Monday, July 11, 2011

Brad DeLong on the Crumbling of University Economics

A friend from Capitol Hill sends a long a link to a Brad Delong column.  In the column, DeLong, a Berkeley professor and former Assistant Treasury Secretary,  writes about the aftermath of the Great Recession and academia:
I was shocked by how large a panic was produced by what seemed to me – and still does – relatively small losses (in terms of the size of the global economy) in subprime mortgages; by the weakness of risk controls at the major highly-leveraged banks; by how deep the decline in demand was; by how ineffective the market’s equilibrium-restoring forces have been at rebalancing labor-market supply and demand; and by how much core-country governments have been able to borrow to support demand without triggering any run-up in interest rates.

It is the scale of the catastrophe that astonishes me. But what astonishes me even more is the apparent failure of academic economics to take steps to prepare itself for the future. “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.
First, it should be noted that the Great Recession was not caused by the implosion of the subprime market, that was a corollary factor developing in the economy. It was not the key factor. The key factor was the dramatic decline in money supply growth, which if you were an Austrian economist, you would have spotted. And it  would have caused you to warn of the intensifying crisis. As I did, in real time, here, here, here, here, here, here, here and here.

DeLong makes a good point in that changes should be made in hiring in academia, that efficient market theorists have been blown out of the water as indeed the markets themselves were blown up, and, though I think Keynesians and monetarists are wrong, I have no objections to adding them to universities, but where is the demand for more Austrian economists, who saw the crisis coming and warned about it?

DeLong makes some very good points about what may happen to economics in academia, if academia doesn't stop playing with imaginary equations that have nothing to do with the economy:

Perhaps academic economics departments will lose mindshare and influence to others – from business schools and public-policy programs to political science, psychology, and sociology departments. As university chancellors and students demand relevance and utility, perhaps these colleagues will take over teaching how the economy works and leave academic economists in a rump discipline that merely teaches the theory of logical choice.

Or perhaps economics will remain a discipline that forgets most of what it once knew and allows itself to be continually distracted, confused, and in denial. If that were that to happen, we would all be worse off.
I couldn't agree more with the general warning DeLong is giving here. But DeLong is wrong about economics losing mindshare to business schools, public policy programs etc. It's not the location of thinking, but where the correct thinking is being done that will attract thinkers and followers.

 If government kept academia refuses to bring on board economists that discuss economic theory that accurately warns and describes what is going on in the economy, then alternative institutions, such as the Mises Institute, will fill the gap.

There is great economic theory out there, developed by such economists as Carl Menger, Eugene Von Bohm-Bawerk, Ludwig von Mises, Friedrich Hayek, Murray Rothbard and many more. If, as DeLong correctly identifies, academia chooses to mostly live in a world of imaginary equilibrium, confusion and denial, then correct theory will find another mode of distribution of its ideas. People are attracted to reason and truth, even when official channels do not sanction such reason and truth. It is the only way to explain the success of the Mises Institute, which has no government funding and no funding from corporate elitists.

Delong is correct in seeing the crumbling of university economics, but there is more going on, a replacement, thanks to the internet, and a stable of economists who are unwilling to give up principle for academic positions of crumbling prestige, is developing that will get the truth out regardless of what insane politics are being played, with rare exceptions, in most of establishment academia.

Long live truth teachers and seekers!


  1. I don't spend as much time following academic economists as Brad DeLong and his academic economist colleagues, but is he really saying that the field of academic economics is suffering from a dearth of Keynesian monetarists and an over-abundance of business cycle theorists?

    I have a hard time squaring this notion with what I have seen published by academic economists, but then again maybe I've not studied enough of that cognitive bias stuff he mentions.

  2. Imagine Brad DeLong, a medical researcher observing a geriatric car accident trauma victim being wheeled in to the ER. The patient is bleeding profusely from multiple open wounds and various organs are hanging out of his body amidst cracked and crushed bones.

    The lead physician, ignoring the wounds and internal injuries, shooes away the surgeons, calls in a couple incompetent nurses who recently graduated from a local govt-supported training school and starts stitching the old man up. Then, he calls in the janitor who begins furiously trying to soak up the bloodstains with a used, dirty mophead.

