Mainstream (orthodox) economics is having a hard time in the pages of the Guardian. First Aditya Chakrabortty writes “How do elites remain in charge? If the tale of the economists is any guide, by clearing out the opposition and then blocking their ears to reality. The result is the one we're all paying for.” Then Seumas Milne adds “Any other profession that had proved so spectacularly wrong and caused such devastation would surely be in disgrace.” In this post I want to say why such attacks are wide of the mark, but also say something about how these attacks gain traction, and why they suggest changing the way the subject is taught.
One frequent accusation, very evident in Milne’s piece, and often repeated by heterodox economists, is that mainstream economics and neoliberal ideas are inextricably linked. Of course economics is used to support neoliberalism. Yet I find mainstream economics full of ideas and analysis that permits a wide ranging and deep critique of these same positions. The idea that the two live and die together is just silly.
The absurdity of linking mainstream economics to all our current problems is also obvious if you think about austerity. As I never tire of saying, the proposition that austerity was a crazy thing to try in this recession is prominent in the pages of undergraduate and graduate textbooks. It is what mainstream economics, as practiced in central banks, tells us. Now I agree that it is a great shame that some influential economists sometimes seem to ignore or have forgotten what is in these textbooks, or put their own textbooks aside to provide support for particular political parties. However it remains the case that the most effective critic of austerity is using totally orthodox economics.
Nearly all complaints about that mainstream start off with the economics profession’s failure to foresee the financial crisis. Again it’s important to make some fairly basic points. First economics is not just (or even mainly) about trying to forecast the future. The percentage of the profession that made this mistake is tiny. Another one of my favourite lines back from when I did forecasting is that macro forecasts are only slightly better than guesswork. We know that, both from past evidence and the models themselves. It is a difficult message to get across, because a very visible part of economics - making decisions about interest rates - necessarily involves forecasts, and the media loves simplistic messages, but institutions like central banks do their best to emphasise the uncertainty involved.
It is also obviously not true that mainstream economics is incapable of understanding what led to the crisis, and what needs to be done to avoid it happening again. I think it’s fair to say that much that is in Admati and Hellwig’s The Bankers New Clothes is pretty mainstream. Perhaps in the past economists have been rather narrow, and even politically naive, in issues from regulation to overseas aid, but that is clearly changing and has been changing for some time.
Having said all this, it would also be a mistake of equal magnitude to think that everything is just fine in the land of academic economics. I am struck about how economists, while at least partially defending their own particular field, are quite happy to express grave concern about what some of their colleagues in other fields do. I’ve noted Andy Haldane and Diane Coyle’s criticisms of DSGE modelling before, and you will find plenty of economists who can be very rude about their colleagues doing finance. More generally I suspect slightly less shrill versions of the sentiments expressed by the two Guardian columnists would attract considerable sympathy from lots of very sensible people who know quite a lot about economics.
Whether this should, or will, lead to any major upheaval in economic thinking – as suggested by Martin Wolf in this lecture for example – is a question for perhaps another post. What I want to focus on here is how the subject is taught, if only because that has a large influence on how the subject is perceived and how it develops. Both Guardian articles talk about student dissatisfaction (as expressed here for example), and there seems to be widespread support for the idea that economics teaching needs some fairly radical reform: see this recent meeting at the UK Treasury (which followed this) and Wendy Carlin’s article in the FT.
I think part of the problem with economics, which is very evident in the way it is taught, is how economists see themselves. (I think Alex Marsh describes this well.) The vision that I think many economists are attached to is that economics is like a physical science. So there is a body of knowledge, which has been accumulated over time in much the same way as the physical sciences have developed. This approach plays down the context in which that knowledge was developed - it may provide a bit of diversion in a lecture, but is not essential. There is certainly no need to worry about the methodology behind the way the discipline works.
An alternative and I now think better, vision would give more emphasis to how economics developed. Economic history would play a central role. Economic theory would be seen as responding to historical events and processes. For example placing Keynesian theory in the context of the Great Depression is clearly useful, given the events of the last five years. I think it is also important to recognise the links between economic theory and ideology. This is partly to understand why governments might not act on the wisdom of economists, but it also leads naturally to recognising that economists need to adapt to the social and political context in which they work. We should also be more honest that our wisdom might be influenced by ideology. Given the limits to experimental and econometric evidence, but with a very clear axiomatic structure, methodology is always going to be an important issue in economics. 
Of course this alternative vision can be taken too far. I do not think it is helpful to teach the subject like a course in the history of economic thought. The insight gained from trying to understand what some past great economist actually said (or still worse, actually meant) is small. We do not necessarily need to know the details of every historical debate. In addition some important ideas in economics do not come from problems thrown up by major historical events or ideology: rational expectations is a clear example. We do try and integrate solutions to new problems into a coherent overall framework. I do not want to go back to teaching a schools of thought type of macro, because the mainstream is much more integrated.
There is an additional problem in teaching economics relative to the sciences. The world that we attempt to describe and advise changes rapidly. This makes a model in which teaching is based on textbooks problematic. Not just because it takes time for textbooks to be produced and updated, but because they tend to want to appeal to those who learnt their subject many years ago, and are not actively researching in the field. How else can you explain the continuing centrality of things like the money multiplier in nearly every undergraduate textbook?
