account on a computer. That higher number in an account on a computer than gives the account holder the right to ask for more paper currency. That paper currency is printed by the Mint. Then each regional Federal Reserve Bank gets enough paper currency from the Mint to take care of any anticipated requests for paper currency by those whose “reserve accounts” or other accounts with the Fed give them the right to ask for paper currency.

Society faces a short-run tradeoff between inflation and unemployment. Under this heading, I would include basic concepts about aggregate demand—how much people, firms and the government want to spend. When prices or wages are sticky, people wanting to spend more leads to more getting produced. When more is being produced, unemployment goes down. In a theoretical world unlike the one we live in, in which prices and wages were perfectly flexible, people wanting to spend more would lead to higher prices, with no change it what gets produced. That theoretical world is relevant because it is probably a reasonable description of what happens in the long-run. The transition from what happens in the short-run to what happens in the long-run means that higher aggregate demand (higher desired spending) will raise output in the short-run and raise prices in the long run, relative to what they would have been otherwise. How fast prices rise is an area of debate.

I am excited about measuring what students have learned in a department-wide way, and firmly of the view that what we should most hunger to measure is how much stays learned even years after students have taken a class. I am confident that the truth about how much students have learned in the long-term sense will be bracing and will lead to a more realistic sense of how many concepts can be taught and a greater interest in designing and implementing more engaging ways to help students learn the very most important concepts in economics.

I have two columns very closely related to this post:

• False Advertising for College is Pretty Much the Norm

• The Most Effective Memory Methods are Difficult—and That's Why They Work

You also might be interested in my move to the University of Colorado Boulder:

• Miles Moves to the University of Colorado Boulder