Economics after the crash

Alex Marsh

About the author
Alex Marsh started his blog – Alex’s Archives – in October 2010. The blog’s audience has grown steadily. Since June 2012 it has regularly featured among the Top 100 politics blogs in the UK on the ebuzzing.com monthly ranking. The blog covers a wide range of topics, but its focus is issues relating to housing and social policy, economics and public policy, and political processes under the Coalition government. Alex’s posts have also appeared on group blogs including the Guardian Housing Network blog, LSE British Politics and Policy blog, and LSE Impact of Social Sciences blog, The Conversation UK, and Democratic Audit. Outside the blogosphere Alex’s day job is as Professor of Public Policy at the University of Bristol, where he is currently Head of the School for Policy Studies. He has published academic articles in a variety of housing and policy journals. His most recent book is the Sage Library in Housing Economics, which he edited with Ken Gibb of Glasgow University.

www.alexsarchives.org www.alex-marsh.net

The material in this collection is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License.

Cover image: © aihumnoi - Fotolia.com Published: November 2013

Contents

Preamble Economists, implicated Economics as a vaccine against economists? On economic amnesia On knowing what’s going on Economists? That’ll be your problem right there The maths question in economics Economists in reflective mood The reopening of the economic mind? Revisiting Capitalism Unleashed Economics emperor: absence of clothes increasingly suspected Economic theory and intuition-based policy Looking to the past on expectations of the future Reinhart and Rogoff: replication and responsibility Dr Smith and the “neoclassicals” Interpreting Osborne Seeking a post-crash economics On signs you’re reading bad criticism of economics On mainstream economics and neoliberalism Would post-crash economics be a step backward? 1 3 5 8 10 16 19 21 24 27 30 32 35 38 41 44 47 50 55

Preamble
My blog covers whatever happens to be interesting or preoccupying me at the time. A post may be triggered a piece in the mainstream media or a post on someone else’s blog. Or by nothing very specific. I may well try to link my discussion, explicitly or implicitly, to an argument or a concept from a relevant academic literature. This is always done informally. One of my blog’s recurring themes is the nature of economic knowledge and the practices of economists. The influence of economics on policy is rarely far from the surface of the discussion. This collection brings together a selection of the posts on economics, economic ideas and the nature of economics that I’ve written over the last three years. The posts mostly reflect on orthodoxy and heterodoxy, and the philosophy, ethics and methodology of economics. Quite a bit of the discussion starts from the macroeconomy, including the fallout from the Global Financial Crisis. Many of the posts aim to situate the economic arguments within a broader political economy. Some themes recur. The aim in bring the posts together here is to make the arguments available to readers who prefer to digest their reading material in more conventional form and to make the arguments accessible to those who have little interest in rummaging around in my blog archive. For this collection I’ve edited the posts slightly for grammar and punctuation. I’ve added annotations and few references where that seems appropriate. Otherwise, the posts are presented here pretty much as you can find them on the blog. Alex Marsh, Bristol November 2013

