If I was devising a panics and bubbles course…

In a recent FT article, Claire Jones reported on the decision by Manchester University to reject a proposal for a course on ‘Panics and bubbles’, the initiative of the Manchester students’ pressure group ‘Post Crash Economics‘ and sympathetic academics.

On the limited evidence of the course reading list, I thought that the course missed a great deal.  I also thought that Claire’s article was a bit one-sided, implying that the decision to ditch the course illustrated the continued, ostrich-like stupidity of the economics profession.

Claire’s article invoked two wise spirits in favour of the Manchester course.  One was Wendy Carlin, who has led an Economic and Social Research Council-funded effort to overhaul the teaching of macroeconomics.  But Wendy’s (excellent effort) doesn’t urge binning the macroeconomics canon in favour of Austrian or informal analysis [as the PCE lot seem to advocate].  It’s centrepiece is to try to get the New Keynesian model used by central banks to be the focus of the undergraduate macro canon, rather than the older IS/LM model, harder to relate to contemporary debates (without the obduracy and genius of Paul Krugman).  This is decidedly mainstream (and welcome).

The other spirit invoked by Claire was Andy Haldane, outgoing Executive Director for financial stability at the Bank of England.  Claire quotes Andy as saying, in support of the PCE’s manifesto:  “The economy in crisis behaved more like slime descending a warehouse wall than Newton’s pendulum, its motion more organic than harmonic.”  Two points.  Take a look at Andy’s cv of papers and speeches, and you find them peppered with formal, mathematical, decidedly mainstream work, or references to them [more on this later].  Second, this metaphor from Andy could rather be taken to be a call to get more mathematical (and therefore ‘mainstream’), not less.  The inference is that the crisis is like a fluid dynamics problem [comment stolen from friend who has to remain nameless].  The study of fluid dynamics  is built from heavy-duty applied mathematics [more so than frontier economics, perhaps].  Students wanting to draw the analogy between the financial crash and organic processes had better stop chatting about Austrian economics and start crunching exotic nonlinear ordinary differential equations [or rather, starting the slow and painful process of learning how to do it].  Even if heterodoxy is to be the new orthodoxy, students are going to need suffer the trials of dynamic mathematics.

Looking through the reading list for the PCE Manchester course, and presuming that this list sketches its scope, it seemed to miss the grand flowering of mainstream financial macro and microeconomics.  If I were teaching a course on panics and bubbles, I would try to give a guided tour of it.  For example…

– I would take them through Diamond and Dybvig’s classic model of banks runs, how redeeming deposits on a first come first served basis causes runs on even healthy banks.  And I would take them through the analyses of moral hazard in the provision of public deposit insurance to stop these runs [for example, see the references in Sargent’s LSE lecture, or indeed Andy Haldane’s speeches].

– I would discuss with them Geanakoplos’ work on how leverage and bouts of optimism creates booms and busts in asset prices.

– I would devote time to discussing rational expectations, monetary, overlapping generations models of fiat money, in which one can see that money acts like a ‘bubble’, and which serve to explain in the purest sense what a bubble can mean, of the kind recounted in the famous conference volume edited by Karaken and Wallace.

– I would try to give a taste of the work of Angelotos and co-authorsMorris and Shin and Shleifer and Vishny who have sought to model how beliefs (eg about the value of an asset, or the likelihood of a future event) can spread and become self-fulfilling.  And I would talk about the foundational work too of Roger Farmer and co-authors establishing the macroeconomics of self-fulfilling prophecies in rational expectations models;  these insights showed how pure shocks to expectations [like waking up and feeling pessimistic for no reason] can cause business cycles.

– I would give some time over to explaining the work of Hansen, Sargent, Cogley, Colacito, Ellison and other collaborators who have shown how asset prices can rise and fall as investors, doubtful of their own models of the dividends from holding an asset, revise their forecasts, and adjust their portfolios to prepare themselves for the worst.  [And, using similar techniques, how monetary policymakers may have aggravated booms and bust, weighing up the signals from competing models of the economy].

– I would make students read the literature on learning in macroeconomics, from its origins in Bray and Savin [and earlier], Marcet and Sargent, through to more recent applications by Adam and Marcet, who showed how cycles in share or house prices can be induced by learning agents revising forecasts of the value of the assets they hold.

– I would try to introduce the economics of networks;  related modern models of money whose value comes about as a way to economise on search for exchange partners, and which give one clear insight into the meaning of ‘liquidity’, (and thus into how liquidity can appear and disappear).

And having done all that, I would regret that there wasn’t time to devote a whole degree to the topic, and I would stuff the reading list with reams of papers I hadn’t even properly read myself, perhaps sentimentally hoping to entice a student to come back for more in postgraduate study.  I’d list Brunnermeir and Sannikov’s work [A survey by the former did make the reading list, as Claire Jones pointed out to me]; I’d tantalise them with the Clarendon lectures of Shin, and John Moore.  I’d offer the collected works of the Kiyotaki-Moore collaboration.  I’d retrospectively regret that I hadn’t had time to lay out standard models of macro-finance and their failures, set out in the sequence of papers by Lucas, Svensson, Mehra and Prescott, Campbell and Cochrane, Epstein and Zin, Fama, Shiller and many more, and, not knowing what to do about it, I’d slap them down in the reading list to perplex the students further.  And, in the same vein, I’d regret that I hadn’t yet set out the standard ways of including banking and finance in macro [due to Bernanke, Gertler, Gilchrist, Carlsrom, Fuerst, and others], where no bubbles and panics prevail, but one gets insight into how to formalise what finance does, and how it can amplify business cycles.  So I would shove all of those into the reading list too, wishing instead that another module could be taught on that.  And then, right before signing off and sending it out to the Faculty Committee responsible for approving the course, I’d fret that there was nothing on empirical macro.  After all, we might talk about panics and bubbles causing booms and busts, but how have people rolled up their sleeves to figure out what did cause business cycles?  And then another alarm bell would go off, worrying that students could hardly be expected to make sense of this without a proper introduction to game theory.  And then another, warning that we had not touched on the economics of financial regulation, or its political economy

I don’t really know why the proposal for the Manchester course on panics and bubbles was rejected.  But, if it were me, I would have ditched it too, in favour of a course that looked more like the above.


