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Economics post crash
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Economics after
the crash
Alex Marsh
About the author
Alex Marsh started his blog – Alex’s Archives – in October 2010. The blog’s audience has
grown steadily. Since June 2012 it has regularly featured among the Top 100 politics blogs in
the UK on the ebuzzing.com monthly ranking.
The blog covers a wide range of topics, but its focus is issues relating to housing and
social policy, economics and public policy, and political processes under the Coalition
government.
Alex’s posts have also appeared on group blogs including the Guardian Housing
Network blog, LSE British Politics and Policy blog, and LSE Impact of Social Sciences blog,
The Conversation UK, and Democratic Audit.
Outside the blogosphere Alex’s day job is as Professor of Public Policy at the University
of Bristol, where he is currently Head of the School for Policy Studies. He has published
academic articles in a variety of housing and policy journals. His most recent book is the
Sage Library in Housing Economics, which he edited with Ken Gibb of Glasgow University.
www.alexsarchives.org
www.alex-marsh.net
The material in this collection is licensed under a
Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License.
Cover image: © aihumnoi - Fotolia.com
Published: November 2013
Contents
Preamble
Economists, implicated 1
Economics as a vaccine against economists? 3
On economic amnesia 5
On knowing what’s going on 8
Economists? That’ll be your problem right there 10
The maths question in economics 16
Economists in reflective mood 19
The reopening of the economic mind? 21
Revisiting Capitalism Unleashed 24
Economics emperor: absence of clothes increasingly suspected 27
Economic theory and intuition-based policy 30
Looking to the past on expectations of the future 32
Reinhart and Rogoff: replication and responsibility 35
Dr Smith and the “neoclassicals” 38
Interpreting Osborne 41
Seeking a post-crash economics 44
On signs you’re reading bad criticism of economics 47
On mainstream economics and neoliberalism 50
Would post-crash economics be a step backward? 55
Preamble
My blog covers whatever happens to be interesting or preoccupying me at the time. A post
may be triggered a piece in the mainstream media or a post on someone else’s blog. Or by
nothing very specific. I may well try to link my discussion, explicitly or implicitly, to an
argument or a concept from a relevant academic literature. This is always done informally.
One of my blog’s recurring themes is the nature of economic knowledge and the
practices of economists. The influence of economics on policy is rarely far from the surface of
the discussion.
This collection brings together a selection of the posts on economics, economic ideas and
the nature of economics that I’ve written over the last three years. The posts mostly reflect
on orthodoxy and heterodoxy, and the philosophy, ethics and methodology of economics.
Quite a bit of the discussion starts from the macroeconomy, including the fallout from the
Global Financial Crisis. Many of the posts aim to situate the economic arguments within a
broader political economy. Some themes recur.
The aim in bring the posts together here is to make the arguments available to readers
who prefer to digest their reading material in more conventional form and to make the
arguments accessible to those who have little interest in rummaging around in my blog
archive.
For this collection I’ve edited the posts slightly for grammar and punctuation. I’ve
added annotations and few references where that seems appropriate. Otherwise, the posts
are presented here pretty much as you can find them on the blog.
Alex Marsh, Bristol
November 2013
Economics after the crash
Page | 1
Economists, implicated
19th February 2011
John Maynard Keynes famously wrote that “[i]f economists could manage to get themselves
thought of as humble, competent people on a level with dentists, that would be splendid”.
Many economists, somewhat uncharacteristically, might well be craving that type of
anonymity at the moment. Because they’ve been getting a hard time of it. And the discipline
may be about to get even less popular.
The arrival of the film Inside Job is likely to fuel the public’s anger at bankers for causing
the financial crisis. And not only causing the financial crisis, but subsequently carrying on
with business pretty much as usual, while the fallout from the crash is felt in public
spending cuts, unemployment and welfare benefit reductions.
But the film does more than that. It broadens the scope of criticism to implicate a range
of other professionals. It wasn’t just the corporate bankers: lawyers, central bankers,
accountancy firms, lobbyists and government officials were also complicit in pushing a
deregulatory agenda. Their actions magnified systemic risk and increased the instability of
the financial system in ways that theory said shouldn’t happen. The real world clearly
hadn’t read the script.
In amongst the culprits identified are academic economists.
Economists in the US come in for particular criticism. There is a cohort of senior
academic economists who stand accused of taking large and undisclosed payments from
private corporate interests in return for acting as cheerleaders for deregulation. And for
providing a veneer of academic respectability to profitable financial instruments of such
complexity that regulatory oversight was near impossible.
While the story that implicates economists is only now reaching the public
consciousness, it is not, perhaps, entirely news – if you know where to look. Sociologists of
knowledge, for example, have spent much of their time studying the way that natural
scientists go about their work in the laboratory. But over the last decade they have also
turned their attention to financial markets and financial economics. In his brilliant 2006 book
An Engine, not a Camera: how financial models shape markets, the sociologist Donald Mackenzie
provides examples of senior economists, from the 1970s onward, who were not content to
restrict their interventions to the academic journals but also felt moved to engage more
directly in paid lobbying activity in pursuit of changes in the law – generally in the direction
of deregulation and creating a more ‘hospitable’ environment for financial innovation.1
The problem isn’t one of which the economics profession itself is entirely unaware. I am
in the middle of reading George F. DeMartino’s recent book The Economist’s Oath: On the
Need for and Content of Professional Economics Ethics.2 DeMartino is arguing that, in contrast to
many other social scientists, economists’ prescriptions and actions in applied policy contexts
1 Mackenzie, D. (2006) An Engine, not a Camera: How financial models shape markets, Cambridge,
MA.:The MIT Press. 2 DeMartino, G.F. (2010) The Economist’s Oath: On the Need for and Content of Professional Economics
Ethics, New York, NY: Oxford University Press USA.
Economics after the crash
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have potentially huge ramifications for the well-being and quality of life of millions of
people. He considers a number of concrete cases of economists acting as social engineers –
including prescriptions for shock therapy applied to transition economies with sometimes
devastating results. DeMartino argues that the discipline’s almost complete neglect of ethical
questions – again in contrast to all other social scientists – is unacceptable and unsustainable.
He advocates for the equivalent of taking the Hippocratic Oath before any economist be
allowed to practice.
Apart from the ethical dimension, there is the issue of how the discipline of economics
has become quite so closely associated with the rationalisation of policies and social
arrangements that have proved so disastrous. That is a whole other question. It is one that
can fruitfully be investigated from a sociological perspective. There are at least two
components to the argument.
First, it is in part a function of the way the mainstream of the discipline has come to
constitute ‘valid’ economic knowledge. There is a strong strand of abstraction and idealism.
If one wishes to succeed within the mainstream of the discipline then there is not simply a
reluctance but a positive disincentive to get too involved with data and the real world.
Second, the discipline is the only social science with a clear global hierarchy, and the
upper echelons of that hierarchy have been colonised by (typically US) economists who
value mathematical and theoretical sophistication over real world relevance. When
mainstream economics becomes entangled in social engineering it tends to view the world
as something that needs to be reshaped to fit the procrustean bed of the theoretical model,
rather than recognising that models are inevitably simplifications that need to be applied, if
at all, with extreme care.
There is a letter in today’s Guardian by Mike Cushman of the London School of
Economics that provides an insight into how these features of the discipline are reinforced.3
But is all this inevitable?
In one sense, the scale of the field is so vast it is hard to get a handle on how things are
evolving. One can find signs that the grip of the mainstream is strengthening. But equally
one can find signs that the mainstream is now more open to recognising the limitations of
established modes of analysis – for example, in the willingness to look more seriously at
models of bounded rationality. And there continue to be heterodox voices at the margins
arguing for different approaches: approaches which recognise the need for a more
institutionally sensitive economics more firmly anchored in empirical engagement with the
real world economy. It could plausibly be argued that these voices are becoming more
numerous and more organised. One place to investigate these views further is through the
Real World Economic Review, which also runs a blog.4
One problem with economics at the margins is that only occasionally does it offer the
sort of concrete and confident prescriptions and predictions that economic advisors to
3 http://www.guardian.co.uk/education/2011/feb/19/crash-fuelled-by-academic-journals (Last
accessed: 21/11/13) 4 http://www.paecon.net/PAEReview/ (Last accessed: 21/11/13); http://rwer.wordpress.com/ (Last
accessed: 21/11/13)
Economics after the crash
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government are typically required to give. When one recognises the open-textured and
contingent nature of the economy the enthusiasm for hard prediction is significantly
tempered. Yet, as long as there is a demand for spuriously precise economic advice, supply
is likely to be forthcoming.
In this respect a recent paper by Charles Manski on Policy analysis with incredible certitude
– currently available as a working paper – is interesting, important and encouraging.5 From
a perspective within the mainstream, Manski is asking some searching questions about the
sort of policy analysis that economists can and should engage in. His concern is very much
the misplaced certitude that is too frequently demonstrated.
So maybe there’s hope. Perhaps some of the hubris is being knocked out of mainstream
economics and there is a future for the discipline in which it is populated by the “humble,
competent people” Keynes thought so splendid. There are some there already. But there is
plenty of room for more.
Economics as a vaccine against economists?
18th September 2011
On Friday a quote from the great Cambridge economist Joan Robinson was circulating on
Twitter:
Purpose of studying economics – to learn how to avoid being deceived by
economists
In fact, the full quote is:
The purpose of studying economics is not to acquire a set of ready-made
answers to economic questions, but to learn how to avoid being deceived by
economists.
This pretty much sums up the spirit in which I teach economics to policy students, so I
thought it was worth a Retweet.
But it triggered a bit of deeper reflection.
In particular, one tweeter queried whether it could be the case. Studying economics,
runs the argument, required embracing the values of economics in order to understand the
analysis. Through a process of socialisation one becomes colonised by the economic
discourse and progressively blinded to the problematic nature of some of the underlying
assumptions and values.
5 This paper has been published as Manski, C.F. (2011) Policy analysis with incredible certitude,
Economic Journal, vol. 121(554), F261-F289. There is also now a book length treatment of the topic in
Manski, C.F. (2013) Public policy in an uncertain world: analysis and decisions, Cambridge, Ma.: Harvard
University Press.
Economics after the crash
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This brief Twitter exchange resonates with some of the great debates in the social
sciences, anthropology, and the philosophy of science. Is it possible to understand and
engage meaningfully with a paradigm/discourse/culture/ontology without complete
immersion within it? Or is it possible to stand outside yet still critically engage with it?
This speaks to a major contemporary challenge – what has been termed the
‘economisation’ of politics and policy. Increasingly policy proposals are being forced on to
the procrustean bed of a utilitarian economic calculus. The policy world is increasingly
framed from within a mainstream economic perspective. Unless proposals can be couched in
the language of market failure, externalities, property rights, information asymmetries and
the like they are not to be taken seriously.
A tactic deployed by policy actors operating from within the perspective of neoclassical
economics is to deny those outside the discipline the standing to comment on economic
matters. You can’t have a view because you’re not an economist. You don’t understand.
Those outside the discipline often feel disempowered when policy debate is conducted
on this economics-inflected territory. The arguments come across as complex, heavy-duty
scientific stuff. It can often seem to offer the sort of ready-made answers that Robinson
warned against:
We’ve run the proposals through the model. We’ve estimated that the policy
will cost £300m. It will deliver £200m of benefits. We shouldn’t do it.
Those without any feel for what these statements mean may feel forced to accept them as
representing something robust. A model sounds pretty scientific. Benefits don’t outweight
costs. That’s got to be bad, right? They may not like the answer they are presented with. But
they have no tools for prising apart the case being made. They are blinded by “science”.
Yet, there are plenty of threads that you can tug at if you know where they are. What’s
the assumed discount rate? How are we valuing life? Valuing time? Are there intangibles
that have been omitted? How have transfers been dealt with? What are the magnitudes of
the elasticities being used? Are they evidence-based or simply conventional assumptions?
How are distributional issues being treated, cross-sectionally and longitudinally? Does the
model deal with only first round effects or secondary effects? Partial or general equilibrium?
Are expectations important in driving market behaviour and how are they treated? What
assumptions are being made about rationality? Or information? Or market structure? Or the
speed of market adjustment? How sensitive are the results to the key assumptions? And so it
goes on.
Which threads are relevant depends on the precise nature of the analysis. But there will
definitely be threads. Pulling on some of them can expose something implausible or deeply
unpalatable embedded in the assumptions or the calibration that drives the conclusions. It
may lead to the whole argument unravelling.
So that brings us back to Robinson. Economics is an art in science’s clothing. The
frontiers of the discipline can be fearsomely technical. There is no doubt this excludes the
non-expert. Yet, the social world the economist seeks to shed light upon is not unintelligible
to the non-specialist. When economics is being applied to policy then it is dealing with real
Economics after the crash
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issues about which non-economists may well be better informed than the economists. They
have standing to challenge the incautious application of inappropriate models.
The mathematical sophistication of economic models is often based upon some
questionable foundations – a house built on sand. And the foundations are not too complex.
When applied to policy questions the economics needs to speak meaningfully to pressing
real world issues. Policymakers are familiar with one half of that process – the issues – they
need to assess whether the economic analysis connects plausibly to those issues.
Most people can develop a feel for the way an economic argument is constructed. There
are usually a few key assumptions that drive the outcome. So it doesn’t require too much
knowledge to start to ask intelligent questions to test the robustness of what you’re being
presented with.
We can draw the analogy with learning a language. It isn’t so difficult to learn tourist
French or to achieve a competent level for reading or writing. You can get a real sense of
what is going on. But that doesn’t mean you’ve got the facility to write cutting edge literary
fiction. Or even effective double entendre-laden limericks. To do that requires much greater
immersion – and may be inaccessible to the non-native speaker.
It is the same with economics. It is not so hard to get a sense of how economic
argumentation works. But that doesn’t mean you’re going to get a paper published in the
American Economic Review.
So if economics is studied critically, examining the foundations upon which
explanations are built and the grammar of the arguments, it is possible to develop
understanding while declining to embrace the values and assumptions that underpin the
discourse. And getting a feel for the subject reduces the chances of being deceived. I’m with
Joan on that.
On economic amnesia
12th October 2011
Economists, one might assume, have something useful to say about the current problems
afflicting the world economy. Yet, since the crash of 2008 there has been a considerable
amount of reflection in parts of the discipline about its failure to anticipate the crash and its
failure to offer effective prescriptions for getting the economy out of the hole it’s in. Of
course, elsewhere in the discipline it is business as usual – with a range of prescriptions for
privatisation and deregulation at the microlevel and fiscal restraint at the macrolevel.
This week’s Nobel announcements are salutary in that respect. Olaf Storbeck described
them as a prize for the Ancien Régime.6 He was criticised for doing so, but his intervention
might be better seen as simply the most recent in a chorus of disapproval directed at an
approach to macroeconomics that came to dominate the field. Thomas Sargent, who shared
this year’s prize, did as much as anyone to propel rational expectations and new classical
6 http://olafstorbeck.blogstrasse2.de/?p=1348 (Last accessed: 21/11/13)
Economics after the crash
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macroeconomic models to the forefront of the field, and his macroeconometric work has
been hugely influential. That is why he was awarded the Nobel prize. But that can be
separated from the question of whether, looked at from a broader perspective, such models
actually shed much light on the way the economy operates.
Some see the solution to the problems afflicting macroeconomics as the need to search
for new ideas. Paul Krugman has recently argued, on the contrary, that the problem is that
the discipline has amnesia.
The history of economic thought is littered with potentially useful ideas that have been
rejected or neglected in favour of new classical or new Keynesian models of complete
markets. The problem is that most economists do not get a chance to study these older ideas,
rather their education focuses upon the current ‘state of the art’. When quite a number of
high profile economists have argued that much macroeconomic theorising since the 1970s
has been travelling further and further up a cul-de-sac, this is more than simply unfortunate.
In his presidential address to the Eastern Economics Association Paul Krugman frames
the point vividly:7
… in responding to the crisis, the profession presented a sorry spectacle of
unnecessary ignorance that didn’t even recognize itself as ignorance, of bitter
debate over issues that were resolved many decades earlier. And all of this, of
course, made the profession mostly useless at a time when it could and
should have been of great service. Put it this way: We would have responded
better to this crisis if macroeconomics had been frozen at the level of
knowledge it had in 1948, when Paul Samuelson published the first edition of
his famous textbook.
This neglect among economists of their intellectual antecedents is not a new phenomenon. It
is, however, getting worse. Fewer and fewer economics departments offer courses in the
history of economic thought. This means that ideas with great potential lie unexplored. It
also means the discipline condemns itself to reinventing the wheel. And it deprives students
of an enriching experience. One of the most memorable parts of my own economics
education was wading through Roger Backhouse’s A history of modern economic analysis and
marvelling at the twists and turns of the story as successive generations of economists tried
to make sense of their subject of study.8 It also gave a clear sense that the process by which
economic knowledge moves forward is not unambiguously a process by which ‘better’
theory replaces ‘worse’ theory. There are other things going on.
