The naughty economists should swim in the mainstream
So says Paul Krugman, who talks of
an upwelling of frustration on the part of heterodox economists. You see it in Thomas Palley’s complaint about gattopardo economics, which I discussed yesterday; you see it in the demands for a radical change in the economics curriculum, which Simon Wren-Lewis wrote about yesterday.
But Krugman says heterodox critics are wrong to complain that the economics discipline didn’t predict the crisis. Governments failed, he says, because they didn’t listen to economists enough, rather than because mainstream economic advice was wrong.
That’s a bit like saying a flower needs more weedkiller to make it grow. The idea that European or American civil services somehow didn’t feature teams of mainstream macroeconomists beggars belief. Where did those Treasury experts study? The moon?
And where were all those radicals at the Federal Reserve? Alan Greenspan: somehow not mainstream enough? Come on.
What about the heterodox articles that dominated the American Economic Review over the last decade? Ah. They didn’t exist.
Krugman’s diagnosis, that economists didn’t recognise the emergence of shadow banking, is so specific and minor that it makes me wonder whether he’s having some sort of internal credit crisis himself. Surely a thinker with the breadth of knowledge to write so lucidly about US and global political economy can see further than that?
For the problems of mainstream economics are much deeper and problematic than a simple failure to understand the emergence of hedge funds and other financial players. Even the idea that governments “should” have listened more to saltwater economists is naive. It fails to acknowledge the reality that power and vested interests dictate which kinds of theory gain prominence and influence policy.
Heterodox economists rightly preach pluralism, but a lot of economics is really just ideology. It’s a system of thinking designed to justify relations of production within the current economic order. It’s no coincidence that mainline economics holds as its basic tenets the concepts of individualism, equilibrium and a strict form of rationality, or that it pretends crises don’t happen and that inequality somehow motivates people to work harder. Saying that markets are efficient is a statement of ideology not science. Basing policy on these sort of assumptions helps capitalism persist; it oils the machine.
This neglect of power and interests relates to another major failure of mainstream economics — its neglect of methodology, meaning the approach to knowledge which concerns the selection and application of methods. A pluralistic approach requires a methodological perspective. How do we choose methods? What meta-perspective enables us to evaluate schools of thought? Sheila Dow’s The Methododology of Macroeconomic Thought is a classic. Her Economic Methodology: An Enquiry, is just as good. When I studied political theory the only compulsory course was “Methods and controversies in the history of political thought”. Methods, controversy and history are mostly avoided in economics teaching.
Economics as taught in most universities is laughably universalist. For example it’s ludicrous that of 76,000 papers published in top economics journals between 1985 and 2005, more were about the United States than the entire rest of the world. Economists think they can speak for everyone and that the world behaves in the way they preach in their unrealistic models, but how can economists know, when they’re mostly based in Europe or America and they don’t even study the rest of the world or go there?
I think the big questions that economists should be asking are (a) why global inequality is getting worse and that most people remain poor (which to be fair Krugman himself also claims to prioritise — hence his recent obsession with Thomas Piketty), and (b) why we can’t live as part of nature, rather than exploiting or dominating it. As seen in Krugman’s shadow banking example, far too much of mainstream economics is trivial or overly-technical, focusing on minutiae. This gives the impression that the big problems have been solved and that we’re just tinkering now. This view is far from the truth, and promotes complacency about glaring problems.
One thing about which Krugman is right is the importance of economic history. In the absence of absolute certainty about the outcomes of theory, and in a situation where we are dealing with the economy as an open system, it’s obviously vital to study what happened in the past. As Mark Twain wrote, history may not repeat itself, but it rhymes. Many highly-trained economists know nothing about economic history. A book like John Kenneth Galbraith’s The Great Crash 1929 should be compulsory reading. If it had been, 2007/8 and its aftermath might have been less likely. Economics needs to be far more empiricist — not just by doing more econometrics but by encouraging the use of case studies and immersion in context.
Lastly, Krugman is wrong to marginalise the frustrations of the heterodox as “a sideshow in the larger scheme of things.” The latest call for reform is only one of many.
Steve Keen, as radical a reformer as they come, seems rarely to have been off TV or out of the newspapers over the last year or so, which has no doubt helped generate funding for his Minsky dynamic monetary model. Partly because of his efforts, endogenous money, modern monetary theory and post-Keynesian economics are more prominent. The Bank of England even recently issued a paper accepting the idea of endogenous money, something about which the heterodoxy had been banging on about for decades. The Real World Economics Review and the online open-access World Economic Review have built tens of thousands of subscribers and the RWER blog remains a go-to destination for questioning economists. The Institute for New Economic Thinking is supposed to promote alternative strands of economics (although it is seen as increasingly conservative).
Several big-shot academics have similarly started to question the very essentials of mainstream economics. Mark Blyth of Brown University admits he’s had to rethink some of his basic ideas. John Kay and former Bank of England monetary policy committee member Willem Buiter similarly question the fundamentals. Krugman himself even points out that Larry Summers has accepted the thesis of secular stagnation, the idea that developed capitalist economies might be set to dawdle for years to come rather than roaring back from crisis. These big beasts would have been less likely to rejig their underlying beliefs had it not been for the existence of a readily-available body of heterodox thought developed in opposition to the mainstream.
So Krugman is mistaken when he trivialises the heterodoxy and tells those naughty economists to paddle to the centre. Student and academic dissent has been building gradually over the last decade amidst a wider public questioning of economics. The problem isn’t that we ignored mainstream economists, it’s that we paid them too much attention. Heterodox economists should keep swimming, strongly, wherever they choose.