Mainstream economists dissing people that want to rethink economics

22 Oct, 2016 at 20:02 | Posted in Economics | 14 Comments

There’s a lot of commenting on the blog now, after yours truly put up a post where Cambridge economist Pontus Rendahl in an interview compared heterodox economics to ‘creationism’ and ‘alternative medicine,’ and totally dissed students that want to see the economics curriculum moving in a more pluralist direction.
Rethinking econ_0
Sad to say, Rendahl is not the only mainstream economist having monumental problems when trying to argue with people challenging the ruling orthodoxy

A couple of years ago Paul Krugman felt a similar urge to defend mainstream neoclassical economics against the critique from students asking for more relevance, realism and pluralism in the teaching of economics. According to Krugman, the students and people like yours truly are wrong in blaming mainstream economics for not being relevant and not being able to foresee crises. To Krugman there is nothing wrong with ‘standard theory’ and ‘economics textbooks.’ If only policy makers and economists stick to ‘standard economic analysis’ everything would be just fine.

I’ll be dipped! If there’s anything the last couple of years have shown us, it is that economists have gone astray. Krugman’s ‘standard theory’ — mainstream neoclassical economics – has contributed to causing todays’s economic crisis rather than to solving it. Reading Krugman, I guess a lot of the young economics students that today are looking for alternatives to mainstream neoclassical theory are deeply disappointed. Rightly so. But — although Krugman, especially on his blog, certainly tries to present himself as a kind of radical and anti-establishment economics guy — when it really counts, he shows what he is —  a die-hard teflon-coated mainstream neoclassical economist.

Perhaps this becomes less perplexing to grasp when one considers what Krugman said in a speech (emphasis added) in 1996:

I like to think that I am more open-minded about alternative approaches to economics than most, but I am basically a maximization-and-equilibrium kind of guy. Indeed, I am quite fanatical about defending the relevance of standard economic models in many situations …

Personally, I consider myself a proud neoclassicist. By this I clearly don’t mean that I believe in perfect competition all the way. What I mean is that I prefer, when I can, to make sense of the world using models in which individuals maximize and the interaction of these individuals can be summarized by some concept of equilibrium … I have seen the propensity of those who try to do economics without those organizing devices to produce sheer nonsense when they imagine they are freeing themselves from some confining orthodoxy.

So now all young economics students that want to see a real change in economics and the way it’s taught — now you know where you have people like Rendahl and Krugman. If you really want something other than the same old mainstream neoclassical catechism, if you really don’t want to be force-fed with mainstream neoclassical theories and models, you have to look elsewhere. 


  1. Mainstream neoclassical economics claims in its own defense that it values rigor and accuses so-called heterodox economics of failing to meet the establishment’s “rigorous” methodological standards. And, when heterodoxy offers a devastating methodological critique of neoclassical economics, the plea is, “what’s your alternative?”
    The problem with Krugman’s strategy of trying “to make sense of the world using models in which individuals maximize and the interaction of these individuals can be summarized by some concept of equilibrium” is that the actual economy is not like this. You can create a kind of analytic geometry with these heuristics, but not a map. If you pretend, as Krugman often does, that this geometry can serve as a map, you are left waving your hands at a closed window, with no way of going out and looking at reality as it is in its many dimensions, viewed from several angles.
    I wouldn’t dispute that Krugman is capable of producing valuable insights with his method, but I do not think it produces the context within which one can produce a consensus of informed opinion. The latter requires referents to observable institutions and behaviors, not just abstract imaginings however elegant or logical their construction.
    The actual economy is a phenomenon of an uncertain world. In an actually uncertain world, “maximization” is not possible — it cannot even be defined — and equilibrium of the sort Krugman is likely to posit, is similarly impossible. In the actual world, agents must act on heuristics and hedge their bets and they will learn and adjust their behavior continuously — there can be no maximization and no equilibrium. However, the economy may be structured and organized, it must be on other principles and if we are to understand that organization, we must look beyond a geometry that a few minutes of critical thought ought to instruct cannot possibly apply as a description.
    It is not as if economics in its full breadth is without any useful hints. But, the obsession of neoclassical economics with marginal behavior has to be balanced by an awareness of the importance of rent-seeking; the neoclassical preoccupation with allocative efficiency balanced by a recognition of the practical dominance of technical efficiency, waste and entropy. We shouldn’t be pretending that money can be only a neutral numeraire.
    Certainly, poor pontus should not be left in self-delusions such as, “if someone spends more than her income, someone else must spend less; everything produced in the economy is either consumed (at home or abroad), invested, or left as inventories”. Sorry, pontus, stocks of money and financial assets means that someone can spend more than her income and that might well mean that others have more income. Lots of other accounted or unaccounted stuff will be produced in the realistically uncertain economy, too, including a lot of waste and error.
    If someone is going to make descriptive assertions about the economy, they need to argue more than an analytic theory or ill-conceived accounting conventions. They need a map, an institutional description or a simulation and actual (not stylized) facts.