Economics after the crash

Economists, implicated
19th February 2011 John Maynard Keynes famously wrote that “[i]f economists could manage to get the mselves thought of as humble, competent people on a level with dentists, that would be splendid”. Many economists, somewhat uncharacteristically, might well be craving that type of anonymity at the moment. Because they’ve been getting a hard time of it. An d the discipline may be about to get even less popular. The arrival of the film Inside Job is likely to fuel the public’s anger at bankers for causing the financial crisis. And not only causing the financial crisis, but subsequently carrying on with business pretty much as usual, while the fallout from the crash is felt in public spending cuts, unemployment and welfare benefit reductions. But the film does more than that. It broadens the scope of criticism to implicate a range of other professionals. It wasn’t just the corporate bankers: lawyers, central bankers, accountancy firms, lobbyists and government officials were also complicit in pushing a deregulatory agenda. Their actions magnified systemic risk and increased the instability of the financial system in ways that theory said shouldn’t happen. The real world clearly hadn’t read the script. In amongst the culprits identified are academic economists. Economists in the US come in for particular criticism. There is a cohort of senior academic economists who stand accused of taking large and undisclosed payments from private corporate interests in return for acting as cheerleaders for deregulation. And for providing a veneer of academic respectability to profitable financial instruments of such complexity that regulatory oversight was near impossible. While the story that implicates economists is only now reaching the public consciousness, it is not, perhaps, entirely news – if you know where to look. Sociologists of knowledge, for example, have spent much of their time studying the way that natural scientists go about their work in the laboratory. But over the last decade they have also turned their attention to financial markets and financial economics. In his brilliant 2006 book An Engine, not a Camera: how financial models shape markets, the sociologist Donald Mackenzie provides examples of senior economists, from the 1970s onward, who were not content to restrict their interventions to the academic journals but also felt moved to engage more directly in paid lobbying activity in pursuit of changes in the law – generally in the direction of deregulation and creating a more ‘hospitable’ environment for financial innovation.1 The problem isn’t one of which the economics profession itself is entirely unaware. I am in the middle of reading George F. DeMartino’s recent book The Economist’s Oath: On the Need for and Content of Professional Economics Ethics.2 DeMartino is arguing that, in contrast to many other social scientists, economists’ prescriptions and actions in applied policy contexts
Mackenzie, D. (2006) An Engine, not a Camera: How financial models shape markets, Cambridge, MA.:The MIT Press. 2 DeMartino, G.F. (2010) The Economist’s Oath: On the Need for and Content of Professional Economics Ethics, New York, NY: Oxford University Press USA.
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have potentially huge ramifications for the well-being and quality of life of millions of people. He considers a number of concrete cases of economists acting as social engineers – including prescriptions for shock therapy applied to transition economies with sometimes devastating results. DeMartino argues that the discipline’s almost complete neglect of ethical questions – again in contrast to all other social scientists – is unacceptable and unsustainable. He advocates for the equivalent of taking the Hippocratic Oath before any economist be allowed to practice. Apart from the ethical dimension, there is the issue of how the discipline of economics has become quite so closely associated with the rationalisation of policies and social arrangements that have proved so disastrous. That is a whole other question. It is one that can fruitfully be investigated from a sociological perspective. There are at least two components to the argument. First, it is in part a function of the way the mainstream of the discipline has come to constitute ‘valid’ economic knowledge. There is a strong strand of abstraction and idealism. If one wishes to succeed within the mainstream of the discipline then there is not simply a reluctance but a positive disincentive to get too involved with data and the real world. Second, the discipline is the only social science with a clear global hierarchy, and the upper echelons of that hierarchy have been colonised by (typically US) economists who value mathematical and theoretical sophistication over real world relevance. When mainstream economics becomes entangled in social engineering it tends to view the world as something that needs to be reshaped to fit the procrustean bed of the theoretical model, rather than recognising that models are inevitably simplifications that need to be applied, if at all, with extreme care. There is a letter in today’s Guardian by Mike Cushman of the London School of Economics that provides an insight into how these features of the discipline are reinforced.3 But is all this inevitable? In one sense, the scale of the field is so vast it is hard to get a handle on how things are evolving. One can find signs that the grip of the mainstream is strengthening. But equally one can find signs that the mainstream is now more open to recognising the limitations of established modes of analysis – for example, in the willingness to look more seriously at models of bounded rationality. And there continue to be heterodox voices at the margins arguing for different approaches: approaches which recognise the need for a more institutionally sensitive economics more firmly anchored in empirical engagement with the real world economy. It could plausibly be argued that these voices are becoming more numerous and more organised. One place to investigate these views further is through the Real World Economic Review, which also runs a blog.4 One problem with economics at the margins is that only occasionally does it offer the sort of concrete and confident prescriptions and predictions that economic advisors to

http://www.guardian.co.uk/education/2011/feb/19/crash-fuelled-by-academic-journals (Last accessed: 21/11/13) 4 http://www.paecon.net/PAEReview/ (Last accessed: 21/11/13); http://rwer.wordpress.com/ (Last accessed: 21/11/13)
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government are typically required to give. When one recognises the open-textured and contingent nature of the economy the enthusiasm for hard prediction is significantly tempered. Yet, as long as there is a demand for spuriously precise economic advice, supply is likely to be forthcoming. In this respect a recent paper by Charles Manski on Policy analysis with incredible certitude – currently available as a working paper – is interesting, important and encouraging.5 From a perspective within the mainstream, Manski is asking some searching questions about the sort of policy analysis that economists can and should engage in. His concern is very much the misplaced certitude that is too frequently demonstrated. So maybe there’s hope. Perhaps some of the hubris is being knocked out of mainstream economics and there is a future for the discipline in which it is populated by the “humble, competent people” Keynes thought so splendid. There are some there already. But there is plenty of room for more.

