In defence of neo-classical economics

I have recently seen an increasing number of attacks on “neo-classical” economics from every section of the political spectrum.

Last week, I heard a number of commentators at the sustainable economics conference claim that neo-classical economics was:

  1. Based on falsified views of the individual,
  2. Static,
  3. Had no supply side.

Then I saw an attack on “neo-classical economics” from Roger Kerr at the Business Roundtable (and more) which seemed to imply:

  1. It ignores institutions,
  2. It ignores transaction costs,
  3. It is static.

I was surprised by these attacks.  More than surprised, I felt like the attacks were based on a straw man version of neo-classical economics – one that in many ways never existed, and if it was floating around it was during the 1950′s-1970′s when a lot of the focus was on a narrow neo-classical synthesis in macro theory.

Neo-classical economics is a term for the “core” of economic theory – primarily modern mainstream microeconomics.  I have discussed here how we get from scarcity to neo-classical economics, and I have discussed neo-classical economics in more detail here.

This “core” is different to the core in the 1970′s – as many of the fringe elements of theory have now shifted their way inside the core of economics (think game theory, endogenous growth theory, transaction cost economics).  However, this is the point, neo-classical economics has evolved and it is this modern version that is taught in universities (at least it is at Victoria) nowadays – contrary to the claims at the sustainability conference that economics hadn’t changed.

The reason I am so defensive about the definition of neo-classical economics is because people see it as the current core – which according to my definition it is.  Setting up an alternative definition of neo-classical economics and knocking it down is either equivalent to setting up a straw man to attack, or directly misleading people to make it sound like modern economists are incompetent.

  • http://www.sustento.org.nz Raf

    Maybe people are dissatisfied on the ability of economics to promote what they perceive as an optimal outcome for society. It could be that economics has been promoted way above its pay grade. Economics simply attempts to explain the world in a way that for many people does not make sense, whether it’s rational man or delusional investor.

    Certainly creating a more dynamic model of the economy incorporating externalities and feedbacks will help as will focus on a range of indicators that mean something to people I.e. That they can relate to.

    This doesn’t mean we should throw out the old model but instead refashion tint incorporate new learning or understanding of how our world functions.

  • http://www.tvhe.co.nz Matt Nolan

    @Raf

    “Maybe people are dissatisfied on the ability of economics to promote what they perceive as an optimal outcome for society”

    Economics isn’t about saying what is the optimal outcome for society – we are about framing the trade-offs that exist and letting people decide what trade-offs they are willing to make. We do this by describing as much as we can.

    This is the thing, we try to separate the most value laden normative aspects of choosing an outcome from the more objective descriptive elements – that way we can try to make sure we have a logically descriptive explanation of the trade-offs, so that society can determine what it is willing to do.

  • Pingback: More on neo-classical economics « Roger Kerr, New Zealand Business Roundtable Executive Director

  • http://rogerkerr.wordpress.com/ Roger Kerr

    My advice would be to stop defending neoclassical economics as being the ‘core’ of economic theory Matt. By redefining the term to include all the developments in economics that you identify (and there are more) you drain the term of any useful meaning. You’re right to defend “modern mainstream economics” instead.

    I wrote this passage in 1986 as a kind of valedictory to the Treasury:

    “In the domain of macroeconomics we have probably all noticed that we have been relearning and reinterpreting much of what we were taught in the 1950s and 1960s, and rediscovering and developing the key ideas of the more established and orthodox tradition of economics that have been found to have a sound microeconomic basis and public policy rationale … What is probably less apparent is that we have been relearning a good deal of the microeconomics that was also shunted up the wrong track around the same time.

    For 50 years after Marshall, the dominant model of market behaviour in most centres of learning outside the sphere of influence of the Austrian school was the perfectly competitive version, with its assumptions of full knowledge, zero transaction costs and no market power on the part of firms and individuals. The central interest was in equilibrium properties, with marginal anything being equal to marginal everything else. The vision of this ideal world was essentially a static one; real time did not enter into it.

