That's the title of Paul Krugman's
long essay on the recession's impact on academic economics in
the New York Times Magazine. This is self-recommending.
The thrust of the argument is that over the years economics (in
particular the neoclassical Chicago school) lost sight of John
Maynard Keynes's insights into the role of unpredictable behavior
in financial crises. The "freshwater" economists took the upper
hand in academia because their models, while useless for
describing recessions, were beautiful and simple in their
mathematics. The current recession, however, has jolted them as
well as the complacent New Keynesians at "saltwater" schools
(i.e. the Ivies, MIT, and Berkeley) out of their complacency and
should lead to a renewed appreciation for Keynes.
The essay covers a lot of ground and there's a lot to say about
it. For one thing, I think that the point about the most
technical, mathematical models beating out less buttoned-down but
more descriptive models says something about the state of higher
education.
I learned economics at Notre Dame, from Marxist
professors (Notre Dame had until very recently one of the most
"heterodox" economics faculties in the U.S.). Even these far-left
economists taught us the neoclassical models that Krugman
implicates, such as the efficient markets hypothesis. Why?
Because they could take it out of a textbook, check our math to
see if we did it right, pass us, and have the job done with.
Teaching us otherwise would have taken a concerted effort. They
weren't interested in doing so because their brand of economics
was unusual enough that they would be faulted for poor teaching
if they convinced us of it. We weren't interested in learning it,
either, because most undergraduate economics majors just want a
job in investment banking. So the compromise was to teach the
perfectly acceptable models that didn't really increase anyone's
understanding of the world. I strongly suspect that similar
influences were at work at the graduate level as well.
This is failure of institutional academia, not of economics,
really. True, economics should not have become so mathematical in
the first place. But the truth is that something similar could
have happened with any social science. Furthermore, it's not
quite right to say that the excessive mathematics were the work
only of Chicago economists. In fact there's a whole history
behind that that involves, among others, the Cowles Foundation at
Yale, specifically tasked mid-century with formalizing
mathematical economics, and Paul Samuelson's influence at MIT --
both very much "saltwater" schools.
