Parag Waknis

The new classical school of thought uses the Solow growth model-based framework with optimising agents to d etermine the values of various macro economic aggregates. It is also referred to as the “real business cycle” (RBC) framework because of its emphasis on real shocks, i e, shocks

A response to “Some Thoughts on the Macroeconomics Curriculum in India” (EPW, 21 January 2012) distinguishes the various schools in contemporary macroeconomics, and surveys the teaching of the subject at the undergraduate level in the United States. It argues for greater flexibility for teachers in India to decide their curricula.

Parag Waknis (parag.waknis@umassd.edu) is with the University of Massachusetts, Dartmouth, US.

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Notwithstanding this, I do not agree with Varma’s assessment of what is missing in current curricula and what exactly needs to be added to make it more heterodox. Also, the comparison with what is taught in the United States (US) needs some elaboration. In what follows, I outline my critique. Having taught economics in both the countries for some time now, I plan to exploit the insider’s advantage.

First of all, I would like to point out that what is mainstream and what is heterodox is not so clear unless we account for existing practices and contexts in different countries. It is also important to be clear about what we mean by different schools of thought in macroeconomics, especially in cross-country comparisons of curricula.

The Classical or its Neoclassical counterpart, as I understand it, believes in the efficiency of markets, while the old Keynesians believe that markets do not always work and in such cases, the government usually has to step in. However, both these schools of thought use a static framework to analyse economic events. This is where the new classical and New Keynesian schools differ from their old counterparts. Both these “New” schools use a dynamic framework.

to the Solow residual as an explanation for business c ycles. It uses techniques of dynamic o ptimisation and dynamic programming to arrive at results. Some initial expositions can be found in the Frontiers of Business Cycle Research, a collection of a rticles edited by Thomas Cooley (1995). Daron Acemoglu’s Introduction to Economic Growth and Robert Barro and Xavier S ala-i-Martin’s (2003) Economic Growth are good examples of this school in the graduate textbook arena.

The New Keynesian model used today really is an offshoot of the New Classical model. As pointed out by Stephen Williamson (2011) in blog posts,1 Michael Woodford (2003) of Columbia University laid out the framework for it in his Interest and Prices: Foundations of a Theory of Monetary Policy. It has all the elements of the New Classical model except that monopolistically competitive fi rms rather than the perfectly competitive fi rms of the New Classical model decide prices. This introduction of imperfect competition along with the use of menu costs or Calvo pricing allows for some price stickiness in the model. However, it is still as micro-founded as the New Classical/RBC m odel, where the representative agent decides things optimally. It is also the workhorse model of monetary policy analysis at various US Federal Reserve banks, though after the crisis its use has been severely criticised.

The US Situation

In most cases in US universities, teachers are free to design their own curricula and tests and choose the text they will use for courses. This allows teachers tremendous flexibility in bringing in fresh perspectives and choosing texts that support their view of the subject matter.

In spite of this freedom, we do fi nd general consensus on subject matter in a typical introductory macroeconomics course.

DISCUSSION

At the undergraduate level, many of the popular texts that end up being adopted more or less look the same. They deal with the short term in the context of sticky prices and wages, and the long run in the context of flexible prices. So a hybrid of Classical and Old Keynesian traditions is presented to the students. A few texts have now introduced the New Keynesian models at this level.2

Most of the undergraduate texts in i ntermediate macroeconomics are in the New Keynesian framework as well. E xamples include textbooks by Olivier Blanchard, Greg Mankiw, and Charles Jones, among many others. On the other hand, only a couple of textbooks like those by Robert Barro or Stephen Williamson offer both New Classical and New Keynesian perspectives at this level. They also touch on search theory in l abour markets, New Monetarist Economics (search theory in money) and overlapping generations models. However, because transition from a New Keynesian principles text to an intermediate one in the same tradition is easier, texts by Mankiw, Jones, Blanchard or Frederic Mishkin are adopted in most places.

In the case of graduate texts, however, Thomas J Sargent and Lars Ljungqvist’s (2004) book seems to be an increasingly popular choice. Varma refers to Sargent and Ljungqvist’s text as a mainstream one, probably because Keynesian models are conspicuous by their absence. Otherwise, the text does an impressive job in conveying the heterodox fl avour of macro economics as practised by researchers. It classifies the models of macroeconomy in complete or incomplete markets set-ups. The benchmark is the Arrow-Debreu world; subsequent chapters deal with departures from it. In this sense, this approach is closer to the way macroeconomic research is conducted today. It also has substantial chapters on search theory of labour as well as money, overlapping generations models, economic growth (exogenous and endogenous), game theoretic perspectives on macroeconomics, political economy and so on.

