Australasian Journal of Education Volume 11, Number 2, 2014, pp.1-24

THE ROLE OF AND THE HISTORY OF ECONOMIC THOUGHT IN AND COURSES * AFTER THE GLOBAL FINANCIAL CRISIS

Peter Docherty Economics Group, of Technology, Sydney

ABSTRACT

The falling number of university economics programs teaching economic history and the history of economic thought has been well documented for some time. The Global Financial Crisis has, however, raised fresh questions about this trend. Student in economics seems to have been piqued by the crisis but writers such as Blinder (2010), Shiller (2010) and Friedman (2010) have argued that macroeconomists must provide better answers than they were doing before the crisis if this interest is to be maintained. This paper argues that their suggested changes can be met partly by re-introducing historical material previously removed from economics curricula. This may take the form of new courses but it may also involve teaching principles and intermediate courses with a greater historical dimension. It is argued that students are more likely to be interested in such material where it is effectively linked to questions of current policy importance such as macro-prudential regulation. The paper also suggests some pedagogical methods such as class debates and writing projects that could be used to effectively support such changes to the macroeconomics curriculum.

Keywords: Economic history, history of economic thought, financial crises, pedagogy. JEL classifications: A2, B1, B2.

* Correspondence: Peter Docherty, Economics Group, UTS Business School, University of Technology, Sydney, P.O. Box 123, Broadway, N.S.W., 2007, Australia. Email: [email protected], Phone: +61 2 9514-7780; Fax +61 2 9514-7711. I would like to thank Rod O’Donnell, Harry Tse, participants at the 19th Annual Australasian Teaching Economics Conference held at the University of Canterbury, Christchurch, New Zealand, July 7 and 8, 2014, and three anonymous referees for helpful comments and suggestions. Any remaining errors are my responsibility.

ISSN 1448-448X © 2014 Australasian Journal of

2 P. Docherty 1. INTRODUCTION The falling number of university economics programs offering courses in economic history or the history of economic thought (HET) has long been lamented by academics in these fields. The emergence of the “business school” as an institutional form in Australia over the last twenty years or so has often been associated with reduced offerings of courses teaching economics-related history of any kind and the closing of economic history departments in particular. At the same time, economics as a discipline has also been under pressure. A number of studies have documented falling numbers of students taking university economics beyond the first year and the closing down of degree programs with an economics focus. Bachelor of Economics degrees have been replaced with or degrees and more students tend to study the disciplines of finance, marketing and than they do economics. Bachelor of Economics degrees once upon a time had minimum HET requirements (See Groenewegen 2003) but this has tended not to be the case in Bachelor of Commerce degrees. The GFC has, however, raised a series of questions about these trends. Blinder (2010) argues that student interest in economics at Princeton has never, in his experience, been higher than in the years immediately following the crisis. Yeunglamko (2011) reports a similar trend in other parts of the world but also points to increased levels of student dissatisfaction with the type of analysis encountered in standard tertiary macroeconomics courses. This analysis, he argues, either fails to address issues surrounding the crisis or it does so with models poorly suited to the task. In 2009, The (2009a, 2009b) magazine, a well-known conservative publication, asked whether traditional economic theory and doctrines such as the efficient markets hypothesis needed to be re-thought in light of the crisis. The occurrence of the crisis, therefore, raises questions about whether the confidence of macroeconomists in their understanding of macroeconomic phenomena, displayed so clearly in the lead up to the crisis (see, for example, Taylor 1998), was misplaced, and whether there are not issues of fundamental importance that need to be rethought as a result of the crisis and the surprise with which it caught most . An important part of this rethinking must surely involve a comparison of the recent crisis with the Great Crash of 1929, and other episodes of financial distress, as well a rethinking of

