Few of my fellow economists have engaged in ReThink thus far. This is –I feel- a mistake. Especially economists should stand up against market failures, of which there are indeed plenty in academic life as well as in education more generally.
There are, no doubt, many reasons for the absence of economists in the debate, ranging from self-selection (18-year old idealists typically don’t choose econometrics) to self-interest (economics faculties face lower budget cuts and in any case can compensate more easily with private sector financing). It might also have to do with the understandable feeling that objections against what has been called in Dutch ‘rendementsdenken’ is somehow an attack on our economic framework.
Nothing could be further from the truth. And this relates to another, important factor of the absence of the economist’s voice: the language barrier. The concerns and demands formulated by ReThink UvA and De Nieuwe Universiteit are not formulated with the economic concepts and theorems that we were trained to think in and teach our students. A word like ‘solidarity’ sounds a bit off to us: we divide that concept into two parts, distinguishing between something called ‘ex-ante risk sharing’ (which may be efficient) and ‘ex post distribution’ (which would be less so). We therefore quite literally speak different languages.
This obfuscates the fact that ReThink’s concerns and observations can be rephrased (or rethought) in traditional economic concepts, which are taught in any neo-classical economics textbook. Conversely, this might also help non-economists to start contributing to ReThink initiatives, and realizing that this whole division is in fact artificial, as we are all in practice social scientists: Adam Smith was as much an economist as a philosopher, and Piketty and Braudel are as much economists as historians. In any case, such a realization might facilitate the start of a real dialogue, as we begin connecting these two separate vocabularies.
The hallmark of micro-economics is the first welfare theorem. It shows that under certain conditions markets are efficient. To be more precise: this theorem demonstrates that decentralized price-taking behaviour is efficient. The price-setting mechanism is more problematic, and the out-of-the-model figure of the Walrasian auctioneer has to be called in. (This figure is sometimes ironically referred to as the neo-classics’ central planner.) This theorem is impressive for its mathematical beauty and analytical rigour. And if other academics can learn anything from us, it is this uncompromising zeal for internal consistency of a model. But we also know that the Devil is in that catch-all disclaimer under certain conditions.
There are so many deviations –referred to by economists as ‘market failures’- from the underlying assumptions that an entire branch of economics is devoted to them. This branch is referred to as public economics, and it is the framework from which we identify and deal with market failures. Similar kinds of market-failures in universities and education are the things that ReThink has recently been addressing. Let me identify and clarify some of them.
First and foremost, price-taking behaviour and (monetary) incentives do not work when when there are multiple stakeholders and when quality is unobservable (research quality has as much to do with counting citations as Bach has to do with the current Top-40 list). As economist Dixit has argued in the Journal of Human Resources: ‘the system of public education is a multitask, multiprincipal, multiperiod, near-monopoly organization with vague and poorly observable goals. This goes a long way toward explaining the disagreements over its problems and the inefficacy of the single-minded solutions that have been tried.’ Nobel Prize winners Akerlof, Stiglitz and Williamson have argued exactly the same point. Their work doesn’t show the way to the solution. So that solution has to be discussed and rethought. But do we seriously believe that counting of articles by publisher, length, number of co-authors, direct citations, and impact factor is the final word on what quality entails?
Second, if we maximize a social welfare function (SWF) that takes into account current generations, we forget about future generations. This is the incompleteness of markets referred to by economists Ball and Mankiw. To be concrete, we might feel something is unimportant (for instance, academic disciplines like Swedish and Czech, the so-called ‘small languages’), but our (great)grandchildren might disagree. But once these disciplines are gone, they are very difficult to restore. Just like Austrian economists like von Mises –founding father of Friedmanian monetarism- were preserved for future generations (for us) by peripheral universities when no mainstream academy would have them, we should stand firm for ‘small languages’. Or in any case, the decision to liquidate them should be taken in a non-market collective decision making process (CDMP), and not by individual price-taking behaviour (that is, whether there are enough students).
A third and fourth market-failure relates to the elimination of small studies as well. They might just be what we call Merit Goods (others call it Bildung) or they may have positive externalities (that is, real-world effects not reflected in prices; others call this ‘social cohesion’ or ‘critical thinking’). Do we really feel that studying the language of Kierkegaard, Andersen and Bergman is not worth investing in? Do we really feel that the first language of economists Wicksell, Myrdall, Veblen and Lindahl should be put to sleep? And what kind of university does UvA want to be by allowing individual price-taking behaviour to define the terms of this debate?
Last, but not least, we have known since Arrow proved the impossibility theorem that a CDMP cannot satisfy several desirable properties simultaneously. So if times are indeed a-changing, the SWF has to be rethought. What others call democratization, we might think of as a rethink of the functional form of the SWF.
Education is riddled with market failures. We know so. We teach this. This reality calls for non-market interventions. It screams for democratization. What shape and form democratization should take is exactly what ReThink is currently discussing. We should therefore not stay silent anymore, if only because rethinking the academic enterprise is too important to be left entirely to non-economists. Everybody should engage. In the end, Dutch economist Hennipman taught at the UvA’s economics faculty that taking a broad welfare perspective implies that profit is not the same as welfare. That made Hennipman a critic of rendementsdenken avant-la-lettre. Of course, many economics departments -including UvA- already don’t teach the history of economics anymore, so we also don’t teach Hennipman. The irony is that his lesson is one that we cannot afford to forget.
David Hollanders teaches finance at Tilburg University and is a guest-researcher at AIAS (FdR). He is also an UvA alumnus, where he studied econometrics (2003), economics/Tinbergen Institute (2008) and history (2003).