Home > students, The Economics Profession > Economics after the crash

Economics after the crash

from David Ruccio

Last week in class, after explaining to students that graduate students in economics no longer study either the history of economic thought or economic history, they asked me if I thought, in the wake of the crash of 2007-08, the training of students in economics—at either the undergraduate or graduate levels—would change.

My answer was, “I don’t know. But, the last time ‘business as usual’ in economics was challenged, in the late 1960s and early 1970s, it was students in economics—at the University of Michigan and elsewhere—who were the ones to initiate the change.”

There are signs that it is happening again today—at Cambridge University, University College London, the London School of Economics, and now at the University of Manchester.

The financial crisis represents the ultimate failure of this education system and of the academic discipline as a whole. Economics education is dominated by neoclassical economics, which tries to understand the economy through modelling individual agents. Firms, consumers and politicians face clear choices under conditions of scarcity, and must allocate their resources in order to satisfy their preferences. Different agents meet through a market, where the mathematical formulae that characterise their behaviour interact to produce an “equilibrium”. The theory emphasises the need for micro-foundations, which is a technical term for basing your model of the whole economy on extrapolating from individual behaviour.

Economists using this mainstream economic theory failed to predict the crisis spectacularly. Even the Queen asked professors at LSE why nobody saw it coming. Now five years on, after a bank bailout costing hundreds of billions, unemployment peaking at 2.7 million and plummeting wages, economics syllabuses remain unchanged.

The Post-Crash Economics Society is a group of economics students at the University of Manchester who believe that neoclassical economic theory should no longer have a monopoly within our economics courses. Societies at Cambridge, UCL and LSE have been founded to highlight similar issues and we hope this will spread to other universities too. At the moment an undergraduate, graduate or even a professional economist could easily go through their career without knowing anything substantive about other schools of thought, such as post-Keynesian, Austrian, institutional, Marxist, evolutionary, ecological or feminist economics. Such schools of thought are simply considered inferior or irrelevant for economic “science”. . .

We propose that neoclassical theory be taught alongside and in conjunction with a broad variety of other schools of thought consistently throughout the undergraduate degree. In this way the discipline is opened up to critical discussion and evaluation. How well do different schools explain economic phenomena? Which assumptions should we build our models upon? Should we believe that markets are inherently self-stabilising or does another school of thought explain reality better? When economists are taught to think like this, all of society will benefit and more economists will see the next crisis coming. Critical pluralism opens up possibilities and the imagination.

The current state of affairs is not good enough. Our classmates tell us that they are embarrassed when their family and friends ask them to explain the causes of the current crisis and they can’t. One of our professors was told that he should follow the dominant research agenda or move to the business school or politics department. Another was told that if he stayed he would be “left to wither on the vine”. This situation is reflected in economics departments across the country – it is national problem. Economics academia can and should be better than this, and that’s why we are

  1. F. Beard
    November 4, 2013 at 2:12 pm

    The government-backed/enforced credit cartel is a HUGE single failure point. If we don’t understand economics yet then why do we put all our eggs in a single basket, must less an historically and ethically rotten one?

    • BFWR
      November 4, 2013 at 3:33 pm

      Yes, ethics is at the heart of what is wrong with not only economics and economic theory, but many of Man’s systems. Relying upon economic “wisdom” or the “wisdom” of any other discipline, alone, is why our systems not only do not serve us well, but also why they require continual tweaking. If we instead based the policies of our systems on the natural reflections of actual human wisdom they would be more inclusive of everything truly relevant because that is what human wisdom actually is….the condensation of human thinking (philosophy) accumulated over time AND the most ethical/human actions (policies) as well. Therfore it is more complete, and because it is the best of both thinking and acting…it by definition cannot be anything but relevant and in fact be the MOST relevant basis for both individual and systemic theory and policy. If we want to make economics more comprehensive, more relevant AND more accurate it must reflect human wisdom.

  2. Garrett Connelly
    November 4, 2013 at 2:50 pm

    Most extraordinary, economist’s refusal to look at reality places them squarely among professional cartoon propagandists.

