Soul-searching in economics
Newsweek’s Rana Foroohar reports [ht: ja] that the most recent meeting of the American Economic Association (in Atlanta) involved “more soul-searching than number crunching.”
Hundreds of the profession’s most eminent thinkers turned out to hear panel after panel discuss how, exactly, they’d gotten things so wrong. Why did most of the world’s top economists fail to forecast the financial crisis? Should the teaching of economics in universities be entirely rethought? While past stars at the AEA have been conservative, finance–oriented intellectuals like Eugene Fama, this year’s meeting belonged to the liberal realists—Paul Krugman, Robert Shiller, and the man of the hour, Nobel laureate Joseph Stiglitz. Stiglitz delivered a keynote debunking the profession’s key tenet—namely, that markets can be trusted. Leading into the crisis, Stiglitz said, “markets were not efficient and not self-correcting, and now huge costs in the trillions of dollars are being borne by every part of society.”
So, what’s the alternative? Foroohar focuses on theories that are “based, to one extent or another, on the idea that people are irrational actors, and that markets aren’t always efficient”—such as the adaptive-markets hypothesis (influenced by evolutionary biology), neuroeconomics (which borrows from brain science), and behavioral economics (stemming from psychology).
Sound familiar? This is the same kind of borrowing from the natural sciences that the neoclassical economics did with respect to nineteenth-century physics. It’s another attempt to make economics “scientific,” by ignoring the historical and social (including, of course, discursive) constitution of economic behavior and institutions.
Foroohar also gets the history wrong:
The last time the world experienced this sort of reset was after the Great Depression. Prior to that, economists saw capitalism as a perfectly self-regulating system, an idea overturned by the crash. That’s when British economist John Maynard Keynes articulated all the ways in which government could and should help bail out an economy.
Economists didn’t get it wrong. Neoclassical economists are the ones who saw—and continue to see—capitalism as a perfectly self-regulating system. Not Marxists or institutionalists or, for that matter, even the classicals.
The mainstream of the discipline may be continuing its history of science-envy but it’s still the case that, in the midst of the current soul-searching, openings are being created for previously marginalized ideas to get a hearing and to reach new audiences.
The only real consensus view expressed at the AEA meeting was that economics is in for a difficult, yet potentially very fruitful period of questioning and cross-pollination.
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As for what has “gone wrong” in mainstream economics, a reading of Goethe’s Faustus, along with some of the work of Dave Colander and others on the “dissemination of economic ideas”, would be appropriate. How do the souless do soul searching? Academia, underneath the veneer of the robes, rituals, pomp and circumstance and heated debates about the equivalents of how many angels can dance on the head of a pin, in arcane venues, is a cross between a gigantic whorehouse and a gigantic Jerry Springer Show; and all sorts of Faustian Bargains are struck every day and all sorts of incestuous cloning networks thrive.
The abstract and one-sided hypothetico-deductivism of the neoclassical paradigm that not only lacked but eschewed any empirical support, now runs to the likes of neurobiology, evolutionary economics, game theory and experiemental economics to try to develop “empirical support” for the heuristic and cornerstone Homo Oeconomicus–analogous to chopping off one’s toes to make a size 10 foot fit into a size 7 theoretical shoe. But this is nothing new; or as the old cliche goes: “what is true is not new and what is new is not true” in mainstream economics. And then there is old fashioned cognitive dissonance. What potential advisor for a PhD candidate is going to sign on to advise a student on a project and dissertation showing that the advisor’s life’s work and supporting paradigm has been a meaningless pile of crap full of elementary methodological mistakes and largely irrelevant to anything real? And what former grad student who has done a lot of Faustian deals to get through a program and get some degree will repudiate the deals and work necessary to get that degree especially when more Faustian deals await to get a tenured gig and “advance” to full-prof before being able to “come out of the ideological closet”? Or what new PhD will say that their degreee is meaningless as it came from a clone factory or a paper mill masquerading as a university? In “The Theoretical System of Karl Marx” by Louis Boudin, MR Classics of Radical Thought published in 1907, Boudin noted that neoclassical thought was always bi-polar on the subject of rationality: assuming perfect information and rationality (ability to see ends and means, costs and benefits) along with the propensity to actually perfectly calculate costs (direct, indirect and opportunity, short and long-term) and benefits to supposedly show a dynamic and endogenously self-equilibrating capitalism driven by and responsive to “exogenous shocks” like consumer sovereignty/choice; and, yet, on the other hand asserting (again without empirical support merely a-priori) fundamental irrationality and illusions driving human perceptions and behavior to support metaphysical and idealist-based epistemologies and general philosophies (Philosophical Idealism) along with neo-nihilism with respect to the possibility and efficacy of purposeful individual or collective action to mitigate the vicissitudes and trajectories of capitalism as a system.
