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!