History after the Global Financial Crisis 3 how such phenomena can be explained. It must also involve an attempt to understand how such phenomena relate to periods of sustained which so occupied the thinking of economists in the lead up to the crisis. Such rethinking is, therefore, likely to involve both economic history and an understanding of how economic theory evolved as it did; the history of economic thought. If macroeconomic researchers are to engage with these questions competently, they will need the tools of historical analysis which have been neglected for the last three decades. Krugman (2009, 2011) made a number of these points immediately after the crisis but not all economists agreed with him. Cochrane’s (2011) disagreement, for example, is now legendary. Lucas (2009) raised similar objections to Cochrane’s in his response to the articles in The Economist mentioned above that asked whether economic theory needed to be transformed as a result of the crisis. The Cochrane and Lucas responses revolved around the central propositions of the efficient markets hypothesis that asset in well-developed financial markets reflect all available information, and that given this, the difficulties of identifying bubbles, distinguishing them from other kinds of disequilibrium adjustment, and taking action to neutralise them without devastating the rest of the economy are essentially insuperable. And of course debate about these issues is perfectly appropriate; this is one of the central functions of academia. But the tone of the responses was such as to suggest that just asking the question as to whether a re-evaluation of economic theory might be necessary was illegitimate, and such a stance works directly against the critical role of academic discussion. A more reasonable intellectual approach would be to allow, and even to encourage, an event like the GFC to raise a broad range of highly critical questions for the profession, and then to carefully and systematically address those questions, even if this results in a confirmation of previously held positions. Such an approach, it is argued in this paper, will involve a strong role for historical studies and this justifies curriculum renewal, or at least significant modification, to reintroduce these studies into economics programs. The paper is structured as follows. Section 2 reviews some of the literature on the general decline in tertiary economic programs as well as the demise of economic history and HET more specifically. Section 3 outlines the intellectual contribution that these fields can make to the

4 P. Docherty training of economists. Section 4 considers some of the explicit reflections on economics education in the light of the GFC before Section 5 outlines a series of specific curriculum modifications designed to address the issues raised in Section 4. Section 6 briefly discusses some of the associated pedagogical issues and Section 7 concludes. 2. DECLINING INTEREST IN ECONOMICS, ECONOMIC HISTORY AND THE HISTORY OF ECONOMIC THOUGHT Reports of declining interest in tertiary economics have been on record now for some time. Millmow (2009, p.59-60), for example, cites evidence from university enrolments which indicate that 1.94% of all Australian higher education students were enrolled in economics programs in 1990-92 whereas this proportion was only 1.15% in 2005-07. He attributes this trend in part to the displacement of student interest in economics by more general business programs. Guest & Duhs (2002) present complementary evidence that students consistently rate the teaching of university economics courses poorly compared to other courses based on the Australian Course Experience Questionnaire and their own survey evidence. They suggest two reasons for this trend: poor pedagogical practices in economics on the one hand and academic incentive structures biased against teaching and in favour of research on the other. Ongeri (2009) provides a similar perspective for the United States. Guest & Duhs (2002) argue that improvement requires economics courses to cover fewer topics, in more depth, and with greater emphasis on real world problems and applications. They also recommend that macroeconomics courses should provide better treatments of financial markets (Guest & Duhs 2002, p.154). Round & Shanahan (2010, p.433) note similar trends and suggest that economists have responded poorly, having done little to accommodate the change in student for real world and practically-oriented courses instead continuing to teach highly abstract theoretical approaches often couched in mathematical terms. It is within this context of a general decline in demand for economics programs that interest in economic history and HET have also occurred. Boot (1997) attributes the observable decline in the importance of economic history in Australian tertiary institutions to a combination of shifting student preferences and “government-imposed financial stringency” (Boot 1997, p.158). With fewer students taking economic history courses and university managers under increased

History after the Global Financial Crisis 5 financial pressure to operate their institutions on smaller budgets (in real terms), departmental structures tend to be reorganised with economic history absorbed into other departments. This has naturally led to a scaling back of economic history course offerings since the sympathies of those becoming responsible for the management of economic history are likely to lie elsewhere and increasingly scarce budget dollars are more likely to be spent on other “strategic priorities” and not on replacing staff in economic history specialisations when they retire. This has rendered it impossible to staff any economic history offerings with the eventual cancelation of all such courses. Blaug (2001), Backhouse (2002), Groenewegen (2003) and Kurz (2006) outline a similar trend for HET though with some qualifications. While there are few departments of HET and this specialization has traditionally been offered within economics departments, the field has tended to be crowded out in teaching programs by new and more technically oriented offerings and in research efforts by a relatively low regard for HET by many economists.1 Blaug offers a number of possible reasons for the decline in the respectability of HET amongst economists. The first is that it is the result of a “philosophical overhang” from positivism (Blaug 2001, p.146). Science is concerned with evidence-based explanations of observable phenomena and it progresses as new explanations are confirmed and the body of knowledge is built up; Looking backward, as HET does, is unnecessary and unproductive in a “scientific” approach to economics and should thus be eschewed. The second reason that HET is not valued results from an “economic” calculation about the allocation of scarce time. There are more important and more productive ways to spend valuable research and teaching time so that even if HET were judged to be beneficial, it is not as beneficial as other pursuits. The third reason largely follows from the first two. Since HET is of little in a progressive science and since other,

1 This low regard is illustrated in the Australian context by the downgrading of the History of (HOPE) and the Australian Economic History Review (AEHR) from “A” to “B” status by the Australian Business Deans Council (ABDC) in the 2013 draft of its revised journal ranking. HOPE was subsequently elevated to “A” status given a substantial outcry not only by the HET research community within Australia but around the world. The AEHR remains at the “B” level.

