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.