Home > The Economics Profession > Economists This Week: What is neoclassical economics? Glasner, Krugman, Vernengo, Knibbe and Pilkington

Economists This Week: What is neoclassical economics? Glasner, Krugman, Vernengo, Knibbe and Pilkington

David Glasner  http://uneasymoney.com/2012/08/27/hayek-was-a-neoclassical-yes-neoclassical-economist/

Keynes’s work was not neoclassical economics, and it has been an ongoing project ever since Keynes published the General Theory to determine whether, and to what extent, Keynes’s theory could be reconciled with neoclassical economic theory. Here is how Hayek summed up his essay.

It seems to me that signs can already be discerned of a revival of interest in the kind of theory that reached its first high point a generation ago – at the end of the period during which Menger’s influence had mainly been felt. His ideas had by then, of course, ceased to be the property of a distinct Austrian School but had become merged in a common body of theory which was taught in most parts of the world. But though there is no longer a distinct Austrian School, I believe there is still a distinct Austrian tradition form which we may hope for many further contributions to the future development of economic theory. The fertility of its approach is by no means exhausted and there are still a number of tasks to which it can profitably be applied.

So we are all (or almost all) neoclassical economists, and none more so than Hayek,  who was steeped in the neoclassical tradition. But no tradition is static. When a tradition stops changing, when it stops evolving, it becomes a relic, not a tradition. And with change come differences of opinion and disagreements, even bitter disagreements, between practitioners operating within a single broad tradition. Many Austrians now view themselves as completely distinct and separate from the broader neoclassical tradition from which their own doctrines evolved, but that was never Hayek’s view. And for all the severe criticisms and complaints he voiced about the direction of economics since the 1930s, he never viewed himself as being cut off, or alienated, from the mainstream of neoclassical economic theory.

Paul Krugman      http://krugman.blogs.nytimes.com/

So, what is neoclassical economics? There’s a historical definition, having to do with the “marginal revolution” of the late 19th century and all that, but what I think we mean in practice is economics based on maximization-with-equilibrium. We imagine an economy consisting of rational, self-interested players, and suppose that economic outcomes reflect a situation in which each player is doing the best he, she, or it can given the actions of all the other players. If nobody has market power, this comes down to the textbook picture of perfectly competitive markets with all the marginal whatevers equal.

Some economists really really believe that life is like this — and they have a significant impact on our discourse. But the rest of us are well aware that this is nothing but a metaphor; nonetheless, most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point or baseline, which is then modified — but not too much — in the direction of realism.

This is, not to put too fine a point on it, very much true of Keynesian economics as practiced (leave aside discussions of What Keynes Really Meant and whether we’re all apostates). New Keynesian models are intertemporal maximization modified with sticky prices and a few other deviations (such as balance-sheet constraints). Even IS-LM loosely appeals to maximization arguments to derive the slopes of the curves, while analyzing outcomes by comparing equilibria.

Why do things this way? Simplicity and clarity. In the real world, people are fairly rational and more or less self-interested; the qualifiers are complicated to model, so it makes sense to see what you can learn by dropping them. And dynamics are hard, whereas looking at the presumed end state of a dynamic process — an equilibrium — may tell you much of what you want to know.

These motives are the reason why other fields facing similar concerns adopt similar strategies. As I wrote long ago, evolutionary theory — the biological kind — looks remarkably like neoclassical economics.

What would truly non-neoclassical economics look like? It would involve rejecting both the simplification of maximizing behavior, going for full behavioral, and rejecting the simplification of equilibrium, going for a dynamic story with no end state.

And there is economics like this: agent-based economics. It’s a project that relies heavily on computing, to keep track of the complexities, and at this point makes simplifying assumptions that are in their own way as unrealistic — but in a different direction! — as those of neoclassical work. Still, it’s a good thing to pursue.

Matias Vernengo    http://nakedkeynesianism.blogspot.co.uk/2012/08/krugman-on-meaning-of-neoclassical.html

So what is neoclassical economics? According to Krugman it is basically maximization and equilibrium. In his words, neoclassical or marginalist analysis is:

“economics based on maximization-with-equilibrium. We imagine an economy consisting of rational, self-interested players, and suppose that economic outcomes reflect a situation in which each player is doing the best he, she, or it can given the actions of all the other players. If nobody has market power, this comes down to the textbook picture of perfectly competitive markets with all the marginal whatevers equal.”

