Economics After the Crash Alex Marsh

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

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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.

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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)

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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.

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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

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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)

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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.

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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)

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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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