I enjoyed Simon Wren Lewis’ excellent post on this on MainlyMacro. A few points by way of a post-script.
1. Simon comes close to giving the impression that the only conclusion you can reach from ‘mainstream’ textbook models is that ‘austerity’ was a public policy disaster. I don’t agree. At the time the Coalition took over, there was a genuine risk of us being dubbed ‘like Greece’. Recapping briefly [more here]. Although we can print our own currency, and, if we chose to, use that printing to finance budget deficits instead of defaulting, I don’t consider that much of an alternative. It would be hard to control, damage monetary and fiscal policy for at least a generation (perhaps, like in Germany leading to overly restrictive institutions and attitudes about these policies in the future), and would expropriate plenty. As the crisis wore on, it became clearer that we were unlikely to be dubbed ‘like Greece’. But at the same time, inflation was high and stable, which, using the same mainstream models that Simon uses, can be interpreted as telling you that there is no weakness in output that it is appropriate for monetary or conventional demand-boosting fiscal policy to stimulate. On this view, chronically weak output has some other cause – likely the sclerosis in the financial system. So, to recap, I think these same mainstream models do make a case for fiscal policy roughly along the lines of what we saw. [Of course, that doesn’t make them worse models, simply because it happens they can be used to explain an unpopular policy].
2. One of the complaints by the campaign for a new curriculum is for a shift in emphasis away from ‘neoliberal’ market economics. It is fair enough to take the position that more intervention in markets would be the thing to stop a crisis of this sort repeating itself (though there are plenty who would disagree). Perhaps even the subversion of the entire market system. But it seems to me that such an analysis has to proceed first by studying the system as it was, an imperfectly functioning market system. Those who go on to do graduate studies learn about the ‘social planner’s problem, and the circumstances under which the solution to this problem does or does not get reproduced by markets. I don’t know if this features in any undergraduate programs. It didn’t in mine, but that might be because that was too long ago. This intertwining of the analysis of the social planner and the competitive market equilibrium expresses the unity in a formal way between the thing the curriculum critics want to subvert and what they want to replace it with.
3. What is most galling about the whole debate is the deluge of ‘expert’ opinion from commentators and writers loosely connected with the economics and policy profession, but who are not practising economists. Not either responsible for implementing policies, nor in any recent period, or perhaps ever, producing research at the frontier, or, seemingly, not even reading it. (Actually, if you aren’t producing it, it’s hard to read it, as most is not very user-friendly). I read a lot of popular physics books, and have a tendency to follow tweet or other internet links on physics (greatly detrimental to my own productivity). But I wouldn’t dream to pronounce on how physics funding should be reformed, or how the physics curriculum should be changed. But this is exactly what economics journalists and other commentators are doing. Economics has a flavour of common sense about it. It’s about buying and selling isn’t it? Demand and supply? I know that, because I want stuff, and people give it to me. The price of fish? I’m an expert because I buy it all the time. They feel like they already are economists and that their daily life tells them all there is to know about it. And when they hear whiffs (for example from Paul Krugman) that it’s not like that sometimes, they conclude quickly that it should be. One retort might be: but why do I have to read all that stuff ? It’s exactly that ugly tricky mathsy stuff about markets that has gotten us into this mess in the first place isn’t it? I don’t believe it is, actually, but, even if you are more sceptical, you can’t judge what has to be thrown away if you have never grasped what it has to contribute.
4. Simon comes close to making the comment that most economists did not make the mistake of failing to forecast the crisis. From where I stood, it seemed that most people did make this mistake. And many of those that did not were forecasting the same crisis for most of their lives, over and over, for reasons that often were internally inconsistent, garbled, and seemed to reveal that they hadn’t absorbed any recent economic thinking. [Some of those populating the senior ranks of the BIS I would put in this category]. So I think most have undergone a re-evaluation of their position on what questions are really solved and what are open. Caballero has a paper in which he refers to a ‘pretence of knowledge syndrome‘, which captures the problem. There were long strands of thought on proper monetary and financial economics in macro, but these were minority activities. Not any more. Everyone is at it now. And citations of those who got in early (Gertler, Bernanke, Kiyotaki, Moore, Williamson, Wright, Lagos, Gilchrist, Carlstrom, Fuerst) have gone through the roof.
5. To re-iterate Simon’s point about forecasting not being a good way to judge economics. Read Nate Silver’s book. Some things may be inherently unforecastable. At risk of irking the anti-economics reader, we know that in theory there are inherently unforecastable things, so it shouldn’t surprise us to find them in the real world!