Economics as a vaccine against economists?
18th September 2011 On Friday a quote from the great Cambridge economist Joan Robinson was circulating on Twitter: Purpose of studying economics – to learn how to avoid being deceived by economists In fact, the full quote is: The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists. This pretty much sums up the spirit in which I teach economics to policy students, so I thought it was worth a Retweet. But it triggered a bit of deeper reflection. In particular, one tweeter queried whether it could be the case. Studying economics, runs the argument, required embracing the values of economics in order to understand the analysis. Through a process of socialisation one becomes colonised by the economic discourse and progressively blinded to the problematic nature of some of the underlying assumptions and values.
This paper has been published as Manski, C.F. (2011) Policy analysis with incredible certitude, Economic Journal, vol. 121(554), F261-F289. There is also now a book length treatment of the topic in Manski, C.F. (2013) Public policy in an uncertain world: analysis and decisions, Cambridge, Ma.: Harvard University Press.
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This brief Twitter exchange resonates with some of the great debates in the social sciences, anthropology, and the philosophy of science. Is it possible to understand and engage meaningfully with a paradigm/discourse/culture/ontology without complete immersion within it? Or is it possible to stand outside yet still critically engage with it? This speaks to a major contemporary challenge – what has been termed the ‘economisation’ of politics and policy. Increasingly policy proposals are being forced on to the procrustean bed of a utilitarian economic calculus. The policy world is increasingly framed from within a mainstream economic perspective. Unless proposals can be couched in the language of market failure, externalities, property rights, information asymmetries and the like they are not to be taken seriously. A tactic deployed by policy actors operating from within the perspective of neoclassical economics is to deny those outside the discipline the standing to comment on economic matters. You can’t have a view because you’re not an economist. You don’t understand. Those outside the discipline often feel disempowered when policy debate is conducted on this economics-inflected territory. The arguments come across as complex, heavy-duty scientific stuff. It can often seem to offer the sort of ready-made answers that Robinson warned against: We’ve run the proposals through the model. We’ve estimated that the policy will cost £300m. It will deliver £200m of benefits. We shouldn’t do it. Those without any feel for what these statements mean may feel forced to accept them as representing something robust. A model sounds pretty scientific. Benefits don’t outweight costs. That’s got to be bad, right? They may not like the answer they are presented with. But they have no tools for prising apart the case being made. They are blinded by “science”. Yet, there are plenty of threads that you can tug at if you know where they are. What’s the assumed discount rate? How are we valuing life? Valuing time? Are there intangibles that have been omitted? How have transfers been dealt with? What are the magnitudes of the elasticities being used? Are they evidence-based or simply conventional assumptions? How are distributional issues being treated, cross-sectionally and longitudinally? Does the model deal with only first round effects or secondary effects? Partial or general equilibrium? Are expectations important in driving market behaviour and how are they treated? What assumptions are being made about rationality? Or information? Or market structure? Or the speed of market adjustment? How sensitive are the results to the key assumptions? And so it goes on. Which threads are relevant depends on the precise nature of the analysis. But there will definitely be threads. Pulling on some of them can expose something implausible or deeply unpalatable embedded in the assumptions or the calibration that drives the conclusions. It may lead to the whole argument unravelling. So that brings us back to Robinson. Economics is an art in science’s clothing. The frontiers of the discipline can be fearsomely technical. There is no doubt this excludes the non-expert. Yet, the social world the economist seeks to shed light upon is not unintelligible to the non-specialist. When economics is being applied to policy then it is dealing with real
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issues about which non-economists may well be better informed than the economists. They have standing to challenge the incautious application of inappropriate models. The mathematical sophistication of economic models is often based upon some questionable foundations – a house built on sand. And the foundations are not too complex. When applied to policy questions the economics needs to speak meaningfully to pressing real world issues. Policymakers are familiar with one half of that process – the issues – they need to assess whether the economic analysis connects plausibly to those issues. Most people can develop a feel for the way an economic argument is constructed. There are usually a few key assumptions that drive the outcome. So it doe sn’t require too much knowledge to start to ask intelligent questions to test the robustness of what you’re being presented with. We can draw the analogy with learning a language. It isn’t so difficult to learn tourist French or to achieve a competent level for reading or writing. You can get a real sense of what is going on. But that doesn’t mean you’ve got the facility to write cutting edge literary fiction. Or even effective double entendre-laden limericks. To do that requires much greater immersion – and may be inaccessible to the non-native speaker. It is the same with economics. It is not so hard to get a sense of how economic argumentation works. But that doesn’t mean you’re going to get a paper published in the American Economic Review. So if economics is studied critically, examining the foundations upon which explanations are built and the grammar of the arguments, it is possible to develop understanding while declining to embrace the values and assumptions that underpin the discourse. And getting a feel for the subject reduces the chances of being deceived. I’m with Joan on that.

