Knowledge that Transforms

Growth economists have spent more than forty years slowing chipping away at the Solow residual, largely by attributing increasingly larger chunks of it to investment in human capital. A few years ago we were reasonably certain that this was the way to go. But an increasing number of studies seem to be telling us that the effect of schooling variables on productivity vanishes when we turn to what seem to be the appropriate econometric techniques for the purpose of estimating growth equations. Should we take these results at face value? Before we do so and abandon the only workable models we have, it seems sensible to search for ways to reconcile recent empirical findings with some kind of plausible theory. In this paper we argue that we can make a fair amount of progress in this direction by combining two ingredients: better data on human capital, and a further extension of the human capital-augmented neoclassical model that allows for cross-country productivity differentials and for technological diffusion.

Between 1973 and 1978, the Indonesian government engaged in one of the largest school construction programs on record. Combining differences across regions in the number of schools constructed with differences across cohorts induced by the timing of the program suggests that each primary school constructed per 1,000 children led to an average increase of 0.12 to 0.19 years of education, as well as a 1.5 to 2.7 percent increase in wages. This implies estimates of economic returns to education ranging from 6.8 to 10.6 percent.

The fiscal theory of price determination suggests that if primary surpluses evolve independently of government debt, the equilibrium price level “jumps” to assure fiscal solvency. In this non-Ricardian regime, fiscal policy—not monetary policy—provides the nominal anchor. Alternatively, in a Ricardian regime, primary surpluses are expected to respond to debt in a way that assures fiscal solvency, and the price level is determined in conventional ways. This paper argues that Ricardian regimes are as theoretically plausible as non-Ricardian regimes, and provide a more plausible interpretation of certain aspects of the postwar U.S. data than do non-Ricardian regimes.

A Test of Game-Theoretic and Behavioral Models of Play in Exchange and Insurance Environments by Cary A. Deck. Published in volume 91, issue 5, pages 1546-1555 of American Economic Review, December 2001

International Trade and Business Cycles: Is Vertical Specialization the Missing Link? by M. Ayhan Kose and Kei-Mu Yi. Published in volume 91, issue 2, pages 371-375 of American Economic Review, May 2001

This paper focuses on pure redistribution among two regional governments. We abstract from mobility of tax bases and externalities in public goods not because they are unimportant, but because they are already well understood. Under conditions of full information, unlimited commitment capacity, and no spillover effects across regions, optimal redistribution is lump sum But these ideal circumstances are seldom met. One of the central results of the paper is that, to cope with asymmetric information, optimal regional redistribution must distort the tax rate chosen by the poor region away from the second best.

Does Buffer-Stock Saving Explain the Smoothness and Excess Sensitivity of Consumption? by Sydney C. Ludvigson and Alexander Michaelides. Published in volume 91, issue 3, pages 631-647 of American Economic Review, June 2001

This study assesses five common explanations for the large decline in U.S. total factor productivity (TFP) during the Great Depression: changes in capacity utilization, factor input quality, and production composition; labor hoarding; and increasing returns to scale. The study finds that these factors explain less than onethird of the 18 percent TFP decline between 1929 and 1933. The rest of the decline remains unexplained. The study offers a potential explanation: declines in organization capital, the knowledge firms use to organize production, caused by breakdowns in relationships between firms and their suppliers, for example. As some firms failed during the Depression, efficiency in surviving firms decreased; managers had to shift time away from production in order to establish new relationships, and firms had to shift to unfamiliar technologies that initially were operated inefficiently. This article originally appeared in the American Economic Review. © 2001 by the American Economic Association. The views expressed herein are those of the author and not necessarily those of the Federal