6 P. Docherty more valuable, pursuits should take priority in the allocation of time, it is not surprising to find that HET is of little vocational use to graduates (Blaug 2001, p.147). The simultaneous occurrence of declining student interest in economics and declining interest in economic history and HET within the discipline itself, raises some important questions. More particularly, are the two trends related? It is, of course, possible that they are not related or that declining interest in economic history and HET is simply a particular manifestation of the more general malaise which afflicts interest in economics itself. Other possibilities, however, might be that there is a causal relationship between the two trends or that both trends have a common, underlying cause. For example, it may be that the discipline has become too detached from trying to explain real world phenomena as suggested by Krugman, and too focused on following the logic of esoteric research programs without sufficient attention to their sphere of relevance. Such a proposition would account for a lack of interest within the profession in using economic theory to explain historically observable phenomena, as well as for a decline in student interest in economics on the assumption that students themselves are interested in real world issues. In this case, it would not be surprising that students would prefer to take courses in finance or marketing which are seen as more relevant to the real world. It would also be consistent with a discipline uninterested in asking whether “wrong turns” might have been taken in the discipline’s development or in considering the possibility of alternative intellectual paths. Whichever of these possibilities is correct, this paper argues that economics and economics education will be better if the latter produces graduates who are both knowledgeable about how their discipline developed and have the ability to analyse real world problems. The following section thus provides a closer examination of how historical studies contribute to the development of better economists and economic researchers. 3. THE VALUE OF ECONOMIC HISTORY AND THE HISTORY OF ECONOMIC THOUGHT A number of writers identify potential benefits for both students and researchers from increased attention to economic history and HET. Boot (1997, p.159), for example, points out the cognitive and problem-solving skills developed by students of economic history as they consider and evaluate the best explanations for observed

History after the Global Financial Crisis 7 historical phenomena. The study of economic history thus sharpens students’ knowledge of economic theory itself as they use that knowledge to understand and interpret real episodes of economic phenomena. Studying economic history also develops the complementary skill of learning how to apply economic knowledge to real problems and institutional settings in a way that also develops economic intuition. This is a skill employers of economics graduates consistently cite as being important for the workplace (See Hansen 2001). Boot (1997, p.159) also argues that economic history requires students to hone their communications skills both in written and oral modes, another skill cited by Hansen as being important to employers. Blaug (2001, pp.150, 156) identifies a set of benefits derivable from HET although his focus is as much on researchers as it is on students. He argues that one does not fully understand an economic concept or theory until one understands how it developed. Since theories emerge from a particular intellectual environment in response to particular challenges and often in contrast to alternative points of view, these circumstances help to define the specific content of that concept or theory.2 Disregarding this context runs the risk of limiting one’s understanding of that concept. This is particularly the case in relation to the concept’s sphere of applicability and its limitations. These are often carefully specified by the original proponents of an idea but subsequently lost by second and third generations of adherents who eventually read not the original proponent but his or her interpreters, and eventually only interpreters of the interpreters. Blaug also argues that the path dependent nature of ideas gives HET an important role in generating new research programs. He points out that a range of possibilities may exist for the development of a particular idea at any given moment in time but that when one of those possibilities is chosen, other potentially profitable possibilities tend to be left behind and unexplored. Research programs then move conceptual awareness in a particular direction so that if the program should run into difficulty and require modification, the possibilities that existed at the conceptual junction originally taken may well be ignored by researchers unaware of this history. It may be, of course, that the branches not taken would not have been fruitful either but this