The neglect of intellectual history sits alongside an intolerance of heterodoxy in many
economic departments. People like Krugman and Stiglitz, although Nobel laureates
themselves, are routinely denigrated and derided by economists working within the
mainstream. No doubt in part that is because of their media profile – after all you can’t be a
‘serious’ scholar and try to engage the public as well. But it is also because they adhere to a
7 Krugman, P. (2011) The profession and the crisis, Eastern Economic Journal, vol 37, 307-312. 8 Backhouse, R.E. (1985) A history of modern economic analysis, Oxford: Basil Blackwell.
Economics after the crash
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broadly Keynesian perspective (for the reason, as Krugman pointed out succinctly the other
day on his blog, that it does a better job of explaining what’s going on).9 It is interesting that
the ideas of Hyman Minsky, a post-Keynesian economist, have attracted increasing media
attention in recent years as people cast around for ways of explaining the financial crisis.
Yet, those ideas have had very limited traction in most economics departments.
The neglect of intellectual history and the intolerance of heterodoxy are important
because they obviate the need for broad reflection. The evolution of economic thought and
the cleavages between contemporary schools of thought rest on questions of ontology and
epistemology. But economists tend to spend most of their time on methodology.
Fundamental questions about the nature of the economy divide approaches – questions
about the nature and implications of time, knowledge, learning, uncertainty, expectations,
for example. Or questions about market structure, market adjustment, frictions and
transaction costs. Or questions about the nature of economic relationships – their direction,
separability, stability, linearity. Different approaches to ‘doing economics’ often flow from
profound ontological differences. Austrian economics, for example, is not more discursive
and less mathematically dense simply because Austrian economists don’t like maths. It is
because their understanding of the economy means the application of the full panoply of
technical economic tools is viewed as pointless. The economy, from this perspective, just
isn’t amenable to that type of analysis. But many economists, well versed in mainstream
approaches but little else, would have had no opportunity to reflect upon such issues in
anything except the narrowest terms. And it is unlikely that any such engagement is framed
explicitly as concerning the ontology of the discipline.
The neglect of intellectual history and the intolerance of heterodoxy are of a piece. They
both flow from a process through which a particular perspective and a particular set of
values – the so-called values of the maths department – have come to capture the
commanding heights of the discipline and to marginalise or silence alternative perspectives.
Progress in economic thought has come to be defined in rather narrow terms, and relevance
to understanding pressing applied problems does not feature all that strongly. Many within
the discipline have been conscious for at least the last two decades that this has been
happening. Many have bemoaned it. Movements like post-autistic economics (now, real
world economics) have arisen in opposition to it. But they have yet to make serious inroads
into thought leadership within the discipline.
How to effect a change of culture within the discipline is a political or sociological
question, rather than a purely economic one, although focusing upon incentives would no
doubt be fruitful. Krugman concludes his speech on a frank, if slightly defeatist, note which
captures the essence of the problem:
What we really need is a change in the destructive social dynamics that
brought us to this point. And I wish I knew how to do that. But my problem is
9 http://krugman.blogs.nytimes.com/2011/10/11/why-believe-in-keynesian-models/ (Last accessed:
21/11/13)
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obvious: I’m an economist, and it seems that we need some kind of sociologist
to solve our profession’s problems.
This captures the scale of the challenge. But before successful change can occur there needs
to be broad-based acceptance that it is needed – as those who study organisational change
will tell you. I’m not sure we’re quite there yet.
On knowing what’s going on
5th November 2011
Leading active members of today’s economics profession … have formed themselves
into a kind of Politburo for correct economic thinking. As a general rule—as one
might generally expect from a gentleman’s club—this has placed them on the wrong
side of every important policy issue, and not just recently but for decades. They
predict disaster where none occurs. They deny the possibility of events that then
happen. … They oppose the most basic, decent and sensible reforms, while offering
placebos instead.
James K Galbraith
Last weekend in a brief post over at Pop Theory Clive poses one of the key social scientific
questions of our time – What do economists know?10 Of course, the answer depends on
which economists one is talking about. As the epigraph above notes, the mainstream of
macroeconomics largely misses the point. It didn’t see the current economic turmoil coming
and has little to offer by way of solutions. One striking thing about Galbraith’s comment is
that it was written in 2000. Not a great deal has changed since then. These deficiencies with
mainstream approaches have been recognised by some high profile mainstream
practitioners, as I noted in On economic amnesia.
Yet, it is not as if economics has nothing sensible to say on the matter.
For example, in a recent paper Joseph Stiglitz sketches out an argument, based upon the
economics of imperfect information and incentives, why many of the problems we have
recently encountered should not be a surprise.11 His point is that modern microeconomics
provides tools that are useful in alerting us to potential problems, but that much modern
macroeconomics does not make use of those tools. Macro has preferred instead to stick with
microfoundations that treat issues such as market-clearing or expectations-formation in such
a way that, by definition, they render the analysis largely useless for understanding the
problems we now face. Stiglitz is particularly scathing about the way in which many
mainstream economic models have neglected the financial sector. As a consequence they
10 http://clivebarnett.wordpress.com/2011/10/30/what-do-economists-know/ (Last accessed: 21/11/13) 11 Stiglitz, J. (2011) Rethinking macroeconomics: what failed, and how to repair it, Journal of the
European Economic Association, vol 9, no 4, 591-645.
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have no traction on the current crisis because, according to the models, it can’t be
happening.
Stiglitz argues that economics has spent too much time and energy improving its
analysis of relatively modest variations in economic activity, while dismissing truly
profound economic dislocations by assumption:
It was as if we had developed a medical science that could treat individuals’
colds, but had nothing to say about serious illnesses. A doctor that said that
that was good enough, because most of the time individuals were either
healthy or suffering from the sniffles, would not be taken seriously; but that
was the position taken by much of mainstream economics (p.608)
Stiglitz argues that, in contrast, we should be interested in economic pathologies. It is when
the system gets seriously sick that we can start to understand better how it works. We
should be focused on the economics of “deep downturns”. And the economics of deep
downturns bears limited resemblance to the economics of good times.
Clive’s Pop Theory post draws on a recent piece by James K Galbraith which points out
that if you are willing to look beyond the mainstream there are a number of strands of
economic thinking that can not only explain what has happened, but also saw it coming.12
Galbraith ends his piece with a call to action. Rather than devoting more resources to what
he terms the Tweedledum and Tweedledee debates between mainstream schools of
economic thought:
The urgent need is … to expand the academic space and the public visibility
of ongoing work that is of actual value when faced with the many deep
problems of economic life in our time. The urgent task is to make possible
careers in those areas, and for people with those perspectives, that have been
proven worthy by events. The followers of John Kenneth Galbraith, of Hyman
Minsky and of Wynne Godley can claim this distinction. The task now is to
increase their numbers and to reward their work with the public recognition
and the academic security it deserves.
The question is how? Once the Politburo has a grip on the discipline, how can it be
loosened? This is not dissimilar to the challenges Paul Krugman noted in his Eastern
Economics Association Presidential Address. Perhaps the answer is that it can’t be done
from the inside, but must come from beyond.
One interesting, perhaps hopeful, development occurred this week at Harvard. Students
walked out of Ec 10, the introductory economics course delivered by Greg Mankiw to
students drawn from diverse undergraduate programmes, many of whom won’t go on to
major in economics. The students released an open letter to Professor Mankiw in which they
12 http://www.twill.info/issues/twill-14/downloads/some_economists_got_it_right_Galbraith.pdf (Last
accessed: 21/11/13)
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explain that they were looking “to gain a broad and introductory foundation in economic
theory” but felt exposed to “a specific—and limited—view of economics that we believe
perpetuates problematic and inefficient systems of economic inequality in our society
today”.13 Perhaps this is the start of something significant. Perhaps it needs a new generation
– less deferential to conventional expertise – to really shift the terrain.
Yet, equally, this particular action may be no more than youthful exuberance and goes
nowhere. It feels similar to the original post-autistic economics protests from back in 2000.
While those protests helped to raise consciousness and contributed to the establishment of a
much more vibrant global community of heterodox economists, the impact upon the
strongholds of orthodoxy has been relatively limited.14
But this week’s student protestors made reference to the broader Occupy movement.
They seek to locate the critique of existing economics education as part of a much broader
wave of discontent with the established order. This may have the potential to impart further
momentum. In higher education systems where we are obliged to weigh student demands
and expectations more heavily it may be that change will be forced upon the economics
curriculum.
One of the problems for anyone interested in delivering more pluralist economics
education is what such a beast would look like. Heterodox economists may rail against
‘toxic textbooks’ infused with the orthodoxy, but accessible materials for alternative
approaches are relatively limited.
This challenge has been picked up. The Institute for New Economic Thinking, for example,
has used the Harvard letter as a springboard for an exercise to assemble alternative curricula
through which a broader-based economics education can be delivered.15 So, again, there is
potential here for greater momentum to develop.
Perhaps this time the citadels are starting to crumble.
Economists? That’ll be your problem right there
10th June 2012
Last Wednesday Suzanne Moore posted a Guardian comment piece entitled Why do we take
economists so seriously? which takes a rather scatter-gun approach to some familiar themes.16
The argument, in outline, is that the economy is in a mess and this is primarily because we
have been hoodwinked by orthodox economists. These economists produce inadequate
theories unsuited to understanding society. But we nonetheless invest them with too much
power over it, and us. The range of opinions on how to resolve the current crisis is too
13 http://hpronline.org/campus/an-open-letter-to-greg-mankiw/ (Last accessed: 21/11/13) 14 http://www.hetecon.net/ (Last accessed: 15 http://ineteconomics.org/blog/inet/imagining-new-intro-economics (Last accessed: 21/11/13) 16 http://www.guardian.co.uk/commentisfree/2012/jun/06/economics-not-science (Last accessed:
21/11/13)
Economics after the crash
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narrow and largely reflects the interests of those who support the current social order. New
voices are needed. As Moore argues:
we are indeed in reduced circumstances when debate is reduced to bankers
arguing with economists. This clash of ideologies is not really left versus
right. It is more akin to fundamentalists talking to agnostics …
This is what you get from this dictatorship of economists, and it should be
overthrown. It is wrong and keeps being wrong. The choices to be made now
are moral, not economic ones. Only an idiot or an economist would think
otherwise.
For a piece in which the author professes to be largely ignorant of the matters about which
she is writing, this is quite a brave stance. Predictably it has generated a response.
In a post that garnered considerable support from tweeting economists, the estimable
Chris Dillow highlights Moore’s failure to grasp the way economic thinking is evolving and
the richness of current economic research.17 Moore argues that:
Economics is not a science; it’s not even a social science. It is an antisocial
theory. It assumes behaviour is rational. It cannot calculate for contradiction,
culture, altruism, fear, greed, love or humanity at all.
Regardless of whether this qualifies as an accurate characterisation of economics at some
point in its history, Dillow points out that these are issues about which current economic
research is very much aware.
Over at The Lay Scientist Michael Story notes that the sort of criticism Moore offers is not
uncommon:18
I get the general idea … economists are either foaming free-market
fundamentalists or mindless automatons, sitting uncaring in their lairs,
crunching numbers and models that have increasingly little relevance to the
real world.
Story’s post tries to balance a recognition of the valid points in Moore’s piece (the problems
associated with complex synthetic financial products and regulatory weaknesses) with the
broader point that such anti-economics sentiment, though widespread, is misplaced. Here
again Story argues that economics is a richer body of thought than Moore credits and is
already tackling – in its own way – the purported inadequacies that Moore identifies.
I find myself somewhere between these positions. Moore’s argument is a monumental,
and rather confused, generalisation. Yet, it is hardly news that economics finds itself in the
17 http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2012/06/economics-
rationality.html (Last accessed: 21/11/13) 18 http://www.guardian.co.uk/science/the-lay-scientist/2012/jun/08/2 (Last accessed: 21/11/13)
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dock over the 2007-08 financial crisis and its fallout. And so it should be. Perhaps the most
high profile examination so far was the film Inside Job, which raised important questions
about the ethics of economics and (some) economists. Prominent members of the discipline
have been forthright in their condemnation of the failings of contemporary macro (as I’ve
discussed in earlier posts). There is no credibility in the argument that economists are not –
even partially – culpable for the problems we now face. And I would not be entirely
optimistic about the discipline’s capacity to deal successfully with its own deficiencies.
But which “economics”?
One of the problems with this discussion is the term “economics”. It is used almost
indiscriminately. Often several significantly different meanings can be in play at the same
time.
“Economics” can refer to what is actually happening out there. That is, in the portion of
the social world we label “the economy”. Where business is conducted. Trade occurs. Needs
are met or go unfulfilled. Fortunes are gained and lost.
Or it can refer to the sort of economic arguments and understandings that circulate in
public discourse – in the newspapers and the pubs – which was discussed a decade or so ago
under the heading “ersatz economics”.19 This bears no necessary relationship to “proper”
economics.
Or it can refer to the “proper” economics associated with the academic discipline that
carries the name. Even here we can differentiate between the economics encountered in the
textbooks – the sort that those who have studied economics are familiar with – and the state
of the art in economic research, much of which is utterly impenetrable to outsiders.
Then, finally, it could be the economics that is influential in policy circles. This is often a
radical simplification of economic thought, in part because that is what is digestible to non-
economists. There is, for example, a strand of free market zealotry, often peddled by the
libertarian component of the Think Tank industry, which could no doubt win prizes for
sticking faithfully to the simple nostrums preached by Chicago price theory in its pomp. But
it bears almost no relation to the more qualified appreciation of what markets can deliver
that characterises much subsequent and contemporary “proper” economic thought. Many
economists recognise the limits to what markets can achieve or the contingencies
underpinning market success. But they aren’t the ones relentlessly pushing free market
ideas into the policy process. Or bending the Minister’s ear about the indisputable benefits
of marketising everything that is as yet untouched by the market’s cold embrace.
As for the economic ideas propounded by politicians with no formal training or
appreciation of the field, radical simplifications would be the best that could be said for
them.
Of course, it isn’t just Think Tanks who act as policy entrepreneurs for marketization.
Inside Job illustrated the role that some economists have played in moving out of the
19 See Garnett, R.F. (ed) (1999) What do economists know? New economics of knowledge, London:
Routledge.
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academy and into the policy arena. A more detailed discussion of these moves has been
provided by Donald Mackenzie in his work on the way in which economists such as
Friedman, Black and Scholes played a role in acting on the world to transform it to better
accord with their vision of how it should be ordered.20
The disaster of Long Term Capital Management should perhaps have alerted us to the
risks of these types of intervention. But clearly the financial markets, financial theorists, and
financial regulators weren’t paying close attention. So when Andrew Haldane argued this
week that new models of financial markets are necessary he is right. But the point should
have been obvious for quite a while.21
When we argue that economists are to blame for the mess we’re in, what exactly are we
referring to? Which flavour of “economics” are we objecting to?
When “proper” economists move into the policy world and start to advocate for putting
their theories into practice, what status does that activity have? Standard economics lays
great emphasis upon the positive/normative distinction. The “science” of economics is the
positive analysis of the world as it is. It has an aversion to normative claims. So when
economists start lobbying policy makers for change because this or that theory says the
world would be a better place if it were remoulded to conform more closely to the theory, is
that even “economics”? Or is it something else entirely?
Economics: somewhat less benighted
If we restrict ourselves for a moment to “proper” economics the picture is, as Dillow and
Story point out, more complex than Moore appreciates.
Economics is a global discipline which covers a range of perspectives. So to talk of
“economics” as a unified body of thought is wrong-headed. But, at the same time, it is a
discipline in which there is a strong orthodoxy, a reasonably clear global hierarchy, and a
heterodox periphery. It is a more unified body of thought than any other science of society.
The received wisdom is that heterodox economists struggle to be heard and largely
participate in conversations parallel to the mainstream. These are not the people who shape
the economic canon. Yet, there are signs that this may be changing slowly. The World
Economics Association – which was launched last year by those unhappy with the perceived
hegemony of orthodox approaches – is now the second biggest membership organisation in
the field.22 Among heterodox economists a range of ontologies are deployed, many of them
explicitly reject the sort of asocial models of the individual that Moore rails against.
But it wouldn’t be right to look entirely to the dissidents to remake the discipline in a
new image. Indeed, some heterodox economists operate with a somewhat caricatured – or,
perhaps more accurately, outdated – understanding of what the mainstream is up to. For
example, while rational choice approaches undoubtedly continue to dominate
20 See fn 1. 21 http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech582.pdf (Last
accessed: 21/11/13) 22 http://www.worldeconomicsassociation.org/ (Last accessed: 21/11/13)
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microeconomics, there is plenty going on under the heading of behavioural economics that
moves the discipline away from simplistic models of narrowly defined and clear-eyed
preference satisfaction. Some of the most interesting papers being produced at the moment
are trying to wrestle with precisely the sort of qualitative, emotional or “non-rational”
factors shaping behaviour that Moore identifies. The idea of bounded rationality is now
commonplace, although frequently not used in the way that Herbert Simon intended.
Equally, there is an explosion of interest in breaking away from atomistic conceptions of
decision making to recognise a range of interaction effects – reference levels and relativities,
peer groups, neighbourhood effects, herding and the like. This opens up possibilities for
multiple equilibria, path dependency and all sorts of sub-optimal outcomes. Many of these
developments therefore have the potential to transform our understanding of the welfare
implications of market allocation mechanisms. Once you place “individual failure”
alongside market failure and government failure the world starts to look rather different.
