the role of economic history and the history of economic ... 11, number... · australasian journal...

Australasian Journal of Economics Education

Volume 11, Number 2, 2014, pp.1-24

THE ROLE OF ECONOMIC HISTORY AND THE

HISTORY OF ECONOMIC THOUGHT IN

MACROECONOMICS AND FINANCE COURSES

AFTER THE GLOBAL FINANCIAL CRISIS*

Peter Docherty

Business School Economics Group,

University 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 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 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 Economics Education

mailto:[email protected]

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 Bachelor of Commerce or

Bachelor of Business degrees and more students tend to study the

disciplines of finance, marketing and management 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 Economist (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 economists. 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 economic growth 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 prices 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 preference 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


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 value in a progressive science and since other,

1 This low regard is illustrated in the Australian context by the downgrading of the

History of Political Economy (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


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 Great Depression 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).


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. Monetary policy

challenges at the zero lower bound suggest that models need to have

more than just a single short term interest rate 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 market 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

rational expectations 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 money 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


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 financial economics. 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


courses in macroeconomics and in senior courses dealing with

monetary economics 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 neoclassical synthesis 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 Currency 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 Adam

Smith 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.


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 central bank-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, competition 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 accounting 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


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.


Figure 1: GDP Growth, Australia

Sources: Australian Bureau of Statistics, Australian

National Accounts: 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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