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Rodrik on economics

May 10, 2013

Dani Rodrik is one of my favourite mainstream economists. The book One Economics: Many Recipes is actually useful for practical development economics, unlike most of the standard stuff. Rodrik’s  methodological one-dimensionality, revealed in the title of his book, is less useful. Economics features many flavours, including at least Keynesian, institutionalist, Marxist, feminist, Austrian, Ricardian and neoclassical. So Rodrik is factually mistaken.

He’s also unhelpful. Pluralism would be a much more healthy state for the economics profession, reflecting the range of actually existing schools of thought and shedding light on hitherto unexplained economic problems. No other social science is so one-dimensional. It is arrogance to suppose that one particular method can explain most things. Lots of other disciplines are pluralist because they reflect our inability to know for sure whether we’re right. A bit like parliamentary democracy, which features several competing perspectives, the non-economic social sciences generally allow various views rather than stamping out or ignoring the opposition.

Statements like the following, in this interview by Rodrik, are worrying:

…what we teach our students in the classroom – the advanced students if not the undergraduates –and what we talk about in the seminar room are typically much more about the myriad ways in which markets fail.

What? It’s OK not to teach undergraduates that markets fail? I continue to find it ridiculous that you can go through an entire undergraduate degree starting from the standard assumptions of perfect competition, foresight, a lack of externalities and rationality. When I did undergraduate economics I found these assumptions bizarre, and doubtless so do many current students. Markets clearly do fail, and catastrophically did so during the 2007/8 crisis. Many people think that markets fail all the time.

Why start from a perspective that suggests that everything is smooth and finely-balanced and relax those assumptions later, when nothing about the economy is smooth and finely-balanced? Perfect competition almost never happens. People aren’t generally rational, nor do they possess anything approaching 100% foresight. Equilibrium is an ageing physics metaphor that can’t describe how markets really work. Why not start from a vaguely realistic perspective? Surely a method which was somewhat nearer the actually existing conditions of human society would have a better chance of explaining it and predicting the future. Starting from the ludicrous idea that markets never fail is a bit like trying to reach New York by starting in Mongolia. It’d be quicker to start in Washington D.C.

The well-known cock-ups of economics — Black-Scholes, the efficient markets hypothesis, Modigliani-Miller and more — result largely from the blinkered attitude of the mainstream. Economists felt certain that the core methodological foundations of the discipline were well-founded, and none of the tiny minority of dissenters were listened to. Some highly contentious theories weren’t exposed to the fresh air of radical critique.

Rodrik is more interesting when he says that:

…contemporary economics in North America has one great weakness, and that is the excessive focus on methods at the expense of breadth in terms of social and historical perspective. PhD programs now train applied mathematicians and statisticians rather than real economists. To become a true economist, you need to do all sorts of reading – from history, sociology, and political science among other disciplines – that you are never required to do as a graduate student. The best economists today find a way of filling this gap in their education. I consider myself very lucky that I was a political science major and did a master’s in public affairs (as it is called at Princeton) before I turned to economics. I say lucky, because some of my best work – by my judgement, at least – was stimulated by questions or arguments I encountered outside of neoclassical economics.

There are powerful forces having to do with the sociology of the profession and the socialization process that tend to push economists to think alike. Most economists start graduate school not having spent much time thinking about social problems or having studied much else besides math and economics. The incentive and hierarchy systems tend to reward those with the technical skills rather than interesting questions or research agendas.

Rodrik’s right that too much of modern economics is just applied maths and statistics. But he surely understands that contemporary economics by definition excludes politics, history and sociology? Neoclassical economics is itself purposefully one-dimensional, thinking that it can achieve everything ahistorically and with no reference to society as a multifaceted and power-based institution which is always political. It’s no good for him to say that he was “lucky”. Every student should be lucky enough, like Rodrik, to study realistic political economy. In this sense the statement above contradicts itself. Rodrik implicitly understands that the economics profession needs to be radically overhauled — methodologically — so that it stimulates students to answer questions or arguments outside of neoclassical economics.

This is in no way to suggest that my own sort of economics — which features bits of Keynes, Marx, Kalecki and Hirschman and Sen — is correct; only that we should listen to a whole range of perspectives so as to be sure we get things right, and that we should argue about them rather than pretending there is only “One Economics”.

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3 Comments leave one →
  1. Yurendra permalink
    May 10, 2013 3:19 pm

    Really interesting, Dan, very much agree with you. In addition to market failures, I would also add that the received wisdom that ‘markets are given’ also needs to be question. Do markets emerge organically or are they constructed (Bourdieu, Polyani)? If it is the latter, which I would argue is, then market failures is the product of what O. Williamson refers to as ex-ante and ex-post misalignment. Markets (a politically constructed institution for exchange) is designed ex-ante to affect behaviour ex-post. And because we have bounded rationality (Simon) it is impossible to get it right. Hence, markets (or rather policies that structure markets) like all other institutions need to enter into a reflexive process (Dan Gay) to adapt and adjust. In my opinion (development) economics, and policies that emerge from it, needs to work upwards from here.

    • May 14, 2013 10:40 am

      Yes, there’s no such thing as ‘the market’ as an unchanging, ahistorical entity; something which works the same across time and space. Markets are built within and by politics and social relations. The economy is a social process. The markets that exist in the islands of Vanuatu are an entirely different animal to the New York stock exchange. The buying and selling of Bitcoin isn’t similar to the Bhutanese apple market. There really are very few parallels between these processes, to the extent that undergraduate discussion of ‘core principals’ or ‘the basics’ is virtually meaningless. Supply and demand curves, for instance, don’t slope up or down at uniform angles, they are broken or non-existent, bend backwards, etc. I even doubt the whole conceptual basis in terms of disconnected individuals operating in their own self-interest.

      And as you say, there’s almost no room at the moment for discussion of reflexive feedback loops in which policy determines markets, and the resulting outcome influences policy, and so on. We’re stuck in this methodological quagmire of positivism and universalism in which mainstream so-called economic ‘science’ apes the imaginary methods of the natural sciences. Development very well highlights the problems facing the discipline.

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  1. Rodrik: almost there, but not quite | Emergent Economics

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