Whether such moves ultimately lead to the transformation of the discipline remains an
open question. In part this is because the implications of these ideas have yet to be worked
through fully. But they also pose a threat. Some of these developments in economics are
deeply uncongenial to those who hold to a conservative, free market ideology. You only
have to look at the critical – at some times rather rabid – response to Sunstein and Thaler’s
libertarian paternalism or Robert Frank’s arguments about income relativities and status
effects to appreciate this.
Yet, while mainstream economics now tolerates ideas that would have been ruled out of
court a few years ago, there remain significant blind spots. For example, macroeconomics
seems in thrall to market-clearing models that are not fit for purpose. The challenge is to
change the path that theory has been pursuing for the last couple of decades. You would
have thought that the spectacular failures to anticipate the global financial crisis would lead
to a major rethink. While some prominent economists have called for this, it is by no means
certain it will follow. It could be argued that the discipline has become locked into a sub-
optimal developmental path by its incentive structure, but that is an argument for a different
day.
Standing back
We are going through a period of exploration and innovation in economics, but significant
ontological issues remain largely unexamined. Ontological issues are at the heart of much
that separates the social science disciplines and schools of thought within a discipline. But
economists don’t tend to do philosophy. At a push they might venture into methodology.
But rarely do you encounter explicit ontological or epistemological reflection.
This is unfortunate because it can act as a brake on change and progress.
We can contrast this with previous eras in which such philosophical reflection was a
legitimate part of economic discourse. I was reminded of this last week during a Twitter
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discussion in which someone mentioned the Cambridge Capital Controversies.23 There was
a time when puzzling over what precisely “aggregate capital” might refer to, and the
dangers of the fallacy of composition, was a pressing issue at the centre of economic debate.
It wasn’t banished to some darkened corner where economic methodologists gather. Hard to
imagine today.
One of the most obvious contemporary illustrations of this is the way in which
economics treats uncertainty. We might think that recent events have rendered rational
expectations approaches even more questionable than they were previously. But where
next? Mainstream approaches tend to transform uncertainty into risk, albeit with a growing
acceptance that risks in some markets may be fat-tailed rather than normally distributed (as
discussed in the Haldane paper on financial markets cited above). Post-Keynesians, on the
other hand, argue that genuine uncertainty cannot meaningfully be “tamed” by translating
it into risk. Action in the face of radical uncertainty has to be the starting point of analysis, it
cannot be abstracted away, even as a first step. Recent debates have disinterred the
Keynesian concept of “animal spirits” in a bid to understand what is happening on the
capital markets. But few have fully taken on board the implications of embracing caprice
among market actors. Deep Keynesians like Shackle would argue that radical uncertainty
transforms the methodology of economics and renders much of the formalism of orthodox
economics beside the point, a position shared by many Austrian economists.
And that is the reason why such ideas do not gain much traction. Logical consistency,
parsimony and tractability are valued. Highly-prized formal methods are privileged over a
plausible ontology.
Constructive critique
I welcome Suzanne Moore’s post. Not for the force of its argument but because, by inviting a
response, it helps to sharpen the counter-arguments. It hints at some genuinely important
questions not just about economic analysis but about the role that economic ideas play in the
policy process. But it is not a very effective critique of those ideas. If anyone is interested in
examining the current state of economic knowledge in a rather more informed and balanced
way then I’d suggest starting with Roger Backhouse’s excellent short book from a couple of
years ago.24
23 Harcourt, G.C. (1972) Some Cambridge controversies in the theory of capital, Cambridge: Cambridge
University Press. 24 Backhouse, R.E. (2010) The puzzle of modern economics: science or ideology?, Cambridge: Cambridge
University Press.
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The maths question in economics
24th October 2012
Over at Noahpinion last week a post on the role of maths in economics generated plenty of
comment.25 This followed the award of the “Nobel Prize” in Economics to Shapley and Roth
for work that is, in almost anyone’s book, highly mathematical. Noah Smith identified a
number of reasons for using maths in economic analysis, each of which could be a good or a
bad reason, depending on circumstance. His broad conclusion is that:
Math is not always the most appropriate tool in economics. But the more real
successes economics achieves, the more good math it will use.
He argued that there are times when it would be appropriate to make less use of maths in
economics. The argument here is summarised as:
The only time not to use math in econ is when we haven’t found the right
math yet.
And in practice, I find that a few of the people calling for less math in
economics … don’t seem to have any such goal in mind. There are a few
people out there who would rather econ stay imprecise forever – so that
nobody will ever be proved wrong or right, and we can let a million flowers
bloom, and everyone’s scholarly opinion about the economy will be equally
valid.
This is a debate that I spent some time thinking about a while ago. I have written a little
about it in relation to the specific applied field of housing economics. It was interesting to
revisit the topic for the first time in a while.
It strikes me, though, that this brief flurry of interest in the maths question is framing
the discussion a bit too narrowly and missing some of the significant points.
One problem with which economic analysis can be afflicted is that, without care,
methodology drives ontology. If the only tool you’ve got in your toolbox is a hammer then
everything looks like a nail. When econometricians were restricted to working primarily
with linear functions then all curves were linear, by assumption and as an approximation.
As the techniques of nonlinear dynamics became better understood and more widely used
suddenly we were happy to accept all sorts of behaviours and possibilities – such as
multiple equilibria or complex dynamics – that previous generations of economists couldn’t
easily accommodate or actively sought to prove to be impossible.
25 http://noahpinionblog.blogspot.co.uk/2012/10/what-is-math-and-why-should-we-use-it.html (Last
accessed: 21/11/13)
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That is just a variation on Smith’s point that ‘we haven’t found the right math yet’.
Seeking to contort the economy on the procrustean bed of an inappropriate mathematical
technique can disguise more than it reveals.
But there is a more fundamental sense in which methodology – particularly
mathematical formalism – can drive ontology.
Perhaps the most famous example is the case of Hicks’ 1937 interpretation of Keynes’
General Theory.26 Hicks seemed to have managed to tame Keynes’ approach into an
economic framework that was intelligible to conventional economists of the time. However,
in doing so he emptied Keynes’ approach of some of its most novel components –
particularly the role of genuine uncertainty – because they cannot easily be incorporated into
the mathematical frameworks used at the time. In his later years Hicks recanted. He felt he’d
sent the debate off in an unhelpful direction. The risk/uncertainty problem is still with us.
You can’t travel too far down the road of an economic discussion of uncertainty before it is
operationalised as probabilistic risk, which is a completely different phenomenon.
That is why I would depart from Smith in his characterisation of the “less maths”
brigade. I wouldn’t dispute that there are some with the motivation to insulate their
theorising from any form of testing. But there have been some heterodox economists who
eschew the use of much mathematics because they conceive of the economy as something
that cannot be tamed and parameterised. They have an ontological stance which leads to a
different methodological palette. If you conceive of the economy primarily as a discovery
process involving agents operating in open systems making genuine choices under radical
uncertainty, who use conventional decision rules and are subject to the double hermeneutic,
then there is little to be gained from overly elaborate algebraic specification or heavy duty
estimation. Structural stability is a chimera. The economy is an embodiment of Heraclitus’
famous aphorism: you cannot step into the same river twice.
Equally importantly, the maths question is about the allocation of scarce resources.
Maths undoubtedly has a part in economic analysis, but does it justify the pre-eminence it
currently has? That depends on your view of what economics is trying to achieve. Given
disciplinary incentives it makes absolute sense for individuals to focus on signalling
advanced mathematical ability, because they know that’s what gets published in prestigious
journals and plays well at hiring time. It delivers clever models and analysis honoured as
being “deep”.
But if the aim of economics is to advance our understanding of the economy then
perhaps the allocation of effort to theory is less obviously justified. Twenty years ago
Thomas Mayer argued that we can think of economic explanation as a chain.27 The
economics profession seems intent on strengthening the links in the chain that are already
the strongest – the models – to the detriment of improving the links in the chain that are
weakest – the plausibility of assumptions, the behavioural foundations of the models, the
26 Hicks, J.R. (1937) Mr Keynes and the “Classics”: A suggested interpretation, Econometrica, vol, 5, no
2, 147-159. 27 Mayer, T (1993) Truth versus precision in economics, Cheltenham: Edward Elgar.
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operationalisation of concepts, the quality of the data used to test the models. And if a chain
is only as strong as its weakest link then that isn’t a wise strategy.
Finally, there is the link between the mathematical models and the way in which they
map on to the economy. One of the commenters on Noah Smith’s post cited Alfred
Marshall’s famous quote:
(1) Use mathematics as a shorthand language, rather than as an engine of
inquiry.
(2) Keep to them till you have done.
(3) Translate into English.
(4) Then illustrate by examples that are important in real life.
(5) Burn the mathematics.
(6) If you can’t succeed in (4), burn (3).
Smith is avowedly not a great fan of argumentum ad verecundiam, but this quote seems to me
to have something useful to say. It can be interpreted in different ways. I tend to focus on
point (4) and think of it as an anchor. It is a prescription for stopping economics drifting off
into its own world of abstraction. It demands that the discipline is not engaged in
mathematical pyrotechnics simply for the fun of it. The analysis has to be illustrated with
examples from real life. And not by trivial examples or stylised facts but by examples that
are of real world importance.
Some economists who prefer to work with serious mathematics never lose sight of what
the discipline is ultimately trying to achieve. They are willing to anchor discussion in
“examples that are important in real life”. But it is hard to dispute that some have drifted off
into the ether, perceiving no great need or obligation to root what they are doing in
advancing our understanding of the economy.
So students who come to economics to see if they can understand the world, address the
pressing questions of the day, and maybe make the world a better place, end up having their
heads stuffed full of maths which appears to have limited relevance to anything of
significance. Master the technique; never mind the intuition, let alone the application. They
may be mistaken in forming that impression, but it is understandable that they do. And
that’s your problem right there.
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Economists in reflective mood
17th November 2012
Next weekend Bristol will host the Festival of Economics, organised under the auspices of the
Festival of Ideas.28 The programme for the Festival of Economics has been assembled by
Diane Coyle of Enlightenment Economics.29 It brings together economic journalists, applied
academic economists, and economists in the think tank world who seek to talk directly to
policy makers. Some are relatively mainstream in their orientation. Some are decidedly more
heterodox.
The arrival of the festival coincides with my finally getting the chance to finish Diane’s
recent edited collection What’s the use of economics? Teaching the dismal science after the crisis
(WTUOE).30 The book arises out of a seminar held back at the beginning of the year, which I
would dearly have loved to have attended. Unfortunately it clashed with teaching my
economics of public policy unit. The book comprises 22 brief chapters giving a range of
perspectives on how economists should respond to the deficiencies exposed by the 2007-
2008 financial crisis.
At least some parts of the economics community are in reflective mood.
One of the key questions contributors to WTUOE address is how the curriculum at
undergraduate and postgraduate level should be changed to equip students with the
knowledge they need to put economics to work in the real world. Much economics
education, particularly at postgraduate level, is geared towards producing academic
economists specialising in producing clever models addressing relatively esoteric concerns.
But the vast majority of students with training in economics won’t go on to have academic
careers in economics. Particularly relevant here are a couple of thought-provoking
contributions on the role and activities of economists in government.
Equally profoundly, how does economics need to change as a body of knowledge in
response to the explanatory failures of existing approaches?
The discussion of how economics students can be better equipped encompasses both
macro and micro, while the discussions of the theoretical adequacy or otherwise of
contemporary approaches is mostly macro oriented. Given that the starting point of the
discussion is the financial crisis that is understandable.
The contributors to WTUOE differ significantly in their views on how much established
economic approaches need to be modified. The minority view among contributors is that
mainstream approaches need a bit of tweaking. With more sensitivity to characteristics of
real world economies which don’t typically feature in conventional RBC models of whatever
flavour – institutional structures, the banking system, finance and debt – perhaps business
can continue pretty much as usual. However, the view that a more profound shift is
necessary is just as frequently encountered as you go through the chapters. Contributors
28 http://www.ideasfestival.co.uk/?p=4627 (Last accessed: 21/11/13) 29 http://www.enlightenmenteconomics.com/ (Last accessed: 21/11/13) 30 Coyle, D. (ed) (2012) What’s the use of economics? Teaching the dismal science after the crash, London:
London Publishing Partnership.
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argue that models that rely on representative agents and rational expectations, for example,
are inappropriate tools for analysing networked societies of heterogenous agents interacting
on the basis of bounded rationality. Alan Kirman provides a typically thoughtful
contribution. The argument is not the sort of anti-formalist argument that some heterodox
economists advance. Rather the argument is that economists have got stuck using the wrong
sort of mathematics. They need to embrace a vision of the economy as an evolving complex
system. And that implies fundamentally different modelling strategies.
The contributors similarly differ in respect of the teaching of economics students. A
minority view is that there isn’t a great deal that needs changing. But the more common
argument is that economics education has become too specialist and too narrow. There is
little space in the curriculum for the history of economic thought or economic history and
the study of the evolution of economic institutions. Where student do applied work it often
involves the secondary analysis of other people’s data. Rarely do students explore the
problems associated with collecting primary data – either administrative data or through
surveys. The judgements involved in transforming the messiness of the world into the
neatness of the rectangular data matrix – problems of coding and classification – go
unexamined. These are topics that other social scientists find squarely at the centre of their
research methods training. But economists tend to be rather incurious about the processes
by which the data arrive in the archive. Never mind “garbage in, garbage out”, it tends to be
full speed ahead to apply the most complex statistical technique they know. I caricature. But
only slightly.
A number of contributions, particular those looking at the work of economists in
government, highlight the emphasis of the economist’s education on deductive reasoning
rather than also exploring processes of induction. The strand of macroeconomic thinking
that views the core of macroeconomics as primarily being about models that can be run on
computers, without the urgent need to bring those models into close dialogue with real
world economies, is deprecated.
Far from living a life of pure deductive reason, applied economists in the real world are
often required to start by piecing together data before trying to make sense of it by applying
some theory, while recognising the importance of institutional constraints and incentives in
a way that much theory does not explicitly capture. The “science” requires a dose of the art
of judgement in order to become useful.
Indeed, there is a suggestion that economists could do with being, at the very least,
sensitised to the sort of concerns that sociologists, political scientists and psychologists bring
to the analysis of society in order to enhance their ability to interpret the world effectively
with the aid of economic theory.
A word that crops up several times in the contributions to WTUOE is “humility”. There
is the suggestion that there has been an unwarranted arrogance about mainstream
macroeconomics. Several contributors feel that, having had its deficiencies exposed and its
certainties undermined, this attitude needs to change.
Few of the contributors to the book framed their chapters explicitly in philosophical
terms. Yet, much of the material was underpinned by some profound questions of ontology
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– what does “the economy” comprise? – and epistemology – how can we best represent and
analyse “the economy”? In emphasizing the importance of the history of economic thought
contributors raise important questions about how economic knowledge evolves. Indeed,
whether it in any meaningful sense can be said to accumulate. In the absence of experiments
or crucial empirical tests it is possible that knowledge evolves through fads, fashion or as a
result of social factors. That opens up the possibility that good ideas were dropped for bad
reasons. Or knowledge may move on as a result of real world events that demonstrate
existing paradigms are inadequate. In this respect Wendy Carlin’s chapter on reforming the
macroeconomic curriculum was particular interesting. She suggests that it is possible to
weave together the content of economic theory, the history of economic thought and
economic history to give an account of how economic crises generate paradigmatic shifts in
thinking, which feed into policy, which in turn generate new crises. Students would not only
come to understand the content of different theoretical approaches to macroeconomics but
do so in a socially embedded way. This in itself should, if done effectively, deliver an
appropriate degree of humility about whatever is considered to be the current state of the
art.
You’ll not be surprised to discover that I am in agreement with many of the contributors
to WTUOE who argue for this more pluralist approach to economics education. I have no
doubt it is beneficial. Certainly it is the way I try to structure my own approach.
It is great to see some of these debates moving beyond the realm of the economic
methodologists and edging closer to the mainstream. But I feel that there is still a way to go
before it penetrates the heart of the citadel.
The reopening of the economic mind?
26th November 2012
Where is the revolutionary thinking in economics? That was one of the first questions posed
by a speaker at the Festival of Economics held last weekend in a very damp Bristol. It is also
one of the most pressing and the most intriguing.
I was among the hardy souls who bought a season ticket for the event and got a feel for
the range of material covered. But rather than review the whole event I want to consider the
issue of revolutionary thinking – posed as part of the session on The future of capitalism – in
the light of the discussion in the last session on Economics in crisis.
The question about revolutionary thinking was part of a discussion reflecting upon the
way in which paradigm shifts in economic thinking are associated with previous economic
crises. Most notably, the rise of Keynesianism occurred in the aftermath of the Great Crash
of the 1920s and the adoption of monetarism – and neoliberalism more broadly – took place
after the apparent breakdown of Keynesianism and the appearance of stagflation in the
1970s. Where is the new thinking – the reconceptualisation of the macroeconomy and the
role of the state – to go alongside the current crisis?
