Why history of thought matters

Tyler Cowen linked to a new blog by Chris House:

My guess is that the important insights of these earlier contributions have been, more or less, adequately incorporated into modern textbooks.  I’m fairly sure that few modern biologists read Darwin’s original Origin of Species, and even fewer modern mathematicians read Euclid’s Elements.  If you want to have a good understanding of modern geometry and number theory, you should simply read a good college-level mathematics text on the subject.  The same holds for the study of evolution.  As great as Darwin’s contribution was, our modern understanding of evolution now eclipses his.  This is the reason behind my casual dismissal of the idea of reading the original General Theory.  If you want a good understanding of these ideas, you are better served by consulting say Mankiw’s intermediate-level Macroeconomics than by reading Keynes or Hicks.  For a somewhat more advanced treatment, you can take a look at Chapter 10 in Blanchard and Fisher (1989).

.   .   .

I could of course be completely wrong.  I recall Christy Romer saying that her decision to spend one of her summers in graduate school reading Friedman and Schwarz’s A Monetary History of the United States was one of the best decisions she ever made.  In a course on the history of thought, or on the rhetoric of economics, I would expect the students to read selections of the originals.  And, of course, there are ideas in the earlier works that are poorly understood, underappreciated or simply forgotten.  Remember though, there is a probably a reason these ideas were not incorporated into the contemporary narrative of economics.

I’m in no position to give grad students advice, as I’m a bit out of touch with modern econ programs.  But I will say that whatever modest success I’ve had with this blog is mostly due to my reading of economic history and the history of thought—two fields that I believe are closely intertwined.  A few examples:

1.  I found that the macro environment during the interwar years is much more interesting than post-WWII, mostly because the government did all sorts of wild and crazy policy experiments. What if the world’s central banks sharply raised their gold reserve ratios, and depressed the global money supply?  What if the US devalued the dollar sharply and unexpectedly during a period of zero interest rates and 25% unemployment?  What if the government suddenly and unexpectedly ordered all firms to raise their nominal hourly wage rates by 20%?  All three of these experiments occurred in just a 5 year period.  Yes, the macro data wasn’t quite as good back then, so economists looked at how asset prices responded to policy shocks—which is the right way to do it in any case!

2.  The interwar economists saw this stuff going on and the results helped inform their policy views. It turns out that there are many ways of thinking about the macroeconomy, which is almost infinitely complex.  Consider the identification problem for monetary shocks, which still hasn’t been solved.  Should monetary policy be thought of in terms of the price of money (Mundell) the quantity of money (Friedman) or the rental cost of money (Keynes)?  During the interwar years many economists thought of policy issues using a very different mental framework from what economists use today.  And I would argue that researchers familiar with these alternative perspectives (Christy Romer, Robert Hetzel, David Glasner, etc.) tended to have more useful things to say about the recent crisis than those who were not.

Modern macro seems to have a certain methodological homogeniety, with the DSGE approach being particularly popular.  Even if it is the best single approach (and I’m not convinced it is) it still might be better for the field if researchers tried all sorts of different approaches so that they would be better prepared for crises like 2008.  We are like a city of 10 million clones where no one has immunity to bird flu.  Nick Rowe has a new post showing that from a certain perspective the New Keynesian (interest rate oriented) way of thinking about the world is really strange, and yet almost everyone thinks that way.   Recall that many of our most famous macroeconomists had little to say about the failures of monetary policy in 2008-09, with Romer/Hetzel/Glasner, etc., being notable exceptions.

PS.  It’s debatable as to whether the General Theory’s best ideas are incorporated into IS/LM-style textbooks.  But even if they are, I would suggest students look at the Tract and the Treatise, which are better books.  And then read Fisher, Cassel, Hawtrey, Pigou and the others.

PPS.  Here’s a post on bubbles I did over at Econlog.


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16 Responses to “Why history of thought matters”

  1. Gravatar of Mike T Mike T
    14. January 2014 at 07:13

    “Yes, the macro data wasn’t quite as good back then, so economists looked at how asset prices responded to policy shocks—which is the right way to do it in any case!”

    >> The right way to do it?? I’m reminded of this classic Jim Grant takedown of Steve Liesman recently: http://www.youtube.com/watch?v=PHxL0aFq4Ts
    So I ask here… what’s the theory behind price administration?

  2. Gravatar of errorr errorr
    14. January 2014 at 07:49

    Tyler Cowen did a commentary in multiple posts a few years ago while revisiting Keynes that was interesting and insightful.

    DGSE will die a slow death. As computing power gets less expensive the next generation will start to use agent based modeling to understand macro phenomena. The emergent actions of millions of agents following simple utility functions will allow people to understand how random variations can effect whole economies. However, it will require that economists also learn at least some programming techniques to make it worthwhile.

  3. Gravatar of Andrew C Andrew C
    14. January 2014 at 08:14

    Have you read The Structure of Scientific Revolutions? It has a lot to say on what it says that people read the seminal works in a discipline (as in philosophy) or only ever read textbook distillations (as in physics). DSGE models also fall very neatly into the idea of a research program as described in the book.

  4. Gravatar of TravisV TravisV
    14. January 2014 at 09:16

    Here’s Kevin Drum summarizing Brad DeLong’s argument (but not totally):

    “Why Have Investors Given Up on the Real World?”

    http://www.motherjones.com/kevin-drum/2014/01/why-have-investors-given-real-world

  5. Gravatar of TravisV TravisV
    14. January 2014 at 09:31

    Mike T,

    Jim Grant’s arguments are a bunch of hot air. The actual data doesn’t support him. Study market monetarism: the data actually fits with market monetarist analysis.