This is clearly incorrect. First, classical authors, meaning those that followed the surplus approach (from Petty to Marx, including Quesnay, Smith and Ricardo) did assume that economic agents were rational and self-interested and they also believed that the economy could be represented by equilibrium outcomes. And they clearly were not neoclassical, meaning they did not believe that supply and demand determined long term prices (natural prices as Smith and Ricardo referred to them, or prices of production in Marx’s terminology).

If profits were higher in a particular sector, capitalists would try to gain from those opportunities entering the industry, and in the process would lead to a uniform rate of profit. Market prices, determined by supply and demand, would gravitate around the long term equilibrium prices that were determined by the technical conditions of production, and the previously given real wage (by conflict), in modern parlance (on the issues raised by the Labor Theory of Value, and Sraffa’s solution just check other posts in this blog).

More importantly, there was no mechanism (even in the case of those classical authors, like Ricardo, that accepted Say’s Law) that implied full utilization of labor, capital or any particular means of production. Wage flexibility did not lead to full employment. The hallmark of marginalism is the notion that supply and demand determines simultaneously the equilibrium long term prices, and that price flexibility leads to full utilization of resources, something that the capital debates have demonstrated long ago it cannot be done. In this regard, Krugman decides (because it must be advantageous) to follow those that he criticizes, and remains oblivious to both logic and empirical evidence. If he wants to be coherent with his Keynesian ideas, he should get rid of the notion of a natural rate of unemployment (or and of interest).

 

 Merijn Knibbe  https://rwer.wordpress.com/2012/08/28/money-loans-and-economics/

In a blogpost, Paul Krugman asks, while defending the heuristic use of neo-classical economics : “What would truly non-neoclassical economics look like? It would involve rejecting both the simplification of maximizing behavior, going for full behavioral, and rejecting the simplification of equilibrium, going for a dynamic story with no end state.” Well, I personally do agree very much with the last part of the sentence – it’s also called ‘history’.

Philip Pilkington

http://www.nakedcapitalism.com/2012/08/philip-pilkington-divine-mathematics-neoclassical-economics-as-spiritual-meditation.html#PLfCI7xp695uCEtB.99

The influence that mathematics has had on neoclassical economics is obviously quite profound. However, when looked at in detail it appears that a certain type of modern mathematics was in fact highly suited to the direction many in the economics profession took after the work of Leon Walras – the Frenchman who founded modern neoclassical economics – appeared on the scene. So, it should not be thought that it was simply the formal tools of mathematics that transformed neoclassical economics into the obscurantist doctrine it is today. Instead it should be understood that its obscurantist skeleton was ready and waiting for its mathematical flesh.

It has been said before – and not just by the present writer – that neoclassical economics amounts to a sort of theological system that bears no resemblance to reality for the simple reason that it does not aim at reality.

  1. August 30, 2012 at 3:50 pm

    According to Keynes, classical [and neoclassical] economists were like Euclidean geometers in a non-euclidean world… what was required to make a realistic geometry in this non-euclidean world was, KJeynes argued, to throw out the axiom of parallels and work out a noneuclidean geometry. Keynes went on [p. 16 of the GT] “Something similar is required today in economics.”

    The three axioms that Keynes threw out are (1) the neutral money axiom; (2) the gross substitution axiom, and (3) the ergodic axiom — as I explain in many places including my books THE KEYNES SOLUTION:THE PATH TO GLOBAL ECONOMIC PROSPERITY (Palgrave, Macmillan,2009); my textbook POST KEYNESIAN MACROECONOMIC THEORY, Second edition, (Elgar, 2011) and in Palgrave’s “Great Tinkers in Economics series ” my book JOHN MAYNARD KEYNES (Palgave/Macmillan, 2007).

    So I wish people would stop blaming the messenger [Mathematics] for the message [neoclassical economics, Austrian economics, new keynesian economics,etc].