  3. Bandorino
    November 4, 2013 at 3:13 pm

    “We propose that neoclassical theory be taught alongside and in conjunction with a broad variety of other schools of thought consistently throughout the undergraduate degree. In this way the discipline is opened up to critical discussion and evaluation. How well do different schools explain economic phenomena? Which assumptions should we build our models upon? Should we believe that markets are inherently self-stabilising or does another school of thought explain reality better? When economists are taught to think like this, all of society will benefit and more economists will see the next crisis coming. Critical pluralism opens up possibilities and the imagination.”

    Amen! No other academic discipline discourages “critical discussion and evaluation” the way it sounds like the Economics departments. Perhaps the department heads need to take lessons from the research being done in biology and computer science or maybe just take a stroll in the woods to observe nature. Maybe then their minds will open to insights already available to us to help us understand and improve economics teaching and behavior.

  4. William Neil
    November 4, 2013 at 3:48 pm

    David, thank you very much. In the spirit in which this post has been offered, I’m going to provide a link to a paper by Fred Block and Margaret Somers, “In the Shadow of Speenhamland: Social Policy and the Old Poor Law,” (2003) which I was directed to by Corey Robin’s blog just a few days ago, which was entitled “When Richard Nixon met Karl Polanyi.” (Here’s the link to the post: http://coreyrobin.com/2013/10/30/when-richard-nixon-met-karl-polanyi/

    Here’s the article: http://bev.berkeley.edu/ipe/readings/Fred%20Block%20Shadow%20of%20Speenhamland.pdf

    Block and Somers go back and do a detailed review of all the economic and sociological research that has been recently occurring around the late 18th century English provisions for the poor and working poor which has become known as Speenhamland – an early social and economic welfare public policy which was designed to supplement wages for the poor (mostly rural) at a time of great of great economic and social turmoil: turmoil in rural agriculture and turmoil as an entirely new industrial workforce was “recruited” for the rising “satanic mills” in the Midlands.

    The paper also revisits the assumptions about nature, human nature and the behavior of the poor – and their incentives and motivations – held by some of the early “classical economists” – that as among the beasts of nature, starvation was the motivating force to get and keep people in the workforce, and wages had to reflect those grim conditions and assumptions. Interference from governmental policy would generate perverse incentives.

    Block’s and Somers’ findings challenge us to revise our views – and Polanyi’s on what “Speenhamland” was about – whether it kept private sector wages low via public subsidies and was a disincentive to work. In other words, had perverse and unanticipated outcomes. As timely as ever since one can hear the echoes of grim early classical economics still today in conservative opinions about work, workers and public assistance of many types, and the low wage service and retail sectors have recently been shown to have a substantial percentage of their workers receiving food stamps and other public supports here in the US. May I remind this audience that in 2010, at a conference of the Hamilton Project in Wash. DC, when unemployment was still very, very high, I heard Peter Orszag the former budget director and then heading to a high banking position, spend his considerable intellectual resources in worrying about large number of Americans collecting disability insurance, Social Security Disability to be more precise. I thought that such focus, given the nature of the economy at the time, and the troubles before us, very strange.

    I think it is important to remember the views of nature and human nature that got economics off to its grim start, to be later followed, after the mid-19th century by the rise of Social Darwinism…and it is not too difficult to hear notes from these older currents today as “the market” is held up to be the ultimate arbiter, moral and otherwise, of what Lincoln called “the race of life.”

    With 28 million Americans earning $9.89 per hour or less, economic history has curved back to the point where a review of the facts around “Speenhamland” – and the conclusions that have been drawn from early and perhaps incorrect readings of the outcomes of its policies, are as relevant as ever. Many lives hang in the balance, here, in Europe, and around the world. History of economic thought indeed.

    • BFWR
      November 4, 2013 at 4:34 pm

      Yes, economics is inaccurate and off target because it is based on only economic “wisdom” not both economic wisdom and human wisdom.

  5. paul davidson
    November 4, 2013 at 3:57 pm

    interestingly , no one seems to mention going to the original Keynes’s General Theory [ not Paul Samuelson’s Old neoclassical synthesis Keynesianism or Krugman and Stiglitz’s New Keynesianism] to study the effect of financial markets on the economy. Yet Post Keynesian economics does exactly that!!