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41 Responses to If I was devising a panics and bubbles course…

  1. Luis Enrique says:

    Hi Tony

    I will unhelpfully suggest additions without subtractions

    Why not go half way and make room for Minsky, historical accounts like Kindleberger, and some of the many excellent histories of the recent crisis, as written by Shin, Viral Acharya, Gorton and others? After all, most undergrads will not go on to study mathematical economics in any depth beyond what their undergrad classes force on them, and would probably get a lot out of narrative accounts. People like Eichengreen (on their reading list) are excellent.

    you also don’t seem to have included much on bubbles in financial markets. There’s tons to choose from, Brunnmeier’s Palgrave dictionary entry a good place to start

    some contract theory might be helpful too – I am thinking of stories about how bankers paid bonuses on short term performance may pursue strategies that destroy the banks they work for.

    perhaps the ideal course would take the best from your list and theirs

    • Tony Yates says:

      On the contrary, this is very helpful. There’s contract theory in the Moore clarendon lectures, but always room for more! Agree on bubbles, and narrative overviews of the crises. As I replied to Claire on twitter, I suppose I think that there’s ample diversity and much more rigour in the ‘mainstream’ stuff here, to be bothered with the so-called ‘heterodox’ material. Perhaps one should include it as part of a history of thought course with a sub module in finance and macro. Anyway, reasonable people can differ on this, and I understand that my passion for the models I mentioned might blind me.

  2. Dan Davies says:

    I will suggest a load of additions and will start with a zero-based budget for theoretical papers in order to accomodate them.

    Because the trouble is that for a course on bubbles and financial markets, there’s nothing here about financial markets! I seem to remember saying five years ago that the real shame of the economics profession is not that anyone failed to predict this or that, it’s that nearly every single professor of economics had to read the Financial Times to find out what a CDO was.

    So I’d start with the basics of real estate valuation, dragging in colleagues from the land economics or surveying course. Discounted cash flow analysis and the different bases (tenant in place, open market, forced seller).

    I’ll let you have a couple of the articles on contract theory and monitoring, but I’m going to need most of that week for a guest lecturer from the law faculty to explain what covenants are and why and how they are used.

    The basics of how to read a balance sheet, and what equity is comes next, because I’m going to need everyone to understand what bank capital means – Admati and Hellwig’s book is as good as any if I’m going for the undergraduate level. There will need to be quite a bit of stuff here on how leverage works.

    Diamond and Dybvig probably needs to be in there, but alongside Bagehot and Perry Merhling’s “New Lombard Street”, plus some discussion of why it was that Greece only saw a “jog” while Northern Rock saw a proper run. Also a few chapters of Marcia Stigum’s book (presumably updated) on the short term money markets, because the kids need to understand that bank runs are mainly a wholesale, not retail phenomenon.

    I question whether any of the articles on “how asset prices can rise and fall” are worth bothering with; none of them are pretty conclusive, and nobody is predisposed to doubt that there isn’t a real phenomenon here. It’s akin to teaching entomology students a course on aerodynamics so that they really, really understand that bees can fly.

    The last couple of weeks we can get into derivatives and structured finance, but I am going to want to set aside at least a week for a detailed tutorial on all the data sources available, how to use them and what comparisons can and can’t be made. The various BIS datasets are probably an hour’s lecture on their own.

  3. Dan Davies says:

    (basically what I’m saying here is that the problem with economists’ understanding of the crisis wasn’t really one of inability to model things in the existing framework. It was that people didn’t understand that the way the system was working was building up leverage, or that leverage was bad, or how things would work when the system cracked. That’s why the Fed kept on using consumer spending as one of their intermediate targets, without really paying attention to the debt stock that was building up)

    • Tony Yates says:

      I think people understood that there was leverage, but not that it was as bad as it turned out to be, or, that, even if it was very bad, monetary policy wasn’t the right tool to do anything about it [eg Don Kohn’s speech]. I’m not sure we did understand how to model things in the existing framework (or do, really), which is why there is such a diverse and work in progress literature on it. I take your general point though which is first we need a basic applied course defining key concepts in finance. [I probably should sit that].

  4. maruku says:

    The number of MSc economics graduates I interviewed for jobs at the BoE who didn’t understand how a balance sheet worked was a regular source of alarm for me. Some of them made it to MA..

    • Abdallah says:

      @ Maruku, now that is what I call a real problem NOT what most of these comments above aimed at self-massaging of egos were doing. Without an adequate grasp of the balance sheets of the real, financial, external and fiscal sectors of the economy coupled with a good understanding of flow of funds, what you have is not an economist but a speculator!

  5. Sakir Devrim Yilmaz says:

    If I was re-devising the Bubbles module

    “If economists wished to study the horse, they wouldn’t go and look at the horses. They’d sit in their studies and say to themselves, “What would I do if I were a horse?”
    —Ely Devons”
    from Mark Buchanan, “Forecast: What Physics, Meteorology and Natural Sciences Can Teach Us About Economics”

    I devised the Bubbles module. I chose the topics and all the articles and books in the reading list. And I will have to respond to this post, because it misses the entire point on so many issues, and I believe it represents a stereotype response from the mainstream, which was given to PCES by my own faculty as well. After all, I know some macroeconomists at Manchester are planning to offer a module exactly in the lines suggested above. In fact, one does not need to say too much after your response to Luis Enrique’s post above where you say “I think that there’s ample diversity and much more rigour in the ‘mainstream’ stuff here, to be bothered with the so-called ‘heterodox’ material” but I will be “bothered” to reply to such arrogance for reasons I listed above.

