The Worldly Philosophers 2.0

Readers of yesterday’s post responded enthusiastically with lots of great suggestions for readings on the history of economic thought – see for example this list from Beatrice Cherrier.

Still, it’s clear there’s no single and accessible, reasonably short, book that is a post-1930s equivalent of Heilbroner’s The Worldly Philosophers. So here are my suggested candidates for a follow-up. This doesn’t mean I like them all! The criterion is that they clearly shaped the character of economics in a meaningful and lasting way – going up to the early 1980s. Needless to say, the suggestions also reflect the limitations of what I know.

Feel free to disagree! But the limit is 12 chapters, so if you’re adding names, you also need to subtract.

  • John Nash
  • Ronald Coase
  • Paul Samuelson
  • Ken Arrow
  • Milton Friedman
  • Gary Becker
  • Fischer Black
  • Robert Lucas
  • Paul Romer
  • Joseph Stiglitz
  • James Heckman
  • Daniel Kahneman

One of the interesting aspects of this exercise is how little known to the general public most of these people are – making the selection difficult because of course there are lots of economists almost as influential who are omitted from this list. Contrast this the role inter-war economists played as public intellectuals when it was clear who the most influential thinkers in the subject were. Maybe that’s changing again now, in the era of Piketty.

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Unhistorical economics?

It’s a university day for me and I was chatting over tea with my economic historian colleague Chris Godden about the new interest in economic history, as people try to understand the turbulent post-crash, perma-crisis times we seem to live in. We got to wondering, though, why there was less interest – including or especially among economists – in the history of economic thought. One might have expected reflection on what had gone wrong with economics, crisis-wise, to lead people to ask some questions about how we got here.

We got on to what books eager undergraduates should be pointed to. Reading the originals is sometimes heavy going – I wouldn’t point anyone to Ricardo, for example. There are some excellent books around. Robert Heilbroner’s The Worldly Philosophers is still the best introduction, I think. An older book is Eric Roll’s A History of Economic Thought (1st pub. 1956), which is better at rooting the individuals in the context of the intellectual currents of their time. More recent is Sylvia Nasar’s Grand Pursuit, a very accessible read. There’s also the more scholarly (and very good) Economics Evolving by Agnar Saandmo. There are also plenty of books about Keynes, notably Robert Skidelsky’s Return of the master, and other individuals – there’s Thomas McCraw’s Prophet of Innovation on Schumpeter, Nicholas Wapshott’s Keynes – Hayek. And more.

                   

But the striking thing about all this is how long ago the history of economic thought ends. So my question is which economists since the 1930s would have to feature in an update of any of the above books? Some names are obvious – Samuelson, Friedman, Becker. Are there others? Who post-1970s who has clearly influenced the direction of economic thinking?

Macroeconomics without the blinkers

Why was the 2008 Global Financial Crisis such a surprise to a surprising number of economists? A new book, Understanding Global Crises: An Emerging Paradigm by Assaf Razin, suggests one reason is the mental blinkers imposed by the real business cycle worldview, whereby productivity shocks and nominal wage stickiness accounted for most cyclical fluctuations – as long as monetary policy was sensibly guided by a rule that avoided policy shocks. That complacency (as it turned out) has of course evaporated, leaving instead agreement about some aspects of the macroeconomic problem – the zero lower bound problem and role of “unconventional” QE – and wild disagreement about fiscal policy.

The book starts with a history of the financial crises of the 1990s and 2000s – and you only have to see that history (the Asian crisis, LTCM, the dot com bubble) to be puzzled anew by the widespread belief in permanent stability by the mid-2000s. The second part looks at the various sources of financial fragility: asymmetric information, risk-shifting and risk-taking, excessive optimism, and co-ordination failures. This section presents a model of the optimal amount of insurance against risk-taking financial institutions, taking account of the moral hazard and adverse selection problems. The third section turns to currency and balance of payments crises, and the Eurozone’s unpalatable choices. It is a relatively short book covering in a very elegant way a lot of theoretical and historical territory.

