Gregory Mankiw, Harvard Economics Professor and former adviser to President George W. Bush, writes in the NYT today that intro economics classes will have to be updated to deal with what we’ve learned in the current economic recession and financial meltdown. I’m surprised by the lessons he lists.

Mankiw suggests that the teaching of economics will have to change in "some subtle ways." For example, Harvard econ freshman will now have to think more about the importance of the financial markets:

Financial institutions are like the stagehands who work behind the scenes at the theater. If they are there doing their jobs well, the audience can easily forget their presence. But if they fail to show up for work one day, their absence is very apparent, because the show can’t go on. The process of financial intermediation is similarly most noteworthy when it fails.

That’s far too subtle for this non-economist. I thought that the Masters of the Financial Universe had utterly failed to do their jobs. They allowed the greed of their executives, financial wizards and derivatives traders to overwhelm their duty to shareholders, lenders and the public; they ignored obvious signs of systemic risk, tanked their companies, tanked the economy, both here and abroad. And when they took their companies into bankruptcy, they accepted massive federal bailouts without the slightest concern for moral hazard, but with an obvious concern about their bonuses (do incentives work?) and reputations as competent managers. I’d think first-year econ students would want to know that. 

Mankiw advised an Administration that thought financial markets are self-correcting and should be left largely unregulated, so I’m left wondering whether he thinks it important to tell Harvard freshman that the entire prevailing theories of markets and the efficacy of self- vs government oversight had utterly failed and were now responsible for mass world-wide misery for which there is now no clear or early escape.

Wouldn’t freshmen want to know that the Masters of the Universe, and those who fronted for them in government turned out to be either incompetent and/or venal, and those who shielded them from oversight were either complete dupes or just one revolving door removed from sharing in the mass looting that occurred, and is still occurring? What is the profession about, if that is not a central teaching?

In the face of the total collapse of the system and its entire regulatory framework, Mankiw can’t seem to describe the catastrophe directly. Instead, he wants to explain the effect of "leverage," and the "limits of monetary policy" when interest rates fall to zero, and how hard it is to forecast when you pretend that nothing catastrophic can happen.

Those lessons are fine, as far as they go, but what will he tell his students about why most of his colleagues and philosophical political allies completely missed the housing bubble, the immense dangers of systemic risk, the collapse of regulatory oversight, and the absurdity of thinking the banksters would self-correct in ways consistent with the public interest? What will the Harvard faculty say about Larry Summers?

College econ freshman may indeed need a more complete overview of what their discipline teaches, but I hope they learn more from the current catastrophe than what Professor Mankiw seems willing to concede.



John has been writing for Firedoglake since 2006 or so, on whatever interests him. He has a law degree, worked as legal counsel and energy policy adviser for a state energy agency for 20 years and then as a consultant on electricity systems and markets. He's now retired, living in Massachusetts.

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