What is wrong with American macroeconomics? In a nutshell, when 2007-9 came along every single macro textbook (including mine) and every single macro course (save possibly Perry Mehrling’s) was of little or no use in helping people who had read or taken them to read publications like the FT… (Read more here)

What follows is a proposal to make the teaching of macro more pluralistic. Yes pluralistic. He argues that macro should include five theories on the cause of unemployment and crisis: The classical (1. real wages too high),  (2. past over-investment), the monetarist (3. money shortage), Keynesian/Hicksian (4. shortage of bonds – and I might add 4b. lack of aggregate demand) and Minsky (5. where stability is unstable).

Yes I agree, we need a more pluralist approach, and then I stepped off for a bit. I was not sure we really needed all these theories. Can’t we make due with a four or three perhaps? Couldn’t we get rid of some of the classical ideas?

On further reflection, I don’t think so. I think the most important thing is to present the set of theories that successfully explain past crises, and if that is the criteria for inclusion, all five theories should all be included. But this allows us to exclude more esoteric ideas which have no empirical and historical backing. And I think DeLong is spot on when he says “All five of these theories are best taught sympathetically by being taught historically.” I wonder if his next textbook will take this approach…

the simulations were not presented as assurance that no crisis would occur, but as a forecast of what could be expected conditional on a crisis not occurring.

Let’s have that again, from the Nobel receipient: The economic models which failed to predict the crisis are fine, not because they came close, but because they don’t even consider crisis as a possible outcome… Tell me that isn’t beautiful!?

A whole roundtable discussion of Lucas’s article and the state of economics is on-going at The Economists website. Thus far written by Mark Thoma (U. of Oregon), Tyler Cowen (GMU), Marcus Brunnermeier (Princeton) and Brad DeLong (Berkeley) with more contributors to be added this week. Bard DeLong’s piece even emphasised that “Mr Lucas said he ‘didn’t really get it’ ” when the bank bail-out was being discussed back in March. It makes for interesting reading, if a bit ‘Wonky’ as Steve Kinsella noted… I’m still chuckling quietly at Mr. Lucas’s ‘defense’ though.

I went to the University of Chicago several years ago. I studied in their illustrious economics department as an undergraduate. There are nearly 400 graduates per annum.

After I graduated I felt I was missing something in my economics education. I went back and read the General Theory. Had I not done this, I would have never heard of Keynesian economics, except in passing about how it is “wrong”. (Sadly this is not an exaggeration.)

I can safely say that, at a minimum, 80% of those UofC graduates were in the same position of ignorance as me. And they were fine with it because there were Nobel winners giving them A’s and applauding their work of regurgitated free market drivel.

For example, the entirety of our required macro education consisted of two quarters’ hashing and rehashing the GE models from Robert Barro. The most ironic thing, as I see it in hindsight, is that so much of this book was built around refuting Keynesian ideas: But these were ideas we had never actually learned in the first place!

I fell in love with that Gothic campus but I do see how we were living in the Dark Ages. I think about the leaders who came from the same position as me and I shudder to think of how many mistakes we are making as a result of this ideology.

— UChicago, Class of 2005

I went to the University of Chicago several years ago. I studied in their illustrious economics department as an undergraduate. There are nearly 400 graduates per annum.

After I graduated I felt I was missing something in my economics education. I went back and read the General Theory. Had I not done this, I would have never heard of Keynesian economics, except in passing about how it is “wrong”. (Sadly this is not an exaggeration.)

I can safely say that, at a minimum, 80% of those UofC graduates were in the same position of ignorance as me. And they were fine with it because there were Nobel winners giving them A’s and applauding their work of regurgitated free market drivel.

For example, the entirety of our required macro education consisted of two quarters’ hashing and rehashing the GE models from Robert Barro. The most ironic thing, as I see it in hindsight, is that so much of this book was built around refuting Keynesian ideas: But these were ideas we had never actually learned in the first place!

I fell in love with that Gothic campus but I do see how we were living in the Dark Ages. I think about the leaders who came from the same position as me and I shudder to think of how many mistakes we are making as a result of this ideology.

— UChicago, Class of 2005

The story excludes the current circumstance of the economy (recession), it assumes – in its classic form – that the economy is not credit driven, and as Paul Krugman complains: “What’s so mind-boggling about this is that it commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship”. In fairness Krugman is only responding to Brad DeLong who goes a little further in lambasting the Chicago guys:

Milton Friedman knew this. Irving Fisher knew this. Simon Newcomb knew this. David Hume knew this. John Cochrane does not know this: does not know that the velocity of circulation is an economic variable rather than a technological constant. I do want to pound my head against the wall. I do not know what else to do…

And here is where the dark ages come in. The Dark ages were dark, because so much knowledge had been lost, and so much more was misunderstood. Some of us might argue that the misunderstandings have been going on for a while, it’s just now that the rest of the profession are catching up. Rudi von Arnim points to a recent article by Benn Steil (director of the Council of Foreign Affairs) who does violence to Keynes and macro through a microeconomic allocation of labour and capital concluding that government spending will only confuse the price mechanism in an otherwise functioning equilibrium. Never mind the macro or the economy, von Arnim worries that

The lack of understanding of ‘depression economics’ is truly, truly depressing. As an aside: No wonder this piece was first published in Forbes. The Econ-guys from Forbes are special buddies of CNN’s Ali Velshi, who is going to run business and economics reporting there in the ground.

And what are all these predictions based on? Empirical estimates of the current crisis? No. Economic History looking at the last great depression? No. How about the evidence from the WWII borrowing to spend budgets which gave us the highest government debt figures as a % of GDP ever? No. This is all based on an assumption, or in Krugman’s words the “ineluctable implication of an accounting identity”. If they had bothered with data they might have found evidence for borrowing ones way out of a recession with the loans paying for themselves in the resulting growth period (as was the case post WWII, and the argument Keynes made at the time), or maybe it might work (which seems to be a consensus on the ’29 crisis)… A Dark Age indeed

Download the full paper

Marca, Massimiliano La. 2004.  “Financial Integration, Growth and Macroeconomic Volatility: Evidence and Interpretations” New School Economic Review 1(1): 31-41