    It is really easy to write on a blog and start listing an entire set of books, articles etc. one would like to cover on a certain topic without considering time and resource constraints. As I explained on several platforms before, I delivered this module between 6-8 pm on Mondays this year as a non-credit voluntary module because the department refused to let it run as an official module, so I could only hold ten 2-hour lectures on such a wide topic. It is even easier to go completely off track and claim that one can teach stochastic growth models to second and third year undergraduate students, whose mathematical capabilities do not go beyond applying the chain rule to second order polynomials…But I will not go into the details of the papers or books you listed above, since they are simply variants of mainstream macroeconomics, and are simply wrong, as admitted by the famous DSGE modeller Stephen Williamson. “The models [in economics] are all wrong. Many people have emphasized that point… That’s what makes economics different. These things are all invalid, but we work with wrong models because they are simple, and – of course – because they are useful.” (Somehow, the usefulness of these wrong theories is only visible to those who construct them).

    Instead, I would like to remind you in the beginning that I have taken my PhD in mainstream economics, simulating closed and open economy continuous time models, after which I have spent time with OLG modelling, and read tens of DSGE models, banking models, currency crisis models etc. so I am not someone you could fool with wishy-washy mathematics disguised as a “rigorous” and “scientific” approach to economics, like in those papers you listed above.

    Let me start with clarifying that as well as BEconSci students who are relatively better at maths, this is a module attended by students studying BA Econ, Politics Philosophy and Economics, Sociology, Political Economy, Political Science, so it was kept almost free of mathematics purposefully. Like most mainstream economists who do not read anything else, you seem to have the impression that mainstream economics is the only approach that uses mathematical modelling, but that is far from truth. In fact, most neoclassical economists do not even know enough mathematics to model dynamic open systems and therefore use what I’d call baby-mathematics for modelling There were many heterodox models I could have used to explain the topics included in the course outline (formal models of Minsky, Steve Keen’s dynamic models, Stock-Flow consistent Models on banking and currency unions, Kaleckian models of distribution, Agent-based models, etc), but to exclude them was a deliberate choice.

    Rather than going through the details of your mainstream list one by one, I would like to list what I would include in my own module if I was re-devising it, which I think you should include in yours as well.

    If I was re-devising this module, I would first spend the very first lecture on scientific methodology, and explain the students the difference between instrumentalism and (critical) realism, as beautifully put by Tony Lawson here, so that they can clearly identify the methodological foundations of each theory they are exposed to.

    Click to access no.10_p155.pdf

    This is especially important because when students face statements by mainstream economists
    such as Prof. Williamson quoted above, they should know how to respond.

    Further, I would make Boland’s piece on economic methodology a must read for these two lectures: http://www.sfu.ca/~boland/methodology85.PDF

    so that the students surely read this section:

    “Since the entire fabric of the academic scientific community is organized to prevent (embarrassing) disagreement from breaking out and thereby organized to make the ordinary economists’ conventionalist methodology work or seem to be true, we cannot risk allowing students to be a source of disagreement. Thus, students must be socialized as soon as possible. The primary technique of socializing them is to have a set pattern of prerequisite courses that they must take before we allow them to think on their own about any particular area. If such an organization is successful, again one can show that conventionalism today is true by construction. (Such a proof would be very popular among mathematicians and other advocates of conventionalism)”

    Then, students would not be too surprised that they are being bombarded with utter non-sense from first year onwards after being aware of all these. In fact, I would also make sure all of them also read this book review:


    especially the statements by the hypothetical “Professor B”, so that when they talk to mainstream economists, they are aware of the level of intellectual ignorance they are facing and they are well-equipped with the necessary philosophical background to argue back. After all this, the students would know that mainstream economics purposefully applies an instrumentalist approach to modelling and uses wrong models without even understanding its philosophical implications, as confessed explicitly many times by its proponents, but since these models have also proven to be extremely useless as instruments as well, they have no scientific value at all by any measure. And finally the excellent piece by Shelia Dow “Methodological Pluralism and Pluralism of Method” would also be a compulsory reading.

    Before I started teaching any macroeconomics, I would continue my lectures with an entire discussion on philosophy of science, from which it looks like you would benefit as well before you could identify studying heterodox approaches as something to “bother with”. For this purpose, I’d put Chalmer’s classical book “What is This Thing Called Science”, Popper’s “The Logic of Scientific Discovery” (1934), Kuhn’s “The Logic of Scientific Revolutions” (1964), Lakatos’s critique of Kuhn in “History of Science and Its Rational Reconstructions” (1970), and Feyerabend’s “Against Method: Outline of an Anarchistic Theory of Knowledge (1974) in my reading list. I would outline Popper’s falsificationism in detail and its relevance to Friedmanian macroeconomics first. From there, I would move on to covering Kuhn’s paradigms, and how a dominant paradigm’s initial response to an alternative would always be avoiding discussion and claiming that similar explanations can be obtained within the dominant paradigm without questioning the paradigm itself and necessitating a change, just like you are trying to do in your post. In this sense, your post is a textbook example of Kuhn’s resistance to change, and I must say that although I do not fully agree with Kuhn’s extremely relativist approach to scientific progress, his contention that researchers of the dominant paradigm might be critical towards theories within their paradigm, but they will fight tooth and nail to defend the paradigm itself is a perfect characterization of mainstream’s (and your) response. This comes as no surprise since it would be heroic to expect people who have spent their entire lives on working within a certain paradigm to accept that they might have been wrong all through this time. Therefore, change will come when old proponents of the dominant paradigm are no longer there, and young scholars, who are more open to change, accept a methodological shift. This of course requires that the anomalies within the dominant paradigm reach to such a level that the paradigm itself is totally discredited and its practitioners completely marginalized outside their own circles; a feature mainstream economics can easily claim to possess more than any other branch of science. The last line of defence in this case is always to resort to the argument “We are doing the right thing but no one understands what we are doing”, a perfect example of which can be found here: http://noahpinionblog.blogspot.co.il/2014/01/the-most-damning-critique-of-dsge.html?