On economic amnesia
12th October 2011 Economists, one might assume, have something useful to say about the current problems afflicting the world economy. Yet, since the crash of 2008 there has been a considerable amount of reflection in parts of the discipline about its failure to anticipate the crash and its failure to offer effective prescriptions for getting the economy out of the hole it’s in. Of course, elsewhere in the discipline it is business as usual – with a range of prescriptions for privatisation and deregulation at the microlevel and fiscal restraint at the macrolevel. This week’s Nobel announcements are salutary in that respect. Olaf Storbeck described them as a prize for the Ancien Régime.6 He was criticised for doing so, but his intervention might be better seen as simply the most recent in a chorus of disapproval directed at an approach to macroeconomics that came to dominate the field. Thomas Sargent, who shared this year’s prize, did as much as anyone to propel rational expectations and new classical
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http://olafstorbeck.blogstrasse2.de/?p=1348 (Last accessed: 21/11/13) Page | 5

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macroeconomic models to the forefront of the field, and his macroeconometric work has been hugely influential. That is why he was awarded the Nobel prize. But that can be separated from the question of whether, looked at from a broader perspective, such models actually shed much light on the way the economy operates. Some see the solution to the problems afflicting macroeconomics as the need to search for new ideas. Paul Krugman has recently argued, on the contrary, that the problem is that the discipline has amnesia. The history of economic thought is littered with potentially useful ideas that have been rejected or neglected in favour of new classical or new Keynesian models of complete markets. The problem is that most economists do not get a chance to study these older ideas, rather their education focuses upon the current ‘state of the art’. When quite a number of high profile economists have argued that much macroeconomic theorising since the 1970s has been travelling further and further up a cul-de-sac, this is more than simply unfortunate. In his presidential address to the Eastern Economics Association Paul Krugman frames the point vividly:7 … in responding to the crisis, the profession presented a sorry spectacle of unnecessary ignorance that didn’t even recognize itself as ignorance, of bitter debate over issues that were resolved many decades earlier. And all of this, of course, made the profession mostly useless at a time when it could and should have been of great service. Put it this way: We would have responded better to this crisis if macroeconomics had been frozen at the level of knowledge it had in 1948, when Paul Samuelson published the first edition of his famous textbook. This neglect among economists of their intellectual antecedents is not a new phenomenon. It is, however, getting worse. Fewer and fewer economics departments offer courses in the history of economic thought. This means that ideas with great potential lie unexplored. It also means the discipline condemns itself to reinventing the wheel. And it deprives students of an enriching experience. One of the most memorable parts of my own economics education was wading through Roger Backhouse’s A history of modern economic analysis and marvelling at the twists and turns of the story as successive generations of economists tried to make sense of their subject of study.8 It also gave a clear sense that the process by which economic knowledge moves forward is not unambiguously a process by which ‘better’ theory replaces ‘worse’ theory. There are other things going on. The neglect of intellectual history sits alongside an intolerance of heterodoxy in many economic departments. People like Krugman and Stiglitz, although Nobel laureates themselves, are routinely denigrated and derided by economists working within the mainstream. No doubt in part that is because of their media profile – after all you can’t be a ‘serious’ scholar and try to engage the public as well. But it is also because they adhere to a
Krugman, P. (2011) The profession and the crisis, Eastern Economic Journal, vol 37, 307-312. Backhouse, R.E. (1985) A history of modern economic analysis, Oxford: Basil Blackwell. Page | 6

