Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday 24 April 2014

When economics students rebel

I read the Manchester Post-Crash Economics Society’s (PCES) critique of economics education in the UK with a bewildering mixture of emotions. (Claire Jones has a short FT summary here.) It is eloquently and intelligently written, but I believe in some respects fundamentally misguided. It is indicative of a failure of mainstream economics education, but not (as it thinks) a failure of mainstream economics. Yet even after all these years, it is a position I can empathise with.

At its heart the critique is an appeal for plurality in economics. Rather than pretend that there is one right way to do economics (what the critique calls neoclassical), the critique says we should recognise that there are many alternative perspectives which have significant worth (and which therefore undergraduates should have significant exposure to). These alternative perspectives have become marginalised within economics over the last few decades, and the critique suggests that the financial crisis is evidence that this process should be reversed. This is not an unusual complaint, and I hear it frequently from those working in other social sciences.

Let me first say what I agree with here. Students should certainly be shown something of heterodox (non-mainstream) thought. I’d like to think that if we taught economics to undergraduates as a more problem solving discipline, with less emphasis on its axiomatic/deductive structure, that would become easier. We should certainly get more economic history in there, and again that would be easier with a problem solving approach.

What I disagree with strongly is that the current dominance of mainstream economics should be reversed, and that we should go back to ‘schools of thought’ economics. There are three reasons for this.

●     Of course mainstream theory can be conservative. It has been used by some to support a particular ideology. I complain a lot about both. But the most important reason mainstream economics has become dominant is not because of these things, but because it has proved far more useful than all of its heterodox alternatives put together. I agree with Roger Farmer here: economics is a science. Its response to data and events may be slow compared to the normal sciences, for obvious reasons, but it is progressive. I cannot see any fundamental barriers to its continuing development.

●     This is because mainstream economics can be remarkably flexible. One of the sad things about the way economics is often taught is that students do not see much of the interesting stuff that is going on in both micro and macro, and instead just learn what the discipline looked like 50 years ago.

Let me give one example. Students get taught that under perfect competition the wage is equal to the marginal product of labour. If that was all there was to say, then you might indeed believe that economics was just a means of excusing current levels of executive pay or arguing against the minimum wage. But instead it is just the start of what economics has to say. Read Alan Manning, who argues that because firms generally set wages and changing jobs is costly, monopsony is the more relevant default model. Read the Piketty et al paper I referenced here which talks about rent seeking by executives, and how cutting top rates of tax encouraged this rent seeking. These are powerful and effective critiques of marginal productivity theory.

●     At first reading, heterodox writers can seem like a breath of fresh air, because they are more holistic and often less formalist. But while many complain, with some justice, that mainstream economics can be resistant of radical ideas, I have personally found at least as much intolerance on the other side. Some heterodox economists appear to reject almost everything that is mainstream, which is frankly just silly. 

I think there may be a particular problem for students who are exercised by what they see as economic injustices around them. Economics in its studied neutrality can appear indifferent to that. It is natural for those who take an anti-establishment, left wing view to react to this perceived indifference by asking for revolution rather than evolution, by looking for a new paradigm. Perhaps those on the right, who may be happier with the status quo, find it easier to work within the mainstream, and use it to their own advantage. Yet any discipline where a utilitarian view is routine, and where diminishing marginal utility is standard, can hardly be described as inherently biased towards the status quo.

I think it is true that economics as a discipline has tried too hard to emphasise that it is an objective, politically neutral discipline, thereby underplaying value judgements when it makes them. Worse still, sometimes heavily value laden ideas like the importance of Pareto optimality are portrayed as being value neutral, which is clearly nonsense (see above). Yet the idea that it should be possible to build a science of human behaviour which is independent of ideology or politics is a noble ideal, and one which has been partly achieved. We may need (and are getting) more political economy, in the sense of recognising that economics works alongside and interacts with social and political forces, but I do not think we need more partisan economics. 

Let me get personal. Over the last few years, I have been in charge of a macroeconomics course at Oxford. For better or worse, if past evidence is anything to go by, one or two of those taking this course will end up helping run the economy. There is so much important mainstream theory that needs to be covered in that course, because it is theory that is essential to trying to understand what is currently going on in the world. At its core is Keynesian theory, which has proved its worth since the recession. (Interest rates didn’t rise because of all that government debt, inflation didn’t take off because of all the money that has been created, and austerity did delay the recovery.) It would be a great step backwards if I had to stop teaching part of that, and instead teach Austrian or Marxian views about the macroeconomy, or still worse spend time worrying about what Keynes really meant. I would much rather a future Chancellor, Prime Minister, or advisor to either, remembered from their undergraduate degree that mainstream theory said austerity was contractionary, rather than ‘well it all depends on whether you are a Keynesian or an Austrian’.

None of this implies that there are not large gaps in the discipline, large elements that will not stand the test of time, and that there is much still to be done. But I agree with Diane Coyle (about economics, if not DSGE) that “the Naked Emperor needs to be reclothed rather than dethroned”. New ideas could perhaps come from heterodox thought, although I suspect that they are more likely to come from other social science disciplines. But they will be developed within the mainstream, leading to the evolution of mainstream thought. If students want to change the world, I think they are much more likely to do this by working within mainstream economics than heterodox thought.


  1. "...I have personally found at least as much intolerance on the other side. Some heterodox economists appear to reject almost everything that is mainstream, which is frankly just silly."

    This is true, unfortunately. But, it's not a reason to preserve the dominance of mainstream economics, unless you think that what ideas should be taught should be dictated by the personalities of their advocates.

    1. True, but if a defining characteristic of heterodox thought is that it must reject anything that is mainstream, that is a problem. I also worry about any school that puts a huge emphasis on the writings of particular individuals.

    2. Is that a defining characteristic of heterodox thought? Maybe it is. But whatever you call it, there must be a school of thought that believes that mainstream techniques are not the only way to analyse a problem, without necessarily rejecting them wholesale. The fact that some heterodox economists might want to throw out everything, should not force us into thinking it's got to be either one or the other.

    3. I think this is slightly disingenuous. Heterodox economists do not reject much mainstream thought simply for the sake of rejecting it but rather because they believe it to be logically flawed. The only way that I can read your comment is "if a defining characteristic of heterodox thought is that it must reject anything that is mainstream, that is a problem FOR ME". It is not a Problem in the abstract. You just don't like it.

      Also the report is quite clear that we're not talking about getting rid of mainstream economics altogether. I recognise that while I may think that it is a ghastly, illogical mess other people may not think so. They should be allowed to teach what they think to be Science. But that should not prevent others from pointing out that it may not be Science at all.

      You think that mainstream economics is a Science. What gives your opinion weight? Presumably your PhD in economics. Well, I know literally hundreds of PhDs in economics that think exactly the opposite. The students are correct that both sides should get a hearing. If you are as convinced as you seem to be that your side is Scientific then you should be confident enough that you can defend this position rationally and convince students accordingly.

  2. I am a non-economist who has stumbled across this blog.

    Lay people such as myself wonder how it can be that QE doesn't feed into the inflation figures? Superficially, it just does seem to make sense. I

    think its important as you say that it is the idea that has value, not this or that school, or even an individual, who may also have some very bad ideas - e.g. gold standard may be a 'barbaric relic' but it definitely imposed an iron discipline on profligate politicians; as the mordant chart of US inflation shows once Nixon 'abandoned gold' in 1972.

    Thank you for an interesting blog.

    Twitter @JohnRConstable

    1. I think the mystery you describe ( it can be that QE doesn't feed into the inflation figures? just does seem to make sense.") is only a mystery if you believe that inflation is purely a monetary phenomenon, that is that change in the monetary base leads to a corresponding change in inflation.

      Inflation and deflation have demand determinants, too. If deflationary changes in money demand (money demand rises) are offset by an increase in the money supply, the inflation level can remain unchanged, even with all of those dollars "sloshing around," to use the grotesque popular phrase.

      When I look at the graph of inflation over the last century, I have to conclude that stone age monetary policy led to crazy inflation and crazy deflation. While it may be hard to disambiguate specific effects, I'm comfortable asserting the superiority of smart technocrats over golden idols.

    2. Well thank you very much Jonas for that inflation insight/explanation, which a non-economist such as myself simply wouldn't have thought of.

      I'm not at all sure that smart technocrats can ever outwit politicians who make daft promises to electorates and then have conjure up the money (usually more debt) to pay for said promises. Hence my point about the discipline that gold formally imposed on these politicians.

      Twitter @JohnRConstable

    3. PS. Unfortunately, I've only just realised in my original post that I meant to say 'Superficially, it just doesn't seem to make sense', but think you understood what I was getting at by your answer - thanks again.

      Twitter @JohnRConstable

    4. Money demand is critically important to understanding inflation. But there's another subtler point.

      Money supply and demand is a weird and subtle thing, because money is demanded for several different reasons -- store of value (savings) and medium of exchange (spending) are very different.

