How has the crisis changed the teaching of economics?

There is an excellent discussion on Economist on this topic.

Number of economists chip in – Hal Varian, Tyler Cowen, Alberto Alesina, Michael Bordo etc. Two broad ideas emerge which need to be included in economics – One economic history and two basic concepts of finance.

This suggestion from Michael Pettis Senior Associate at the Carnegie Endowment for International Peace is stunning to say the least:

ONE of the stranger myths about the recent financial crisis is that no one saw it coming. In fact quite a lot of economists saw it coming, and for years had been writing with dread about the growing global imbalances and the necessary financial adjustments. In 2002 for example, Financial Policy published my article, “Will Globalization Go Bankrupt?” in which I compared the previous decade to earlier globalisation cycles during the past two hundred years and argued that we were about to see a major financial crisis that would result in a sharp economic contraction, bankruptcies of seemingly unassailable financial institutions, rising international trade tensions, and the reassertion of politics over finance. I even predicted that at least one financial superstar would go to jail.

How did I know? It didn’t require a very sophisticated understanding of economics, just some knowledge of history. Every previous globalisation cycle except one (the one cut short in 1914) ended that way, and nothing in the current cycle seemed fundamentally different from what had happened before.

Financial history does not vary much—there is little about the Roman real estate crisis of 33 AD, for example, that isn’t thoroughly familiar to us today. What strikes me is that while many economists, bankers and policymakers were caught flatfooted by the crisis, most economists with real knowledge of economic and financial history—and by history I do not mean the last twenty years or thirty years—thought a crisis almost inevitable and broadly understood how it was going to occur.

So how should the teaching of economics change? That’s easy. While mathematical fluency is very useful, it should not be at the heart of economics instruction. That place should be reserved for economic history.

I will try and read this article on priority basis. But what a point and what fantastic forecasting. It is difficult to find better words for inclusion of economic history in econ-101.

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