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If we think a bit harder about the two previous crises it is clear that the relationship
between economic crisis and economic theory is rather less straightforward. While Keynes
had been piecing together the fragments of his theory over a period of years its articulation
largely followed the crisis. Yet, the ascent of neoliberalism – as Daniel Stedman Jones
highlighted in his presentation – was rather more deliberate and took decades. The ground
had been well prepared. Policy entrepreneurs were ready to introduce monetarism when the
1970s crisis opened a window for policy change.
But that doesn’t detract from the basic point. The ecology of economics has in the past
been more diverse. It was possible for distinctive schools of thought to coexist in a way that
appears no longer to be the case.
While one approach to economics was in the ascendant following the interventions of
Samuelson, Arrow and Debreu it took a while to become embedded as the mainstream. In
macro, real business cycle models continue to frame the debate. New Keynesian models may
throw some grit into the frictionless world created by Kydland and Prescott but they are
pressed from the same mould. And models that don’t show at least a family resemblance
run the risk of being disdained as irredeemably ad hoc. There is limited tolerance of
heterodoxy.
This situation can be contrasted with the way microeconomics is developing. As Diane
Coyle pointed out during the Economics in crisis session, microeconomics appears relatively
open to new ideas and learning from outside economics – particularly in respect of the rapid
movement of behavioural economics from the margins to the mainstream.
This is perhaps all the more extraordinary once you start enumerating the key
characteristics of the macro models – continuous market clearing, rational expectations,
representative agents, the absence of an explicitly modelled financial sector. It is hardly
surprising that such models are unable to capture the characteristics of the current crisis.
Yet, as Coyle noted, some macroeconomists have a problem even recognising that there is a
problem.
Personally I wouldn’t want to overstate the extent to which microeconomics is
cognitively open, but the contrast is illuminating.
A point I have made repeatedly, from my rather semi-detached position, is that
economics tends to prioritize methodology over ontology. Students spend a lot of time being
drilled in the latest mathematical technique and solving problems. They spend less – or no –
time thinking about what sort of an entity the economy is and how it should be modelled.
The rational expectations assumption is one of the best examples. Sure it maintains
mathematical tractability. But really? Even on average? When professional macroeconomists
don’t have a particularly good grip on what the economy is going to do next?
I studied macroeconomics just as RE models were coming to full prominence. I’ll be
honest, I found them utterly implausible from the start, even as an approximation. They just
felt misconceived at a foundational level. I guess that was part of the reason I fell out of love
with much of the substance of economics and became more interested in the practices of
economics.
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Of course, since those days things have got a whole lot worse. At Saturday’s session one
student commented from the floor that he felt that he wasn’t really studying an MSc in
economics but an MSc in maths. He finished his remarks by rather plaintively wondered
whether there might be potential to study something a bit more clearly related to the real
world economy.
The presentations from the panel in the Economics in crisis session were fairly unified in
their call for the economics curriculum to incorporate more consideration of the history of
economic thought, economic history and the nature of economic institutions. These are all
topics which have been progressively excised from the curriculum in many of the leading
economics programmes. I would add to the mix the revival of the philosophy and
methodology of economics; something which has also been sidelined to make space in the
timetable for ever more ferociously complex mathematical and quantitative techniques. If
there could be consideration of philosophy I would expand that to include ethics. Aditya
Chakrabortty rightly referred to examples – such as those showcased in the film Inside Job –
of economists facing substantial and self-evident conflicts of interest and nonetheless
proceeding without reflection. This would be considered unethical practice in most other
disciplines, but quite a few economists are nonplussed that the issue is even raised. I
blogged about this in Economists, implicated back when the film was originally released.
Another student in the audience asked when they might see some of these topics
featuring in the curriculum of a degree programme. While work is underway to progress
this agenda, it is not a transformation that will be effected rapidly.
The panel also offered a general endorsement of the value of inter-disciplinary
collaboration. Chakrabortty noted that some of the most interesting work on the economy is
being done in places like Manchester’s Centre for Research in Socio-Cultural Change or the new
Sheffield Political Economy Research Institute.31 These research centres may involve economists
working with scholars from other disciplines, and they are surely doing interesting and
important work, but it would be interesting to see whether any of that work would have the
honorific “economics” bestowed upon it by a prominent member of the economics
professional.
That raises an issue that troubled me about the session. None of the speakers was a true
defender of the faith. All were, at the very least, open to recognising the weaknesses of the
economic approach and the possibility of learning from and collaborating with other
scholars. But in this respect they were atypical of most of the economists of my
acquaintance. The disciplinary incentives are massively stacked against this type of
approach.
Young academics know that research is all that counts in recruitment. Departments
want recruits – or ‘hires’ as economists are wont to call them – who are doing work that is
“clever” or “deep” and addresses a theoretical or empirical puzzle that is preoccupying
some part of the discipline. Applicants know that being able to offer a job market paper
targeted at a journal that is considered core to the discipline, with plenty of ABS stars, is
31 http://www.cresc.ac.uk/our-research/remaking-capitalism (Last accessed: 21/11/13);
http://speri.dept.shef.ac.uk/ (Last accessed: 21/11/13).
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what counts. An R&R or acceptance in such a journal is even better. Applied work in field
journals plays less well. Cross-disciplinary work can be frowned upon and considered
rather third-rate: “not economics”.
Academics with an interest in things like economic methodology or history of economic
thought have a choice. Either they suppress that interest and do something deemed to be
more important or they reconcile themselves to life in the academic slow lane. One can
imagine that in the UK they might even end up in teaching-only positions so that their
research doesn’t have to weaken the power, or sully the purity, of the department’s REF
submission.
If one wants to change this situation the challenge is formidable. The discipline has
followed a path-dependant process to an equilibrium that is now self-reinforcing.
Conventionally we might say that an exogenous shock would be required to change the
trajectory of the system. But the exogenous shock would need to be bigger than the Global
Financial Crisis. Because that hasn’t managed to trigger change and shift thinking at the core
significantly.
I wonder what it would take?
I am reminded of a comment Paul Krugman made a while ago when he said he couldn’t
see a way forward: he suggested that what was needed to work out how to change the
discipline was a sociologist not an economist. Someone who understands the way in which
strong group cultures are formed, sustained and can be changed.
Now there’s an admission.
Revisiting Capitalism Unleashed
29th December 2012
Over Christmas I went back to Capitalism Unleashed by Andrew Glyn.32 It is simultaneously a
sparse and a sprawling book. The text has fewer than 190 pages, and yet it covers an
immense amount of territory. I returned to the book to look for clues.
Glyn’s broad argument is that the post-Second World War period is a game of two
halves.
During the 1950s and 1960s western industrialised economies experienced an
unprecedented period of stability and growth during which the division of economic output
was renegotiated – in the face of full employment and better worker organisation – away
from profits and towards wages.
The crisis of the 1970s was followed by an extended period during which these gains for
labour were eroded in the face of austerity politics, economic restructuring, globalisation,
deregulation and privatisation. Glyn notes that capital account deregulation and financial
innovation, in particular, reduced national autonomy, increased disruptive economic
32 Glyn, A. (2006) Capitalism Unleashed: Finance, Globalization, and Welfare, Oxford: Oxford University
Press.
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volatility and created dysfunctional incentives for senior management. He uses the now-
famous example of the failure of Long-Term Capital Management and the contagion
experienced during the Asian financial crisis to illustrate some of the key points.
Environmental degradation sits ominously in the background as possibly placing an upper
bound on future economic growth.
Glyn notes that the post-1980 marketising and liberalising policy agenda was not
notably successful in improving the performance of the relevant economies. It was,
however, successful in reordering the beneficiaries of the fruits of economic activity. There
was a rebalancing away from wages and towards a greater share to profits. More income
was also derived from property. These changes led to increasing inequality.
Glyn’s key observation is, however, about the resilience of social institutions, although
he doesn’t quite frame it in those terms. Over an extended period there has been a cross-
national policy agenda – sponsored by International Organisations – directed at welfare
retrenchment. However, the institutions of the welfare state have proved remarkably robust,
particularly in continental European countries. Glyn sees this as a positive sign. He argues
that the welfare state is worth fighting for. It is the most effective means of mitigating the
“market inequality” exacerbated by liberalisation and of providing adequate social
insurance.
The book finishes with a brief discussion of the possibilities for introducing a Basic
Income for all citizens. This is a means of moving away from the pernicious effects of means-
testing benefits. It is also a means of coping with the fact that achieving adequate living
standards will not require everyone to work full time, and that there is more to life than paid
employment. Achieving this goal is not an economic impossibility. The barriers are
primarily political.
You may be asking why, specifically, I was revisited Glyn’s book. What sort of clues
was I looking for?
The answer lies in the fact that the book was published in 2006. I was interested to see
what it had to say about the implications of financial deregulation and innovation. A while
ago there was a debate about who did or did not see the Global Financial Crisis coming. The
Queen famously asked why economists hadn’t anticipated it. Others have argued that if you
look beyond the economic mainstream, blinkered as it is by the use of a particular set of
unsuitable economic tools, then there were plenty of people who foresaw the dangers. I
couldn’t quite remember what Glyn had to say about it.
It turns out that, while the prime suspects in triggered the Global Financial Crisis –
subprime mortgage lending coupled with securitization – do not feature very prominently
in Capitalism Unleashed, if you draw together the threads of Glyn’s argument, and those of
the sources he cites, it’s pretty much all there. You would be justified in arriving at the rather
pessimistic conclusion that it was a question of when rather than if the next financial crisis
was going to arrive. And how bad it was going to be.
To take a few examples:
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The Bank of International Settlements in… [i]ts Annual Report for 2005 noted
that “The global system seems to have become prone to financial turbulence
of various sorts”. A recent paper … from BIS argued that there seems to be a
“common structural thread” linking the increasing number of financial crises:
“Increased risk taking on the part of private sector participants in financial
markets has been facilitated by financial market deregulation and technical
change. Liberalized financial systems seem inherently more prone to …
intermittent financial crises than do repressed financial systems … Increased
competition could bring a ‘sharpened dilemma’. Financial institutions find it
harder to maintain rates of return even as shareholders demand that returns
rise”. The author notes the tendency for the finance sector to take greater
risks: “Consider how the loan losses to emerging market economies (EMEs)
… in the 1970s seemed to spark a series of risky initiatives to reconstitute
profits. In turn banks went into leveraged buyouts, property lending,
proprietary trading and then lending to EMEs all over again”. He gloomily
concludes that “the modern financial system seems to be subject to a wide
range of problems: operational disruptions, institutional insolvencies, short-
term market volatility, medium-term misalignments and contagion across
countries and markets”33 (pp.69-70)
Although the bailout of LTCM prevented serious longer-term repercussions
the crisis brought into sharp focus the potential fragility of the financial
system at its most sophisticated end. This is a continuing worry for the
financial authorities charged with regulating the sector and minimizing the
likelihood of major crises. A recent, very sophisticated … analysis found that
a conclusive assessment of the systemic risks posed by hedge funds required
data that was unavailable and likely to remain so. However, the results of
their modelling suggested that “we may be entering a challenging period”
and that “systematic risk is increasing”.34 Moreover the banks are heavily
involved with the hedge funds. “With margins in traditional business
squeezed, big banks are falling over themselves to provide prime brokerage
services to hedge funds, which include extending credit, securities dealing
and settlement and so forth. Competition has led to an erosion of credit
standards … One respondent [to a recent survey] even refers to prime
brokerage as ‘the crack cocaine of the financial system’”35
33 White, W. (2004) Are changes in financial structure extending safety nets?, Bank of International
Settlements Working Paper No 145. 34 Chan, N., Germansky, M., Haas, S. and Lo, A. (2005) Systemic risk and hedge funds, NBER Working
Paper 11200, p 97. 35 Plender, J. (2005) Shock of the new: A changed financial landscape may be eroding resistance to
systemic risk, Financial Times, 16 Feb.
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Problems like those at LTCM seem endemic given the search for ever more
exotic ways of beating the market. In May 2005 where was a “near systemic
meltdown” in the “Over the counter” derivatives market … This followed the
reduced credit rating of GM and Ford bonds, which affected several popular
hedge fund trading ploys. (p.72)
The genie of financial competition and expansion has been released by
deregulation and financial innovation. Whilst the worse effects of the
resulting financial fragility have been felt in the Asian countries hit by the
crisis of 1998, it would be wrong to assume that the greater sophistication of
financial markets in OECD countries insures them against financial problems
… the real economies of the USA and especially Japan have been scarred by
financial excesses and the whole financial system can be threatened by the
unrelenting search for “value” through ever more complex financial trades.
Regulators are trying to secure the benefits from liberalization whilst limiting
the risks, but this is formidably difficult and the chances of a major financial
crisis must certainly have increased. The April 2005 issue of the IMF’s regular
Financial Stability Report … expressed the worry ‘The combination of low
risk premiums, complacency, and untested elements of risk management
systems dealing with complex financial instruments could ultimately become
hazardous for financial markets’. (pp.152-153)
Glyn might perhaps have flagged up more explicitly the role fraud could potentially play in
magnifying some of the dynamics identified, but apart from that all the ingredients for the
crisis are there.
Having looked again at Capitalism Unleashed, it would be fascinating to hear Glyn’s
analysis of the Global Financial Crisis that began just a year after the book was published.
Our understanding of the mess created and the damage wrought by the financial system
would no doubt have been substantially enhanced if we were to benefit from his insight.
But we are sadly denied that opportunity. Capitalism Unleashed was Glyn’s last word on
these matters. It is a human tragedy that he died at a relatively young age in December 2007.
But it is also a profound loss to the world of social analysis.
Economics Emperor: absence of clothes increasingly suspected
6th January 2013
In the period since the 2007 Financial Crisis “economics” has played an increasingly high
profile role in shaping policy. The austerity policies implemented in many western
countries, with significant negative impacts upon citizens’ well-being and the social fabric,
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come with the endorsement of many economists as the correct medicine to deal with our
economic maladies.
Yet, over the same period, the claims of the discipline of economics to any privileged
insight into the workings of the economy and society have come under greater critical
scrutiny than at any point over the last forty years. The sense of disillusionment with the
value of mainstream economic approaches has undoubtedly grown. The empire may be
crumbling.
The latest instalment in this saga is the publication this week of an IMF working paper
by Blanchard and Leigh in which they elaborate upon, and test the robustness of, a
conclusion first reported briefly in the IMF’s World Economic Outlook back in October 2012.36
The conclusion is that the economists have got it wrong again. Specifically, forecasts of the
impacts of rapid and aggressive austerity policies on economic growth were substantially
understated. Austerity has had a much more negative effect upon countries’ economies than
had been anticipated. This may not, perhaps, come as a huge shock to anyone else.
Blanchard and Leigh argue that the problem was that the fiscal multipliers used to make
the forecasts were not the right ones. The multipliers had been estimated in “normal times”
(their term). While they may have been perfectly serviceable when economies are operating
normally, during a period of extraordinary economic turbulence like the one we are
currently experiencing – in particular the effect of the zero lower bound on nominal interest
rates – the effective multipliers are much larger. It would only be by going back to the 1930s
and estimating fiscal multipliers for that period that you might be able to recover values that
would be more applicable to current circumstances. This has recently been attempted. And,
obviously, the run of data emerging for the post-2008 austerity period is lengthening all the
time, which allows new estimates of the relevant parameters under current conditions.
Some commentators have used this paper as a basis for arguing that austerity policy has
been a serious error and hugely damaging experiment, as its critics have maintained
throughout. Alex Andreou at the New Statesman, for example, argues that George Osborne
now finds himself as “an increasingly lonely poster boy for austerity”.37 While that is no
doubt correct, Blanchard and Leigh do not conclude that their findings mean a rejection of
austerity policy. They argue:
Finally, it is worth emphasizing that deciding on the appropriate stance of
fiscal policy requires much more than an assessment regarding the size of
short-term fiscal multipliers. Thus, our results should not be construed as
arguing for any specific fiscal policy stance in any specific country. In
particular, the results do not imply that fiscal consolidation is undesirable.
Virtually all advanced economies face the challenge of fiscal adjustment in
response to elevated government debt levels and future pressures on public
finances from demographic change. The short-term effects of fiscal policy on
36 http://www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf (Last accessed: 21/11/13) 37 http://www.newstatesman.com/politics/2013/01/george-osborne-increasingly-lonely-poster-boy-
austerity (Last accessed: 21/11/13)
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economic activity are only one of the many factors that need to be considered
in determining the appropriate pace of fiscal consolidation for any single
country.
The debate over austerity in practice is vitally important. But the Blanchard and Leigh paper
is epistemologically interesting as well. The argument is that many of the macroeconomic
models used to forecast the impact of austerity are likely to have used the “wrong” fiscal
multiplier. But it is hard to tell because in many of the models the fiscal multiplier is an
unreported and unexamined parameter. In some cases Blanchard and Leigh have worked
backwards from the forecasts with the aim of inferring what the multiplier must have been.