2 Groenewegen (2003, p.123) makes a similar point in terms of HET providing “perspective” on modern economic theory.

8 P. Docherty cannot be determined a priori. Researchers trained in the history of economic thought are, therefore, able to suggest new possibilities, serving as facilitators of new directions in contemporary research. Roncaglia (1996, p.298) broadens this methodological perspective by using the contributions of Kuhn and Lakatos to define what he calls the “competitive view” of scientific inquiry. Given the philosophical demise of positivism,3 Roncaglia notes the impossibility of evaluating alternative theoretical approaches to the explanation of phenomena by appeal to some “objective” criteria. The perspectives of Kuhn and Lakatos thus revolve around the existence of “paradigms” and “research programs”, and such paradigms and programs are evaluated on the basis either of judgements about the ability of a body of ideas to explain enough of the observable phenomena in its sphere of applicability, or on the basis of epistemic values promulgated by particular research communities (See also Chalmers 1999, pp.112- 117; 132). Given the lack of objective evaluation criteria, Roncaglia suggests that paradigms and research programs essentially compete with each other to see which is capable of providing the most convincing explanation for any particular economic phenomenon. This seems reasonable since it implies that explanations will only be embraced in the absence of better explanations. In this respect, Blaug’s observations, cited above, become very important since HET is able to generate new competitors for existing economic theories by identifying contextually dependent strengths and weaknesses, applicability domains and limitations of the dominant theory and its historical alternatives (cf. Roncaglia 1996, p.299). If these characterisations of historical studies in economics are correct, the decline in their importance is likely to render economics a less insightful discipline. The following section considers how the occurrence of the GFC affects this perspective. 4. ISSUES RAISED BY THE GLOBAL FINANCIAL CRISIS Blinder (2010) provides anecdotal evidence that the GFC generated the highest level of student interest in economics that he had seen his in long career at Princeton. This, of course, is not surprising. The crisis constituted the most significant macroeconomic event since the Crash of 1929 and the which followed it. It thus

3 See Caldwell (1982, pp.62-63; 244) for a detailed account of the problems with positivism, cf. Jones (1977), Cross (1982) and Beed (1991).

History after the Global Financial Crisis 9 represented an economic event of intense interest for students both because it demanded an explanation and because at a more personal level it held such widespread social implications. Blinder referred to it as a true “teaching moment” (Blinder 2010, p.385) and many of us teaching macroeconomics at the time drew students’ attention to the once in a life time learning opportunity it represented. Such a motivational gambit is, of course, double-edged, imposing on the instructor the burden of being able to exploit the opportunity and to inspire students with pertinent analysis and penetrating insight. Blinder argues that the tools at the disposal of most macroeconomists were inadequate to the task and that this situation warrants, therefore, a thorough re-evaluation of how we think about the macroeconomy and how we teach students about it. Blinder’s pedagogical analysis focuses on the macroeconomics curriculum and has two elements. He first identifies a crucial set of choices we make as teachers that need to be rethought in light of the crisis (Blinder 2010, pp.386-387). Secondly, he identifies a range of topics that have traditionally been omitted from macroeconomics principles courses that the crisis should cause us to introduce (Blinder 2010, pp.387-390). In terms of important choices that Blinder thinks ought to be rethought, he lists four: the relative emphasis on growth versus cycles; how Keynesian the analysis should be; how many interest rates are included in the models we present to students; and the level of model complexity especially with respect to its financial features. His view is that the trend away from treating cycles that occurred across the nineties towards emphasising growth should now be re-balanced in favour of cycles. He is also of the view that emphasis on Keynesian analysis and Keynesian policy responses to events such as the GFC should be increased. challenges at the zero lower bound suggest that models need to have more than just a single short term if discussion of policy options is to make any sense. Finally, Blinder argues that models need to be more complex with a greater role for financial markets than they have been over the last thirty years. In terms of additional topics to which the crisis demands we pay greater attention, he includes the determination of risk premia in interest rates; asset bubbles; securitization; the role of leverage in financial structures; the difference between insolvency and illiquidity; systemic risk and the “too big to fail” doctrine; and moral hazard. Blinder (2010, p.390) is

