Econ 101: Hopelessly Outdated And All The Macro You Need To Know?

Gregory Clark, UC Davis economic historian and Atlantic blogger, wrote awhile back a very interesting post about the failures of the profession to predict the current downturn, and the irrelevance of most contemporary economic research to understanding the recession. In a sense, he’s arguing that economists have stopped studying the economy because they thought the problem was solved – the business cycle moderated, fiscal and monetary policy levers sufficiently understood to make another Great Depression* impossible. Here’s Clark’s assessment of the current debate:

The debate about the bank bailout, and the stimulus package, has all revolved around issues that are entirely at the level of Econ 1. What is the multiplier from government spending? Does government spending crowd out private spending? How quickly can you increase government spending? If you got a A in college in Econ 1 you are an expert in this debate: fully an equal of Summers and Geithner.

The bailout debate has also been conducted in terms that would be quite familiar to economists in the 1920s and 1930s. There has essentially been no advance in our knowledge in 80 years.

While I like the thrust of the comment (and given my own recent reading of 1930s economic writings I largely concur) I disagree slightly with the timeline. 80 years ago, in 1929, John Maynard Keynes had not yet published A Treatise on Money (1930), let alone The General Theory of Employment, Interest and Money (1936). Hicks’ famous interpretation of the General Theory, which set the stage for Samuelson’s text and the Econ 101 courses Clark refers to, was published in 1937. So, I think to be a bit more precise and a bit more charitable, we can say there has been very little advance in the terms of the debate in the last 70 years. Which is to say that we still think of the economy roughly how we did just after Keynes (but not much before him), and we still focus on the same metrics for success and the same big policy proposals. But is that the same thing as saying there has been no advance in our knowledge? Or just to say that the paradigm of economics (to abuse Kuhn for a moment, as so often happens) has not shifted as much as all the debates about monetarism, New Keynesianism or Real Business Cycle theory would suggest.

But back to the central claim Clark makes: has all of the macroeconomic research done in the last 70 years really provided us with nothing (or less than nothing in Eugene Fama’s case) helpful for a big crisis? Does Econ 101 give you all the macro you need to know for the current crisis, even though it’s all considered hopelessly outdated by graduate curricula standards? If so, why?

Clark connects the uselessness of contemporary macro to the Great Depression II: Electric Boogaloo to economics turn towards studying the apparently trivial, e.g. online dating. But that can’t be enough – PhD economists are still required to take a rigorous year of macroeconomics, at least, in basically every program. And every top department has plenty of people who are still studying the dynamics of economies, rather than specific markets.

Thoughts?

* I was sorely tempted to write “Great Bagel” there in honor of the West Wing but, of course, bagel stands in for the R-word not the D-word.

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5 Comments

  1. In other words:
    “Econ 101 is truth, econ 101 is beauty – that is all
    Ye know on Earth and all ye need to know.”

  2. limitatiosnandshortcomings

     /  May 11, 2009

    “Which is to say that we still think of the economy roughly how we did just after Keynes (but not much before him), and we still focus on the same metrics for success and the same big policy proposals.”

    Legitimate question (actually I think its perhaps the most important question!): who, exactly, is this “we”?

  3. @Limitations: Excellent question, and one I’ve been (legitimately) hit with before. I think both the set of policymakers (congress, the president, etc.) and the set of journalists (all in the US) refer to the economy in a way that is very similar to how the economy was discussed by the same set of people in, say, the 1940s. I’m planning a research project to nail that down, but I won’t have the data collected and analyzed until Fall 2010 (likely), as there are a couple other things on my plate until then.

    This specific discussion, however, refers mostly to macroeconomists. Macroeconomics as a separate discipline starts with Keynes, in some important sense anyway, and macroeconomists now do talk in a way very much consistent with how they talked by the late 1930s.

  4. limitatiosnandshortcomings

     /  May 12, 2009

    I can empathize with been “(legitimately) hit” by it myself, so am, in a sense, glad it might be something that we sometimes unwittingly forget to fully explicit. Actually, its a question that I increasingly find myself asking others/books/articles/essays/myself.

    Your answers does clarify a lot, however. So thanks.

    (And, no, you are not allowed to ask me who my “we” refers to!)

  5. droads

     /  May 15, 2009

    I don’t think Econ101 students get enough macro to “get” the current economic crisis. Have u seen this vid? http://www.youtube.com/watch?v=_ZAlj2gu0eM&feature=channel_page

    And does econ 101 explain the equalization of the rates of profit? I can’t remember. And how much more Macro can u get that “CAPITAL”?