    Once we eliminate these three FUNDAMENTAL axioms of mainstream economics, we get a real world economic analysis which can demonstrate that it is not sticky prices and wages (a la Krugman) that creates the unemployment problem — that even with flexible wages and prices there is no automatic market mechanism that assures full employment in the short run, or even (till you are blue-in-the-face) long run.

    So come on lets get with Keynes’s real — monetary analysis.

    Payl Davidson

    • August 31, 2012 at 8:25 am

      “So I wish people would stop blaming the messenger [Mathematics] for the message [neoclassical economics, Austrian economics, new keynesian economics,etc].”

      Although I am not too sanguine, in general, I agree with the above.

      It’s true that mathematics and statistics have have been used as devices to make otherwise crappy works look “scientific” and to make them unassailable for those who are less knowledgeable about maths, but could perceive their obvious flaws.

      At the other hand, and this is where I think maths can be useful, maths requires precision in one’s reasoning: clear, unambiguous definitions, clear arguments.

      And this is what people often forget: non-mathematical economic works can be pretty crappy, too.

  2. Bruce E. Woych
    August 31, 2012 at 12:39 am

    Pure and Simple: Neo-classical Economics is class business models of political economy.

  3. Bruce E. Woych
    August 31, 2012 at 12:41 am

    A “true” political market economics would be equivalent to or parallel to the “Real Politik” of critical contemporary power relations.

    • Bruce E. Woych
      August 31, 2012 at 12:45 am

      Since “power” corrupts and absolute power corrupts absolutely, a true discipline of contemporary economics would need to employ game theory with systems analysis to project an authentic context to even attempt “theory”…meanwhile these well paid losers are mere cheerleaders along the playing field. And YES Virginia…there IS a Santa Claus too.

  4. Alice
    August 31, 2012 at 11:05 am

    Neoclassical economics is the dark science. Best they (those who get sucked in to studying it- get off theiir ego trip – take a look at what others think of them ie really (hated and detested profession) – or be left alone in their labs with their door padlocked and bolted and a dose from nurse Ratchet every four hours to stop them staring intoi stata for non solutions to the ridiculous game of their version of the future with no reference to history.

    These people who pursue this profession really are certifiable and doing not much but using the rest of us an an “eco – illogical” experiemt.

  5. Alice
    August 31, 2012 at 11:07 am

    Neoclassical economics? The dark science? Yes it is. If only they could hide themselves away.

  6. Alice
    August 31, 2012 at 11:28 am

    They actually lost the entire meaning and elegance and social usefulness of economics when they abandoned the great economic historians and thought mathematics could rule economics alone.

    Since then no-one has been able to understand them (and admission to the inner sanctum is highly restricted) but they have rendered themselves entirely useless for their ability to address the big issues like permanently higher unemployment, higher inequality etc

    Problems once worthy of economic study but now that the bells are tolling these neoclassical economists are still toiling away at their dreamland utopic models while the rest of us sink.

    What do they realy care? Whats on sale here is professions – as long as they toe the party line.

    • davetaylor1
      August 31, 2012 at 12:08 pm

      Alice, “pro” is short for prostitute, not professional. That lot have sold their souls to the devil.

      • Alice
        September 1, 2012 at 10:41 am

        They are prostitutes Dave.
        Not economists at all. I just resent at least some of our public taxes are wasting time providing the facilities for these people to hawk their shoddy wares to the highest bidder.

  7. davetaylor1
    August 31, 2012 at 8:37 pm

    @ Krugman: “Even IS-LM loosely appeals to maximization arguments to derive the slopes of the curves, while analyzing outcomes by comparing equilibria.”

    @ IS-LM: “Economists who understand IS-LM have done vastly better in tracking our current crisis than people who don’t”.

    The explanation of IS/LM found by following Krugman’s link is revealing. If, according to monetary econometrics, investment of savings is proportional to interest rates and net liquidity of money inversely so, and according to monetary econometrics, GDP increases when lower interest rates increase liquidity (i.e. immediate availability) of money, it would not be surprising if further econometrics tracked these; but in fact they haven’t.

