Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday 22 June 2012

Teaching macroeconomics after the crisis

A slight variation on an old theme

                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. Does this reflect insularity or intellectual arrogance? Surely the failure to foresee the financial crisis must have led to some change in what was taught. Does this not confirm something rotten at the heart of economics?
                First I need to explain ‘not much’. [In what follows I only deal with core macro courses, and not options at either undergraduate or graduate level.] John Vickers, who gives the first year macro lectures, has added material on bank runs, leverage and banking reform, where for the latter he has of course played a major role in current UK policy. My own second year undergraduate lectures include a wealth of topical examples to illustrate basic theory. And perhaps most significantly, Martin Ellison now gives a couple of weeks of lectures on recent developments in modelling financial frictions as part of the core post-grad macro course.
                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. As a result, I teach this stuff with renewed vigour and determination. As many people know, both our current Prime Minister and the Leader of the Opposition will have attended a past version of the course I teach (although well before, I hasten to add, I started teaching it). Although George Osborne read Modern History at Oxford (and here ‘modern’ means from 1330, so the Great Depression was not necessarily covered in depth!), one of his principle advisors also read PPE (Politics, Philosophy and Economics). If any future Prime Minister or Chancellor follows a similar path, I want them to remember basic macro theory.
                Now I also teach the first part of the core macro for our MPhil (Oxford’s two year masters) course, and you might think that the basic Ramsey model which is covered there has less relevance to recent events. To some extent this is true: I’ve noted how the standard intertemporal consumption model is not going to explain trends in savings in the UK or US over the last few decades, and my colleague John Muellbauer has written extensively on this. On the other hand, I find the Ramsey model and its OLG variant very useful in discussing issues around the control of government debt.
                So while the Great Recession has clearly shown that macroeconomics is incomplete in important respects, it has not shown that what we thought we knew is all wrong.  In many respects it has shown it is exactly right.
                However I think I should add one important rider to this. Anyone wanting to understand what has happened over the last five years would be better off reading an undergraduate macro textbook like Mankiw than a masters textbook like Romer. This is not because the former is less technical than the latter, but because the former is more old fashioned in academic terms. They might do even better still by reading The General Theory. Before I am misunderstood, I am not suggesting anything is wrong with what we currently teach. Rather that the inevitable focus at the masters level on the recent macroeconomic literature leaves no place for the history of macroeconomic thought, and that is a problem.
                Now I must confess two things here. First, I have not always held this view. Indeed until quite recently, when I thought most macroeconomists signed up to the New Neoclassical Synthesis, I imagined economics might be like a physical science, where knowledge of bygone theory added little to our understanding of the world today. The Great Recession changed that view, for me at least. Second, this argument to teach the history of macroeconomic thought is one that tends to be made by those of a certain age, and even though they might also be very eminent (for example), don’t we all want to pretend we are still young? Well maybe it’s time to admit my age.


  1. Yes, it's also a vindication of the economics taught at A Level. I'd be happy if the chancellor and his advisers understood basic A Level standard economics, e.g. deflationary fiscal policy - tends to be deflationary!

  2. Would you teach Steve Keen or is he beyond the pale?

  3. "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."

    I must ask you, are you speaking of the IS-LM model? For there is nothing truly Keynesian in it. Hicks already had it in mind at least 5 years before Keynes wrote the GT and Keynes in fact rejected his analysis in a private letter to Hicks. The IS-LM is not Keynesian but "fiscal-neoclasscial".

    Second, we're in this mess because macroeconomists ignored the effects of private debt and bank-credit. And politicians ignored the risk of too much private debt because economists told them it would be OK since "one's debt is another's asset." So the politicians probably "remembered basic macro theory" as you wanted them to. The problem was that the basic macro theory was, well, limited.

    One question regarding the changes in the curriculum: have you added Minsky into it?

  4. "...I imagined economics might be like a physical science, where knowledge of bygone theory added little to our understanding of the world today."

    Where did you get this idea? As a physicist I can tell you this is completely wrong. The old physics is crucial in understanding the new models, and it is the first that is taught, extensively. Without classical electrodynamics you cannot understand quantum field theory. Without classical field theories you cannot understand general relativity. And string theory is just an application of quantum field theory and general relativity in a different context. Modern condensed matter theory is an application of quantum field theory. Really, many of the mathematical methods developed in the last centuries (most in the 19th) are the basis of just more sophisticated models of modern physics. Moreover, quite often a lot of modern problems can still be tackled using (very) old physics (much of astronomy uses Newtonian physics, while general relativity is almost ready for its 100th birthday). Perhaps the biggest difference is that now you can do huge simulations on powerful computers, but that's also just a new way of using old theories.

    Apparently unlike economics, physics is not at all as a replacement of old theories with new theories. It is a layering of new theories extending the reach of old theories. But the old theories still hold their importance, and therefore it is essential that they are taught. It seems that this lack of amnesia should be the most important lessons for macro economics coming out of this crisis.