    As intellectual abstractions, the refined versions of the perfect competition model are a tour de force, and even illuminating up to a point. The trouble for policy purposes is that the model leaves out much that is critical in the real world, extending far beyond features such as economies of scale, which were always recognised as qualifications. Confronted with a host of situations in which its ‘nirvana’ properties do not hold, theorists initially devoted enormous intellectual effort to exploring the so-called economics of imperfect competition. Much of this also originated in Cambridge, and focused in particular on monopoly and oligopoly. The view that monopoly was a pervasive problem attained great influence, further undermining faith in the competitive economy and strengthening interest in anti-trust and planning.

    As with the attack on Keynesian macroeconomics, the challenge to the regulatory wave of the 1930s that flowed from perceptions of ubiquitous ‘market failures’ took time to develop. Initial critiques of intervention on market failure grounds involved two main propositions. One was to draw attention to the ‘grass is always greener’ fallacy. Critics pointed out that the fact that some market outcomes are not perfect (judged against some abstract ideal, in reality not attainable under any form of economic organisation) did not necessarily mean that governments can improve on them. ‘Government failure’ came to be recognised as a problem often at least as severe as market failure – especially given human fallibility and the incentives involved in public decision making. As one writer has put it, the fact that a fish can’t fly doesn’t mean that a rhinoceros can do any better. The second critique recognised that most interventions involved costs as well as benefits. When the test that the benefits would outweigh the costs was applied, many interventions failed, or should have failed, to pass. Empirical studies also called into question the importance of earlier perspectives; for example Stigler summarises the conclusions of a large amount of quantitative research in noting that ‘The evidence that monopoly is important is negligible, and the evidence that it is a quite minor influence on the workings of the economy is large’.

    However, the development of microeconomic theory has gone far beyond these initial counterattacks on ideas of imperfect competition. A large body of research has stressed the need to incorporate an understanding of incentive mechanisms, principal/agent problems, voting behaviour, uncertainty, and information, transaction and adjustment costs into any useful model of economic behaviour. The ‘new’ economics of organisation – which goes back at least to Coase’s initial work on the theory of the firm – has pointed out that the long-standing preoccupation of economists with the allocation of resources in atomistic markets is an unsound and unbalanced view of social activity. The insight that markets and organisations are alternative economic arrangements whose relative efficiency depends on transactions costs, broadly defined, has led to a long overdue interest in the systems of incentives that motivate behaviour in organisations, and to the development of modern agency theory. The literature on ‘contestable’ markets has merged to supplement the competitive market model by showing that the openness of a market to potential competition may be more important than the structure of an industry – the number of firms in it – in determining production efficiency. What contestability and transaction costs economics has shown is that competition and competitive outcomes are (a) complex, and (b) not dependent on the atomistic assumptions of perfect competition. Finally, a renewed interest in entrepreneurship and the dynamic effects of competition in promoting the search for new knowledge and innovations has further exposed the limitations of static microeconomic theory.

    The point to be stressed in surveying these developments in microeconomic thinking is not the problem of abstract models. All models, including those that encompass costs of information, transactions and other complex aspects of business structure and conduct, are abstractions. The problem has been the facts or behaviour that some economists have attempted to explain with over-simplified models, and the policy prescriptions they have adduced. The traditional models have simply not provided us with enough microanalytic insights to help us understand individual transactions, which is what we must attempt to do if we want to improve outcomes in some way.”

    The most refined development of neoclassical Marshallian economics was the Arrow-Debreu model. As one commentator has noted:

    “In its most elegant form neoclassical economics is epitomised by the idealised, frictionless, Arrow-Debreu model which provides necessary and sufficient conditions for a competitive equilibrium to be a Pareto optimum. The dominant presumption in the profession was for a long time, and is still largely the case in the public sector today I suspect, that any departure from the idealised situation (eg of MC = P) is a market failure that will stop the Pareto conditions from holding. Since this part of neoclassical economics implicitly assumed that government was perfect (eg property rights were perfectly well defined and contracts perfectly enforced and there were no deadweight costs of taxation) the bias towards intervention was strong.

    So my position is that neoclassical economics has a lot to offer, but that its application to policy by economists has a lot to answer for. At the micro level, perhaps the bit I hate most is competition policy – premised as it is on the notion of static ‘perfect competition’. The critical Schumpeterian notion of dynamic efficiency potentially undermines the entire static efficiency case – so in practice it is essentially confined to the ‘too hard’ basket.”

