Is EE432 pretty much useless?

Here's a question from a student...

I question that all of the topics that we covered in the class are really applied in today banks or BOT, something like plug in the data in model and use its outcome to predict the economy? or they are just the model to form the idea for each topic, something like if you are inflation-bias type, the economy gonna be like blah blah blah without any need to use any data to plug in?

The main reason for my question is to answer myself that I know how useful of what I have learned for the whole semester because now I’m blanked with the practical uses of this course (may be it may takes time for me to use it in the future some day) and also if my friend ask me why they have to study this course, I still have no idea.

It's a very important and perfectly legitimate question. Here are my thoughts...

A lot of economics that's taught today is still pretty much a 'pure' rather than an 'applied' science. The sad fact is, there's still a lot about the economy or human behaviour that we economists have not fully understood, so we're pretty much in the stage of developing our understanding. So it would be wrong to approach economics like an applied science, like medicine or engineering, where after you finish a course, you expect to be able to build a bridge or cure a certain disease. Learning formal models does not promise you a complete recipe to solve all economic problems on earth. But it gives you an invaluable habit of a scientist...i.e. to approach a problem in a systematic way. To be able to differentiate key factors from trivial ones, and to come to conclusions that are free from emotions, personal bias, or political orientation. That's what makes properly trained economists different from economic commentators.

I hope our course will have illustrated to you how each conclusion we reach is based on solid formulation, so that if there is any disagreement, we can always go back to check which step in our model or our assumption we disagree about. This provides a framework on which we can progressively learn something about the economy, and not just circling around the same issue over and over without knowing really what's right and what's wrong and why.

Are formal theories ever used in real life? A central banker does not differentiate their loss function before they arrive at a decision, that's certain. But you'd be surprised, for example, that not long ago countries with hyperinflation fail to understand this very basic truth that we take for granted in lectures...that you cannot push output beyond potential and hope nothing happens to inflation. In fact, you don't have to actually do the output expansion...once you reveal your intention to do it, inflation will be there almost immediately. Nowadays any properly trained economist in any central bank has this understanding engraved in his head. So global inflation has come down in recent years not because of pure luck, but it comes from our better understanding of economics. And it comes originally from models and theory, from discussions in classroom and universities.

In any given day at the central bank, we don;t go over maths and models. It is assumed that you have learned it in school. We study data and use econometrics a lot, in order to check if the working of the economy as appear in the data is in line with our understanding. But without any theoretical understanding, your econometric skills won't help much, as you will be lost about what to look for. Just like a surgeon who doesn't understand the anatomy...he may be good at cutting, but he will not be able to save lives!

Personally, I can definitely testify that, without my previous econ training, the quality of my work at the bank today will be far inferior. I can't pin point exactly what I have learned that makes such a huge difference...but it's unlikely to be Kiyotaki-Moore equation 3.4 or whatever. I'd say it's a combination of the ability to think critically, the tendency to think analytically (instead of looking for cheap explanation), confidence to tackle problems of quantitative/mathematical nature, ability to recognise the right solutions when you see them, habit of keeping up with recent research etc. These things, I think, are acquired slowly over time. I hope ee432, and other courses you take at TU, give you a good start!

Comments welcomed!

There are other 'exam' questions from other students, and I will post them here too...soon!