      When we're talking about inflation & deflation, we're talking about the amount of "medium of exchange" money in circulation. Money which has been hoarded as savings -- under the mattress, or stuck in T-bills -- isn't money for this purpose.

  3. what I find puzzling, is that it's easy to teach mainstream economics in such a way that leaves ample room for heterodox points of view, or more generally, to teach mainstream economics so that students appreciate that the glass is only half full.

    In fact I'd have hoped this is the way in which economics actually is taught, with ample discussion of what's missing from our models, where the data are inconsistent with the models, so that this criticism that economists preach slavish adherence to orthodoxy just should not arise. For example. see Romer's Advanced Macro has lots of material on what's wrong with macro models.

    After all, most economics research happens because the researcher thinks something is wrong with, or is missing from, previous work. Economics is constantly criticising itself. This doesn't mean criticisms from outside economics are no useful, but it does belie the idea that economists the contents of undergrad courses are beyond reproach. Many ideas that some people consider heterodox - for example "free trade might not be such a great idea" - are actually articulated very well within the mainstream.

    When teaching perfect competitive labour markets, as you say, it should be made clear that what's being taught constitutes the most basic of building blocks, a point of departure, not a picture of how we think labour markets work. I'd have thought the perfectly competitive model typically leads in to a discussion about how unlike a perfectly competitive market labour markets actually are.

    meanwhile if you want to see an example for the dogmatism of the heterodox, see this comment from the lecturer involved in the Manchester movement:

    1. I absolutely agree. However I can also imagine that economics could be taught in a very bad way, without any of the critical realism that you talk about. Furthermore, mainstream economists can also appear pretty dogmatic and condescending - see, for example, Tony's own defense of microfoundations.

      I had just read the comment to Tony's post that you referred to, and yes, it does conform to a standard 'mainstream economics is doomed' type of reaction. (I can remember similar stuff from my youth decades ago.) It is also typical in spending a lot of time on methodology. Now here I think the mainstream is also partly at fault, because they avoid methodological discussion as if to do otherwise was a sign of failure. But as someone who does take an interest in methodology, I have to say that some of the methodological writing that finds favour among the heterodox appears not to understand the discipline they critique. But maybe that is another post!

    2. Luis Enqiue: I answered you in the other blog but the comment has not been approved yet. I stumbled upon this post today, so I am posting one here as well.

      I responded to Mr. Yates's's post in the same tone he chose to adopt in his initial post in which he supports the decision to ditch the module, but I did not defend dogmatism of the heterodoxy anywhere. I believe mainstream economics as in textbooks is almost completely wrong, but I lecture Macroeconomics I, Macroeconomics II, and I tutor Macroeconomics III, International Economics, explaining my students why they are wrong. I teach them the deposit multiplier in the textbook, and then talk about how banks create money out of thin air. I teach them the causal relationship between money supply and inflation in the textbook, and then show QE. I teach them the open economy IS-LM model in the textbook and then show why CB cannot control the money supply, therefore model predictions do not hold in reality. Do you want to try to do the same thing in your Macro modules, and teach for example why post-keynesian endogenous money literature is wrong, and the central banks control the money supply? It is me whose module has been blocked twice, therefore I think you should be a little bit more fair before you accuse me with dogmatism. I don’t try to kick out mainstream economists from my department, I don’t block their elective modules. I teach the mainstream approach even in the bubbles module, I compare it with Post-Keynesians, Circuitists, Marxists, Austrians, etc. Is this your understanding of dogmatism? Just because I don’t agree with mainstream economics mostly does not make me a dogmatist unfortunately, that is not what dogmatism means.

      I guess I must also make it clear that there is plenty of research that could be classified as mainstream (or at least not heterodox) that I find very useful. Most of this stuff is not in macroeconomic modeling though. However, there are also attempts within the mainstream macro I appreciate, like this DSGE model for example.

      Still, the real issue at the heart of all these discussions is not what I think of neoclassical economics and its textbook representations, it is why I cannot teach anything else in a university. I am not trying to convince you to agree with me on economics, I am just reminding you my right to disagree with you and teach it, and that being more crowded in universities does not give mainstream economists the right to declare themselves authorities on what is scientific and what is not, particularly when this topic has been debated for over a century. (And Simon, this is not thinking too much on methodology, this is reminding some my right to disagree with them at the very core of the modelling process, it is reminding some that they do not have monopoly on defining how economics should be done)

      By the way, I am not involved in the student movement. After the initial hype PCES created, I was asked to teach such a module by my own department last year. I prepared a course outline, but the decision was reversed in 15 days for reasons I will not go through here so I delivered it as a non-credit voluntary module. I proposed it again for next year, but it was rejected again, despite significant support from several members of the faculty.

      I regret to remind you that it is not very ethical to make such claims without knowing what has happened in the last one year regarding this module, and to argue that I am involved in the Manchester movement. I happily did what any academic in my situation should do.

      Sakir Devrim Yilmaz

    3. Dear Sakir

      My apologies if I said anything misleading, and I'm glad to have made the position clear. As I said in my previous comment, mainstream economists can also appear arrogant and condescending. I also appreciate there is one big difference: mainstream economists have the power, while heterodox economists do not.

      But I have a genuine question, which I would love to hear your response on (either here on by email). I reread the Tony Lawson paper after you referenced it. I have my own thoughts about it in terms of scholarship, but what I am less sure about is how you could use it to critique mainstream economics. It is very abstract, and contains no examples that contrast an instrumentalist and realist approach. I can guess, but I might be completely wide of the mark.

    4. Sorry - two typos: 'you' rather than 'to' in the first sentence, 'or' rather than 'on' in the 4th.

    5. Dr Yilmaz,

      The comment I made at Tony's place made one single point: your attitude is dogmatic. I've just checked the definition and see no reason to retract. I fail to see why you object to that characterisation, it's very clear for all to see.

      I found the rest of your comment here rather alarming. Nobody is supposed to be teaching students that central banks control the money supply, or that the ISLM model is true, or that increasing the quantity of base money will cause inflation.

    6. I will not continue pointless personal discussions here about dogmatism, all is indeed clear from my posts.

      More importantly, if you are so "alarmed" that these things are being taught in universities, I think you should express this to the authors of the textbooks and thousands of economics departments all over the world that adopt these books, not me. My students are lucky enough to be warned about these myths, millions of others graduate from their degrees believing that these are established facts.

    7. No. These things should not be being taught in universities, unless the teacher is a moron. I was taught and have taught using standard macro textbooks and was never taught nor have taught students that the central bank can set the (broad) money supply. I have taught students models in which that happens. I find the idea you might not see the difference alarming. You might as well say we teach students the world consists of two countries producing only wine and cloth.

    8. Dear Simon, thank you very much for your response. I agree Tony Lawson’s paper does not give any concrete examples. So I will give an example, and try to explain how it is relevant in my opinion. I am writing a post for a blog on this, this piece draws from that. I am sorry it will be a very long one.
      Let’s take the issue of maximizing representative agent/firm as an example (I also include those models where there’s a “continuum” of identical firms/consumers). This is one of the main points mainstream uses to dismiss most heterodox approaches, even formal ones: Not having microfoundations, and therefore not being “rigorous”. No one would deny that a representative agent is a very unrealistic description of an economy. Rather, the defence for representative agent/firm modelling is that it provides a good approximation to the outcome of interaction of many heterodox agents. If this was the case, however, then model predictions would have been in line with the observed reality, which is very hard, if not impossible, to claim for these models. Further, there are many papers, which show the claim that representative agent/firm is a good approximation has also been challenged theoretically and empirically for a long time.
      You can say there are many heterogeneous agent/firm models, that is true. Yet, more than 95% of mainstream macro modelling still uses representative agents, firms and banks. And this is only one example. The ones that escape this shortcoming will have many other ones, such as equilibrium thinking, marginalist calculus, or other heroic assumptions. My point is not that the instrument is wrong, that is a common thing in models for simplification. What is rather interesting is that although the mainstream claims that heterodox approaches are not “rigorous” enough due to lack of microfoundations and/or appropriate formal modelling, when it faces precisely the same criticism from physicists, who are experts on analysing dynamic complex systems such as today’s economies, it starts defending its own “elementary” rigour. At this point, mainstream not only claims to have the authority to choose which instruments must be used, but also the level of complexity these instruments should interact with each other! However, reactions towards physicists are much more tuned than reactions to formal and non-formal heterodox schools, since most mainstream macro modellers do not quite understand the mathematics these extremely complex models apply. In these cases, the dismissive tone of mainstream macro modellers in general focuses on physicists’ inability to grasp economic concepts and relationships, and criticizes these extremely complex models for being unrealistic!!! This criticism is of course not only invalid but also funny in the sense that mainstream macro, like other formal heterodox macro, has no problem with unrealistic modelling. What makes a representative agent model for instance a better instrumentalist approach than an Agent-Based Model (ABM) in which thousands of agents exchange goods and services like gas molecules exchanging heat in a complex environment, or any other microfoundation? Especially when there is plenty of evidence that representative agents/firms are very bad tools in averaging the aggregate outcome of interaction of many heterogeneous agents, and they have proven to be very poor in predicting actual outcomes or explaining macro phenomenon. At the end of the day, both are unrealistic representations of reality, and simply different instruments. And as Friedman himself argued fiercely as well, whether or not instruments are realistic should not matter for a model (Lawson and Boland have the quotes). Friedman even claimed the more unrealistic the instruments are, the better it is for an economic model. Then according to this criterion, agent-based models for instance must be superior to mainstream macro if they manage to provide as much data-fit as mainstream models and to outline an as reasonable “story”, simply because they are more unrealistic!