    For a fuller critique, see the article by Wolfgang Kasper, What’s Wrong with Neoclassical Orthodoxy? available at http://www.nzbr.org.nz

    I‘m not surprised by what you heard at the sustainable economics conference. Some fair points may have been made (eg that neoclassical economics is static) but for many the term is just lumped in with other labels (like neoliberal, monetarist and Chicago economics) by anti-market critics who do not understand economics.

  • http://www.tvhe.co.nz Matt Nolan

    @Roger Kerr

    Hi Roger,

    I believe that we are in agreement regarding what modern economics is, and what issues are important in economics – the only area of departure is in the definition of what neo-classical economics is. Even so, there are two reasons why I would term neo-classical economics more broadly than you have in your piece.

    1) I don’t believe that even the core of economics was ever as narrow as your classification of neo-classical implies.
    2) The common view of the term neo-classical economics is mainstream economics – where mainstream economics definitely includes game theory, transaction costs, contracting, a dynamic structure, and the such.

    In essence, neo-classical economics is a subset of possible economic theories – this is true. It is defined through its appeal to methodological individualism, the existence of preferences, and choice – within the general economic environment of scarcity.

    All modern methods come through this methodological lens – as they get incorporated it is a sign that neo-classical economics is evolving, not that it is a new discipline.

    ****

    On a normative economics, and policy related, note there is a lot I agree with you on – people do abuse the economic method to get the results they wanted. This isn’t neo-classical economics though, this is people taking things like the perfect competition assumption (which is meant to be a specific type of counterfactual – not even necessarily a realistic one, as even the classical economists recognised) and smashing it around till they get what they want.

    In essence, my impression is that you disagree with a bunch of bad normative economics that has occurred in the past – a fact I can wholeheartedly agree with.

  • Falafulu Fisi

    Matt, why are you defending neo-classical economics considering that it has been demolished/debunked many times in the past? WHY? WHY? WHY? I don’t understand.

    What Roger Kerr said is correct.

    Kerr said…
    1. It ignores institutions,
    2. It ignores transaction costs,
    3. It is static.

    Are you aware about researches in economic dynamic agents network (linking) theory & modeling? It is dynamic, since in the real world things changes over time and not stay the same (ie, static) for all time. There are lots on the topic but here are some references:

    1) “Business fluctuations in a credit-network economy”
    http://www.unifr.ch/econophysics/paper/download/id/1006.3521/format/pdf

    2) “An Analysis of the Japanese Credit Network”
    http://www.unifr.ch/econophysics/paper/download/id/0901.2384/format/pdf

    3) “Economic dynamics with financial fragility and mean-field interaction: a model”
    http://www.unifr.ch/econophysics/paper/download/id/0709.2083/format/pdf

    I can point you out to more references because I believe that you haven’t been aware of the latest researches in financial economics.

  • http://www.tvhe.co.nz Matt Nolan

    @Falafulu Fisi

    “What Roger Kerr said is correct. ”

    I disagree. And as I’ve said, it is because our definitions of what neo-classical economics is differ – not because we have differing opinions of what good economics is.

    I especially disagree with the insinuation that economics was ever static – I agree that dynamic processes were not fully incorporated in analysis by any stretch, but this was a weakness economists recognised and have been working to deal with – it is how a discipline evolves.

    I also find it difficult to agree with the claims that economics ignores transaction costs and institutions. Transaction costs have long had a place in economics – hell without them we wouldn’t even have externalities.

    And I used to claim that economists had a weakness when looking at institutions – then I read more old papers and discovered that these types of issues were mentioned in words, and we were told that the authors recognised bits that were missing from what they were doing.

    Economics is still progressing along the same methodological lines – as a result, I would term modern economics “neo-classical”. The fact that analysis has improved, and our ability to model has improved, is good – but it doesn’t change the fact that it is still part of the same neo-classical paradigm.

  • http://www.tvhe.co.nz Matt Nolan

    @Falafulu Fisi

    “What Roger Kerr said is correct.

    Kerr said…
    1. It ignores institutions,
    2. It ignores transaction costs,
    3. It is static.”

    Also, this is a very important point here, if this is “neo-classical” economics, then it never ever existed … outside of the realms of awful policy analysts attempts to justify the policy their minister had told them to, which is frankly not economics.

