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Paul Krugman: In Economics, Old Is New Again

Paul Krugman: We don’t seem to need different economics as much as we need different economists.

Mike Konczal at The Washington Post recently made a very good point about how we teach economics. He suggests that we should return to the way the economist Paul Samuelson did it in 1948, when he wrote the first version of his famous textbook – macroeconomics first, then micro. This, Mr. Konczal explains, would give students a better perspective on reality, even though all the same material would eventually be covered.

I would add that the motives behind Mr. Samuelson’s ordering apply just as well today as they did then. He was writing when the memory of the Great Depression was still fresh; students wanted to know how such things could happen. How did he get them to take that stuff about the perfection of markets seriously after all that had just happened? By first teaching them that monetary and fiscal policy could be used to ensure full employment.

Six years into the Great Recession and the not-so-great recovery, all this seems new again. But there are some serious problems with Mr. Konczal’s solution – some of what Mr. Samuelson did in 1948 can’t be replicated now. What Mr. Samuelson brought to economics was actually a double dose of innovation – Keynesian macroeconomics plus a new orientation toward mathematical models. At the time these went hand in hand, and were mutually reinforcing: the apparent success of Keynesian macro, which was model-oriented, vanquished the institutionalists.

Today, the economists most deeply committed to viewing the world through a haze of equations also tend to be deeply hostile to any kind of macroeconomics that can make sense of the recent crisis. Also, back then Keynes was new and innovative. Today, you have generations of economists brought up in the belief that Keynesian macro is wrong – they don’t know what’s in it, actually, but that’s what they were taught.

Finally, if microeconomics is to be justified with the claim that government policy will ensure more or less full employment, what, exactly, in today’s world would inspire you to believe that? So Mr. Konczal is right about what we should be doing. But it’s not gonna happen.

The Trouble With Economics Is Economists

That’s in large part what Simon Wren-Lewis argued in a recent online post defending mainstream economics. And I largely agree. It is deeply unfair to blame textbook economics either for the crisis or for the poor response to the crisis.

The mania for financial deregulation, for example, was not a product of standard economic analysis – in fact, it flew in the face of the canonical model of banking crises, which suggested both a crucial role for government guarantees to prevent self-fulfilling panics and the need for regulation to control the moral hazard such guarantees would create.

It’s true that few economists tracked the rise of shadow banking that bypassed the traditional safeguards – but that was a problem of vigilance, not bad theory. Efficient markets theory arguably deserves more blame for the failure of too many economists to recognize the housing bubble, but textbook economics always presented the theory as a baseline, not a revealed truth.

As for the crisis response, the remarkable thing has been the determination of policy makers to do the opposite of what textbook macroeconomics said they should have been doing. Slashing spending when interest rates are zero, jumping at any excuse to raise rates – these policies aren’t about applying orthodox economics.

In fact, the amazing thing has been watching the proliferation of newly invented models to justify our doing the opposite of what Economics 101 says. The problem, of course, is that this wasn’t just a case of ignorant or bull-headed political appointees ignoring economic wisdom: Many prestigious economists were all too eager to turn their backs on standard macroeconomics, even when it was working very well, because of their political leanings. And that, I think, says that there is something wrong with the structure of the economics profession. We don’t seem to need different economics as much as we need different economists.