    9. These models have every right to try as unrealistic instruments as they wish, just like any other formal heterodox model. At the end of the day, how more unrealistic can you get than assuming that there is only one person in an economy? Or that the agent uses marginalist calculus to take decisions? Or that economies always converge to an equilibrium? Is the mainstream then claiming to be more realistic than ABM for instance and therefore to have more merit? If so, what is its response to the criticisms to itself from more realist but mathematically simpler models? Or to those dynamic non-micro-founded continuous time disequilibrium models, some of which have much higher data fit and explanatory power?
      One other line of argument against complex system analysis is that these models are too complicated. This raises the question of how complicated an economic model can be, and who decides on this level of complexity. A model must find the right balance between abstraction and explanatory power, but to draw a universal benchmark for this balance is impossible. At the end of the day, modelling is not a game of who will explain more of the same data with a simpler model. It is supposed to reveal us some insights into the dynamics of what we are investigating, and that might require a significant level of complexity most of the times. I am using ABM as an example, because it is an interesting case. Unlike other formal heterodox models, which are in general, though not always, mathematically simpler than their mainstream correspondents, ABM models are extremely complicated, and apply mathematical techniques proven to describe phenomena in complex systems before, while escaping the lack of micro-foundations critique from the mainstream (In fact, they are the ultimate micro-founded models). Therefore, the stereotype mainstream dismissal of heterodox models as non-rigorous unfortunately does not work here. But this time, the argument is that ABM is “too rigorous”. Then, this argument can also be used by other formal heterodox models, which might mathematically be simpler than mainstream but might be more realistic and explaining a lot more, just like mainstream models claim to do when they compare themselves with ABM models. The problem once again is that there is no way of knowing where to draw the line here, although mainstream claims it is the ultimate authority to decide on that. I wonder if it is claiming to have found the exact dose of un-realisticness that is required to analyse economies. If so, what is the foundation of this belief? Surely not the legendary non-success of mainstream macro models to predict crisis or to explain macro phenomenon.
      The issue of microfoundations is critical so I would like to say a few more things on that. One line of defense I have come across many times is that microfoundations, as employed in mainstream models, derives “expected/observed” economic decisions from agent’s behaviour, such as increasing savings when interest rate increases. Therefore, they are claimed to be superior to models which impose this observed behaviour ad hoc. However, the problem here is that in order to produce some other observed relationships, many more ad hoc assumptions, such as distortions, frictions, imperfections, are imposed on the initial microfoundation at random (One model has financial frictions but price flexibility, the other has heterogeneous agents, financial frictions but marginalist calculus, and so on...) Therefore, the problem for the modeller becomes “What additional features should my microfoundations have so that I get this result as well as the other one?” Those that are successful in modifying the microfoundations in the appropriate way to “explain” an anomaly gain credentials within the mainstream, and a whole series of papers employing the same microfoundations emerge, until the models fail again and the same cycle starts from the beginning.

    10. While these changes to microfoundations are justified by referring to some data or observation, this does not change the fact that they are imposed ad hoc, at will, as they fit. What makes a micro-founded macro model a better one than the one without microfoundations then? If the whole set of microfoundations drew from advances in psychology, behavioural economics, behavioural finance, experimental economics, industrial economics etc. and therefore had some credibility (realism), there could be some arguments in favour of them and we could discuss only method. Since they are completely ad hoc, bad approximations as shown many times, and most importantly, they still overall depict a fantasy world despite modifications to initial microfoundations (imperfections) are always justified by some data, they are merely very crude instruments still and therefore they are not as crucial in determining the scientificness of a theory as the mainstream wants everyone to believe. This is a very basic tenet of instrumentalism, as I explained above and it was taken to the extreme by Friedman himself. If the mainstream will continuously set its microfoundations in an ad hoc and deductive way as models fail to predict or explain, and also claim that the realisticness of instruments does not matter, how can it blame models without microfoundations to be “ad hoc” and non-scientific? Mainstream as of now is not really micro-founded; it is ad hoc micro-founded at will. Setting the microfoundations in a completely ad hoc way is not any different from setting a macro model in an ad hoc way to make it explain more of what we are investigating, why do we have to use your set of wrong instruments (and methods) which have proven to be very bad ones in our, and many others’ opinion? Even more, there is no difference between setting up a micro-founded model in which you are assuming an ad hoc microfoundation to find something and stating the same thing in words. Modelling in this sense is just a mathematical game mainstream plays within a certain framework additionally, which I accept is fun, but does not have as much value added as it believes unless models work to explain/predict some other phenomenon as well without any modification. Further, that game can be played in many other settings equally or even more scientifically because instruments are not metrics to judge scientificness, or are they?
      Even further, what makes these two formal approaches superior to non-formal schools, which point to the immense literature on the non-predictability of human behaviour coming from psychology, sociology, behavioural economics etc? Or in other words, what makes instrumentalism superior to realism? What guarantees that mainstream or any heterodox school will be able to find the correct instruments that we need in our models in order to understand causal relations? Is there any guarantee that such instruments even exist in the first place, or that we are mathematically well-equipped to be able to find them now?
      In my opinion, the outcome of this discussion is that one can do economic modelling using complex system analysis employed by physicists, meteorologists, biologists, neuroscientists, one can use simple or more complicated non-micro-founded models or one can also choose a realist path and abstain from abstract modelling. Mainstream macroeconomics will have to respect to both formal and realist non-formal schools of heterodoxy as much as itself. The mainstream’s current position against formal and non-formal heterodoxy is contradictory and impossible to defend, unless it claims it knows surely
      1) whether or not modelling is doable in the first place,
      2) if so, exactly how realistic/unrealistic economic models can/should get,
      3) only which one set of wrong instruments and methods can be used for modelling,
      4) and no one else knows anything on this subject.
      I am only hoping the level of arrogance among the mainstream modellers has not reached to this level despite its now widely acknowledged failure

    11. At the moment, the conversation between the mainstream (M), and the heterodox (H) is like this:
      H - Your models are wrong, they don’t describe reality
      M- I know, they don’t have to. The instruments can be wrong, the outcome of the model is important
      H -Ok then, I will use different instruments for modelling.
      M - No, you cannot do that.
      H - Why?
      M - Because your instruments are wrong. And they are more wrong than mine.
      H - But you said they can be wrong. So is there also a limit to how wrong they can be? Who decides on that and how?
      M -It doesn’t matter what I said before. My wrong ones are the correct wrong ones.
      H - How do you know that?
      M -Because my models have predictive power. And mine also approximate more complex relations very well.
      H - They don’t. Almost no mainstream model could foresee the last crisis or many others. There’s also plenty of evidence against representative agent/firm modelling, against equilibrium convergence, marginalist decision making. And also, can there not be other wrong instruments we can use?
      M - No. Mine are the only correct wrong instruments. I just haven’t been able to combine them in the right way up to now.
      H - How do you know that?
      M – I know.
      H - Hmm, I have difficulty in accepting that. Can I do economics without instruments may be?
      M – No, you cannot. You have to use instruments.
      H – Why? I am not even sure if we can find the correct wrong instruments. I am a bit sceptical about this.
      M – No, you must use instruments. I know they exist and we can find them. And you don’t have to try to find new ones, I have already found some for you. Although I almost never get things right and there’s plenty of theoretical and empirical evidence against them, I am sure my instruments are the only correct wrong instruments, and you should use them. Otherwise, you are not doing scientific economics.
      I am sorry but the mainstream is asking for too much, it is asking for academic immunity, but it has nothing to justify it. If it has chosen to adopt instrumentalism, it should know the limitations associated with it and therefore respect, not dismiss all heterodox instrumentalist approaches and work to show that their instruments and methods are more successful than other formal approaches. This is not the case at the moment, since the mainstream performs terribly even according to the criterion it set itself (predictive power), therefore it is not in a position to claim that its instruments and methods are the only correct ones. Arrogance in this aspect is very annoying and it is the reason all these discussions finally end up as discussions on methodology. Claims like “the heterodox is telling the wrong story, it should work with the same instruments and methods” are unfortunately unsupported, and there might always be many other sets of instruments that might be available to and deployed by heterodox macro models and shown to work. Further, the mainstream should also keep in mind that instrumentalism is not necessarily the only way of doing economics since there is no conclusive consensus in favour of instrumentalism over realism and one can find many strong arguments to choose any of these methods. As every mainstream macro modeller knows by heart, when one starts building a model, one knows more or less what he/she will find and say, and constructs the model in such a way that this result can be deduced from the model. The model employs wrong instruments, but this is tolerated. This process is not necessarily superior to stating the same idea but not finding an appropriate mathematical toy to “back it up”. At the end of the day, what one says is at least as (if not more) important as how one says it.
      I apologize again this has been a long post. The dismissive arrogance I outlined above still appears here and on the other blog, as now I am accused of not understanding what a model is for by those who have no idea about what they are doing.