So I look forward to seeing what comes out of the Institute of New Economic Thinking’s project to reform the undergraduate syllabus, headed by Wendy Carlin. Her macro textbook with David Soskice is innovative in replacing the IS-LM framework with a more realistic and up to date three equation model (IS, Phillips curve, monetary rule), and by giving imperfect competition a central role, and a new version where the financial sector has much more prominence is due out soon. While it is plainly nonsense to say that mainstream economics cannot explain the financial crisis and critique neoliberal policies, we need to do what we can to make that clear, and we should start with our students.
 In fact, I think the lack of interest in methodology among mainstream economists is itself revealing. The combination of a highly deductive theoretical structure with many alternative but problematic ways of getting evidence makes economics a fairly unique discipline from a methodological point of view, so it would be natural to want to explore the methodology of economics. However you might want to shy away from this if you pretended economics was just like biology of physics.
While certainly many economists view their field as a "hard science" along the lines of physics, I think it would be a mistake to say that the reason why is the presence of an empirical basis in the discipline. The psychological basis of neoclassical economics has been exploded behavioral experiments and further demolished by evolutionary theory. Economic actors are not atomistic, self-interested, utility-maximizing, rational little Ayn Rand clones running about. An empirical basis would draw from ethnography, psychology, neuroscience, sociology, and history to far greater degree than the arbitrary assumptions of Eugene Fama, Milton Friedman, or Hayek, not to mention the Utilitarians who laid the ground work for Classical economics or the Marginalists who did so for Neoclassical. Were economics empiricalin its assumptions, it would draw from Karl Polanyi and Mark Granovetter to establish an "embedded" basis for economic thought.ReplyDelete
You misunderstand me if you think that is what I was saying. Actually I suspect the opposite is true - it is the tight axiomatic structure of mainstream economics (at least, before behavioural economics) that leads economists to want to draw analogies with physical science. And I was fairly explicit that those analogies are incorrect.ReplyDelete
My eye is immediately drawn to two statements, which I think underlie the complaints:ReplyDelete
"First economics is not just (or even mainly) about trying to forecast the future."
"The vision that I think many economists are attached to is that economics is like a physical science."
Aside from the apparent contradiction they describe, it could be asked what usefulness mainstream economics has (especially in the political sphere) if there is little forecasting capability. And yet there is an abrasive certainty offered by some economists in proposing particular policies in the political sphere.
Indeed it seems strange that the term "political economy" seems to be lost, and I'm sure that is deliberate - as an attempt to use the "scientific neutrality" of mainstream economics to promote a certain political agenda.
I came to economics after doing degrees in natural sciences, and found economics teaching, which I then needed to work in central banking, immensely frustrating. What I wanted to know is how the economy works - a mechanistic explanation - and academic macroeconomics does not provide enough of this. What academics have to understand is that models are often formalising ideas, not explaining or justifying them. For this, you need descriptions and statistics. History of economic thought should be a cornerstone of teaching economics, because it explains how the first and most obvious ideas became accepted or found wanting - for example, when I did physics in the first year of university, we repeated Millikan's oil drop experiment. And a key part of macroeconomics should be a course covering the meaning and compilation of the main economic statistics such as GDP, trade balance, inflation, money supply etc.ReplyDelete
The inability of the most eminent economists to fail to resolve the basic questions never ceases to amaze me. I have still yet to hear a rigorous explanation from the Keynesians about why Cochrane's and Fama's question about where the resources are supposed to come from for fiscal stimulus - the usual riposte is an appeal to "economics 101", which is hardly scientific. It should surely be possible to settle this with some descriptions, logic and facts.
I went on to teach economics at a Russell group university, and tried to teach the students as far as possible to give them knowledge that would help them work in central banks or financial markets. This was not as successful as I hoped, partly because I think that the students were feeling that my emphasis on the practical was leaving them behind in the mathematical modelling arms race that they would need for a masters degree, so I quit after a couple of years. I will say though, since you mention the failure of the "profession" to see the financial crisis coming, that I went on from my account of the monetary policy transmission mechanism in my monetary economics lectures to conclude that, as the last sentence of my last lecture in December 2005, "the danger of a crash bigger than the most aggressive easing now available to the central banks can mitigate is obvious".
I have still yet to hear a rigorous explanation from the Keynesians about why Cochrane's and Fama's question about where the resources are supposed to come from for fiscal stimulusDelete
They're meant to come from the pool of currently unemployed resources, the existence of which is the reason why anyone's proposing a stimulus.
I think you mean unemployed people, rather than unemployed resources. Your explanation seems reasonable to me, and I think that is what Cochrane said - that if stimulus worked, it would be about tweaking the economy to run more efficiently, the unemployed being some kind of reservoir of labour looking for a match, supported partly by own and family resources and partly by a social safety net.Delete
And that is how the Keynesians like Krugman should have advanced the discussion. Because once you realise where the expansion of GDP is supposed to come from, you can have a more mature conversation about whether mobilising the unemployed is indeed worthwhile and if so how best to achieve it. As it is, Krugman keeps sticking to the textbook idea of simply expanding government spending with the idea that the government spending is going to drag some unemployed back into the labour force, without considering the financing of this stimulus and how this might affect employment in other ways, which I think many will find to be an explanation lacking rigour. As a result, there is a common idea among people who think they understand economics (and therefore do not hesitate to opine on policy) that what fiscal stimulus actually does is mobilise resources that the "rich" are greedily just sitting on. For example, this idea was repeated last week in the BBC interview with Krugman and Stiglitz.