Their key argument is:
However, our results need to be interpreted with care. As suggested by both
theoretical considerations and the evidence in this and other empirical papers,
there is no single multiplier for all times and all countries. Multipliers can be
higher or lower across time and across economies. In some cases, confidence
effects may partly offset direct effects. As economies recover, and economies
exit the liquidity trap, multipliers are likely to return to their precrisis levels.
Nevertheless, it seems safe for the time being, when thinking about fiscal
consolidation, to assume higher multipliers than before the crisis.
This can be read as saying no more than that macroeconomic models and the forecasts they
generate need to be more sensitive to context.
Alternatively, it can be read as saying that such modelling strategies are fundamentally
flawed. Fiscal multipliers should not be treated as parameters. They are endogenous. That
would imply that they should be modelled explicitly. But if confidence is a part of shaping
their values then they may, in principle, be impossible to estimate. So a more radical reading
– one which would no doubt be favoured by many more heterodox economists – is that this
whole enterprise is doomed. The Blanchard and Leigh paper should be read as one more –
and possibly the final – nail in the coffin of macroeconomic forecasting. All such forecasts
should be treated as no more than guesswork.
Blanchard and Leigh assert that “As economies recover … multipliers are likely to
return to their precrisis levels”. How do they know? Economists didn’t expect the
multipliers to go haywire once austerity was implemented, proving wrong what had
previously been widely accepted as correct. Why should we expect things to return to
“normal” once economies recover? Indeed, their argument takes the period 1997-2008 to be
“normal”: given the spectacular and unsustainable run up of public and private debt during
this period, in what sense was it normal? It is possible that it offers us no guide to what is
going to happen when economies recover, particularly as the political expectation is that
even if the economy recovers austerity policy – if less aggressive – will be with us for a long
time to come.
The implications of this argument are therefore perhaps more profound than the
authors intend. And they strengthen the hand of those who argue that we need different
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types of economic knowledge. Those are not necessarily new types of knowledge. The
urgent task may be to recover what we lost as a result of the ascent of formalism über alles.
Economic theory and intuition-based policy
21st January 2013
For a few week’s I’ve been carrying a pdf of a working paper by one of the elder statesmen
of economics – Richard Lipsey – around on my hard drive. Entitled Twenty five
methodological issues in memory of Mark Blaug its focus is pretty self-evident.38 Today I had the
opportunity to read it. I’m glad I did.
If economics students encounter a methodology book then it is likely to be Mark Blaug’s
The methodology of economics.39 That may be the only discussion of economic methodology
they ever come across. Even though it rather overplays the possibility of falsifying theories,
it’s a great book. In fact, its adherence to a somewhat outmoded Popperian philosophy
makes it a better read. It’s generally quite negative about much of modern economics. Blaug
was rather disillusioned. Economists seemed rather wedded to a set of core theoretical
principles and beliefs. They seemed less committed to the robust empirical testing of the
implications of those beliefs, and the rejection of those beliefs if they fail the test. Theology
not science. The book is good knockabout stuff.
Blaug died in 2011, hence Lipsey’s title. Lipsey’s short paper is a wide ranging overview
of some key methodological issues and puzzles across both micro and macro. It’s very much
in the spirit of Blaug’s writing. The core question is how do ideas persist – and not only
persist but continue to dominate – in the face of demonstrable theoretical inadequacy or
incoherence, or robust evidence that contradicts them.
After a brief discussion of falsification Lipsey makes the following statement:
In what follows, I distinguish two related types of policy advice. The first,
which I call “theory based,” can be formally derived from a well-specified
theory; the second, which I call “intuition based,” is not formally derived but
is in the spirit of the theory in question and seems reasonable to those who
accept that theory. A survey of advice given by economists shows that
intuition-based policy advice is commonly given.
Methodological issue 2: How should one assess intuition-based policy advice
when it is based on a formal theory that is not generally accepted?
38 http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp12-18.pdf (Last accessed: 21/11/13) 39 Blaug, M. (1992) The methodology of economics: or how economists explain, 2nd ed, Cambridge:
Cambridge University Press.
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I’d not seen the distinction drawn in this way before, but as he proceeds it is clear that he has
in mind something akin to the fallacy of misplaced concreteness.
In framing this issue he touches on something that always troubles me when I kick off
teaching micro in the public economics context, as I did last week.
We teach that a complete competitive market economy will deliver a socially optimal
allocation of resources. The first and second fundamental theorems of welfare economics
follow. We observe that the conditions under which this result is obtained are eye-
wateringly strict. The Arrow-Debreu economy is nothing like any economy we’re ever likely
to encounter in reality.
We tell stories about diminishing marginal returns and upward sloping supply curves.
We then most likely tell some stories about market adjustment as a process rather than end
state. Those stories tend to skate over the question of how the market moves if everyone is a
price taker. The stories imply market power, but the conclusions rule it out by assumption.
The gap that opens up has been known about for a long time.
We talk about market failures of various types and note that markets in reality are as
likely to be monopolistically competitive or oligopolistic as they are to be competitive in the
textbook sense. All these factors place a huge question mark over any general conclusion
that markets will do the business in terms of maximising social welfare. That is perhaps
most fully worked through in models with imperfect information. We might talk about the
theory of second best – something that is, of course, close to Lipsey’s heart. This suggests
piecemeal deregulation may move you further away from the social optimum, rather than
closer to it. It suggests very careful analysis of the situation is required before policy
conclusions are drawn.
But it is rarer to wind back and say: right then, hang on a minute, given all these real
world imperfections, do the first and second theorem of welfare economics have any
relevance to anything? After all, they are the theory-based justification for thinking that a
market economy is a good idea and government intervention is distortionary. If we’re
saying they’ve got next to nothing to do with the real economy then what theory-based
justification is there for thinking that the policy of marketising and deregulating are a good
idea in practice?
Blaug was pretty dismissive. He considered general equilibrium theorising “totally
irrelevant: it has no empirical content and is incapable of answering any practical question
that an economist might want to pose.”
Lipsey is a little more measured. He argues that economists may have the Arrow-
Debreu result and the first and second theorem in the back of their mind when making
policy recommendations, but what they are doing is making intuition-based
recommendations. The intuition is that markets without distortions are generally better,
even though that cannot be rigorously derived from any theory which aligns to a plausible
characterisation of the real world. Lipsey poses pertinent questions:
Methodological issue 4: Can we learn anything about the efficiency of real
world market economies by studying the efficiency of Arrow-Debreu-style
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general equilibrium models? Is it not misleading to derive policy
prescriptions that apply to this imaginary world and assume that they apply
to the real world?
I’m not entirely convinced Arrow-Debreu looms quite so large on the mental horizon of the
contemporary economist, but, nonetheless, the thrust of the argument is valid.
Lipsey goes on to explore a number of absolutely core issues such as the nature of
competition (a process or an end-state), the nature of technological change and its role in
economic growth, the significance of uncertainty – rather than risk – to real world
investment decisions. On the macro- side he focuses on the “death” of Keynesianism
declared in the 1970s and the subsequent search for the source of macroeconomic
fluctuations on the supply side rather than the demand side.
Throughout the paper Lipsey argues that the empirical evidence largely counts against
the way in which neoclassical economics conceptualises the various issues. He places
alongside the neoclassical approach an evolutionary approach which he argues does a better
job of accounting for the way in which real world economies function.
Lipsey’s argument is inevitably very broad brush. Some of the argument would perhaps
have benefitted from a rather closer engagement with the current state of the relevant
debates. They aren’t all debates that I’m familiar with, but where they are literatures that I
know something about I felt that the current state of thinking is not quite as benighted as
Lipsey portrays it.
Nonetheless, the paper raises some profound questions. And I don’t think a closer
engagement with the current state of the debates would have undermined the key point he
is seeking to make. His paper suggests the weight of evidence is sufficient – across the range
– to conclude that conventional approaches to some foundational issues are fatally flawed.
And that seems like fair comment to me.
Looking to the past on expectations of the future
30th January 2013
The way in which economic agents form expectations about the future is one of the most
important issues in economics. All economic theory has to take a position on the matter,
whether it is discussed explicitly or the treatment is left implicit.
For three decades now the rational expectations hypothesis has dominated, despite a
persistent strand of criticism. The more tenacious and optimistic advocates of the REH
might take the view that it has something meaningful to say about how people actually
make decisions. A more common position is to adopt an instrumentalist as if position. The
latter approach is more credible, though nonetheless still problematic.
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In a post yesterday at Noahpinion Noah Smith reviews developments in the theorisation
of expectations.40 The stranglehold of the REH is undoubtedly weakening. A range of
alternative approaches are now available and being actively explored. Much of this new
thinking is inspired by the concern for decision-making biases and heuristics that
characterises behavioural economics. Concepts such as recency bias or information cascades
are invoked.
These ideas may well bring us closer to an understanding of how expectations are
formed in the real world. But they open up the prospect of irrational market movements that
is nothing short of alarming for those committed to a vision of markets as a process of
orderly and predictable adjustment.
Smith notes that in looking for alternatives to REH not only can we draw on new
theoretical resources but we can also look back to earlier approaches. Here Friedman’s
approach based upon adaptive expectations is identified as relevant.
I would advocate stepping back even further.
When thinking about expectations I always start from Keynes’ famous 1937 paper in the
Quarterly Journal of Economics.41 This is a paper which some claim distils the essence of
Keynes’ General Theory. It focuses on uncertainty and its implications. The key passage is:
By “uncertain” knowledge, let me explain, I do not mean merely to
distinguish what is known for certain from what is only probable. The game
of roulette is not subject, in this sense, to uncertainty … Or, again, the
expectation of life is only slightly uncertain. Even the weather is only
moderately uncertain. The sense in which I am using the term is that in which
the prospect of a European war is uncertain, or the price of copper and the
rate of interest twenty years hence, or the obsolescence of a new invention, or
the position of private wealth owners in the social system in 1970. About
these matters there is no scientific basis on which to form any calculable
probability whatever. We simply do not know.
Yet, we nonetheless have to act. So what should we do? Keynes continues:
How do we manage in such circumstances to behave in a manner which saves
our faces as rational, economic men? We have devised for the purpose a
variety of techniques, of which much the most important are the three
following:
(1) We assume that the present is a much more serviceable guide to the future
than a candid examination of past experience would show it to have been
40 http://noahpinionblog.blogspot.co.uk/2013/01/the-power-and-terror-of-irrational.html (Last
accessed: 21/11/13) 41 Keynes, J.M. (1937) The general theory of employment, Quarterly Journal of Economics, vol 51, no 2,
209-223.
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hitherto. In other words we largely ignore the prospect of future changes
about the actual character of which we know nothing.
(2) We assume that the existing state of opinion as expressed in prices and the
character of existing output is based on a correct summing up of future
prospects, so that we can accept it as such unless and until something new
and relevant comes into the picture.
(3) Knowing that our own individual judgment is worthless we endeavor to
fall back on the judgment of the rest of the world which is perhaps better
informed. That is, we endeavor to conform with the behavior of the majority
or the average. The psychology of a society of individuals each of whom is
endeavoring to copy the others leads to what we may strictly term a
conventional judgment.
This notion of conventional judgment is crucial. It prefigures much of the recent discussion
of herding and the like.
The point, for Keynes, of highlighting these characteristics of uncertainty and
expectations is that they lead to a theory of market behaviour which has a very different
flavour:
Now a practical theory of the future based on these three principles has
certain marked characteristics. In particular, being based on so flimsy a
foundation, it is subject to sudden and violent changes. The practice of
calmness and immobility, of certainty and security, suddenly breaks down.
New fears and hopes will, without warning, take charge of human conduct.
The forces of disillusion may suddenly impose a new conventional basis of
valuation. All these pretty, polite techniques, made for a well-panelled Board
Room and a nicely regulated market, are liable to collapse. At all times the
vague panic fears and equally vague and unreasoned hopes are not really
lulled, and lie but a little way below the surface.
It strikes me that the post-REH literature is working its way back around to the position that
Keynes had reached three quarters of a century ago.
The point for Keynes was that these characteristics of markets under uncertainty made
the pursuit of highly formal theory a questionable enterprise. Economics was far better
characterised as the art of reading the economy and the application of judgement than it was
as a branch of (applied) mathematics.
In many ways that was the rock upon which the good ship Keynes foundered, as
formalism became the virtue privileged above all others among economists. But that’s
another story.
The key message I take from Keynes is that economics may have to rethink some pretty
foundational issues and rediscover some of the wisdom of a previous era before it can get
back on track.
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Reinhart and Rogoff: replication and responsibility
18th April 2013
… the actions of economists today bear on the life chances of the world’s population
far more substantially than do the actions of the members of most other professions.
George DeMartino
Replication is an activity that doesn’t attract enough attention, enough credit, or enough
effort in the social sciences. But it is an activity that is getting a lot of attention at this precise
moment. This has come courtesy of the exposure of both flaws and contestable
methodological choices in Reinhart and Rogoff’s landmark study of public debt and
economic growth.
The economic blogosphere has exploded with debate over the issue. But, just in case
you’re not following it, here are the key points. Reinhart and Rogoff followed up their major
historical work looking at debt and economic growth This time is different with a paper called
Growth in a time of debt published in the American Economic Review in 2010.42 Their key result
is that levels of public debt in excess of 90% of GDP are associated with lower rates of
economic growth. Indeed, the mean annual growth rate they report, once debt crosses the
90% threshold, is negative.
This body of work is highly influential.
A quick search on Google Scholar will tell you that the NBER version of Growth in a time
of debt has been cited 450 times, while This time is different has been cited over 2000 times
since 2009. That is a lot of citations for social science publications: you’re doing pretty well
once citations for a piece get into double figures within four years.
In a paper published this week, Thomas Herndon, Michael Ash, and Robert Pollin
(HAP) of the University of Massachusetts, Amherst identify problems with the Reinhart and
Rogoff result.43
There are three main issues:
First, Reinhart and Rogoff selectively exclude years of high debt and average
growth. Second, they use a debatable method to weight the countries. Third,
there also appears to be a coding error that excludes high-debt and average-
growth countries. All three bias in favor of their result, and without them you
don’t get their controversial result.
Since the HAP paper has received publicity there has been a huge amount of debate.
Reinhart and Rogoff have issued two responses. The second is rather more conciliatory than
the first, inasmuch as it concedes the point that there was a data processing error. But
42 Reinhart, C.M. and Rogoff, K.S. (2009) This time is different: Eight centuries of financial folly, Princeton
University Press. 43 http://www.peri.umass.edu/236/hash/31e2ff374b6377b2ddec04deaa6388b1/publication/566/ (Last
accessed: 21/11/13)
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broadly-speaking their responses defend their existing position and argue that even if you
correct the calculations their key finding still stands.
Some commentators have stated, over the last day or so, that they never found the
Reinhart and Rogoff result very convincing in the first place, particularly the idea that there
was an identifiable threshold when debt hits 90% of GDP. If you graph the data one of the
most striking things is that the data points are all over the place and therefore any
association between debt and growth is decidedly sketchy. Also, whatever association can
be found is driven by a few countries with particular characteristics and circumstances.
If we’ve all been convinced all along that these results were so flaky, it is curious that
they have achieved such prominence, rather than being rubbished or ignored. But that is by
the by.
The reason all this is important, rather than just being a bit of a spat over academic
methodology, is that the Reinhart and Rogoff result has moved beyond academia to be
hugely influential in policy terms. Reinhart and Rogoff are both at Harvard and are well-
placed within academic economics, but they have also worked at the IMF so are plugged in
to economic policy debates at global level. What they say has influence.
Their result has been absolutely central in buttressing arguments in favour of austerity.
Azizonomics yesterday provided a selection of quotes from senior political figures invoking
the Reinhart and Rogoff result as offering scientific justification for the benefits of fiscal
consolidation.44
There is rather more debate over whether Reinhart and Rogoff themselves see their
results as justifying austerity policy. This in part turns on the question of causation. Reinhart
and Rogoff have defended their work with the argument that they were only pointing out
an association between debt and economic growth, not suggesting that high levels of debt
causes low economic growth. Indeed, it is highly likely that causation also runs the other
way – hitting a period of low growth leads to ballooning public debt.
That might well formally be true of the position Reinhart and Rogoff adopt, but their
statements on the matter have not been a model of clarity or caveat. Commentators have
pointed to various of their statements over the years which might be construed without too
much difficulty as suggesting that Reinhart and Rogoff thought not only that the
relationship was causal but also that austerity was the way to go, even if they didn’t quite
set out their position in those terms.45
Whether it is possible to track down clear statements made by Reinhart and Rogoff that
implicate them in supporting austerity isn’t the main issue. There are at least two points that
are more important.
First, if we accept their formal position at face value and conclude that all they have
done is identified associations between variables, without making any sort of causal claim,
44 http://azizonomics.com/2013/04/17/of-reinhart-rogoff-the-emperors-new-clothes/ (Last accessed:
21/11/13) 45 http://www.bloomberg.com/news/2011-07-14/too-much-debt-means-economy-can-t-grow-
commentary-by-reinhart-and-rogoff.html (Last accessed: 21/11/13)
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then really you’ve only just started on the analysis. In fact, unless you are going to claim – or
imply – causation the finding isn’t all that illuminating. As Noah Smith observes:46
I think that books like This Time Is Different are merely jumping-off points for
an investigation of that hypothesis; they do not constitute any kind of proof.
