The moribund state of economic theory

I wrote about Hugh Goodacre’s post on the History of Economics discussion thread under the heading, How many economists can dance on the head of a pin?. This is what he said in his post:

Sir, The moribund orthodoxy that currently exercises such an inflexible grip on university economics departments will, as Wolfgang Münchau comments, inevitably face a challenge, and this “will come from outside the discipline and will be brutal” (“Macroeconomists need new tools to challenge consensus”, April 13). The orthodoxy has brought this dismal prospect on itself through the brutality with which it has purged those departments of any other school of thought than its own.

Indeed, in its extreme version, the orthodoxy’s doctrine holds quite simply that there are “no schools of thought in economics”, a totalitarian assertion all too true in most economics departments today, so ruthless has been the purge of alternatives. As a result, the different approaches to economic issues of Adam Smith, Bentham, Ricardo, Marshall, Keynes, Friedman and so on are all relegated to the fringe subject of the “history of economic thought”.

This is indeed a 1984 situation, in which the very idea that debate could exist on how to approach economic issues is regarded as a mere historical memory, and consequently of purely antiquarian interest.However, economics students are increasingly demanding a pluralistic curriculum, as discussed by Martin Wolf in “Aim for enlightenment, technicalities can wait” (April 11). Similarly, the “fossilised habits of thought” entrenched in much of the economics professions are facing increasing criticism from within the academic world (see, for example, “The world no longer listens to the deaf prophets of the west”, Mark Mazower, April 14). Let us hope that all this pressure from students, from the worlds of journalism and of interdisciplinary debate, will combine to bring university economics departments back into the world of liberal academic life from which they have for so long isolated themselves.

I left a very substantial space in time for others to say their piece, but after almost a week, I felt I had waited long enough. This is what I wrote:

I have let six days go by to see if anyone else was interested in Hugh Goodacre’s message on the moribund state of economic theory. The more time goes by, the more I am convinced there is this subject taught at universities called “economics”, and there is this aspect of the world that is called “the economy”, but the first has only a remote relationship to the second. And I could not agree more about the following in the letter Hugh quoted, with two minor qualifications which I will come to:

‘In its extreme version, the orthodoxy’s doctrine holds quite simply that there are “no schools of thought in economics”, a totalitarian assertion all too true in most economics departments today, so ruthless has been the purge of alternatives. As a result, the different approaches to economic issues of Adam Smith, Bentham, Ricardo, Marshall, Keynes, Friedman and so on are all relegated to the fringe subject of the “history of economic thought”.’

My first qualification is the exclusion of John Stuart Mill and second is the inclusion of John Maynard Keynes. Mill is excluded because he has become so far off the beaten track that virtually no one even thinks of his contribution to economic theory, which was massive and arguably a good deal greater than Ricardo or Bentham. Ricardo could no longer be read to gain insights into the operation of an economy, while with Mill you certainly can.

But the inclusion of Keynes is a mystery. Virtually all macro is Keynesian. Who nowadays writes contra-Keynes? Is there any economist in the world writing today – other than myself – who is associated with a strident anti-Keynesian perspective? I can think of hardly a one, and there are not many more than a dozen. Following the dismal failures of fiscal and monetary policies to restore growth – both of which I consider Keynesian to their roots – I cannot understand why there has been so little interest in a post mortem of some kind and the investigation of alternatives.

I can only wish Hugh and his associates the best of luck in their quest to broaden the spectrum of opinion that are considered worth consideration within schools of economics. It is long overdue.

If I knew how to write these things without antagonising the others, I would. But years in the midst of a political environment, and then all this blogging, has left me with a style of writing not necessarily perfectly equipped for the academic world. But following my post was this one from one of the great economists of the world, Professor Richard Lipsey, from whose world class introductory text I had previously learned and taught. And this is what he said:

I agree completely with the others who say that many modern economics departments (but not, I think, mine) admit of no conflicts among, or even the existences of, various modern approaches. It is a mystery how anyone can hold to this view in the light of institutionalists who emphasise the importance of institutions, ‘Newtonians’ of various sorts who use maximising equilibrium models and evolutionists who emphasis evolving systems without static equilibria. And this only mentions a few of the competing visions of how best to study the economy.

I do not suppose this is the place to dwell on the contentious additional point raised by Steve Kates but I would observe that there is a world of difference between traditional Keynesian, New-Keynesian, and post-Keynesians. The econometric models of my country’s Department of Finance and its Central Bank use updated and expanded Keynesian income-flow models. So, like it or not, updated traditional Keynesian concepts, insights and measurement categories are still useful in the work of applied economists.

Since as a text book writer, I am often accused of accepting the modern no-differences view, I mention below three of my recent publications that put forward alternative visions to the prevailing one. This is not only to set the record straight but in the belief that they might be of some interest to those who agree that creative criticisms of the prevailing view are needed.

I would also say that in going ahead, we should not throw the maximising baby out with the bath water of its overuse. Partial equilibrium, maximising models of some markets, such as foreign exchange and wheat, are useful.

Recent non-orthodox recent publications by Lipsey

“Does History Matter: Empirical Analysis of Evolutionary versus New Classical Economics” (with Kenneth I Carlaw), Journal of Evolutionary Economics, 2012.

“Some Contentious Issues in Theory and Policy in Memory of Mark Blaug,” in Mark Blaug: Rebel with Many Causes, M. Boumans and M. Klaes (eds.), (Cheltenham: Edward Elgar), 2013

“The Phillips Curve and the Tyranny of an Assumed Unique Macro Equilibrium” Simon Fraser University Discussion Paper, 2014

He may not agree with my anti-Keynesian views, but sees it properly as a legitimate perspective. More importantly, if Richard Lipsey sees the moribund nature of economic theory as a genuine issue to be considered, there are some very influential people who have seen the problem and are willing to add their names to the list of those who are dissatisfied with standard economic teaching and practice. I don’t know how much dynamite it will take to break up the logjam, but this is certainly a very much needed assist.