Thanks for your objective response.
> I think you mean unemployed people, rather than unemployed resources.Delete
You would be only partially correct. Unemployed people, certainly. But also: factories that were designed to run two shifts a day and are now only running one. Railroads that were designed to run 20% more cars per train than they're currently carrying. Or, for that matter, computers that were bought in 2007 and then which were left sitting in a closet starting in 2008 when the company downsized (if you assume a three-year life cycle, then there aren't any more of those around, but there certainly were for a while.)
> As it is, Krugman keeps sticking to the textbook idea of simply expanding
> government spending with the idea that the government spending is going to
> drag some unemployed back into the labour force, without considering the
> financing of this stimulus and how this might affect employment in other
> ways, which I think many will find to be an explanation lacking rigour.
On the contrary: this is all textbook Keynesianism, which has explored the entire interrelationship ad nauseam. If Krugman keeps telling you 'this is Econ 101', that's not him obfuscating or refusing to answer important unanswered questions. It's you, not having paid attention in Econ 101.
> As a result, there is a common idea among people who think they understand
> economics (and therefore do not hesitate to opine on policy) that what fiscal
> stimulus actually does is mobilise resources that the "rich" are greedily just
> sitting on.
Not having seen that interview, I can't say for sure, but I find the chances of either one of them saying that to be quite remote.
However, there is certainly a related argument to be made: if the engine of growth of the economy is the increasing real (i.e. inflation-adjusted) incomes of those whose spending is income-bound, then directing more than 100% of the income gains made since the collapse to the richest 10% (whose spending is not income-bound) would indeed be a significant reason for the lousy economy. A hundred people who make $25,000 a year spend a lot more, buy a lot more, and therefore keep a lot more money in circulation (and a lot more other people employed, and so on) than one person who makes $2.5m a year. So, if you have 100 people making $0 a year and one person making $2.5m a year, you are indeed hurting the economy. (And yes, yes, the $2.5m guy invests his money, but as is very obvious, there is no shortage of investment right now, whereas there is a very large shortage of demand.)
Incidentally, Krugman doesn't believe this. He's said repeatedly that he doesn't believe increased inequality by itself is necessarily bad for the economy, because one can envision an economy where 99% of the people make things for 1%. I happen to think he hasn't put enough thought into that particular argument (and he definitely hasn't formalized it yet).
I take your point about various complimentary resources (to labour) also being unemployed, Fred. The reason why think it is important to be specific about the nature of the resources involved is that I think one potential cause of the present protracted downturn could be new competition (with China etc) for natural resources such as oil. For our productive capacity to be viable, labour and its complimentary resources may have to accept lower real returns.Delete
"It's you, not having paid attention in Econ 101" is a typical insider response. If it is that basic, you could explain it in a couple of sentences, but I presume you can't. This is one reason why the history of economic thought is important - because it keeps the derivation of accepted ideas under review.
IIRC, I got excellent marks in introductory macro, because I knew to suspend my scepticism and play the game. I remember exercises in which G increased, causing Y to increase. But that is Cochrane's point; how can G just increase? The government has to either take money from somewhere (eg reducing C) or print it. And printing it is really monetary policy, for which sticky prices are key, but a five year downturn is straining the concept of "sticky".
To be precise, Stiglitz said ( BBC World Service Business Daily 22/11, 11 minutes in ): "Those at the top....don't spend a significant faction of their income; those at the bottom are spending everything". This an accounting impossibility; even a hoard of banknotes represents a loan to the central bank, and in turn to banks or the government.
I emphasise that I am not saying that Keynesian macro is wrong, but I think that economists' way of explaining it is so lacking in rigour that I find it unconvincing, and therefore potentially a dangerous basis on which to make economic policy. This is, after all, a post on economics teaching.
""It's you, not having paid attention in Econ 101" is a typical insider response."Delete
Aha, so you either have not read a macro textbook or you have not understood it but at the same time you call nobel price laureates like Krugman and Stiglitz "people who think they understand economics".
"This an accounting impossibility; even a hoard of banknotes represents a loan to the central bank, and in turn to banks or the government."
First of all, banknotes are technically not a loan to the central bank but a claim, they appear on the right side of the balance sheet of the CB. Second, it would be an accounting identity if we lived in a barter economy. But we live in a monetary economy and here people are not forced to save via real investments as money exists (hence terms like liquidity trap).
If you are confused about such elementary stuff you might wanna delve into Econ 101. Before you criticize something you gotta understand it (e.g. you will read the name Marshall quite a few times in the General Theory, i.e. Keynes first learned classical economics before he started to point out that its "laws" do not hold in a recession).