Naturalism is where understanding of the world begins, but not where it
ends.
It may be that similar looking patterns and associations between variables in different
countries at different points in history are driven by entirely different causal processes. Until
you’ve grappled with causation then you’ve not got very far. You can say very little.
The second point about this episode is that it takes me back to some of the arguments
advanced by George DeMartino in The Economist’s Oath, on the need for a professional ethics
for economics.47 DeMartino’s position is that economists’ traditional resistance to the
conscious cultivation of a professional ethic is unjustified and unacceptable. As noted in the
epigraph, he argues that:
… the actions of economists today bear on the life chances of the world’s
population far more substantially than do the actions of members of most
other professions. (p98)
The Reinhart and Rogoff incident would seem to represent a paradigmatic example.
Now, the conventional response to this would most probably be that Reinhart and
Rogoff were just producing objective analysis in their role as economic scientists. They
cannot be held responsible for the way in which that analysis was taken up, used and
abused to further particular political agendas.
DeMartino’s point is that this stance is inadequate. It is an abdication of responsibility. It
is not acceptable to claim that one can only be held responsible for the intended
consequences of one’s actions when “[u]nintended consequences are sometimes predictable,
probable, and/or significant” (p92).
Reinhart and Rogoff may wish to style their work as objective analysis that is tentative
and to be treated with caution. But it was entirely predictable and probable that producing
such work in 2009 and 2010 was going to give political actors further ammunition with
which to justify the austerity drive that was already under way. And the consequences of
this austerity drive have been hugely significant for populations all over the world. Many
people have been reduced to destitution as a result. People have died. The institutional
structures of a number of countries have been deeply, possibly fatally, undermined.
Are Reinhart and Rogoff responsible for all this? Clearly not. Did they have any
responsibility to think through how their work might have been put to use? The
conventional answer to that is no. The more responsible answer would be yes. It may have
46 http://noahpinionblog.blogspot.co.uk/2013/04/what-if-all-those-times-really-were.html (Last
accessed: 21/11/13) 47 See fn.2.
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led the work to be presented in different ways. It may have led to conclusions and caveats to
be reframed in ways that reduced the possibility of the work being abused in pursue of a
political agenda.
And if Reinhart and Rogoff do not wish to align themselves with the austerity agenda,
and feel that the invocation of their work in this context is misplaced, then should they not
have responded before now? A comment from Colander and colleagues is entirely
apposite:48
Researchers have an ethical responsibility to point out to the public when the
tool that they developed is misused. It is the responsibility of the researcher to
make clear from the outset the limitations and underlying assumptions of his
model and warn of the dangers of their mechanical application.
It would be interesting to reflect on the extent to which Reinhart and Rogoff had been
actively seeking to highlight the misuse of their findings as a justification for austerity in the
policy process, before everything kicked off this week.
Few people outside of the world of economics would contest that economists and
economic thinking have significant impact upon the lives and livelihoods of the world’s
population. This would tend to suggest that deep ethical deliberation is necessary in order to
ensure that such power is wielded with great care. Yet, economics has so far been pretty
resolute in its rejection of the relevance of ethical reflection.
Perhaps the Reinhart and Rogoff incident will rekindle the debate. Perhaps it will
convince some of the doubters that simply denying an intimate connection between
academic economics and practical action in no way means the connection ceases to exist.
And therefore attention to ethics is a key professional responsibility.
Dr Smith and the “neoclassicals”
15th June 2013
Debates over the demarcation of different schools of economic thought are by no means
new. Taxonomic disputes break out sporadically. Whether “mainstream”, “orthodox” and
“neoclassical” economics ever have been, are, or could be synonymous is a question that has
exercised several authors of a philosophical turn of mind. Lately the econ blogosphere has
turned to the issue, with the focus on the identity and identification of neoclassical
economics. Noah Smith made an intervention on the issue a couple of days ago.49
48 http://www.ifw-members.ifw-kiel.de/publications/the-financial-crisis-and-the-systemic-failure-of-
academic-economics/KWP_1489_ColanderetalFinancial%20Crisis.pdf (Last accessed: 21/11/13) 49 http://noahpinionblog.blogspot.co.uk/2013/06/what-is-neoclassical-economics.html (Last accessed:
21/11/13)
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Smith notes that the characteristics commonly associated with neoclassical economics,
as defined by Wikipedia, look like this:
Neoclassical economics is a term variously used for approaches to economics
focusing on the determination of prices, outputs, and income distributions in
markets through supply and demand, often mediated through a
hypothesized maximization of utility by income-constrained individuals and
of profits by cost-constrained firms employing available information and
factors of production, in accordance with rational choice theory.
But, Smith argues, there are plenty of papers appearing in prestigious economics journals
that don’t have all – or, in some cases, any – of these characteristics. There are authors who
have written papers clearly in the spirit of neoclassical micro, but have also written papers
without such characteristics. Is it sensible for such authors, having sinned once, to be forever
labelled “neoclassical” by their critics?
Smith goes on to argue that this incautious application of the label “neoclassical” is
problematic for innovation in economic thought. To get to this conclusion it is necessary to
take a view on the nature of non-neoclassical economics:
“neoclassical” seems often to be used to describe anything that does not fall
within a small well-known set of “heterodox” paradigms. I think that is
wrong. The net effect of that type of thinking will be to block people from
thinking of new ideas, because it defines any really new approach as
“neoclassical”. So people who want to subvert or replace econ’s dominant
paradigm will be shepherded toward old alternatives such as Austrianism,
Post-Keynesianism, etc.
This is an interesting way of framing the issue. It tends to suggest that it is the heterodox
economists that exercise the power of classification. Which is a rather different reading of
the situation to the more convention one: heterodoxy is banished to the margins by powerful
actors in control of the mainstream of economics.
Nonetheless, there is something to this suggestion. If a new idea is going to gain any
traction then it most likely has to be located in relation to some existing body of thought.
And if it does not align well to existing heterodoxies – many of which are in themselves
rather diverse bodies of thought – then the idea may well have to make its way as part of the
mainstream.
Here I think that Smith elides the distinction between “neoclassical” and “mainstream”.
Mainstream economics is, to my mind, a largely sociological construct. It is the type of
economics that dominates the field at a particular point in time, attracts research effort at
leading institutions, and attracts plaudits from senior members of the economics
community. Much of it is embodied in the textbooks that introduce students to the subject
and induct them into the academic community.
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Neoclassical economics is part of the mainstream. Twenty or thirty years ago
neoclassical economics arguably was the mainstream. But a range of other approaches –
drawing on behavioural economics or evolutionary game theory, for example – have arisen
and now sit comfortably as part of the mainstream. If you go back to the 1920s, US-style
institutionalism was at the heart of the mainstream. But it was toppled in the 1940s. The
diagnosis of the constitution of the mainstream must refer to a specific point in time.
The other intriguing issue here is that the features highlighted by Smith as characteristic
of “neoclassical” economics are not necessarily those taken by heterodox economists as the
most distinctive or problematic features of “mainstream”, including neoclassical, economics.
It is just as likely that heterodox economists would see problems with the privileging of
(excessive) mathematical formalism, such that knowledge (whether theoretical or empirical)
that is not expressed in mathematical form is not considered “economic” knowledge at all.
Or the disagreement would be at the more profound ontological level: the failure to take
fundamental uncertainty seriously or the treatment of the social world as a closed and static
system for modelling purposes. That leads to an objection to the pursuit of covering laws for
the economy – that is, the whole nature of the mainstream economic enterprise is
profoundly misconceived. Or critics might focus their concerns on the bedrock of
explanation such as methodological individualism or fixed preferences: no credible
explanation of economic behaviour can omit the constitutive role of institutions.
Of course, these concerns may immediately give rise to challenge. It will no doubt lead
to the counter-objection that some “neoclassical” economists have recognised that social
institutions cannot be derived purely from the aggregation of individual decisions. Or that
not only might preferences be endogenous, but that making preferences endogenous puts an
entirely new complexion on the analysis. Similarly, it could be argued that there are
economists of great eminence who are undoubtedly mainstream, if not avowedly
neoclassical, who don’t have much truck with formalism. Someone such as Ronald Coase.
And how would one describe Thomas Schelling? Mainstream? Certainly. Formal? A little.
Perhaps we need a new category – “unorthodox”.
In commenting on the absence of neoclassical characteristics from key papers, Smith
notes:
These are mainstream papers, published in the most mainstream of econ
journals. And there are many others like them. Does their very mainstream-
ness automatically make them “neoclassical”, even though they have zero of
the elements that are commonly held to define neoclassical economics? If so,
then I contend that the word “neoclassical” has lost all useful meaning.
Given my comments above, you will no doubt anticipate that I will say that it depends on
what you identify as the key elements of neoclassical economics. A different definition of
key characteristics and these papers are back in contention.
But the other point I would make is that this isn’t an area in which the pursuit of hard
and fast demarcation rules or definitive lists of characteristics is necessarily likely to yield a
huge amount of insight.
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It would be more productive to think of the issue in terms of Wittgenstein’s notion of
family resemblance. He famously used the example of the notion of the “game”. There is no
easy way to specify exactly what the characteristics of games – board games, team games,
war games, non-competitive games, etc – are in general, but we recognise a game when we
see one. This is mainly as a result of having seen many games and seen many non-games.
When we talk of family resemblance we do not expect to see all characteristics present – he’s
got his mother’s eyes and his grandfather’s smile, thank goodness he hasn’t inherited his
father’s flat feet. The same sort of, often subconscious, process arguably applies to the
recognition of “neoclassical” economic explanations.
It is worth reflecting on what purpose is served by patrolling the boundaries between
schools of economic thought. Smith suggests it creates barriers to innovation. That doesn’t
seem an unreasonable claim. Border patrols certainly mean economics is a field of largely
independent and parallel conversations, as Arjo Klamer has argued. And those on both sides
of the border have contributed to this state of affairs.
The question is whether it is possible to move beyond this situation. There has been
quite a lot written recently about economic pluralism. Almost all of it is written outside the
“mainstream”. The literature includes the argument that not only do we need to move
beyond thinking of economics in terms of incommensurable Kuhnian paradigms but that
this is entirely possible.
Accepting that this is possible, the question then becomes do we want to? Whose
interest would it serve? And whose interests might it serve to keep the border guards in
place?
It is not possible to go far in this sort of discussion without arriving at the need for some
rather more sociological reflection.
And if one thing’s for sure, that’s definitely not the sort of thing mainstream economists
get up to.
Interpreting Osborne
10th September 2013
The more I think about economic policy the more I think that there isn’t a big enough dose
of interpretivism applied to it. This thought recurred yesterday reading George Osborne’s
set piece speech in which he, as Isabel Hardman of the Spectator put it, “trashed” Plan B.50 I
think trash-talk would perhaps be a better description of his approach.
One thing that – some – economists have learnt from the Great Recession of 2007-08 is
that our understanding of the economy is rather more partial than had hitherto been
assumed. That doesn’t mean that economists don’t have interesting and useful things to say.
But the economy can behave in ways that economists found difficult to read. Some would
50 http://blogs.spectator.co.uk/the-spectator/2013/09/george-osbornes-speech-on-the-economy-full-
text/ (Last accessed: 21/11/13)
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say this means models need to be refined, respecified, recalibrated. Other would take a more
radical stance and say that the economy and economics needs to be rethought. Conventional
models and methods don’t have room for some of the characteristics that are fundamental to
the way the economy functions. Chris Dillow highlighted some key points last week in the
context of a post about the difficulties of forecasting.51
If you were thinking about it in terms of narratives you might suggest that what is
needed is a change of root metaphor.
Much economic writing still treats the economy as a machine that obeys the laws of
Newtonian physics. Hence we talk about calibrating relationships that are linear or
linearized. We talk about removing frictions. We talk about linkages and transmission
mechanisms. We talk of velocities of circulation. Well, some do.
If we instead rooted our thinking in a biological metaphor then we would think more in
terms of time, development and change; expectations, knowledge and learning. There
would be space for market sentiment; for births and deaths; for evolution. That is hardly a
new point.52
Some might say that the root metaphor is what distinguishes the real economics of the
academy from the ersatz economics of the business commentariat. That may largely be true.
But the presumption is that this casts the academic approach in the more favourable light.
And that may not be the case.
The uncertainties in economic knowledge open up possibilities for competing readings
of events. And that in large part was Osborne’s theme yesterday. The fluidity of the
situation opens up a discursive space. He sought to impose his preferred reading on
unfolding events while, at the same time, launching a pre-emptive strike to undermine the
alternative reading of the situation offered by his critics: or, rather, to undermine his
interpretation of their reading.
I am not going to offer an in-depth deconstruction of his speech. I’m not sure I’ve got
the energy.
But I wanted to make a few points.
The first point is that Osborne gives an assured presentation of his reading of the
situation. Yet just about every claim he makes is highly contestable. When he comments on
what has happened to the economy, what is happening to the economy, what effect Plan A
has had, what effect Plan B would have, and the adequacy of the policy responses around
regulation and microeconomic reform he is seeking to stabilize a particular reading of the
situation, underpinned by a range of debateable causal claims. These are truth-claims that
perhaps make sense from within a particular worldview. But it would be perfectly possible
to wheel out counter-claims that, for example, the action the Government has taken on
banking reform, or macroprudential regulation, or to deal with levels of private debt are
wholly inadequate. Or that headline claims about jobs generated, reducing levels of
51 http://www.investorschronicle.co.uk/2013/09/03/comment/chris-dillow/why-we-can-t-predict-
CBw6Z40EZFbzw09qOKBRyK/article.html (Last accessed: 21/11/13) 52 See, for example, Mirowski, P. and Goodwin, C.D. (eds) (1994) Natural images in economic thought:
Markets read in tooth and claw, Cambridge: Cambridge University Press.
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economic inactivity, or the impact of tuition fees on university finances are being given a
misleading spin.
The second point is that, for me, the speech doesn’t really frame the issue in the right
way. Were critics of plan A saying that the economy would never recover if plan A were
followed? I don’t think so. At least not if they were sensible. They were saying that plan A
inflicted unnecessary pain and prolonged the pain for longer than was necessary, while at
the same time doing longer-term damage to the productive capacity of the economy. That
argument is not invalidated by signs that the economy is picking up. And given that much
of the recent growth in GDP is attributable to exports it is as much about what is happening
in the rest of the world as it is anything that can be attributed to government action.
Equally, the speech has some noticeable silences. A major theme is cost of living.
Osborne argues that the real way to deal with cost of living problems is to get the
macroeconomic framework right:
you don’t solve the pressure on cost of living with simply a shopping list of
interventions and government regulation.
Of course, there are important improvements we can make to the scale of
energy and water bills, the cost of housing, the fees paid for everyday
financial services, the expense of rail and road travel.
These are a burden on families – and we are doing everything we can do to
reduce their cost – with more to come this autumn. We know every penny
counts for hardworking people. But by themselves these changes don’t
amount to an economic policy. And to focus exclusively on these things alone,
important as they are, is to miss the wood for the trees.
I know that times are tough and that family budgets are squeezed. But
fundamentally, Britain is poorer than it was not because government didn’t
intervene enough, or rail regulation wasn’t tough enough, or rental policies
weren’t fair enough.
He glides on from here without offering any great insight into the “important
improvements” concerned. And of course “can make” is rather ambiguous. It doesn’t mean
we are going to make them. In most of the policy areas listed here the “doing everything we
can do” has not so far amounted to very much. It is either disingenuous – because there is
more that could be done but we choose not to do it – or an admission that government is
powerless to address oligopolistic utilities markets, the problems of speculators cornering
commodities markets, and the like.
Finally, the points about narrative and interpretation come out very clearly in Osborne’s
references to housing. He makes much of the venue for the speech – 1 Commercial Street. He
explains that as a development this stalled with the crash of 2008 but it is now moving ahead
again towards completion. Osborne reads this as a wholly positive sign that the economy is
turning the corner.
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Yet you can read the housing market, and specifically the development at 1 Commercial
Street, rather differently.
But I don’t need to discuss that in detail because Jules Birch has already done it
beautifully. Go read it here.53
Seeking a post-crash economics
30th October 2013
Mathematics brought rigor to economics. Unfortunately, it also brought mortis.
Attributed to Kenneth Boulding
From a couple of posts in the Guardian over the last week you could get the sense that the
move to recast economics is gathering momentum. Last Thursday the emergence of the Post-
Crash Economics Society received some publicity.54 Undergraduate students at the
University of Manchester have formed the group to campaign for a broader-based
economics curriculum which breaks away from an exclusive focus upon the formalist,
orthodox paradigm. The article also notes the launch of Rethinking Economics, an
organisation championing a more pluralist approach to economics education.55
Yesterday Aditya Chakrabortty reported on an event at Downing College Cambridge,
where dominant approaches were similarly deprecated and calls were made for the valuing
of alternative perspectives.56
In the light of the perceived failings of the dominant economics paradigm there is
plenty of agitation for new approaches. These represent just two of the most recent
developments. But is it having any impact?
