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Economics beyond Krugman, Mankiw, and Rodrik

from Lars Syll

1390045613Economics students today are complaining more and more about the way economics is taught. The lack of fundamental diversity — not just path-dependent elaborations of the mainstream canon — and narrowing of the curriculum, dissatisfy econ students all over the world. The frustrating lack of real-world relevance has led many of them to demand the discipline to start developing a more open and pluralistic theoretical and methodological attitude.

Dani Rodrik — among economics journalists and commentators often described as a heterodox economist — has little understanding of these views, finding it hard to ‘understand these complaints in the light of the patent multiplicity of models within economics.’  Rodrik shares the view of his colleagues Paul Krugman and Greg Mankiw — both of whom he approvingly cites in his book Economics Rules — that there is nothing basically wrong with ‘standard theory’ and ‘economics textbooks.’ As long as policymakers and economists stick to ‘standard economic analysis’ everything is fine. Economics is just a method that makes us ‘think straight’ and ‘reach correct answers.’

Writes Rodrik in Economics Rules:

Pluralism with respect to conclusions is one thing; pluralism with respect to methods is something else … An aspiring economist has to formulate clear models … These models can incorporate a wide range of assumptions … but not all assumptions are equally acceptable. In economics, this means that the greater the departure from benchmark assumptions, the greater the burden of justifying and motivating why those departures are needed …

Some methods are better than others … For some these constraints represent a kind of methodological straitjacket that crowds out new thinking. But it is easy to exaggerate the rigidity of the rules within which the profession operates.

Young economics students that want to see a real change in economics and the way it’s taught, have to look beyond Rodrik, Mankiw, Krugman & Co. Those future economists who really want something other than the same old mainstream neoclassical catechism; those who really don’t want to be force-fed with mainstream neoclassical deductive-axiomatic analytical formalism, have to look elsewhere.

Just like Krugman, Rodrik likes to present himself as a kind of pluralist anti-establishment economics iconoclast, but when it really counts, he shows what he is — a mainstream economist fanatically defending the relevance of standard economic modelling strategies. In other words — no heterodoxy where it really would count.

Almost all the change and diversity that people like Krugman and Rodrik applauds only take place within the analytic-formalistic modelling strategy that makes up the core of mainstream economics. All the flowers that do not live up to the precepts of the mainstream methodological canon are pruned. You’re free to take your analytical formalist models and apply it to whatever you want – as long as you do it using a modelling methodology acceptable to the mainstream. If you do not follow this particular mathematical-deductive analytical formalism you’re not even considered doing economics. “If it isn’t modelled, it isn’t economics.” This isn’t pluralism. It’s a methodological reductionist straightjacket.

In Rodrik’s world “newer generations of models do not render the older generations wrong or less relevant,” but “simply expand the range of the discipline’s insights.” I don’t want to sound derisory or patronizing, but although it’s easy to say what Rodrik says, we cannot both have our cake and eat it. Analytical formalism doesn’t save us from either specifying the intended areas of application of the models or having to accept them as rival models facing the risk of being put to the test and found falsified.

The insistence on using analytical formalism and mathematical methods comes at a high cost — it often makes the analysis irrelevant from an empirical-realist point of view.

No matter how many thousands of models mainstream economists come up with, as long as they are just axiomatic variations of the same old mathematical-deductive ilk, they are not heterodox in any substantial way, and they will not take us one single inch closer to giving us relevant and usable means to further our understanding and explanation of real economies.

  1. December 26, 2022 at 7:42 pm

    In the numerator, bankers adjusted for credit risks with risk adjusted interest rates.
    Then the regulators also did so, in the denominator, with risk weighted bank capital requirements.
    Academia has kept total silence on how that distorts the allocation of credit.
    https://subprimeregulations.blogspot.com/2021/01/and-academia-kept-silence.html

  2. robert r locke
    December 26, 2022 at 9:23 pm

    I’m an historian who finds mathematic mainstream modeling of little use in the study of economic. history.

    • Ikonoclast
      December 27, 2022 at 10:34 pm

      Perhaps I was on a social media platform for too long [1] but I found myself wanting to like the above post by robert r locke.

