But 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.I don't know how any serious student of economic behaviour could waste his time in "modern" economics courses. They are irrelevant. They teach ideologically "pure" claptrap that has no utility in the real world. These courses are great if you wish to aspire to a position in a "think tank" for some right wing billionaire, but if you want to help shape the future and help the world move forward, you wouldn't waste your time of what comes out of the Chicago school or any of the other "modern" economics faculties. That is a simple, sad fact.
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. 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.
Perhaps I am missing what is really going on. Perhaps economics departments are reorienting themselves after the Great Recession in a way similar to how they reoriented themselves in a monetarist direction after the inflation of the 1970’s. But if I am missing some big change that is taking place, I would like somebody to show it to me.
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.
The "model making" of modern economics strikes me as on a par with scholasticism where academics debated the number of teeth in a horses mouth but nobody could be bothered to go out on the street and actually count them. The math is elegant but irrelevant. There is no homo economicus. The real world is filled with flesh-and-blood economic actors with incomplete knowledge, time pressures, and faulty cognitive equipment. That's not in the math currently in use.
DeLong hopes that economics will reform iself, but I'm much more pessimistic.