    I mean seriously, when was economics EVER static – I can’t believe how much I hear this claim, and I can’t believe how much it is contradictory to every bit of economics I have ever read.

  • Falafulu Fisi

    Matt said…
    I mean seriously, when was economics EVER static .

    Well we know that economics is never static, but Neoclassical economics equilibrium (ie, static or otherwise called stationary in the language of time-series) of the market is a myth. Equilibrium doesn’t or have never existed in the real world markets (or any economic system). Is there a problem with assuming equilibrium from the outset (ie, the premises)? Yes! Why? Because it leads to misleading theories? There is none whatsoever in neoclassical economics that says anything about market bubbles & bursts, because of its false premises of assuming equilibrium. But we had seen market bubbles & bursts happening in the past, on a regular basis, hadn’t we? We just can’t wish that realities conform to our theories. It should be the other way round. Our theories should conform to realities and obviously, realities such as market bubbles & bursts don’t agree with neoclassical economics.

  • http://www.tvhe.co.nz Matt Nolan

    @Falafulu Fisi

    There are a number of points I strongly agree with you on in this, for sure. But, I think it is more how we view the nature of equilibrium that is important.

    The idea of equilibrium, and the transition between equilibrium, gives us the idea about tendencies in relationships – tendencies that allow us some guidance regarding ordinal relationships within the economy. As long as we view this as the purpose of an initial model, or what I would call a caricature, then it is extremely useful.

    I would also agree that we should want our models to represent reality, but the issue is that “reality” depends on the theory we use to frame it – we have a circularity problem.

    The real critique of “neo-classical economics” isn’t that it is too narrow and can’t explain data – it is that it is too broad and can explain the same thing in many ways! It is the values that we have to insert in the framework that require more work.

    Also, economic models can have bubbles – we just often either assume them away, or assume that the welfare cost of pressing against them is higher than leaving them. The primary justification for that would be that they involve a psychological element that economists currently aren’t equipped to deal with – even though there is scope in the economic framework to include it.

    Economics doesn’t have the ability for lab experiments or any such, we are relying on a poor description of reality, and a methodology that is extremely broad.

  • Falafulu Fisi

    Matt said…

    The idea of equilibrium, and the transition between equilibrium, gives us the idea about tendencies in relationships – tendencies that allow us some guidance regarding ordinal relationships within the economy.

    This is not the problem. All theories invented by humans started like this. Existing theories are being modified or being overhauled completely. The problem is holding on to theories (both academics & practitioners) which have been exposed as false (real-world observation-wise & premises formulation-wise) where politicians/policymakers do cling to them as there is no alternative, which can definitely lead to devastating effects.

    I’ll give an analogy here from Physics. Newton laws were based on false premises/assumptions, therefore the theory is false from the outset. Einstein came along and overhauled Newton’s laws of mechanics. Hey, but Newton laws works everyday then why bother with complex theory of relativity for use in designing a car or building a bridge? The answer is that, we always live in a newtonian world (ie, our everyday surroundings) and it would be a waste of time using relativity to design a bridge or a large structure, where as one can just use newtonian mechanics (much easier & faster) to do the same design. Relativity reduced to newtonians at very very low speed compared to that of light. The 2 theories are equal at that slow speed domain. This is similar to tendencies that allow us some guidance regarding ordinal relationships in physical structures design that you mentioned above (but you’re referring to economics).

    The danger of applying the analogy I stated above to economics (according to one economics researcher’s words), is that in economic calm time the neoclassical models (equivalent of Newtonian mechanics in physics) work fine. It is when the arrival of economic tsunami such as market crash (which neoclassical cannot explain) is the main concern because it can wiped out all the gain that were accumulated during the economic calm time, so the cons of using neoclassical far far outweighs its pros. As you said, that it is very useful, there is no question about that, because that wasn’t the main argument that scholars & critiques of neoclassical economics were trying to point out. It is about its generality (ie, it must work in a wider domain). If it is too narrow then it has to be questioned.