I agree that much of so called “mainstream” economics’ problems were self-inflicted and that there is (or was until last year) a level of hubris among these mainstreamers that is difficult to grasp and even more difficult to accept. But since my beginning point is pragmatics my take on the collapse of the mainstream, the attack of the outsiders, and the “soul searching” now going on is somewhat different. Arrangements, structures if you will, should be judged, in my view, by a simple metric — do they work? It can be argued that neoclassical economic arrangements (academics, math, economies, and public policies) worked for a time. And that’s all you can ever expect from any set of arrangements, economic or otherwise. They all fail eventually. Neoclassical economics and economists have been criticized on this list and elsewhere for “ignoring the real world.” Problem with this statement is that there really is no “real world” to ignore. There are only the made and being made worlds that actors create in conjunction with other actors. These are all temporary, certainly biased, defensive against other proposed sets of arrangements, and never perfectly explain or control every action or decision. Neoclassical economists and their friends played a large part in constructing the economic world of perfect and efficient markets and little role for government that has dominated economics and economies (never completely) over the last 3-4 decades. It is a failure. It other works it eventually stopped working. But for a time it worked. People had money and jobs, goods were purchased, taxes collected, and businesses operated successfully. But it can also be argued that inequality of incomes grew, labor unions, environmental concerns, and democratic decision making were marginalized, and a new type of “risk society” was created that put all the other economic arrangements in jeopardy. But, and this is the point I want to emphasize, it will be NO different with the next arrangement or sets of arrangements to organize economic study and life. So tread lightly in your criticisms of the neoclassicals. They failed but so will you if you get the chance to set the arrangements the way you like. Failure is part of the process. It comes to all creations to arrange what we do and how we do it. I don’t mean to discourage the creation process and re-building of academic economics and economies. Obviously the current set of arrangements is no longer functional. Let the re-building begin. But with humility.
I have a sightly different view: I agree that all theories fail eventually, although some look as if they will have long staying power, and that reality has a way of showing up all our ideas. So humility, yes, we need in large amounts.
But I dispute that the neo-classical system ever worked: it never really engaged reality so it was never tested until recently when it failed almost immediately. Most of the time in which economics was propounding neo-classical thought, no one outside economics gave it any thought. It was an imaginary hegemony: no one in business acted or thought along orthodox lines. Only when politics co-opted the ideological aspects of it, did neo-classical theory come into contact with reality e.g. through extensive deregulation and then through the export of technologies like EMH into banking. It blew up within years. Which is pretty much instantaneously in real world terms.
I agree with Ken Zimmerman, that we can all use a bit of humility—and with Peter Radford, that neoclassical economics ever worked.
Let me make it even stronger: neoclassical theory NEVER worked. Not during periods of growth or recession; not in the United States, Latin America, or elsewhere. It never worked either as a theoretical system or in terms of a set of policies.
But we do need to be careful: there’s capitalism (as an economic and social system) and there’s neoclassical theory (as one way of making sense of that system). And the two are not the same. What we do find right now is that many people are questioning both capitalism, as a system, and neoclassical economics, the theory that celebrated that system.