10 P. Docherty not of the view, however, that any of this reconstitutes a reworking of the fundamentals of the standard macro model. His approach is what might be called an incrementalist approach to curriculum modification. The “basic framework” remains solid, he argues, it simply needs re-balancing and the addition of some new topics. Shiller’s (2010) position is stronger. He argues that the poor state of the economics curriculum reflects a crisis in economics research itself. For Shiller, the research crisis was its failure to predict the Global Crisis. He raises a number of issues linked to the crisis that he, therefore, suggests need more attention in both teaching and research, including: the causes and effects of speculative bubbles; the role of and the idea of market efficiency; the nature and extent of the appropriate level of government intervention in the economy; the place of Keynesian analysis and “animal spirits”; and comparisons of the GFC with the Great Depression. Friedman (2010) shares much of Shiller’s perspective, arguing that the crisis should change our thinking about macroeconomics and what we teach our students. He identifies a series of propositions arising from the crisis that “contradicted so many central truths of modern economics” and to which more attention needs to be given in our teaching including: the fact that we live in a monetary economy, and that this matters; the significance of credit rather than and the importance of processes of financial intermediation which generate credit; the fact that Minsky was right and that markets are not always rational; and the significance of frictions and distributional effects. There are clearly commonalities in the issues raised by Blinder, Shiller and Friedman, and their overall critical perspective stands in contrast to the perspective of economists such as Cochrane and Lucas. The defence offered by Cochrane and Lucas for the efficient markets hypothesis must be seriously considered. They argue that the very nature of the hypothesis suggests that events like the GFC cannot be anticipated because if they were anticipated, this would have led rational agents to sell low quality asset backed securities well ahead of the turmoil or indeed not to have been willing to hold them in the first place. This unwillingness would have made it difficult for investment banks to put in place the financial architecture that allowed the accumulation of sub-prime risk ahead of that risk’s eventual realisation and the onset of the crisis. By definition, shocks of the type

History after the Global Financial Crisis 11 associated with the crisis cannot be anticipated, according to Cochrane and Lucas. But of course this defence rests on a presumption that the efficient markets hypothesis is correct. It interprets the experience of the crisis from the perspective of that hypothesis. Another legitimate approach is to ask whether there were alternative ways of thinking about events such as the GFC and whether those alternatives were more consistent with the emergence of the GFC than the efficient markets hypothesis. That is, another approach is to do what an empirical science (which economics and finance are according to both Cochrane and Lucas) is supposed to do, and that is to evaluate alternative hypotheses in the light of the evidence. From this perspective, Minsky’s financial instability hypothesis is one alternative explanation worthy of consideration as Friedman (2010) explicitly points out. It was paid little attention prior to the crisis but on the surface provides a potentially reasonable explanation of its occurrence.4 Since the other issues to which Blinder, Shiller and Friedman draw attention are either aspects of Minsky’s theory or factors complementary to that theory, this suggests that the issues raised by these authors certainly deserve increased scrutiny. Whether this leads to an incremental change in the nature of economics, as suggested by Blinder, or a fundamental rethink, as suggested by Shiller and Friedman, we need not declare here and can leave to the outcome of careful consideration of the issues they raise. What we do need to declare here, however, is a fundamentally greater openness to the consideration of alternatives to pre-crisis macro and . That, as suggested above, is the task of science (defined broadly as the pursuit of knowledge) and also the task of science education. Both Blinder (2010, p.386) and Shiller (2010, p.407) suggest an explicit role for economic history and the history of economic thought in the consideration of alternatives that the crisis demands we

4 In making assessments of this nature, a distinction needs to be drawn between predicting the precise timing of the crisis and predicting its occurrence and general features. A particular theory could well be designed to do the latter but not have the structural detail to be capable of the former. It would be a mistake to dismiss a theory which was capable of predicting the occurrence and general features of the crisis on the grounds that it did not predict sufficient detail but to accept a theory that did not predict the crisis at all. This point is explicitly addressed by Krugman (2009, 2011). See also the documentary film Inside Job (directed by Charles Ferguson, Sony Pictures, 2011) for a discussion of the economists that did predict the crisis in general terms.

12 P. Docherty undertake. But this is also implicit in Friedman’s analysis. Shiller argues, for example, that we should encourage a stronger awareness of how economic thinking has developed, pay more attention to real historical analysis, and incorporate insights from other disciplines as part of the consideration of alternatives. The following section, therefore, suggests how economic history and the history of economic thought in particular might be re-injected into the economic curriculum in response to these challenges. 5. RE-INJECTING HISTORY INTO THE CURRICULUM The analysis offered above suggests that economic history and HET each have important contributions to make to economics education (as well as to economic research). It also suggests that the importance of these contributions has been underscored by the GFC. A number of potential modifications to the economics curriculum flow from these observations. Firstly, Blinder’s argument that the relative emphasis between cycles and growth should be modified in favour of cycles, and Shiller’s suggestion that the causes and effects of speculative bubbles need greater attention both imply that financial crises need to receive greater attention in macroeconomics and finance programs. This could take the form of new courses such as The History of Financial Crises at senior undergraduate, graduate or MBA levels dedicated to historical examinations of the conditions under which crises emerge, the defining characteristics of such crises (both historical questions) and the explanation of such events (a theoretical and HET question). Comparisons of the Great Crash of 1929, the Great Depression, and the GFC stand out as obvious candidates for examination in such courses but there are many other possibilities. Courses with balanced perspectives on this topic could be built around such works as Keynes (1936), Galbraith (1954), Friedman & Schwartz (1963), Temin (1976, 1989), Kindleberger (1973, 2000), Minsky (1982), Shiller (2005), Akerlof & Shiller (2009) and Reinhart & Rogoff (2009). In the Australian context, Schedvin (1970) and Boehm (1971) on the Great Depression and the 1890s Depression respectively would also be worthwhile. But extended or thematic treatments of these topics (as opposed to dealing them as mere examples) could justifiably and usefully be included in principles and intermediate