If it is true that according to mainstream economic theory austerity in the UK is a mistake (and I'm not doubting it), why do we not hear this from more economists in positions of public influence? Why can the BBC apparently only ever find 'city economists' to interview who invariably seem to support the austerians view? What about the economists on the MPC, the OBR, the IFS, the IMF, the OECD? The former Governer of the BoE appeared to support the Governments austerity policies. Has he and all the rest 'forgotten what is in their textbooks' or being party-political? If so, no wonder economics has a bad name! Simon says that it is only 'some' economists, implying its a minority, but it doesn't seem like that. Simon and the few others that speak out seem more like voices in the wilderness than voices of orthodoxy. I'm sure most of the public believe that support for austerity is economic orthodoxy.ReplyDelete
It is as much about who gets the blame for it as who actually made the mistake.ReplyDelete
The more difficult it gets to grasp the more people rely on the impression they get from media and their peers and the more things move from facts/analysis to credibility/perception.
Gaagh! I retired 9/12 after 40 years in software development, decided to study economics as a hobby. My degree is in Physics, I was trained as a scientist, my conclusion, economics is not a science. Or, it's like creation science. Conservative economics starts with the answer ("free markets are the best") just like creation science ("god created everything") and then work backwards to fit the data to their conclusion, facts and data be damned. Or, to quote your post above "it also leads naturally to recognising that economists need to adapt to the social and political context in which they work".ReplyDelete
What total and utter crap! Words fail me. No, I here's my opinion: "crappity-crap-crap".
Maybe economics should aspire to be more like engineering than physics. Anyway, don't give up - economics needs more people with undismissable scientific credentials to get involved.Delete
My experience has been similar to yours, a background in Physics and Software Engineering.Delete
I have learned a good deal from reading people like Krugman, but the public and popular debates in Economics often strike me as plain odd.
For example, where would Physics be if we took two phenomena, one 107% of its value five years ago, and one with 80% of its value five years ago, called them by the same name, and insinuated that the similarity in name implied similarity in effect?
I am of course talking about government spending in the UK and Greece today and the name "austerity".
I don't think I am being too pedantic here. A lot of public or popular Economic debate seems to consist of reducing rather dissimilar phenomena to a single name, and then arguing over the name.
Jon, conflating all forms of government expenditure is unenlightening. A squeeze in expenditure in one sector can be accompanied by an increase on non-discretionary payments in another. Austerity-deniers rarely acknowledge this.Delete
> For example, where would Physics be if we took two phenomena, one 107%Delete
> of its value five years ago, and one with 80% of its value five years ago,
> called them by the same name, and insinuated that the similarity in name
> implied similarity in effect?
Where would we be in Physics if we took two phenomena, one that increased a particle's motion relative to us by 4% and the other which increased it by 40,000%, and called them both the same thing?
Or, more to the point, a thought experiment: We have two electromagnets, each of which is holding a metal ball suspended delicately in midair below it. And gravity is steadily increasing, at a rate of 10% per hour. In one electromagnet, we gradually cut the strength by 5% per hour. In the other, we increase the strength by 5% per hour. Result? Both balls fall to the ground. If you asked me, I'd say they fell to the ground for the same reason. Apparently you would disagree.
Other way to look at it.ReplyDelete
In Physics you assure that testconditions are similar. In economics you assume that and not even give it a second thought if that is the case.
Of course in physics it is much easier to do, however that doesnot make it less necessary.
Like in the present situation basically Macro is assuming that the underlying economy is working in a normal way. Like a normal sort of allocation for instance, which is clearly not the case.
This is a very good point.Delete
Geologists and nuclear engineers didn’t calculate the risks correctly, or forsee the disaster at Fukushima. For some reason they don’t get pilloried for “failing to forsee” to the same extent that economists do in respect of the credit crunch.ReplyDelete
Unlikely that the calcs were wrong. The facts/assumptions very likely were the cause. And the people who made these were probably to blame for some part.Delete
Anyway things like that is a 'once every .... year' stuff. With several 100s of these things around every few years it is likely something happens.
Difference between the 2 groups is that science or anything else isnot anywhere close to foresee a tsunami and that kind of stuff.
While nearly every trader (while they are effectively the market) could have told you that in 2000 internet, 2007 RRE, and now the equity market is in a bubble. But economists largely ignore/ignored that.
While you can be sure that if a better method would be found to predict natural disasters it would be used.
This is because their models *can* explain the phenomena in question, even if they failed to in this particular instance. Conversely, economists don't seem to close to building 'the' model of the economy. Furthermore, the tsunami was an exogenous shock in a system we don't control whereas the crisis was an endogenous process in a system that we at least partially control.Delete
Having said this: yes, the engineers and people involved are partially to blame for Fukushima. But economists are even moreso.