    12. Luis Enrique: Don't worry, I can see the difference, it is the students that cannot see the difference, unless they are shown another world, which is what this discussion is all about. Why do you think almost every student I ask the question "What happens when CB prints money?" replies like a parrot "inflation goes up"? Because they learned the same thing in all their macro modules, from models in which CB controls the money supply and increase in base money leads to more money supply, which leads to inflation. It is in the book. So it does not matter if you are rhetorically claiming that you are only teaching a model in which CB controls the money supply or there are only two countries, you have never claimed that these hold in reality; you are teaching wrong results from your models (anti-inflation bias in rational expectations models, anti government drivel in long run models, justifying abnormal returns with marginal factor pricing) which then are accepted as a universal fact by them because you are neither teaching them something else, nor allowing others to teach them other views.(By the way, I should remind you this is the dictionary definition of dogmatism: Stating an opinion as if it were an established fact. Does that make it clear that it is the mainstream that is dogmatist, because it is dictating its opinion as an established fact? Am I dictating my opinion on modelling/paradigm as the only truth? Do you even know which paradigm or modelling strategy I like?)

      For this reason, at least 8 out of 10 students you ask from any university will tell you that they think what is in the textbook is the truth. And there is nothing more natural than that, especially when those model results are taught as the only economics in universities. In every field, textbooks present true knowledge confirmed by observation, not what comes out of some model which doesn't really get it right. It is a core textbook, it is not your paper in which you can claim as crazy things as you like. In a textbook that you call "economics", not "mainstream economics", if you write the money multiplier in that way for example, and the students read it as if it were a description of reality, they will believe in it. Then they graduate, get jobs in the financial sector, and when QE starts, they start claiming that there will be hyperinflation. Bank of England finally gets so fed up with the stupid inflation discussions that do not understand credit creation following QE that they publish this:

      Funnily enough, 26 years ago, Basil Moore had written this. So no excuses such as “we all got it wrong”.

      Similarly, BIS had to publish this:

      And FED economists had to write this:

      I recommend you make these essential readings for your macro modules as well if you already haven’t done so. Then I think you will understand why I said there is no need to teach a large chunk of mainstream models, or to work on them any further.

      I have a few questions for you: Which of the following is a stronger statement?
      -I do not think there is any need to bother with learning heterodox approaches.
      -I think the students have nothing to learn from mainstream models such as A, B, C and similar ones.
      Have you shown the same reaction you have shown to me to the writer of the first sentence? If not, why?

    13. Dr Yilmaz,

      "Have you shown the same reaction you have shown to me to the writer of the first sentence? "

      Yes. This all started on Tony's blog because Joe said Tony was the only one displaying a dogmatic attitude, and my comment illustrated his error: your attitude is dogmatic too (all orthodox economics is simply wrong etc.). My reaction to you both is the same. If you look at my first comment on Tony's blog you will see I suggest his course should make room for Minsky, Kindleberger, Eichengreen etc. If you look at my first comment here you will see I think economics should be taught as if it is teaching established facts.

      I am also alarmed at the idea that students leave university thinking that their first-year text books are straightforward descriptions of reality with nothing more to be said. I do not know what proportion leave that that idea, you say 8 out of 10, I hope fewer. For example all our first years had to write an essay using the money multiplier to explain why base monetary expansion (QE) did not increase the money supply, after having looked at data on both in lectures, and they had to explain that banks are not necessarily going to increase lending just because the quantity of reserves in the system has increased. These students should not be graduating with daft counterfactual ideas about QE. [I am not going to say what uni I am talking about, but it's on a par with Manchester (or above it, if you go by research ranking).]

      other fields may be able to teach material that simply conveys true knowledge, but economics is very different from that, and makes heavy use of deliberately unrealistic models to shine some light on some small part of reality. There is always more to say. I would agree with you that if economics is not taught in a fashion that makes this clear, that would be a very bad thing. But it wasn't taught to me in that way (of course not, it would be absurd to teach perfect competition like that, for example).

    14. Unfortunately, nowhere have I said all mainstream macroeconomics is totally wrong. Or all heterodox is totally correct. That is why I quoted myself above. I listed models, and said there is nothing to learn from these and similar ones. Further, as I said above as well, I have the right to disagree completely with the mainstream, that does not make me a dogmatist.
      I posted this paper above as well, I will quote Claudio Borio from the BIS, on the essential characteristics for a model, on the parts I fully agree.

      “Essential features that require modelling
      The first feature is that the financial boom should not just precede the bust but cause it. The boom sows the seeds of the subsequent bust, as a result of the vulnerabilities that build up during this phase. This perspective is closer to the prewar prevailing view of business fluctuations, seen as the result of endogenous forces that perpetuate (irregular) cycles. It is harder to reconcile with today’s dominant view of business fluctuations, harking back to Frisch (1933), which sees them as the result of random exogenous shocks transmitted to the economy by propagation mechanisms inherent in the economic structure (Borio et al (2001)). And it is especially hard to reconcile with the approaches grafted on the real business- cycle tradition, in which in the absence of persistent shocks the economy rapidly returns to steady state”

      “The second feature is the presence of debt and capital stock overhangs (disequilibrium excess stocks)”

      How could this be done?
      “One step would be to move away from model-consistent (“rational”) expectations” “Heterogeneous and fundamentally incomplete knowledge is a core characteristic of economic processes.”

      “A third, arguably more fundamental, step would be to capture more deeply the monetary nature of our economies. As discussed in more detail in the next sub-section, models should deal with true monetary economies, not with real economies treated as monetary ones, as is sometimes the case”

      “And in all probability, this will require us to move away from the heavy focus on equilibrium concepts and methods to analyse business fluctuations and to rediscover the merits of disequilibrium analysis, such as that stressed by Wicksell (1898)”

      In summary: No equilibrium modelling, no exogenous shock modelling, no representative agent/firm/banks, no rational expectations, no complete knowledge, no non-monetary economies but in the true sense. So, Borio is implicitly saying there is no model in the mainstream that can explain business cycles...

      These are the minimum requirements needed for the new generation of modelling. And I believe mainstream microfoundations are not so secure, so the models could be macro models without microfoundations (this is where I’d disagree with Borio). As you can guess, that leaves out a vast majority of mainstream models. Are there any models that satisfy all those above in the heterodox modelling? Not to my knowledge. But there are attempts in that direction I am aware of and try to follow. Just like I try to follow attempts from the mainstream in this direction but they are hard to find, particularly when one does not agree with equilibrium and exogenous shock models.

      Regarding teaching, I am happy to hear about your assignment. I covered money creation and QE in the lectures, and gave an assignment on how public and private debt are related to the crisis in the UK. But the problem extends beyond first year textbooks as I said, to IS-LM and microfoundations in the second year, and to rational expectations and real business cycle in the third year. These are awful characterizations of an economy, and yield biased results. Some may have been lucky to get a good education, but there is a reason in over 10 universities in the UK, students are very unhappy that they are learning a one-sided economics.

  4. Shiller's fuller version of his Nobel prize winning speech saw him say that:

    "Lionel Robbins, with his 1932 book An Essay on the Nature and Significance of Economic Science has had the honor of inventing the most common definition today of economic science, of the unifying core idea that defines this science. He wrote then: 'The economist studies the disposal of scarce means. He is interested in the way different degrees of scarcity of different goods give rise to different ratios of valuation of them, and he is interested in the way in which changes in conditions of scarcity, whether coming from changes in ends or changes in means — from the demand side or the supply side — affect these ratios.' The importance of prices in allocating scarce resources is an idea whose beginnings go back at least to Adam Smith in the 18th century, with his “invisible hand,” and there was a certain wisdom in Robbin’s framing of the entire field of economics around this idea. This wisdom still today is not fully apparent to the untrained public. Most people do not appreciate that all of our economic activities and all of our pleasures and satisfactions, and those of subsequent generations, are ultimately guided by prices of scarce resources as formed in the markets. There is a problem, however, with the interpretation of economics that Robbins so persuasively gave. For his definition appeared to cast the economic problem exclusively as about scarcity of production resources, like energy and food, rather than also about scarcity of human intellectual and psychological resources. He casts the problem as man against nature, when in fact much of the economic problem is dealing with man against himself."