And to complicate things a bit: neoclassical theory (like all economic theories) has a “performative” dimension. The hegemony of neoclassical theory has had an impact on the way capitalism has been structured, not only through policies of privatization and deregulation but also as a discourse, as a way of making sense of the world.
The failure of neoclassical theory is therefore two-fold: it failed with respect to other economic theories (and here I include the range of heterodox views, from Marx and Keynes to feminist and postcolonial economics) and in the way our lives came to be “performed” according to the precepts of neoclassical theory.
One final point: my original posting meant to highlight the attraction of “scientism” in recent attempts to fix mainstream economics. If we’re going to move beyond neoclassical economics, we’re going to have to come to grips with that scientism, too.
David: I am with you up to a point. I am worried, though, that the failure of the overly and wrongly scientifically informed neo-classical theories would lead to a rejection of all scientific influence. I see a need for a blend: history, culture, geography, and all social influences need to inform economics, but there still seems to be a place to import scientific methods and insights as well. Are you advocating a total rejection of scientific influence? Or a modification? What do you mean by “scientism”?
Peter, what I mean by scientism are 3 things: (1) the idea that it’s necessary to ground economics in one or another of the natural sciences (e.g., physics, biology, or brain science), (2) the idea that science is a singular thing (e.g., the experimental method or mathematical modeling) and not a range of different approaches, and (3) the idea that science, however defined, trumps everything else (e.g., history or textual analysis). So, my rejection of scientism does not entail a rejection of science per se.
Thank you for the clarification.
I think this places a great burden on economists to develop a common method or set of methods that can be agreed upon as valid. In the sciences you mention that debate presumably takes place and the acknowledgement of various theories as having value to that particular community is thus established.
I don’t see that in economics. Instead I see a variety of subjective islands often disconnected and contradictory that condemn the project to endless self-examination. There even seems little agreement over exactly what economics is about. While that engenders lots of excitement and opportunity within the project it also creates and fans frustration outside. We are rapidly reaching a point where the public should ask whether they should pay heed to economists at all.
I realize this is not exactly new. And I also understand that theories come and go: the disproof of ideas is surely how we make progress. But the project of economics connects intimately with society as a whole: people’s livelihoods often depend upon the efficacy of economic policy.
As an outsider looking in I find it vexing, and often confusing, to have the burden placed upon me for choosing which particular theory needs to be followed at each particular moment. The remarkable divisions within the subject are alarming to behold in the context of the urgent need for advice.
That’s why I, presumably naively, continue to search for coherence amongst the competing strands of thought that comprise economics. When I began my search I was unprepared for the extreme and often hostile differences I have found. As a matter of course I find it beneficial that there are competing ideas, but it would help if they were trying to solve the same problem. Or even that they recognized the existence of a problem in the first place.
Fragmentation is not the same thing as pluralism. At least not from a ‘user’s’ perspective.
I don’t know what to say, Peter. I am not at all bothered by the fragmentation you regard as “confusing.” For me, any attempt to “develop a common method of set of methods that can be agreed upon as valid” usually favors those in power and marginalizes the rest of us. It’s really Foucault’s point about the way discourse creates what is normal and what is not normal–be it sexuality, mental illness, crime, or economics.
But, indeed, the existence of a fragmented disciplinary landscape does mean that the choice of economic theories (the theory you choose, and the theory that chooses you) matters a great deal. Different economic theories have quite different consequences in the world, an issue that science does not and cannot settle. Economists–both academic and everyday–simply don’t agree on what the economy is, what problems exist, how those problems can be solved, or anything else.
And that’s just fine by me. . .
David: Thanks once again. Are you saying that you see no thematic core that can be called economics? Or that there is no collection of ideas that cohere around such a core? Is economics simply a conversation with no conclusion? I don’t want to over play my point since I am firmly a proponent of diverse opinions and methods. My ‘fear of fragmentation’ is simply that without coherence we risk falling into an ‘anything goes’ frame of mind that condemns the subject to decline or irrelevance since it produces too many solutions, and cannot even agree on the problems it tries to solve. Is there a boundary within which we recognize each other as economists and our ideas as being ‘economics’? Or is there no boundary?
