Mainstream economics — a methodological strait-jacket
Jamie Morgan: To a member of the public it must seem weird that it is possible to state, as you do, such fundamental criticism of an entire field of study. The perplexing issue from a third party point of view is how do we reconcile good intention (or at least legitimate sense of self as a scholar), and power and influence in the world with error, failure and falsity in some primary sense; given that the primary problem is methodological, the issues seem to extend in different ways from Milton Friedman to Robert Lucas Jr, from Paul Krugman to Joseph Stiglitz. Do such observations give you pause? My question (invitation) I suppose, is how does one reconcile (explain or account for) the direction of travel of mainstream economics: the degree of commonality identified in relation to its otherwise diverse parts, the glaring problems of that commonality – as identified and stated by you and many other critics?
Lars P. Syll: When politically “radical” economists like Krugman, Wren-Lewis or Stiglitz confront the critique of mainstream economics from people like me, they usually have the attitude that if the critique isn’t formulated in a well-specified mathematical model it isn’t worth taking seriously. To me that only shows that, despite all their radical rhetoric, these economists — just like Milton Friedman, Robert Lucas Jr or Greg Mankiw — are nothing but die-hard defenders of mainstream economics.
The only economic analysis acceptable to these people is the one that takes place within the analytic-formalistic modelling strategy that makes up the core of mainstream economics. Models and theories that do not live up to the precepts of the mainstream methodological canon are considered “cheap talk”. If you do not follow this particular mathematical-deductive analytical formalism you’re not even considered to be doing economics …
The kind of “diversity” you asked me about, is perhaps even better to get a perspective on, by considering someone like Dani Rodrik, who a couple of years ago wrote a book on economics and its modelling strategies — Economics Rules (2015) — that attracted much attention among economists in the academic world. Just like Krugman and the other politically “radical” mainstream economists, Rodrik shares the view that there is nothing basically wrong with standard theory. 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”. Similar to 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 would really count. In my view, this isn’t pluralism. It’s a methodological reductionist strait-jacket.
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Real-World Economics Review Blog 
Do you interact with Steve Keen? Perhaps a dialog would interest your readers.
Some years back I wrote a letter to the editor of The Nation criticizing an article Amartya Sen wrote for them. I called him a mainstream economist and he was appalled. But he is firmly entrenched in neoclassical economics as are Krugman, Stiglitz, and Rodrik. I like some of their critiques, but they can’t leave that straightjacket behind. We desperately need a very different approach to economics! https://evonomics.com/klees-neoclassical-economics-failed-what-comes-next/
Dear Steven Klees,
on October 13, 2023 at 2:11 pm, you posted a comment mentioning the same paper that appeared in Evonomics.
I have posted my reply on October 14, 2023. I hope you have read it.
Dear Sirs,
As an academically educated physical chemist (1961-1967) and aerosol physicist in my scientific career, I was always sceptical during my economic study (University of Amsterdam; 1980-1988)) and later on, about economic models. I think that mainstream models, especially, using these for forcasting have to be mistrusted. Think about the Dynamic Stochastic General Equilibrium Model showing a complete failure during the The Great Financial Crisis. Sometimes, however models can be used to explain economic phenomena as an example the mathematical models of Steven Keen to denote the instability of the economy.
Dear Fokke,
you have a good personal history to argue about economics and its future.
Please read our discussion between Klees and me around the article by Lars Syll. There are at least eight interactive posts, which may be interesting to you.
The above “reply” October 25, 2023 at 5:00 pm is only a small part of the dialogue.
“We desperately need a very different approach to economics!”
You don’t say! Repeating that endlessly, as Lars does, eventually becomes boring even to people who agree with him. There are a number of issues. Are we supposed to be analysing and describing the workings of an existing system? Or are we judging it ethically and then trying to construct one nearer to our ethical preferences? If the former, are we trying to frame theories of some fairly widespread application or is that impossible? If impossible, is economics a branch of anthropology in which everything is sui generis and general theorising is misplaced? If, however, we think Adam Smith and Richard Cantillon were not wrong in thinking one could generalise about the nature of commerce and the wealth of nations, we must establish under what conditions a given generalization holds. We embark necessarily on a process of abstraction and idealization. What are the methodological principles that should govern that process?
When we examine empirical regularities, how do we determine their causes and how do we distinguish between competing hypotheses? Both Lars and Steven Klees dismiss both experiment and statistical analysis. One must accept that these cannot confer certainty but if that makes them illegitimate, what is the perfect method of bringing evidence to bear?