J M Keynes and Adam Smith both said that economics is a simple subject that only a few people understand, which points to the problem of getting new big ideas into the subject.ReplyDelete
My first lesson in economics said that it was about "unlimited wants with limited resources". This is then "shown" with budget lines and indifference curves. Already you are making an assumption about human behaviour which is controversial. Who came up with this? When, and why? Many anthropologists could show you societies where that is not so obvious. If it is capitalism that makes people behave this way, you need to discuss it. And a big discussion it should be. If it is inherent in human behaviour, and basically dates back to the law of the jungle, say so, explain, and bring in the big debates of the philosophers. The problem is the discipline has been taken over by technicians. In the past it was a subset of politics and philosophy. Saying that markets create winners and losers and whether winners should compensate losers is not about politics, it IS politics. It is the desire to separate it, form a self-contained entity based on micro-economics, which itself is something highly political dressed up as science, where essentially the whole thing in terms of reform is a non-starter. Until we have some rigorous normative discussion in the subject questioning why things are done the way they are, it will not go anywhere. Economics has no problems bringing in scientists. It has a huge problem bringing in really good political scientists who would regard its critical reasoning as amateurish. You also have an interesting view of orthodox. I would say Ricardo and Sargent (read his 1982 article on the Four Big Inflations to get into his head) are orthodox. I would say the IMF policies to address the Asian Financial Crisis were orthodox. I would say that Keynes and quantitative easing policies, and the IMF's new colours (when it talks to the powerful) are not. And by the way, how useful has all this new DSGE theory been in coming up with the original ideas for the "unconventional" macro-policy we have seen?ReplyDelete
"Limited wants with limited resources" means greedy. A very cynical view of human behaviour that needs explaining. Of course economics associates opportunism with virtue. Again, we just need more than mickey mouse explanation of why and ultimately what the consequences for the future of humanity, are. It should also be done without a model which just explains .... the model.Delete
I totally disagree; economics teaching should be as positive (as opposed to normative) and objective as possible. Of course you are right that the idea that people tend to want more is a simplification, but it probably explains more of the variance of people's behaviour than more social interactions, such as group cooperation etc, so it is a reasonable place to start. The Copernican system captures the truth about the earth's relationship with the sun and planets much better than the Ptolemaic system, and it is probably how you explain it to a child, even if Copernicus did not get the idea of elliptical orbits.Delete
Having read some of the commentary on this latest discussion of economics education, especially in the Guardian, I fear that there is a danger that many frustrated ideologues of both left (who like to blame free-market dogma for the financial crisis) and right (too much gubbermint regulation) jump on it to say, "you should have done what I told you! Whether you use mathematical models in economics or not, by the nature of having many moving parts, it is inevitably going to be complicated and sometimes counterintuitive (as Tim Harford often brilliantly describes without maths), and frankly I suspect that many of the critics of economics are simply rebelling against the difficulty of understanding it.
"economics teaching should be as positive (as opposed to normative) and objective as possible."Delete
What we don't want is what is political and subjective being dressed up as positive. We need to accept that there are different possible explanations of phenomenon which are true. We need to understand why we take this particular approach. We ask first if we do not have this approach, what approach would it be? We know other approaches work - how else would Germany and Japan have industrialised so quickly? And then the truth of alternative narratives can only be gaged empirically. Economists do not look properly at other explanations of human behaviour or the behaviour of humanity and capitalism other than "we want more". And then we get something built on it posited as science. No science, let alone a humanities or social science, operates that way. Much more rigorous questioning at the fundamental level before you even start making models (if you do) is needed. Modern economics is certainly difficult to understand. Fine if the issues are complex. Not if complex technical detail is obfuscating questionable propositions.
"economics is not just (or even mainly) about trying to forecast the future"ReplyDelete
I am not sure I accept that. Economics is all about saying "if we do XYZ things will go better than if we do ABC".
So, whilst economists cannot be blamed for failing to predict events such as Lehman Bros collapse, or the UK being forced out of EMU, or the 1970s oil price spike, they can be blamed for failing to get things right on, say, the UK's recent recovery or the dangers inherent in CDSs and their offspring.
People like Milne and Chakrabortty are essentially anti-intellectual, and their proposed solutions little better than a return to bleeding the sick. But there is no use pretending that the claim of the economics profession to be a science has taken something of a hit over recent years, and more humility is required.
"We do try and integrate solutions to new problems into a coherent overall framework. I do not want to go back to teaching a schools of thought type of macro, because the mainstream is much more integrated."ReplyDelete
This sums up the problem in economics. It is the integration that has led to a lack of critical reasoning. You cannot have critical reasoning in a discipline unless you accept there are different narratives, complete and consistent in their own way. Fitting new ideas into an existing framework does not lead to serious contesting of fundamental ideas. Why is an existing type of economics now is so prevalent? It originated in England at the time of an aggressively expanding commercial and then political empire. It was adopted by the US during the Cold War era seriously threatened by communism immediately after WWII that obviously, as wars do, led to a major reorganisation of power. Why did they adopt this type of economics, which ultimately would have to be followed by all? Why not the French, or the German, or the Marxian, or the Chinese? Not all the answers are as obvious as you may think. We got basically an English classical framework with some Keynesian ideas added and it took on a technical format that isolated itself from politics and philosophy. You need to properly understand why. It was not only or even because of empirical foundations or the ideas made for better policy, or that might be part of the answer. It is a complex story that requires people who are able to engage in multi-layered, complex subjective and normative discussion. Techniques in other social scientists drawing on the work of people such as Derrida have developed these. It asks what is something by first asking what it isn't. It also needs people who have thoroughly gone through Das Kapital, the General Theory and the Wealth of Nations.
I agree with you.Delete
"One frequent accusation, very evident in Milne’s piece, and often repeated by heterodox economists, is that mainstream economics and neoliberal ideas are inextricably linked. Of course economics is used to support neoliberalism. Yet I find mainstream economics full of ideas and analysis that permits a wide ranging and deep critique of these same positions. The idea that the two live and die together is just silly.
