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? 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 last month in the aftermath of this year’s Nobel prize in economics.
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. 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 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 (p608)
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. 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 (which I discussed briefly here). 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 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”. 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.
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. So, again, there is potential here for greater momentum to develop.
Perhaps this time the citadels are starting to crumble.
* Stiglitz, J. (2011) Rethinking macroeconomics: what failed, and how to repair it, Journal of the European Economic Association, vol 9, no 4, 591-645.