Ten years ago, David Colander wrote an obituary describing "the death of neo-classical economics." Sort of. Strictly speaking, he was calling for economist-assisted terminasia:
The use of the term neoclassical to describe the economics that is practiced today is not only not useful, but it actually hinders understanding by students and lay people of what contemporary economics is.
Let me be clear about what I see as the largest problem with the use of the term. The problem is its use by some heterodox economists, by many nonspecialists,and by historians of thought at unguarded moments, as a classifier for the approach that the majority of economists take today. We all, me included, fall into the habit of calling modern economics neoclassical when we want to contrast modern mainstream economics with heterodox economics. When we like the alternative, the neoclassical term is often used as a slur, with our readers or listeners knowing what we mean…The worst use, and the place one hears the term neoclassical most often, is in the discussions by lay people who object to some portion of modern economic thought. To them bad economics and neoclassical economics are synonymous terms.
There is much not to like in current economics; but slurring it, by calling it neoclassical economics, does not add to students’ understanding of the current failings of economics. Economists today are not neoclassical according to any reasonable definition of the term. They are far more eclectic, and concerned with different issues than were the economists of the early 1900s, whom the term was originally designed to describe. If we don’t like modern economics, we should say so, but we should not take the easy road, implicitly condemning modern economics by the terminology we choose.
David Colander's description fits perfectly the critics of the "neoclassical political and economic mindset" described in Mike Moffat's recent post.
It is true that most economists believe first year textbook writer Greg Mankiw's 6th principle: markets are usually a good way to organize economic activity.
But they also are aware of Mankiw's 7th principle: Governments can sometimes improve market outcomes.
There is legitimate disagreement about whether a particular economic issue, for example, the tar sands development, is best described by the 6th principle – markets are good – or the 7th – more government intervention could improve outcomes. I would vote for the latter (when I'm not feeling too cynical about government), my fellow bloggers might disagree.
As an academic economist, it's not difficult to avoid these disagreements, especially if you steer away from conversation topics like global warming over lunch with colleagues.
PhD students and new faculty members are almost as likely to have an undergraduate degree in engineering or mathematics or physics as in economics. They may never have taken Econ 101. Graduate courses in economics also teach that markets are good. But in the grad school version – "If preferences are locally nonsatiated, and if (x*, y*, p) is a price equilibrium with transfers, then the allocation (x*, y*) is Pareto optimal" – the ideological content is so deeply buried it is easy to be completely unaware of it.
These days, technique matters. Have you controlled for endogeneity? Unobserved heterogeneity? Did you use the right kind of standard errors? Do you have a good instrumental variable?
As technique becomes more important for deciding what is good research, ideology becomes less so. The rapidly growing field of behavioural economics, for example, questions the presumptions of rational choice that underpin the Econ 101 stories about markets. Behavioural research is published because in part because it's often technically sophisticated, and in part because it explains the real world.
But the phrase neoclassical economics is still good for one thing: it's really handy for separating out insiders, who never use the phrase, from those outside the mainstream.
Worthwhile Canadian Initiative 
Great post!
I still think the term “neoclassical economics” has value, as it distinguishes the marginalist/utility maximizing/rational behaviour style of microeconomics from more behaviouralist approaches where strict rationality is not assumed at the outset.
I’m a little puzzled about what the 6th/7th principle has to do with the issue. Pigou wrote several books on the issue and he’s one of the giants of neoclassical economics. Neoclassical economics makes behavioural assumptions, not ideological ones.
I agree, though, that you almost never hear the term within academia.
“But the phrase neoclassical economics is still good for one thing: it’s really handy for separating out insiders, who never use the phrase, from those outside the mainstream.”
Yes, but with one exception: historians of economic thought using “neoclassical” in its original meaning, to make a useful and important distinction between economic thought post the 1871 marginal revolution (Jevons, Walras, Menger) and earlier “classical” thought (Smith, Ricardo, Mill). In that sense, the only economists nowadays who are not “neoclassical” are those who reject marginal analysis. Not that I can think of any, offhand. Austrians, for example, as followers of Menger, are certainly very neoclassical.
There is also something asymmetric in distinguishing the “mainstream” from any other, for example the Austrians. Because over the years many Austrian ideas (some might say “all the good Austrian ideas”) have been absorbed into the mainstream. So “Austrian” has come to mean “whatever is left of Austrian ideas once you subtract all the (good?) Austrian ideas that have been absorbed by the mainstream”. (The Austrians can never win, because if they ever do win a battle, the ideas that won are no longer “Austrian” but “mainstream”.
For example, the “natural rate of interest” is originally an Austrian idea. But many New Keynesians use it quite happily, and don’t think of it as Austrian at all. (I myself thought it was Swedish, until a commenter corrected me and told me the Swedes had got it from the Austrians.)
The undergraduate education of economics grad students, and its implications, is worthy of a post in its own right.
It’s a slur.
That’s why mainstreamers or insiders don’t use it.