If we cannot offer even tentative answers to these questions, we are reduced to saying that economics as a positive study is impossible and the neo-classicals are foolish (or worse) to attempt it. Yet that is not the tone of the critique; there is the implicit suggestion that there is a better way of proceeding. Time, surely to put up or shut up. Give some examples of the right way to theorise in social studies and how these point the way ahead. Or has everyone, everywhere always been wrong?
Dear Gerald,
Perhaps it needs to be repeated endlessly! Neoclassical economics is a theoretical and methodological straightjacket. I’d be interested in your reaction to my argument for economic practice alternatives in my Evonomics article cited earlier and in my reply to yoshinori a few minutes ago about the existence of a perfectly good intersectional left politcal economy theory. And there is no perfect method of bringing evidence to bear. We are stuck with face valid crosstab data and qualitative evidence from which to make arguments.
The main issue would be how to conceive how the economics develops.
If there are three fields: (pure) theory, practice, and policy, as Steven Klees claims, they are not necessarily connected with each other. Having different ideas and thoughts on practice and policy, it would be possible to argue theory itself.
Steven Klees’s conclusion is that there is a very small possibility that economics will develop beyond actual mainstream economics. It seems to be based on two sides of thinking. One is the observations on the actual state of mainstream economics, for which I have no big objections. The other side, which seems to be important for this forum, is the sterility of exclusively criticizing this and that aspects of mainstream economics (this is what Lars Syll is doing). Why do we not consider how to develop (an alternative) economics? Steven’s conclusion is too much influenced by these two tendencies. So, it is natural that he cannot see any new movements among heterodox economists.
Expecting a new good economics among mainstream would be self-contradictory, if one admits there are so many fundamental problems in mainstream or neoclassical economics. Our problem is not to repeat eternally how it is wrong. We should think of how to develop a new economics.
The new economics we are searching for may not yet exist at all. It may be burgeoning in a form of primitive ideas. Or, perhaps its theoretical core is already obtained. A possibility is Post Keynesian (post-Keynesian) economics, to which Lars Syll refers affirmatively in his Interview to Jamie Morgan. If it is not yet developed enough, we should work how to enhance its development.
Economics is a science which grows and develops. The knowledge how it grows is precious for actual workers in economics. My fundamental doubt about Lars Syll arguments is that he has no intention to enhance an alternative economics.
Creating or developing a new alternative economics is totally uncertain efforts. New economics only grows evolutionarily. What we have already in our hands are primitive and provisional. Theory and empirics develop hand-in-hand. There may be no ideal econometric tool that is universally valid and efficient. Suppose a new knowledge was discovered by a method. Is it necessary that the method is perfect and applicable for all situation? If the new knowledge is stimulating, the new knowledge may be incorporated as a new hypothesis as a part of a theory. The knowledge will be tested in view of this theory. It may become a fact, if the hypothesis passes the tests. But it still remains as a provisional fact. When theory and empirics evolve, it may be interpreted in a different way. Asking too high a standard for mainstream economics, Lars Syll is forgetting that a science develops with tools in hands. We should be more pragmatic. There are no perfect tools. We have no need to have such tools.
“We desperately need a very different approach to economics!”
This call for a different and presumably new approach has been answered but few people seem to be interested in it. Having become frustrated in how macroeconomics (as a pseudo-science) has become politically, commercially and religiously biased, with many different confusing and conflicting schools of thought, I decided to research and see published a much more exacting and truly scientific way for the choice of its axioms, the definition of its terms and sectors, their modelling into a “Big Picture”, the resulting logical analysis, etc.
This research work was spread over many years, and it has resulted in two working-papers and a 310-page book “Consequential Macroeconomics”, which as copyright holder I offer for free to all those who are concerned with of what it REALLY comprises and how it ACTUALLY works. The explanations are easier to follow that what previously resulted in complexity and confusion. At last, the past pseudo-science can now be replaced with a true one!
Do not despair anymore but do try to get into discovering a much better way for the presentation and good understanding of this vital subject. Write to me for a free e-copy: chestdher@gmail.com and sweep away past confusion!