History after the Global Financial Crisis 13 courses in macroeconomics and in senior courses dealing with or financial markets.5 In terms of the theory of crises, the contribution of Minsky, as suggested earlier, is worthy of special attention but this is also true of the work of Keynes. Keynes deals with crises in chapters 12 and 22 of the General Theory in terms of concepts such as the “state of long term expectation”, the negative impact of organized financial markets on the stabilising influence of entrepreneurs’ “animal spirits” when bad news triggers “sudden and violent” selling behaviour by poorly informed investors, and the “state of credit” or the reduced confidence of lending institutions in the ability of borrowers to repay loans when defaults begin to rise, all of which have counterparts in the pathology of the GFC (see Docherty 2011, pp.525-528).6 Minsky’s (1964) focus on the role of optimistic expectations across boom periods, increased financial innovation and layering, debt accumulation and resulting financial fragility extends Keynes’ work on crises and is now widely recognised for its relevance to the Global Crisis. There are also important counterparts of these Minskian concepts in the work of Claudio Borio (e.g. 2005) which has played a central role in developing the recent concept of macro-prudential regulation. This concept is an important part of the Bank for International Settlements’ Basel III regulatory framework developed in response to the crisis. A clear link can thus be built between HET and current policy questions that has the potential to enhance student interest in considering the work of earlier economists. A second set of possibilities follows from Blinder’s emphasis on how Keynesian the treatment of macroeconomics should be and Shiller’s related emphasis on “animal spirits”. The persistent tension between Keynesian and anti-Keynesian views which have resurfaced following the Global Crisis suggests the current legitimacy of teaching macroeconomics in terms of the historical interplay between these perspectives. One could thus design a macroeconomic principles course around such a historical account, beginning with Keynes’ General Theory, outlining its distinctives against the ruling orthodoxy at the time of its publication, then look at Keynes’ assimilation into

5 See Gordon (2011) for a set of possibilities built around the Great Depression. 6 Keynes’ work on crises might also be compared to other contemporary explanations of fluctuations such as those of Robertson (1915) and Pigou (1927). Thanks to an anonymous referee for this suggestion.

14 P. Docherty the and the dominance of this synthesis across the 1940s, 50s and 60s. One could then consider the rise of monetarism, the problems it encountered in the 1980s, and the re- assertion of Keynesian ideas in the form of New Keynesianism in the 1980s and 1990s. Papers such as Friedman (1968), Johnson (1971), Tobin (1981), Blinder (1988), Romer (1993), Delong (2000), Romer (2000) and Blanchard (2009) would provide an intelligible mainstream account of this historical development which could be used to supplement the related models of a standard macroeconomics textbook. Works such as Akerlof & Shiller (2009) could finally be used to raise critical questions about the implications of the Global Crisis for this historical development with a view to asking where the analysis leaves macroeconomics at the present moment. Thirdly, one could use the quantity theory of money and the equation of exchange as pedagogical themes for a more advanced macroeconomics course, teaching the frameworks outlined above with reference to their treatment of the quantity theory and the assumptions they make about the various elements of the equation of exchange. Given the intellectual heritage of the quantity theory, this would even allow a longer historical perspective on the development of monetary thought. More attention could be paid in this context to the origins of the quantity theory in the works of Locke and Hume, and then to the nineteenth century monetary debates and the various theories outlined in those debates such as the Rigid and Moderate Bullionist positions, the School and the Banking School, as precursors to the Keynesian-Monetarist controversies of the twentieth century. Vickers (1959), Green (1992) and O’Brien (2007) all provide very useful accounts of these developments. There are also theoretical connections within these debates to issues of current policy importance such as macro-prudential regulation mentioned earlier. This regulation requires identification of bank loans that are being used to finance speculative asset purchases as opposed to bank loans that are being used to finance other economic activity. This was precisely the objective of the real bills doctrine of and the Banking School so that problems with the real bills doctrine could thus be usefully explored and comparisons made between this position and the other nineteenth century theories referred to above in teaching students about the issues underlying macro-prudential regulation.