    1. And yet this is a terrible definition of economics -- an atrocious definition.

      Because most of the important issues in political economy today relate to artificial scarcity. Resources which are NOT scarce, but are made scarce by rent-seekers or for other political reasons.

      It's most obvious when it comes to stuff like copyrights and patents, but frankly, money is in the same boat. Any scarcity of money is entirely artificial, driven by decisions at the central bank and Treasury/Exchequer.

      Economics is NOT about scarce resources or their allocation. If it were, economics departments would be entirely Marxist. "From each according to their ability, to each according to their need" is pretty obviously how you should allocate genuinely scarce resources, and it's how we do it whenever there's a food shortage and we have to impose rationing.

      Economics is about the nature of money and property and the use of money and property in society, and I think that's the best description of the field. Unfortunately a hell of a lot of economists have really whacked out and wrong ideas about money, starting with the goldbugs.

  5. A decent post overall, but at the same time, rather panglossian:

    3 challenges for you to consider:

    1) How is it that we have a Chancellor and many advisors who came through Economics at Oxford who don't think austerity is contractionary? (I'm sure it is not to do with you personally, but PPE is the centre of economics education in our political system, so it's an important question.)

    2) A challenge to you and Luis Enrique: Yes, economics can be taught well in the current framework, with a healthy critical attitude to the (all!) models. However, explain how this can actually be spread to a majority of economics classes - as it isn't the case at the moment - and crucially (as in (1)) has not been the case historically.

    This reality is often mysterious to people working in England, because the academic profession here has typically been pretty good, esp. in the way they teach. However, in e.g. the US system (and in Germany) the balance (numerically) is clearly towards doctrinaire teaching. Far too many economics students have very little education in how to think about models - quality, selection and proper construction.

    3) A challenge for Simon and Roger Farmer. If someone gathers lots of cars, say everything from an Alfa Romeo to a Yugo and starts studying them, does that make for a science?

    The key challenge for economics is to let go of the naturalistic fallacy, to recognise that "natural experiments" are actually experiments within constructs or machines that we call "economies." That doesn't mean you can't study and learn, but it does mean you need a different sense of where the science lies. And no, I don't expect a paragraph to convince anyone, but I hope you might at least engage seriously with the issue, rather than simply dismiss it.

    1. On (1), I do not know, because I did not teach either Cameron or Rupert Harrison. However one explanation is that they were taught before macro took the problem of the ZLB seriously, and they did not keep up with literature subsequently. On (2) I'm interested in your contrast between the UK and US/Germany - do you have any evidence on this? On (3), I honestly do not know what you mean - can you be more specific?

    2. On (2) there's a couple of papers on this, I'll try to dig them out. My library access is currently expired and it might have to wait until my new adjunct contract is signed off.

      On (3) - it's a complex metaphor, perhaps it's too much for a comments section, but here goes.

      Here is how economics has developed. It has collected a set of machines - "economies" - and given the constraints (modern developed economies, etc.) it's not a huge set. It's then gone about deducing fundamental principles about them. The problem in my mind becomes clear if you think about different machines, say cars. You can deduce some of the laws of physics from studying the internals of cars - but there's a number of things that are really hard to understand from inside that frame of reference. It's not that you can't be scientific about it, but you need to understand the limitation in your ability to deduce "universal laws."

      Economics as taught and often as practiced is really bad at understanding where those limitations are - instead we're treated to physics style pronouncements about "universal laws." The deep problem that we've lived through from 80s onwards is that we've started to alter society to fit those laws, rather than noticing that if society differs, maybe those laws aren't strictly universal.

      I don't think you have that arrogance - and many British academics don't (although some sub-sections, e.g. health economics in the UK are as bad as anywhere in the world.) But this arrogance has dominated policy.

      And to circle back to (1) for a moment - how did we come to stop taking the ZLB seriously? It's not as if Cameron or Harrison's education experience pre-dates the Great Depression?

      I fear I'm about to non-usefully throw another challenge at you, the same one that got me into commenting on econ-blogs years ago now - from a discussion with Mark Thoma - which is: How can you regulate academic economics to reduce the cover it provides for things like expansionary austerity, and other politically useful but academically dubious concepts? Because those concepts are regularly bolstered and defended by prominent academic economists… and that's why people outside the profession really question what is going on inside...

    3. As one final aside while I argue with the IT dept over my e-library access - the paucity of literature on the differences in economics teaching across different countries/traditions is a bit worrying in itself. Ordoliberalism is a big thing - it completely dominates economics teaching in German universities - but there are only one or two papers about this.

    4. I do not think you can stop academics giving cover to bad ideas, and I do not think that you should. What I would like to see is more acknowledgement outside economics about when such views are clearly minority views. I'm particularly interested in how Keynesian economics is taught in Germany.

  6. At least start in small steps. Historical case studies will show that actually economic theory is wrong or irrelevant just a little bit too often. This will naturally develop critical reasoning. And that is firstly what we want in economics.

  7. "...I have personally found at least as much intolerance on the other side. Some heterodox economists appear to reject almost everything that is mainstream, which is frankly just silly."

    No it is not silly. It is an attitude. Some personalities come across as repelling saying that but frankly I think someone like Fred Lee of UMKC comes across with such a view as attractive.

    I am not a student but if I were to enter an undergraduate or a graduate course, such a view would have been very helpful for me. Frankly, when I became interested in economics, I quickly assumed this view in no time without anyone telling me but this is may not be the case with others. If I were a teacher I will definitely give this viewpoint in the first class itself.

    That is not to say that one shouldn't read other stuff. Actually a lot of central bank publications are good but the authors do not realize that what they say is inconsistent with orthodoxy.

  8. We need another approach that does not insist on optimising firms and households (as defined by Victorian economics). An approach that is well informed by how people and humanity as a whole actually behaves. To be able to properly appraise something like orthodox economic theory you need something to appraise it against. This includes evidence. This includes other plausible approaches. It is a two way thing. They need to understand what you say, you need to understand them.

    I agree that much will need to come from other disciplines. For example a study of the major intellectual debates in philosophy will immediately expose some of the big problems of the current singular dominant paradigm in macro-economics.

    Important will be looking at the findings of other disciplines on the other terms. What we do not want is their inclusion into Victorian or DSGE type ideological frameworks.

    1. What I mean by the last sentence is that some ways of looking at the world are not compatible with others. I think for example Roger Farmer will have trouble reconciling Classical Victorian economics and Sargent with Keynes because the latter has a fundamental philosophical disagreement about their view of society and humanity.Humanity as a whole does not necessarily act as the sum of individual self-interested agents. It is a far more compassionate and social being. There is not necessarily an equity-efficiency trade-off. It is a contradiction that orthodox theory finds difficult to handle.

    2. --->> An approach that is well informed by how people and humanity as a whole actually behaves. <<---

      This. There were some movements towards this in the late 1990s -- the "experimental economics" movement which showed (by running experiments) how people actually behaved with regard to money.

      This has influenced the microeconomics courses not at all. If the microeconomists had paid a little bit of attention to these experimental results, they could have started constructing a genuine microeconomics, but instead they keep parroting the same old bullshit about supply curves.

      Theory of the Firm needs to describe how firms actually behave. Hint: there is no supply curve and there is no equilibrium. The most important action of firms is MARKETING, which isn't even covered in the first two microeconomics courses.

    3. You really have no idea what you're talking about, do you?

  9. "Worse still, sometimes heavily value laden ideas like the importance of Pareto optimality are portrayed as being value neutral, which is clearly nonsense (see above)."

    I'm very happy to hear this, I think for the first time ever outside of myself. I had a post on this, and Mark Thoma did put it in his links:

    1. and I read it, so would have linked if I had remembered - apologies. On the point about how the subject is taught (your comment below), I have the feeling that the current debate over teaching is limited to the UK. I vaguely remember something a few years back about graduate teaching in the US, but as you discovered, my memory is not that good!

    2. Elizabeth Anderson and Debra Satz have both made similar points about Pareto optimality and you might find it useful to track their stuff down - though they are philosophers and your mileage may vary on your tolerance for philosophy.

      Satz makes the point in her book, Why Some Things Should Not Be For Sale. Liz Anderson makes it in her book, Value in Ethics and Economics.

      Anderson's book gets deeply into meta-ethical reflection on the relations between emotions and value. Satz is not so interested in philosophical questions about the nature of value. Instead, she is interested in the moral question: when do we have reason to intervene in markets? But her deeper interest (which is less explicitly addressed in her work) appears to be: how does a market's capacity to provide various goods (and to create various negative externalities) depend on the social contexts in which it is embedded?

