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.