Dealing with the inflexible grip of an intolerant orthodoxy

This was a note posted to the Societies for the History of Economics three days ago.

The Guardian, Tuesday 21 October 2014

Ha-Joon Chang powerfully argues the case that it was “an economic fairytale” which “led Britain to stagnation” (Opinion, 20 October). It may be added that our universities bear a heavy responsibility for this situation. Certainly, it cannot be denied that the fairytale paradigm (“supply-and-demand”, competition in the market, and all the rest of it) can be applied to any economic issue. The point, however, is that the currently dominant adherents of this approach deny that any other approach can even claim to be economics at all; indeed, adherents of other schools of thought have very largely been purged from our university economics departments.

Proponents of the fairytale justify this stranglehold by claiming that all former insights into the economy that have stood the test of time have now been incorporated into their own – narrowly quantitative – “modelling” framework: thus, Keynes’s discussions of uncertainty are reduced to “models” of expectations, Hayek’s alternative to neoclassicism into models of “price messages”, Marx’s heritage into models of inequality, Ricardo’s into “rent-seeking”, and so on. Consequently, so the argument goes, there is no longer any basis for the claim that there are different schools of thought in economics. There is only one.

It is the inflexible grip of this intolerant orthodoxy on university economics departments which has so signally distanced academic economics from engagement in discussion and debate outside the academic arena, much of which is directed towards questioning its fairytales. It is, by the same token, very encouraging that students who reject their approach have in the past year or more been reintroducing into university economics departments the kind of vibrant debate which ought to lie at the heart of academic life.

Dr Hugh Goodacre

Member of the academic board, University College London

I could not have agreed more so this was the reply I posted today:

I left Hugh Goodacre’s interesting post alone for the last few days to see if anyone else were interested. Apparently not, but I am. He made two points. First that the monopoly position of the economic mainstream, which he described as “this intolerant orthodoxy”, needs to be confronted so that other approaches to thinking about economic theory are brought into the curriculum. And then second, he notes that there has been the start of a kind of uprising amongst economic students who believe they have been deprived of the kind of broader education they would prefer but do not know how university departments can be encouraged to teach it.

I am in complete agreement with the need to bring these various other traditions into mainstream debate and am also working with the student movement, the so-called “Post-Crash Economics Society”, which coincidentally just last week had its first meeting in Australia.

There are many more ways to approach economic questions than those found in the confines of the mainstream. There has also been such a failure of the economic theory to provide much guidance in getting our economies out of the problems we are now in, that I find it a scandal how little effort has been made to have a post mortem on what went wrong. And when I think of what it is that went wrong, I am not referring to the frequently raised question about why was no one able to foresee the GFC, but the more significant question, which is, why are the policies that have been introduced to restore our economies to health not working?

The Post-Crash Economics approach is one way of going about it. But given my first experience here I have doubts about whether this is much of an answer even though the right questions were being asked.

The main speaker had come all the way from Manchester to discuss what they had in mind. And while there were various moments when his own underlying agenda was all-too-obvious to me as a long-ago member of the left, his final slide had the words “It’s time to challenge the orthodoxy” and showed a woman with a “power to the people” fist in the air.

I therefore asked the first of the questions from the floor, which was more of a comment than a question. And what I said was something like this

“If you would like to set up a group that widens the study of economics and introduces the full range of the various schools of thought to the education of economics students, then I am with you. But if you are going to just use this grouping as another version of the ratbag left, then you will do nothing other than create one more meaningless structure which someone such as myself will have nothing to do with. Your presentation was not neutral. You are a person of the left, which is all right since many people are. But you will only succeed if what you do really is neutral between all of the various groups that find neo-classical economics wrong in important respects. Economics, however, is not an easy subject that someone without formal training can choose amongst theoretical perspectives without serious study. If this is just one more self-indulgent anti-capitalist rant, then this will go nowhere. You cannot ‘democratise’ the study of economics as you described your ambition as if economics can be some kind of all-in enterprise where everyone’s opinion counts for one and no one’s counts for more than one. If you are genuinely interested in broadening the perspectives students receive, then, but only then, will you have the support of those of us from a more market-oriented perspective, or indeed, from anyone with an interest in the fullest development of economic theory.”

To be quite blunt about it, economic students are in no position to suggest how economic theory ought to be taught or what the content of their courses ought to be. And even while I agree with them that there is a large problem with mainstream economic theory, and I am pleased to find they are curious about other approaches, I cannot see how they can have much to say about which economic theories are the most appropriate. It is an issue to be decided within departments of economics and amongst economists themselves. They are absolutely right to seek a wider set of perspectives but I am not sure they are going about it in the right sort of way.

My own version of what these students have sought was proposed in my Defending the History of Economic Thought (Elgar 2013). In my view, the ideal place for debates among the various economic traditions is within the study of the history of economic thought. This is where it should be. Such discussions should be found on our websites, in our journals and as an important part of our conferences. Every one of these heterodox traditions has a history of its own that is an essential element in understanding these theories. Whether Austrian or Marxist or anything else between, each focuses on its own historical development as a way of understanding its own core concepts. It is, sadly, only the mainstream that ignores its history, which is why HET has almost disappeared from within most schools of economics.

I not only think this is part of the means to save the history of economic thought from extinction, but it would also be a valuable addition to the education of economists. The most important ability an historian of economic thought must have may be an ability to make sense of the views of others. It is why HET should be a forum for discussing the widest range of perspectives so that we can all learn new things from each other.