Mike and Nick, click on the link for the 6th principle. You’ll enjoy it.
Mike, thank you for your kind words.
Nick, I have a similar kind of winning-the-battle-losing-the-war feeling when I read a lot of recent papers in economics of the family. Yes, I wanted the black box of the household to be unpacked. But this is what you’ve come up with!?!
Surely there must be a good canoeing metaphor for the absorption of small tributaries into the mainstream?
“In that sense, the only economists nowadays who are not “neoclassical” are those who reject marginal analysis. Not that I can think of any, offhand.”
That’s true, though I would count utility maximization/rationality as being both in the canon of classical and neoclassical economics. Behavioural economics, IMO, is not neoclassical.
Frances: I love Yoram Bauman – thanks for posting the link!
I’m still unsure what neoclassical economics has to do with ideology. I can imagine a GE model that makes the following assumptions:
– All industries of any importance have large fixed costs and strictly declining marginal costs throughout
– All industries have large production externalities (some negative, some positive)
– Consumption of any good exhibits a network externality (I’m just piling on at this point)
– There is some reason (transaction costs?) why Coaseian solutions are not feasible.
Such a model would suggest policy intervention the scale of which isn’t seen outside of North Korea. Of course, you have to ‘buy’ the assumptions.
I think we need to ‘take back’ the term neoclassical (though not like Randal Graves does in Clerks II). If we allow it to be defined by outsiders, we’ll wind up getting the profession tarred as a bunch of right-wing ideologs (more so than it is already).
There is legitimate disagreement about whether a particular economic issue, for example, the tar sands development, is best described by the 6th principle – markets are good – or the 7th – more government intervention could improve outcomes. I would vote for the latter (when I’m not feeling too cynical about government), my fellow bloggers might disagree.
Actually, in the example you give, more gov’t intervention is what exacerbated the problem [or improved the general Canadian economy if you’re a neoclassical economist of the Liberal variety 🙂 ]
Alberta placed Murray Smith, a former Minister of Energy in the Ralph Klein gov’t, in a space rented in Canada’s Washington DC embassy in order to actively promote the heck out of the tar/oil sands to Americans (investors, O&G companies as well as politicians). He would openly brag about how Alberta was practically giving the mineral rights away with such low royalty rates (1% until cap cost recovered, then 25% – rates developed in the 90s when oil prices were much lower and different era altogether). He said never met a pipeline he didn’t love. The reason stated in the Alberta caucus to justify the big push was the concern that the world would be moving away from oil (especially the real dirty stuff) and Alberta would be left with this large, untapped and worthless resouce – so get as many shovels in the ground as quickly as possible.
One of Murray’s more hucksterish moves was to arrange for Alberta to be part of the Smithsonian Folk Festival in 2006 – the featured item as described in this G&M article:
Alberta’s Gift to Culture
The venerable Smithsonian holds an annual event focusing on folk arts and crafts. This year Alberta will park a massive dump truck there to tell the story of the oil sands.
Later this month, a massive off-road dump truck will be parked on the National Mall in front of the Smithsonian Institution, an eye-popping sight that the Alberta government hopes will draw attention to the province’s growing importance as an energy supplier to the United States.
The truck, a smaller version of the two-storey-high models used in the Athabasca oil sands, is part of a $3.8-million publicity push by Alberta in the U.S. capital, highlighted by the province’s participation in the Smithsonian’s Folklife Festival. The annual outdoor event sponsored by Washington’s leading museum attracts up to a million people to savour folk cultures, crafts and foods from around the world.
This, in my mind, was the catalyst for the US environmental movement to kick into high gear against the tar sands (their outrage mentioned in the article)- which is gaining momentum with its latest effort targeting Alberta tourism (pictures of gooey tailings ponds/dead ducks in oil etc). So, kinda backfired on Murray and the gov’t, one might argue.
Nick,
Wait, “natural rate of interest” came from the Austrians? I just read Wicksell’s Interest and Prices a few months ago, and I don’t recall him crediting anyone with that. I may have missed it, though. I do recall references to Böhm-Bawerk, but not as an attribution for the natural rate concept.
http://en.wikipedia.org/wiki/Coase_theorem
“The problem in real life is that nobody knows ex ante the most valued use of a resource…”
Only true where induction or deduction not possible.
In the runoff wiki example, a problem is fat tails. Courts prefer a monetary settlement which is fine for measurable local effects. But if the river runoff kills the only dam in town or only irrigation or drinking water, the compensation will have to rise as ex ante we know what airlifting water costs and drinking water more important than carwash. If no external equivalent supplies, the Courts have to assert themselves (ex ante know) rather than badly playing inflation Mint or denier.
http://en.wikipedia.org/wiki/Neoclassical_economics
“1.People have rational preferences among outcomes that can be identified and associated with a value.
2.Individuals maximize utility and firms maximize profits.
3.People act independently on the basis of full and relevant information.”
