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Has spring sprung?

August 20, 2013

About 18 months ago I wrote  a post called the Economics Spring which argued that the Keen/Krugman debate represented a tipping point in economics. So far my post is one of the most popular on Renegade Economist, with nearly 16,000 page views. It got  a lot hits on my own site as well as a few retweets.

I wrote that: “Most economists failed to understand or predict the global economic crisis, and should therefore be deposed. Just as the despots of north Africa and the middle East crumbled in the face of a critical mass of popular opposition, so too mainstream economics is looking shaky in the fresh-faced glare of laymen.” Establishment economists have been so bad at understanding the crisis that a lot of knowledgeable outsiders look far more convincing — and their remedies better.

Krugman’s acknowledgement of Keen was unprecedented: Keen was a guy from a supposedly minor Australian university who wrote a demolition-job of mainstream economics over a decade ago which rejected almost the whole mainstream. Until last year he was completely unheard-of outside heterodox circles. Here he was having a bust-up with a Nobel prizewinner, one of the most-read economics bloggers.

But has economics really changed?

In some ways, yes. Keen continued to work the media circuit, winning lots of attention and securing 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 Real World Economic Review has 23,000 subscribers and its blog remains a go-to destination for questioning economists. The launch of the online open-access World Economic Review journal met with flood of sign-ups. There’s even a whole new institute dedicated to new economic thinking.

Krugman, surely one of the most exciting academic bloggers, continues to skirmish with the fringes, leading some to suggest that he is becoming progressively more radical. Three times this year the New York Times columnist has mentioned Michal Kalecki. Last week he said the neoclassical synthesis was breaking down: practically the equivalent of a Jew rejecting the Torah. His 2009 New York Review of Books essay said that the previous two decades of macroeconomics had been a “waste of time”. Later he called macroeconomics a “sorry spectacle of unnecessary ignorance”.

Duncan Weldon said that Krugman’s neoclassical synthesis post was one of the most significant blog posts on economics he’s ever read. In itself it’s a huge admission for a successful academic economist to admit that power, rather than the marketplace of ideas, dictates which theories become prominent. Next Krugman noted the decline of new growth theory, the next big thing when I was a student.

Other academics have similarly started to question the very essentials of mainstream economics. Here’s Mark Blyth of Brown University:

…a notion I used to give short thrift to but am really having to rethink this now – the old Marxist notion of the long run crises of overaccumulation and overproduction.

Now I teach [the Philips curve] every year and I have two slides.  The first slide I use is the data from Britain in the 1970s that Milton Friedman used to calibrate this model, to prove it is right.  It only has nine data points, I mean Jesus Christ it’s ridiculous – nine data points for a whole macro theory.  But it does show this pretty nice pattern and we’ve been teaching this stuff ever since in every macroeconomics class.  But the next slide I show is the data from Britain from 1992 to 2007.  It’s based on twice as much data and it’s horizontal.  So what does that mean?  It means basically that the model is completely wrong empirically.  It means that in fact you can have pretty much any level of unemployment you want and a constant rate of inflation, which is actually the world we live in now.

So what is the first function of economic knowledge?  It’s prejudice.  It teaches you to think about the world in a certain way so that your bottom line response is: no you can’t do that because of the Phillips curve.  Government action is pointless and will only produce more inflation.

Never mind the lefties; the crisis already prompted a catalogue of mainline economists to question tenets of the mainstream, people like John Kay and former Bank of England monetary policy committee member Willem Buiter. It seems like not a month goes by without a press article lamenting the state of economics.

But do a few newspaper pieces, blogs and retweets make any difference?

Maybe not: the curricula and journals show little sign of changing. The latest issue of the American Economic Review features such page turners as: “Does Disability Insurance Receipt Discourage Work? Using Examiner Assignment to Investigate Causal Effects of SSDI Receipt.” (The answer: yes, mostly). The Quarterly Journal of Economics has a ground breaker on: “Rules with Discretion and Local Information.”