  2. I think there is always need for transforming teaching in all disciplines, including economics, and I have personally argued more specifically about in which directions I think there is still need to modify economics teaching. That said, I actually pretty much agree with Krugman and Rendahl about their main arguments. In particular, I disagree completely that models that include, say, a concept of equilibrium and maximizing agents are useless because we know that “the existence of equilibrium and individual maximising agents […] from history, sociology and psychology are wrong.” With the same line of reasoning one could argue that most models in mechanincs are useless, because it is hard to argue that equilibrium in a fundamental sense exists in the physical world either. Moreover, these models typically assume a world with only 2, 3 or a few bodies, and no living creatures of any kind. Yet, I think these models often make perfect sense even though they are extremely crude models of reality. The models, whether in physics, economics, linguistic or any other disciplines should of course always be questioned, but for models to make sense and learn us something that we didn’t already knew about the reality, they must simplify reality. Or so I believe anyway.

    • Just because good, useful, epistemically fecund models are invariably ‘unrealistic’ models does not mean that any and all unrealistic models is a good, useful, epistemically fecund model.

      A simplifying assumption is not the same as a nonsensical or impossible assumption. Assuming that an agent lives forever or maximizes over an infinite number of generations is not a ‘simplifying’ assumption, for example.

      Therefore, the appeal to the ‘unrealistic’ models of classical mechanics to buttress the usefulness of the rational maximization of ‘well-behaved preferences’ under perfect information and no (radical) uncertainty plus equilibrium based models of neoclassical economics will not do. It is based on faulty elementary logic.

      • Agree with your first point: Of course, all unrealistic models ar not useful. Disagree with your second point: That an agent lives forever or maximizes over an infinite number of generations is in my view simplifying assumptions in the same way as physicists often assume models where the universe consists of only two bodies, which are also often infinitesimally small (although with a finate mass). (Think of a suitable model to predict the time it takes for a pencil dropped one meter above the ground to reach the ground.) Of course, such a universe could not exist. Yet, the models still make a lot of sense.

    • “The models, whether in physics, economics, linguistic or any other disciplines should of course always be questioned, but for models to make sense and learn us something that we didn’t already knew about the reality, they must simplify reality. Or so I believe anyway.”

      Well if that is the test, have we learned anything from these models about reality that we did not know before they came along?

      I would argue that we haven’t. Formalism has been a dead end in economics, something that was learned in other social sciences long ago when formalism was tried.

      • Yes, I think we have actually learned a lot through the models that we would not know, or think equally clear about, otherwise. A few examples of such questions: 1. What is the advantage and disadbantage of using consumption taxes versus income taxes? 2. When is it a good idea to tax intermediate goods in production? 3. Is it a good idea to use differentiated commodity taxation as a redistributional or equity device, or is it better to use other tools such as income taxes for that purpuse? 4. Why has inquality increased in most western societies the last decades? 5. How come we have been so unsuccessful in combat climate change, despite the fact that most policy makers have known about the problems for decades? 6. How can we explain lasting discrimination despite strengthened discrimination laws? 7. What are the best way for a government to deal with different kinds of environmental problems? I also think formal models have been very important for developing better statistical methods that helps us measuring and understanding what has happened in the world.