#1 and #3 conflict lots. #1 assumes income source and in our winter country easy to not have job or welfare (many countries who also went through Great Depression have basics guaranteed). Don’t want people knowing a Manchurian Candidate brain ant or nuke blueprint….but do want us knowing when screwing with future monsoons and harvests is a platform outcome. If adults are getting fat want food cooking/exercise info or and food subsidies/taxes/programmes info, even if cuts into #2 pork profits. #2 should mention Crowns maximize happiness (stops WMDs and helps individuals be informed, afford necessities).
Neoclassical doesn’t generally weight or heirarchy principles in a flowchart. And when it does, Mankiw says markets first and then gov, why? Get stuck in maybe inefficent wirebraining. Y pro-market future?
Andy: that’s what I thought too. Then someone (a commenter on Scott Sumner’s blog?) corrected me. I think Wicksell got it from von Wieser originally, IIRC. Maybe it’s debatable, in the sense that von Wieser had the basic idea, further extended by Bohm Bawerk, and extended again by Wicksell. Dunno. A quick Google doesn’t answer this clearly.
The government/capitalist firm dicotomy does not capture the range of possibilities. Housing co-ops and private landlords both operate within markets. Their motivations (and therefor their behaviour) differ dramatically.
20th Century workforce:
“http://en.wikipedia.org/wiki/Neoclassical_economics
“1.People have rational preferences among outcomes that can be identified and associated with a value.
2.Individuals maximize utility and firms maximize profits.
3.People act independently on the basis of full and relevant information.””
That Wiki quote is “as expressed by E. Roy Weintraub”. It is doubly not authoritative.
Modeling is hard. Modeling under imperfect information is harder. All modelers make simplifying assumptions. Sometimes that simplifying assumption is full information; sometimes it isn’t.
It is totally false to say that the assumption of full information is in any way integral to mainstream or “Neoclassical” economics. A model with imperfect information is not ipso facto non-mainstream or non-“Neoclassical”.
It is also an appallingly cheap shot. Those who can build theories; those who can’t just stand at the sidelines complaining that the builders’ made simplifying assumptions.
“Mainstream neo-classical economics is wrong because it assumes perfect information”. That’s total BS. It’s not just false, it’s intellectually lazy — the sort of critique made by someone who can’t be bothered: either to understand mainstream economics, or to work on an alternative. It’s just an easy excuse (often ideologically motivated) to keep on babbling and waving your hands.
Sorry. I’m not really attacking you in particular, C20th. I’m attacking a whole load of people.
I second what Nick just said. Very well put mate.
Thanks Adam.
I should add, just to back up my main point: the Arrow-Debreu model is arguably the high-point of “Neoclassical” economics. It assumes that people do not know the (current and/or future) state of the world. You can criticise the A-D model for many things, including the particular way it introduces uncertainty. But you cannot criticise it for assuming that people have “full and relevant information”, because it makes the opposite assumption.
Nick – Updating that wikipedia entry would be a voluntary donation to a public good. Unfortunately I don’t know enough about history of thought to fix it.
As an undergraduate I was introduced to economics via the Paul Samuelson textbook. His approach was called a neoclassical synthesis if I remember correctly. I suspect that this formulation, and not Veblen (who coined the term neo-classical) is the origin of neo-classical as a catch phrase for what is taught as economics in the Anglo-American mainstream.
It was Jevons who though that political economy should be replaced by economics. I consider that to have been a step backward actually. Indeed perhaps we should have stayed with Moral Philosophy rather than adopting political economy. Adam Smith held that appointment I believe.
I am not sure I approve of limiting economics to insiders. Academic exchange should be open, should it not? What cannot be understood by outsiders requires translation so that it can be. Otherwise, the worldly become the unworldly philosophers i would have thought.
Duncan – interesting. Much of what is published in scholarly journals can’t be understood by outsiders. Part of the value of this blog is precisely the translation that you mention. Interestingly enough, just last week I was given a kindly, well-intentioned lecture by a colleague along the lines of “spend less time blogging and more time trying to publish articles in top academic journals.” It’s not clear that, in the strange world of academic economics departments, worldliness is rewarded.
But the market for ideas is competitive. And if academic economics don’t offer intelligible analysis of economics policy, someone else will – and sometimes it’ll be served up with a slur about neoclassical types!
That would be nice, but it pre-supposes a certain amount of willingness of non-economists to try to understand what economists have learned. Too often, outsiders find anti-economics more seductive than the real thing.
I love this blog, but as a non-economist outsider, you are being way too easy on your own profession. Obviously a single word (neoclassical) will fail to catch the subtleties of a whole discipline – that’s obvious. But when my son comes back from an Economics 101 course at an Ontario university and shows me bald statements like these from his textbook (Parkin and Bade) then I have no problem with using a broad brush to criticize the profession:
“redistribution programs confront society with what has been called the big tradeoff – the tradeoff between equality and efficiency… A more equal distribution means there is less to share.”
and (while we are talking about Pop Internationalism) in the “Key Points” summary to the Global Markets chapter: “Arguments that protection is necessary for infant industries and to prevent dumping are weak.” (yes, that is the entire bullet point) and “Arguments that protection saves jobs… are flawed”.
