Postgrad teaching and Keynesian economics: a survey

This post is joint with André Moreira, an economist at the Bank of England

Three years ago one of us got into a discussion with Paul Krugman and Brad DeLong about how dominant, or otherwise, the New Keynesian model of business cycles was in academia. That post contained a footnote with an idea: why don’t we look at what the top schools actually teach their post graduates, to see if there are a large proportion of students who are not being taught any Keynesian economics. We came together with the idea of doing just that.

We initially thought that we could do this by ‘simply’ contacting the academics teaching core macro courses and asking them for their syllabus. You can probably guess the problem we encountered, although thanks to those who did respond. So instead we decided to survey recent students. That worked much better, with one exception we note below. (The results are written up in more detail as a short paper – see the top of the main list from this link).

We decided to ask a simple question: “Approximately what percentage of the core Macro sequence that you received covered models involving price and/or wage rigidities (including New Keynesian models)? Please round your answer to the nearest 5% mark.” We sent this question to graduate students at the top 15 schools during 2014/15 [1]. Here are the results

Table 2: Survey results

The one school missing is Chicago. Contact information for these graduates is not publicly available, and we were told by both the course administrator and the academic in charge of the course that they have a policy of not divulging the email addresses of postgraduates, even after we made it clear what we wanted them for. We also received no information from our earlier requests for a syllabus.

Of course no simple question like this is perfect: at NYU, for example, the first year teaching focuses on methods, and Keynesian analysis is covered in a later (but optional) course. We found no major discontinuities according to the year students entered the programme (a few variations are noted in the paper), and the information matched the syllabus information from those who had been good enough to respond to our first survey. We sent the results to course teachers a few months ago for any comments or corrections.

The main message we draw from these results is that, in at least the top schools, there is no major divide between a group that teaches Keynesian economics and those that do not. There is a large amount of variation among schools, but there is little evidence of the marked bifurcation among top universities that some discussions of a saltwater/freshwater divide might suggest. We suspect opinions will differ on whether the variation we still found is natural in a discipline like economics or is an indication that something is wrong.

We would be interested in any thoughts about whether it would be worth taking this analysis further in any way.

[1] Top 15 according to the IDEAS ranking of economic institutions as of September 2013.

The New Classical Revolution: Technical or Ideological?

Paul Krugman: “The state of macro is, in fact, rotten, and will remain so until the cult that has taken over half the field is somehow dislodged”

The cult here is freshwater macro, which descends from the New Classical revolution. In response

Steve Williamson: “At the time, this revolution was widely-misperceived as a fundamentally conservative movement. It was actually a nerd revolution.” “What these people had on their side were mathematics, econometrics, and most of all the power of economic theory. There was nothing weird about what these nerds were doing - they were simply applying received theory to problems in macroeconomics. Why could that be thought of as offensive?”

The New Classical revolution was clearly anti-Keynesian, in the sense of Keynesian theory of the 1960s/70s, but was that simply because Keynesian theory was the dominant paradigm? As Williamson says, these guys were outsiders, and they wanted to revolutionise the discipline, which meant attacking the dominant theoretical framework of the time, which was Keynesian IS/LM.[1]

I have no particular expertise here: when this was all happening I viewed it from afar and with a lag, although perhaps that is also an advantage. But for what it is worth, I think there is some truth in what Stephen Williamson (SW) says. I certainly think that New Classical economists revolutionised macroeconomic theory, and that the theory is much better for it. Paul Krugman (PK) and I have disagreed on this point before. It was New Classical economists who recognised the importance of Muth’s rational expectations idea, and it is hard to imagine making sense of what the Fed has done this year without it.

But this is not where the real disagreement between PK and SW lies. The New Classical revolution became the New Neoclassical Synthesis, with New Keynesian theory essentially taking the ideas of the revolutionaries and adapting Keynesian theory to incorporate them. Once again, I believe this was a progressive change. While there is plenty wrong with New Keynesian theory, and the microfoundations project on which it is based, I would much rather start from there than with the theory I was taught in the 1970s. As SW says “Most of us now speak the same language, and communication is good.” What New Keynesian theory does is allow central banks to apply New Classical ideas in a way that is relevant to the task they have to perform, which is inflation control through demand management.