Steven Klees, I think we are coming from the same place emotionally and in terms of values. I suspect we would vote for the same politicians. That said, I think your emotions are getting the better of you so that you fail to make important distinctions. Societies and economies are complex systems that have evolved. Evolution does not optimise but it is more robust than theories based on principles. If we wish to guide or goad such systems in a particular direction we have first to understand them. The attempt to understand the system as it is is not an unworthy study just because we consider the system ethically inferior to others we can imagine. The chances of effecting useful change, as distinct from utopian dreams, depends on understanding what is really going on before attempting to change it. We are going to agree that neo-classical economics contains a lot of ideological obfuscation and does not help understanding. But we are not going to understand the beast simply by observing small groups pursuing alternatives. We have to have positive hypotheses about how the current system works and we have to evaluate them. Your disdain for experiment and statistical analysis is obscurantist. We must seek to improve and apply empirical methods to the highest ethical and professional standards if we are going to get anywhere, not simply despair because it is too easy for biased researchers to fake it.
The Handbook of Macroeconomic Methodology, to which Lars contributed, has one important article by Katarina Juselius. She relates that application of co-integration and VAR methods shows all of the theoretical restrictions implied by the new-Classical rational expectations school are unsupported or rejected by the data. The same applies to the restrictions in post Keynesian models. On the other hand the implications of old-fashioned hydraulic Keynesian theory are consistent with data,
This means macroeconomists have been largely wasting their time for the past 40 years, which those of us engaged in applied work and looking to apply theory in practice could have told you already. Whatever theory or new approach you come up with has to pass the same tests. Economics is either an empirical study or it is simply a theatre of clashing ideologies. Your empirical relativism means you are reconciled to the second possibility. Naively, perhaps, I hope for something better.
Unfortunately this handbook does not include my most obvious and coldly logical way for defining and modelling our social system. Having achieved this (see my short working-paper SSRN 2865571 “Einstein’s Criterion Applied to Logical Macroeconomics Modelling), the next step is to examine how it can be adjusted to reach closer to a state of equilibrium. This is far from obvious and to provide the necessary methodology best needs a mathematician with experience in understanding about unbalanced simultaneous liner equations. In my book “Consequential Macroeconomics” I have provided some examples, where simplifying assumptions are made (and the results are meaningful), but the general problem still needs to be solved, .
The full solution methodology will need a general rule for choosing at which term (of the 19) in the 6 equations one should begin to alter, so that the overall amount of disequilibrium is reduced after the change has been made. This process must then be repeated until all of the disequilibrium has been either eliminated or reduced to being insignificant. Excuse my ignorance, but can somebody kindly show me where such a procedure might be found?
Gerald, I appreciate your reply but we’ll have to continue to disagree. I believe political economy theory has told us all we need to know to understand the problematic operations of a capitalist market system. You seem to think that one article shows how macroeconomists have been wasting their time for 40 years. I think there is ample evidence that all neoclassical economists have been wasting their time for a much longer period. Unfortunately, both their theory and methods are bankrupt. The work of literally millions of people on real world alternatives in practice — as exemplified by those attending the World Social Forum each year — is inspiring.
“I believe political economy theory has told us all we need to know to understand the problematic operations of a capitalist market system.”
Is there a political economy theory that makes such a claim? Perhaps Marx did but he can’t have understood quite everything since the system evolved and did not collapse in the way he foresaw. None of the “real world alternatives” is in danger of becoming general in the forseeable future, so I believe there is plenty of work to do to understand market systems.
Political activists have a strong tendency to believe that he or she knows the right economic policies, although he or she has done no serious study in economics. Consequently, he or she often believes that he or she can choose right economics by a simple criterion whether the latter supports his or her policy orientation. A similar tendency can be observed also in this blog. It is not a healthy state for heterodox economics.
Indeed Yoshi, it is not at all healthy nor the right way for determining what policy would be best. And because macroeconomics is so badly strewn with many biased theories and claims, by using this approach we will never get out of this abyss. What we need is a much more scientific way that is based on logic and applied to properly defined terms after accepting sensible axioms and proper assumptions, about the operational aspects of our social system. Few writings on our social system take this attitude but without it there seems to be no satisfactory way of thinking that we can all agree upon.
