The GEM Project has a special interest in the on-going debate about undergraduate macro textbooks. In the generation that followed the New Keynesian seizure of the macro academy’s mainstream, their signature dynamic stochastic general-market-equilibrium theory (enriched with rational market frictions) has informed the instruction of graduate students. Undergraduate curriculums, however, still rely on Early Keynesian thinking, organized around total nominal spending and the keystone assumption of meaningful wage rigidity (MWR). The latter suppresses wage recontracting and easily introduces, in the context of weakening nominal demand, involuntary job loss and unemployment – phenomena that undergraduates stubbornly insist play a role in satisfactory explications of business cycles. Graduate students, perhaps stupefied by the mathematics their professors require them to wade through, are much more docile. For whatever reason, they tolerate their teachers’ inability to introduce involuntary unemployment into rational-behavior DSGME theory.
For many years the textbook debate has centered on how to rid undergraduate instruction of irrational EK modeling. Authors have been experimenting with simplifying NK frameworks, frequently relying on sleight-of-hand designed to get undergraduates to look the other way while forced layoffs in recession are simply ignored. One frequent trick is to provide joblessness a prominent place by emphasizing labor-market search/match analysis while glossing over the fact that search unemployment is wholly voluntary.
The Bowles-Carlin Approach
That over-long lead-in gets us to the subject of this post. Samuel Bowles and Wendy Carlin (hereafter B&C) have recently written a thought-provoking article on the on-going textbook debate, “What Students Learn in Economics 101: Time for a Change” in the Journal of Economic Literature (Issue One, 2020). What makes their views particularly interesting is that neither author is a New Keynesian. Bowles has been a critic of general-market-equilibrium forever and Carlin, in the second edition of her introductory textbook written with David Solstice, forcefully rejects fundamental aspects of NK thinking. Pledging to no longer ignore the six million involuntarily lost jobs in the 2008-09 Great Recession, she admits that DSGME modeling is indefensible.
From Bowles and Carlin: “We make the case for a shift in what students learn in a first economics course, taking as our exemplar Paul Samuelson’s paradigm-setting 1948 text. In the shadow of the Great Depression, Samuelson made Keynesian economics an essential component of what every economics student should know. By contrast, leading textbooks today were written in the glow of the Great Moderation and the tamed cyclical fluctuations in the two decades prior to 2007. Here, using topic modeling, we document Samuelson’s novelty and the evolution of the content of introductory textbooks since, and we put forward three propositions. First, as was the case in the aftermath of the Great Depression, new problems now challenge the content of our introductory courses; these include mounting inequalities, climate change, concerns about the future of work, and financial instability. Second, the tools required to address these problems, including strategic interaction, limited information, principal–agent models, new behavioral foundations, and dynamic processes including instability and path dependence, are available (indeed widely taught in PhD programs). And third, as we will illustrate by reference to a new open access introductory text, a course integrating these tools into a new benchmark model can be accessible, engaging, coherent and, as a result, successfully taught to first-year students. Deployed to address the new problems, following Samuelson’s example, the new benchmark provides the basis for integrating not only micro- and macroeconomics but also the analysis of both market failures and the limits of government interventions.”
The Bowles-Carlin Bad Mistake
Calling for construction of a new curriculum to replace Samuelson’s, B&C assume that Samuelson’s original objectives have been satisfied or are no longer important. In that, they err badly. A more modest and more powerful revision, eventually used in conjunction with the modern-problem approach, is to introduce first-year students to the generalized-exchange theory and its take on understanding the nature of and what to do about macro instability.
Paul Samuelson explained the motivation for his pathbreaking 1948 introductory economics textbook as follows: “Today the non-specialist in physics deserves and expects to learn about atomic energy and nuclear structure in his first year of study, rather than remain bogged down in elementary experiments on falling bodies and heat calorimetry. Why then should teachers of economics withhold from the first-year course the really interesting and vital problems of over-all economic policy?” (Samuelson 1948, p. vi). What Samuelson brought to the front of his text Economics—literally—was the problem of involuntary unemployment and, in order to address the problem, a teachable version of Keynes’ General Theory.
B&C give Samuelson’s ambitions top billing in making their case about what textbooks should do. But, by arguing for a fundamental makeover of his ambitions, they ignore that the great economist’s objectives were not satisfied. As noted, Carlin’s second-edition text draws critical attention to mainstream macro theorists’ struggle with the nonexistence of involuntary unemployment in their modeling. NK theorists want us to just ignore the problem, treating it as little more than an inconvenience and inviting everybody to look the other way.
An extraordinary quote from Olivier Blanchard, among the most prominent of New Keynesian theorists, underscores the foolishness of looking the other way: “One striking (and unpleasant) characteristic of the basic NK model is that there is no [involuntary] unemployment! Movements take place along a labor supply curve, either at the intensive margin (with workers varying hours) or at the extensive margin (with workers deciding whether or not to participate). One has a sense, however, that this may give a misleading description of fluctuations.” May be misleading? Being a mainstream macroeconomist today is simply embarrassing.
B&C should set aside their redesign of undergraduate textbooks to accommodate a larger range of admittedly important topics until the macro academy can explain the costly episodic instability that gave rise to macroeconomics as a distinct field of neoclassical theory in the first place. The crucial task of introducing microfounded MWR into mainstream thinking must first be completed. Solving the fundamental macro problem enables rational-behavior modeling of involuntary job loss, of evidence-consistent responses of employment and output to nominal-demand disturbances, of powerful total-spending propagation of real shocks, of the broad implications of chronic wage rents, of the long-lagged macrodynamics of job downsizing and wage givebacks. Solve the longstanding crucial MWR problem, and textbook authors would then be free, without embarrassment, to broaden undergraduate economics to the Bowles-Carlin list of “new problems now challenge the content of our introductory courses”.
Blog Type: New Keynesians Saint Joseph, Michigan