What Should Every Econ Grad Student Read?
We sat round the table discussing what is missing from the reading lists of today's graduate students in economics. Today's syllabuses concentrate heavily on stocking up their mathematical and econometric toolkit. I don't have a problem with that. On the contrary, I regret the technical deficiencies in my own background, and I regret them more as it becomes less likely that I'll ever make them good.
Still, we worried: do today's syllabuses neglect a broader understanding of how institutions have evolved and of what history shows? What should every economics graduate student read?
There has been a lot of comment recently on how to educate today's kids in animal spirits, neuroeconomics, and behavioral stuff. But that was not at the centre of our concern, important though it is (I wrote about it recently here). This is a correction that is already under way. When Thomas Sargent says that rational expectations is "oversimplified," it won't take long to trickle down into advanced macro.
What bothered us is deeper issues: are today's graduate students learning, discussing, and debating how successful market economies have evolved, and how and why markets work, what stops them working, and how best to let them work?
One suggestion was that the graduate students should all read The Wealth of Nations by Adam Smith (1776). The only Nobel laureate at the table (for this was Stanford) dismissed the idea with a wave of the hand. "Too eighteenth century," he said.
Overawed, I kept my mouth shut. Here is what I thought afterwards.
My first recommendation is an article called "The Use of Knowledge in Society" by Friedrich von Hayek (1945). Here, Hayek explained how markets economize on information. In a market economy, supply and demand allocate resources without outsiders or superiors needing to possess complete information about individual preferences or firms' capabilities. Bureaucracies, in contrast, need to know everything about you, me, and everyone else, before they can make decisions. Where market economies thrive on information, bureaucracies choke on it -- something that I see daily, sitting in the Hoover Archive among the milliions of documents bequeathed to history by the Soviet command economy.
Having read that, a natural question, particularly in our present-day context, is: what should be done when markets nonetheless fail? Here I turn to Oliver Williamson (1985), who proposed the idea of the "impossibility" of selective intervention. Most people think we should aim to combine the best of market forces and political action (I do too). Let the market economy do its wonders where it can; where it can't, let the government intervene and fix things. Williamson points out that in principle this cannot work out. The reason is that there is intrinsic uncertainty about where political action can allocate resources better than markets. If you give politicians the power to intervene selectively, it is certain that some of their interventions will make things worse. (And they do! Look around you!) As a result, no government, democratic or otherwise, can commit to intervene only when the result will improve social welfare.
Despite this, governments do intervene. When they do, do they improve things on balance? An essential handle on this question is provided by an article on "The New Comparative Economics" by Djankov et al. (2003). I do not know whether this article has truly founded a "new comparative economics" but it does conceptualize and model a fundamental idea. This is that every society faces its own trade-off between losses from political action and inaction. The absolute losses can be large or small, depending on each society's institutional arrangements, but every society has its own optimum. There is no guarantee that an optimum will be reached, however. Learning where we are in relation to our own optimum is similar to understanding whether we are suffering from too much or too little intervention.
Finally, although selective intervention is impossible, government have historically intervened and have often required the advice of economists to do so wisely. And they will continue to do so. Therefore, graduate economists need to understand how their advice can affect both economic policy and the economic lives of millions. In particular, every graduate student should know more about the Great Depression. No one has written a better account than Peter Temin (2000), and the story he wrote ten years ago has vivid, extraordinary relevance for the present day. I hope he is proud of it; he should be.
Unless you have a better idea ...
- Djankov, Simeon, Edward Glaeser, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer. 2003. The New Comparative Economics. Journal of Comparative Economics 31:4, pp. 595-619.
- Hayek, F.A. 1945. The Use of Knowledge in Society. American Economic Review 35(4), pp. 519-30.
- Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations. In four volumes. Edinburgh.
- Temin, Peter. 2000. The Great Depression. In The Cambridge Economic History of the United States, Volume III: The Twentieth Century. Edited by Stanley L. Engerman and Robert E. Gallman. New York: Cambridge University Press, 2000
- Williamson, Oliver E. 1985. The Economic Institutions of Capitalism. New York: The Free Press.