June 25, 2007

The challenge of being a heterodox economist. After grabbing a free drink in the Friedman reception, I strike up a conversation with economist Michael Perelman in the hallway... Perelman, who is there for the EPI reception, works at the margins of the discipline; he is one of a few hundred self-described "heterodox" economists at the conference. His last book, Railroading Economics, was about the creation of the "free market mythology"... I ask him about how he relates to the so-called mainstream of his profession. "It's a mafia," he says quietly, his eyes roving over to the suits spilling out of the Freedom to Choose room.

Classical economics refers to the theories laid out by Adam Smith and David Ricardo in the eighteenth and nineteenth centuries, which emphasized the power of the "invisible hand" of the market to promote the division of labor and economic growth. Smith famously summed up the recipe for prosperity as "peace, easy taxes, and a tolerable administration of justice," with "all the rest being brought about by the natural course of things." A hundred years after Smith, a group of "neoclassical" economists came along and added a few key features to his account, which continue to ground the field to this day--that humans are rational, utility-maximizing agents with fixed preferences, that they make decisions "at the margins" and that the mechanisms of supply and demand (operating free of government interference) will lead to a general equilibrium whereby resources are allocated efficiently. That view dominated for the next sixty years until John Maynard Keynes came along in a period of global economic crisis and proposed a new way of looking at the economy, one focused on national economies as systems that were decidedly imperfect and prone to failure. In the wake of Keynes's work in the 1930s and '40s, economists had a problem on their hands. They had two models for how an economy worked: the neoclassical account of supply, demand and prices (microeconomics) and Keynes's account of the relationships among consumer demand, employment and money (macroeconomics). In the 1940s and '50s, a series of legendary economists formally fused the two, producing the "neoclassical synthesis." Many of the pioneers of this work, from Paul Samuelson to Kenneth Arrow, were famously liberal. But their work stressed the ways in which markets, functioning on their own without interference, tended to an interdependence described as "general equilibrium." In their wake came a parade of libertarian economists, like Milton Friedman and his Chicago School colleagues, who pushed the neoclassical model to leave Keynes behind completely, to fully embrace the logical extremes of a world of self-interested rational actors--a back-to-the-future gambit dubbed the "new classical" economics. In terms of the implications for the relative value of market and nonmarket forces in allocating resources, the new classical view didn't differ substantially from Adam Smith's original contention. In the same way classical economics was born as a brief for laissez-faire capitalism, against the prevailing interventionist mercantilism of the day, the new classical model reaffirmed the value of markets in the wake of Keynes's critiques. And it came to dovetail quite neatly with a worldview that has dominated the past thirty years of globalization, which Notre Dame heterodox economist David Ruccio succinctly summed up to me as one in which "markets, private property and minimal government will achieve maximum welfare."

posted by HawthorneWingo 17 years ago
  • Big article, and I haven't read it all. It's no surprise that economists (of all stripes) react negatively to anyone who would try to disprove their pet theories. Economics and politics go hand-in-hand, and this so-called social science is not a science at all. At least it doesn't rely on the scientific method much. This is just a capitalism vs. socialism argument being fought by nerds.
  • Maybe it's because I study history, but I've never found the neoclassical theories satisfying. They just don't seem to fit what has happened over the last 500, 1000 or more years. Talking about the heterodox economists, the article says
    Many point out that humans aren't rational, or not nearly as rational as the theory would have them be (and, further, that in the aggregate this creates market failures). Others point out that humans are social creatures, not individual agents, and their preferences and behaviors are forged by social structures: institutions, habits, social mores and culture all mediate and drive economic behavior. Others say that price and value aren't interchangeable and that prices don't arise from the simple intersection of supply and demand curves, while some argue that unequal power between different sectors of society affects how markets operate.
    and the history student in me thinks, yes, that's what I've seen in what has actually happened in our world in the past. History is nothing but empiricism, at least when I do it (being not very talented at being theoretical or abstract) - it's what happened. And if your theory doesn't fit what happened, it's not a very good theory. I was actually in a lecture on economics for historians a few months ago, and the lecturer was trying to explain the nature of trade between Britain, the tropics and the rest of Europe as a simple matter of economic exchanges - but the pattern didn't make any sense unless you also realised that the tropics in question (which were exporting their produce to Europe, who then exported to Britain and Britain didn't seem to be doing much for anyone) were largely ruled by Britain, and their production and markets were being directed to British interests, due to political and military power. When I asked him about that, he said it wasn't important, he was just trying to explain some abstract principles about trade, but those abstract principles did not fit the examples he was trying to give of them, and at the same time, he would have left anyone in the class who didn't know the history under the impression that the colonial trade system was based on mutual benefit and not coercion.
  • An economist is someone who argues that something can't work in practice because it doesn't work in theory.
  • The problem with being a heterodox economist as the article rightly points out, is that it's a negative definition. Saying that you're against neoclassical economics without saying what you're *for* doesn't move the intellectual markers much. At least the behavioral economists have an intellectual framework supported by empirical research. It's probably the first real advance in economic thinking in centuries.
  • Yes, as a history student, the mind often boggled with regard to some of the things my friend who is an economist told me about his economics lectures. Another guy (another economics student) who we used to run with made me frequently double take with his complete disregard/ignorance of what seemed to me to be elementary psychology and organisational politics.