Thomas Palley reminded me of a post I had planned to write on how mainstream economists are attempting to raise the drawbridge. And not just those on the conservative wing.
Liberal mainstream economists, such as Paul Krugman and Simon Wren-Lewis, also want to pull up the drawbridge over the moat and protect the castle of mainstream economics.
According to Krugman, heterodox economists are working with the wrong storyline:
Here’s the story they tell themselves: the failure of economists to predict the global economic crisis (and the poor policy response thereto), plus the surge in inequality, show the failure of conventional economic analysis. So it’s time to dethrone the whole thing — basically, the whole edifice dating back to Samuelson’s 1948 textbook — and give other schools of thought equal time.
Unfortunately for the heterodox (and arguably for the world), this gets the story of what actually happened almost completely wrong.
It is true that economists failed to predict the 2008 crisis (and so did almost everyone). But this wasn’t because economics lacked the tools to understand such things — we’ve long had a pretty good understanding of the logic of banking crises. What happened instead was a failure of real-world observation — failure to notice the rising importance of shadow banking. Economists looked at conventional banks, saw that they were protected by deposit insurance, and failed to realize that more than half the de facto banking system didn’t look like that anymore. This was a case of myopia — but it wasn’t a deep conceptual failure. And as soon as people did recognize the importance of shadow banking, the whole thing instantly fell into place: we were looking at a classic financial crisis.
Wren-Lewis offers much the same interpretation:
Let me get personal. Over the last few years, I have been in charge of a macroeconomics course at Oxford. For better or worse, if past evidence is anything to go by, one or two of those taking this course will end up helping run the economy. There is so much important mainstream theory that needs to be covered in that course, because it is theory that is essential to trying to understand what is currently going on in the world. At its core is Keynesian theory, which has proved its worth since the recession. (Interest rates didn’t rise because of all that government debt, inflation didn’t take off because of all the money that has been created, and austerity did delay the recovery.) It would be a great step backwards if I had to stop teaching part of that, and instead teach Austrian or Marxian views about the macroeconomy, or still worse spend time worrying about what Keynes really meant. I would much rather a future Chancellor, Prime Minister, or advisor to either, remembered from their undergraduate degree that mainstream theory said austerity was contractionary, rather than ‘well it all depends on whether you are a Keynesian or an Austrian’.
In both cases, the argument is that everything we need to analyze and come up with effective policies to get out of the Second Great Depression is contained within mainstream economics. And we don’t really need to do anything fundamental to change the way we teach and do economics. Instead of attempting to learn something about heterodox economic theory and making an alliance with heterodox economists—perhaps even creating new drawbridges into the mainstream castle or blowing up the walls of the castle itself—liberal mainstream economists like Krugman and Wren-Lewis have decided to stick with the hydraulic Keynesian models that can be found in the corners of the castle of mainstream economics.
Don’t get me wrong: I’m not against teaching mainstream economics. I do it all the time, precisely because it’s the hegemonic economic discourse and students need to know how it works (even, and perhaps especially, when it doesn’t work). But that doesn’t mean it’s the only sort of economics students or policymakers should be exposed to. There are a lot of other ideas, which heterodox economists have been developing and using for a long time, that can make sense of and get us out of the current mess we’re in.
But students won’t even know such ideas exist if their professors keep them trapped within the walls of the existing castle.