The absurdity of linking mainstream economics to all our current problems is also obvious if you think about austerity. As I never tire of saying, the proposition that austerity was a crazy thing to try in this recession is prominent in the pages of undergraduate and graduate textbooks."
"Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back."
I think that austerity has been deliberately misinterpreted by the Keynesians in an attempt to ridicule it. Austerity was never about stimulating the economy through some confidence fairy; it was, and still is, about avoiding a debt trap (and some of its advocates suggested that the depressing effect of lower public expenditure or higher taxes may be offset somewhat by lower yields reflecting bond market confidence in the chances of getting their money back and it being worth something when they do). And not even Krugman claims that austerity does not work in its own terms - ie it does at least reduce the public deficit.Delete
Yes, the theory is that austerity reduces the public debt, and mere empirical refutation of theory makes no difference.Delete
I said "deficit", not debt. Where is the empirical refutation of the idea that austerity reduces the public deficit? And for that matter, where is the empirical refutation of the theory that austerity reduces the public debt (my guess is that you are not distinguishing between debt and debt to GDP ratio, which are two different things).Delete
Depends what you mean by neoliberal. As I use it, it means someone who thinks that we essentially live in a walrasian eq - and thus think that the way to fix things is to amend one smal "market imperfection" at the time.Delete
this is = mainstream economics.
PS: the alternative is to think that there is a legitime roll for politics byond issues of pure "redistribution" (whitch also refers to the redist from their ideological, and nonsensical, null)Delete
The fact that economists are asking why austerity policies have been adopted in spite of what their textbooks told them underscores the point that they need to study their subject in conjunction with politics, as in England and Europe it once was. A DSGE model based on a good Edgeworth box will not explain this very well, even if you tinker with the assumptions. Starting thinking outside the box.ReplyDelete
Read the first 20 pages of Mankiw's widely used intro textbook to find all the validation you want that Economics, as taught, is mostly right wing fantasy falsely presented as scientific.ReplyDelete
I think you need some ontologically based discussion on the meaning of orthodox and mainstream. A general equilibrium model based approach is orthodox, based on Victorian English political economy and utilitarian (rubbish). IS-LM is mainstream, especially in policy, but not orthodox.ReplyDelete
Two of the main crisis theories empirically confirmed about 2008 crisis are Financial Instability Hypothesis and Tendency of the rate of profit to fall. Both of them belong to heterodox economics-political economy and has been used only by a minority to predict the crisis. Each orthodox economist should study them and should also try to understand why these theories have worked better than mainstream DSGE models. After all, predicting a crisis point is the epitome of economics science- it's like predicting a tsunami for meteorologists.ReplyDelete
As far as I understand, history of economic thought should be the core of an economics degree. I open my macro textbooks and I just read 10 chapters with models like IS-LM, AD-AS, Solow, new Growth Models, Phillips curve, NAIRU etc but you won't realize WHY and WHEN these theories occurred and what questions were they supposed to answer.
eg Monetarism-even though an abandoned 200 years old theory- started to be very famous at early 70s and for 2 decades due to Keynesian failures(stagnation, etc)
It won't surprise me if gradually instability economics would introduced to more universities since it's not a "dangerous" (politically flavored) theory and it seems to be more efficient than old-school equilibrium economics.
For example, have a look to labour theory of value introduced by Smith and further expanded by Ricardo and Marx. It's consistent, empirically verified yet, abandoned by orthodox economists. More specifically, the whole marginalist/utilitarian approach developed just to abandon this theory. Why? I'd say because Marxist political economy (the successor of classical political economy) was too much "dangerous" for the mainstream due to it's radical conclusions. There was need for a non-dangerous theory which would create and highlight the concepts of equilibrium, lack of conflicts, etc. Of course modern macro is much more sophisticated than Jevon's or Marshall's works but at its core is based on these concepts. Is this a true science? I believe it is (to some extent) but, it's logically incorrect therefore it should be replaced.
Another example, the concept of optimal contract (Akerlof, Leland, Pyle, Morgan, et al) has firstly been introduced by Marx 150 years ago. Then, it has been replaced by the more coherent theory of stagnant pools of money through capital circulation.
Orthodox economists rediscovered-through individual maximization- a (flawed) concept firstly introduced almost 2 centuries ago.
Similar examples are of course, numerous. I'd suggest that history of economic thought should be introduced in all economics depts alongside more heterodox courses. I'm sure that many distinguished students-even at postgraduate courses- are not aware at all of neoclassical criticism and it's implications.
Thus, a new economist would use DSGE models and other neoclassical shcools without knowing the fallacies of consumer maximisation behavior, capital theory controversies and many more similar key criticisms.
I couldn't agree more. I was taught undergrad macro (neo Keynesian) as if it was gospel. I no longer believe that it is useful or has much practical relevance other than as the basis for an academic career.Delete
"For example, have a look to labour theory of value introduced by Smith and further expanded by Ricardo and Marx. It's consistent, empirically verified…"Delete
Are you kidding? its theoretically AND empirically disproven!