    I’d also spare another lecture for physicist Mark Buchanan’s book “Forecast: What Physics, Meteorology and Natural Sciences Can Teach Us about Economics”, which likens contemporary mainstream economics to early physics theories. The book presents a brilliant critique of equilibrium thinking, rational expectations, game theory, mainstream economics’ groundless belief in market efficiency and characterizing deviations from this efficiency as “notably rare exceptions”, a critique of microfoundations and Friedman’s “positive” economics, and a brilliant presentation of complex system dynamics. In fact, the book deserves a module of its own: My favourite quote: “If economists have suffered from physics envy, it’s because they have envied a false image of physics. They ought to envy the right kind of physics—indeed, the right kind of science. Facing up to a disequilibrium world means giving up any hope for a “theory of everything.” Physicists and other scientists have learned this the hard way. Even really simple problems can easily foil our desire to give clever and elegant equilibrium solutions”

    Next, I would spend a lecture on why the whole idea of microfoundations of macroeconomics is completely pointless and atomistic micro-founded modelling has been proven to be wrong even by mainstream general equilibrium theorists during 1970s, something mainstream macro models simply ignore. For these lectures, once again, I’d also make extensive use of Prof. Buchanan’s book cited above, since it has excellent examples from physics on why a system can neither be considered as the sum of its individual elements, nor can be represented by the dynamics of those individual elements. Further, I’d use the article “The Macrofoundations of Microeconomics,” and the book “Beyond Microfoundations: Post-Walrasian Economics” by David Colander, and Steve Keen’s “Debunking Economics” as essential reading for these lectures.

    I’d also include these two excellent pieces very recently published by your fellow colleagues at Bank of England on what money is, and how banking industry creates money.

    After these two papers, the students would be well aware that they have nothing to learn from papers like Diamond, Bernanke-Gertler and all other similar papers you have listed above on bubbles, monetary policy, or self-proclaimed “modern” theories of money etc.

    There are many other non-mainstream approaches that draw from insights from psychology, behavioural economics, politics, cultural studies etc. that I would like to talk about in my lectures, but I both had serious time constraints and I wanted this module to remain as macroeconomic as possible, being well aware that even this dose of heterodoxy would be enough to be fiercely attacked and blocked. A foresight that did not take too long to come true, which you clearly support as well.

    Although you claim the opposite, in essence you know exactly why the University rejected this module. Because like you, some think they have the power to define the domain of economics, and identify what economics is and what it is not. And again exactly like you, some think they have the self-righteous intellectual authority and the capacity to “ditch” certain approaches to economics in favour of others, even though those approaches they champion have proven to be terribly wrong and explicitly serve a political agenda while pretending to be value-free by hiding behind wishy-washy mathematics. (More on that here: http://larspsyll.wordpress.com/2014/04/20/self-righteous-chicago-drivel-is-far-from-everything-you-need-to-know-about-economics/)

    But I must accept that you are not committing a big sin, because this is a standard reaction by any dominant paradigm to an alternative, as I mentioned above, so it is not only easily predictable but also turns out to be very entertaining subsequently when one looks back in time. (Just like this: http://www.science20.com/hammock_physicist/einstein_got_it_wrong_can_you_do_better-85544) It would be good to keep in mind that no paradigm, even if it may survive wrong predictions for a long time, can infinitely dominate a science while being not only a catastrophic failure in explaining what it is attempting to explain but also responsible for the misery of millions of people around the world due to what it recommends.

    And finally, Dr. Yates, let me remind you that no one from PCES would attend your module. Because you would be trying to teach them exactly what they are running away from. You may not have noticed, but the module is called “Bubbles Panics and Crashes: An Introduction to Alternative Theories of Economic Crisis”, not “Last Minute Attempts to Rescue Mainstream Economics from Its Unavoidable Demise”. The faculty, on the other hand, would love your module and instantly approve it unlike mine. And that is exactly what PCES is all about.

    You may not like what I teach, you may design your own module on the same topic and run it along mine but neither you nor anyone from my faculty have any right to prevent my module from running. I really wonder what makes you or anyone else so boldly brave to view yourself as self-proclaimed authorities on what will be taught in a university about economic crisis and what will not. Your and my own faculty’s approach to “ditch” my module (for which 240 economics students have signed a petition) in favour of a module you outlined above prove that while mainstream economists love to preach liberalism economically, they are much closer to fascism politically.

    Dr. Sakir Devrim Yilmaz
    University of Manchester

    • Tony Yates says:

      Thanks: these comments are very revealing.
      Two small points: I am not a Professor, nor a Doctor.

    • Dan Davies says:

      If economists wished to study the horse, they wouldn’t go and look at the horses.

      It’s more that if economists wrote the Haynes car maintenance manuals, they would have five chapters on the principles of combustion, six on friction, one on how to drill for oil and a concluding chapter covering the debate over whether the manual is for a Sherman tank or a Ferrari.

