On Friday Simon Wren-Lewis discussed whether New Keynesians made a Faustian pact when they decided to engage new classical economists on their own modelling territory. He concludes that New Keynesians were not compelled against their will to adopt modelling devices such as rational expectations and inter-temporal optimisation at the individual level. These modelling techniques were perceived as an improvement on existing practice. But it may nonetheless have turned out in retrospect to have been a strategy that carried significant costs. New Keynesians may be less able to shed light on fast moving events in the real world than they might otherwise have been.
Where is the revolutionary thinking in economics? That was one of the first questions posed by a speaker at the Festival of Economics held last weekend in a very damp Bristol. It is also one of the most pressing and the most intriguing.
I was among the hardy souls who bought a season ticket for the event and got a feel for the range of material covered. But rather than review the whole event I want to consider the issue of revolutionary thinking – posed as part of the session on The future of capitalism – in the light of the discussion in the last session on Economics in crisis.
The question about revolutionary thinking was part of a discussion reflecting upon the way in which paradigm shifts in economic thinking are associated with previous economic crises. Most notably, the rise of Keynesianism occurred in the aftermath of the Great Crash of the 1920s and the adoption of monetarism – and neoliberalism more broadly – took place after the apparent breakdown of Keynesianism and the appearance of stagflation in the 1970s. Where is the new thinking – the reconceptualisation of the macroeconomy and the role of the state – to go alongside the current crisis? [Read more...]
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...]
In a recent New York Times blogpost Paul Krugman responds to a correspondent who complained about the looseness of his writing. Starting sentences with ‘And’ or ‘But’ seemed a particular irritant. Krugman is only too conscious of the challenge he faces. The subject matter he is dealing with is generally very dry. If he is going to make it accessible to interested non-specialists then it has to be written with some verve. And that may require taking a few stylistic liberties.
Krugman is constantly vigilant against producing indigestible economic stodge. I think he succeeds. Especially if you compare his popular writing with some of his work of professional economic audiences, some of which can be a little stodgy at times. Krugman cites George Orwell’s 1946 essay Politics and the English language as his ‘bible’.
I read Krugman’s piece on my phone while on the train. So, being at a loose end, I thought I’d reread Orwell’s essay. Even though it’s one of the most famous pieces of criticism of political writing, I’d forgotten quite how great it is. [Read more...]
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...]