    • Olaf to understand those questions you need deeply and widely informed historical knowledge. This is obviously the case with understanding rising inequalities or the failures of environmental policy which are about the long run dynamics of capitalism.These are questions like what caused WWI. They cannot be attributed to a single event, they are caused by a interplay of events. With the some of the other questions you asked, you are right in that we as a social science we have to ask general questions, ie not how did WWI happen, but how do wars happen, or how does inequality happen? However in all cases, and this applies to the other issues you mention, you need to draw on detailed historical case studies and the analysis has to be multifaceted and multidisciplinary. Analysis has to be necessarily holistic. I would argue that abstraction and standardised theoretical approaches which have cut us off from psychology, sociology, history and other such knowledge has not shed us well, and I do not believe economists have barely added to the stock of knowledge about how the world really works over the past 50-70 years.

      • Nanikore, I believe we need a large heterogeneity of methods generally in the social sciences, including detailed analysis of individual mechanisms and broader studies aiming to get the big bictures. I also think it is often difficult these days to say whether a particular study, or research question, belongs to a certain scientific discipline, a development I welcome. We need to analyze specific questions from different perspectives and with different methods, and I also think we need both increased cooperation and competition between different approaches.

      • Olaf I am in agreement with you now, and I think if there is one thing most participants in this blog agree on it is that we need more pluralism in the discipline.

  3. I sometimes encounter the critique that as long as you cannot come up with some own alternative to the failing mainstream theory, you shouldn’t expect people to pay attention. But, in my view, that is to seriously misunderstand the role of philosophy and methodology of economics! As John Locke wrote in An Essay Concerning Human Understanding:

    The Commonwealth of Learning is not at this time without Master-Builders, whose mighty Designs, in advancing the Sciences, will leave lasting Monuments to the Admiration of Posterity; But every one must not hope to be a Boyle, or a Sydenham; and in an Age that produces such Masters, as the Great-Huygenius, and the incomparable Mr. Newton, with some other of that Strain; ’tis Ambition enough to be employed as an Under-Labourer in clearing Ground a little, and removing some of the Rubbish, that lies in the way to Knowledge.

    That’s what philosophy and methodology can contribute to economics — clear obstacles to science.

    • Arthurian there is no point in saying we should keep the assumption that the world is flat because we don’t know what the reality is. Krugman’s die hard insistence on retaining assumptions such as the existence of equilibrium and individual maximising agents, which we know from history, sociology and psychology are wrong, is heavily connected with his identity. He also won a nobel prize for this stuff. We already knew everything we know now about trade and development before Krugman’s models actually came along. What he was awarded for was putting this into a neo-classical gadget.

      I would argue, however, that rather that acquire knowledge from this exercise, we actually lost it.

      Read this, it is depressing reading, but it reveals everything about Krugman’s thinking. He argues that a lack of realism in economics was justified for the purposes of formalisation and argues that there should be

      “a willingness to do violence to the richness and complexity of the real world in order to produce controlled, silly models that illustrate key concepts”

      Click to access krugman1994.pdf

      Personally, I do not see what these gadgets “illustrate” or how they can possibly deepen our understanding of how the world actually works. I would just prefer an explanation – backed by (quantitative AND non-quantitative evidence including primary historical documentation) of what actually happens. Forcing analysis into a standard framework which is clearly wrong will not help understanding, but get in the way. This is as true in understanding how the economy works, as it is in understanding how wars happen or cancers spread.

  4. “If you really want something other than the same old mainstream neoclassical catechism, if you really don’t want to be force-fed with mainstream neoclassical theories and models, you have to look elsewhere.”

    I find the Syll blog very interesting. Perhaps now is as good a time as any to bring this up.

    Maybe I’m wrong, but it seems to me that you focus exclusively on flaws in the way econ is done today. I am often left wondering what you think economists should do instead. If you suggested an alternative once in a while it would help. Or maybe emphasize the alternatives a little more, as I seem to have missed them.

    • //I am often left wondering what you think economists should do instead.//
      I believe there would be a significant social benefit in the form of better public policy if the entirety of the undergraduate economics curriculum were devoted to the study of market failure.
      Information assymetry, lemon markets, regulatory capture, principle-agent problem, etc.

      • What economists should do instead is to construct a better theory based on more logical assumptions and clearer definitions of variables. If they do it properly it turns macroeconomics into a true science, as in my recent book “Consequential Macroeconomics-Rationalizing About How Our Social System Works”. Write to for a free e-copy, and please tell me where your involvement in this previously badly explained matter lays.

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