      • Abdallah says:

        True Davies. And if the same economists were to teach you how to drive the car, they would first give you a two-semester courses on principles of motion, petrochemical extraction, air dynamics, chaos theory and if time permits, throw in physical geography, cloud and rain formation, psychology of drugs, etc. I leave what will come in the second and third years to your imagination!

  6. Joe Earle says:

    First, thanks for engaging with our society. We have a few brief comments/questions.

    You say:

    “Students wanting to draw the analogy between the financial crash and organic processes had better stop chatting about Austrian economics and start crunching exotic nonlinear ordinary differential equations”

    We completely agree about ODEs: economics students do not learn enough dynamic mathematics, and where they do it’s in a very limited and stylised fashion. In fact, one example of a basic pedagogical starting point that uses ODEs is Richard Goodwin’s model of economic fluctuations:


    We’d love for something like this to be included!

    Nevertheless, your comment seems to imply there’s something inherently lesser about non-mathematical approaches, even though you haven’t justified this position. We aren’t wedded to Austrian economics; we just think it’s one example of an alternative theory that should be explored, whether it’s mathematical or not. (Admittedly it’s somewhat refreshing to have the ‘Austrian’ charge thrown at us – we are used to being accused of being Marxists!)

    As for mainstream models, we’ve never said we want to eschew the mainstream completely – we’re just looking for relevant theories to be taught, whichever ‘school’ they belong to. You have referenced a lot of mainstream material but have not justified why, say, Minsky or other post-Keynesian theories of crisis should not be taught. In fact you seem to be the only person in this debate (and in the comments) calling for dogmatism over pluralism.

    Also, as Sakir has pointed out, some of what you reference is not suitable for an undergraduate course.

    One final question: Sakir’s module was actually only half theory. It started by going through the history of financial crises including the Great Depression, East Asian Crisis and 2008. Would you retain this inductive approach, or just have it as a course in economic theory?

    • Tony Yates says:

      Thanks for your questions, which are good ones.

      I think mathematics is essential for characterising complex empirical phenomena adequately [probability theory, least squares…]; and I think it’s essential in order to make theories precise enough to be compared to data; and once things get beyond very simple examples, essential to make sure theories are checked for internal consistency, that all of its corrollaries are establishable, and to make sure that a statement of a theory means the same thing to many people. That’s why I think that mathematical modelling is the only way to progress. For sure there is a place for debating the sociology of economics, whether people’s methods are scientific or not, but I think this is a relatively low priority [since I don’t believe in the conspiracies your lecturer pointed to], given the extraordinary richness of the so-called mainstream.
      I think all of what I reference could be made intelligible to anyone, let alone clever undergraduates. There is the issue of time of course.
      My course would cover empirical/behavioural finance and empirical financial macro too, or at least brief assertions of what I believe the different theories do or do not get about the crisis, where they accord with and where they disagree with the data, where they are good answers, where they are question-begging.
      If ‘mainstream’ means ‘non-maths’ [this is what ‘unlearningeconomics’ suggested] then I don’t think it’s worth spending much time on. If it doesn’t mean that, then I reject that ‘mainstream’ is a very good label. THere is a cacophany of disagreeing and complementary approaches in the literature [which my list gives a flavour of] already. If your commment is specifically why not cover Minsky, then sure, read Minsky, but it is highly incomplete and imprecise, and more of a short call to do further research than an endpoint. I don’t think any of the post-Keynesian [mathematical] stuff is good enough to bother with or mounts a serious enough critique or offers a constructive enough alternative. The non-mathematical post-Keynesian stuff I have already commented on.

      Two further comments. I think it’s great that you are stimulating this debate. As Roger Farmer points out. Those who turn into the best economists were typically those who didn’t just sit back and take it from their own Professors. [A rather salutory lesson: I myself was extremely passive and lazy as a student]. I also think that you shouldn’t blame academics for stasis in the curriculum, even where that stasis is inappropriate. Incentives to focus as much of ones’ energy as one possibly can on research are extremely intense, and extra, entrepreneurial or innovative activity in teaching is not rewarded at all. [The only thing that will determine whether I get a good raise or not is how many research papers I publish. Nothing else will make a jot of difference, provided I don’t take bribes from students, abuse them, or turn up drunk to lectures].

      • Joe Earle says:

        Thanks a lot for the response – we will save further responses for a blog post that will more generally address recent critiques of our society’s work (e.g. the module and the report) and we’ll let you know when it’s published.

        However, we do want to say that we think it is unfair to portray our lecturer as simply a conspiracy theorist. Many believe that there exists a dominant research agenda within economics and that this continues to define what is and isn’t economics. This is even admitted to by prominent economics such as Simon Wren-Lewis at the University of Oxford (http://mainlymacro.blogspot.co.uk/2014/04/when-economics-students-rebel.html). Also, as a society we have researched the impact of REA and now REF for our report and our University have told us that they can’t hire non-mainstream economists in the economics department. So other forms of economics are being marginalised and not necessarily because mainstream economics has proved it has won. It is not a conspiracy to say that economists as a profession are reluctant to allow new forms of thinking, either because a) as you contend mainstream economics is simply better or b) as our lecturer contends mainstream economists want to maintain their credibility. There is no conspiracy, simply disagreement on the reasons for exclusion.

        He referred to a “political agenda” and cited the continued teaching of Chicago school’s Real Business Cycle Theory at our university even though many believe it is a million miles away from economic and political reality (i.e. the Great Depression being the Great Vacation). Also as even Wren-Lewis points out, at undergraduate level students often learn that people are paid their marginal product – that is clearly not a politically neutral statement and has been used by economists such as Mankiw to justify high salaries for company executives. You may believe that this is not hugely important or particularly explicit (i.e. a lot of students don’t realise the political implications of RBC theory) but again there is simply disagreement and not a conspiracy.

