The civil war within economics

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Manchester University’s Post-Crash Economics Society (PCES) released a report recently into the way economics is currently taught at Manchester, which is relevant to economics teaching at universities worldwide.

Their well articulated advocacy for pluralism in economics teaching, where neoclassical approaches are just one of many analytic techniques in the curriculum, has tapped into the current media disquiet with economics.

The involvement of the Bank of England’s new Chief Economist, Andrew Haldane, certainly helped, and the report has now found media coverage at the Financial Times, the Wall Street Journal blog, The Independent, and Paul Krugman’s New York Times blog.

In this article I first provide an overview of the PCES report in the context of the modern history of economics and the dissenting voices that came before them. Then I examine the tribal defences raised by the mainstream in response to it, which only serve to reinforce the urgency of the task of transforming economics into a socially valuable endeavour.

What is it all about?

The PCES report provides a concise overview of the systematically narrow and outdated teaching approach in economics, which unfortunately simply reflects the mainstream practice of economics. It highlights how the economics profession, and economic teaching, has seen a ‘great narrowing’ over the past two decades, all but redefining the discipline away from the study of economic phenomena, to the study of a particular family of equilibrium marginal models.

At a practical level the report offers guidance for improving teaching, and a wholeheartedly agree with the points made, which I summarise as follows (emphasis is quoted text)

  1. Economics education should begin with the study of economic problems, where economic phenomena are outlined and the student is given a toolkit and must evaluate the strengths and weaknesses of how different theories explain different phenomena.
  2. Introduce pluralism so that students understand that different models and theories can be applied or are most useful in different situations. Students should be able to consider a variety of theories before forming judgements. This is important because economic theory is not universally applicable and much depends much on institutional, historical and social contexts.
  3. Include the study of institutional power structures and politics. In doing so, students should be aware of the ethics of being an economist and a consideration of the ethical consequences of economic theory.
  4. Ensure that the philosophy of economics, or the more generally the philosophy of science, forms a core part of the curriculum. Student should be able to understand which assumptions are justified in a scientific theory and how rigorous must the ability to falsify a theory must be.
  5. Finally, provide students an understanding of the historical development of a particular model or economic paradigm in order to contextualise the approach and provide insight into the problems it was designed to solve and how context influenced its formation.

The PCES report, and its proposed reforms, is itself part of a recurring theme in the history of economics. In 1973 Joan Robinson tried to revolutionise economics teaching, writing a textbook reflecting most of the reforms advocated by the PCES. Unfortunately that book is all but forgotten in economics. I certainly wish Robinson had been successful, as it would have deterred the next generation of top economists from merely repeating the nonsense that went before them.

In a strange historical coincidence, William Baumol complained of poor teaching of economics as far back as the late 1930s. At the time he found the teaching ignored what was then the cutting edge work of Keynes and Joan Robinson herself.

In 1968 it was the Union for Radical Political Economists that set about disrupting the discipline. By 1972 this movement had agitated so successfully that the then President of the American Economics Association John K Galbraith, a supporter of the movement, noted in his 1972 Presidential address to the Association that “For a new and notably articulate generation of economists a reference to neoclassical economics has become markedly pejorative”. He went on to say

Neoclassical and neo-Keynesian economics, though providing unlimited opportunity for the demanding niceties of refinement, has a decisive flaw. It offers no useful handle for grasping the economic problems that now beset the modern society.

But nothing changed.

In 1992 the Foundation for European Economic Development (FEED) funded work that produced a Plea for a Pluralistic and Rigorous Economics, which was published in the American Economic Review.  Again, nothing.

More recently the Post-Austistic Economics movement emerged in Paris in 2000 with a similar mission to reform economics, followed closely by a proposal to open up economics by a group of PhDs at Cambridge in 2001.

In 2003 Harvard economics students organised a group called Students for Humane and Responsible Economics (SHARE), which launched a petition calling for a new approach to economic teaching and offered an alternative introductory course that was ultimately rejected by the university. At Manchester, the PCES has had their proposed course on Alternative Theories of the Crisis rejected by the university just a month ago.

In 2011 we also saw the EC10 class walk out on N. Gregory Mankiw’s lecture at Harvard in support of the Occupy protests, which in retrospect seems completely appropriate given Mankiw’s prostitution of economic ideas to defend the wealthiest 1%. Published at one of the leading economics journals, Mankiw’s ‘Defending the 1%’ article provides a classic example of the unscientific nature of the discipline’s ‘respectable’ journals, and the perverse anti-scientific but ideological incentive system embedded in the culture of economics.

The PCES is now one of many student societies, including for example, the German Pluralist Economics Network, justifiably calling for change in economics. Again the time appears ripe for disruption of economics, and the PCES offers useful guidance for how to achieve that.

The tribe responds

First, let me say that ‘econ tribe’, the core of the economics profession, is truly a tribe – a clique, a social construct – rather than a scientific community. As senior econ tribe member once gave me the following advice.

…the group ‘elders’ have implicit theories in their heads as to how the world works, what forms of behaviour are appropriate, what beliefs are reasonable, what questions are truly yet unanswered, what articles of faith should not be doubted, and where they and their group ultimately make their money

Oh, and that’s just the start (added emphasis).

