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The Economics of Grading

18 Aug 2020

I think one of the interesting parallels that has come out of this Ofqual grading fiasco is that of the macroeconomy. Consider the grades one receives as currency, which can be used to “buy” various goods and services - in this case, a university spot or impressing future employers. The flooding of higher grades due to the “double lock” of Ofqual predictions and CAGs is a bit like monetary stimulus.

The Keynesian Economist: In the short-run, monetary stimulus has a real effect in increasing output, because of sticky prices - here, that refers to the fact that one’s university offer does not adjust to the increased number of high grades. This means that more people are able to go to universities in this cohort.

The Classical Economist: The consequence of a temporary increase in output beyond potential output is that there will be a period in the future where output is below potential. That is, universities will need to accept fewer students in the future in order to compensate for taking more now.

The Monetarist Economist: We know that money is neutral in the long-run - it does not have an effect on real variables. Although employers previously looked at A-Level grades for fresh graduates due to the heterogeneity in university degree classifications, they will have had 3 years to adjust how they impressed they are by those As - in a sense, they will have increased the price of their belief such that an A from this cohort doesn’t buy as much of it as it did before. This means that people will be unable to get increased employment opportunities on this basis - the increase in As has no real effect in the long-run.

Of course, these are mere caricatures of economic schools of thought - the reality of macroeconomics today is that it has very much converged upon the new neoclassical synthesis à la Woodford, so people who self-identify within these categories are far and few. But these nonetheless illustrate salient points about the three main historical threads leading up to today’s research frontier: the sticky prices of the Keynesians, the long-run equilibrium of the Classicals and the monetary neutrality of the Monetarists.

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