    Declaring the patient "healed" now that he's sewn up and all exterior visible signs of injury (aside from numerous recently stitched, scarred areas) are gone, he allows DeLong to enter the room and begin running tests on the poor guy in order to collect statistics.

    DeLong proceeds to hook the man up to a treadmill and asks him to run as long as he can. Barely conscious, the man begins stumbling down the treadmill, his stitches reopening one by one. He eventually bleeds out, topples over from exhaustion and dies right there in front of DeLong.

    DeLong looks at his charts of statistics he has just collected and is surprised and amazed that the man was not able to make a full recovery. He concludes that what is not needed is more surgeons but more physicians and incompetent nurse graduates, as well as more researchers like him.

    Soon, another hapless accident victim stumbles into the ward...

  3. Delong is an idiot - just like all the other social scientist economists. They should all be fired or put out to pastrure.

  4. I honestly mean no insult when I say that I view academic economics view the larger prism of social science.

    We have built a primarily government subsidized and controlled university system supposedly to both make education more affordable and to provide an Ivory tower of truth unswayed by moneyed interest.

    I submit we were horribly wrong.

    What we got was out of control education costs and hundreds of billions of 'research' that is so shrouded that the whole endeavor brings to mind a reclusive 17th century monastery.

    From this perspective, no one, including Mr DeLong has any idea what 'we need,' since the market has no say in demand, even while some of these priests actually hold sway over some of our most controlling institutions.

  5. One could say that this is a triumph (that is obviously missed by Mr. DeLong) of non-violence structure in society (free market) vs. violent structure (government anything/everything).

    I might have a poli-sci paper for next fall...

  6. @Brian,
    Neo-classical synthesis Keynesianism (Hicks, Samuelson) and Monetarism (Friedman) went out of fashion in the 1970s and early 1980s. Milton Friedman's ideas were effectively discarded a few years after being tried in the early 1980s.

    Only in the inner core of central banks one could find some macro-economists still working in those fields. The economic fashion since the 1980s was Chicago School, Efficient Market Hypothesis and Dynamic Stochastic General Equilibrium. This all spiced up with some Game Theory for application areas like Industrial Organisation, Auction Theory etc. On the macro-economic fringe one had New Keynesians (e.g. Paul Krugman, Greg Mankiw, Ken Rogoff) and the Law and Economics (Chicago) field (e.g. Richard Posner).

    This has been a problem for all Economic Historians (e.g. Kindleberger), Post-Keynesians (Minksy, Michael Hudson), (New) Institutional Economists and Evolutionary (Neo-Schumpetarian) Economists and Austrian Economists.
    Also people from the Santa Fé School (Complexity Economics) were forced to publish their mathematical economic modelling work in peer reviewed Mathematics and Physics Journals!

    The point is the third section's set of schools (except for the modellers of Santa Fé) tend to emphasise expressing economics in text instead of math, and operate a conception of an economy where disequilibrium has to be presupposed and nearly all economic events are not due to an "outside, unexpected shock" or technology doesn't come unto us like manna from heaven, laws and regulations are not political sideshows but products of clashing economic interests.

    Heterodox schools consider a crash an intrinsic (endogenous) generated event, mostly due to the wrong designs in institutions (e.g. the role of central banks and their relation to banks in todays economy and regulation vs the role of markets).

    Aside from these you do have some Behavioral Finance and Behavioral Economics professors. Not completely clear how they tend to look at equilibrium, but most seem to be quite heterodox.

    Where Brad deLong expresses his pity that Economics departments at the major Ivy League schools haven't been reorganised, most people from Heterodox schools, who were far better aware of what was going on as they have an endogenous conception of economic shocks, are (a slightly bit less) surprised, that all neo-classicals still get most of the airplay and are running around and behave as it doesn't matter they have completely missed the major economic catastrophe in nearly a century.

  7. There are very few Austrian Economists in universities because Austrians actually have jobs in the PRIVATE SECTOR!

    Those who can't "do" teach.

  8. I feel sorry for Delong, he seams to have been taken for a ride here. The purpose of academic economics is to support left of center politics. There are answers to this crisis, it's just that they are firmly reactionary. No mainstream department will ever hire professors who will tell the truth, that we basically have to go 100 years back in policy.