…many economists like to pretend that even if they give practical policy advice, they as economists make no value judgment on what people want, i.e. ‘preferences are taken to be stable and can differ over all individuals’.

Such statements are then implicitly ‘backed up’ by theoretical models of decision making arising from underlying preference maps (i.e. a ‘deeper layer’).

Now, as a statement of reality this is a completely absurd and purely religious position since no-one even comes close to having ever measured a preference map despite the feeble protestations of the revealed-preference crowd, but as a defensive shield against the criticisms of psychologists and mathematically-challenged economists it is very effective. It drags criticisers into a morass few will escape from and that no outsider would be able to follow anyway, making it sound like a good riposte.

Nearly all sub-fields of economics have similar defensive religious beliefs used to deter entry by unwanted outsiders

A give-away signal of a tribe member is that they will deny the religious nature of their tribe, and pledge loyalty wherever possible by defending the tribe against all challenges. This is the sell-out that most successful economists make at some point in their career, something Yanis Varoufakis has written extensively about.

We see evidence of overt religious zeal and loyalty pledges in the mainstream responses to the PCES report. Here are the links so you can read them for yourselves – Wren-Lewis, Yates, Farmer, Krugman. Expect more in the coming weeks.

The blueprint response was that economics teaching could be better, but economics is fine. I couldn’t disagree more. This is a mere loyalty pledge.

Poor teaching reflects the poor scholarship of the discipline more broadly. This is most clearly seen in Ferrero and Taylor’s survey of economists, where 78% of professional economists (including professors) incorrectly answered a multiple-choice question about the definition of opportunity cost. The profession subsequently kicked into gear to defend itself from embarrassment, with one article in a ‘respectable’ journal making the Alice in Wonderland response that any Humpty can use opportunity cost to mean just what they choose it to mean – “neither more nor less!”

But the big defensive play to combat the PCES threat was to assert that the ‘sciency-ness’ of the mainstream is the reason for its dominance, and the reason we should respect it. Again, deny the religious aspects of economics, be loyal to the tribe.

From Wren-Lewis.

…economics is a science. Its response to data and events may be slow compared to the normal sciences, for obvious reasons, but it is progressive

From Farmer

Economics is a science…the core approach to modern economics, both macro and micro, is the culmination of a process of intellectual argument in which ideas have been sifted, debated and compared with facts. Some have survived; others have not.

Farmer’s claim is not at all true. Most of the modern macro debates were already happening in the 1800s.

It is scary to think that these economists believe what they doing is science. There are parts of economists that do take those crucial scientific steps of prediction and experimentation, and the results usually contradict mainstream theory – conflict is real, costly punishment is real, social norms can evolve and change, preferences are not well behaved, markets boom and bust, and more. Yet for some reason the preacher’s models seem immune to evidence.

A comment from Yates’ post points to the non-scientific approach deemed acceptable in economics.

If economists wished to study the horse, they wouldn’t go and look at the horses. They’d sit in their studies and say to themselves, “What would I do if I were a horse?

Physicist-turned-sociologist Duncan Watts has warned about this approach

…social scientists, like everyone else, participate in social life and so feel as if they can understand why people do what they do simply by thinking about it. It is not surprising, therefore, that many social scientific explanations suffer from the same weaknesses—ex post facto assertions of rationality, representative individuals, special people, and correlation substituting for causation—that pervade our commonsense explanations as well.

Krugman and Yates take the whole ‘sciency-ness’ one step further, pretending that economists do in fact know what’s going on in the economy, in banking, in financial crises, and in recessions. Or something.

Steve Keen fired off a response to Krugman, arguing that he contorted the failure of economics to foresee even the remote possibility of a debt-fuelled crisis, into a mere failure to keep an eye on shadow banking – as if better data on shadow banking would have somehow led to the whole econ tribe dropping their core money-less models of the economy in equilibrium to embrace theoretical approaches of outsiders.

A second defensive play, seen in Yates and Farmer’s responses, is that within the mainstream there is a model for everything, so no need to look outside. Again, no reference to the success of any of the models in predicting economic phenomena. It is as if the high priests response to evidence is to merely create a new god – “Ah yes, haven’t you seen, we have a Tornado God now. Solved that didn’t we” – and ignore reality.

In the past Krugman has actually made similar points. Mainstream economics ignored increasing returns to scale as a reason for trade, even though it had long been understood by ‘outsiders’. To address this he created the Increasing Returns God for the tribe.

I was, of course, only saying something that critics of conventional theory had been saying for decades. Yet my point was not part of the mainstream of international economics. Why? Because it had never been expressed in nice models.

Which only serves to highlight the invalid non-scientific approach – ideas are not judged on the merit as predictive tools, but on whether they can be expressed in the pre-determined modelling methods of the tribe as nice totems of the modelling gods.

As I have said, the value of a scientific model is its ability to predict outcomes in new situations. In economics, the reverse is true. Most economists believe that models provide insights simply by their construction, whereas in reality we can never know if the model is useful unless it offers useful predictions.

