Brad DeLong [ht: cw]—he who grasps “reality with both hands”—now counts himself among those economists who, in the run-up to the current crises of capitalism, had “forgotten a fair amount that is relevant, and. . .been distracted by an enormous amount” that is not.
Apparently, what DeLong didn’t know is that reality would bite back.
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.
That puts him in good company with the rest of mainstream economists. For the most part, they still don’t get it. But DeLong, to give him credit, does fear for the future of the discipline.
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.
That’s it? That’s the best he can come up with? Admittedly, most of the people he’s now willing to let into the discipline have been at or outside the margins of mainstream departments of economics. But what about all the other economists who, since at least the middle of the nineteenth century, have contributed to our understanding of the uneven dynamics of capitalism—of capitalist crises, conspicuous consumption, uncertainty, financial fragility, globalization, the history of capitalism, and the like? I’m thinking of Marx, of course, but also Veblen, Hilferding, Mitchell, Kalecki, Robinson, Polanyi, Galbraith, Steindl, Baran, Sweezy, Clower, Leijonhufvud, and many others. They wouldn’t have been astonished by the scale of the catastrophe of the past three years nor were the people today who have read them and who draw from their work.
Once bitten, twice shy. That’s about as much reality it seems DeLong can take.
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