[Marxism] Ivory Tower Unswayed by Crashing Economy

Louis Proyect lnp3 at panix.com
Thu Mar 5 07:19:15 MST 2009

NY Times, March 5, 2009
Ivory Tower Unswayed by Crashing Economy

For years economists who have challenged free market theory have been 
the Rodney Dangerfields of the profession. Often ignored or belittled 
because they questioned the orthodoxy, they say, they have been shut out 
of many economics departments and the most prestigious economics 
journals. They got no respect.

That was before last fall’s crash took the economics establishment by 
surprise. Since then the former Federal Reserve chairman Alan Greenspan 
has admitted that he was shocked to discover a flaw in the free market 
model and has even begun talking about temporarily nationalizing some 
banks. A Newsweek cover last month declared, “We Are All Socialists 
Now.” And at the latest annual meeting of the American Economic 
Association, Janet Yellen, president of the Federal Reserve Bank of San 
Francisco, said, “The new enthusiasm for fiscal stimulus, and 
particularly government spending, represents a huge evolution in 
mainstream thinking.”

Yet prominent economics professors say their academic discipline isn’t 
shifting nearly as much as some people might think. Free market theory, 
mathematical models and hostility to government regulation still reign 
in most economics departments at colleges and universities around the 
country. True, some new approaches have been explored in recent years, 
particularly by behavioral economists who argue that human psychology is 
a crucial element in economic decision making. But the belief that 
people make rational economic decisions and the market automatically 
adjusts to respond to them still prevails.

The financial crash happened very quickly while “things in academia 
change very, very slowly,” said David Card, a leading labor economist at 
the University of California, Berkeley. During the 1960s, he recalled, 
nearly all economists believed in what was known as the Phillips curve, 
which posited that unemployment and inflation were like the two ends of 
a seesaw: as one went up, the other went down. Then in the 1970s 
stagflation — high unemployment and high inflation — hit. But it took 10 
years before academia let go of the Phillips curve.

James K. Galbraith, an economist at the Lyndon B. Johnson School of 
Public Affairs at the University of Texas, who has frequently been at 
odds with free marketers, said, “I don’t detect any change at all.” 
Academic economists are “like an ostrich with its head in the sand.”

“It’s business as usual,” he said. “I’m not conscious that there is a 
fundamental re-examination going on in journals.”

Unquestioning loyalty to a particular idea is what Robert J. Shiller, an 
economist at Yale, says is the reason the profession failed to foresee 
the financial collapse. He blames “groupthink,” the tendency to agree 
with the consensus. People don’t deviate from the conventional wisdom 
for fear they won’t be taken seriously, Mr. Shiller maintains. Wander 
too far and you find yourself on the fringe. The pattern is 
self-replicating. Graduate students who stray too far from the dominant 
theory and methods seriously reduce their chances of getting an academic 

“I fear that there will not be much change in basic paradigms,” Mr. 
Shiller wrote in an e-mail message. “The rational expectations models 
will be tweaked to account for the current crisis. The basic curriculum 
will not change.”

“I hope I am wrong,” he added.

The political undercurrent undoubtedly makes change more difficult. 
There is a Crayola box full of differently named economic schools that 
are critical of mainstream free-market theory, but these heterodox — as 
opposed to orthodox — economists generally tend to fall into the liberal 

Given the short time span since the crisis began, no one expects large 
curriculum changes yet. But in addition to Berkeley and the University 
of Texas, professors at a number of departments including those at the 
University of Chicago, Harvard, Yale and Stanford, say they are unaware 
of any plans to reassess their curriculums and reading lists, or to 
rethink the way introductory courses are organized.

John B. Taylor, an economist at Stanford and one of President George W. 
Bush’s advisers, whose forthcoming book is titled “Getting Off Track: 
How Government Actions and Interventions Caused, Prolonged, and Worsened 
the Financial Crisis,” said he was planning to update his introductory 
textbook, “Principles of Macroeconomics,” because of the crash. But 
while the revision will include information about the financial crisis, 
he said, explanations of fundamental principles won’t change.

To Philip J. Reny, chairman of the economics department at the 
University of Chicago — Milton Friedman’s intellectual home and free 
market headquarters — such caution is a good thing. “Academia typically 
moves slowly and carefully and thoughtfully,” he said. “There is a lot 
of speculation in the press” as to why the financial system collapsed, 
he added, but a lot of “work needs to be done to figure out what really 
happened, which dominoes are in front and caused others to fall.”

Outside of the classroom, debates about the crash are taking place in 
several public lectures and faculty workshops on the subject. But 
“before we’re certain of what the answer is, we’re unlikely to think in 
terms of changing the curriculum,” Mr. Reny added. “That’s very serious. 
The responsible thing to do is wait until we have some understanding of 
what went on here.”

There are a handful of departments that have welcomed alternative 
theorists, like the University of Massachusetts, Amherst; the University 
of Massachusetts, Boston; the University of Utah; and the University of 
Missouri, Kansas City (where the Heterodox Economics Newsletter is 

To Mr. Galbraith and L. Randall Wray, an economist at Missouri, the two 
thinkers whose work is most relevant today are John Maynard Keynes, who 
argued that the government should spend its way out of the Great 
Depression, and Hyman Minsky, who maintained that financial institutions 
could prompt ruinous crashes by taking on too much risk. Neither, Mr. 
Galbraith said, is part of the core curriculum in most economics 
graduate programs.

When asked why graduate students don’t study Keynes or Minksy, Mr. Reny 
replied that graduate students work on subjects — like real models of 
business cycles — that are at the frontier of the field; by contrast 
Keynes and Minsky are not on the frontier anymore.

Mr. Wray prefers to call such mathematical modeling “the frontier of 
nonsense.” For more than a decade Mr. Wray has asserted that both the 
theory and the models used by risk-rating agencies are wrong. He has 
been invited to speak at the University of Chicago, he said, but by 
social science graduate students, not by the economics department.

When it comes to the financial crisis Dani Rodrick, an economist at 
Harvard, said, “The problem wasn’t with the economics but with the 
economists.” Theories and models are tools, but “we have fixated on one 
of the possible hundreds of models and elevated that above the others,” 
he said, referring to free market theory. “We form a narrative of the 
moment, which fits the zeitgeist.”

For many the narrative that seemed to best explain the experiences of 
the 1970s, ’80s and ’90s, when the Soviet economy collapsed, and India 
and China became more market oriented was told by free market theorists.

A real shift among economists will come only if there is a wholesale 
collapse, Mr. Wray and Mr. Card agreed. If unemployment is still high 
three years from now, then you might start to see a paradigm shift, Mr. 
Card said; economists will “have to say that the market isn’t supposed 
to work this way.” But if the economy bounces back in a year, then they 
will be able to dismiss the financial crash as an anomaly that is 
unimportant to the larger theory, he added.

A field shifts, Mr. Card and Mr. Wray said, not so much because the wise 
elders change their minds, (they are too invested in the way things 
are), but rather because a new generation of scholars comes along and 
pushes into new areas of research.

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