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broadly Keynesian perspective (for the reason, as Krugman pointed out succinctly the other day on his blog, that it does a better job of explaining what’s going on).9 It is interesting that the ideas of Hyman Minsky, a post-Keynesian economist, have attracted increasing media attention in recent years as people cast around for ways of explaining the financial crisis. Yet, those ideas have had very limited traction in most economics departments. The neglect of intellectual history and the intolerance of heterodoxy are important because they obviate the need for broad reflection. The evolution of economic thought and the cleavages between contemporary schools of thought rest on questions of ontology and epistemology. But economists tend to spend most of their time on methodology. Fundamental questions about the nature of the economy divide approaches – questions about the nature and implications of time, knowledge, learning, uncertainty, expectations, for example. Or questions about market structure, market adjustment, frictions and transaction costs. Or questions about the nature of economic relationships – their direction, separability, stability, linearity. Different approaches to ‘doing economics’ ofte n flow from profound ontological differences. Austrian economics, for example, is not more discursive and less mathematically dense simply because Austrian economists don’t like maths. It is because their understanding of the economy means the application of the full panoply of technical economic tools is viewed as pointless. The economy, from this perspective, just isn’t amenable to that type of analysis. But many economists, well versed in mainstream approaches but little else, would have had no opportunity to reflect upon such issues in anything except the narrowest terms. And it is unlikely that any such engagement is framed explicitly as concerning the ontology of the discipline. The neglect of intellectual history and the intolerance of heterodoxy are of a piece. They both flow from a process through which a particular perspective and a particular set of values – the so-called values of the maths department – have come to capture the commanding heights of the discipline and to marginalise or silence alternative perspectives. Progress in economic thought has come to be defined in rather narrow terms, and relevance to understanding pressing applied problems does not feature all that strongly. Many within the discipline have been conscious for at least the last two decades that this has been happening. Many have bemoaned it. Movements like post-autistic economics (now, real world economics) have arisen in opposition to it. But they have yet to make serious inroads into thought leadership within the discipline. How to effect a change of culture within the discipline is a political or sociological question, rather than a purely economic one, although focusing upon incentives would no doubt be fruitful. Krugman concludes his speech on a frank, if slightly defeatist, note which captures the essence of the problem: What we really need is a change in the destructive social dynamics that brought us to this point. And I wish I knew how to do that. But my problem is

http://krugman.blogs.nytimes.com/2011/10/11/why-believe-in-keynesian-models/ (Last accessed: 21/11/13)
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obvious: I’m an economist, and it seems that we need some kind of sociologist to solve our profession’s problems. This captures the scale of the challenge. But before successful change can occur there needs to be broad-based acceptance that it is needed – as those who study organisational change will tell you. I’m not sure we’re quite there yet.

On knowing what’s going on
5th November 2011 Leading active members of today’s economics profession … have formed themselves into a kind of Politburo for correct economic thinking. As a general rule—as one might generally expect from a gentleman’s club—this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen. … They oppose the most basic, decent and sensible reforms, while offering placebos instead. James K Galbraith Last weekend in a brief post over at Pop Theory Clive poses one of the key social scientific questions of our time – What do economists know?10 Of course, the answer depends on which economists one is talking about. As the epigraph above notes, the mainstream of macroeconomics largely misses the point. It didn’t see the current economic turmoil coming and has little to offer by way of solutions. One striking thing about Galbraith’s comment is that it was written in 2000. Not a great deal has changed since then. These deficiencies with mainstream approaches have been recognised by some high profile mainstream practitioners, as I noted in On economic amnesia. Yet, it is not as if economics has nothing sensible to say on the matter. For example, in a recent paper Joseph Stiglitz sketches out an argument, based upon the economics of imperfect information and incentives, why many of the problems we have recently encountered should not be a surprise.11 His point is that modern microeconomics provides tools that are useful in alerting us to potential problems, but that much modern macroeconomics does not make use of those tools. Macro has preferred instead to stick with microfoundations that treat issues such as market-clearing or expectations-formation in such a way that, by definition, they render the analysis largely useless for understanding the problems we now face. Stiglitz is particularly scathing about the way in which many mainstream economic models have neglected the financial sector. As a consequence they

