Monday, February 6, 2012
Andrew Lo, who is both a professor at MIT's Sloan School and chief investment strategist for a hedge fund, has written a provocative piece (which has the added benefit of being short - just 9 pages) about the problem of "theory envy" in economics and its implications for teaching economics. "Theory envy" is the desire to be like physics and math, despite the inability to do controlled experimentation and empirical validation as physicists can. In a few, remarkably clearly written pages, Lo shows how theory envy has reduced the usefulness of economic thinking. He suggests that the solution is to develop "messier but more realistic empirical or experimental results" rather than simply "elegant theory under counterfactual assumptions." (p.7)
His insights into the implications for teaching economics are relevant for discussion here.
Unlike mathematics and physics, where gifted students can quickly develop intuition for some of the most fundamental concepts of the discipline, economics demands considerably greater institutional and historical context to achieve a comparable level of understanding. Although students of any introductory economics course can easily regurgitate the mathematics of supply and demand, until they witness the price-discovery process in action in a market that they care about, it is virtually impossible for them to fully appreciate both the power of the Marshallian cross as well as its many limitations in the face of trading costs, uncertainty, limited and asymmetric information, and institutional rigidities. ... One needs a minimum level of exposure to economic contexts and behavior before being able to develop new insights into its inner workings. (p. 7)
Providing such exposure suggests (at a minimum) inverting the traditional economics sequence:
one natural innovation is to teach economics not from an axiomatic and technique-oriented perspective, but by posing challenges that can only be addressed through economic logic. Instead of starting microeconomics with the consumer’s problem of maximizing utility subject to a budget constraint, begin by challenging students to predict the impact of a gasoline tax on the price of gasoline, or asking them to explain why diamonds are so much more expensive than water, despite the fact that the latter is critical for survival unlike the former. Instead of starting macroeconomics with national income accounts, begin with the question of how to measure and manage the wealth of nations, or why inflation can be so disruptive to economic growth. Without the proper institutional, political, and historical context in which to interpret economic models, constrained optimization methods and fixed-point existence proofs have much less meaning and are more likely to give rise to theory envy. (p. 7)
This is an inversion at a minimum because many graduate (and even undergraduate) programs in economics do not do the contextual part at all, but focus almost entirely on the technical skills. I was lucky in my Ph.D. program (at MIT) to have professors like Michael Piore, Paul Joskow, and Jean Tirole who brought rich institutional knowledge to their teaching. Joskow's extensive experience in the utilities industry (and as MIT's point person for negotiations with utilities) made his teaching in industrial organization far more focused on the world than a pure theory approach. Piore's internal labor markets work epitomized learning from what happened in the world. And Tirole had a large supply of examples to illustrate his theoretical analyses (and cotaught with Joskow). But many of our courses were only tenuously related to the world outside the classroom.
Note that Lo is not advocating tossing theory out entirely, just putting it in context:
However, when students understand the “why” of their course of study, even the most complex mathematical tools can be mastered and are almost always applied more meaningfully.
For Ph.D. students, gaining exposure to live economic environments before they begin writing dissertations should be a priority, and can be accomplished via industry and government internships or field work. By observing or participating in real economic activity in the domain of their likely field of specialization, students will develop a much deeper sense of purpose as they begin their research careers in economics. (pp. 7-8)
How does this apply to law schools, which are not preparing students for "research careers" in the same way as Ph.D. programs? In two ways. First, if economists have a moderate case of theory envy, law professors have full-blown, massive infections. The success of "law and...." movements is one sign of this, but so is the emphasis on "paradigm shifting" and such in legal scholarship. Casebooks fill up with note material providing various theoretical perspectives. Longer and longer casebooks (which cost more and more) are the result - and it is not clear to me that students benefit sufficiently from the 100s of pages of note material to make it worth the cost to their wallets (or backs, from hauling these massive books from class to class). Reading cases and statutes themselves ought to be a start. The theory can come later, when students know enough to get more out of it.* Or maybe there should just be less of it.