    Lowering interest rates and even vastly increasing the money banks are allowed to issue is merely adding the middle class to those without sufficient money to invest in their own future (decent housing, health care and education for their/our children). To even track that one needs to understand what doesn’t appear either in the model or the econometrics: that the IS and LM graphs apply to different populations: the “haves” with a surplus to invest and those so short of ready money that they spend all they have on inferior goods, make do and mend, and only save for their children by going without.

    The virtues of the latter group have been too readily attributed to the former, who as a class have forgotten how (prior to Henry VIII) interest-taking, profiteering and land-grabbing were not simply automatic (or even expected) but actually illegal. (One was expected to share one’s surplus goods with the needy via charity, local community tithes or – in the case of the monetarily rich, i.e. landlords and merchants – government taxes). Hence the legal challenge insinuated by Shakespeare’s Shylock as his alien money-lender threatened to tear the heart out of the British economy, the counter-attack half a century later by tax-dodging Parliamentarian regicides, and the “Glorious Revolution” whereby the tax-dodgers turned the tables with an unwritten constitution legalising THEIR taxing of Government via compounded interest on a fictitious monetarised National Debt. Also missing from Krugman’s IS/LM graph, then, is which group is receiving the interest.

    In short, since Krugman’s interpretation is entirely monetary, it is misunderstanding (or misrepresenting) money and/or economics. The latter is not just about money and trade, but about biological people, human expectations, historic legal decisions and illegality. Either way, it is not enough for economics to “track” what is happening. Its job is to explain WHY it is happening in such a way that – when necessary – we can do something about it. That’s what Keynes did, not what IS/LM does.
    Krugman @ IS-LM: “So, the first thing you need to know is that there are multiple correct ways of explaining IS-LM. That’s because it’s a model of several interacting markets, and you can enter from multiple directions, any one of which is a valid starting point”.
    Agreed the “because”, but what is “correct”? The markets are missing from the model, and the possible interpretations, though formally consistent, generate contradictory aims and moralities. Is economics about “interacting markets”, or about people with different roles communicating with each other through markets? Is it to be about “making money”, or about “feeding the kids” to sustain the well-being of humanity in cooperation with Nature? We need to choose, but is “money” a thing or power to be distributed, or information in a human-powered system controlling physical distribution?
    In such a system, if one type of information represents the ultimate aim, the others represent corrective feedbacks and instrumental aims. If making money is instrumental to feeding the kids rather than vice versa, then the feedbacks from production and distribution are reversed and policy corrections should be opposite to what they are now. Instead of trying to produce more to sell more we should be distributing and looking after what we have already got, and only reproducing what is being consumed, along with worthwhile improvements. As information, money can be reproduced at negligible cost, so it does not have to be earned; indeed, having already been given a livelihood is the condition of being able to earn it.

  8. August 31, 2012 at 10:51 pm

    John Hicks, inventor of IS-LM was a good friend of mine. I convinced him to renounce IS-LM as a representation of Keynes which I published as an article entitled “IS-LM: An Explanation” in the 1980-1981 winter issue of the JOURNAL OF POST KEYNESIAN ECONOMICS. Instead Hicks signed on to my argument that Keynes;s analysis required assuming a nonergodic system.

    It unfortunate that People like Krugman still use IS LM. it jst makes so called “Keynesians” like Krugman really supporters of the neoclassical theory.

    Paul Davidsont.

  9. Rhonda Kovac
    September 4, 2012 at 1:16 am

    Because of the intimate and reciprocal interrelationship between economic academia and the political establishment–with so many chameleon-like shifts between principle and political expediency operating under the blessing of key mainstream academicians–one is hard-pressed to argue that there IS any meaningful mainstream economic ‘theory’ to be pinned down.

    Neoclassicism appears to be more a political front-end–to put a respectable public face on corrupt political dealings, to be paraded when it serves its purpose, and hidden away when not–rather than an honorable, good-faith account of economic phenomena that advances understanding and promotes well-being.

    It is no wonder the economic establishment is so blithely uninterested in examining and correcting itself.