History after the Global Financial Crisis 15 Fourthly, explicit re-examination of the concept of rationality traditionally used in economics and finance is suggested by Shiller’s identification of “animal spirits” as an important psychological aspect of dynamics surrounding the crisis and by Friedman’s emphasis on the work of Minsky. This is probably already happening in finance courses but could usefully be linked with an examination of the work of Keynes and Minsky discussed above. Lastly, development of the concept of macro-prudential regulation raises questions about the relationship between central banks and prudential regulators. A course which examined the historical development of central banking in conjunction with the development of thinking about central banking could be designed to address the issue of the best institutional allocation of various -related functions. Such a course could be organised around works such as Goodhart’s (1988) The Evolution of Central Banks and Fetter’s (1965) The Development of British Monetary Orthodoxy, 1797-1875 and could deal with the relationship between monetary policy and financial stability, in the banking sector, the provision of lender of last facilities, emergence of the Bagehot principle of supporting illiquid but solvent banks, the too big to fail doctrine, the development of prudential regulation, and central bank independence. Not surprisingly, all of the suggestions outlined above deal with courses in macroeconomics, monetary economics and finance. This follows directly from the focus in this paper on the implications of the GFC for teaching. But the rich set of possibilities for economic history and HET suggested by this event is merely indicative of the value of history more generally for economics the contributions of Roncaglia (1996), Boot (1997) and Blaug (2000) identify, and which were discussed in Section 3 above. A broader set of possibilities designed for the business school context might be some form of Business History Sub-major, made up of a block of inter-disciplinary courses coming off the first year of a typical business degree. Each course within this sub-major could incorporate insights from more than one traditional business discipline. It could include The History of Financial Crises course outlined above but in addition, subjects along the following lines might be included:  Emergence of the Modern Corporation; This course could employ principles from corporate governance, finance and to help students understand how an

16 P. Docherty important structure within the modern business context emerged. Students would thus develop a better understanding of the dynamic forces shaping the modern corporation.  The Development of Economic Thinking; Drawing upon economics and marketing, this course would trace the evolution of concepts and frameworks used to understand the environment within which businesses operate. It would look at thinking about both the consumer and the firm as well as the overall business environment.  History of Business Leadership and Innovation; This course could examine approaches taken to leadership by well-known and successful entrepreneurs to the management of their companies. It would also consider the role of innovation in the success of such entrepreneurs and the factors that have been identified to account for this innovation. Given the importance of the GFC, it makes sense for historians to respond with workable suggestions that speak to the immediate educational needs and possibilities highlighted by this event. But if any of the above opportunities are effectively exploited by historians, new and wider possibilities may well emerge down the track. 6. PEDAGOGICAL STRATEGIES TO SUPPORT HISTORICAL STUDIES The possibility that greater use could be made of historical perspectives in economics education either in the form of new courses or by integrating these perspectives into existing courses raises some pedagogical questions. It was suggested in the previous section that orienting these perspectives so as to provide critical reflection on issues of current significance (such as macro-prudential regulation) could deal with the “relevance” issue identified as a problem for economics teaching generally by such studies as Guest & Duhs (2002) and which might well confront the re-introduction of economic history and HET given inaccurate stereo-types of historical studies. But the value of historical studies could be underscored by adopting pedagogical strategies most appropriate to these fields. Bowmaker (2010) reports insights obtained from interviews with Barry Eichengreen on teaching Economic History and Steven Medema on teaching HET in which both highlight the importance of

