Tuesday, January 14, 2014

History Matters

I was planning to take a break from blogging today but then I came across Chris House's homily to his students encouraging them not to read the General Theory; or, for that matter, anything else written in economics BME (before the Mankiw era). I simply cannot let that exhortation stand without adding a few words in defense of the history of thought and in support of Scott Sumner's  take on Chris' post.

I've given quite a few public lectures over the last several years to promote economic literacy and to publicize my book, How the Economy Works.  In those talks, I was often asked if I think that economics is a science. My answer is yes; but it's not an experimental science. The research task of a group of economists is similar to that of a team of research chemists, presented with an unknown substance and asked to identify it, subject to two constraints.  1) the team is allowed to conduct at most three experiments a century and 2) they are not allowed to read the research notes of their predecessors.

A knowledge of economic history is equivalent to a knowledge of the outcome of the chemistry experiments; a knowledge of the writings of our predecessors is equivalent to reading the research notes written at the time.

Chris tells his students not to read the classics. I tell my students something very different.  Be skeptical of everything you're taught.  Think through a problem before you read the literature; then go read  what other people had to say.  By thinking out the problem first you are more likely to understand why the literature moved in the way it did.  And don't stop reading with whats on the reading list for your latest course. It often pays to dig back a bit further; sometimes a lot further.

When you tackle hard problems, and that's pretty much everything in macro, it pays to read what very smart people before you had to say about those problems. Read Hicks' Value and Capital.  Read Patinkin's  Money Interest and Prices. Read Hayek on The Constitution of Liberty.  And YES read Keynes' General Theory.


  1. I have another reason why I think the classics are important.

    It keeps economics exciting. My classmates that read Hicks, Hayek, Keynes, Buchanan, Friedman, Coase, or whoever are much more likely to be excited about their economic studies. It keeps them motivated. This motivation is important when working through textbook after textbook. These books are classics for the same reason Dickens is a classic- they are interesting books.

    Now, of course the causation could be the other way. More motivated students read more books and therefore more classics. However, from conversations, these old books are the cause. I know many people who changed careers to being economists after reading Keynes or Hayek (myself included). I don't know anyone who did that after reading Mankiw, but maybe I am weighing my own experience too much.

    1. That's another good reason, I agree completely.

    2. I could say, with only mild exaggeration, that I changed careers after reading Mankiw's original menu cost paper. But yeah, the textbook probably not very inspiring.

  2. Professor Farmer,
    Why of course you're correct! I am not being sarcastic. When I was studying economics as an undergraduate at Swarthmore College (Professor Bernard Saffron was my favorite in the department, may he rest in peace), he had us read all sorts of things. We even read mimeographed articles from the The National Review, when he felt it would be helpful. College students are not so fragile that they will be harmed forever due to exposure to history of economic thought.

    In physics, we learn about the ether, phlogiston theory and pre-Copernican belief that the sun revolves around the earth. Deconstruction is part of the learning process. Also, it naturally motivates study of what is current, and may even pique greater interest!

    It seems irresponsible of Chris House, to provide no instruction on BME economic thought. That will leave his students without any guidance in the real world. Imagine, being graduated with a major or even a minor in economics, yet having no exposure to those iconic names: Hobbes, Maslow, Hicks, Hayek, John Maynard Keynes. That would be so sad.

    I am Ellie Kesselman. I have seen you around on Crooked Timber and Delicious bookmarks. I'm not an economist, but you probably could tell ;o) I just thought I'd stop by and say hello, and offer praise where it was clearly due.

    1. Thank for your kind comment Ellie K. I have to admit to not having read Maslow. Any recommendations?

  3. Liberalism’s peak economic experience came through the coordinated efforts of the world’s central banks in establishing Global ZIRP, which created a crack up boom in risk assets, as the dynamos of economic action, these being creditism, corporatism, globalism, and clientelism, which facilitated inflationism, producing peak moral hazard based fiat wealth.

    Liberalism sovereignty and seigniorage secured the Means of Economic Inflationism, where Milton Friedman and Ben Bernanke, using the Benchmark Interest Rate, ^TNX, under Global ZIRP, fathered and favored the investor and the client.

    Liberalism’s economy died in January 2014 with the collapse of the Emerging Markets; this coming with the death of fiat money on October 23, 2013, and the death of fiat wealth on January 24, 2014.

    But twin extinction events, terminated liberalism, and as a result its creation, that being the investor and the client died, as greed turned to fear that the world central banks’ monetary policies have crossed the rubicon of sound monetary policy and have made “money good” investments bad.

    The first extinction event was the bond vigilantes calling the Interest Rate on the US Ten Year Note, ^TNX, higher from 2.48%, on October 23, 2013, which terminated fiat money, defined as the combination of Aggregate Credit, AGG, and Major World Currencies, DBV, and Emerging Market Currencies, CEW.

    The second extinction event was the bond vigilantes calling interest rate on the Emerging Market Local Currency Bonds, EMLC, higher, and the currency traders calling the Japanese Yen, FXY, higher, and Emerging Market Currencies, CEW, lower, which forced the investor to derisk and delverage out of the Emerging Market, EEM.

    Thus in January 2014, The Bow of Economic Sovereignty, fully passed from democratic nation states and the world central banks, to regional sovereigns and regional sovereign bodies; these are now growing in political capital, and its authority to establish regional economic fascism, replacing crony capitalism, European Socialism, Greek Socialism, and Communism.

    Regionalism is establishing a new debt based money system, that being the diktat money system, where regional overlords, ruling in each one of the world’s ten regions in mandates of regional economic governance, and in debt servitude schemes of totalitarian collectivism unifying all of mankind’s seven institutions, establish regional security, stability and sustainability.
    News reports reflect that the beast empire is now rising out of waves Club Med sovereign, banking, and corporate insolvency. It has the feet of a bear in banking supervision in Frankfurt; mouth of a lion in Berlin, as DW reports German FM vows more aggressive foreign policy; and coat of a leopard in fiscal supervision in Brussels, where a One Euro Government, that is a Eurozone Superstate, featuring a banking union, military union, and fiscal-debt union will form as leaders meet in summits to renounce national sovereignty and annonce regional pooled sovereignty as they set forth regional framework agreements, as these constitute the constitution of regional economic governance.


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