He told me that in the multiple choice section of the exam it was easy to get the right answer – just look for the most right-wing, free-market one of the options.
While this is the kind of stuff that the profession teaches as fact to introductory students (and there are many other examples in the textbook), I see no problem with giving economists a hard time, and “neoclassical” seems a fine term to use.
It’s not just about simplification – yes, everyone has to simplify – but about what gets chosen as a first order model. Many economists treat market failures as second-order perturbations to the basic first-order competitive market model – refinements that modify the details but don’t challenge the validity of the first-order conclusions.
But then I guess I’m just standing on the sidelines…
Duncan: “Political Economy” has meant, and currently means, a lot of different things to different people. It’s even vaguer than “Neoclassical economics”.
Here’s my crude take on it:
“Economics” originally meant “Home economics” (and there’s more to home ec., or managing the household economy, than just cooking, as even reading an old edition of Mrs Beeton will tell us http://en.wikipedia.org/wiki/Mrs_Beeton ).
So when you needed to distinguish the management of the economy of the polis from that of the domus, you needed to say “political economy” to distinguish it from domestic economy.
And if it’s clear from the context that you are not talking about home ec., the “political” in “political economy” is redundant, and potentially misleading. Indeed, it misleads people a lot today.
In Canada today, among non-economists especially, “political economy” usually means “political scientists and sociologists talking about economics”.
In the US today, and among Canadian economists, “political economy” (aka “positive political economy”) usually means “public choice theory”, or more generally “the application of methods traditionally associated with economics to study questions traditionally associated with political science”. In other words, economists use “political economy” to mean “economists talking about political science questions”, whereas political scientists mean the exact opposite: “political scientists talking about economics”.
Or, “political economy” is just shorthand for “doing economics the way I want it to be done, in a way that supports my ideological perspective, which is very different from how those damned economists do it”.
That’s why it’s so thoroughly misleading a term, and best avoided.
Really, I thought “political economy” was just shorthand for “doing political science the way I want it to be done, in a way that supports my ideological perspective, which is very different from how those damned political scientists do it”.
Frances; good one! Yes, it means that too!
That would be nice, but it pre-supposes a certain amount of willingness of non-economists to try to understand what economists have learned. Too often, outsiders find anti-economics more seductive than the real thing.
You could reverse the terms and make an equally profound statement.
One observation of mine in some of the industries/businesses where I have been engaged: Rarely will you see someone with purely an economics degree in the decision making executive. For example, in the oil and gas industry it’s often engineers/lawyers/MBAs/accountants/geologists – occasionally (as in BP/Talisman) you get someone with a PhD from Oxford in astrophysics who worked on radio emission mechanisms in pulsars who make the corporate decisions.
And because they do not have the same depth of academic economic training, it would be folly to suggest that certain industries would respond definitively a certain way based upon certain price/tax/political signals that have their origins in academia. It depends…
“And because they do not have the same depth of academic economic training, it would be folly to suggest that certain industries would respond definitively a certain way based upon certain price/tax/political signals that have their origins in academia.”
As someone who has a foot in both campus (moreso private sector), this is in one sense true. For instance, when making price decisions I don’t have a nice neat demand curve to look at.
But so what? For instance, suppose I wanted to model how my cat catches a bird in mid flight (and I’ve seen her do it). The amt. of variables I would have to throw at the problem are immense and you’d need a least a B.A. in physics to be able to come close to be able to calculate and model the forces at play correctly enough to have her in the right place at the right time. Obviously my cat doesn’t and isn’t making all those calculations but somehow she’s able to catch the bird.
The important thing is that the models are an accurate representation of what happens (if price goes up 10%, what happens to quantity demanded), not that the agents involved are making those exact calculations when making their decisions. Because quite obviously, they’re not, the same way my cat isn’t.
Voxeu is the class of world economic thought. I never learned Napolean in HS or why EU was trending fascist near end of 19th century, don’t speak 6 languages. Chretein was headed there… USA blogs are just about refuting neocons. Where are the principles of Neoclassical thought? Mankiw’s? http://www.slembeck.ch/principles.html
I wasn’t interested in learning a flawed University curriculum and neoclassical isn’t sophisticated enough to need an essay description. If someone points out a reading list I’ll point out why the cold war is over and why China should adopt EU over USA.
That being said, neoclassical economic models don’t make perfect predictions. One reason may be that they miss widescale cognitive biases among economic agents, which is why behavioural economics is potentially quite useful.
Funny how no one has pointed out, a la Robert Skidelsky, that mainstream academic Anglo-American economics is completely discredited. That is, the events of the financial/economic disaster that began in 2007 have shown economics to be “useless…useless in either or explaining or providing remedies for the crisis” to quote Skidelsky. One of the reasons mainstream economics is useless is that it assumes away the possiblity of slumps, prolonged recessions, or depressions. So it literally has nothing to say on the events of the last three years.