    In the physical world, our cars or airplanes will always be operated in the newtonian mechanics and never in the relativisitic world, therefore the application of newtonian mechanics in our daily lives design tasks never really required relativity. We can’t apply the same to economic systems where we immersed in. There needs to be some economic theories that can generalize , similar to relativity which is more general than newton (or perhaps theories that can have the ability to detect the telltale sign of an upcoming economic tsunami) and those general theories do reduce to neoclassical economics. In economic world, we both live in near-equilibrium & non-equilibrium dynamics, therefore neoclassical is useless and too narrow. It is not generalize.

    Matt said…
    The real critique of “neo-classical economics” isn’t that it is too narrow and can’t explain data – it is that it is too broad and can explain the same thing in many ways!

    No, neoclassical economics is too narrow. Can you cite some references here please to show that neoclassical is too broad?

    Matt said…
    Also, economic models can have bubbles – we just often either assume them away, or assume that the welfare cost of pressing against them is higher than leaving them.

    Again, can you cite me some references on this please?

    Matt said…
    The primary justification for that would be that they involve a psychological element that economists currently aren’t equipped to deal with – even though there is scope in the economic framework to include it.

    Yes, researches in non-mainstream areas such as complex system & behavioral economics is gaining momentum.

    Matt said…
    Economics doesn’t have the ability for lab experiments or any such, we are relying on a poor description of reality, and a methodology that is extremely broad.

    We both agree on that. But the majority of economic modeling is theory first then data second (deduction). It should be the other way round. It should be empirical data/observation first then models second (induction).

  • http://www.tvhe.co.nz Matt Nolan

    @Falafulu Fisi

    “If it is too narrow then it has to be questioned.”

    Agreed, and agreed with everything you have said prior to this point as well. BUT, of course I wouldn’t agree that economic laws are too narrow – I would state they are too broad.

    I guess the distinction here is that when I think about economic laws, I am thinking about microeconomics – I can buy the argument that a specific school of macroeconomics is “too narrow” as single schools often make too many implicit assumptions, something they have to do given the lack of verifiable data.

    I don’t see neo-classical economics as too narrow because I see it as the general micro framework, not as the dominant macro framework per see – and I guess this could be the main reason for the difference.

    However, if this is the case it is also fair to say that macroeconomics is currently still building itself with a focus on methodological individualism – that was the driver of RE models and the such to start with. These things take time, and I agree that increased realism (in so far as the realism is relevant) is important – but it still appears to be part of the same research project.

    “Again, can you cite me some references on this please?”

    Chapter 5 in Lectures on Macroeconomics by Blanchard and Fisher. All through Foundations of International Macroeconomics by Obstfeld and Rogoff.

    I was under the impression the existence of bubbles was well accepted – even inside the overly simplified linear difference equation case.

    The idea not to lean against them was popularised by the Fed, through both Greenspan and Bernanke. Of course, there are complications – and a definite role through which fiscal policy and institutional policy matter. And the question is also not a closed one for macropolicy. That is just the prevailing current value judgment, judging by the monetary policy framework used by many central banks.

    “Yes, researches in non-mainstream areas such as complex system & behavioral economics is gaining momentum.”

    Behavioural as not mainstream? I think the generalisation of the utility function is mainstream, the implicit value judgments about choice and preferences is probably what lies outside the core at the moment. And the reason for this is because the “core” tries to avoid things that can be seen as normative value judgments.

    With complex systems, my impression had always been they will be useful – but we have to be careful incorporating expectations formed within what appear to be complex systems and the nature of individual choice. So making sure we again stick to methodological individualism.

    “We both agree on that. But the majority of economic modeling is theory first then data second (deduction). It should be the other way round. It should be empirical data/observation first then models second (induction).”

    I agree in part – but the problem with induction is the feeling that we are “data mining”. That we are trying to find relationships, when the imperfection in the data and in our methods of dealing with empirical issues implies that there is significant scope for finding relationships that do not really exist.

    I have a lot less faith in data since I left university and started spending everyday working with it – I truly believe that theory and data need to guide each other, and that mainstream economics does a reasonably good job of trying to balance both sides. Data used to be ignored, I agree, but the balance “feels” about right now (to bring out my sentimental side ;) )

  • Jim Rose

    Matt,

    Economists are unpopular because they keep telling people things they do not want to hear such as all choices have opportunity costs, and there are limits to which we can remake the world in accordance with our desires and on how quickly and cheaply we can change the world.