      Note 1: I was on the bird app for 1 year. That was too long.

  3. Steven Klees
    December 27, 2022 at 5:13 pm

    Thank you Lars! I sometimes see hope in Krugman or Rodrik’s liberal analyses. Rodrik, in particular, has joined the Democratizing Work movement started by some French scholars and activists. He has argued that creating good jobs has vast positive externalities associated with it, implying a major need for government intervention in job creation, anathema to neoliberal neoclassical economists. But he, like Krgman and Mankiw, are unwilling to give up the core fantasy of perfect competition on which all their models are built.

  4. Steven Klees
    December 27, 2022 at 5:18 pm

    And I should add, the theoretical and practical emptiness of the idea of Pareto Efficiency — which keeps the neoclassical enterprise alive.

    • yoshinorishiozawa
      December 28, 2022 at 12:47 pm

      Steven Klees >

      But he, like Krgman and Mankiw, are unwilling to give up the core fantasy of perfect competition on which all their models are built.

      This is an interesting case on which we should reflect carefully. Krugman and Rodrik have a liberal political ideas. Their policies are often better than others. In spite of this, their economics is deeply neoclassical. Is this sufficient to support their economics? I believe you don’t.

      Please reverse the situation. I see many contributors in this Blog who judge a policy good or bad uniquely on the basis whether they like the policy or not. They are indifferent of whether their economics (say heterodox economics) is good or bad.

      In most of cases, it seems contributors are only interested in policies and do not care for the economics that hides under the policies. As long as this state continues, it will be hopeless that this RWER movement produce any better economics. Without deep understanding how our economy works, there will be no good policies.

  5. Ikonoclast
    December 27, 2022 at 10:43 pm

    I think the core fantasy of economics is that market prices measure value. I am not original in thinking this. I follow Capital as Power theory in this matter. Prices are administered and even rigged (correct term) by capital power. Prices instantiate power.

    Markets are not a measuring system, they are a transmission system. They transmit (mostly bogus) information and they transmit power. The bogus nature of much of the information in markets is part of the power system.

    • rsm
      December 27, 2022 at 10:58 pm

      What if pricing power games moved wholly to a finance sector that was disconnected from real provisioning, because a strong basic income gave everyone access to basic resources?

      • Ikonoclast
        December 28, 2022 at 6:27 am

        What need is there for anything disconnected from real provisioning? Why have that sphere at all? Just asking, theoretically.

        Of course, in reality, humans will endlessly game any system with the most inventive corruption they can come up with. Too many players love a corruptible system for the system to ever be de-corrupted. An unregulated finance sector is manna from heaven for them.

      • rsm
        December 28, 2022 at 5:27 pm

        《Why have that sphere at all?》

        Can an unregulated financial sector provide a virtual, nonviolent outlet for humans who like to play power games, while a strong, generous, non-tax-funded, inflation-proofed, universal, unconditional basic income insures my access to real resources no matter how much corruption financiers virtually engage in?

      • Ikonoclast
        December 29, 2022 at 1:06 am

        “Can an unregulated financial sector provide a virtual, nonviolent outlet for humans who like to play power games, while a strong, generous, non-tax-funded, inflation-proofed, universal, unconditional basic income insures my access to real resources no matter how much corruption financiers virtually engage in?” – rsm.

        I think the answer to your question is “No”. I am fallowing CasP (Capital as Power) theory, as I understand it. Permitting some people to own lots of real stuff (property) and to have ways to acquire lots of money too which can be converted into acquiring lots of real stuff, has effects on the distribution of real stuff.

        “Strong, generous, non-tax-funded, inflation-proofed, universal, unconditional basic income insures… access to real resources” will work only if the purchase rates for real stuff (prices and inflations) are not messed up by the power players in property ownership, money and finance. Their power to acquire large quantities of money has to be tightly controlled so long as money is used to purchase real stuff (real goods / real services).

