Last month, students from four continents joined forces to call for reform of the economics curriculum.
In an open letter, the students said they wanted their courses to delve into a wider range of economics theories and methodologies than the standard neo-classical model that dominates undergraduate teaching, and to learn more about the implications of policy-making.
Speaking to those students was a heartening experience – all of them struck me as extremely thoughtful and articulate. Their desire for reform seemed driven by a curiosity about the world and what economics could do to improve it.
I suspect they’ll be encouraged by comments made in a speech today by the similarly thoughtful and articulate Benoît Cœuré, who sits on the European Central Bank’s executive board.
Addressing a Frankfurt audience, Mr Cœuré echoes the students’ calls for pluralism and real-world applicability. He argues that change would make future generations of central bankers far more able to cope with financial crises.
On real-world applicability, here is what he says:
The typical methodology of economic theory is first to consider a frictionless benchmark, corresponding for instance to a long-run steady state equilibrium, and then enrich it with frictions. While this is understandable from a methodological point of view, this approach can easily imply a neglect of the short and medium-term dynamics, drastic adjustments and complexities that are important for central banks.
Another unfortunate outcome is that the typical economics curriculum tends to emphasise the frictionless benchmark more than the realistic variants. Shifting the academic focus to a world with frictions would have a welcome impact on teaching, allowing central banks to hire from a pool of young economists better equipped with methods and tools to address policy challenges.
…Academic research develops according to its own internal logic and research questions, which may not always overlap with social priorities. The choice of questions addressed sometimes depends on their intellectual appeal more than on policy relevance. The publication “game” can even generate short-term herding and fads.
…Issues like robustness, non-linearities and parameter instability are key concerns for central banks and have only been taken seriously in academic research relatively recently.
On pluralism, he says:
The dominant “rational expectations” modelling paradigm in economic research postulates strong assumptions about human decision-making, implying, for instance, that economic agents are always able to assign sensible probabilities to alternative outcomes. Clearly, this characterisation of human decision-making stands in stark contrast to our own recent experience. We need to understand how panics and bubbles can emerge from psychological biases. The Nobel prize co-awarded to Robert Shiller last year will certainly encourage more research in this direction. While much progress has been made on studying notions such as Knightian uncertainty, sentiment, confidence or sunspots, more work is probably needed before they can be part of our standard modelling toolbox. A challenge is of course to come up with tested and robust behavioural theories.
…We need to be able to think about behavioural issues, financial frictions and macroeconomics inside a common set-up. Central banks also need economists trained to think along all of these different dimensions and able to tackle the substantial degree of complexity posed by these problems, which should be part of the curriculum.
In line with policy-makers’ concerns for robustness, it is essential that several paradigms and approaches can be developed in parallel. The recent economic crisis was also in large part a crisis in economic thinking, paralysing policy institutions when they needed to act. With a more pluralistic approach, it is more likely that new conceptual tools can be found when the standard ones are not helpful. Of course a balance must be found between plurality, which brings robustness, and proliferation, ie, too many approaches, which would prevent comparability.
Mr Cœuré is not the first central banker to say this. Andy Haldane, the Bank of England’s new chief economist, wrote an inspiring introduction to the manifesto of the University of Manchester’s Post-Crash Economics Society.
But signs that support for reform is building among top central bankers, who play an important role in shaping which academic ideas seep into mainstream thinking, is likely to do a great deal to help the students’ cause.