DeLong: Economics in Crisis

Brad DeLong on what is (and should be ) taught in economics programs:

Economics in Crisis, by J. Bradford DeLong, Commentary, Project Syndicate: The most interesting moment at a recent conference held in Bretton Woods, New Hampshire ... came when Financial Times columnist Martin Wolf quizzed ... Larry Summers... "[Doesn’t] what has happened in the past few years,” Wolf asked, “simply suggest that [academic] economists did not understand what was going on?”

Here is the most interesting part of Summers’ long answer: “There is a lot in [Walter] Bagehot that is about the crisis we just went through. There is more in [Hyman] Minsky, and perhaps more still in [Charles] Kindleberger.” That may sound obscure to a non-economist, but it was a devastating indictment. ... Summers then enlarged his answer to include living economists: “Eichengreen, Akerlof, Shiller, many, many others.” ...

For Summers, the problem is that there is so much that is “distracting, confusing, and problem-denying in…the first year course in most PhD programs.” As a result, even though “economics knows a fair amount,” it “has forgotten a fair amount that is relevant, and it has been distracted by an enormous amount.”

I think that Summers’ judgments are fair and correct. ... “We need to change our hiring patterns,” I expected to hear economics departments around the world say in the wake of the crisis.

The fact is that we need fewer efficient-markets theorists and more people who work on microstructure, limits to arbitrage, and cognitive biases. We need fewer equilibrium business-cycle theorists and more old-fashioned Keynesians and monetarists. We need more monetary historians and historians of economic thought and fewer model-builders. We need more Eichengreens, Shillers, Akerlofs, Reinharts, and Rogoffs – not to mention a Kindleberger, Minsky, or Bagehot.

Yet that is not what economics departments are saying nowadays. ...

[My response to Summers' talk was a post called Re-Kindleberger.]

Update: Roman Frydman emails:

I much appreciated and liked Brad Delong’s piece about Economics in Crisis and strongly agree with his appeal for the profession to resume treating history seriously. We clearly need the same discussion about the foundations of macro and finance theory. May I suggest the introduction to my recent book with Michael Goldberg, Beyond Mechanical Markets (Princeton University Press, 2011: http://www.econ.nyu.edu/user/frydmanr/books.htm for an argument that we badly need to rethink these foundations. The intro can be found at: http://www.econ.nyu.edu/user/frydmanr/Introduction.pdf.

I hope that this will help us focus on perhaps the most controversial aspect on what went wrong with economics and what we can do it about it.