We might consider Andrew Lilico’s article in yesterday’s City AM in which he asserts
that existing economic approaches have done a good job of accounting for the financial crisis
and the subsequent performance of the global financial system.57 He summarily dismisses
anyone who criticises these approaches as “cranks”. Is this a sign that the champions of
orthodoxy are rattled? Fighting a rearguard action based on denigration? It might be. Or, for
all I know, it may just be that Lilico likes routinely to label anyone who happens to disagree
with him as a crank. It would certainly be fair to say that what’s happening in the pages of
City AM is probably not a great guide to the state of the debate in economics education.
Chakrabortty concludes his piece:
53 http://julesbirch.wordpress.com/2013/09/09/osbornes-symbol-of-turning-a-corner/ (Last accessed:
21/11/13) 54 http://www.post-crasheconomics.com/ (Last accessed: 21/11/13) 55 http://www.rethinkecon.co.uk/ (Last accessed: 23/11/13) 56 http://www.theguardian.com/commentisfree/2013/oct/28/mainstream-economics-denial-world-
changed (Last accessed: 21/11/13) 57 http://www.cityam.com/article/1383008010/ignore-cranks-orthodox-economics-can-account-2008-
financial-crash (Last accessed: 21/11/13)
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Economics ought to be a magpie discipline, taking in philosophy, history and
politics. But heterodox approaches have long since been banished from most
faculties, claims Tony Lawson. In the 1970s, when he started teaching at
Cambridge … “There were big debates, and students would study politics,
the history of economic thought.” And now? “Nothing. No debates, no
politics or history of economic thought and the courses are nearly all maths.”
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.
This narrowing of the compass of the economics curriculum has been evident for some time.
One of the most telling passages in the piece about the Post-Crash Economics Society was
the response from a Manchester University spokeman:
… as at other university courses around the world, economics teaching at
Manchester “focuses on mainstream approaches, reflecting the current state
of the discipline”. He added: “It is also important for students’ career
prospects that they have an effective grounding in the core elements of the
subject”.
“Many students at Manchester study economics in an interdisciplinary
context alongside other social sciences, especially philosophy, politics and
sociology. Such students gain knowledge of different kinds of approaches to
examining social phenomena … “
This would appear to be an implicit concession that if you want a rounded understanding of
the economy – to be a well-equipped student of production, allocation and exchange – then
you won’t get there by studying economics alone. Many might well agree. Indeed, the point
might be seen as unexceptional. But a comment of this type being made about chemistry,
physics or biology might feel a bit more incongruous.
Yet I don’t think this is necessarily the product of some grand strategy to silence
heterodox perspectives. Rather, it’s a product of disciplinary incentives. If your starting
point for hiring decisions is to value the potential to publish in the top five economics
journals above everything else, and you have an accepted global ranking of journal quality,
then that is a recipe for, incrementally, recruiting those whose work speaks to what are
currently defined as the core concerns of the discipline, as arbitrated by a small number of
US-based journal editors. The ability to contribute to the delivery of broad-based pluralist
curriculum doesn’t necessarily get much of a look in. Indeed, the narrow research focus of
individual hires means that over time what precisely constitutes the “core elements of the
subject” becomes more tightly defined.
The challenge is that this is a strongly path-dependent process. Having reached a
neoclassical equilibrium it makes limited sense at the level of the individual hiring decision
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to depart from the current strategy. So dominant practices and perspectives are not only
sustained but strengthened.
The question is how to break out of this process. Something has to disrupt the
established processes driving the reproduction of economic labour. An exogenous shock is
required. Many hoped the poor performance of conventional macroeconomics in accounting
for the financial crisis was that shock. But it looks increasingly like that wasn’t sufficient to
cause a substantial shift away from business as usual.
Perhaps a bottom up process of student campaigning might do the trick. That would
present economists with an interesting test of their belief in consumer sovereignty, as
@unlearningecon observed on Twitter the other day.
I think the sort of coalition of support being built by Rethinking Economics has a greater
chance of exerting leverage.
And these sorts of initiatives are, of course, not mutually exclusive.
It strikes me that one area that could benefit from further exploration is the economics-
ethics nexus. Economists, unlike most other social scientists, are formally wedded to the
clear distinction between positive and the normative analysis. Yet, there is strand of
argument that this distinction is fundamentally unsustainable. Economic analysis is shot
through with ethical judgements masquerading as value-free science.
Working this particular seam could be productive.
The argument is not that economic analysis needs to switch away from ‘neoclassicism’
to an alternative paradigm. It would seem that those arguments have so far been rather
successfully rebuffed by the disciplinary powers-that-be. The argument is rather that the
current paradigm is not what you think it is and isn’t doing what you think it’s doing. That
is a more indirect – but perhaps ultimately more successful – route to the same destination.
If this isn’t an area that you are familiar with then something like Jonathan Aldred’s The
Skeptical Economist: Revealing the ethics inside economics is a relatively gentle and reasonably
engaging introduction. Then it might be interesting to graduate to something like Hausman
and McPherson’s Economic analysis, moral philosophy and public policy. Sen’s On ethics and
economics is brief, to the point, and a bit of a classic. But it maybe isn’t the place to start.58
If a stronger ethical awareness could be coupled with an appreciation of the
performative dimension of economic analysis that would represent a hugely powerful
combination. However, we know that if engaging with ethical deliberation is a challenge,
engaging most economists with performativity would be mind-blowing. One step at a time.
An acceptance of the irreducibly ethical basis for economic analysis – something that the
founding fathers of economics would have been reasonably comfortable with – would
require a fundamental reappraisal of the value and values of much contemporary analysis.
It would make economics more humble in its aspirations and modest in its claims. It
would make economic analysis more reflexive and open to dialogue. It would moderate
disciplinary aspirations to embody norms of scientific investigation that have been
58 Aldred, J. (2009) The sceptical economist: Revealing the ethics inside economics, Abingdon: Earthscan.
Hausman, D and McPherson, M. (2006) Economic analysis, moral philosophy and public policy,
Cambridge, CUP. Sen, A. (1987) On ethics and economics, Cambridge, CUP.
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questioned in the natural sciences for several generations. It would, in fact, make economics
understand that it is genuinely a social science. And that that is what it needs to be for it to
make a positive contribution to the understanding of society.
On signs you’re reading bad criticism of economics
4th November 2013
A couple of weeks ago Chris Auld’s blog carried a post entitled 18 signs you’re reading bad
criticism of economics.59 Auld is seeking to help the reader differentiate bad criticism from
‘solid’ criticism. The post generated plenty of debate below the line and was retweeted into
my timeline several times.
I’ve been thinking about the post for a few days. There are a whole bunch of issues
tangled up in Auld’s 18 signs. Some of them are relatively technical points. Some of them are
rather more far-reaching.
I have a suspicion that underlying Auld’s distinction between good and bad criticism
there is the division between internal and external critique. That is, good criticism is internal
criticism – it is generated from within a particular academic community by people working
from within broadly the same intellectual paradigm. External criticism originates,
surprisingly enough, from outside that paradigm. We generally find that economists – like
most people – are rather more tolerant of and amenable to internal than external critique.
Auld dismissed bad criticism as crankery, which is a label that mainstream economists
have a tendency to apply rather indiscriminately to perspectives that differ too much from
their own. One person’s crankery is another person’s foundational critique. But if proponent
and critic operate from profoundly different social ontologies then most likely all that will
result is mutual incomprehension. That doesn’t necessarily make criticism from a non-
mainstream economic perspective wrong. Except from the perspective of the mainstream
economist, of course.
I won’t run through Auld’s points in detail, but I wanted touch on all of them.
I’ll start by observing that Auld uses the term ‘economists’ as many critics do – in a
rather undifferentiated manner. He is therefore right that critics who claim that ‘economists’
claim that people are always rational (Sign 8) are engaging in bad criticism. Not all
economists claim this to be the case. Which isn’t the same as saying no economist does.
Auld identifies several jargon terms that bad critics misconstrue: not only ‘rational’
(Sign 12) but also ‘efficiency’ (Sign 13) and ‘externality’ (Sign 14). It would be fair to say that
it isn’t unknown for economists to fail to keep the informational and allocative definitions of
efficiency clearly separate. However, whether criticism is invalidated by terminological
inexactitude rather depends on how badly wrong you are in the use of the term and what,
precisely, the criticism is.
59 http://chrisauld.com/2013/10/23/18-signs-youre-reading-bad-criticism-of-economics/ (Last accessed:
21/11/13)
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Some of Auld’s signs of bad criticism are empirical. He is surely right that if a critic
were to claim that economics is not empirical that would be bad criticism (Sign 10). But there
is surely some good criticism in asking precisely what sort of empirical endeavour
economics might be and what it has achieved or can achieve. He sees the claim that the
financial crisis has disproved mainstream economics (Sign 9) as bad criticism. But it strikes
me this is rather more debatable. Of course it depends on how broadly one wants to define
‘mainstream’, but I think that credible criticism is possible on issues like the empirical
performance of the efficient markets hypothesis or the empirical adequacy – or even
relevance – of DSGE models. That some of the most high profile proponents of this type of
mainstream macro have declared it to have emerged from the crisis unscathed does not ipso
facto demonstrate that it is fit for purpose.
Auld considers criticism that treats all of economics as if it were battles between schools
of macroeconomics (Sign 11) to be bad criticism. That is an interesting point, because it
depends on what is intended. On the one hand, it is clearly true because such criticism
leaves out all of microeconomics and much else besides. On the other, the criticism that
much of the debate between “schools” of macroeconomics is about the implications of rather
modest variations in detailed assumptions might constitute rather good criticism. Those
with radically different views of how the macroeconomy operates aren’t even invited to join
in the party.
We know that mainstream economics is generally intolerant of heterodox approaches.
So it is perhaps not a great surprise that Auld sees any criticism of economics that cites
Debunking Economics as crankery (Sign 18). Whether you agree with Steve Keen or not, he
has asked some important ontological and epistemological questions of dominant
approaches to economic analysis. That the mainstream economics community has dismissed
him rather than engaged with his arguments – which in many ways simply echo the more
pluralist debates within the economics community that existed prior to the 1980s – reflects
rather worse on the economics community than it does on him.
The claim that all economists care about is money (Sign 15) and that economists ignore
the environment (Sign 16) are common complaints, and they are not unrelated. Stated in
these bald terms then they clearly are bad criticism. Again, however, they can be reframed
into slightly softer terms – for example, that converting everything into the common metric
of money both requires unacceptable compromises and loses something important in
translation – and they could then constitute perfectly respectable criticism.
Auld highlights the indiscriminate use of the term ‘neoclassical’ (Sign 3) and the
reference to “the” neoclassical model of Walras (Sign 4) as problematic. I would agree that it
certainly could be problematic. However, the term ‘Walrasian’ is often used by critics in a
rather allusive way to signal the prioritising of mathematical elegance over real world
relevance – even if the mythical auctioneer is not explicitly invoked. Does that make it bad
criticism? Quite possibly, but it depends what the point is.
The elision of the distinction between ‘neoclassical’ and ‘mainstream’ economics (Sign 5)
is certainly common. We can accept that the neoclassical school no longer represents the
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entirety of the mainstream in the way it once did. But the distinction between the two is
elusive and by no means unproblematic.
The last few signs of bad criticism Auld identifies operate in a rather different register
and get us into rather deeper water.
Treating macroeconomic forecasting as the major goal of economic analysis (Sign 1) is
clearly wrong, if only because much economic analysis has nothing to do with the
macroeconomy let alone forecasting. We might all agree that forecasting is not a major goal
of respectable economic analysis. We might also agree that anything close to a point estimate
of a future economic magnitude is almost certainly wrong. The best you might aspire to is
qualitative predictions about the broad range of values within which an outcome might fall.
But we can’t deny that there is quite lot of forecasting going on. Or that most of it is wrong.
Clearly, this point might be a reference to all the criticism after 2008 that economists
singularly failed to see the crash coming. But I’m not sure that was a failure of forecasting so
much as a rather more fundamental analytical failure.
Auld identifies a bunch of bad criticisms that move us into more sociological territory.
He cautions against criticism that frames the issue in terms of politics and claims that
economists are market fundamentalists (Sign 2). Criticisms that refer to “corporate masters”
or imply economists are shills for the wealthy or corporations (Sign 7) and any criticism that
uses the term “neoliberal” (Sign 6) are considered bad criticism.
There is plenty going on in these statements and I’m not going to unpack it all here. The
first point is usually addressed by reference to the profile of academic economists’ own
political beliefs, which, at least in the US, tend to be less right wing than non-economists
would imagine. But we then have to explore which “economists” we are talking about. In
particular, we might inquire into the political profile of the economists who have genuine
leverage over policy. We might ask what sort of economic analysis spews from the think
tank industry telling simple stories about the market and marketization being the solution to
most policy woes. When critics look at the effects of economics on the world that is more
likely what they are thinking about. Similarly, claims that all economists are shills for
corporate interests are clearly false. But the claim that some high profile economists are
compromised by conflicts of interest, which in any other walk of life would be seen as
deeply problematic, can hardly be disputed.60
As for neoliberalism, it is often used as a general pejorative applied to those whose
policy proposals one happens to disagree with. That is bad criticism. But we cannot
conclude from this that neoliberalism is not a phenomenon of considerable contemporary
significance. And while I don’t think “economics” as a body of thought can meaningfully be
labelled as neoliberal, I don’t think we can dismiss the possibility that certain types of
economic analysis allied with particular political interests are implicated in the
neoliberalisation of society. But that is a topic for another day.
Finally, Auld see any criticism that goes out of its way to point out that the Economics
Nobel is not a real Nobel is bad criticism. I disagree. Economics has done its darnedest to
60 http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_201-250/WP239.pdf
(Last accessed: 23/11/13)
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claim some of the reflected glory of the Nobel committee without any great justification.
Critics tend to see this as saying much about economists’ pretensions to being scientists like
natural scientists rather than scientists like social scientists. Pointing out to economists that
the “Nobel Prize” is more correctly called the Sveriges Riksbank Prize in Economic Sciences
is just tweaking their noses.
I like to think that is me showing my usual tolerance. But it may be, of course, that I’m a
crank too.
On mainstream economics and neoliberalism
10th November 2013
One of the most intriguing questions facing the merry band of wanderers interested in the
philosophy and history of economics is how mainstream economic approaches appear to
have emerged relatively unscathed from the Global Financial Crisis.
Casual observers might well find this a bit of a puzzle. A body of knowledge that
professed itself unable to shed any light on one of the most profound social events of recent
human history, even though it was squarely in the middle of the relevant intellectual terrain,
is on the face of it paradoxical.
Of course, the response from the cognoscenti, bolstered by unfalsifiable doctrines such
as the efficient markets hypothesis, is that events such as the GFC are fundamentally
unpredictable. So economics cannot be held deficient for failing to do so. And, anyway,
mainstream economic ideas such as incentive-incapability in markets subject to significant
information asymmetries can do a good job of explaining key aspects of the crisis in
retrospect. If that’s any help.
Less enlightened souls might retort that had economists stepped out the ivory tower,
removed their theoretical blinkers, and spent a bit more time getting down on the frontline
trying to understand the way institutions and behaviours were changing in an increasingly
financialised economy then perhaps they wouldn’t have been quite so surprised when a
Global Crisis they considered theoretically impossible actually happened.
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The resilience of mainstream economics is a key question that motivates Philip Mirowski’s
most recent book Never let a serious crisis go to waste.61 And a key part of his answer is the
way the economics discipline has changed. Having largely purged itself of the need for the
serious study of history, philosophy, methodology or heterodoxy the discipline has a serious
case of groupthink. And the economists’ response to the GFC can be illuminated with
61 Mirowski, P. (2013) Never let a serious crisis go to waste: How neoliberalism survived the financial
meltdown, London: Verso.
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another core social psychological concept – the management of cognitive dissonance.
Economists cleave even closer to their beliefs, despite the contrary evidence.
But Mirowski does not restrict himself to an inquiry into the epistemological
inadequacies of mainstream economics. His intellectual project has greater ambition.
Mirowski seeks to embed an understanding of how economics has responded to the crisis
within a broader understanding of the activities of what he terms the “Neoliberal Thought
Collective” (NTC).
The Neoliberal Thought Collective
The core of the book’s argument is that the NTC has played the long game on multiple
fronts. Starting from the foundation of the Mont Pelerin Society in the 1940s it has engaged
in a utopian project to remake society in the image of entrepreneur and the market. Starting
from Hayek’s beliefs regarding the limits of human knowledge, and his subsidiary critique
of expertise, the project is founded upon the belief that the market is a more efficient
information aggregator than any other human institution. So all must be subservient to the
benign munificence of the market.
The neoliberal project departs from classical liberalism and libertarianism in rejecting
the idea of a minimal or nightwatchman state. Instead, the genius of neoliberalism is to
create a veneer of small-state liberalism while retaining at its core the belief that a strong
state is required to deliver its vision. For example, populations might consider that
rendering their welfare, in all its dimensions, subservient to the whim of the market is
unacceptable. They might consider it unacceptable for governments to sign away their rights
to shape their own destiny within their own border in the name of globalising trade. So it is
imperative to ensure governments are fully signed up to the neoliberal ideal. They must
possess a willingness to ignore or override the views of their own electorate, if the logic of
marketization demands it.
