The Econ Bubble Bursts?

At the Atlantic's new Brave New Deal blog, UC Davis' Gregory Clark considers "how the crash is reshaping economics." To paraphrase Keynes, he seems to think economists may become humbled, incompetent people:

[T]he shock to the world of finance has been echoed by a shock to the world of academic economics that is just as profound.

In the long post WWII boom, as free market ideology triumphed, economists have won for themselves a privileged place inside academia.

First there is the cash.... most high ranked economics departments have professors earning in excess of $300,000. Not much by the pornographic standards of finance, but a fat paycheck compared to your average English or Physics professor.

It is not just the stars. Journeyman assistant professors in economics routinely come in at $100,000 or more. And, unlike the hard sciences, they do this fresh from their PhDs, without a publication to their name and without years of low pay as post-docs....

Why did academic economics generate so much prestige? Sure, modern economics is technically demanding. But so, for example, are theoretical physics and archeology, and physics and archeology professors are (relatively) dirt poor.

The technical demands helped limit the supply of economists. But what drove demand was the unquenchable thirst for economists by banks, government agencies, and business schools - the Feds, the Treasury, the IMF, the World Bank, the ECB. Economics had powerful insights to offer the world, insights worth a lot of treasure. Economics was powerful voodoo. Any major university or research institute wanted to arm itself with this potency.

The current recession has revealed the weaknesses in the structures of modern capitalism. But it also revealed as useless the mathematical contortions of academic economics. There is no totemic power. This for two reasons:

(1) Almost no-one predicted the world wide downtown. Academic economists were confident that episodes like the Great Depression had been confined to the dust bins of history. There was indeed much recent debate about the sources of "The Great Moderation" in modern economies, the declining significance of business cycles...

(2) The debate about the bank bailout, and the stimulus package, has all revolved around issues that are entirely at the level of Econ 1. What is the multiplier from government spending? Does government spending crowd out private spending? How quickly can you increase government spending? If you got a A in college in Econ 1 you are an expert in this debate: fully an equal of Summers and Geithner.

The bailout debate has also been conducted in terms that would be quite familiar to economists in the 1920s and 1930s. There has essentially been no advance in our knowledge in 80 years.

Well, 73 years... but it is striking how much of the discussion of our current troubles revolves around the textbook Keynesian framework we teach our principles students. While that raises the question of what, exactly, we've been doing since the General Theory (and why anyone is paying us to do it), I'm not convinced its entirely a bad thing for us economists. Introductory economics is, to a large extent, our public face - far more people take intro economics than read academic journals. While Clark may be right that this crisis provokes doubt about the value of some of our research, outside the profession we are not judged by the contents of Econometrica.

I'm actually somewhat heartened that what we teach in macro principles seems more relevant than ever, and the crisis is increasing interest in the subject (one might say we're naturally hedged). I'd like to think many of our past students are coming belatedly to a realization that they learned some very helpful tools for understanding the world in Econ 1 (Econ 202 here - apparently we have a higher rate of course-number inflation than Davis). While it is too late for them to revise their course evaluations, former students certainly could dash off a note to the Dean describing their increased appreciation of their Econ professors...

So, I'm not as gloomy as Clark about the demand for our services, but I do think some self-criticism is in order. Another striking feature of the crisis has been that we find ourselves talking about Keynes more than ever, and names like Irving Fisher and Frank Knight are popping up with increasing frequency. One salutary outcome of this bout of navel-gazing would be more attention to the history of economic thought, which I have urged previously.

But who am I to say? Apparently I haven't even attained "Journeyman" status yet...