    Who likes someone who repeated deflates your dreams of a better world through political action?

    The repeated attacks on the methodology of economics are a tactical diversion.

    Critics show this sudden interest in the methodology of economists, but not their own methodological pedigree, because a methodological witch-hunt diverts attention from who gains from a proposed policy, who loses, and postpones or escapes entirely a careful comparison of the announced effects of a proposed policy with a large body of well-tested knowledge showing what is actual effects of a given policy most likely might be.

  • Falafulu Fisi

    I tend to avoid anything from Blanchard since he is still a mainstreamer, therefore I have only read 1 or 2 of his papers (I think).

    Behavioural economics is not mainstream as I stated before ( I said non-mainstream).

    Economic Network/Linkage analysis falls under adaptive Complex system modeling , since agents (nodes) form a network linkage (edge) with each other. The strength of each linkage in the network can increase or decrease over time (dynamic and not static), up to certain time-instant that some linkages are completely cut-off from certain nodes (agents) and new linkages are being formed with other nodes (agents) where no previous connections were established. It is more like a robot that keeps rewiring itself during its lifetime since the time it has been out of the production lines in years earlier. It can wire its old components with connections to new components that weren’t there when it was first built.

    I think you should watch Joseph Stiglitz(youtube) in his talk during the Institute for New Economic Thinking (INET) conference earlier this year. There are other vids from that same INET conference which are available from their website (and also available from youtube).

    You must watch them because the talks mainly honing in on the failure of mainstream & neoclassical economics, ie, the falsity of their premises.

    An Agenda for Reforming Economic Theory

    The Stiglitz’s lecture is a good one, but I still see him as a mainstreamer because he is still insistent that Keynesians can work but only if it is modified further.

    There are numerous publications that I can send you (perhaps to your private inbox) about the criticism of neoclassical economics that once you read them, you would probably turn & become atheist against neoclassical economics.

  • http://www.tvhe.co.nz Matt Nolan

    @Jim Rose

    Hi Jim,

    Very true – often it is unhappiness with the outcomes that make people uncomfortable with economics more generally. Fortunately, I do not think that is the case with the specific people I have discussed here.

    @Falafulu Fisi

    Hey,

    Blanchard is great, although I guess I’m a mainstreamer ;)

    Feel free to send me the papers, I would prefer them in my gmail address – as my work address tends to get pretty packed! The details are in the “about us” section at the top of the blog.

    I am a pretty heavily indoctrinated methodological individualist – it would take quite a push to get me out of that frame ;)

  • Jim Rose

    Thanks Matt,

    As for the people you were talking with, and what troubled them about the gaps in neoclassical economics, is not a definitive way of defining what neo-classical economics is is to look at the table of contents of a few popular microeconomic textbooks?

    Steve Landsberg’s table of contents is as follows:

    1. Supply, Demand, and Equilibrium.
    2. Prices, Costs, and the Gains from Trade.
    3. The Behavior of Consumers.
    4. Consumers in the Marketplace.
    5. The Behavior of Firms.
    6. Production and Costs.
    7. Competition.
    8. Welfare Economics and the Gains from Trade.
    (Appendix: Normative Criteria.)
    9. Knowledge and Information.
    10. Monopoly.
    11. Market Power, Collusion, and Oligopoly.
    12. The Theory of Games.
    13. External Costs and Benefits.
    14. Common Property and Public Goods.
    15. The Demand for Factors of Production.
    16. The Market for Labor.
    17. Allocating Goods Over Time.
    18. Risk and Uncertainty.
    19. What Is Economics?

    How many critics of economics have read a table of contents of a leading economics textbook?

  • http://www.tvhe.co.nz Matt Nolan

    @Jim Rose

    Very true. However, I think even if we point this out, some critics will always just “not believe us”.

    And there is the definitional issue – some of the debate here stems from the fact that I take neo-classical as modern econ, while others want to use the term to define another older set of instruments they do not like.

    Personally, I think this rolls over too much onto the normative economics area – where there are value judgments that were applied that we may feel were inappropriate. While I agree with this, I’ve always been of the impression that neo-classical economics was the name for the methodological individualistic (reductionist) framework that economists work within.