I have tried in my writing and research to find such a path and to a limited degree I believe I have found it. Read my 310-page e-book “Consequential Macroeconomics”, which I offer for free at the e-address below, and find our for yourself if I am correct. And if you find that I am not, kindly (for all our sakes) make some effort to do better! chestdher@gmail.com
To Gerald and Yoshi,
Gerald, why do you go back to Marx? And Yoshi, why do you go to policital activists? There has been plenty of serious study by political economists after Marx who have told us a LOT about how capitalsim works (or really doesn’t) and for whom. When I was in grad school long ago Baran and Sweezy’s Monopoly Capital said a lot and there has been so much comprensive work since. One of my favorites goes back to 1999 – MacEwan’s great Neo-liberalism or Democracy. But political economists have written volumes and even textbooks on capitalism and we’re seeing more wonderful intersectional analsyses that integrates critiques of and alternatives to structures of patriarchal, racial capitalism. You should subscribe to https://www.heterodoxnews.com/n/htn318.html to get more exposure!
Steven, I think we are at cross purposes. I read Baran and Sweezy as a young man and Ernst Mandel too. That is all very broad brush. Capitalism does not look to be in immediate danger of being superseded so we face a lot of more particular problems in how to ameliorate the system and the way it works to help people now. We agree that neo-classical economics is a limited and often misleading tool of analysis but the notion that we know enough to always prescribe the right policy is not one that strikes me as plausible. I have seen too many reforming administrations in too many countries adopt well-intentioned strategies that miscarried.
Gerald, History — across countries — tells me that neoclassical economists don’t “know enough to always [ever?] prescribe the right policy.” All we have is endless disagreement about what to do or about the reasons a policy did or didn’t work in the past. Neoclassical economics has not been a very useful platform for answers to policy questions. Left policial economy offers alternatives but, at least in the U.S., these scholars’ views are marginalized.
So ghholt, what we need is a truly scientific theory of macroeconomics that works properly. Several posts on this website have suggested similar ideas, but apart from myself nobody has come out with one. My book is not the end of it, but at least it does begin to show how such a theory can be built using sensible logical methods to replace the objectional older biased and intuitive ways about which you rightly complain. Please refer to what I already claimed above in this discussion.
Steven,
We certainly are at cross purposes if you suppose I am defending neo-classical economics. I am a consistent critic of orthodox macroeconomics and the whole gallimaufry of “microfoundations”, representative agents, rational expectations, real business cycles and long-run equilibrium paths. Intellectual clutter all of it. But I remain an empiricist, Any theory has to stand up to testing, which usually means statistical testing. Quantification is essential to understanding. What does “big” mean? And I deny your assertion that theories of political economy exist which have resolved all issues. Herbert Simon laid down the basis for a sensible microeconomics, developed in the evolutionary approach of Nelson and Winter, In macroeconomics we haven’t got much further than Kalecki and Minsky. The Harvard Growth Lab with Ricardo Hausmann have done useful work on economic development and international trade, which cuts across a lot o orthodox theorising. Yes, a lot of good stuff has been marginalised; so has a lot of empty verbiage.
Gerald, I don’t think political economy has resolved all issues but I do think that neoclassical economics cannot resolve ANY. Microeconomics is ridiculous and irrelevant. Macroeconomics less so — except when it uses micro as its base. But macro has resovled NO issues in almost 100 years of trying. YOU may think that some macro issues are clear but there are a lot of macroeconomists who disagree with you — so nothing is resolved!
Steven,
you may be right when you write:
In my understanding, this implies that we must try to build economics that can give deeper understanding of how economy works. It is your choice to “have more hope for alternative economic practices than I do for new theories” (your post on October 25, 2023 at 7:46 pm). It does not imply that we hope for new theories. Please check my proposal on November 16, 2023 at 6:57 am and on November 18, 2023 at 9:06 am. How do you think about it?
If, as you say, I maybe right that macroeconomics “has resolved no issues in almost 100 years of trying” that implies for me that more neoclassical theorizing will not be productive. I’m not sure I would join a discussion group of heterodox economics thinking but it might be a nice idea.
> it might be a nice idea.
Thank you for supporting my crude idea. I know that discussion on heterodox economics from view points of methodology will be quite confusing, because what we are thinking as the ideal direction of heterodox economics is so diversified that it is sure we face a great confusion. Even so, it is a necessary step to go forward.
David Harold Chester posed a very difficult, but important problem:
Almost all readers will agree with the first sentence. As for the second, many will wonder whether your theory can be a good starting point of “a truly scientific theory of macroeconomics that works properly.” I read his book Consequential macroeconomics (2015) five years ago. I do not know how different the new book of 600 pages version is. As far as I judge by what I have read, I doubt if it is a “truly scientific theory” and if it is macroeconomics that “works properly.” But he is confident that it is in both senses.