http://clivebarnett.wordpress.com/2011/10/30/what-do-economists-know/ (Last accessed: 21/11/13) Stiglitz, J. (2011) Rethinking macroeconomics: what failed, and how to repair it, Journal of the European Economic Association, vol 9, no 4, 591-645.
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have no traction on the current crisis because, according to the models, it can’t be happening. Stiglitz argues that economics has spent too much time and energy improving its analysis of relatively modest variations in economic activity, while dismissing truly profound economic dislocations by assumption: It was as if we had developed a medical science that could treat individuals’ colds, but had nothing to say about serious illnesses. A doctor that said that that was good enough, because most of the time individuals were either healthy or suffering from the sniffles, would not be taken seriously; but that was the position taken by much of mainstream economics (p.608) Stiglitz argues that, in contrast, we should be interested in economic pathologies. It is when the system gets seriously sick that we can start to understand better how it works. We should be focused on the economics of “deep downturns”. And the economics of deep downturns bears limited resemblance to the economics of good times. Clive’s Pop Theory post draws on a recent piece by James K Galbraith which points out that if you are willing to look beyond the mainstream there are a number of strands of economic thinking that can not only explain what has happened, but also saw it coming.12 Galbraith ends his piece with a call to action. Rather than devoting more resources to what he terms the Tweedledum and Tweedledee debates between mainstream schools of economic thought: The urgent need is … to expand the academic space and the public visibility of ongoing work that is of actual value when faced with the many deep problems of economic life in our time. The urgent task is to make possible careers in those areas, and for people with those perspectives, that have been proven worthy by events. The followers of John Kenneth Galbraith, of Hyman Minsky and of Wynne Godley can claim this distinction. The task now is to increase their numbers and to reward their work with the public recognition and the academic security it deserves. The question is how? Once the Politburo has a grip on the discipline, how can it be loosened? This is not dissimilar to the challenges Paul Krugman noted in his Eastern Economics Association Presidential Address. Perhaps the answer is that it can’t be done from the inside, but must come from beyond. One interesting, perhaps hopeful, development occurred this week at Harvard. Students walked out of Ec 10, the introductory economics course delivered by Greg Mankiw to students drawn from diverse undergraduate programmes, many of whom won’t go on to major in economics. The students released an open letter to Professor Mankiw in which they

http://www.twill.info/issues/twill-14/downloads/some_economists_got_it_right_Galbraith.pdf (Last accessed: 21/11/13)
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explain that they were looking “to gain a broad and introductory foundation in economic theory” but felt exposed to “a specific—and limited—view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today”.13 Perhaps this is the start of something significant. Perhaps it needs a new generation – less deferential to conventional expertise – to really shift the terrain. Yet, equally, this particular action may be no more than youthful exuberance and goes nowhere. It feels similar to the original post-autistic economics protests from back in 2000. While those protests helped to raise consciousness and contributed to the establishment of a much more vibrant global community of heterodox economists, the impact upon the strongholds of orthodoxy has been relatively limited.14 But this week’s student protestors made reference to the broader Occupy movement. They seek to locate the critique of existing economics education as part of a much broader wave of discontent with the established order. This may have the potential to impart further momentum. In higher education systems where we are obliged to weigh student demands and expectations more heavily it may be that change will be forced upon the economics curriculum. One of the problems for anyone interested in delivering more pluralist economics education is what such a beast would look like. Heterodox economists may rail against ‘toxic textbooks’ infused with the orthodoxy, but accessible materials for alternative approaches are relatively limited. This challenge has been picked up. The Institute for New Economic Thinking, for example, has used the Harvard letter as a springboard for an exercise to assemble alternative curricula through which a broader-based economics education can be delivered.15 So, again, there is potential here for greater momentum to develop. Perhaps this time the citadels are starting to crumble.

Economists? That’ll be your problem right there
10th June 2012 Last Wednesday Suzanne Moore posted a Guardian comment piece entitled Why do we take economists so seriously? which takes a rather scatter-gun approach to some familiar themes.16 The argument, in outline, is that the economy is in a mess and this is primarily because we have been hoodwinked by orthodox economists. These economists produce inadequate theories unsuited to understanding society. But we nonetheless invest them with too much power over it, and us. The range of opinions on how to resolve the current crisis is too