    The Fed is not “artificially suppressing” interest rates. In fact, its monetary expansions have INCREASED interest rates. See here: http://scottgrannis.blogspot.com/2013/12/some-favorite-charts.html

    Second, it’s not just rich people in Connecticut benefiting from easier money. The vast majority benefit from easier money and higher employment. Honestly, how many people were actually complaining when Volcker eased monetary policy (with higher inflation) in 1983 and 1984 when unemployment was high?

  6. Gravatar of ssumner ssumner
    14. January 2014 at 09:47

    Mike, Jim Grant? Is the guy who predicted that the Fed’s “easy money policy” would bring us high inflation?

    Andrew, A long time ago.

    Thanks for the links Travis.

  7. Gravatar of TravisV TravisV
    14. January 2014 at 12:57

    Prof. Sumner,

    I think you’re wrong to say that Yglesias believes government spending increases aggregate demand. Notice the way he wrote the following sentence (in October):

    http://www.slate.com/blogs/moneybox/2013/10/23/how_to_fix_everything.html

    “I think there is a persuasive case that nominal income targeting alone would work, but pairing the target with the addition of this instrument should address the objections raised by fiscalists (since the instrument is fiscal policy) but also most of the objectives raised by demand denialists (since the instrument is also a pro-growth supply-side reform).”

  8. Gravatar of Michael Byrnes Michael Byrnes
    14. January 2014 at 13:17

    Here’s a good argument for NGDPLT:

    http://www.businessinsider.com/the-feds-communication-policy-disaster-2014-1

  9. Gravatar of benjamin cole benjamin cole
    14. January 2014 at 13:39

    Even more recent economic history is illuminating. The profession in the 1960s talked a lot about keeping the economy at “optimal output” and posited fighting inflation with monetary tools would be very expensive in terms of lost output…50 years later the profession is fixated on inflation and the ECB has a single mandate…Yellin rhapsodizes about a 1 percent inflation target…

  10. Gravatar of Brian Donohue Brian Donohue
    14. January 2014 at 13:56

    I wasn’t even a biology major and I read Origin of Species- I figured most educated people did. Because, unlike Newton even, just about anyone can get their brain around it. It’s a remarkable book, even now.

  11. Gravatar of Benny Lava Benny Lava
    14. January 2014 at 14:41

    By this logic no one should bother with Adam Smith. Though sometimes, when people talk about Wealth of Nations, I’m pretty sure most people who cite the book have never read it.

  12. Gravatar of Mike Sax Mike Sax
    14. January 2014 at 16:04

    “My guess is that the important insights of these earlier contributions have been, more or less, adequately incorporated into modern textbooks. I’m fairly sure that few modern biologists read Darwin’s original Origin of Species, and even fewer modern mathematicians read Euclid’s Elements. If you want to have a good understanding of modern geometry and number theory, you should simply read a good college-level mathematics text on the subject.”

    In a way that seems to make perfect sense as mathematics has moved beyond the Euclidean world since the 19th century. On the other hand why is the Elements still so widely read? are these readers just learning about modern geometry and number theory in a very inefficient way?

    I don’t think so. My guess is he may well be right about the guys in the mathematics shops. However, the Elements are still read with profit by a different kind of reader.

    Maybe the Euclid’s is more of interest for those who are in the philosophy of mathematics. Basically then maybe a modern mathematician reads the latest, newest stuff but the philosophers love the Elements.

    Yet, I think that the kind of blinkers in modern fields may not be of profit for it. I certainly agree that Macro is worse for it’s recent disinterest in the history of thought.

    P.S. I don’t even want to get started on the idea that Mankiw is a better authority on Keynesianism than Keynes himself.

  13. Gravatar of ssumner ssumner
    14. January 2014 at 21:11

    Travis, Matt definitely favors fiscal stimulus, and thinks it works.

  14. Gravatar of Erik Trygger Erik Trygger
    15. January 2014 at 02:44

    Scott, could you possibly expand a bit on Mundell? Or do you have a link?

    Is this possibly the effect you refer to?

    “In Inflation and Real Interest(1963), he has shown that higher inflation can induce investors to lower their cash balances in favor of increased real capital formation.”

    http://robertmundell.net/mundell-as-in/mundell-tobin-effect/

  15. Gravatar of JohnB JohnB
    15. January 2014 at 21:39

    The real problem is that the entire profession, conservative and liberal, adopted Keynes’ silly aggregative economic reasoning and created the entirely misguided discipline of macroeconomics. Without relativity and quantum mechanics, macroeconomics would have never been invented because it is a useless attempt to copy the methods of physics where bodies behave differently at different scales.

    How hip of Keynes to persuade people by directly copying the dynamics of physics! Anything to make people take econ more seriously. Paul Samuelson took it even farther by mathematizing basic logical (illogical in many cases) arguments. Despite being a flagrant violation of Occam’s Razor and retarding real understanding, he did manage to fool people for quite a while about what economists really knew.

    The only good work being done these days is in micro or economy wide economics based entirely on micro-level reasoning. The valuable contribution of economics is the economic way of thinking which is entirely absent in macro. It’s as though Keynes was able to make people believe that incentives and logic no longer mattered when talking about the economy.

    Basically, Keynes and Samuelson are analogous to Sigmund Freud in psychology. They came at times when really good, pioneering work was being done in their fields-psychology was focusing on brain chemistry in the 1870s-and set their professions back for 100 years.

  16. Gravatar of ssumner ssumner
    16. January 2014 at 06:23

    Erik, I was referring to the fact that Mundell often looks at monetary policy from an exchange rate perspective.

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