I think the difficulty that PK and I share is with those who in effect rejected or ignored the New Neoclassical Synthesis. I can think of no reason why the New Classical economist as ‘revolutionary nerd’ should do this, which suggests that SW’s characterisation is only half true. Everyone can have their opinion about particular ideas or developments, but it is not normal to largely ignore what one half of the profession is doing. Yet that seems to be what has happened in significant parts of academia.

SW likes to dismiss PK as being out of touch with current macro research. Lets look at the evidence. PK was very much at the forefront of analysing the Zero Lower Bound problem, before that problem hit most of the world. While many point to Mike Woodford’s Jackson Hole paper as being the intellectual inspiration behind recent changes at the Fed, the technical analysis can be found in Eggertsson and Woodford, 2003. That paper’s introduction first mentions Keynes, and then Krugman’s 1998 paper on Japan. Subsequently we have Eggertsson and Krugman (2010), which is part of a flourishing research programme that adds ‘financial frictions’ into the New Keynesian model. You would not think of suggesting that PK is out of touch unless you are in effect dismissing or marginalising this whole line of research.[2]

I would not describe the state of macro as rotten, because that appears to dismiss what most mainstream macroeconomists are doing. I would however describe it as suffering from two unhelpful biases. The first is methodological: too much of an obsession with microfoundation purity, and too little interest in evidence. The second is ideological: a legacy of the New Classical revolution that refuses to acknowledge the centrality of Keynesian insights to macroeconomics. These biases are a serious problem, partly because they can distort research effort, but also because they encourage policy makers to make major mistakes.[3]
   



[1] The clash between Monetarism and Keynesianism was mostly a clash about policy: Friedman used the Keynesian theoretical framework, and indeed contributed greatly to it.

[2] It may be legitimate to suggest someone is out of touch with macro theory if they make statements that are just inconsistent with mainstream theory, without acknowledging this to be the case. The example that most obviously comes to mind is statements like these, about the impact of fiscal policy.

[3] In the case of the UK, a charitable explanation for the Conservative opposition to countercyclical fiscal policy and their embrace of austerity was that they believed conventional monetary policy could always stabilise the economy. If they had taken on board PK’s analysis of Japan, or Eggertsson and Woodford, they would not have made that mistake.

Uncivil debate? Harsh words over fiscal policy

Over the last two years there has been a debate through blogs and elsewhere between those who support fiscal stimulus and those who do not. Take Brad deLong’s analysis of this note by John Cochrane for example. To say the debate has been intemperate would be an understatement.  People have complained that one or both sides have been too dismissive of the other (see, for example, Tyler Cowan here.)

                Now I’m the last person to argue that economists are never guilty of unnecessary and off putting aggression and point scoring. However it is quite easy to understand what has happened here. For those in certain freshwater departments like Chicago, for example, the idea of an effective fiscal stimulus was something they had thought had died with the rational expectations and New Classical revolutions of the 1970s. It was therefore something of a shock to see it being resurrected, and it is understandable that they might dismiss it as invoking long discredited ‘fairy tales’. It looked as if 30 years of progress in the discipline was being ignored. It is clear from Cochrane’s piece that he is not dismissing New Keynesian theory – he just thinks New Keynesian theory is all about monetary policy.

                 On the other hand those advocating the effectiveness of fiscal policy knew perfectly well that while New Keynesian analysis certainly did emphasise monetary policy as the stabilisation tool in normal times, in a liquidity trap (or a currency union for that matter) it also implied that certain types of fiscal policy would work as well. In these circumstances, you do not react kindly to having your analysis dismissed as out of date and a fairy tale. (In fact you find it shocking and slightly unbelievable, in my own case.)

                While this may help explain why the debate has been bitter, it does not excuse both sides. Those freshwater economists who suggested that fiscal stimulus at a zero bound was a fairy tale that was not supported by modern macroeconomic analysis were simply wrong. Why such innovative and clever people should make this mistake is interesting, and I’ll return to this later, but wrong they clearly were. If the likes of Krugman and DeLong are guilty of anything, it is that they tried too hard to make sense of what the other side was saying. Perhaps they should have simply said "go away and read the literature".