Teaching macroeconomics in the aftermath of the crisis

24 Jun, 2012 at 18:11 | Posted in Economics, Theory of Science & Methodology | Comments Off on Teaching macroeconomics in the aftermath of the crisis

Simon Wren-Lewis has a piece on his blog on how teaching macroeconomics after the crisis looks:

I was asked the other day how macroeconomics teaching at Oxford had changed as a result of the Great Recession of 2008-9. My answer, which was not much, seemed a little surprising at first …

So why was my answer not much? Because although the crisis has added material, nothing has really been thrown away as a consequence of what has happened. We have not, either individually or collectively, decided that the Great Recession implies that some chunk of what we used to teach is clearly wrong and should be jettisoned as a result. Speaking for myself and my second year undergraduate lectures, quite the opposite is the case. As Paul Krugman has pointed out many times, recent developments have in many ways been a vindication of the basic Keynesian model that lies at the heart of any undergraduate macro course.

Indeed, I would go even further. The mess we are currently in is due in part to policy makers ignoring this basic macroeconomic analysis.

To be honest, this citation really gets me rather gobsmacked. First of all because I find its rather self-congratulatory and complacent attitude unwarranted. But also – re Krugman – because it, at least to my reading,  seems to be in bad accordance with what Krugman has repeatedly said after the finance crisis, e. g. in his speach at the Eastern Economic  Association:

So we’re having an economic crisis. I say “having,” not “had,” because we have by no means recovered … This crisis was the time for the economics profession to justify its existence, for us academic scribblers to show what all our models and analysis are good for. We have not, to put it mildly, delivered …

One can make excuses for the failure of the economics profession to foresee that the 2008 financial crisis would happen. It’s much harder to make such excuses for much of the profession’s failure to realize that such a thing could happen …

The overall point should be clear: economists had good enough intellectual frameworks to have seen the risk of something like the banking and balance sheet crisis that burst upon us in 2008. But they ignored that risk.

My best answer is that they were caught up in the spirit of the times, with its faith in the wisdom of markets and of the financial industry. Nobody could deny the possibility of runs on conventional banks, which have happened so often in history. Few could deny that debt deflation had happened in the past. But to argue, or even to think about, the possibility that the old evils could manifest themselves in new forms would have been to question the whole basis of decades of policy, not to mention the foundations of a very lucrative industry . .. And by not pursuing that line of thought, the profession fell down badly on the job.

We’ve entered a Dark Age of macroeconomics, in which much of the profession has lost its former knowledge, just as barbarian Europe had lost the knowledge of the Greeks and Romans.

How did all this knowledge get lost? … First, success in academic economics came from publishing “hard” papers — meaning papers that used rigorous and preferably difficult mathematics … Successive cohorts of students were trained only in the newly rigorous version of macro, which had lost touch with the field’s previous intellectual achievements.

And as these cohorts became professors in their turn, they closed off both publication and promotion to anyone who questioned the dominant academic approach …

All of this would have been OK if the triumph of anti-Keynesianism was justified by superior empirical success. But it wasn’t. As I read the history of the equilibrium approach, it’s a story of failing upward …

The policy debate of 2009–2010 was virtually indistinguishable from the policy debate of 1931–1932. Long-refuted doctrines that should have been consigned to the dustbin of history were stated as if they were fresh new ideas — and they were fresh and new to many economists, because our profession had lost so much of its heritage.

In short, in responding to the crisis, the profession presented a sorry spectacle of unnecessary ignorance that didn’t even recognize itself as ignorance, of bitter debate over issues that were resolved many decades earlier …

Some economists are pushing forward with new macroeconomic models … But as I’ve said, our big problem was not lack of models … The biggest problem we had as a profession wasn’t failure to keep up with a changing world, it was failure to remember what our fathers learned.

And re the policymakers ignorance, I would rather say like Keynes:

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.

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