The book concludes that some vital questions remain unanswered by the latest dynamic general equilbrium models it presents – including the most bitterly-disputed policy questions: when should fiscal austerity be implemented to reduce debt levels and unfunded demographic liabilities; when should monetary policy start to be tightened; when does the need to stabilise the financial system outweigh the risks of moral hazard.; and how should monetary policy take account of asset price bubbles during the zero/low interest rate period? These seem pretty fundamental, which I suppose will keep macroeconomists busy for some time.

The book is based on courses Prof Azin has taught since the crisis, and is geared towards a graduate student audience, so it is not one for the general reader interested in the sorry state of the global economy and financial markets, post-2008. It looks like a must-read for relevant courses, however. To me – with a foot in the academic camp but not remotely expert in global macro or finance – it also looks like it’s retrofitting economic theory to events. It is good to have it demonstrated so clearly, as many macroeconomists have assured me, that macro models can accommodate the kinds of event we have experienced in life. But it leaves unanswered the original puzzle – why did so many macroeconomists wear the real business cycle blinkers in the first place?

Progress – for and against

I picked up Karl Popper’s The Poverty of Historicism earlier this week. He is arguing against those social scientists who see laws of progress in operation, those who, “Believe that their own advance has been made possible by the fact that we are now ‘living in a revolution’ which has so much accelerated the speed of our development that social change can now be directly experienced within a lifetime.” However, he adds, “Change has been discovered over and over again.” There is nothing new in this enthusiasm for modern times. “Since the days of Heraclitus, change has been discovered over and over again.”

The Poverty of Historicism is very much a book of its own time (1957): it’s hard to imagine anyone today writing this, about the most important difference between the natural and the social sciences: “By this I mean the method of constructing a model on the assumption of complete rationality (and perhaps also on the assumption of the possession of complete information) on the part of all the individuals concerned.” Human beings, he says, are not perfectly rational, but they are more or less rational. “There are good reasons, not only for the belief that social science is less complicated than physics, but also for the belief that concrete social situations are in general less complicated than concrete physical situations.”

I don’t think he’d have many takers for that argument today. Progress?

Modern macro

Although I don’t teach or practice macroeconomics, if I did I’d certainly be thinking of using the new textbook from Wendy Carlin and David Soskice, Macroeconomics: Institutions, Instability and the Financial System. As the subtitle so clearly indicates, this book does absolutely engage with the messiness of the post-crisis real world. Its aim is to stay simple enough for undergraduate use while also realistic enough to empower its readers to understand the why and how of the financial crisis and to evaluate macroeconomic policy. For graduate students or practising economists wanting a reference book, this offers a tractable, intuitive model that combines the standard 3-equation approach with the insights of Hyman Minsky (mentioned in the Preface) and institutional realism.

The first chapters set out the standard 3-equation model, and chapters on expectations and money & banking follow. The latter includes a description of how a modern banking system works (no whiff of a money multiplier!). Two chapters on the financial sector and the crisis follow – including topics like balance sheet recessions, QE, and a discussion of austerity policies. There is a chapter on innovation, growth and fluctuations – Solow, endogenous growth and Schumpeterian growth. Next comes a section on the open economy, with separate chapters on oil shocks/commodity prices and  the Eurozone.

The final chapters cover monetary and fiscal policies, supply side policies and the labour market, and a final chapter on real business cycles and the New Keynesian approach.

This is certainly the first textbook I’ve spotted to have incorporated the lessons of the crisis, and it does so very elegantly, keeping the modelling framework reasonably simple. The book also weaves in the events of recent economic history, and applies the models it develops to actual events, so students do not have the dispiriting experience of being taught an economics in the classroom divorced from the kind of economics they hear about in the news.

I’m a big fan of Wendy’s already, having had the pleasure of working with her on the CORE curriculum and e-book; and this new textbook confirms my opinion. I’ve dipped in to specific chapters that I can evaluate properly, such as the one on growth and the supply side and labour market sections  – perhaps if I read the whole book properly it will cure me of my ingrained macro-scepticism……