Whither economics?

21/08/2013 § 3 Comments

There is a fascinating little side discussion going on in the econoblogosphere. John Quiggin, who was a keynote speaker at the recent 2013 New Zealand Association of Economists conference, brought some recent blog-strands together to support a provocative statement:

Paul Krugman’s recent columns, responding in various ways to JM Keynes, Michal Kalecki and Mike Konczal have made interesting reading, signalling a marked shift to the left both on economic theory and on issues of political economy.

Quiggin picked up on some ideas that Krugman was bouncing around, and suggested that together they represent a challenge to current economic policy. The two (of three) that got me thinking were:

  • the loss of the neoclassical synthesis, which asserts essentially that getting macro conditions right gives free rein to laissez-faire micro policies, and
  • recognition that people — motivated, opinionated, blinkered people — do science in general and economics specifically, so that any statements of fact and truth must be viewed as partial.

Taking the last one first: well, duh. Oh, sorry, that’s not very intellectual of me. Let’s try this: modernism focused on universal statements, while post-modernism called into question the universality of modernism. Modernism made bold sweeping statements about how society should be organised; post-modernism suggested that it depended on your perspective. Po-mo suggested that perspective was bound up in power and privilege, so the bold-sweeping-statements were re-statements of power. And furthermore, as deconstructionism demonstrated, the bold narratives contained seeds of dissent, gaps or kernels (depending on your metaphor) that revealed how much the modernist perspective was imposed. So, recognising that the people doing economics are always speaking from a situated perspective, well, that puts economics about where the rest of the social sciences were in the late 1960s.

On a related note, Noah Smith’s description of ‘derp’ is absolutely brilliant. He uses Bayesian updating to explain political discussion. People who don’t change their minds in the face of contradictory evidence aren’t irrational, they just have really strong priors. Some of what passes for political and economic analysis is just restatements of priors, which are themselves reaffirmations of power relationships.

The loss of the neoclassical synthesis is a bit different. My history of economic thought is shaky, but here’s my take. There has been discussion for years about the microfoundations of macroeconomics. Somewhere, Krugman explained that micro and macro have different bases. Micro is about how people behave, so it’s the psychology and sociology of commerce. Macro is about statistical relationships in aggregates. We can estimate the statistical relationships without needing a behavioural explanation of why they hold.

The recent Krugman blog post that Quiggin picks up goes further than saying that these are two different areas of research. The neoclassical synthesis intentionally separated them, ring-fenced the micro from the macro. In a totally economist move, the neoclassical synthesis said, ‘assume the correct macro conditions’ when thinking about micro. The GFC and follow-on show the assumption is unwarranted. We won’t get the macro conditions right, and that will have micro ramifications.

This is also, in a sense, old news. When I finished my Bachelor’s, we were in a recession and jobs were hard to find. When my brother finished his degree, we were in a boom and employers were paying hiring bonuses. He stepped right into a job and never looked back; I took a while to get going. I have sympathy for the 20-somethings of today — their futures are significantly damaged by stuff that was going on when they were teenagers or younger. Of course the macro affects the micro. It’s just not as personal when you’re a tenured academic producing economic theory.

What Quiggin and Krugman and others are saying is that economics needs to account for the lived experience of people in ways that it has been reluctant to do over the last few decades. Well, they have my support.

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§ 3 Responses to Whither economics?

  • Grant Taylor says:

    Krugman has become a bit of a hero to me over the past couple of years of reading his columns in the NYT, among others. It has somehow inspired hope that there are smart, wise humanists in high office in the world; too rarely, do they have a strong public profile.

    • I have thought that if I really understood Krugman and his critics, I would understand macro. It is interesting to read the criticisms from both the Left and the Right and try to place them in a theoretical framework. Quiggin’s post is essentially a critique from the Left — that Krugman has corrected himself by moving Leftward.

  • Matt Nolan says:

    “So, recognising that the people doing economics are always speaking from a situated perspective, well, that puts economics about where the rest of the social sciences were in the late 1960s”

    To be fair, almost every economist in the universe views economic statements as conditional – and they also tend to accept that any “conclusion” must involve either explicit or tacit normative assumptions.

    You’ve reminded me to post about the Krugman post though – I had an unfinished draft, I will do :)

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