Steven Kopits argues about the relevance of market imperfections, to wit:
What the hell do you teach your students, Menzie? “Well, you know, here’s the theory, but let’s not get carried away with it in real life.”? Why would anyone want to be an economist when the bulk of your views seem to revolve around exceptions to the rule, about presumptions that you are smarter than the market or that markets don’t work?
What do I teach my students? Well, taken literally, I teach them entirely mainstream economics as taught in 2021, and not as it was taught in the 1960’s. If you doubt it, take a look at my teaching page. Am I using crazy textbooks? In PA854 (Macro for public affairs), I use a draft textbook I coauthored with Doug Irwin, but on macro at least not far from Caves/Frankel/Jones. In PA856 (International trade), I use Rob Feenstra and Alan Taylor. In Econ 442 (Macroeconomic Policy) as well as Econ 302 (Intermediate Macro), I used Blanchard’s Macroeconomics. In the latter, I used to use John Taylor‘s (!) textbook. For PA819 (Advanced statistical analysis for public affairs), I used James Stock and Mark Watson’s textbook. I dare anybody to say these are outside of the mainstream.
I think the great virtue of economics training is to know when to apply simple models and when to apply more complicated models. If I want to examine the market for corn, maybe a model of a homogenous good, with full information (in the sense both sides of the transactions have roughly the same information set) is appropriate. If I want to model the market for used cars, maybe I want to use what Steven Kopits thinks is an exception to the rule, namely asymmetric information. I’m pretty sure George Akerlof, in my Ph.D. macro course, didn’t claim asymmetric information pervaded all markets. But perhaps enough markets are so characterized such that we ignore the implications of asymmetric information at our own peril.
Closer to current research, in international finance, we often talk about uncovered interest parity (UIP), the proposition that expected returns on bonds expressed in a common currency are equalized in the absence of barriers to arbitrage. But the joint hypothesis of UIP and rational expectations is one of the most rejected hypotheses in the empirical literature. Well, taking Kopits’s Weltanschauung, we should not teach the rejections of UIP, since it’s “an exception”.
Addendum, 2/9 10:30am Pacific:
Tom Michl brings my attention to an illuminating paper by Bowles and Carlin, Journal of Economic Literature (2020). Well worth a reading.