Two extraordinary things happened to the economics profession in the last 20 years. Economics became the most popular course at many universities and the financial crisis seriously damaged the field’s credibility.News flash: there have been episodes of secular stagnation, capitalist crises of overproduction, and speculative bubbles before. Without awareness of that past, and knowledge of the controversies over the years, the Keynesian Cross and the Hicks-Hansen synthesis and rational expectations and dynamic stochastic general equilibrium are simply devices for torturing people without the visual-spatial strengths to follow them.
No wonder there’s a major rethink underway on how economics is taught. But the traditional economics taught to undergraduates held up better than many people realize. In order to help today’s students understand the new economic order, we don’t need to throw out existing models. Instead we need to teach more economic history. One of the best parts of my economics education was the two years of economic history I took as an undergraduate. Those courses still influence how I understand the evolution of markets. Most important, they gave me a long-term perspective and awareness that understanding the economy requires both a solid intellectual framework and an openness to new ideas.
Economics offers a series of parables to help us understand how the economy works. The parables are abstractions that make many simplifying assumptions because the world is too complicated to capture in a simple model. Economists may argue about which assumptions are appropriate or what the best framework is to describe a problem, but this does not mean any one approach is totally wrong. Often it’s not that one model is wrong, it is just applied to the wrong problem.Without knowledge of exchange, arbitrage, indifference, and opportunity cost, it's even possible to go wrong.
For instance, most undergraduates are introduced to Keynesian ideas through the IS/LM model. The model describes a snap-shot of an economy in a recession. But it is less useful to understand how an economy develops over the long term or how risk and uncertainty matter. It’s a great model to answer some questions, but terrible for others. But it is not always obvious, even to top economists, when to use what model. That is where the divisions arise.
Post-Crash Economics appear to have done so.
Schrager goes on to characterise economics as “a series of parables to help us understand how the economy works.” Firstly, this is an incredibly weak characterisation of economic theory: are we supposed to be enthusiastic that what we’re learning equates to little more than mathematical ‘parables’? Does this not create the type of ‘anything goes’ situation that the scientific method is supposed to prevent? We actually believe and hope that economics as a field is better than this.It is. The mathematics provides precision to the parables, generating testable implications. The quickest way to call out a parable is to identify an unexploited gain from trade or a dominant strategy not used or wishful thinking. That does not preclude considering macroeconomic models other than the Keynesian Cross and its offspring.