Modern economics is sick9 March, 2016 at 19:30 | Posted in Economics | 3 Comments
Modern economics is sick. Economics has increasingly become an intellectual game played for its own sake and not for its practical consequences for understanding the economic world. Economists have converted the subject into a sort of social mathematics in which analytical rigour is everything and practical relevance is nothing. To pick up a copy of The American Economic Review or The Economic Journal these days is to wonder whether one has landed on a strange planet in which tedium is the deliberate objective of professional publication. Economics was once condemned as “the dismal science” but the dismal science of yesterday was a lot less dismal than the soporific scholasticism of today …
If there is such a thing as “original sin” in economic methodology, it is the worship of the idol of the mathematical rigour invented by Arrow and Debreu in 1954 and then canonized by Debreu in his Theory of Value five years later, probably the most arid and pointless book in the entire literature of economics.
The result of all this is that we now understand almost less of how actual markets work than did Adam Smith or even Léon Walras. We have forgotten that markets require market-makers, that middlemen have to hold inventories to allow markets to function, that markets need to be organized and that property rights need to be defined and enforced if markets are to get started at all. We have even forgotten that markets adjust as often in terms of quantities rather than prices, as in labour markets and customer commodity markets, as Alfred Marshall knew very well but Walras overlooked; so well have we forgotten that fact that a whole branch of economics sprang up in the 1960s and 70s to provide “microfoundations” for Keynesian macroeco- nomics, that is, some ad hoc explanation for the fact that a decline in aggregate demand causes unemployment at the same real wage and not falling real wages at the same level of employment …
Indeed, much of modern microeconomics might be fairly described as a kind of geography that consists entirely of images of cities but providing no maps of how to reach a city either from any other city or from the countryside.
Mark Blaug (1927-2011) did more than any other single person to establish the philosophy and methodology of economics a respected subfield within economics. His path-breaking The methodology of economics (1980) is still a landmark — and the first textbook on economic methodology yours truly had to read as student.
A couple of months ago Richard Lipsey — whose textbook, written together with Peter Steiner, was my first introduction into economics forty years ago — was kind enough to forward me a chapter he had written for the book on Mark Blaug: Rebel With Many Causes (Edward Elgar). Interesting reading!
When I contemplate the formal defence, I wonder how different we economists are from the pre-Kepellerian astronomers who were dominated by the Greek belief that a model of perfection could be used to deduce behaviour in the imperfect world in which we live. Plato had announced that the circle was the perfect form of closed motion and that, since the heavens were within the spheres of perfection, heavenly bodies must move in circles. Kepler banned from astronomy forever the view that we could deduce something about real-world behaviour by studying these Platonic ideas of perfection. Yet today economists seek to deduce propositions about the real world from models of perfection, such as the Arrow Debreu model of the efficiency of perfect competition. No one ever thought that the real world was diffused with perfect competition or competitive end-state equilibrium. Yet somehow we must think we learn something about the world from such models, for otherwise the bulk of economists would not insist that the formal proof of optimality is about the most important thing that can be taught to students.