"Are you kidding? its theoretically AND empirically disproven!"Delete
I hope that both of you are kidding, unless you are talking about prices.
If you think price and value is the same thimg, more or less by definition, I think that I just started to hate the effect mainstream economicsm has had on the public discourse even more.
To use the financial crisis as a touchstone of how well Economics can make predictions seems very dubious to me. Economics can tell us a lot about economic systems in more or less steady state, or evolving slowly, but expecting it to make useful predictions ahead of financial panics on the scale of 1907, 1929 or 2007 is like expecting a Physicist to make useful predictions about the other side of a singularity.ReplyDelete
An historian will tell you that an economic system is never in a steady state. This is the sort of artificially constructed stuff people need to question.Delete
Quite. There is too much emphasis, in what the public perceive to be mainstream economics, on "this is how economics works in my imaginary world", as opposed to how it works in the real world.Delete
Actually, physicists and scientists in general *are* required to know why a system will appear stable for a long time then violently erupt. Examples: that bridge that ended up oscillating madly, the atmosphere of Venus. You're implying there is no causal link between the boom and the bust, and therefore that predicting the economy will be steady indefinitely is a 'good approximation'. However, this basically reduces macroeconomics to being only correct when we don't need it, then wildly off when we do. In other words, you're saying the discipline is useless.Delete
Macroeconomics has to change. It cannot be an entirely technical subject, it just does not prepare people for the types of challenges that real world policy making entails. You cannot have technicians make major macro-economic policy decisions.ReplyDelete
Just because the textbooks were right doesn't mean the profession was. The profession has to change. Failure has consequences.ReplyDelete
A science only progresses by shedding what has been proven wrong. Alberto Alesina is a professor of Economy at Harvard. Eugene Fama just received the Nobel Prize.
You can't just point out the bits that in hindsight have proven right, you have to get rid of the bits that were proven wrong. And if you can't prove them wrong because the underlying assumptions are too hypothetical, let Popper throw them out for you.
I have long thought that the subject of economics is much more like the subject of ecology than of physics, so economists go wrong trying to emulate physics.ReplyDelete
Your reference to the Hausman book is interesting. I just (as in yesterday evening) finished reading it, and found that it sharpened my criticisms of economics considerably.ReplyDelete
I don't see how you reconcile that book with:
"One frequent accusation, very evident in Milne’s piece, and often repeated by heterodox economists, is that mainstream economics and neoliberal ideas are inextricably linked. Of course economics is used to support neoliberalism. Yet I find mainstream economics full of ideas and analysis that permits a wide ranging and deep critique of these same positions. The idea that the two live and die together is just silly."
Hausman makes a good deal of the equilibrium assumption and the moral prescriptions that it is (wrongly, in his view and mine) taken to warrant. The fact that other views exist does not, in my view, change the fact that, overall, economics as a field does make these prescriptions and that neoliberalism incorporates them and uses them as a justification.
My apologies to ordinary readers of this thread; the above is incomprehensible without having read Hausman's book and I lack both the space and the patience to reproduce the arguments here.
"Nearly all complaints about that mainstream start off with the economics profession’s failure to foresee the financial crisis. Again it’s important to make some fairly basic points. First economics is not just (or even mainly) about trying to forecast the future."
I'm sorry, but as far as the public is concerned the main face of economics is recommendations about policy. These recommendations by their nature claim that good things will happen if they are followed, and that claim incorporates a forecast.
Moreover, as Tim Young pointed out upthread, it was quite possible to forecast that a financial system structured as our actual one was (and largely still is), with very high leverage and deep, complicated, and opaque interconnections, is highly disaster prone. The fact that the actual disaster cannot be predicted accurately enough to make money by trading on the information does not change the fact that the problems were foreseen in enough detail to have prevented (or at least mitigated) them if the political will had been present. In view of this I consider the claims that I've seen made that the failure to forecast the crisis is a vindication of economic theory to be totally outrageous. (I understand that you are not making this claim, but what you are saying is uncomfortably close)
I also consider the fact that economists such as Greg Mankiw could make claims in his public role that contradicted his own textbook and apparently suffer no professional consequences to be an indictment of the institutional structure of the profession.
Having said all of the above, let me add that I do think that economics has valuable theoretical insights and empirical findings to offer. That is why I read your blog. It's also obvious from other parts of this post that you are aware of the problems I am pointing out, and even more so from other posts. For this reason I'm puzzled by the way you have structured your argument. Perhaps that last is influenced by you concern with the way economics should be taught, a concern I've ignored.
My point is that I view a great deal of the overall outrage about the role of the field of economics in the run-up to the 2008 disaster to have a good deal of justice, numerous honorable exceptions (including yourself IMHO) notwithstanding.
Really like your blogs, they seem very fair and considered. Obviously time-consuming but very much appreciated.ReplyDelete
One should not conflate the arenas of application of economics. Certainly the academic and political applications diverge. Also the financial and commercial arenas form third and fourth versions of the "science" of economics. Within Physics there are sub fields with rather little overlap although habits and tools in common are prevalent. On American TV The Big Bang Theory has emphasized the dichotomy between theoretical and applied physics. Comments here about ecology and engineering are also cogent.ReplyDelete
In the Guardian article: University economics teaching to be overhauled http://www.theguardian.com/education/2013/nov/11/university-economics-teaching-overhaul, we read:ReplyDelete
Professor Michael Joffe, an economist at Imperial College, said space could be made in the curriculum if academics could admit that many theories were "plain wrong" and should not be taught.