The sense I get here from some of the comments is that at worst, it could be seen as mildly disreputable. And no different from other academic subjects that use obscure jargon or(in economics’ case) a lot of completely phony, sophisticated mathematics(Skidelsky again) to exclude “outsiders”.
But so what?
Well, a good example that has come up often enough here and that I have challenged – lower corporate taxes (at what point is it low enough) or the “dire impact” on certain industries , say O&G sector, of having a carbon tax (remember, we are all Albertans).
I’ve worked in that industry. I’ve done economic forecasts/estimates in that industry. I know firsthand how investment decisions are made in that industry. I know how out of control development in the oil sands can kill off the natural gas industry. Hence why I have confidence in challenging some economic claims/assertions. That’s the so what.
I’ll let someone with more of a background in Macro comment on Ed’s comments. I think he has a point, though, if somewhat overstated. One thing I will mention is that there were in the 90s a lot of attempts to create models in the RBC framework that allowed for depressions (it was always one of the big criticisms with the RBC framework). I never found any of them particularly convincing, but others may disagree.
JvfM: I’ve read your posts and I’ve never been sure which, exactly, claims/assertions you’ve disagreed with (your posts tend to be fairly short/vague and about a single industry when we’re discussing the economy as a whole).
I still think you need to differentiate the ‘how’ and ‘what’ questions. I used to be able to throw a pretty decent curveball and I can tell you that I sure as heck didn’t learn to do so by reading physics textbooks. The process was one of trial and error, getting advice from people, etc. No physics involved in the learning/doing process whatsoever. But the ‘what’, in the sense of ‘how did the ball curve’ was a pure physics problem.
Should we throw out physics because that’s not how pitchers think when they’re throwing a curve?
JvfM: I’ve read your posts and I’ve never been sure which, exactly, claims/assertions you’ve disagreed with (your posts tend to be fairly short/vague and about a single industry when we’re discussing the economy as a whole).
Well, given that Canada is increasingly a resource based economy, the principal driver being energy related (even your little toy acknowledges as much – and of which I have suggested why it may not have worked as well in recent yrs – because production volumes as well as prices are rising) it would seem my “single industry” is highly relevant to the whole economy.
Sometime ago SG posted a number of links to academic papers on reducing corporate taxes. In the comments I queried him on WHAT his optimal corporate tax rate might be, and HOW he arrived at it? The discussion went like this:
If the intent of this blog list is to educate the PPG and win them over to your argument, why not simnplify it for all of us (I tried reading a few papers – typical ‘theoretical” stuff).
So, let’s cut to the chase. You write: “The optimal tax mix is heavy on consumption taxes, light on corporate taxes, and somewhere in between on personal income taxes.”
So, in 2010, in Canada, in this resource based economy, where the world economy is at today, what is your optimal tax mix, and how did you arrive at the specific numbers?
Posted by: Just visiting from Macleans | May 27, 2010 at 07:56 PM
What does PPG mean?
Posted by: Stephen Gordon | May 27, 2010 at 08:20 PM
Parliamentary Press Gallery.
Posted by: Andrew F | May 27, 2010 at 08:32 PM
Right. I subsequently saw Aaron Wherry (member of PPG) directed some traffic your way on his Macleans blog:
Stephen Gordon has put together a valuable primer ahead of what probably should be a national discussion on taxes and the federal treasury.
http://www2.macleans.ca/2010/05/27/proactive-disclosure-2/
Doubtful he read many papers either. He posted roughly 7 hrs ago.
Posted by: Just visiting from Macleans | May 27, 2010 at 08:43 PM
Ah – thanks.
JVFM, the rest is going to have to await another blog post.
Posted by: Stephen Gordon | May 27, 2010 at 08:49 PM
OK. I’ll continue waiting – a q I’ve been asking for quite sometime. Tough to argue one political platform is better/worse than the other until one knows the optimal point (and assumptions), and the tradeoffs in adhering to that policy as opposed to others.
Posted by: Just visiting from Macleans | May 27, 2010 at 08:57 PM
Indeed. But I’m pretty sure you were one of the people asking where the evidence was for the tax-shift story. One thing at a time.
Posted by: Stephen Gordon | May 27, 2010 at 09:11 PM
Apparently his reading comprehension/memory is better than yours. 🙂
http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/05/corporate-income-taxes-a-primer.html?cid=6a00d83451688169e20133ef057eb1970b#comment-6a00d83451688169e20133ef057eb1970b
Ahh.. right. I should post more on the corp. tax story as well.
Also, I think it’s time for a MERT update (short story: It’s actually worked very well recently).
Though “relevant to dollar” and “relevant to the economy” are too different kettle of fish. Particularly when you’re talking about, say, Southwestern Ontario.
Skimming the behavioural and New Keynesian wikis. All agent assumptions model an individual as a hedonist maximizer. Behaviour econo tries to fix some bias, but the model is itself an unsubstantiated normative judgement.