Second, perhaps law schools should put more emphasis on students with life experience and less on LSATs. I'd have been in trouble as a student had that been the rule, but I think I got more out of my Ph.D. program - after 4 years of non-academic experience - than I did from my J.D., despite generally inferior teaching at the Ph.D. level to the teaching at the J.D. level. I would have been better at taking advantage of law school had I worked for a few years before law school. That doesn't mean everyone needs to do something besides study before law school, but richer pre-law school experiences for more students would be useful in the classroom by broadening the discussion. However, so long as US News evaluates law schools on the basis of LSATs and UGPA (and law schools and law students care about those rankings), the focus on LSAT and UGPA will remain.
There's a larger debate on theory in the legal academy and people's positions in that debate may influence their positions on theory's role in teaching. And theory is different in law - in economics there is pretty much "a theory". (And, as an economist, I think it's a darn good one - or at least better than the alternatives.) In law, we've got a diverse set of often contradictory theories.** In an economics department, it is pretty easy to decide what belongs in the introductory sequence of classes at the undergraduate and graduate levels. In law it is almost impossible to agree what belongs in, say, Torts (which is one reason those casebooks are so long - capturing market share means including something for as many professors as possible).
Setting those issues aside as much as possible, it still seems to me that the pendulum may have swung too far towards theory in teaching law. Over the past seven years, I've worked with Craig Boise (now dean at Cleveland Marshall) to build a class that teaches students how to do a variety of offshore financial transactions.*** We use lawyers, accountants, regulators, and others to teach students how to do transactions by showing them documents and explaining what the various people involved in the transactions actually do. We do a little theory - some international tax law concepts, a bit of constitutional law (to explain why some jurisdictions can do these types of transactions and others cannot), and some debate over the merits of allowing these types of transactions for both the onshore and offshore jurisdictions. But the theory takes a back seat to focusing on what lawyers do, why they do it, and how they do it. After a number of years of trying, we think we've hit the sweet spot in terms of the mix and that sweet spot has very little legal theory (or economic theory) in it. The sweet spot may differ across subject matters, of course.
Lo's essay is a pre-conference essay for what looks like a fascinating conference on "What Post-Crisis Changes Does the Economics Discipline Need?" being held this month in the UK. I don't think we need an equivalent conference of legal academics - instead we need a dialogue with the legal profession about where legal education fits into the future of a profession undergoing significant changes. John McGinnis and Russell Manges' recent proposal to change legal education to an undergraduate major might be a good place to start that dialogue, since such a change requires rethinking legal education from the ground up. Perhaps an undergraduate major is one way to get theory envy under control. But such a change would reduce, not enhance, the context-building of students' outside experience. McGinnis and Manges suggest that an undergraduate law degree might produce reinvorgated LL.M. programs. Those might then fill that niche.
* Richard Epstein describes his own initial legal education during two years at Oxford: “The only direction I got was being told to read the 19th-century judicial opinions.” He attributes his intellectual development to starting with primary source material in cases and Roman law rather than with modern legal theories, as his contemporaries did at Yale and Harvard. I discuss this further in my chapter on Epstein in Pioneers of Law and Economics.
**See C. Steven Bradford's brilliant essay "As I Lay Writing: How to Write Law Review Articles for Fun and Profit: A Law-and-Economics, Critical, Hermeneutical, Policy Approach and Lots of Other Stuff That Thousands of Readers Will Find Really Interesting and Therefore You Ought to Publish in Your Prestigious, Top-Ten, Totally Excellent Law Review" for a clever satire of legal scholarship's use of theories.
*** Offshore does not mean "money laundering". More on that and the class later.
Posted by Andy Morriss
Charlie Munger, a lawyer of some accomplishment at Berkshire Hathaway, noted the problem of physics envy (specifically, the real world problems caused by reliance on faulty econ theories) in a 2003 talk given at UC Santa Barbara, "Academic Economics: Strengths and Faults after Considering Interdisciplinary Needs." The one thing I like about Charlie Munger is his relentless focus on real world decisionmaking -- nothing is more relevant for lawyers. [Bill Henderson.]