  6. yoshinorishiozawa
    December 28, 2022 at 2:31 pm

    Economics students today are complaining more and more about the way economics is taught. The lack of fundamental diversity — not just path-dependent elaborations of the mainstream canon — and narrowing of the curriculum, dissatisfy econ students all over the world. The frustrating lack of real-world relevance has led many of them to demand the discipline to start developing a more open and pluralistic theoretical and methodological attitude.

    Admit this is right. Is Lars Syll’s recommendation useful or practical? Is he really “open and pluralistic”? It seems Syll is recommending to abandon “analytical formalism and mathematical methods.” I do not object that some economists (or historians) do that. If they can produce an analysis that is “relevant from an empirical-realist point of view”, why we do not have economics that “further our understanding and explanation of real economies” now?

    If we succeed to build an economics that “further our understanding and explanation of real economies”, I do hope and believe that many of econ students will urge the university authority and the education ministry to teach such economics. Please remind that Real-World Economics emerged inspired by French students’ movement around 2000. That fever seems to have subsided but it will come back if we obtain an economics that “further our understanding and explanation of real economies”.

    Then, the real problem for us is not the necessity of ousting “analytical formalism and mathematical method,” but is to build such a new economics that “further our understanding and explanation of real economies”. The point I wonder whether Lars Syll’s campaign is good or not is this: Recommendation to abandon “analytical formalism and mathematical method” has been recommended since about 30 years ago (Of course, there were similar recommendations ever since economics became formalized). Economic philosophers and methodologists are quite powerful now after Tony Lawson started to preach critical realism and social ontology about 30 years ago. “Ontology” was a kind of neologism 30 years ago. Now it is accepted as common words among heterodox economists. Despite of this strong influences, have Lawson and his followers ever produced an economics or economic theory that “further our understanding and explanations of real economies”? I am very sceptic. Many of heterodox economists think that critical realism is useless because it is difficult to produce a new economic theory along the line of critical realism.

    Lars Syll claims methodological pluralism. It is good. But, is his attitude really “open and pluralistic” in theories and methodologies?
    I believe it is not.

  7. Gerald Holtham
    January 1, 2023 at 6:45 pm

    May I ask a question about “mathematical-deductive analytical formalism”? When someone like Steve Keen sets out a formal disequilibrum model of macroeconomic cycles that is not based on neo-classical “micro-foundations” or when Nelson and Winter set up an evolutionary model of industrial growth based on behaviouralist assumptions are they guilty of mathematical-deductive analytical formalism? And does that mean they are not heterodox economists?
    If we knew where Lars draws his lines it would make his meaning clearer. Can he give an example of economic theorising that avoids the trap of mathematical-deductive analytical formalism?
    One difficulty with verbal statements of theory is that some people want to test them to see if and when they are compatible with the evidence. That evidence generally comes in quantitative form. Testing then may well require specifying a quantitative version of the theory to see if it is data-compatible. We may end up with an equation or two or even a model. Is that illegitimate? If so what is the alternative way to test a theory?
    Without answers to these questions I do not know what to make of Lars’ remarks.

    • yoshinorishiozawa
      January 2, 2023 at 1:39 pm

      A good question!

  8. January 3, 2023 at 1:48 am

    The entirety of “mathematical-deductive analytical formalism” is only (potentially) helpful up to the point where it drops its reductionistic methodology in favor of paradigmatic/operant concept analysis and then figuring out how to most efficaciously implement the newly discovered new paradigm concept.

    Accomplishing that makes erudite dunces out of every analyst still mentally holding onto the old/current paradigm. So has it been since humanity acquired self-awareness and hence also became aware of the reality of ethics, since nomadic hunters and gatherers learned agriculture and started homesteading and urbanization and since helio-centrism replaced geo-centrism.

    So will it be when analysts recognize the old/current operant but problematic economic concept of Debt Only for the creation and distribution of new money and discover the best ways to implement Abundantly Direct and Reciprocal Monetary Gifting.

    • January 4, 2023 at 3:18 am

      What doth it profiteth an economic theorist if he knows all of the data and calculus and yet misses the current operant concept that dominates the entire system, and thus how to craft a new one?

      Answer: Essentially nothing,

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