    3. Probably, the looking through following essay would be the best place to start with Liz Anderson (from whom many of Satz's ideas derive):

  10. A huge thing for me is that in macro 1 and macro 2 (and almost no one takes anything beyond this in the US, where 1 and 2 are often required, but nothing else), from my experience and personal knowledge, it's all about the theory of how great pure markets are, and little or nothing at all about serious market problems, like externalities (especially positional, but that's the longtime pink elephant at every level of econ), asymmetric information, natural monopoly power, etc. And really nothing on the problems if you're concerned about coming anywhere close to maximizing total societal utils when the marginal utility of dollars plummets.

    1. Nasty typo, I meant micro 1 and macro 1 (for undergrads).

  11. To hear you and Farmer assert such nonsense about how economics is a science is frankly downright scary. You guys are top professors in the discipline, and you are both utterly ignorant of the ontological differences between the social world and the natural world. I suggest reading John Searle. The fact is that economics can never be a science, and the problem has nothing to do with the constraint of having non-experimental data, and everything to do with the fact that economists study the evolution socially constructed variables, which are influenced in unpredictable ways by human beliefs and intentionality.

    1. Joe, literally everybody in the entire field is aware of the differences between the social world and the natural world. The whole discipline was reconstructed sometime in the 70s so that predictions can be robust to human beliefs and intentionality. The solutions economists hit on may not be the right ones, but to think they've never thought about it makes it sound like you are completely unaware of the last 40 years of economic theory.

    2. Much scarier is the assertion that social phenomena are exempt from scientific enquiry. How else do you understand scarcity problems?

    3. Walt, if you think the shift to micro foundations in the 1970s solved the problem of performativity in economics - a problem that comes about because of the ontological structure of the social world - then you have absolutely, positively no idea what you are talking about.

    4. It's quite possible to study the evolution of socially constructed variables scientifically. Psychologists and anthropologists do it all the time. They've spent a *lot* of time working out how to do this. It's difficult.

      Unfortunately, economists on the whole haven't learned a damned thing from the century of work put into making psychology and anthropology more empirical (and therefore more scientific).

  12. It's really an informative and well described post. I appreciate your topic for blogging. Thanks for sharing such a useful post.

  13. The only general equilibrium model that you encounter in your standard micro education, is one where we essentially live in an utopia (except, possible, beucase of unfair initial distribution).

    Every partial equilibrium model in standard micro is set within this framework - i.e. "assume this trivial problem but that our world is essentially a utopia".

    If that isn´t conservative, i don´t know what is.

    1. PS: A non-conservative approach would be to start by figuring out some rough answer concerning what the world would look like given that every market failure actually could be solved.
      Unless the answer becomes - as our current world does - all kinds of effects that in current models only have second order effects, will now have first order effects.

  14. Some Witty Alias25 April 2014 at 15:34

    Correct me if I'm wrong but I see two strands of criticism towards economics.

    One comes from within economics: Joe Stiglitz, Paul Krugman, Ricardo Caballero.

    Those people have been in the field a long time and their arguments revolve around "evolution rather than revolution".

    Then there are the anthropologists, undergraduate students, "public intellectuals" (i.e. Slavoj Zizek, etc.), and journalists who have never worked on DSGE models, never spent a lot of time at economics conferences, and have at best a limited interaction with experienced economists.

    Those people preach revolution over evolution.

    Now, I have learned that you should respect authority simply because outsiders rarely know the whole story.

    For example, I find it fascinating that undergraduate students who have no experience at all in ANY field of life, let alone something as complex as economics, can feel that they can authoritatively challenge economic theory, march out of Greg Mankiw's classes, protest, etc.

    Likewise with people like Slavoj Zizek or anthropologists who somehow think that because they are relatively intelligent they can figure out economics in a few months and start lashing criticisms out as if they are now the real experts.

    In short- I think the "revolution" movement is fed mostly by the ideology and impulses of outsiders while the "evolution" movement is where the actual experts are.


    1. Your argument has some merit to it although the idea that only insiders should be allowed to change a science has it's problems as well. For one thing, having spent a decade or more learning economics, almost everyone would (understandably) shy away from proclaiming that it is all nonsense because, if that is true then what have they been doing for the last ten years?

      Another problem is motivation. It is very difficult to spend a large part of your life studying and learning something that you believe is wrong. Therefore, those who are prone to accept the received wisdom in economics will stay in while most of the people who are inclined towards disagreeing with it (perhaps because they can think outside the box?) are going to drop out.

      That said, I too think evolution beats revolution in the economics case. :D

    2. Undergraduate students already have more experience of life than Greg Mankiw.

      He's been spouting absolute bullshit, really obvious bullshit which is disproven by anyone who's recently applied to college or applied for a student loan. Bluntly, the students know more than he does.

      The anthropologists, of course, know more about economics than professional economists, because they're *actually studying the foundations* of economics.

      This is very different from Zizek, who's a goofball.

  15. An interesting parallel is the evolution of sociology in UK HE. An influx of 'revolutionaries' in the late 1960s and early 1970s overturned the prevailing orthodoxy that did indeed have plenty of faults but did at least have the merit of insisting on properly generalisable (which usually means quantitative) empirical research. The result was lots of 'theory' with no proper methodological base and the virtual death of sociology as a policy relevant or politically relevant discipline. Instead it helped create an intellectual climate where the philosopher/commentator could just about say anything they liked and scant attention or importance was paid to empirical evidence. Unsurprisingly the new right, and in the US the GOP, was quick to learn the advantages of 'relativism all round' and apply it to just asserting what they 'know' to be true.

    1. That IS interesting. Would it be possible for you to show some research/authoritative articles about this issue? Not knowing much about sociology as a science, I would very much like to know more.

  16. Just a perspective, from yet another former PPEist:

    I am doing a part-time Masters in economics and I have to say it's very frustrating. My teachers clearly thought I needed a "grounding" in classic micro, but I find it both tedious and annoying. The stuff on game theory, auction theory and so on was far more interesting than some hundred-year-old speculation about idealised situations, but the latter took up half the course! I am now doing macro, which is even worse. The lectures on DSGE modelling seem to me to be the second time in my life that an academic true believer has tried to teach me obvious drivel (the first being the attempts by a chap at St Peter's to teach me that ordinary language had an underlying logical structure that could be rendered in formal logic). Euler equations? Production functions? Representative agents? It's all nonsense and seems to be based on the thoroughly unscientific idea that the assumptions don't matter if the output looks about right (which, anyway, it doesn't -- the wretched things are hopeless at forecasting!). I can't see why you aren't moving wholesale either back to IS-LM, Mundell-Fleming (I work in financial markets and that really is useful) etc. or onward to agent-based modelling.

    Part of the problem with all this is that thinkers get driven away while diligent little beavers just love getting to grips with the smart-alecery of it all. So who is going to enter the field? The diligent little beavers. That's why your field has ossified.

    This is almost all behind me -- one exam (assuming I can bring myself to do the revision) and then hopefully on to econometrics and advanced game theory next year. Now those are things that are actually worth doing!

    1. Some Witty Alias25 April 2014 at 17:43

      This is what worries me.

      You are a student at the master's level.

      Why are you so convinced in your ability to judge a massive field like economics that very smart people have spent decades developing?

      Do you really know all of the arguments for and against DSGE modeling, microfoundations, representative agents, etc.? You can't. There just aren't people smart enough in this world to learn about all of that in the span of a year or two or even five.

      It's the same situation when undergrad students staged walk-outs from Greg Mankiw's classes at Harvard.

      Criticism is the final destination of a long process of education.

      First you learn, you listen, you dive deeply into a field. Then you are equipped to critique productively and confidently.

      Yet some people want to become critics from the start.

      It's not possible. And that's why revolutions oftentimes fail- because they are often raised by people who aren't really equipped to revolutionize in a meaningful sense.

      Sorry if the tone seems harsh.

    2. Criticism is the final destination of a long process of education.

      Unfortunately in the case of economics the destination has been indoctrination. Why?
      Remarkably little criticism along the way?
      A good theory on how this happens?
      Try Das Kapital, or any work by Adorno, Habermas

      Often in international capitalism you get concentrations of production, capital and inequality, unlike free trade and market theories propose. This applies to intellectual production which result in intellectual hegemonies whose emergence have nothing to do with their marginal product.

    3. Some Witty Alias26 April 2014 at 18:10

      How many economics papers have you tried to publish to know that there is "remarkably little criticism along the way"?

      The criticism within economics is fierce.

      In a Finance PhD class I took every research paper was meticulously and aggressively dissected for flaws in every aspect: the empirical methodology, the assumptions, the quality of the data, etc.

      The absence of criticism is precisely in the fields that people like Adorno thrived in- where there are practically no coherent theories that can actually be tested, nothing really at stake because no one suffers anything if they are "wrong".

      On the other hand, people livelihoods are at stake when economists' models are used to make monetary and fiscal policy, when trade agreements are negotiated, or when investment decisions are made.