  10. September 5, 2012 at 6:20 am

    Regarding Paul Krugman’s response to the “What is neoclassical economics?”, I would like to first address his idea that neoclassical economics is “…nothing but a metaphor”. Well, it may of course be characterized as a metaphor. In this regard the term has been given serious study over decades concluding that (some) metaphors can not only be empirically grounded but that scientific progress frequently involves the evolution of metaphors into meaningful scientific models. And so referring to neoclassical economics as a metaphor—setting aside the trivializing “nothing but”—can be characterized as tautological.

    As another comment, Krugman earlier indicated that “Some economists really really believe” in Walrasian “[utility] maximization-with-equilibrium” but that “I and many others” take a more nuanced approach, by:

    “….[taking] the maximization-and-equilibrium world as a starting point or baseline, which is then modified — but not too much — in the direction of realism.”

    From this we may conclude that Krugman does not credit university economics as a subject that can acceptably explain, let alone guide. This is obviously correct, and I of course agree. But he does believe it is a satisfactory basis for “[modification] … in the direction of realism.”

    This line of thought may be considered remarkable. First, Krugman seems to dismiss “economics based on maximization-with-equilibrium” as not worthy of study in an epistemologically serious way—when he refers to the subject in the negative sense as “nothing but a metaphor”. And yet it is supposedly used in a serious way—as “[the] starting point or baseline … in the direction of realism.”

    In this regard, the approach of standard economics (and government) is like navigating dangerous channels using charts known to be incomplete in certain (known, but ignored) respects, where the navigator nevertheless uses the incomplete charts—“modified … in the direction of realism”—to steer the ship. But when charts are incomplete in important respects that are ignored, realism (based on intuition or the stars or a simple compass)—in the sense of avoiding the rocks—is a doubtful idea.

    Accordingly, when we properly recognize university economics is incomplete, using it as the starting point for realism may be characterized as nonsense compounded. With (economic) navigation like this on the bridge it is little wonder our economy has run aground.

  11. davetaylor1
    September 6, 2012 at 9:52 pm

    Well said, Thomas. Your metaphor of Krugman’s metaphor is much more illuminating and fail-safe than Krugman’s original neo-con (pretend conservative) foundation. Therefore let’s take it further, following up my comment at #11 on Krugman @ IS/LM.

    You are quite right, when navigating with an incomplete map, the fail-safe course is to stay in deep water. That’s what happens in the mico-economics of a firm: when profits are too low, the directors look for another product. But even with a complete map, one needs to know where one is relative to it. Navigation involves not just a steersman but course-plotting, course adjustment to allow for positional drift over time, and a look-out watching for rocks and traffic ahead. Four jobs, one defining the aim, the others reacting to information about it on different timescales: compass error ‘now’ Proportional to directional error; positional error found as the sum or Integral of ‘past’ drift off course; lookouts anticipating a ‘future’ need to be off course by a certain Differential. That’s the role of Keynesian macro-economics. Hence a PID Servo: a generic type of information system serving a controller of anything or everything: the firm OR the economy – or the ship [of state]. They’ve been around for 50 years, but in economic and political circles you’d hardly know. No wonder crashes are not anticipated when the crew haven’t learned about being off course.

    For an introduction see http://en.wikipedia.org/wiki/PID_controller.

    For some ancient theory about the difference between macro and micro see http://plato.stanford.edu/entries/aristotle-categories/.

    http://plato.stanford.edu/entries/aristotle-categories/

    While economists and politicians remain blithely inaware of (or indifferent to) logical principles sorted out fifty years ago

    • davetaylor1
      September 6, 2012 at 9:58 pm

      Sod this immobile, half-obscured little reply box. Sorry for the tail, folks.

  12. paolo leon
    September 13, 2012 at 1:38 pm

    Glasner does not understand why the Soviet economy was based on neoclassical principles. Remember that Stalin liked the balanced budget, that Keynes was decadent and, above all, that Lange and the basis of the planning policies, intially Harrod-Domar type (Strumilin), were later influenced by Solow and friends.
    Maynard was certainly not a neclassicist, as Davidson shows, but he still had some qualms: remember the marginal efficincy of capital, well criticized by Garegnani, as incoherent with the rest of his thinking.

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