  • http://offsettingbehaviour.blogspot.com Eric Crampton

    I saw too many Austrian critiques of “neoclassical” econ back in grad school that were aimed at Samuelson circa 1960. The mainstream has of course moved a hell of a lot since then.

    As far as I’m concerned, neoclassical means standard price theory.

    This working paper by Beaulier and Subrick came out of grad student frustration of the general tone of the Austrian seminars at GMU…

  • http://www.tvhe.co.nz Matt Nolan

    @Eric Crampton

    That is a good paper. It is actually a really good idea to describe current economic thinking along the lines of the criticisms it receives – as a large number of the critiques stem from an outdated view of economic theory. It provides a sort of focal point to discuss the diverse areas of research in the discipline.

  • Jim Rose

    Eric and Matt,

    Do economists agree on much at all, and even on methodology?

    In macroeconomics, there are the following schools of thought:
    1. monetarists,
    2. new classicals,
    3. new monetarists,
    4. New Keynesians,
    5. real business cycles,
    6. Keynesians,
    7. Old Keynesians,
    8. Post-Keynesians, and
    9. Austrians.

    These schools do not agree on the cause of inflation, and in the case of Joan Robinson, the cause of hyperinflation.

    Many of these schools have trouble communicating with each other at all or even agreeing on how to resolve differences in opinion.

    Deciding whether inflation was a monetary phenomena was a many decade long debate. The professional consensus of economists changed sides from a clear no to a straight yes.

    Given the level of disagreement among economists, critics of neo-classical economics should be expected to misfire.

    The prefix neo seems to be an all purpose sustained sneer these days. Neo-classical, neo-liberal and new right would round off the stereotyping.

  • Falafulu Fisi

    Eric Clapton, that’s a great paper too. I’ll alert Peter Creswell @ Not PC about that paper, because I think that he (& other Austrians followers like the Libz) do suffer from the idea that economics shouldn’t be mathematised.

    Mainstream economics is not just protective about their research methods, but they’re arrogant to other (fringe) research domains that conduct researches into economics. This is well-known such as they tend to dismiss researches from behavioural economics & econo-physics for example.

    I would like to quote one of those fringe econonomist Prof. Steve Keen :

    Despite the severity of the crisis in the real world, academic neoclassical economists will continue to teach from the same textbooks in 2009 and 2010 that they used in 2008 and earlier (laziness will be as influential a factor here as ideological commitment). Rebels economists will be emboldened to proclaim “I told you so” in their non-core subjects, but in the core micro, macro and finance units, it will be business as usual virtually everywhere. Many undergraduate economics students in the coming years will sit gobsmacked. as their lecturers recite textbook theory as if there is nothing extraordinarily different taking place in the real economy.

    The same will happen in the academic journals. The editors of the American Economic Review and the Economic Journal are unlikely to convert to Post Keynesian or Evolutionary Economics or Econophysics any time soon—let alone to be replaced by editors who are already practitioners of non-orthodox thought. The battle against neoclassical economic orthodoxy within universities will be long and hard, even though its failure will be apparent to those in the non-academic world.

    From : Neoclassical Economics: mad, bad, and dangerous to know

    Also Physicist , Prof. Gene Stanley, the Director of Center for Polymer Studies, Department of Physics @ Boston University, mentioned in one of his article that he & some fellow physicists tried to submit research articles in economics in the early 1990s to major economics peer review journals but were turned down. His opinion was the establishment in economics (mainstreamers) were skeptical about the application of physics methods in economics.

    From then onwards, the branch of Econophysics was born. Physicists who are working on economics problems, now have a forum and a journal to publish their work. Those research works are mainly published in the Statistical Mechanics Journals. The journal is not entirely econophysics work, but it does publish econophysics papers being submitted to it. The journal is still remain a physics journal dedicated to publishing work in particle/atomic/molecular physics researches. Other reputable science journals like Nature, Physics Review Letters and others have started accepting econophysics research articles for publications as well. This trend is growing and now physicists don’t give a toss if mainstreamers take note of their work or not, but the empirical evidence that have been shown to confirm the models from the econophysics community is gaining momentum (ie, models agree with the data). Also mainstreamers still haven’t picked up on the work of physicists in economic problems. I mean, there is hardly any mentioned of the work done by physicists in economics by mainstreamers.