I'd like to know which ideas are to be banned, and who will draw up the inquisition hit list?
I'm generally told that all versions of the labour theory of value are wrong. I seem to recall[*] that Mark Blaug spent a little time in his 'Economic Theory in Retrospect', saying Henry George was totally wrong, but neglected to actually explain what the evil Georgian ideas were. Why bother explaining to young economics students why a hypothesis is wrong when the ideas originating that hypothesis are befuddled and obscured? I call that anti-education. Can we explain and refute Christianity only by reference to Galileo's critique of the Aristotelian planetary model? That would be great on a physics course but is of dubious value as in the study of history.
[*] I can't find George in the index to the 4th edition, but I noticed there's a book called Henry George, edited by a Mark Blaug, weird.
Joffe gives an example in that article...Delete
the mainstream media are full, full, of prominent economist advocating for austerity, taxcuts for the rich, etc.
now it is true there are a few blogs, here and there, read by a tiny minority of people (with possible exception of P Krugman on volume) advocating for other ideas
but there doesn't seem to be any organized, vocal opposition by mainstream economists
For instance, when Feldstein or Mankiw or Fama or Cochrane says something outrgeous, where is the full page advert in the N Y Times (or euro equivalent) signed by several hundred prominent economists, decrying the mis use of their profession ?
your little argument, read by almost no one, doesn't atone for the professions lack of professional responsibility
have you considered that the blame might be the mainstream media for only turning to these guys? in almost no academic field is there such a coalition of people who might sign an NYT advertisement.Delete
a lot of people here, particularly retired physics and engineering types, think themselves superior to economists.ReplyDelete
OK, I will stipulate for the sake of arguments that many economists sell themselves to rich people, generating whatever argument is needed to support lower taxes, fewer rights for workers, etc
In return, I would like you (if you live in US/EU) to stipulate that much of the cheap food that you and your family enjoy every day comes from virtual slave labor (eg, the tomato harvesters in Florida, in the southern US)
so, when you look in the mirror, are you really in a moral posistion to criticize the economics profession ?
On the rationality assumption in Economics, I strongly recommend Roy Weintraub'sReplyDelete
article "Neoclassical Economics", in which he makes it clear that the rational
paradigm that is central to the economist's approach to the world is nothing but "doing the
best one can under the circumstances". I haven't found anyone yet who can
refute that this is what we do in fact, and therefore I conclude the utility
maximization paradigm is a very good general construct for predicting choice
behavior, and valuing the resultant choices. Weintraub's piece is at http://www.econlib.org/library/Enc1/NeoclassicalEconomics.html
I'm not an economist, just a bystander citizen. But tell me an economist's politics and I can tell you with near 100% certainty said economist's position on any economic issue. I don't expect fail-proof predictions, but 80 years later economists still argue about the Great Depression's causes & cures, predictable by ideology. Economists select, manipulate and reinterpret data to support their ideological view of the world. Way, way, way more is needed than a change in how the subject is taught. Most scientists change their opinions when confronted with solid, contrary evidence. Economists don't.ReplyDelete
I think that is a bit disingenuous to emphasize that models contained in undergraduate textbooks have fared well in the crisis when those models have long been unacceptable in graduate study or articles in leading academic journals. If most economics programs are anything like my program was at Cambridge, these models were introduced, but it was made clear from a very early stage that they were insufficient for use by respectable economists.ReplyDelete
I appreciate your comments on economic methodology, and I agree that methodology will always be central to the study of economics. However, I think that the study of methodology can go far beyond an introduction to the history of economic thought. Economic foundations remain rooted in epistemology, ethics, and logic in a way that the economics curriculum simply does not acknowledge. Teaching economists even the smallest amount of critical thinking, rather than the "building a toolkit" method that teaches economists to emulate physicists and engineers could revolutionize economic thought.
Mainly Macro: " Now I agree that it is a great shame that some influential economists sometimes seem to ignore or have forgotten what is in these textbooks, or put their own textbooks aside to provide support for particular political parties. However it remains the case that the most effective critic of austerity is using totally orthodox economics."ReplyDelete
Krugman's comments (http://krugman.blogs.nytimes.com/2013/11/27/the-trouble-with-economics-is-economists/?_r=1):
"The problem, of course, is that this wasn’t just a case of ignorant or bull-headed political appointees ignoring economic wisdom: many prestigious economists were all too eager to turn their backs on standard macro, even when it was working very well, on behalf of their political leanings.
And that, I think, says that there is something wrong with the structure of the economics profession. We don’t seem to need different economics as much as we need different economists."
My add-on is that there is something rotten in macro when the people who are right still cower before the people who are wrong. I see Stephen Williamson, John Cochrane, John Taylor and a whole bunch of inflationistas still give respect, rather than called out on their - well, lies. I see a pair of economists who committed flat-out academic fraud excused on the basis of an Excel error.
I notice that in climate science, another field with hard problems, they've done much better. And they seem to be far more willing to work with people in any and every field which can help.