An individual is a utilitarianism abacus, with self maximizing being a large component. The correct normative model would be the more utilitarian one’s info or experiences are, the more they could use neo classical assumption or be given more power/money under New Keynesian. The less info one has or at least has given the circumstances, the more big brother. It should be a recursive model that varies with maturity of agent. Right now it is assumed agents with money or pull are good.
ex) assume 0.7% of GDP MDGs is optimal foreign aid funding. USA privately donates only 0.21%, so would need less individual agent pull in a good model, but if they donated 2%, is too much, need fewer taxes. You can measure how well private economic agents measure externalities and such, and if they don’t, the model parameters need to reflect idiots (and pork Crowns flipside like gun registry, arresting potheads, corrupt police, 3rd gen ethanol subsidy). We haven’t started to measure Crowns well, if, hospitals won’t reveal performance data to protect unions, treat as inefficient and cut budget. USA has programme to measure which teachers increase student grades, if unions object, pay off debt. Most profitable university degree is petro engineer, if they won’t pay a carbon tax don’t crowd out efficient professions.
I think people can let their own experiences in industry blind them from the larger picture (forest from trees problem).
For example, from where I’m sitting, Canada would do best if oil fell to $1/barrel. Why? Well, what happens to my company when oil prices go up:
– My shipping etc. costs go up (bad)
– My customers shipping etc. costs go up so they cut back their expenses elsewhere(bad)
– The CDN$ goes up, so when I convert my US revenue to CDN, I have less of it (very bad)
This applies to practically every company in SW Ontario. And we all know that SW Ontario is the engine that drives Canada. 🙂
Let me point out that it’s Robert Skidelsky I was quoting, so it’s really more his beliefs although I think he happens to be completely correct on the uselessness of academic economics.
I suppose I should have said macro-economics, but while micro-economics works well with a focus on industries, etc. micro doesn’t explain AT ALL, the possiblity of economies remaining in prolonged slumps such as the one we’re experiencing now(due to get a whole lot worse very quickly because of fiscal austerity and the failure to deal with the banks correctly).
So the limitations of micro led to the development of business cycle theory, didn’t it? But that doesn’t explain the possibility of depressions either, as far as I know.
Tom Slee:
“But when my son comes back from an Economics 101 course at an Ontario university and shows me bald statements like these from his textbook (Parkin and Bade) then I have no problem with using a broad brush to criticize the profession:
“redistribution programs confront society with what has been called the big tradeoff – the tradeoff between equality and efficiency… A more equal distribution means there is less to share.”
……………
While this is the kind of stuff that the profession teaches as fact to introductory students (and there are many other examples in the textbook), I see no problem with giving economists a hard time, and “neoclassical” seems a fine term to use.”
Let me take that one example, about the trade-off between equality and efficiency. Most (all?) first year econ texts make the same point.
What did you do when you read that point you disagreed with? Did you:
A. Read further into the text, to understand what Mike Parkin and Robin Bade meant by that point and the reasoning behind it? Or,
B. Shut the book in disgust like a shocked Christian fundamentalist reading his kid’s godless biology text?
I suspect the latter.
Is the equality-efficiency tradeoff immune to criticism? No. Is it the whole truth? No. Are there no exceptions? No. But does it contain an important truth that every educated person ought to understand, expecially those who advocate government policies to increase equality? Yes. yes, and yes.
In fact, reading your comment makes me especially proud to be a teacher of first year economics. And from now on, I am determined more than ever to teach the equality-efficiency tradeoff. And well done Mike and Robin that they at least “exposed you” to this shocking idea, even if you read no further. And I very much hope your son read further, and learned the reasoning behind it.
Ironically, the one economist I most associate with this tradeoff is the late Arthur Okun, a generally lefty economist from the Brookings institute. (I don’t think he discovered the tradeoff, but he did clearly express it with his great “leaky bucket” metaphor.)
It is especially important for those who most want government policies to promote equality to understand this tradeoff. That way, they can best understand the costs of equality, and how to design policies to try to minimise those costs. (This, broadly, is one of Stephen Gordon’s perennial themes.)
No apologies whatsoever for “neoclassical economics” shocking you in that way. Instead, great pride. You have re-affirmed by belief in what I do for a living.
This applies to practically every company in SW Ontario. And we all know that SW Ontario is the engine that drives Canada. 🙂
True, Hamilton, home of the former Dofascos , Stelcos etc. who supply the pipe, roll the steel is just outside of the wiki boundaries of SW Ont.
I think people can let their own experiences in limited geographic diversity blind them from the larger picture (can’t see beyond the Forest City from trees problem).
“The important thing is that the models are an accurate representation of what happens (if price goes up 10%, what happens to quantity demanded)”
And this is, of course, precisely the reason for the anger of those outside the profession at economics — the models appear never to be marked to market.