I think it is a feature of the real world that competing ideas will ebb and flow in dominance and that economics will constantly be redefined. I find that healthy. The object of pluralism, to me, is to defend the diversity necessary for future problems to be solved, or to protect the future from current errors – neo-classicism being an example. At the same time there should be some form of discipline around the standard of the conversation you want to encourage, else we pass less, not more, along.
Peter, I’m afraid I’m going to confirm your worst fears: I do not believe there’s any thematic core to this thing we call economics. No single object, no single set of questions, no singular method–however broadly defined. My reasoning is simple: each economic theory defines and responds to its own object and set of questions, and each utilizes a different method to analyze that object and address those questions. So, the people who do economics have NOTHING in common. No mutual recognition (as I’ve often discovered, when I and many of my friends have been written out of the discipline). No boundary (since the boundaries themselves are defined differently according to the different protocols of the contending theories).
The hegemonic practitioners within the discipline attempt, of course, to discipline the conversation. But that’s all it is: an attempt to impose one object, set of questions, and methods on everyone else. One way to think about it is McCloskey’s rhetoric + Foucault’s power = the contested terrain of the economics discipline.
To my mind, we may not pass along agreement but we do pass along knowledges, including the knowledge that the discipline itself has been subject to disagreement, and the hegemonic theories contested, from the very beginning.
As a matter of fact, David, I find what you say to be very reflective of the real world: complexity seems to defy us at every turn so we need many tools at hand to solve whatever problems we come across. Your vision is so different from that with which I am familiar. When I worked in banking I was very used to having to respond to requests for information about the economy: for example, employers and union leaders wanted to know certain ‘facts’ so they can negotiate contracts and so on. I was depressed that the literature allowed me so many options I felt I was making up answers rather than being able to rely on ‘hard science’ to guide me. Consequently I gave up on economics and focused on devising my own approach. Only now, years later, have I circled back to find out what’s going on. Frankly it’s a big improvement, but I still feel as if I have to invent answers as I go along.
What David describes is the general case across the board for what’s loosely called social arrangements and cultures. All efforts at building a final, comprehensive, and unchallengable set of principles, rules, tools, texts, and physical devices that is “economics” (the academic discipline or actual economies) is just as tenuous, uncertain, and temporary as all the other parts of the worlds actors build. Which means the social and physical sciences, religions, governments, and the “humanities” are all in the same boat with “economics.” This is not to say there is chaos and we all constantly live in a state of panic. (Okay, panic may be nearby all the time.) Actors manage in particular times and places, by various means to create stability. But all stable solutions decline and eventually collapse. What can I say — Tarde, Garfinkel, and Latour have it right.
Just a couple of quick comments. . .
Peter, yes we’re always inventing answers. My only caveat is, those inventions are always theoretical, that is, they’re always produced within one or another theoretical framework. That’s why neoclassical answers are so different, for example, Marxian answers.
And, Ken, that’s a great way of describing the field or discipline, as a set of contestable and often-contested “principles, rules, texts, and physical devices” (I would emphasize languages). The set that is considered “final, comprehensive, and unchallengeable” always excludes some, who in turn call them into question. That’s my preferred way of recounting the history of economic thought and of understanding the current debate within economics.
But don’t misunderstand me. It’s not just the “field” that’s uncertain, tentative, and transient — it’s rather everything we count as “reality.” Also, I don’t want to leave the impression that these things can be overcome, that there is a real world to which we can appeal that if only we look long and hard enough will settle the conflicts. The conflicts cannot be settled, cannot be overcome, ever! The situation is answers will keep coming up, but will always be partial, uncertain, unclear, and questionable. Finally, I don’t, certainly deny the importance of language in all this “rattling around” but my view is it’s just one part, and does not sit above the others.