      The pressure to get it right is immense.

      Meanwhile, no one really expected anything of Adorno or Habermas beyond an interesting lecture.

    4. Finance as an economic field has practically nothing to do with economics as a field.

      That... actually says something really bad about academic economics. Finance papers have to be practical. Economics papers don't.

    5. "Do you really know all of the arguments for and against DSGE modeling, microfoundations, representative agents, etc.? "

      Yes. You're making the Courtier's Reply -- "Oh, but you have not read the advanced versions of our analysis of how many angels dance on the head of a pin." This is bullshit.

      - There are no valid arguments for DGSE modeling. Equilibrium generally doesn't happen in economics, and there's no motivation for even doing this kind of modeling in economics other than "the math is pretty". It can be dismissed immediately.
      - The argument for microfoundations would be great, if the microfoundations were accurate, but we know the microfoundations are badly wrong (based on microeconomic experiments). You don't "microfound" your biology on alchemy or Aristole's theory of the four elements, because *they're wrong*; you have to have working chemistry before you can have a "microfounded" biology. You do not have microeconomics working well enough to have decent microfoundations for most of macroeconomics.
      - Representative agent modeling is a reasonable way to do things *if you can get a decent model for your representative agents* which includes the salient features. It has to have representative agents plural, of course, since economic activity depends on the heterogeneity of the people involved. Of course this sort of model is rare; most representative agent models have blatantly ridiculous representative agents who omit key behavior features.

      It really doesn't take much work to figure this stuff out. You don't even need a bachelor's degree, let alone a master's, you just need to have a scientific approach and look at the data. This is not clever stuff.

    6. Thanks @SWA. Other commentators have made some good criticisms of your comment.

      It seems you would like a world where nobody could criticise anything until he was an expert in the field. The problem is that 1) only people who thought the field was good would bother to become experts and 2) once they were experts, they would have a strong incentive to think the field was good.

      You do not necessarily need expertise to exercise judgement. Speaking as someone who mostly read philosophy, if that was true, I would still be studying Descartes.

      Again speaking as someone who mostly read philosophy, it is no surprise to me to find some very intelligent people believing in daft things and indeed devoting their intellectual lives to them. This has been the normal fate of very intelligent people for most of history. The big example is, of course, God (and a whole stack of attendant nonsense); Marxism is another widespread case in recent history. These fields are far from unique, and daft sub-fields are surely far more numerous and present in many disciplines. So when I find jolly clever people doing DSGE modelling, I think: "oh, another case of that".

    7. PS I don't think anyone picked up on your comment about the real usefulness of DSGE. I work in investment, and I have been a macro strategist; people don't use DSGE to make money, and everyone treats economists' forecasts with the scepticism they deserve. You remind me of this cartoon:

  17. Simon,

    When you make the judgment that mainstream macro has proved more useful than all the heterodox economics put together, I'm wondering what heterodox economics you have actually read? Any?

    1. I've been asked this before:

      That was in the context of a challenge I set that was deliberately designed to allow heterodox economists to demonstrate how useful their analysis could be. You can judge for yourself the result.

      I have both worked in government, and a great deal with those still in policy making institutions. I have a reasonable understanding of what they find annoying about academics, and when they can make use of research.

  18. You write: New ideas "will be developed within the mainstream, leading to the evolution of mainstream thought"

    The problem is that there is no mechanism by which this process can take place in modern academia. Microeconomic theory (or perhaps economic theory) has already debunked DSGE and all of modern finance, yet it has had no impact on the practice of these subfields. As long as the economics profession is divided into silos, and mathematical rigor (i.e. the continuum, etc.) is valued over creating models that can reasonably be related to the real economy, there is no hope for the advance of knowledge within the profession.

    1. In my more optimistic moments I disagree. Advances in macro will come partly through today's micro filtering through to macro. There are two opposing forces: natural conservatism versus the success that comes through innovation. But the more that macro students get exposed to modern micro before they specialise, the quicker change will come.

    2. Micro is fighting the same battles, unfortunately. There is some competent "modern micro" -- the experimental-economics stuff (proving conclusively that people care about fairness more than income-maximizing, for example), the practical finance stuff, the institutionalist stuff -- but what gets taught in Microeconomics 101, 201, and even 301 is bull. Even at the best schools.

      Exposing macroeconomics students to more BAD microeconomics is not the answer.

  19. I don't think that mentioning a specific intro text would actually do much good but I have found one that helped provide a guide on how to include more plurality without sacrificing the essence of mainstream economics. I don't agree with the treatment of everything in the text but the approach used would be a good starting point and/or in the revision of introductory economics. The text is called Economics in Context, there are some gaps in the text and areas in need of improvement and is a bit too politically oriented but I believe it does provide a solid basis for the reformation of introductory economics. It has been 60 years since the current structure was introduced and rethinking that structure is long overdue.

  20. R Scott Palo Alto, CA

    Anglo American Economics has been trying to act like it was a physical science for nearly 100 years now. At the same time the field of economics has been playing fast and loose with first principals as if they did not matter. Profit Maximizing individuals are about as rare hens teeth. Most of us don’t really want to compete day in day out to put a roof over our heads and raise our children. Economists have been trying to act like they were objective when in fact they have been unwittingly carrying water for the most conservative elements of our society. Naive underlying assumptions that cannot withstand examination (invisible hand and a belief that markets allocate efficiently) doom economics departments in both the US and Great Britain. For macroeconomics to be truly useful it needs to be more than just a form of historical accounting on a national or international scale. Big Data and statisticians are going to do a far better job at recognizing patterns in data than economists ever will. So much of what we admire in human beings patriotism, empathy for the less well-off and service to God and country are trivialized by conventional market economics. These soft human categories do not fall neatly into Anglo American economics easily measured categories and are written off as externalities. The economics profession is so internally focused it has become a self-perpetuating insiders club of people who too often could not make it math or physics and rolled into economics. As a result the really interesting things in what the average person thinks of as economics just don't get tended to nor investigated. Economics needs to let go of its fascination with nice little mini-max problems and see how the real world works. Example: I ran a technical consulting services for several years. Despite all kinds of planning forecasting and micro level data collection we had the optimal number of trained consultants for what we needed about 2 days a year. The rest of the time we had either too many or too few. Market economies are the same way. We spent the vast majority of the time in either booms or busts. Equilibrium is just not a very useful concept in the real world. All the time spent idolizing how great it would be is just time wasted that we ought to be spending on finding out how economies founded on real human beings complex decision making actually work. I thought we were going in the right direction with behavioral economics however that field seems to have evolved into trickery and cleverly worded contracts to get people to sign up for 401K plans or give blood or give body parts rather than focus on what really motivates people to fully participate in their communities. Economics is too important to be left to academic economists.

  21. "Of course mainstream theory can be conservative. It has been used by some to support a particular ideology"

    I have only taken an intro to macro course an this was my impression exactly. There was an air of "and this supports a lot of right wing policies" throughout the course. There was no real room to discuss alternatives. A "follow the dotted line" kind of course.

    "Yet any discipline where a utilitarian view is routine, and where diminishing marginal utility is standard, can hardly be described as inherently biased towards the status quo."
    The normative foundations of utilitarianism, and the key moral philosophical developments in utilitarian/consequentialist thought over the last few decades was completely missing from the macro course I took. Two examples. Prominent utilitarians now accept that the theory is normatively global in scope. A key focus for anyone working within such a framework then naturally should be to focus on issues of global resource allocation. The marginal utility of a lot of resources in the richer world is laughably small compared to that from alternative use in poorer countries. Yet that topic never ever came up during the entire course. Second, utilitarian moral philosophy now widely accept that the species category lack intrinsic moral weight. Animals are proper subjects of moral concern. In a world were billions of animals are treated as things and exploited and processed as cheaply as possible you'd think that this topic would be investigated. But no. Economics seem to lag at least 30 years in its normative axioms of the underlying theory it is often said to be using.

  22. "But the most important reason mainstream economics has become dominant is not because of these things, but because it has proved far more useful than all of its heterodox alternatives put together. "

    Claim made without evidence. Because it's false.

    This is completely false. Practically any heterodox microeconomics theory -- throw a dart at one -- has been more useful than the entirety of neoclassical microeconomics.

    Your macro focus blinds you to where economics is *really* sick. It's micro which is really sick. The portions of macro which are derived from micro are the sick parts, and this should give you a clue.

    Keynes has been very useful. Keynes is heterodox. Veblen has been very useful. Veblen is heterodox. Arguably the whole of the Keynesian macro tradition is heterodox. You really have to pay attention to the utter tripe taught in macro (the idea of supply curves is utter hooey -- in general they don't exist) in order to understand why the students are complaining.

    1. I agree. Keynes and even ISLM is OK. The bull and the morally and philosophically questionable aspects of macro is in the micro.