Of course there are some models that, in their domain, function adequately enough — some financial models, some micro-econ models. But even astrology or alchemy had their successes. What people outside the profession care about are the large scale models, the ones that suggest ways in which societies should be rearranged, and we’ve precious little evidence that these accurately model reality, regardless of how they model individuals.
Yes, political economy is a broader category than economics or the neo-classical synthesis. It is older, and it is more historical. It includes institutions like central banks, finance departments, transnational corporations, hedge funds, and repo markets, etc. in its accounts of what needs to be described and explained. Political economists do not think what was done before the marginal revolution can be ignored. Nor can it safely be assumed what we need to know has been absorbed by Greg Mankiw and included in his intro book.You might try doing your first year course Nick as a history of economic thought.
I appreciate this quote from a paper by David Laidler and Roger E. Backhouse “What was Lost with IS_LM” Their concluding sentence reads: “The evidence from the development of macroeconomics during the era of IS-LM suggests that a failure to keep track of already existing ideas extracted a price from the discipline, and one that it continues to pay.” I think this applies more generally to the field as I understand it.
In his History of Economic Analysis Schumpeter talked about the Ricardian vice. Set out constraining assumptions, reason from them imaginatively, draw some logical conclusions, and make policy recommendations, not noting whether or not your theorizing takes place in something similar to real world conditions.
When economists talk about int. trade policy using models such as the 2+2+2 framework, I had trouble finding this helpful. Exchange rates, and international monetary arrangements need to be part of the story, for a start. David Hume (thought by D.P. O’Brien to be the first classical political economist) writing before Adam Smith managed to deal with both in “Of Money” and “Of the Balance of Trade.” Much neo-classical trade theory does not admit the need to talk about both at the same time. Admittedly it is messier to do this, but Harry Johnson and Robert Mundell were not afraid to expound on the links between the two.
I would be happy to see people from econ dept.s hanging out with sociologists and political scientists interested in similar subjects. I think more intellectual integration is needed, not more specialization.
Frances I think the top economics journals may end up containing questions raised widely online and debated in blogs.
I would be happy to see people from econ dept.s hanging out with sociologists and political scientists interested in similar subjects. I think more intellectual integration is needed, not more specialization.
The problem is that these sorts of collaborations invariably end up with the economists having to spend their time explaining basic principles to people who already have very strongly-held and misguided ideas about what economics is.
Duncan: “Yes, political economy is a broader category than economics or the neo-classical synthesis.”
If you had instead written: “NO, political economy is a broader category than economics or the neo-classical synthesis.” I would have understood you (even though I would have disagreed with you). My point was that “political economy” can mean loads of different things to different people.
“It includes institutions like central banks, finance departments, transnational corporations, hedge funds, and repo markets, etc. in its accounts of what needs to be described and explained. Political economists do not think what was done before the marginal revolution can be ignored. Nor can it safely be assumed what we need to know has been absorbed by Greg Mankiw and included in his intro book.”
So does economics. So do economists. You are defining “economics” as a straw man.
“You might try doing your first year course Nick as a history of economic thought.”
There would be benefits and costs in doing that. Part of me likes the idea. But then you can’t teach a good history of thought course without spending a lot of time teaching some ideas that are total rubbish, like the Labour Theory of Value. (I was shocked to learn recently that some Poli Sci profs teach their students the LTV, as if it were a valid theory of value! Those guys are totally out of it!).
Now, you can make a valid case for teaching LTV, just as you can make a valid case for biologists teaching Creationism (creationism as something that people have and some still do believe is a historically and sociologically important datum; it helps students to understand Darwin better if they have an alternative with which to compare it; it helps students understand science as a process, not merely a list of theories). But there’s a clear conflict between trying to teach students economics as we think it is today, and trying to teach the history of economic thought properly.
But yes, there’s a lot of useful stuff in those old guys, even if there is a lot of rubbish too. And ISLM leaves some of that useful old stuff out, but it also added a great insight that the old guys didn’t have. (Of course, nowadays, ISLM is “old stuff” too, and I have to try to convince younger economists that it contains important insights). But that’s an argument for economists to study the history of economic thought. Not an argument for “political economy” (whatever that means) vs economics.
“When economists talk about int. trade policy using models such as the 2+2+2 framework, I had trouble finding this helpful.”
The 2x2x2 model contains (at least one) great insight: under certain conditions, free trade in output goods can be a substitute for free factor mobility.
But yes, I agree with you that the “pure” (i.e. non-monetary) theory of international trade can leave an important question unanswered. Funnily enough, I actually added a very short section to the Canadian Mankiw that (very briefly) added a discussion of exchange rates and the Humean price-specie flow mechanism to better help students understand why free trade would not lead to permanent mass unemployment in one country if it were uncompetitive in all goods.
On acting like a shocked fundamentalist: guilty as charged 😦
On teaching a history of ideas – I agree with NR. There must be a point somewhere between ideology and “here are a bunch of guys (mainly) with some thoughts. Who knows what’s right?” Luckily, it’s not my job to find it.
