What stops economists exploring new ideas

13 Jun, 2013 at 17:10 | Posted in Economics | 2 Comments

There are plenty of economists who will happily admit the limits of their discipline, and be nominally open to the idea of other theories. However, I find that when pushed on this, they reveal that they simply cannot think any other way than roughly along the lines of neoclassical economics. My hypothesis is that this is because economist’s approach has a ‘neat and tidy’ feel to it: people are ‘well-behaved’; markets tend to clear, people are, on average, right about things, and so forth. Therefore, economist’s immediate reaction to criticisms is “if not our approach, then what? It would be modelling anarchy!” …
The economist’s mentality extends up to the highest echelons of economics modelling, and culminates in the ‘DSGE or die’ approach, described well on Noah Smith’s blog by Roger Farmer:

“If one takes the more normal use of disequilibrium to mean agents trading at non-Walrasian prices, … I do not think we should revisit that agenda. Just as in classical and new-Keynesian models where there is a unique equilibrium, the concept of disequilibrium in multiple equilibrium models is an irrelevant distraction.”

When questioned about his approach, Farmer would probably suggest that if we do not assume markets tend to clear, and that agents are, on average, correct, then what exactly do we assume? A harsh evaluation would be to suggest this is really an argument from personal incredulity. There is simply no need to assume markets tend to clear to build a theory – John Maynard Keynes showed us as much in The General Theory, a book economists seem to have a hard time understanding precisely because it doesn’t fit their approach. Furthermore, the physical sciences have shown us that systems can be chaotic but model-able, and even follow recognisable paths …

Ultimately, the only thing stopping economists exploring new ideas is economists. There is a wide breadth of non-equilibrium, non-market clearing and non-rational modelling going on. Economists have a stock of reasons that these are wrong: the Lucas Critique, Milton Friedman’s methodology, the ‘as if‘ argument and so forth. Yet they often fail to listen to the counterarguments to these points and simply use them to defer to their preferred approach. If economists really want to broaden the scope of the discipline rather than merely tweaking it around the edges, they must be prepared to understand how alternative approaches work, and why they can be valid. Otherwise they will continue to give the impression – right or wrong – of ivory tower intellectuals, completely out of touch with reality and closed off from new ideas.

Unlearning Economics


  1. Lars. I appreciate your citing my work although I do not agree that Keynes built a theory in which “markets do not clear”. The idea of markets clearing is Walrasian and was ascribed to Keynes by the economists who attempted to integrate Keynesian economics with General Equilibrium theory. That began with Hicks who wanted to understand the connection of the General Theory with his own work on temporary equilibrium theory in Value and Capital. It was solidified by Patinkin in Money Interest ad Prices and introduced to the mainstream by Samuelson in the third edition of his undergraduate textbook. I do not think that is the right way to integrate Keynesian economics with General Equilibrium theory.

    The conventional way to describe involuntary unemployment in a Walrasian model is to argue that there is a unique equilibrium, but prices are sticky. I do not think that that is a helpful way to understand Keynes. A better way to describe involuntary unemployment is to argue that some Walrasian markets are absent because of frictions due partly, but not exclusively, to moral hazard. That leads to a model with a continuum of equilibria that can be Pareto ranked. That is surely a better way of understanding why Keynes argues, rightly I believe, that high involuntary unemployment is an EQUILIBRIUM phenomenon.

  2. I like Roger Farmer’s work a lot. However, I’m not convinced by the clever “tricks” he comes up with to close his models. First, some of them are not new. Phelps and Gordon have been on the beliefs aspects for awhile. Second, his idea that agents die and are born into models is an interesting way to deal with temporality but it is a contrived “time.” Ole Peters gets at all of this with his idea that economist are thinking of parallel worlds and don’t really take “time” seriously. This is not too surprising in light of the connection between Nash and Debreu. Topology theory is lurking in the background.

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