Economics instruction in U.S. high schools is basically delivered in two ways. About half of high-school students take a required or elective course in economics, according to transcript data. The great majority of these students (about 95 percent) enroll in a regular course that focuses on basic economic concepts with applications. The remaining small percentage of students take a college-oriented course that is often called “honors” or Advanced Placement (AP) economics. Economics instruction for the other half of high-school students, if it is provided at all, is typically delivered in the context of other courses in the high-school curriculum in what is sometimes called the “infusion” or “integrative” approach. These courses would most likely be required courses taught in the social studies, such as U.S. history or American government, or in elective courses taught in business education. This study investigates what high-school students know about basic economics given the different types of economics instruction. The primary focus is on the achievement of students who complete a basic course in high school economics. These results are important because they supply insights into what high school students who have received direct instruction in economics know about the subject. For comparison purposes, the achievement of students who have not taken a formal course in economics will be investigated to identify what they know about economics. The comparison of those students with and without instruction in a separate course in economics gives the best estimate of the importance of direct instruction in economics to the economic understanding of most high-school graduates. In addition, similar comparisons between those students with and without direct instruction in economics will be made for two groups of higher-ability students: those who enroll in honors or AP courses in economics and those who enroll in such courses for other social-studies subjects.

In spring 2000, we conducted a national survey of academic economists to determine how economics is taught in four different types of undergraduate courses (Principles, Intermediate Theory, Statistics and Econometrics, and other upper-division courses) at institutions in the five Carnegie classifications (research, doctoral, master’s, baccalaureate, and associate), as listed in A Classification of Institutions of Higher Education, 1994 Edition. This new survey replicates our 1995 survey (Becker and Watts, 1996). Therefore, we can compare the results from the two surveys to document changes in teaching methods, as well as the related academic issues that were addressed in the background information section of the surveys. A key reason for believing that teaching methods might have changed during this period was the sharp decrease in economics enrollments during the early 1990’s (Becker, 1997; John Siegfried and David K. Round, 2001). As we have documented elsewhere (Becker and Watts, 1998), there is evidence that economists are less likely to use non-lecture teaching methods than instructors in other fields, and that students rate economics instructors somewhat lower than they rate other instructors. Changing teaching methods and increasing the importance of teaching within economics departments, in response to falling enrollments, is therefore a plausible and endogenous response for faculty members and departments concerned about losing resources. Furthermore, there is at least circumstantial evidence that economists are devoting more attention to teaching than in the recent past (Becker, 2000). Since our 1995 survey, several books have been published to illustrate how economists can use a wide range of alternative teaching methods in undergraduate courses (e.g., Becker and Watts, 1998; William Walstad and Philip Saunders, 1998). Other books have appeared focusing on specific teaching methods, such as using classroom experiments, spreadsheet applications, or active-learning and cooperative-learning assignments (e.g., Diane Keenan and Mark H. Maier, 1995; Tod S. Porter and Teresa Riley, 1995; Theodore Bergstrom and John H. Miller, 1997; Denise Hazlett, 1999). Becker (2000) documents the increase in AEA sessions devoted to teaching economics at the annual meetings of the Allied Social Sciences Association during the mid-1990’s. At the 1998–2000 Allied Social Sciences Association (ASSA) meetings the number of sessions devoted to teaching economics ranged from 11 to 14, and presented sessions dealt with such topics as teaching economics in the transition economies (chaired by World Bank chief economist Joseph Stiglitz), a retrospective on Nobel laureate Paul Samuelson’s principles textbook, how faculty advisors can deal with student apprehensiveness about taking economics courses, and teaching business economics (chaired by Nobel laureate Ronald Coase). As recently as the 1996 ASSA meetings in San Francisco there were only six sessions on teaching economics, and at the 1994 meetings in Boston there were only four such sessions. Similarly small numbers of sessions were scheduled through the 1980’s. Here we ask whether any increased emphasis on teaching in economics departments has led to changes in how economics is taught. Do academic economists report that they are now * Becker: Department of Economics, Indiana University, Bloomington, IN 47405 (e-mail: [email protected]), and Adjunct Professor, School of International Business, University of South Australia; Watts: Department of Economics, Purdue University, West Lafayette, IN 47905 (e-mail: [email protected]). We thank Julia K. Huffer, Kevin M. Green, Siddhartha Kapoor, Chatchai Meteveravong, Alexandre Skiba, and Suzanne Becker for help in the mailing, data entry and tabulation, and preparing of this paper. Financial support from the Purdue University Center for International Business Education and Research, University of South Australia School of International Business, and the National Council on Economic Education through its sponsorship of the Journal of Economic Education is gratefully acknowledged.