I am not here today to insult my fellow economists, but to hopefully inspire the young, aspiring economics teachers among you to learn your craft and to do your job. Teaching is a most worthy vocation, and the teaching of economics is especially needed today given the plethora of popular fallacies that occupy the public imagination and the public policy community. But the problem is even deeper because our profession has fallen short in its job of teaching the basic principles of our discipline. Graduate students are too often trained in the technical tools of optimization and in deriving the theorems that constitute the equilibrium models with which they are taught to work. However, they no longer learn price theory, which analyzes the critical role that relative prices play in guiding human decision making and the necessary adjustments on multiple margins that are required for adapting to changing circumstances. Institutions, while no longer ignored, are merely mentioned, not analyzed, as Barry Weingast (2016) has recently emphasized in an essay, "Exposing the Neoclassical Fallacy." Again, graduate students are trained in sophisticated procedures of statistical testing, but largely remain ignorant of history and thus economic performance through time as a result of institutions and institutional change.
The consequence of this educational trajectory is that when graduate students find themselves in front of a classroom of undergraduate students after successfully completing their studies, they either must bifurcate their teaching lives from their research lives or attempt to dumb down their research results to communicate effectively with undergraduates. There is nothing inherently wrong with this, but economics without price theory is not economic theory, and measurement without theory isn't empirically meaningful. Students don't learn the beauty of economic theory, and they don't learn the empirical importance of economic history. In short, they don't learn how the world works; they don't learn the governing dynamics of human action and the mechanisms that produce the social cooperation under the division of labor that modern civilization depends on.
My speech title derives from a brilliant lecture from my teacher James Buchanan. In his essay "Economics and Its Scientific Neighbors," Buchanan argued for the renewed commitment by the economist to the basic principles of the science. These principles have been refined through the evolution of economics, but the essential insight comes down from Adam Smith through F. A. Hayek--what I have called "mainline economics." In mainline economics, the invisible hand explanation of market order follows from the self-interest postulate via institutional analysis. The economic forces at work bring about systemic order and the pattern of exchange and production that realizes that the gains from social cooperation come about due to the incentives created by private property rights, the guiding influence of relative prices, the lure of entrepreneurial profits, and the discipline of losses. Shifts in the rules of the game will set in motion changes in incentives and information, and with that the learning from the feedback that actors receive.
Not only do different institutional arrangements possess different incentive effects, they also...