History after the Global Financial Crisis 17 class discussion as a key pedagogical technique they use in their teaching. This approach allows students to grapple with, what for them are, unfamiliar ideas, and to forge links between what they already know and the new perspectives they are encountering, whether these links are positive or points of difference. This perspective is confirmed by Cohen & Emmett (2012, p.551) and is consistent with the broader pedagogical argument of Salemi et al. (2010, p.143) that structured discussion enhances student learning of higher order concepts. Conway et al. (2010, p.198) also argue that the use of debates in the teaching of HET enables students to connect with the fact that a good part of HET is discovered by examining historical debates on matters of public policy. This would seem particularly relevant to the material suggested in Section 4 for inclusion in macroeconomics courses, particularly the Bullion and Bank Charter debates of the nineteenth century and the Keynesian–Monetarist debates of the 1970s. Having students research the positions in these debates, engage in classroom-based debates themselves on the same or closely related questions, and then participate in a debriefing session with the instructor following the debates would be a potentially useful pedagogical strategy. Medema stresses the importance of having students engage with primary sources in HET courses (see Bowmaker 2010) as do Cohen & Emmett (2012). Great care would, however, need to be taken in introducing students to such sources, especially in principles and intermediate courses, so as not to overwhelm them with intellectual language and categories so unfamiliar that they would be put off further historical study. Instructors would first need to discuss appropriate conceptual frameworks, explain the meaning of key terms whose meanings have changed or fallen into disuse since primary sources were written, and provide textual pointers or markers to help students navigate these sources in order to make them more accessible. Using short excerpts in face to face teaching as part of this familiarising exercise could also be very effective. But clearly, if students are to engage in debates on the kinds of matters suggested above, reading the original arguments would be highly beneficial. Cohen & Emmett (2012, p.550) also suggest that HET courses lend themselves to writing across the curriculum assessment strategies. HET tends to use mathematics selectively, relying instead on textual and exegetical analysis best conveyed in essays and other types of

18 P. Docherty writing. Thus, structuring an analytical argument in written form is a skill that students are likely to need if greater use is made of historical perspectives and writing across the curriculum strategies could be used to develop this skill. Writing is also a generic skill that students tend not to develop very well in standard economics programs and one that employers cite as being important for graduates to possess (see Hansen 2001). Graduates would thus be developing professional skills as well as enhancing their knowledge of economics if this approach was to be used.7 This strategy could also be dovetailed with the suggestion above that debates and class discussion be used in history courses. Students could be required to submit a discussion or briefing paper prior to or following their involvement in a class debate on the same topic. On the teaching of economic history, Fishback & Nickless (2012, pp.529-530) argue that use of quantitative data in teaching of specific historical episodes is invaluable for making such periods more tangible for students. Using such data can help to make the issues to be considered more concrete, enable comparisons to be made with contemporary problems, and identify specific phenomena for which explanations need to be sought. One might begin a principles or intermediate macroeconomics class, for example, with something like Figure 1 identifying the fall in Australian GDP growth in 2008-09 and comparing it with previous downturns in 1960-61, 1982-83 and 1992- 82 as well as in the Great Depression. This would not only provide a useful comparison of Australia’s experience in the Great Depression and the GFC but could also be used to raise questions as to the difference in forces shaping the economic experience of the two periods. What caused such a large downturn in the Great Depression? Why was the most recent experience so much more moderate? My own experience with such an approach is that student curiosity is pricked by making the nature of significant historical episodes tangible in this kind of way and that they respond well to the challenge of thinking critically about the causes and appropriate policy responses to such events.

7 We saw above that Boot (1997, p.159) also makes this point with reference to the study of economic history and O’Donnell (2010) makes the same point about student development of generic skills in courses dealing with alternative economic perspectives. See Docherty et al. (2010) for details of a writing across the curriculum-type strategy that was used in a large intermediate macroeconomics class that could be useful in considering this pedagogical approach.

History after the Global Financial Crisis 19

Figure 1: GDP Growth, Australia Sources: Australian Bureau of , Australian : National Income, Expenditure and Product, Catalogue No. 5202, Table 2; Haig (2001); Hogan (1960); and Dowrick (1999). Data for the period during and immediately after World War II was not available. There are, therefore, a number of pedagogical strategies that could be employed to support the enhanced use of historical analysis suggested by such writers as Blinder (2010), Shiller (2010) and Friedman (2010) in response to the Global Crisis. 7. CONCLUSION A decline in the status of economic history and the history of economic thought has been documented for some time as has the decline in student enthusiasm for economics as a discipline. The Global Financial Crisis has, however, raised a series of questions about these trends. Student interest in economics seems to have been piqued by the crisis but writers such as Blinder (2010), Shiller (2010) and Friedman (2010) have argued that macroeconomists must provide better answers than they were doing before the crisis if this interest is to be maintained. This paper has argued that their suggested changes can be met partly by re-introducing historical material previously removed from economics curricula. This may take the form of new courses such The History of Financial Crises and Development of Central Banking courses but it may also involve teaching principles and intermediate courses with a greater historical dimension. It is argued that students are more likely to be interested in such material where it is effectively linked to questions of current policy importance such as macro-prudential regulation. The paper has also suggested

20 P. Docherty some pedagogical methods such as class debates and writing projects that could be used to effectively support such changes to the macroeconomics curriculum.

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