    Econophysicists have taken the non-mathematical ideas of Austrians (self-organised & self-emergence, etc) and start mathematising them, because they have the experience of modelling those types of complex system dynamics in the physical science but being applied to economics. There have been amazing empirical results from some of those models. Here is a quote from one of those econophysics researchers:

    Soros himself this morning referred constantly to his own theory of ‘reflexivity’, by which he essentially means interacting agents, the feedback which takes place between such agents the session last night was on Keynes and Hayek. A bit strange at a conference on NEW thinking to go back to the works of someone who died in 1946 (K) and someone whose major contributions were complete by the mid-1950s (H). But we need to junk completely the macroeconomics of the past 30-40 years, so it kind of makes sense.

    I think Hayek in particular was the brilliant precursor of complexity theory; he stressed the inherent limits to knowledge. Very interestingly, the Hayek man last night did refer if only briefly to complex adaptive systems and how Hayek lacked the mathematical tools to work in this area – true, but we now have them.

    Now, work on mathematising Austrian ideas is starting to gain momentum from econophysics community as the following recent book shows. Chapter 14 is on Hayek.

    Title : “Classical Econophysics”
    Table of Content:

    1. Problematizing Labour
    2. Problematizing Information
    3. Labour Productivity
    4. From Machines to the Universal Machine
    5. Information and Communication
    6. Political economy: Value and Labour
    7. The Probabilistic Approach to the Law of Value
    8. Value in a Capitalist Economy
    9. Farjoun and Machover’s Theory of Price
    10. A Probabilistic Model of the Social Relations of Capitalism
    11. Money and the Form of Value
    12. Credit and Capital
    13. Understanding Profit
    14. Hayek on Information and Knowledge

    There are more work on both micro & macro economics that have been published (journals & bound ones) in recent years.

    Mainstream economics must wade themselves wider than the apple tree they grew up on, rather than falling not far away from the apple tree. Revolutionary science ideas in human history started by falling far away from the norm and the last 100 years we have witnessed such great achievements in science. Do we expect economics to do the same? I doubt it because; mainstreamers don’t want to read anything counter to their religion.

    Jim Rose said…
    Given the level of disagreement among economists, critics of neo-classical economics should be expected to misfire.

    So, you think that Joseph Stiglitz criticism (in that youtube vid above, I linked to in my previous post) misfired? You think that Stiglitz (as a mainstreamer himself) was disingenuous in his criticism of the shortfall/falsity of neo-classical premises? Umm, that’s very interesting.

  • Jim Rose

    Thanks Falafulu Fisi,

    Your remark that “Despite the severity of the crisis in the real world, academic neoclassical economists will continue to teach from the same textbooks in 2009 and 2010 that they used in 2008 and earlier (laziness will be as influential a factor here as ideological commitment … Many undergraduate economics students in the coming years will sit gob smacked as their lecturers recite textbook theory as if there is nothing extraordinarily different taking place in the real economy” is a good example of the evidence base of critics of economics.

    Have you or Prof. Steve Keen checked and compared the tables of contents of the older, more recent and 2011 planned editions of popular macroeconomics textbooks? The university textbook market is ruthlessly competitive.

    Amazon.com in general and the new to this edition tabs at academic publisher web sites are good early ports of call for reviewing textbook contents.

    Many economics lecturers post their current and past lecture notes free on the web. Has Prof. Keen checked these to see what is actually said in macroeconomics class by a representative sample of macroeconomics lecturers in 2008, 2009, and 2010?

    What do the blogs of prominent macroeconomists discuss these days? John Taylor is a good example?

    Tenure-track and promotion minded academics are publishing left, right and centre on the great recession as evidenced by the annual meeting papers of the American Economic Association and recent issues of the journal of economic perspectives to name but a few places. Lee Ohanian’s recent paper on the great recession at home and abroad in JEP is excellent as is anything by John Taylor anywhere since 2007.

  • http://www.finallyfastcommercials.com finallyfast

    Matt and all, thanks for the great debate. I believe and agree with the fact that economics are never static. Matt, you are right on… “Neoclassical economics equilibrium (ie, static or otherwise called stationary in the language of time-series) of the market is a myth.” Truer words were never spoken. There’s no evidence of real equilibrium ever appearing in the real world! Ever!