The Harvard undergraduate economics guide continues to take the very standard view that:

An economic analysis begins from the premise that individuals have goals and that they pursue those goals as best they can. Economics studies the behavior of social systems – such as markets, corporations, legislatures, and families – as the outcome of interactions through institutions between goal-directed individuals.

The syllabus follows the classic, mainline perspective, with no requirement to study the history of economics or the history of economic thought, let alone contemporary economics traditions other than the neoclassicals. Harvard is probably representative of most universities, despite a walk-out two years ago by students who said that their course pushes a “strongly conservative neoliberal ideology.” In this they echoed a 2003 Harvard petition and the earlier French post-Autistic student movement, which criticised the neoliberal stance of the mainstream.

But as Krugman says, maybe the malcontents don’t need to bother with the journals any more.

…the amount of good stuff — stuff delivered in real time, on blogs open to anyone who wants to read rather than in the pages of economics journals with a few thousand readers at most — is amazing. When it comes to useful economic analysis, these are the good old days.

In several cases — Syria aside — the Arab spring wasn’t a wholesale confrontation of power; it was a gradual simmering-to-the-surface of widespread discontent. New media like Facebook and Twitter helped fan the flames. Often, true revolutions occur when radicals subvert the status quo and simply start doing new things in new ways. Without wishing to sound like a dedicated follower of Foucault, trying to fight power structures only tends to reinforce them. You’re never going to beat an army.

Economics is a constantly mutating phenomenon, and it’s quite difficult to define exactly what it is or what the ‘mainstream’ is. Deirdre McCloskey prefers the term ‘post-Samuelsonian’. Even the term neoclassical presents difficulties — does it include recent developments like behavioural or experimental economics? Some don’t even think that the economics of information for which the likes of Stiglitz and Akerlof got their Nobel prize is mainstream. Even self-declared new Keynesians like Krugman, Stiglitz and Mankiw have thought of themselves as outsiders. I’m not sure that Krugman is quite the upstart that some seem to think. Dropping a few marginalised names does not a radical make.

Some fringe economists despair the slipperiness of the mainstream, but diversity and fragmentation are surely assets. It’s just about conceivable that the current academic journals and courses will become more and more irrelevant and that questioning, knowledgeable outsiders and critical students will simply walk past the academic gatekeepers into new, pluralistic territory which reflects the ideas of the whole world, not just Europe and the United States — and where no single method dominates. People will increasingly surf the Internet and find out for themselves. The big questions, in my view, are to what extent the open economics of the blogosphere and web will supersede the paid-for paper journals, and whether new ideas start filtering through to policy. If the rest of the world is anything to go by, the future is bright (with a few cloudy spells).

2 Comments leave one →
  1. arijitbanik permalink
    August 22, 2013 8:13 pm

    In the battle of ideas the audience in the corridors of public policy and the theatre of public discourse do not currently understand the difference between orthodox mainstream theories (i.e., monetarism, general equilibrium theory, neo-Walrasian theory, rational expectations theory, neoclassical synthesis Keynesianism, new classical economics, and New Keynesianism) and heterodox theory.
    The latter is often framed as ‘nuts’ thanks to people like Mark Thoma being cited by The New York Times to give his views on modern monetary theory, while the former packages old wine in new bottles with divination masquerading as science with the promotion of market monetarism and NGDP targeting.
    This isn’t a call to embrace MMT but one to re-consider pluralism.
    I sincerely hope that I am wrong and you are right but short of a purging of the old guard and the freshly indoctrinated new guard that is replacing them we will not see a much needed return to political economy (for example) as a central tool to guide all manner of policy making. Rather than much needed forward looking schemes such as European Recovery Program and United Nations Monetary and Financial Conference we have the expectation today that economies will structurally adjust thanks to pricing signals knowing full well that current schemes such as EMU and GATT leave a lot to be desired in terms of architecture.


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