On hanging out with sociologists – I don’t know if they hung out much, but I was very impressed by the Kranton and Akerlof work on Identity Economics, not only because it seems to explain some things that needed explaining, but also because it manages to keep an economics approach while respecting and integrating some key concepts from sociology. They had clearly done a lot of work taking sociologists seriously (but not uncritically), and benefited from it.
Maynard: I’m not sure where you get the idea that “the models appear never to be marked to market.” Go back to my discussion of RBC. Read Kydland and Prescott. If anything, I’d argue they overdid trying to match their model to the data through calibration.
But again, go back to my physics example. Suppose you were writing a physics textbook and you wanted to explain how a baseball pitcher made a ball curve. Would you explain the forces being imparted on the ball, or would you explain the process that I went through as a kid pitcher developing my curveball (a hell of a lot of trial an error)? Why should economics be modeled differently than physics?
On hanging out with sociologists – I don’t know if they hung out much, but I was very impressed by the Kranton and Akerlof work on Identity Economics, not only because it seems to explain some things that needed explaining, but also because it manages to keep an economics approach while respecting and integrating some key concepts from sociology. They had clearly done a lot of work taking sociologists seriously (but not uncritically), and benefited from it.
It’d be interesting to know if there have been similar stories going the other way: sociologists taking economics seriously and benefiting from it.
Well I don’t know, of course, but as you probably know already Jon Elster certainly reads like he has: see his essay on Marx and game theory here and his “Explaining Social Behavior”.
And well done Mike and Robin that they at least “exposed you” to this shocking idea, even if you read no further. And I very much hope your son read further, and learned the reasoning behind it.
As the economics-taking son in question I figured I would chip in. I did read further, and I learned the reasoning behind the equality-efficiency tradeoff. What I did not learn was any leftwing objections or critiques of the tradeoff; you could say that in an introductory course you have to oversimplify issues, but somehow all my other introductory courses manage to do so without completely neglecting one side of the argument.
Is the equality-efficiency tradeoff immune to criticism? No. Is it the whole truth? No. Are there no exceptions? No. But does it contain an important truth that every educated person ought to understand, expecially those who advocate government policies to increase equality? Yes. yes, and yes.
I think there must have been a misunderstanding. The problem my dad and I have with the textbook is not that it teaches the equality-efficiency tradeoff. The problem is that it states the equality-efficiency tradeoff as indisputable fact. It does not mention any possible criticisms, it does not acknowledge that this idea is not “the whole truth”, and it does not mention any exceptions. In fact, the textbook does exactly what my dad accused it of: it reduces complex issues into simplistic right wing propaganda. So, what exactly is your point?
To quote from the book:
“The big tradeoff is based on the following facts… taxing people’s income from employment makes them work less. It results in the quantity of labour being less than the efficient quantity.”
Apparently, it is a “fact” that raising taxes results in less labour. I could argue that redistributing the wealth to the poor and sick increases human capital (by educating the poor and healing the sick) and thus leads to more labour overall. But such criticisms are clearly just as naive and unfounded as a fundamentalist’s attack on evolution, and that is why the book quite rightly forgoes any such nonsense and declares the tradeoff as fact, ignoring the whining of backwards people such as myself.
You could say that in this way the book shocked me, or exposed me to new ideas; but I think it would be more accurate to say that the book annoyed me. Being forced to read simplistic conservative economics and regurgitate it on command can do that.
I suppose adopting a Marxist perspective could also be considered taking economics seriously. Of course, it’s been a very long time since economics took Marx seriously; I think it was Samuelson who dismissed him as a ‘minor post-Ricardian’. When will sociologists do the same?
Simon: from a limited sample of knowing you, on the basis of your one comment above, I would say that the Parkin and Bade text was a great success in your case. You both learned (at least the basics of) the main point, and also learned to approach it with a critical perspective, and thought of possible counterexamples, themselves based on economic theory (human capital theory).
Too bad it annoyed you!
Do you realise that the biggest problem in teaching economics to most first year students is just getting to step one?
Being forced to read simplistic conservative economics and regurgitate it on command can do that.
If you were principled and believed you were right, you wouldn’t have regurgitated. So, you sold out. There must be some economic theory about this – cost/benefit; risk/reward; apple falling close to tree; etc.
Simon: you might (or might not) find this post of mine relevant: http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/06/why-do-economists-assume-tradeoffs.html . It would be my counterargument to your counterargument.
JvfM: one of the problems of MC exams is that they leave no room whatsoever for a student to disagree with the text/prof, and explain why he disagrees. So a prof can’t distinguish between a student who doesn’t understand the point and a student who understands the point but thinks it’s wrong. And it’s very common in first year to have lots of MC questions (or similar).
Simon’s “exam answer” in his comment above gets an A grade, for example (A+ if he had added a supply and demand diagram, with a deadweight cost triangle). Even though I think his answer is (ultimately) wrong (as in my linked post). But if he ticks the box “there is no tradeoff”, he gets 0%.