        We would like to finish by saying two things. Firstly, our lecturers response to your blog is a) a critique of mainstream economics (which went largely unresponded to) and b) frustration that University of Manchester rejected his module despite over 200 students explicitly stating their desire to be introduced to alternative economic theories which seems symptomatic of a broader trend to closedown debate within economics. At PCES we are calling for our education to include greater diversity of and greater engagement between economic theories. That will not happen as long as the knee jerk reaction to disagreement is to call those who disagree conspiracy theorists. Just asserting that other perspectives are not rigorous enough is not enough for us, we want to know why and we want to be given the tools to be able to form our own opinions.

        Secondly we would like to reaffirm our society’s belief in the need for debate within economics and we ask that you might read our recently written report. We would be very interested to know your thoughts on it and to engage in reasoned debate about how open economics education and research should be to alternative perspectives.

        We would also like to thank you again for your thoughtful responses to our Society’s work.

    • Luis Enrique says:


      “you seem to be the only person in this debate (and in the comments) calling for dogmatism over pluralism”

      some quotes from Sakir:

      “variants of mainstream macroeconomics ,,, are simply wrong”

      “students …are being bombarded with utter non-sense from first year onwards”

      “mainstream economics …[has] no scientific value at all by any measure”

      ” students .. have nothing to learn from papers like Diamond, Bernanke-Gertler and all other similar papers “

      • Joe Earle says:

        We would like to clarify that our PCES is arguing for pluralism not dogmatism. We do not intend to claim that we know enough about mainstream or heterodox approaches to be able to determine whether one and not the other should be taught. PCES doesn’t claim that mainstream economics is wrong but that its monopoly position is detrimental to our education and unjustified by any reference to its superior usefulness or value. It may or may not be better, we do not know, but it is only one of many ways of doing economics and therefore should not be raised to the sole object of study in our economics education. We argue that students should be given the toolkit necessary to evaluate alternative economic perspectives not just told that any one approach is the right one.

        Yes, you highlight our lecturers most confrontational quotes but you haven’t engaged (it seems) with the main body of his argument, which seems to our limited knowledge to be well thought out and supported. He, unlike us, has spent many years learning mainstream economic theory and he strongly disagrees with it. I’m sure we could go through Tony Yates’ blog and many other blogs to find putdowns of other perspectives. For example, that last quote you highlighted seems to be roughly equivalent to Tony’s broad message in this blog. Our Report highlights that at Manchester the economics department has failed to replace retiring or leaving non-mainstream economists for the past 15 years. This environment is increasingly hostile to economists who don’t follow the dominant research agenda and with the rejection of Bubbles, Panics and Crashes we share our lecturer’s anger about how alternative perspectives and economists are treated.

        This blog and the subsequent comments seem like a good case in point. While the blog was an interesting contribution to literature for a mainstream Bubbles modules it asserted without detailed argument the redundancy of alternative perspectives and ended with the confrontational statement that the author would have rejected the module too. The comments very quickly descended in confrontation rather than academic debate. Our reading is that there is an increasingly strong divide between orthodox and heterodox economics that isn’t justified and just serves to perpetuate lack of interaction 90% of the time and pointless bickering 10% of the time. Economists on the outside, quite justifiably in our eyes feel isolated, unfairly ignored and mistreated resorting to ad hominem attacks while economists on the inside ignore them or label them conspiracy theorists.
        This is not a productive place for the discipline to be at and it is why we aren’t responding to each blog individually. We don’t want to get drawn in to counterproductive bickering. We want to have serious and meaningful discussion. We hope that you will have a look at our report. It outlines our arguments for change and the reforms we would like to see. We hope it underscores our commitment to pluralism not as you suggest dogmatism.

      • Sakir Devrim Yilmaz says:

        I do not have time to engage in pages long discussions on the web, but a few things need to be made clear here. That the models are wrong are not my own words, I quoted the most famous DSGE modeller on that. And he is not the only one to have accepted this, no neoclassical economist would claim the opposite, just google and you will find Friedman’s,and Caldwell’s quotes on the same topic. If you have a look into instrumentalism, you will see that this is not a problem for this methodology. As put by Prof. Williamson as well, the value of the models comes from their explanatory and predictive power despite their simplicity. Then, one wonders what scientific value an instrumentalist model, which does not even attempt to present a realistic description of the economy but claims to possess its scientific value due to its success in prediction and whose predictions are always wrong might have.

        I will say just a few things briefly on teaching. I believe mainstream economics, as in textbooks especially, is blatantly wrong, but I lecture Macroeconomics I, Macroeconomics II, and I tutor Macroeconomics III, International Economics, explaining my students why they are wrong. I teach them the deposit multiplier in the textbook, and then talk about how banks create money out of thin air.I teach them the causal relationship between money supply and inflation in the textbook, and then show QE. I teach them the open economy IS-LM model in the textbook and then show why CB cannot control the money supply, therefore model predictions do not hold in reality.

        I would be glad if you could explain to me what students can learn from the Diamond model which argues banks are simple intermediaries between savers and borrowers, or from the Bernanke-Gertler model according to which bubbles cannot exist, or from Bernanke’s other papers according to which the Central Bank should not respond to increases in asset prices if they do not affect expected inflation. Or what can they learn from all those real business cycle papers in which money and prices do not exist? Or the Solow-Endogenous growth models? Or the rational expectations models with perfect knowledge where optimal inflation is zero?

        I do not want this conversation to turn into a counterproductive bickering, as Joe said. It is me whose module has been blocked twice, therefore you should think a little bit more before you accuse me with dogmatism. I don’t try to sack mainstream economists from my department, I don’t block their elective modules. I teach the mainstream approach in the bubbles module, I compare it with Post-Keynesians, Circuitists, Marxists, Austrians, etc. Is this your understanding of dogmatism?

