A Professional Economist Tackles the Controversial Seventh Form Economics Examination

Listener: 12 February, 2005.

Keywords: Education; History of Ideas, Methodology & Philosophy;

Intrigued by a row over some questions in the 2004 Level 3 (Seventh Form) NCEA economics exam, I obtained the paper. It is in four sections. The first two, “Understanding marginal analysis and the behaviour of firms” and “Understanding the market and allocative efficiency”, required the student’s mastery of some standard economic concepts.

The fourth part, “Describe and illustrate aggregate economic activity”, would be more controversial, with considerable disagreement among practising economists as to the right answers. The problem arises because of the desire for “relevance”, so that students are given exercises that purport to be about the actual economy, but are really about a highly idealised one. I suppose that is okay, providing that students do not end up with the impression they know a lot about reality, and could run the macroeconomics division of the Reserve Bank or the Treasury. That takes at least another five years of study.

The two questions that generated the public row were in the third part, “Describe and illustrate resource allocation via the public sector to compensate market failure”. I was surprised how little of the basics the student was required to demonstrate. Neither this part, nor part two, required an explanation of the meaning of “allocative efficiency”, a concept that I spend some time over when teaching adults.

Moreover, there is absolutely no hint that the students (or teachers) had to understand the fundamental distinction between “positive” and “normative” economics. Positive economics is how the economy works; normative economics is how we judge the outcome. It is the distinction made by philosophers David Hume and Immanuel Kant between “is” and “ought”, without which ideology takes over from reality.

You can see the problem in the first question, “What do economists mean when they say ‘a market has failed’?” How the student was expected to answer in three lines is beyond comprehension, but to do so requires a clear understanding that although markets solve the positive economic questions of what, how, for whom, where and when, the market’s answers to those questions can be unsatisfactory, judged by some normative or moral criteria.

In the first controversial question, students were told that “the New Zealand government provides ‘free’ (ie, heavily subsidised) education at state secondary schools. Explain why this results in a better resource allocation than the free market shown in Graph 1.” (Note the normative “better”.) As in the fourth part, this is not a statement about reality, but an exercise that says, “Assume the world is like we have posited in Graph 1. Derive a conclusion.” But how close does Graph 1 reflect the real world? Hence the public dispute.

The other disquieting question was “Explain why using ‘free market’ policies causes income inequality.” Even the examiner is embarrassed by the term “free market”, putting it in quotation marks, for it is an ideological rather than analytic notion. I would have thought the provided five lines were excessive, answering, “Of course. All social arrangements other than death lead to inequality, and markets – free or whatever – are social arrangements.”

However, preceding the question – and unmentioned in the public debate – was the comment that “New Zealand government policies in the last 20 years have been more ‘free market’. In the same period, inequality has increased and the gap between rich and poor has grown wider.” Both statements are true, but are they connected?

I think I can claim to have made the most careful evaluation of that question. To my surprise, I could not demonstrate any connection. Rather than attributing the widening gap to market liberalisation, I showed that it was mainly due to cuts in income taxes on the rich, and benefit and public expenditure cuts on the poor. There may be a caveat – there are always caveats – but I would hardly expect a seventh former to deal with it. Anyway, I want a bit more data before I am sure. Suppose that the seventh former was widely read. How would they answer the question along the lines the preceding comment seemed to require, yet knowing that it was probably wrong?

Were a group of professional economists to have sat the seventh form exam, we would have zipped through parts one and two, largely failed part three, and never finished part four as we put in all the caveats.