Thus, in the US, New Keynesianism seems to be the mainstream when it comes to undergraduate texts; graduate macroeconomics seems to be more e clectic. Of course, one can still argue that it is not eclectic enough since it does not include the Austrians, Behaviourists, Structuralists, Kaleckians and so on.3 The main concern, however, is that popular opinion in the US is more informed by Keynesian perspectives; the eclectic macroecono mics taught in graduate school has not made it into undergraduate curricula.

The Indian Context

As said before, the macroeconomics curriculum in India does need a total revamp. However, changes have to be both at the level of the system as well as content. In addition, these changes need to occur in the context of huge disparities in the skills and knowledge of students as well as teachers, and given that teachers do not have any stake in the curriculum design and testing in most places.

A systemic change is an important one in this context. For example, updating a syllabus has to mean more than just changing the names of books in the syllabus. But in most places, change is limited to such cosmetics. More often than one would like, newly added books get relegated to reference book status and more diluted and stripped versions of these texts become a staple for teachers and students alike. So it does not really mean much when the syllabus refers to Sargent and Ljungqvist’s book as a text. In some places like Jawharalal Nehru University, Delhi School of Economics or Indira Gandhi Institute of Development Research, students do get exposed to multiple perspectives. Those graduating from these places have contributed to furthering the understanding of issues faced by the Indian economy. However, not much of this research informs even the graduate curriculum across India, leave aside the undergraduate.

I think one reason why this is the case is because teachers have a little or no say in what is to be taught. A way out is to get rid of standardised curricula and testing practices that characterise many universities and imbue the system with more flexibility and individual agency. Better schools in India already do this. This would open up some competition in instruction and also create a demand for better written textbooks. The transition would take time and will not be without hiccups, but will definitely pave a way for

redesigning the whole system of economics curriculum design and instruction.

As for the redesigning of syllabi, any such restructuring exercise cannot be done in isolation. To build an eclectic perspective, multiple electives have to be offered that follow up on the core material. To do so, one has to take a more holistic view of what is taught in economics undergraduate and graduate courses and not just consider the macro economics syllabus alone. Also, the importance of an Indian orientation cannot be overemphasised. Theories have a higher pedagogical value when they are grounded in the institutional realities of a particular economy.

Notes

1 Stephen Williamson (2011), a Professor at Washington University in St Louis, writes a blog called “New Monetary Economics” which can be accessed at: http://newmonetarism.blogspot.com/. His scholarly work on New Monetarist Economics is available in the latest issue of the Handbook of Monetary Economics.

2 Tyler Cowen and Alex Tabarrok’s (2012), Modern Principles: Macroeconomics is the only exception I know of. They cover both the New Keynesian and New Classical models.

3 Note that many higher level electives are offered quite routinely that cover behavioural macroeconomics, or microeconomics from institutional perspective, political economy, history of thought, etc. Of course, the frequency and importance of such courses in the overall scheme of things may differ from department to department.

References

Acemoglu, Daron (2008): Introduction to Economic Growth (Princeton: Princeton University Press).

Blanchard, Olivier (2010): Macroeconomics, updated edition (Upper Saddle River, New Jersey: Pearson Prentice Hall).

Barro, Robert (2010): Intermediate MACRO (Mason, Ohio: South-Western College Pub).

Barro, Robert and Xavier Sala-i-Martin (2003): Economic Growth (Cambridge: MIT Press).

Cowen, Tyler and Alex Tabarrok (2012): Modern Principles: Macroeconomics (New York: Worth Publishers).

Cooley, Thomas (1995): Frontiers of Business Cycles Research (Princeton: Princeton University Press).

Jones, Charles (2011): Macroeconomics (New York: WW Norton).

Mankiw, Gregory N (2012): Principles of Macroeconomics (Mason, Ohio: South-Western Cengage Learning).

Mishkin, Frederic (2009): The Economics of Money, Banking and Financial Markets (Upper Saddle River, New Jersey: Prentice Hall)

Sargent, Thomas J and Lars Ljungqvist (2004): Recursive Macroeconomic Theory (Cambridge: MIT Press).

Varma, G Visakh (2012): “Some Thoughts on the Macroeconomics Curriculum in India”, Economic & Political Weekly, 47(3): 22-26.

Williamson, Stephen (2011): Macroeconomics (Upper Saddle River, New Jersey: Pearson).

Woodford, Michael (2003): Interest and Prices: Foundations of a Theory of Monetary Policy

(Princeton: Princeton University Press).

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