Economics after the crash

Economics after crash coverOne of the topics I’ve revisited regularly on this blog over the last three years is the nature of economic knowledge and economic analysis.

I have brought together nineteen of these blogposts as a collection of essays on the philosophy, ethics and methodology of economics. The essays touch on questions such as why economists missed the global financial crisis, debates about how economics needs to change, and the impact that economic analysis has on the real world. The issue of orthodoxy, heterodoxy and pluralism in economic analysis features prominently. The need for a stronger ethical component to economic education and economic analysis is a recurrent theme. Several of the essays make the link between economics and a broader political economy.

The essays are available free to download below the fold here, from the bookshop, or direct from my Scribd site.
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On mainstream economics and neoliberalism

mirowskiOne of the most intriguing questions facing the merry band of wanderers interested in the philosophy and history of economics is how mainstream economic approaches appear to have emerged relatively unscathed from the Global Financial Crisis.

Casual observers might well find this a bit of a puzzle. A body of knowledge that professed itself unable to shed any light on one of the most profound social events of recent human history, even though it was squarely in the middle of the relevant intellectual terrain, is on the face of it paradoxical.

Of course, the response from the cognoscenti, bolstered by unfalsifiable doctrines such as the efficient markets hypothesis, is that events such as the GFC are fundamentally unpredictable. So economics cannot be held deficient for failing to do so. And, anyway, mainstream economic ideas such as incentive-incapability in markets subject to significant information asymmetries can do a good job of explaining key aspects of the crisis in retrospect. If that’s any help.

Less enlightened souls might retort that had economists stepped out the ivory tower, removed their theoretical blinkers, and spent a bit more time getting down on the frontline trying to understand the way institutions and behaviours were changing in an increasingly financialised economy then perhaps they wouldn’t have been quite so surprised when a Global Crisis they considered theoretically impossible actually happened. [Read more...]

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On signs you’re reading bad criticism of economics

Constructive criticismA couple of weeks ago Chris Auld’s blog carried a post entitled 18 signs you’re reading bad criticism of economics. Auld is seeking to help the reader differentiate bad criticism from ‘solid’ criticism. The post generated plenty of debate below the line and was retweeted into my timeline several times.

I’ve been thinking about the post for a few days. There are a whole bunch of issues tangled up in Auld’s 18 signs. Some of them are relatively technical points. Some of them are rather more far-reaching.

I have a suspicion that underlying Auld’s distinction between good and bad criticism there is the division between internal and external critique. That is, good criticism is internal criticism – it is generated from within a particular academic community by people working from within broadly the same intellectual paradigm. External criticism originates, surprisingly enough, from outside that paradigm. We generally find that economists – like most people – are rather more tolerant of and amenable to internal than external critique.

Auld dismissed bad criticism as crankery, which is a label that mainstream economists have a tendency to apply rather indiscriminately to perspectives that differ too much from their own. One person’s crankery is another person’s foundational critique. But if proponent and critic operate from profoundly different social ontologies then most likely all that will result is mutual incomprehension. That doesn’t necessarily make criticism from a non-mainstream economic perspective wrong. Except from the perspective of the mainstream economist, of course.

I won’t run through Auld’s points in detail, but I wanted touch on all of them. [Read more...]

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Dr Smith and the “neoclassicals”

dames 03Debates over the demarcation of different schools of economic thought are by no means new. Taxonomic disputes break out sporadically. Whether “mainstream”, “orthodox” and “neoclassical” economics ever have been, are, or could be synonymous is a question that has exercised several authors of a philosophical turn of mind. Lately the econ blogosphere has turned to the issue, with the focus on the identity and identification of neoclassical economics. Noah Smith made an intervention on the issue a couple of days ago.

Smith notes that the characteristics commonly associated with neoclassical economics, as defined by Wikipedia, look like this:

Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by cost-constrained firms employing available information and factors of production, in accordance with rational choice theory.

But, Smith argues, there are plenty of papers appearing in prestigious economics journals that don’t have all – or, in some cases, any – of these characteristics. There are authors who have written papers clearly in the spirit of neoclassical micro, but have also written papers without such characteristics. Is it sensible for such authors, having sinned once, to be forever labelled “neoclassical” by their critics? [Read more...]