It is telling that we see no arguments based on scientific principles in these responses. Nothing on the practical usefulness of mainstream approaches above others. No long lists of scientific battles won by the mainstream because of the useful predictive power of their approach, and plenty of silence on the battles they lost (eg. the capital debates).

That is to be expected from the tribe’s high priests. But it also shows a distinct ignorance of alternative approaches. If there was a wide understanding of alternatives a response comparing the merit of different approaches could be made. The reason it isn’t made is because once economists learn of heterodox approaches the usually leave the tribe. For example, I can’t imagine that any macroeconomist with a decent understanding of Godley and Lavoie’s integrated monetary models would really continue to believe that the mainstream ‘label the residual’ approach to a money-less equilibrium is more valid.

The future

I wish the PCES the best of luck. It is possible for economics to be a useful science, but that requires a much more humble discipline that is able to judge theoretical and methodological approaches based on proper evidence. It starts by acknowledging that in a scientific sense, the body of knowledge in economics is extremely limited, and much of what passes for economics is a collection of mere credible stories about certain phenomena, which are yet to be tested.

I hope indeed that the observation that Pilkington makes is the correct one, and that the time is ripe for transformation in economics.

…silently, behind the scenes, the heterodox have been winning the debate. Krugman would never admit this, of course — indeed, he seems to live in a bit of an echo chamber over at the NYT with all his fanboys and fangirls and he may not even be fully cognizant of it — but if you move in economics circles you’ll know this to be generally recognised.

But let me finish with more sober words from James K Galbraith, because I believe transforming economics is going to be one hell of a battle of tribal politics.

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.

They are always surprised when something untoward (like a recession) actually occurs. And when finally they sense that some position cannot be sustained, they do not reexamine their ideas. They do not consider the possibility of a flaw in logic or theory. Rather, they simply change the subject.

No one loses face, in this club, for having been wrong. No one is dis-invited from presenting papers at later annual meetings. And still less is anyone from the outside invited in.

Comments

  1. “It is possible for economics to be a useful science” You might want to re-think that comment in the light of all that has gone before in this article. No one questions that Economics is a useful tool, but it won’t become a science…

    • casewithscience

      @Janet

      Disagree – science is the disciplined observation or experimentation with any natural system. The abstract nature of human interaction in use of resources is such a system, in the same way that any human behaviour can be studied as a scientific discipline.

      That said, the majority of economics study is mere puffery with little acknowledgement of the scientific discipline other than meaningless and convenient use of statistics.

  2. reusachtigeMEMBER

    Mainstream economics is so “The world is flat. Why? Because we say so. Off with your head!”. It’s just so obviously flawed in taking this position. It goes against progress. So for that reason there’s probably a very good chance that there is a conspiracy behind this that protects a certain group. Why else would such a dumb position exist?

    • Hmmmmm … now which “certain group” do you think might have something of an incentive to encourage the supremacy of those schools of economic “thought” (*chuckles*) that ignore the role of banks, debt, and money … and thus, of Usury?

      Three guesses. And your first two don’t count.

      • @Opinion8red,

        Respectively… the – object – has no agency i.e. “banks, debt, and money … and thus, of Usury?”

        The agency is a matter of human acts, which are given validity by quasi religious ideology’s and back stopped by those with advantage over others, for – their – benefit alone.

        Skippy… remember the date when sociopolitical economics got re-branded to economic science and by what agency this occurred?

    • Pfh007MEMBER

      I will second that motion !

      I am quite hopeful that reform is possible – 5-6 years is about right for the significance of the explosion of the ‘great moderation’ mindset to start to be digested,

      The paradigm is starting to shift.

      If not from within the gentlemen’s club from the many who are not in the club, who live in countries where the club doesn’t exist or does not encourage membership.

  3. Economy is driven by people’s interests, there is no other driving force, e.g. the main object in economics should be this simple reality – people’s interests and how they form groups to defend them through power and policies, e.g. politics. Some people have common interests and they form groups. Why wouldn’t economics start with studying what are those interests, identifying the groups and their position in economy, then judging which theory reflects which group interests and how this is reflected in policy making and our life. Simple, isn’t it?

  4. David Barnes

    I think the main article and it’s multiple references plus the subsequent discussion suggests that agreement on and solutions to these issues is anything but simple. For example,just today there is a mighty bun fight going on regarding the coming budget. If things were simple there wouldn’t be a need to debate anything. I’m not suggesting tour ideas don’t have merit by the way.

  5. Ronin8317MEMBER

    Krugman predicted quite accurately what will happen when you impose austerity when interest rate runs out of steam : it makes things worse. So it is unfair to say economist cannot predict crisis. They are however unable to come up with solutions because the current economic structure contains problems with no solutions. The biggest failure in economic theory lies in accepting the status quo, and refusing to contemplate solutions that lies ‘outside the box’.

  6. SweeperMEMBER

    The economy is too complex to model. That’s why Keynes only had one curve diagram in the whole GT (the investment/saving equilibrium). I think he later said the diagram was pretty much useless anyway.

    Economics should learn from this. There are more insights in the GT (which are validated every single day) than in all the modeling done since.