  23. Ahem, that's "the utter tripe taught in MICRO"

  24. "Equilibrium is just not a very useful concept in the real world. "

    This is the most important thing which conventional economics gets wrong.

    Equilibrium analysis is completely, utterly useless. Trend analysis is useful, and sustainability analysis is useful (i.e. "this trend has to reverse *because*...."). Equilibrium never happens and is not a useful concept.

    Mathematically, you might compute an equilibrium in order to determine a trend, or in order to determine sustainability, but it's just a mathematical tool. It's like finding critical points of functions *in order* to find out whether functions are increasing or decreasing in a range. Equilibrium is not useful by itself.

  25. "I read the Manchester Post-Crash Economics Society’s (PCES) critique of economics education in the UK with a bewildering mixture of emotions. ... Yet even after all these years, it is a position I can empathise with.
    Students should certainly be shown something of heterodox (non-mainstream) thought. … We should certainly get more economic history in there, and again that would be easier with a problem solving approach.
    What I disagree with strongly is that the current dominance of mainstream economics should be reversed, and that we should go back to ‘schools of thought’ economics.
    Let me get personal. Over the last few years, I have been in charge of a macroeconomics course at Oxford.
    If students want to change the world, I think they are much more likely to do this by working within mainstream economics than heterodox thought."

    Yes, reading the PCES critique of UK economics education AND reading your post evoked mixed feelings for me, too, which made me hesitate to comment.
    My son will study (financial) economics MSc in Oxford next academic year, which is partly why I follow your blog.
    Myself I studied economics and specialised in economics of developing countries in Amsterdam, starting in 1978, when much that PCES finds missing in present curricula was still included.
    I have been working mainly in financial jobs (not exactly what I aimed for when studying) in not-for-profits, often development NGOs.
    I was one of those students who wanted to change the world, specifically hoping to be enabled to contribute to solving the problem of global inequality, who was disappointed about the unrealistic economics hidden underneath the math and who included as much social and economic history and other social science in (the electives of) his curriculum in response.

    Yet I can empathise with your position.
    I agree that 'schools of thought' economics is less desirable than heterodoxy being taken serious and being successively integrated in new, newer and newest 'syntheses'.
    I am not so sure that mathematical modelling should be the basis on which all theory should be grafted, though.

    On a constructive note I could suggest to have a look at the 'conversation' approach to economics (and science in general) as developed by Arjo Klamer ( and his project together with Deirdre McKloskey and Stepen Ziliak to build a pluralistic economic textbook in a participatory way (

    "the idea that it should be possible to build a science of human behaviour which is independent of ideology or politics is a noble ideal, and one which has been partly achieved."

    On a more critical note I do not believe in the desirability of a 'science' of human behaviour that pretends to be independent of ideology and politics.
    Economics to solve problems should be considered as art rather than science, as 'the way in which we organise that people get what they need' (see my “economics of want and greed”).
    '... in the face of scarcity', one could add, except that without scarcity no organising is needed.
    In order to solve problems, economists should be aware WHOSE problems they try to solve.
    Many economic problems centre on whether the government should have a smaller or larger role in organising the satisfaction of needs.
    That is also THE issue in the 'civil war within academic macroeconomics' diagnosed by Paul Krugman in his NYtimes blog of April 25th.
    It matters a lot whether an economist tries to solve a problem of a government (often in need of a narrative to justify its role) or of the type of large organisations that can afford to hire economists (often to make them justify a position that governments should intervene less in their operations).
    In order to really solve such problems (rather than exacerbating them by antagonising opposite interest groups) economics should endogenise ideology and politics: make their economic role explicit.
    Ideology and politics are economic tools.


  26. "But the most important reason mainstream economics has become dominant is not because of these things, but because it has proved far more useful than all of its heterodox alternatives put together."

    I disagree with this. A lot of knowledge has been forgotten. Take for example our understanding of how countries develop. Developmental economists once knew a lot about the importance of basic provision - such as clean water and other investments - that could only be provided through government, including foreign government aid. It knew about the dangers also of excessive foreign capital dependence. It knew about the unstable consequences on income distribution inherent in the development process. Put basically, it knew that the equity efficiency trade-off was not only not necessarily true, it was a dangerous proposition.

    In the rush to formalisation so they could mathematicise the discipline (which seemed to be an aim in itself), much of the ideology of post 1978 economics indirectly went into policy. With disastrous consequences - particularly through the World Bank and IMF. I am now happy to say that after failing to get countries out of the poverty trap and the miserable experience of the Asian Financial Crisis even the IMF is now saying that some capital controls are good. The World Bank is using anthropologists and others who understand third world societies much more, rather than uncritical applied mathematicians which I think a lot of PHD Econs are.

    So we are seeing progress now. But by no means has this been a linear progressive trend.

    For future progress I think we need to import more knowledge from other disciplines, be more empirical - especially in the interpretation and understanding the context of data, less prone to starting with singular methodologies, and certainly, we need a lot, lot more proper and careful primary evidence generated and model-free historical analysis.

  27. Coming to the end of my undergraduate course, to me the major problem is that economic history is not studied at anything beyond a very superficial level.

    I have only the sketchiest idea of the narrative of the recent economic crisis and none of that was taught as part of my course (e.g I have little idea about: the details of US sub-prime lending and shadow banking; the history of financial regulation and deregulation; which banks collapsed and why; a country-specific, detailed analysis of the eurozone crisis (e.g Greece); or past precedents such as the Asian Financial Crisis). A solid knowledge of the real world is needed to judge how plausible different theoretical models are; that's what 'science' is.

    Similarly, there are not even any optional papers on the history of economic thought: I have never read anything, and know very little about, Smith, Ricardo, Malthus, even Keynes.

    Other than that, I can't think of another academic discipline that is so narrow, in the sense of simply not teaching dissenting theories. I don't think mainstream macro is as useless as someone like Steve Keen thinks (but I do think most of Micro and its whole approach is fairly useless). But he's surely right that not even mentioning teaching students authors like Minsky or even considering the very fundamental criticisms he suggests is the sign of a bad academic discipline.

  28. Chris House says this:

    "The truth is that most of the principles of standard economics carry with them a fairly conservative / neo-liberal message*

    If that is not strong enough reason that we need another paradigm that carries a different message, what is?

    1. That sounds like an terrible reason! You do not like conservative/neo-liberal messages, and you believe an assertion that standard economics implies these, so standard economics must be incorrect.

      There are two things wrong here. The first is letting politics be a good way to judge the validity of a social science. The second is assuming that when someone makes a statement about economics it must be true.

      So let me repeat a point I made in my post, that no one has responded to. Much economics takes a utilitarian view when thinking about social welfare. A standard assumption is diminishing marginal utility. Therefore economics implies that, other things being equal, we should redistribute from the rich to the poor. Clearly economics is the work of committed socialists!

    2. "A standard assumption is diminishing marginal utility. Therefore economics implies that, other things being equal, we should redistribute from the rich to the poor."

      Of course market-fundamentalists would respond that it is the market which should be left to redistribute this. A fundamental message of the General Theory, which I think Farmer is trying to reclarify, is that the market does not achieve a socially efficient outcome.

  29. I think I could save pixels by just typing "my usual comment" here, but I will waste pixels. You lament that students are taught the economics of 50 years ago. You also note that Keynesian macro-economics performed very well. I note that Keynesian macroeconomics as it was 50 years ago performed just as well -- in fact the arguments which yielded correct predictions were presented to the public using a 77 year old model which performed very well.

    Paleo-Keynesian economics is now heterodox. I am not as young as I would like to be (I'm 53) and I wasn't ever taught Paleo Keynesian economics. It seems to me to be worth exploring.

    This waste of pixels provides no useful suggestion. I understand that Oxford undergraduates are still taught IS-LM. I think that is a good thing. Yes economics has made huge advances and teaching old micro 101 (without a warning that it has all arguably been refuted) is unwise (I teach it making that warning).

  30. See Antonio Fatas:

  31. How shall I put this.

    If Alan Manning's work on the labor market were the default model taught in Microeconomics 101 -- monopsony as the default labor market -- and if all published papers had to justify any exceptions from this default in their model -- then economics as a discipline would be a LOT healthier.

    It isn't. Manning is effectively heterodox. Think about why.

    Likewise, if the default for goods markets -- taught in Microeconomics 101 and where all papers must justify their departure from these assumptions -- was a cartel of businesses engaged in product-differentiation and advertising to attempt to become monopolies, setting prices by a cost-plus mechanism, then economics would be a LOT healthier.

    It isn't.

  32. Nice, if slightly alarming in places dicussion. Thanks for posting. Greatly concerned by the idea that you - or anyone - believes it may be possible to build a 'science of human behaviour which is independent of ideology or politics'. Absolute folly to believe it may be possible to seperate humans from their conditions.

    On a different note, Krugman has been mentioned and I enjoyed his recent post::

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