THE GREAT FINANCIAL CRISIS
HOW HAS IT CHANGED THE TEACHING OF ECONOMICS?
THE DEMAND FOR BETTER
ECONOMISTS HASN’T CHANGED
• IN THE aftermath of the Great Depression there were important
changes in the way economics was both studied and taught,
but it may be over-optimistic to think that the current financial
crisis will involve anything like the same degree of re-evaluation
of the profession's habits. Most importantly, the Roosevelt
administration vastly increased the numbers of economists
employed by the federal government . The expansion of job
opportunities also created an incentive to create and remodel
university courses to meet this demand; ideas and incentives
complemented one another.
SECONDARY TEACHERS MUST
LEAD THE CHARGE
• There are severe
financial stresses on
universities everywhere
that will cast doubt on
their ability or willingness
to initiate untried yet
potentially more relevant
teaching methods.
THE ECONOMIC FEAR TO FEAR
IS FEAR ITSELF
•
We have the same workforce and
physical capital today as in 2007.
•
Watching one financial megalith
after another bite the dust and one
politician after another scream, "The
depression is coming, the
depression is coming", terrified the
private sector.
•
Too many textbooks present old-time
Keynesian solutions, viewing this as
a problem of inflexible wages and
prices. It's not. And the solution is
not more spending, but taking the
fear out of the economic equation.
COMMUNICATE THE POSSIBILITY OF
MULTIPLE EQUILIBRIA
•
If employers fear significantly
depressed economic activity, they will
sit on their hands and produce that
outcome.
•
If demanders fear their next paycheck
will be their last and that their assets
will drop in value, they will stop buying
and sell their assets and, thus,
instigate their prediction.
•
If lenders fear their borrowers are no
longer trustworthy, they'll set their
lending rates higher and ensure that
only desperate borrowers request
loans.
ECONOMIC HISTORY WILL BE AT THE
HEART OF ECONOMIC INSTRUCTION
•
One of the stranger myths about the
recent financial crisis is that no one
saw it coming.
•
A lot of economists saw it coming, and
for years had been writing with dread
about the growing global imbalances.
•
The mass of enthusiasts targeted
these economists as doomsayers and
party poopers.
•
Financial history does not vary much—
there is little about the Roman real
estate crisis of 33 AD, for example,
that isn’t thoroughly familiar to us
today.
BANK RUNS CAN OCCUR EVEN WHEN
INDIVIDUAL DEPOSITORS ARE INSURED
•
When institutional lenders all
abandon an investment bank
simultaneously, the bank
experiences a liquidity crisis that has
much in common with a classic bank
run.
•
In a modern bank run, the actors
rushing for the exits are institutional
lenders not individual depositors.
•
Liquidity and financial intermediation
have emerged as key topics in
macroeconomics and finance.
THE CRISIS HAS BROUGHT TO THE FORE THE COMPLEX
CONNECTIONS AMONG MARKETS, GOVERNMENT AND
SOCIAL AND ECONOMIC POLICIES.
•
The basic principles of economics
have not changed—people and firms
respond to incentives; demand and
supply determine the relative prices of
goods, services and even money itself;
markets generally allocate resources
well and deliver welfare-improving
outcomes.
•
The notion that markets are always
efficient, can be left to themselves and
are self-correcting is no longer
tenable.
•
Markets do eventually correct but, if
allowed free rein, can get so far out of
line that the corrections take the form
of collapses that can be very painful.
MACROECONOMICS IS AT AN
HISTORIC CROSSROADS
•
Macroeconomics is in flux relative to
the consensus view that seemed to
be forming pre-2007.
•
It is hard to know what
macroeconomics will look like in 20
years.
•
Today's students have an
opportunity to take part in this
creative destruction. That prospect
is helping to get many new students
excited about macroeconomics.