What Happened to Economics?

Professors Marion Fourcade and Rakesh Khurana published a recent Harvard Business School paper on what they see as the United States model of graduate business education hijacking the discipline of economics into the model for corporate control in large industrial companies. The idea continues those expressed in Khurana's excellent book, "From Higher Aims to Hired Hands."

It got me thinking about what I see in an MBA "Investments" course I'm teaching this term. I have a slightly different take on what's happened with Economics, which is my academic discipline. Most of the foundational theoretical work in what's called Modern Portfolio Theory, Multifactor Models, Capital Asset Pricing Model, or Fixed Income was done by classical economists, from Macaulay to Lintner, Sharpe, Tobin, and many, many others. However, this work was not considered "financial economics" in college or graduate school, but all of this work was integral to microeconomics, theory of the firm, asset pricing or traditional modules within the economic toolkit.

I believe that the business schools, driven by the Ford Foundation and others as Khurana points out, merely lifted these modules out wholesale and cobbled them together into what is loosely called "Investment Theory," "Financial Economics," or "Financial Theory," taught in business schools.

This has had two effects. First, what is left in the economics curricula is insufferably dull, like national income accounting, and without the foundational framework expressed by Samuelson, Hicks, Solow and many others. Economics is rightly considered mind-numbing, because much of the meat has been picked from it. Secondly, the part that has migrated to the business school curriculum is applied mechanically and without any of the political economy or welfare economics focus that give the techniques meaning.

A real attempt to erase economic illiteracy in our children and populace would help stem abuses like dolloping out unsecured credit like crack cocaine to vulnerable segments of our population. It would help our young students look prudently at the inefficiencies and inequities in our higher education system. Some of the Federal Reserve banks have started making economics education part of their community charter--that's a great idea.