        The point is not what I think of neoclassical economics and its textbook representations, it is why I cannot teach anything else in a university.

      • Tony Yates says:

        Your response to Williamson’s mention of the old Box comment makes me wonder if you understand what a model is, or is for. Your paragraph ‘I would be glad if you would explain to me….’ is a depressing hotch-potch, frankly. I can see why you missed mainstream papers out of your course: you haven’t read them, and what you have read, you haven’t understood, or no longer remember well. I take all this as more evidence that Manchester made the right decision in turning down your request to make this an acredited part of their degree.

      • Frank Knight says:

        my favourite was “mainstream economists love to preach liberalism economically, they are much closer to fascism politically”.

    • RandoMan says:

      Joe Earle,

      What you say on dynamic mathematics is quite astonishing. Doesn’t the University of Manchester offer any course on dynamic modelling in economics?

  7. Nick Rowe says:

    Thanks for that good laugh! I needed that, as I sit here grading 300 final exams for my first year macro course.

  8. Dan Davies says:

    I don’t think any of the post-Keynesian [mathematical] stuff is good enough to bother with or mounts a serious enough critique or offers a constructive enough alternative.

    Would you include Wynne Godley and Marc Lavoie’s work in that?

  9. stone100 says:

    Perhaps the answer is for people such as Sakir Devrim Yilmaz to provide courses online in the manner of the MITx course http://www.bbc.co.uk/news/education-17012968. Perhaps it then wouldn’t matter whether the academic establishment disapproved or not.

    • Tony Yates says:

      Much of the material seems to be online, so, in a sense, this is happening.
      But it’s not a solution.
      Students want to have this as part of the degree they pay for and submit to employers to demonstrate their cleverness and industry.
      Sakir wants to be remunerated for his efforts.
      Neither is happening at the moment.

      • stone100 says:

        The MITx (electronic engineering) course is assessed and can be shown to employers etc. That is what makes it so different from simply being self taught.

        I wonder whether some alternative source of funding would pay for Sakir Devrim Yilmaz or someone like that to set up such an online course. Wynne Godley and Marc Lavoir thank Warren Mosler for financial support in the preface to their book .

        Click to access Monetary%2BEconomics%2B-%2BLavoie%2BGodley.pdf

        I was impressed that Warren Mosler paid for an effort that does not really conform to the more controversial aspects of MMT, -which is what he is better known for funding.

        Like Dan Davies, I’d be really interest in seeing a coherent criticism of that Wynne Godley and Marc Lavoir book. Are you saying that it is wrong? Are you saying that it fails to address the important points for understanding macroeconomics? As an outsider to economics it seems unfathomable why it isn’t the standard textbook that economics students get taught from.

  10. Eric Lonergan says:

    There is profound insight in all of the economic “schools”: in real business cycle theory, in Minsky, in Hayek, in Friedman, in Kurz, in Galbraith and Fama … They are also all very wrong on important points. Most “rubbishing” is defensiveness and intellectual fear. Students would benefit from eclecticism. But let’s not worry too much: the barriers to entry in education have gone. All that is required is an open mind and access to the internet. We don’t need economics courses any more. BTW, I once asked Wynne Godley if the monetary base should be included in the liabilities of the state …

    • Tony Yates says:

      If you think we don’t need any economics courses any more, then you either i) don’t know much about where the subject has go to, or ii) you are a superhuman genius, dwarfing almost anyone in the profession. I am still taking courses 20 years into my career, and I am sometimes overwhelmed by how much other stuff there is to know how to do, let alone keeping track of what people have actually applied the tools to.

  11. Eric Lonergan says:

    Sorry, that’s not my point at all, Tony. I am just observing that the barrier to entry in education has gone. You don’t need a course, or even a library, to do the studying or to find the papers. It’s all free. University lecturers may even be hampered in economics, for institutional reasons, which appears to be the case with Dr Yilmaz. As a live example of this point, I have just read some of his lectures. (Most of which I think are flawed, but all of which is thought-provoking, and I would recommend). So anyone can acquire the knowledge provided by an economics course at Manchester University (including the course work they won’t fund) by sitting at a laptop, reading blogs and using google scholar. They may end up more knowledgeable. I think the merits of a formal degree or qualification are materially different under these circumstances.

    • Tony Yates says:

      Sure. I mostly agree. Though some of the material I struggle with requires either extremely lucid and spoon feeding textbooks, which are often nonexistent, or a lecture, or both, to illuminate, for those with moderate IQ’s like me.

  12. Eric Lonergan says:

    Having just looked through some of your lecture slides, I may have to revise my beliefs about the merits of a course! It looks like a great mix of theory and practice. I am also putting your last remark down to false modesty …

    • Tony Yates says:

      Those are very kind remarks. But it’s not modesty. I’m well down the distribution of talent in modern macro; there is a fantastic array of stuff out there [eg those papers i listed in the original panics and bubbles course]. And there’s a difference between absorping what the pioneers have done and passing it on [which I am beginning to get to grips with] and coming up with it yourself [which I’m not, and may never].

  13. Very unusual post. Seems to mainly rely on argumentum ab auctoritate — a classical logical fallacy. But the argumentum ab auctoritate is used in a strange way because the writer reads intentions into the statements of the authority figures. So, perhaps something more like quasi-theological textual interpretation is going on here rather than classical argumentum ab auctoritate. Throw in some poorly chosen metaphors (Haldane’s spirit? did he die?) and you’ve got something resembling an attack… I guess. There’s also another fallacy — probably another argumentum ab auctoritate — in that the use of mathematics seems to be equated with the quality of argument. Of course one of the authority figures cited — namely Krugman — regularly speaks out against this fallacy.