In outline this story is not so different from histories of neoliberalism that exist
elsewhere. Mirowski expands on the idea of the NTC by suggesting it isn’t a closely-coupled
conspiracy but a rather looser collection of fellow travellers that has expanded from the MPS
to include a range of think tanks, media outlets, academics and other thinkers. He uses the
metaphor of a Russian Doll, and argues that the appearance of the project on the exterior
and the appearance at the core can be very different.
While Mirowski rejects the idea that he is positing a global conspiracy, the NTC plays a
rather elusive role in his argument. It is invoked repeatedly as moving behind the scenes to
realize desired geopolitical outcomes. The argument is strongest when it descends a level
and starts to identify the capillaries through which power is exercised – for example, the
way in which a substantial proportion of the academic economics profession in the US is
beholden to the Fed or the way in which the Koch brothers directly intervene to ensure the
academic appointments they fund have the correct ideological complexion. But overall the
idea of the NTC is rather undeveloped. It is not quite the deus ex machina of the story but it is
never very clearly identified nor is agency very explicitly theorized. The NTC has an elusive
and protean nature.
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Neoliberalism after the crash
Mirowski is not, however, simply interested in the rise of neoliberalism. He is more
interested in the fate of neoliberalism after the GFC and the way in which economics has
responded. Here he does a good job of laying out the ways in which economists have both
intervened in the crisis as it evolved and provided rationalisations for retaining bodies of
economic thought that might be viewed as ripe for rejection. His is also an argument about
how economists aligned with financial interests to argue against substantial reform of the
finance industry. Some significant individual conflicts of interest are laid bare. He provides a
valuable account of the rather unedifying role some leading economists – but not necessarily
“economics” in general – have played in supporting and advancing a particular set of
sectional interests.
Unusually for a book about economics and the crisis, in chapter three Mirowski takes
what appears at first sight to be a significant detour into the neoliberalization of the
individual. While the entrepreneurialisation of the self is something that you’ll find
discussed in particular branches of the sociological literature, it more rarely penetrates
analysis that is rooted in economics. The central importance of the entrepreneurial self to his
argument gradually becomes clear. It is integral to his reflection on why effective
alternatives to neoliberalism have struggled to develop.
The argument is that after 30 years of largely undiluted neoliberalism our subjectivity
has been well and truly colonised, although Mirowski doesn’t quite put it like that. Most
people view the world through neoliberal spectacles. Genuinely critical analysis – such as
analysis in terms of class interests – is impossible if everyone accepts the idea that
individuals are in charge of their own destiny, treats their life as a project with risks to be
mitigated, and views failure as weakness of individual will rather than a product of
structural inequalities. In Mirowski’s view acts of resistance such as the Occupy movement
ultimately fail to escape a neoliberal mindset and hence are ultimately ineffective.
My feeling is that Mirowski is right to highlight this issue, and isn’t the first to do so,
but he overdoes it slightly. His argument can be read as suggesting that the NTC has created
an effective totalizing discourse. But, if nothing else, the fact that Mirowski’s argument is
from an Archimedean point suggests that the discourse of entrepreneurialisation has
boundaries.
The full-spectrum approach
One of the most intriguing elements of Mirowski’s argument is what he calls “the full-
spectrum approach to neoliberal political mobilization”. Here he is joining the dots and
arguing that a pattern emerges. The neoliberal response to a problem takes short-term,
medium-term and long-term forms. It may be that responses over different timescales
appear to emanate from very different social locations, but they are directed to a common
aim of realizing the neoliberal utopia of market pre-eminence.
Mirowski argues this pattern can be detected in different policy areas. He takes the
example of climate change. The short-term neoliberal response is to engage in agnotological
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activity – in this case climate change denial. This is not necessarily because climate change is
doubted. The aim is to manufacture sufficient doubt to undermine the justification for or
consensus about swift policy intervention. The underlying aim is to buy time in order to
develop, propose and embed market-based “solutions” to the problem. In this case the
solution is carbon trading. As a solution this makes traders a lot of money, costs polluters at
lot of money, and does almost nothing to reduce carbon emissions in practice. That is the
intention. Meanwhile governments delay making any more serious direct interventions. The
long term response is geo-engineering. Because carbon trading will ultimately fail and
source of the problem – level of emissions – has not been addressed, a market will develop
for novel solutions like cloud seeding or reflectors in space. These are all technologies that
can be patented and from which vast amounts of money can be made by the corporate
sector.
Mirowski argues that you can trace the same moves from the neoliberal playbook in the
response to the financial crisis. The short-term response was to muddy the debate and
distract from the finance industry as the source of the problem. Mirowski argues that
neoliberals in the US have had considerable success in implanting the idea that government
regulatory behaviour and Government-Sponsored Entities (Fannie Mae and Freddy Mac)
were the cause of the GFC, even though there is no evidence for this at all. Secondly, the
medium term response was a selection of market-based mechanisms for state purchase of
poor performing assets, the privatisation of gains and the socialisation of losses. The longer-
term objective is to fundamentally weaken the role of government and increase the role of
the corporate sector in governing our lives. The imposition of austerity leading to waves of
privatisation and withdrawal of state services moves the agenda forward.
While Mirowski’s argument here is not compelling, he is absolutely right to be standing
back and trying to discern the big picture. It would be well worth developing the argument
and testing it against other policy areas.
Placing the protagonist
An interesting question is quite where Mirowski is coming from on these issues, politically
and theoretically.
He is clearly a man of the left, but he has little time for those seen as on the left in the
economics debate (eg Krugman, Stiglitz) and nor does he have a very positive view of
responses to the GFC such as the Occupy movement. He laments the absence of an effective
counter-narrative to neoliberalism. But he argues that this is partly a product of the
entrepreneurialisation of the self – people are so imbued with neoliberal identities that they
cannot think beyond it to a different form of social order. Again, while there is something in
this argument, it would benefit from refinement.
In theoretical terms, Mirowski draws on an eclectic range of resources but rarely does he
do so uncritically. He draws quite heavily on Foucault circa Discipline and Punish and,
particularly, the Birth of Biopolitics, but considers that Foucault succumbed to the very
neoliberal tendencies he presciently identified. He is quite critical of materialist analysts of
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neoliberalism for being too deterministic and of sociologists of science such as Donald
MacKenzie for lacking an adequate political economy.
He also has limited time for those one might naively have assumed were kindred
spirits. For example, the Institute for New Economic Thinking is dismissed as not saying
anything particularly new.62 I can see why he says that, but I don’t think it’s entirely fair. I’ve
no particular association with the INET, but it is a relatively broad church and some strands
of work under its banner are trying to do something different.
It would be fair to say that Mirowski isn’t on a mission to recruit a coalition of the
willing to charge the neoliberal citadel. Perhaps the group that gets away most lightly under
Mirowski’s gimlet eye is Old Institutional Economists like Veblen and Galbraith. It’s a little
unfortunate that the ranks of the OIE are rather depleted these days.
Where next?
Mirowski’s book is an attempt to answer the question “Why did the neoliberals come
through the crisis stronger than ever?”. At the end of the book he notes that he has “passed
lightly over some other highly contentious collateral issues”. These include:
What were the key causes of the crisis?
Have economists of any stripe managed to produce a coherent and
plausible narrative, at least so far? What role have heterodox economists
played in the dispute?
What are the major political weaknesses of the contemporary neoliberal
movements?
What is the current topography of the Neoliberal Thought Collective?
What lessons should the left learn from the neoliberals, and which should
they abjure?
What would a vital counternarrative to the epistemological commitments
of the neoliberals look like?
Is there a coherent alternative framework within which to understand the
interaction of the financialization of the economy with the larger ebbs and
flows of political economy in the global transformations of capitalism?
If one were convinced by Mirowski’s analysis then addressing these questions would appear
a sensible next step. But at the same time it feels like we need the answers to some of these
questions before we are likely to be convinced by Mirowski’s analysis. While some of it is
plausibly evidenced, some of it is rather more assertive. The issue of the “topography” of the
Neoliberal Thought Collective seems fundamental. I don’t think Mirowski’s analysis, at its
current stage of development, is anywhere near compelling on this point.
Following this list of questions, Mirowski goes on to observe (p356):
62 http://ineteconomics.org/ (Last accessed: 20/11/13)
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These are serious inquiries, demanding lavishly documented advocacy and
lengthy disputation (and maybe a different species of Mont Pelerin Society to
hash them out?), which should be on the agenda of the left. Of course, there
may not be the luxury of decades of time similar to that available to the
neoliberals back in the 1940s (with tipping points looming for world climate
and corporate domination).
I think he is right to note the issue of tipping points. Whether or not we accept the argument
that the NTC is acting as Eminence Grise in the whole affair, it is clear that current
trajectories represent the progressive self-disempowerment of states and increased corporate
domination. That may be a neoliberal utopia, but it is a dystopian future for any democrat.63
I found Never let a serious crisis an intriguing but frustrating book. It is passionately
argued and it addresses a topic of the utmost significance. There are many passages that are
illuminating. It offers ideas and hypotheses that are pregnant with possibility and worthy of
further exploration. The author lands quite a few of his punches. But, equally, he frequently
swings and, in my view, misses. The argument becomes a little too strident and a little too
assertive.
The book is erudite and ambitious. But the argument is a bit baggy. I’m not entirely sure
who the book is aimed at. Those who are already concerned about the rise of neoliberalism
and corporate power will no doubt enjoy it. But I don’t think Mirowski sees himself as
purely preaching to the converted. Yet, it is unlikely to be sufficiently closely argued to
convince the sceptic. There is a suggestion that it is aimed at the general public, but it’s
pretty heavy-going for the non-specialist reader and unnecessarily sesquipedalian at times.
One thing is for sure – if there are any mainstream economists willing to do battle with
the book then they are almost certain to hate it.
Would post-crash economics be a step backward?
21st November 2013
Discussion of the need for the reform of economics in the post-crash world continues to
gather momentum and prominence in parts of the econosphere. Wendy Carlin set out a case
for change at the FT on Sunday, while a group of post-Keynesian economists stuck their
head above the parapet in a letter to the Guardian on Monday.64
The thrust of the post-crash economics argument is not that mainstream economic
approaches should be rejected in favour of an alternative. Rather it is the more modest plea
63 http://www.theguardian.com/commentisfree/2013/nov/04/us-trade-deal-full-frontal-assault-on-
democracy (Last accessed: 21/11/13) 64 http://www.ft.com/cms/s/0/74cd0b94-4de6-11e3-8fa5-00144feabdc0.html (Last accessed: 23/11/13);
http://www.theguardian.com/education/2013/nov/18/post-keynesians-comeback (Last accessed:
21/11/13); http://www.theguardian.com/commentisfree/2013/nov/20/orthodox-economists-failed-
market-test (Last accessed: 21/11/13)
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that economics should be taught more pluralistically and contextually. Mainstream
approaches should be set alongside alternative bodies of thought. Economics students
would benefit from rediscovering economic history, genuinely institutional analysis, a dose
of philosophy, and the history of economic thought. It’s an agenda with which I have a lot of
sympathy.65
We are seeing bits and pieces of a backlash. That is inevitable.
If one embraces the belief that economics is a science characterised by the ongoing
accumulation of knowledge then these calls for recognising pluralism and a historical
sensibility will seem highly peculiar. To accept that there might be something to be gained
from studying Friedman, Keynes, Knight, Marshall, Ricardo or Smith – genuinely studying
what they had to say not just invoking their names – would be to concede the possibility
that, in fact, the discipline isn’t accumulating knowledge but, somewhere along the line,
took a wrong turning.
To depart from what might be considered the historical thread of the mainstream and
seriously consider Samuels, Galbraith, Straffa, Commons, Veblen, Marx and the like would
be more like admitting the possibility that we are on the wrong track altogether.
What a pluralist and contextual economics education would or should look like is an
intriguing question. There are plenty of people now working on it. Who might be in a
position to teach it is an equally interesting question, given that part of the problem is that
the discipline is suffering from amnesia.
But, of course, pluralism doesn’t necessarily mean the curriculum has to become more
backwards looking. A couple of weeks ago I suggested that a focus upon ethics and the
unavoidable ethical commitments of all economic theorising would inject a valuable
contemporary critical dimension to economics education. Another possibility is, rather than
simply looking backwards, to explore alternative economics perspectives that are currently
active research programmes.
I’ve just scooted through Brian Arthur’s Complexity economics: a different framework for
economic thought.66 Complexity economics is an obvious candidate for an alternative
paradigm. Arthur argues it is a fundamental reconceptualisation of the economy.
Equilibrium and substantive rationality are rejected as the starting point for analysis. The
economy is algorithmic and evolving:
A picture is now emerging of the economy different from the standard
equilibrium one. To the degree that uncertainty and technological changes are
present in the economy – and certainly both are pervasive at all levels –
agents must explore their way forward, must “learn” about the decision
problem they are in, must respond to the opportunities confronting them. We
are in a world where beliefs, strategies, and actions of agents are being
“tested” for survival within a situation or outcome or “ecology” that these
65 See http://www.alexsarchives.org/is-a-little-economics-dangerous/ 66 http://ineteconomics.org/research_note/complexity-economics-different-framework-economic-
thought (Last accessed: 20/11/13)
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beliefs, strategies and actions together create. Further, and more subtly, these
very explorations alter the economy itself and the situations agents encounter.
So agents are not just reacting to a problem they are trying to make sense of;
their very actions in doing so collectively re-form the current outcome, which
requires them to adjust afresh. We are, in other words, in a world of
complexity, a complexity closely associated with nonequilibrium.
Arthur neatly encapsulates how embracing complexity changes the perspective. It
transforms the focus of analysis in a way that addresses the weakness of classic comparative
static analysis. Rather than focusing on equilibrium states and telling informal stories about
how we get from one to the other, the analysis focuses on the movement:
Until now, economics has been a noun-based rather than verb-based science.
It has pictured changes over time in the economy function as changes in
levels of fixed noun-entities—employment, production, consumption, prices.
Now it is shifting toward seeing these changes as a series of verb-actions—
forecast, respond, innovate, replace—that cause further actions.
If equilibrium is achieved it is temporary and more or less transient. Structures emerge as
mesolevel phenomena. From a complexity perspective time and history matter.
To some extent complexity economics is rediscovering themes that economics has
forgotten. The argument is that when economics decided to model itself on nineteenth-
century physics the focus narrowed to questions of allocating fixed resources. Had
economics instead chosen biology as its model then the focus would have been on the
formation of the economy and its evolution: how the economy emerges in the first place and
how it changes structurally over time. These are not questions that can be satisfactorily
answered in an equilibrium framework.
These are, however, themes that early classical economists were entirely comfortable
addressing. Indeed, they were thought to be the core of economic thought. But they are
themes mainstream economics rather misplaced after the late nineteenth century. They
nonetheless continued to preoccupy many flavours of non-orthodox economics. The story of
how economics came to expunge historical time and its implications from its core theoretical
concerns is fascinating in itself. For anyone interested, Hodgson’s How economics forgot
history provides a valuable intellectual history.67
Arguably complexity economics simply allows a return to old questions using new
tools. Tools which, though computational rather than analytical, may not be written off as
irredeemably “ad hoc” by mainstream economists.
Complexity economics is, of course, not new. It started to develop some momentum in
the 1980s through the work of the Santa Fe Institute. But it is now gaining broader interest
and acceptance. That has probably been helped by the fact that it has been effectively
67 Hodgson, G.M. (2001) How economics forgot history: The problem of historical specificity in social science,
London: Routledge.
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popularized. Indeed, perhaps the best place to encounter complexity economics for the first
time is Beinhocker’s The origin of wealth.68
The complexity economics research programme is by no means unproblematic. It raises
all sorts of interesting ontological and epistemological questions, particularly about the
scope for transferring learning from computer-based simulations to real world economies. It
could be argued that it represents no more than a way of taking the concerns of Austrian
economists with uncertainty, knowledge, and the entrepreneur and draping them in a new
more ‘scientific’ garb. It is susceptible to similar criticisms. Institutional economists, for
example, would highlight that complexity economics can lead to some quite conservative
conclusions about the wisdom of market mechanisms and a similarly inadequate
understanding of social structures and social power.
My aim is not to advocate on behalf of complexity economics specifically, but rather to
observe that there is plenty going on within contemporary economics – broadly conceived –
that is grappling with some of the major social questions that mainstream economics barely
touches upon. Of course this resonates with classical economics. It could be no other way. To
address these questions is not to succumb to an unhealthy and unproductive preoccupation
with historical curiosities that the truly enlightened have long moved beyond.
Questions of co-ordination, learning and change over time are at the heart of social life.
That hasn’t changed. And it isn’t going to. They need to be at the heart of an education in
economics.
68 Beinhocker, E.D. (2006) The origin of wealth: Evolution, complexity and the radical remaking of economics,
London: Random House.
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