    But I do not see any economics professors [including the heterodox economists who subscribe to Real World Economics and who complain about mainstream economics], trying to support the use of Post KeynesIan textbooks such as

    This is a textbook that teaches students why financial markets can not be efficient, why liquidity is a double edge sword, why when countries like Germany and China run persistent trade surpluses they depress the global economy, and what are the Keynes plan policies to solve these problems of a capitalist economy that uses the institution of money contracts to organize all market production and exchange transactions..

    Try it you might even like it!!

    • Lyonwiss
      November 4, 2013 at 7:51 pm

      Paul, The way I see Krugman use ISLM, I get the impression that he is only Keynesian within the tradition of the neoclassical synthesis. Is this correct in your view?

    • davetaylor1
      November 4, 2013 at 7:58 pm

      Paul, looking up Post Keynesian Economics on Wiki trying to resolve an ambiguity in your first para here (whether PK goes exactly to Keynes’s General Theory or to study the effect of financial markets), I found a link to http://en.wikipedia.org/wiki/Monetary_circuit_theory which astonished me. So Steve Keen’s into this, and monetary circulation is so obvious to me that I’ve always taken it for granted; but it is not indexed in the General Theory (except via Locke’s allowing for velocity in estimating quantity), and even Adam Smith saw it (the Ponzi scheme we have now) as an abberation. May I ask, therefore, what (if any) role does circulation have in your textbooks? Here you refer only to transactions.

      Other bloggers may like to reflect on the fact that the few references in the Wiki article on monetary circulation (Steve Keen apart), are to continental economists; even they were kick-started by an “amateur”. No wonder Anglo-American economists cannot see how economies work, nor understand up-to-date explanations of them when offered. It seems even Keen is into quantitative maths rather than dynamic logic, i.e. differential equations rather than circuit topology and the conveyance of (not necessarily true) messages by the circulation or withholding of money. I will now, however, read him with renewed interest.

  6. November 11, 2013 at 10:16 am

    Economics will never be a science until it deals honestly with certain basic facts and assumptions:
    1. What is the economy for? The way economists today describe it, it is value-free, that is, devoid of concern for human beings, just for price and demand (actually effective demand, since that’s all that counts, in Economics) models.
    2. What are the factors of production? Labor, Capital and…wait for it… Land. Without the last one, it’s like talking about physics without heat or gravity. And no, Land is not a form of Capital, as it has been wrongly conflated with for over 100 years; it’s almost the opposite.
    3. What is money and who should be allowed to create it? Is a private monopoly on money-creation the best model? What about a Public Option for money, aka Sovereign Money, or debt/interest-free money?
    4. Following up on #3, who should be allowed to created credit? Just the private sector, or should there be a Public Option for credit in the form of Public Banks too?
    5. How much money is actually available? This basic accounting fact is not as straightforward as it seems. There are 10s of trillions in government assets (described in the CAFRs), yet governments say they are “broke.”
    6. What are the true costs of “externalities,” conveniently ignored by economists, but not by the planet? Who pays the cost of these?

    This is just the beginning. As Keynes noted, mathematical models based on nothing add up to nothing.

  7. chdwr
    November 12, 2013 at 3:01 am

    The difficult thing about change is mostly just the decision to actually change itself. This is especially true when the change that needs to be made is one that simultaneously trans forms the entire discipline/body of thought….and also leaves many if not most of the structures/basics of that discipline/body of thought virtually intact. So it would be if a change in the consumer financial paradigm of loan only were complemented by the addition of a policy of individual monetary grace, the free gift. This simple and singular change would utterly transform economics and economic theory. It would also leave profit, free enterprise, private property etc. completely unchanged. And actually, incorporating individual monetary grace in a world of abundance made imminently possible/necessary due to the acceleration of technological innovation….would evolve and so insure the the stability and even the survival….of profit making economic systems. After all…if a profit making system not only now cannot rationally create enough jobs/individual incomes for the system to function properly, but with the acceleration of innovation/efficiency will only make the system less able to be balanced, then without evolution it is inevitable that such a system will devolve into either a socialist or a fascist work state.

    Transformative ideas….are transformative. Let us have them.

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