The Hat of Generalisation

How reading a blog can increase your grade:

In my classroom a few years ago, I introduced the ‘Hat of Generalisation’, helpfully made by @adamwilkie95 and @jtphaynes. It was two feet high, made of light blue cardboard, with a white bobble on the top and a daisy chain chinstrap. On the front of the hat, so no one was in any doubt as to what it stood for, was a large capital G. This did not stand for ‘Gangster’ (see daisy chain chinstrap….). It stood for ‘Generalisation’.

There has been much debate, over many centuries, as to whether or not Economics is a science. It has largely now been acknowledged as a ‘Social Science’. This means that whilst it is not possible to predict exactly how each individual in society will respond to a certain action (such as increasing the tax on a specific product) it is possible to show the overall effects on society in general (less people will buy the product if the price increases), but some

people will ignore the signal for a variety of reasons. This distinction can gain you many evaluation marks.

Let’s take interest rates as something that people generalise about:

“Evaluate the effects of an increase in interest rates on Aggregate Demand.”

Standard student answer:

“An increase in interest rates means that there will more of an incentive to save, as the reward for saving has grown, and less of an incentive to borrow, as the cost of borrowing will increase. This will mean that consumers will be willing to spend less and will save more, thus consumption will fall and AD will decrease as consumption is a component of AD.”

A perfectly reasonable, scientific explanation of the effects…. BUT, read the same thing again, with a few subtle changes in language:

Phil Hensman @PhilsEconomics

“An increase in interest rates means that there will more of an incentive to save, as the reward for saving has grown, and less of an incentive to borrow, as the cost of borrowing will increase. This may mean that consumers could be willing to spend less and may save more, thus consumption should fall and AD may decrease as consumption is a component of AD.”

The only word that has changed in the second answer was ‘will’, and I didn’t change every example. It is true that an increase in the interest rate will increase the reward for saving, but it is not true that every consumer will save more. Using the word may, and expanding on it means that you are about to be rewarded with the golden halo of evaluation marks!

Why Might Some Consumers Not Save More?

I try to encourage my students to use the words “It Depends” when evaluating, it encourages them to look at the issue from more than one perspective.

If an individual is earning minimum wage and the rate of inflation is high, will they be saving more money? Probably not, as their disposable income is already low, so, given the fact that they can either spend or save their income, if they need to spend all of their income to keep themselves from absolute poverty, are they really going to think “Never mind eating this month, I can earn an extra 0.5% interest on any money I save!” Unlikely… So, “it depends” on the individual’s income level.

This brings us nicely onto another point, “It depends” on the size of the increase. 0.5% is likely to have a limited effect, but a 15% increase in interest rates is likely to have a much greater effect, as the reward for saving/cost of borrowing is so much greater, BUT, either way, not EVERYONE will be rushing to the bank with ALL of their money and therefore stop eating….

Also worth considering is the economic climate at the time of the interest rate increase. “It depends” on where on the economic cycle the economy is. If people are confident about their futures, such as during a boom, they are less willing to save, so the increase may have a limited effect, but as we see today, during recession/recovery, record low interest rates are not necessarily encouraging people to go out and spend all of their money as consumer confidence is generally low as some people worry about their future, so a factor other than the interest rate itself comes into play. Great evaluation.

More than anything, this highlights the use of English in your answers. Economics is not an exact science, so, in essay questions especially, use words such as ‘could’, ‘should’ ‘likely to’ and ‘may’ instead of ‘will’. This should make a real difference to your evaluation marks, but “it depends” on whether you explain why.

Phil Hensman @PhilsEconomics

The Hat of Generalisation can be worn in many circumstances in Economics, make sure you don’t wear it…. Unless you like daisy chains and lower grades.

Phil Hensman @PhilsEconomics