  14. Adrian Phillips says:

    My attention has just been drawn to this thread by the Financial Times which quoted it today. As a non-economist albeit a financial markets practitioner for many years, I was struck by the the inward-looking aspect of the whole debate. In particular the exhortation to learn how to perform exotic nonlinear ordinary differential equations (quoted in the FT article) seemed to go to the heart of the question of how academic economists have greater priorities than empirical evidence. Yes, it is the question of mathematics. Today’s economics resembles politics in Wales. There you have to speak the Welsh language to progress at all. That only a tenth of voters speak it and fluency is of vanishing practical value is beside the point. Knowledge of the language has become a key ingredient in a classical craft monopoly. As has higher mathematics in the economics profession. The point has been far better made by Roger Bootle
    who is, of course, a distinguished practitioner of economics. Perhaps the key difference between him and academic economists is that to earn his living he must sell his work on the basis of the value that outsiders find in it.

    • Tony Yates says:

      I don’t see how you can have read my blog to make these remarks.
      Those campaigning for an alternative economics curriculum have, in part, sought to reject formal teaching methods appealing to those who saw analogies in how the economy behaved in the financial crisis to organic problems in biology or fluid mechanics. This is silly. Those analogies may well exist, but they imply deploying tools used in that discipline (eg nonlinear ODEs) in a model of the economy.
      There’s no alternative to formal mathematics whether in theory, or proper empirical work. Without it there is no hope of progress. Granted, with it, you aren’t guaranteed progress either.
      Thanks for your ignorant swipe at academics! Many ply their trade in the private sector too, and don’t need pat advice like this. I suspect that if you were at all in touch with what is going on in the best departments viz macro or finance, you would not risk generalisations like that.

  15. Thought I’d offer a brief comment, since you linked this on twitter…

    First, something a few people have already touched on: this basically reads as “if I had unlimited time and resources, no departmental constraints/obligations and god-like students, I’d design a course exactly in line with what I like/endorse.” Apart from the sheer volume of theories and ideas in here, you’re suggesting teaching advanced macro models like the learning literature, as well as pretty complex (certainly for undergraduate level) financial/bank models like Diamond-Dybvig. I mean, I suppose you could just give students an overview of these, but then your course lacks depth and probably still covers too much. A cynic might even suggest the sheer volume of literature presented here is an attempt to ‘blind with science’, in many cases without really explaining why a theory is relevant.

    Second, as I pointed out, you’ve given no reason to doubt ‘heterodox’ macroeconomic theories; you’ve just dismissed them outright. which is odd because it’s basically a mirror image of the accusation you seem to be throwing at heterodox economists: ignorance. What about Marxist crisis theory, Godley-style Stock-Flow Consistent models, Minsky, Agent Based Modelling, financial models from econophysics, systems dynamics, etc? Why do these models not at least deserve a seat at the table?

    Third, the substance of your suggestions. I don’t think all of it is irrelevant, but some of it is of questionable usefulness. You really think ratex, OLG models and all the rest of it have covered themselves in glory? They offered no way of understanding the crisis ex ante (please note this isn’t the same as forecasting-style prediction), and the recent efforts I’ve seen to ‘incorporate’ finance just seem to involve arbitrary exogenous constraints/assumptions that are clearly tailored to produce a preordained outcome.

    As for more micro-based models like Diamond-Dybvig, these are basically just formalisations of things even the public know (we need bank deposit insurance to prevent bank runs) which may be useful for ‘thinking things through’ but don’t really offer any original insights. Remember, theory is there to advance our understanding beyond the obvious, rather than just rationalise it in a different way.

    Oh and I do agree with you about understanding balance sheets, accounting, statistical measurement etc. An absolute necessity for both macro and micro.

    I’m in a rush, so I’ll offer some links below. I’ts not my intention to spam you with links instead of making arguments; they’re just here if you’re interested:

    On the learning literature:

    On ABM:
    View at Medium.com

    On developments in macro:

    …and alternatives:

    • Tony Yates says:

      Thanks for these comments.
      I can’t do justice to them properly now.
      I don’t, as you say, state my reasons for being sceptical of het econ. But in my post ‘why microfoundations have merit’ some of my views about how macro should be done are set out. My main beef is that the rejection of mainstream econ illustrated in that course looked ignorant of what mainstream econ was, and I even question whether, given the explosion of work and approaches in the last 30 years, it’s a useful label.
      ABM I like a lot, and consider it faithful to the microfoundations approach. Many practitioners take radically different views about the building block assumptions (market clearing, rationality, costs of adjustment/transactions etc) and subject matters, but I think this work is very exciting. Some of the papers I have read, and conference appearances I have witnessed have displayed a lack of knowledge about what is going on in ‘mainstream’ heterogeneous agent macro, but fields are so big and time consuming now that that’s understandable.
      I think that formal, statistical models of complex system dynamics in finance definitely also deserve a seat at the table.
      I think your critique of DD is too quick and damning. They showed how to explain why healthy banks can be brought down, and paved way for further study of the benefits and costs of policy intervention (witnessed in work by Keister and others for example).
      Your comments about what would be feasible and appropriate in a course. I think, perhaps optimistically, that I could pick a good sample of the papers and explain them in accessible terms, and give a taster of the progress made and still to be made, and make an intelligible course out of that. If anyone wants to offer to pay me to do it I am ready and willing! I am not an experienced teacher, so I can’t say these things with much credibility. But I don’t buy the argument that they were left off the course because of time or explainabilty constraints.

  16. Pingback: Time for a Copernican revolution in economics | Pennsylvania Conservative Review

  17. Pingback: PCES Myth-Busting: One-and-a-Half Cheers for Maths - Post-Crash Economics Society

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