I don’t disagree with you, Ken, especially the idea that appeals to reality will never settle the conflicts. That’s because, for me, different theories produce different realities (or, in more technical language, different thought-concretes about the concrete-real). So, for example, the reality that neoclassical economists see/produce is quite different from the one seen/produced by other groups of economists. What that means, for me, is that the uncertainty of the discipline of economics is not an ontological given but a product of different, contending discourses.
David, I do not disagree with your general conclusion although my language would be somewhat different due to my background in Anthropology and History academic disciplines. But the really interesting part is studying and describing the results of this. In simple terms there are no correct answers, only more or less well constructed and effective (in terms of self-consistent working worlds) answers. That’s why I said earlier on this blog that neoclassical economics “worked.”
So, we’re back to where we started, to the issue of whether or not neoclassical theory “worked.” Ken says yes, I say no. In my view, the fact that “people had money and jobs, goods were purchased, taxes collected, and businesses operated successfully” was not because neoclassical theory worked; it’s because capitalism was successful: capitalism was successfully extracting profits and redistributing them (e.g., to investment, upper management, and finance) so that growth took place. That particular pattern of capitalist growth created, in turn, the current crises. Now, neoclassical economists have a different explanation for that capitalist success—one based on individual choice, free markets, and private property—and of the subsequent failure—based on government mistakes. So, here we have 2 different explanations of both capitalist success and failure but the success doesn’t prove that neoclassical theory worked.
So let’s take it to basics. Did economic life collapse when neoclassical economics became the dominant theoretical paradigm in economics departments, business schools, and many economies around the world? No. Was this because neoclassical theory, arrangments, and devices were functioning as designed and intended in each and every instance? Not likely. Did the theory through its activities shape economic life and actions to function and look more like the theory? Probably, based on the evidence. Did this shaping sometimes make the theory more successful and sometimes less successful? Clearly. So what I mean when I say neoclassical theory worked is that it was successful, for a time, at partially changing the shape and function of economic actions and arrangements, sometimes to its own benefit, sometimes not. But like all notions of “right” economic actions and functions, both before and after it, neoclassical notions eventually encountered countervailing notions they could not overcome or on their own created contradictions that made neoclassicalism unpopular and thus unworkable.
Please remeber Keynesianism worked for the 25 years after World War II– The Marshall plan (uder the Truman Administration) being a variant of what Keynes suggested in his Keynes Plan at Bretton Woods — and fiscal stimulus whenever the economic looke like it was petering out — e.g., the largest peacetime public works program, i.e., the interstate highway system under the Eisnehower administration, and under the NASA pogram to go to the moon under the Kennedy Johnson administration.
What caused its collapse was the Samuelson Solow argument that a Phillips curve tradeoff between inflation and unemploym,ent was possible– and thestupid Carter Administration for buying such Crap — which was a violation of Keynes’s theory.
The success of the neoclassical resurgence in the 1980s was because Reagan was the biggest Keynesian fiscal policy stimulus president since Roosevelt.
Paul, so what you’re saying is neoclassicalism worked in econonies because it stole Keynesian thunder and solutions. But then it disguised them as something else. You make my points. That is the way it works. Since there is no “real” world until its built all strategies are open and used. Maybe it’s just time that Keynesians, or heterodox economists turned the tables on the supporters of neoclassical formulae. Steal their thunder and some of their policies and repackage them with some alternative approaches. In fact I think some are already doing that. There is no such thing as a purist, in anything.
Fascinating discussion, thanks.
I like the comment that we can’t agree on economics definition/purpose.
For me, I like to think of the goal of economics to be health—of the environment, the individual, & the society.
I believe in relating scientific & mathematical phenomenon to economic studies & I believe they can show us patterns. But to over-focus on them leads to imbalance, something we ought to realize, but it seems American society, due to its history, does not have balance in its personality.
Also, annoying-the early definition of man as self-interested, concerned about his own survival. I think of the woman, the mother, who cares for her child & whose concern & care keeps the child alive. She is the opposite of self-interested. Again, here, the definition of economic man seems to leave out the female energy, & so contribute to imbalance.