Mainstream (orthodox) economics is having a hard time in the
pages of the Guardian. First Aditya Chakrabortty writes “How do elites remain in charge? If the tale of the
economists is any guide, by clearing out the opposition and then blocking their
ears to reality. The result is the one we're all paying for.” Then Seumas Milne
adds “Any other
profession that had proved so spectacularly wrong and caused such devastation
would surely be in disgrace.” In this post I want to say why such attacks are
wide of the mark, but also say something about how these attacks gain traction,
and why they suggest changing the way the subject is taught.
One
frequent accusation, very evident in Milne’s piece, and often repeated by
heterodox economists, is that mainstream economics and neoliberal ideas are
inextricably linked. Of course economics is used to support neoliberalism. Yet I find mainstream economics full of ideas and analysis that
permits a wide ranging and deep critique of these same positions. The idea that
the two live and die together is just silly.
The
absurdity of linking mainstream economics to all our current problems is also obvious
if you think about austerity. As I never tire of saying, the proposition that
austerity was a crazy thing to try in this recession is prominent in the pages
of undergraduate and graduate textbooks. It is what mainstream economics, as
practiced in central banks, tells us. Now I agree that it is a great shame that
some influential economists sometimes seem to ignore or have forgotten what is
in these textbooks, or put their own textbooks aside to provide support for
particular political parties. However it remains the case that the most
effective critic of austerity is
using totally orthodox economics.
Nearly
all complaints about that mainstream start off with the economics profession’s
failure to foresee the financial crisis. Again it’s important to make some
fairly basic points. First economics is not just (or even mainly) about trying
to forecast the future. The percentage of the profession that made this mistake
is tiny. Another one of my favourite lines back from when I did forecasting is
that macro forecasts are only slightly better than guesswork. We know that,
both from past evidence and the models themselves. It is a difficult message to
get across, because a very visible part of economics - making decisions about
interest rates - necessarily involves forecasts, and the media loves simplistic
messages, but institutions like central banks do their best to emphasise the
uncertainty involved.
It
is also obviously not true that mainstream economics is incapable of
understanding what led to the crisis, and what needs to be done to avoid it
happening again. I think it’s fair to say that much that is in Admati and
Hellwig’s The Bankers New
Clothes is pretty mainstream. Perhaps in the past economists have been rather
narrow, and even politically naive, in issues from regulation to overseas aid,
but that is clearly changing and has been changing for some time.
Having
said all this, it would also be a mistake
of equal magnitude to think that everything is just fine in the land of
academic economics. I am struck about how economists, while at least partially
defending their own particular field, are quite happy to express grave concern
about what some of their colleagues in other fields do. I’ve noted Andy Haldane
and Diane Coyle’s criticisms of DSGE modelling before, and you will find
plenty of economists who can be very rude about their colleagues doing finance.
More generally I suspect slightly less shrill versions of the sentiments
expressed by the two Guardian columnists would attract considerable sympathy
from lots of very sensible people who know quite a lot about economics.
Whether
this should, or will, lead to any major upheaval in economic thinking – as suggested by Martin Wolf in this lecture
for example – is a question for perhaps another post. What I want to focus on
here is how the subject is taught, if only because that has a large influence
on how the subject is perceived and how it develops. Both Guardian articles
talk about student dissatisfaction (as expressed here for example), and there seems
to be widespread support for the idea that economics teaching needs some fairly
radical reform: see this recent meeting at
the UK Treasury (which followed this) and Wendy Carlin’s
article in the FT.
I
think part of the problem with economics, which is very evident in the way it
is taught, is how economists see themselves. (I think Alex Marsh describes this well.) The
vision that I think many economists are attached to is that economics is like a
physical science. So there is a body of knowledge, which has been accumulated
over time in much the same way as the physical sciences have developed. This
approach plays down the context in which that knowledge was developed - it may
provide a bit of diversion in a lecture, but is not essential. There is
certainly no need to worry about the methodology behind the way the discipline
works.
An
alternative and I now think better, vision would give more emphasis to how
economics developed. Economic history would play a central role. Economic
theory would be seen as responding to historical events and processes. For
example placing Keynesian theory in the context of the Great Depression is
clearly useful, given the events of the last five years. I think it is also important
to recognise the links between economic theory and ideology. This is partly to
understand why governments might not act on the wisdom of economists, but it
also leads naturally to recognising that economists need to adapt to the social
and political context in which they work. We should also be more honest that
our wisdom might be influenced by ideology. Given the limits to experimental
and econometric evidence, but with a very clear axiomatic structure,
methodology is always going to be an important issue in economics. [1]
Of
course this alternative vision can be taken too far. I do not think it is
helpful to teach the subject like a course in the history of economic thought.
The insight gained from trying to understand what some past great economist
actually said (or still worse, actually meant) is small. We do not necessarily
need to know the details of every historical debate. In addition some important
ideas in economics do not come from problems thrown up by major historical
events or ideology: rational expectations is a clear
example. We do try and integrate solutions to new problems into a coherent
overall framework. I do not want to go back to teaching a schools of thought type
of macro, because the mainstream is much more integrated.
There
is an additional problem in teaching economics relative to the sciences. The
world that we attempt to describe and advise changes rapidly. This makes a
model in which teaching is based on textbooks problematic. Not just because it
takes time for textbooks to be produced and updated, but because they tend to
want to appeal to those who learnt their subject many years ago, and are not
actively researching in the field. How else can you explain the continuing
centrality of things like the money multiplier in nearly every
undergraduate textbook?
So
I look forward to seeing what comes out of the Institute of New Economic
Thinking’s project to reform the
undergraduate syllabus, headed by Wendy Carlin. Her macro textbook with David Soskice
is innovative in replacing the IS-LM framework with a more realistic and up to
date three equation model (IS, Phillips curve, monetary rule), and by giving
imperfect competition a central role, and a new version where the financial
sector has much more prominence is due out soon. While it is plainly nonsense
to say that mainstream economics cannot explain the financial crisis and
critique neoliberal policies, we need to do what we can to make that clear, and
we should start with our students.
[1]
In fact, I think the lack of interest in methodology among mainstream
economists is itself revealing. The combination of a highly deductive
theoretical structure with many alternative but problematic ways of getting
evidence makes economics a fairly unique
discipline from a methodological point of view, so it would be natural to want
to explore the methodology of economics. However you might want to shy away
from this if you pretended economics was just like biology of physics.