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Is a little economics dangerous?

meme-warsA few weeks ago I had a brief exchange on Twitter with @unlearningecon about the possibility of introductory economics instruction going beyond teaching the neoclassical model of perfect competition and exploring alternatives. If I remember correctly our exchange didn’t get much beyond me saying that to do so is quite a challenge. Students can find it difficult enough to grasp the standard model, let alone alternatives to it. The challenge is compounded because some of the alternatives, at micro-level at least, are not as well worked through as the standard model. @unlearningecon didn’t feel it was so difficult.

Of course, I’ve no idea upon what @unlearningecon is basing his/her view. Our exchange was no more extensive than that. We didn’t pursue the issue. The view might be underpinned by plenty of experience. All I can say is that, in that case, the experience is different from mine.

For quite a while I have been thinking about what students should be introduced to when they are introduced to economics. The issue has become somewhat more high profile following the global financial crisis and the questioning of established economic paradigms. [Read more...]

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Keen insight into the monetary economy

Lucas Papademos, former vice-president of the European Central Bank, has now been installed as the new Prime Minster of Greece. The imminent arrival of former European Commissioner Mario Monti as Prime Minister of Italy will get the post-Berlusconi era properly under way. This is to be an era of technocratic policy-making by market-approved placemen.

Defenders of democracy are deeply concerned about the way in which this process has evolved. It is not so much that crisis has precipitated change at the top of national governments. Nor even that these countries find themselves governed by interim governments that are appointed rather than elected. More concerning is the apparent erosion of sovereignty through the overt intervention of foreign governments in domestic affairs, and the apparent concentration of European power in the hands of the eight members of the Frankfurt Group, only two of whom are democratically elected politicians.

But this is not simply a crisis of politics and the economy. It is also a crisis of economic epistemology. Of economic knowledge. Paul Mason, BBC Newsnight’s Economics Editor, observed on Friday’s programme that “The economic orthodoxy of an entire generation of politicians seems to be failing. And they don’t know what to do.” [Read more...]

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On knowing what’s going on

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. [Read more...]

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On economic amnesia

Economists, one might assume, have something useful to say about the current problems afflicting the world economy. Yet, since the crash of 2008 there has been a considerable amount of reflection in parts of the discipline about its failure to anticipate the crash and its failure to offer effective prescriptions for getting the economy out of the hole it’s in. Of course, elsewhere in the discipline it is business as usual – with a range of prescriptions for privatisation and deregulation at the microlevel and fiscal restraint at the macrolevel.

This week’s Nobel announcements are salutary in that respect. Olaf Storbeck described them as a prize for the Ancien Régime. He was criticised for doing so, but his intervention might be better seen as simply the most recent in a chorus of disapproval directed at an approach to macroeconomics that came to dominate the field. Thomas Sargent, who shared this year’s prize, did as much as anyone to propel rational expectations and new classical macroeconomic models to the forefront of the field, and his macroeconometric work has been hugely influential. That is why he was awarded the Nobel prize. But that can be separated from the question of whether, looked at from a broader perspective, such models actually shed much light on the way the economy operates.

Some see the solution to the problems afflicting macroeconomics as the need to search for new ideas. Paul Krugman has recently argued, on the contrary, that the problem is that the discipline has amnesia. [Read more...]

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Osbornomics – the path to enlightenment

Is a major change in policy thinking imminent? Will Hutton’s piece in Sunday’s Observer focused on the question of quite what the Labour party stands for. It is relatively clear what it is against, but its positive project is rather less obvious. And it needs such a project if it is going to counteract Conservative economic strategy. In the course of his discussion, Hutton argues that we can expect a change in the Coalition’s approach to deficit reduction some time soon and the recent less than congratulatory OECD report on UK policy is evidence in support of the case: [Read more...]

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Economists, implicated

John Maynard Keynes famously wrote that “[i]f economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid”. Many economists, somewhat uncharacteristically, might well be craving that type of anonymity at the moment. Because they’ve been getting a hard time of it. And the discipline may be about to get even less popular.

The arrival of the film Inside Job is likely to fuel the public’s anger at bankers for causing the financial crisis. And not only causing the financial crisis, but subsequently carrying on with business pretty much as usual, while the fallout of the crash is felt in public spending cuts, unemployment and welfare benefit reductions.

But the film does more than that. It broadens the scope of criticism to implicate a range of other professionals. It wasn’t just the corporate bankers: lawyers, central bankers, accountancy firms, lobbyists and government officials were also complicit in pushing a deregulatory agenda. Their actions magnified systemic risk and increased the instability of the financial system in ways that theory said shouldn’t happen. The real world clearly hadn’t read the script.

In amongst the culprits identified are academic economists. [Read more...]

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