I was sent a copy of an interview with Eugene Fama, the newly minted Nobel Prize winner for economics, in which the covering letter implied that when I read it through I would see what a poor choice he had been. So I read it through and at the end I had an even higher regard for Fama than I had had before. Such is the nature of economics. But there was this one bit that jumped right off the page:
Q: What will be financial crisis’s legacy for the subject of economics? Will there be big changes?
A: I don’t see any. Which way is it going to go? If I could have predicted that, that’s the stuff I would have been working on. I don’t see it. (Laughs) I’d love to know more about what causes business cycles.
Now the depressing thought is that there actually might not be any changes, big or small. Economics is now in the hands of the public service who want nothing more from theory than an excuse for their own existence. An economics that leaves them with little to do does not have much of an appeal to heads of Treasuries and central banks. And since Fama just after he says what I quoted above then said, “I used to do macroeconomics, but I gave (it) up long ago”, makes me think that he’s not been in that part of economic theory for quite a while. And that, of course, is the area that needs to be explored.
The business cycle is where the work needs to be done but if Fama is anything like the 99% who know little of what came before Keynes then he knows too little about how to think about the cycle and its rich and detailed pre-Keynesian literature. Fama understands that you cannot beat the market, not just in terms of knowing more than anyone else, but you cannot beat the market as the way to generate economic growth and prosperity. It is the high table of economic management but we have instead handed over economic management to people whose highest personal achievement was getting high distinctions in game theory and math ec.
It used to be said it’s all in Marshall but no one meant that literally. I still say it’s all in Mill, and while I don’t mean that literally either, there’s more there than in Mankiw. But wherever it can all be found if such a place exists, it is definitely not in a modern text in macro. It’s time we all tried to know more about what causes the business cycle, because that is where the answers, if there are any answers, will be found.