There must be many economists who are thinking or feeling like David. Although the reason is very different, I am also thinking that our book Microfoundations of Evolutionary Economics (2019) by Morioka, Taniguchi, and me is revolutionary, because it is a turn from price- to quantity-adjustment view. There are a few economists who agree with us, but majority of economists are skeptical of our claims. There is no definite procedure of how a revolutionary theory becomes recognized as such. Mendel’s law of heredity required about 40 years before it was recognized as true scientific laws. We can find many other examples.
There are many heterodox journals and newsletters. It seems we lack a channel to find out new promising theories. The forum like this Blog can be a good place for such a channel. But, in reality, there are few such promoting efforts.
Book reviews in RWER are such a possible tool. In the case of mainstream, an article that is published in a five or six top Journals attracts many people’s attention and a new theory will be strongly disseminated quite rapidly. With this regards, there are too many heterodox journals. Methodologists like Las Syll can be a such living media but for the moment they are not aware of their important rolls.
I have proposed to create a forum in which heterodox economists can inform each other and discuss the future directions of heterodox economics.
The simplest and easiest to start is to organize a series of book reviews (or paper reviews if necessary) in this RWER Blog. If the editors of this blog offer a space (a post for reviewing a book or a paper) once a month, or each two months, for example, it will not be very difficult to realize this proposition.
I have checked if there are goods candidates for this attempt. Two books seem to be a good candidate for the discussion:
(1) Foundations of Real-World Economics (2019; 2023) by John Komlos.
(2) Economic theory for the real world (2024) by Victor Beker.
(1) has three editions and it was already book-reviewed by Alan Freeman in Real-World Economics Review #103 (March 2023). (2) may not have been published yet. But, there are no problems. Freeman reviewed (1) from his own perspective and did not mainly argued whether he is satisfied with the economics presented in (1). In the latter case, we can wait until it will be published.
The reasons to chose these two books for initiating a book review series are rather simple:
(1) Both books have phrase “real world” (economics) in its title.
(2) Both authors are contributors to RWER and RWER Blog.
(3) Both try to present a comprehensive economics in a positive form.
(4) Both are influenced by Real World Economics movement from 2000.
Criticizing mainstream economics is one thing. Obtaining a new alternative economics is another thing. We can easily agree that representative agent, rational expectations, strict logic, etc., are not the methods we should adopt. It is easy to say that we should adopt more realistic assumptions for our theory. Which ones to choose, or how to construct theories concretely, is no easy choice. It will be difficult to get a consensus but this is what we should do for the further development of heterodox economics.
I have proposed a plan to create a series of book reviews in view of creating a forum of informed comparison of possible and promising heterodox economic theories. I have also proposed two book titles that may be a candidate for the first reviews.
I reflected on what will happen if such a forum will eventually created (in a very fortunate case). I can easily predict that there will be a great confusion and many of arguments may not be productive. There are possibilities that the forum becomes the place of antagonism that throws abusive language against each other. To make the new forum a constructive one, all (or at least majority of participants) must be aware of the difficulty of constructive criticism and keep a good manner and attitude to make our discussion deeply critical but equally constructive.
I found a paper that has already reflected on the problems that may arise in “comparing theories.” I recommend all future participants (if there would be any) to read the following paper by Arne Hein. The expression I used at the top of my post “informed comparison” is the term I learned from his paper.
Arne Hein (2020) (2020) Comparing economic theories or: pluralism in economics and the need for a comparative approach to scientific research program. (open source) Journal of Philosophical Economics 13(2): 162-184.
I made a mistake in the above post. As I have corrected after Heise’s notice in my post, I was confused when I wrote the author’s name. The correct citation was:
Arne Heise (2020) Comparing economic theories or: pluralism in economics and the need for a comparative approach to scientific research program. (open source) Journal of Philosophical Economics 13(2): 162-184.
I have to say that I think only way to understand macroeconomy is to understand balance-sheets and what is happening to them.
After that many macroeconomic phenomena such as economic growth or slumps become easy to explain.
Best book I know that explains macro-accounting is Randy Wray’s primer: https://www.amazon.com/Modern-Money-Theory-Macroeconomics-Sovereign/dp/1137539909/ref=sr_1_1?crid=36ZFFB50P4YVE&keywords=randall+wray+primer&qid=1700796725&s=books&sprefix=randall+wray+primer%2Cstripbooks-intl-ship%2C173&sr=1-1
I mean, even if people disagree with MMT premise that government cannot run out of money, theory on accounting should be non-controversial.