  5. This is an excellent reflection. I hope everyone teaching economics, at any level, conducts some similar thinking. This alone would represent a significant change in economics teaching.
    It is also good to hear economists state that "the mess we are currently in is due in part to policy makers ignoring this basic macroeconomic analysis", but maybe you don't stress enough that it is "basic" that matters the most.
    Basic economics is simple, useful and relevant, as the recession loudly reminded us. The usefulness and relevance of fancy modern economics looks much more debatable. And when fancy economics cannibalizes the basic one (as you state it does at the master level), it becomes counter-productive.

  6. Economists are bad at defining economic variables. Economist statisticians are good - but economists aren't. Did you know, for instance, that non-profits serving households (the soccer club, the National Trust( as well as jails are part of the sector households? More attention to this is needed to enable the students to understand the metrics, starting with the 'old school', chartalist double entry definition of money, as used by the statisticians of the ECB. Every month, the ECB press release clearly shows the 'money=debt' relation. Students have to know about this. You can't define money without talking about debt. And even when you do not accept this double entry accounting, chartalist point of view - the students have to be able to read the press releases of the ECB (the neo-classical divisia definition is at least a little more advanced than the standard textbook definitions (see the Blanchard and Bernanke textbooks!) - but it still leaves out that money and debt are siamese twins and that debt is as essential a feature of out monetary system as the pound.

    Merijn Knibbe

  7. Dear Prof Wren-Lewis,
    I've a little question for you:

    Can you or any economist explain why the graph on mirrors the US economy so well over the years?

    The graph could not be simpler. It takes M1, adds sweeps and subtracts industrial and commercial loans. Even on the scale at which the graph is drawn you can see the crash of 1987, the moderation during Bill Clinton's presidency, the wayward expansion during the first half of the first decade of this century and much else. For the latest period you can see a contraction.

    I am sure no economist can really understand this graph. And this inability lies at the heart of the confusion that besets macroeconomics at present. Economics carries a century of misconceptions regarding money.

  8. You should teach the history of macroeconomic thought AND economic and financial history. Otherwise, you will teach what I was taught, which was all theory and no evidence. Undergraduates come to economics without much sense of what it is that needs explaining and you need to give it to them.

  9. Anyone wanting to understand what's happened over the past five years should read the General Theory?

    I'm not sure about that. The General Theory isn't a layman's guide. My guess is it's comprehensible to first-year undergrads with an A-Level in econ.

    Mankiw might be more suitable. His new edition includes a clear explanation of the causes of the credit crunch, though I've seen some claims that it's not well balanced.

    There's also the problem that we're too close to events to understand them. Indeed, anyone claiming to teach definitively the causes of the GR is in error, to my mind, since events haven't yet played out. While setting out current theories, one would still need to express uncertainty.

  10. Three points;
    The economic decisions made by the current Govt are determined by political motives not economic understanding.
    My reaction to what I take to be the typo referring to Osborne's 'principle' advisor is that the poor devil isn't having much success in that area either.
    Thank you for your reassurance that the teaching of Economics in the home of lost causes isn't responsible for the crude simplifications and inaccurate soundbites that sum up current Govt policy

  11. Prof.

    Could we tempt you to comment on the history of the PPE?
    There seems to be this great swathe of PPE graduates across the UK's political class.
    And few of them seem to show much appreciation for the (E) part of the course.
    This ranges from the knee-jerk anti-Keynsian attitudes through to general incoherence about how the economy works.

    Strangely, it seems from anecdotes by Chris Dillow amongst others, that this wasn't exactly a function of the teaching. Yet if we're to accept the reality of the PPE as the finishing school for our rulers, it would be good to understand what directions it is pushing their minds in.

  12. The undergraduate course in Money and Banking has also been completely revamped (just before the crisis i think) and includes lots of up to date material and references on the crisis, unconventional monetary policy etc.

  13. Olakar your statement that Keynes rejected IS-LM in a private letter I've never heard-that doesn't mean it's right or wrong just I've never heard it.

    I thought Skidelsky has written the most authoritatively on Keynes and according to him Keynes in his own life time chose not to fight IS-LM for pragmatic reasons.

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

    56% of the population thinks that higher taxes and spending would lead to growth.

    Only 42% want the government to create jobs. Politicians know perfectly well what would create jobs, but economists have not been supportive of job creation without higher government spending, inflation, bubbles, or trade barriers:

  15. Posts like these reconfirm Professor Steve Keen's view that we need to occupy economics departments and throw the neoclassicals out.

    The great recession should have taught us about the dangers of high levels of private debt but neoclassicals seem determined to ignore private debt.


Unfortunately because of spam with embedded links (which then flag up warnings about the whole site on some browsers), I have to personally moderate all comments. As a result, your comment may not appear for some time. In addition, I cannot publish comments with links to websites because it takes too much time to check whether these sites are legitimate.