http://hpronline.org/campus/an-open-letter-to-greg-mankiw/ (Last accessed: 21/11/13) http://www.hetecon.net/ (Last accessed: 15 http://ineteconomics.org/blog/inet/imagining-new-intro-economics (Last accessed: 21/11/13) 16 http://www.guardian.co.uk/commentisfree/2012/jun/06/economics-not-science (Last accessed: 21/11/13)
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narrow and largely reflects the interests of those who support the current social order. New voices are needed. As Moore argues: we are indeed in reduced circumstances when debate is reduced to bankers arguing with economists. This clash of ideologies is not really left versus right. It is more akin to fundamentalists talking to agnostics … This is what you get from this dictatorship of economists, and it should be overthrown. It is wrong and keeps being wrong. The choices to be made now are moral, not economic ones. Only an idiot or an economist would think otherwise. For a piece in which the author professes to be largely ignorant of the matters about which she is writing, this is quite a brave stance. Predictably it has generated a response. In a post that garnered considerable support from tweeting economists, the estimable Chris Dillow highlights Moore’s failure to grasp the way economic thinking is evolving and the richness of current economic research.17 Moore argues that: Economics is not a science; it’s not even a social science. It is an antisocial theory. It assumes behaviour is rational. It cannot calculate for contradiction, culture, altruism, fear, greed, love or humanity at all. Regardless of whether this qualifies as an accurate characterisation of economics at some point in its history, Dillow points out that these are issues about which current economic research is very much aware. Over at The Lay Scientist Michael Story notes that the sort of criticism Moore offers is not uncommon:18 I get the general idea … economists are either foaming free-market fundamentalists or mindless automatons, sitting uncaring in their lairs, crunching numbers and models that have increasingly little relevance to the real world. Story’s post tries to balance a recognition of the valid points in Moore’s piece (the problems associated with complex synthetic financial products and regulatory weaknesses) with the broader point that such anti-economics sentiment, though widespread, is misplaced. Here again Story argues that economics is a richer body of thought than Moore credits and is already tackling – in its own way – the purported inadequacies that Moore identifies. I find myself somewhere between these positions. Moore’s argument is a monumental, and rather confused, generalisation. Yet, it is hardly news that economics finds itself in the
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2012/06/economicsrationality.html (Last accessed: 21/11/13) 18 http://www.guardian.co.uk/science/the-lay-scientist/2012/jun/08/2 (Last accessed: 21/11/13)
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dock over the 2007-08 financial crisis and its fallout. And so it should be. Perhaps the most high profile examination so far was the film Inside Job, which raised important questions about the ethics of economics and (some) economists. Prominent members of the discipline have been forthright in their condemnation of the failings of contemporary macro (as I’ve discussed in earlier posts). There is no credibility in the argument that economists are not – even partially – culpable for the problems we now face. And I would not be entirely optimistic about the discipline’s capacity to deal successfully with its own deficiencies. But which “economics”? One of the problems with this discussion is the term “economics”. It is used almost indiscriminately. Often several significantly different meanings can be in play at the same time. “Economics” can refer to what is actually happening out there. That is, in the portion of the social world we label “the economy”. Where business is conducted. Trade occurs. Needs are met or go unfulfilled. Fortunes are gained and lost. Or it can refer to the sort of economic arguments and understandings that circulate in public discourse – in the newspapers and the pubs – which was discussed a decade or so ago under the heading “ersatz economics”.19 This bears no necessary relationship to “proper” economics. Or it can refer to the “proper” economics associated with the academic discipline that carries the name. Even here we can differentiate between the economics encountered in the textbooks – the sort that those who have studied economics are familiar with – and the state of the art in economic research, much of which is utterly impenetrable to outsiders. Then, finally, it could be the economics that is influential in policy circles. This is often a radical simplification of economic thought, in part because that is what is digestible to noneconomists. There is, for example, a strand of free market zealotry, often peddled by the libertarian component of the Think Tank industry, which could no doubt win prizes for sticking faithfully to the simple nostrums preached by Chicago price theory in its pomp. But it bears almost no relation to the more qualified appreciation of what markets can deliver that characterises much subsequent and contemporary “proper” economic thought. Many economists recognise the limits to what markets can achieve or the contingencies underpinning market success. But they aren’t the ones relentlessly pushing free market ideas into the policy process. Or bending the Minister’s ear about the indisputable benefits of marketising everything that is as yet untouched by the market’s cold embrace. As for the economic ideas propounded by politicians with no formal training or appreciation of the field, radical simplifications would be the best that could be said for them. Of course, it isn’t just Think Tanks who act as policy entrepreneurs for marketization. Inside Job illustrated the role that some economists have played in moving out of the
See Garnett, R.F. (ed) (1999) What do economists know? New economics of knowledge, London: Routledge.
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academy and into the policy arena. A more detailed discussion of these moves has been provided by Donald Mackenzie in his work on the way in which economists such as Friedman, Black and Scholes played a role in acting on the world to transform it to better accord with their vision of how it should be ordered.20 The disaster of Long Term Capital Management should perhaps have alerted us to the risks of these types of intervention. But clearly the financial markets, financial theorists, and financial regulators weren’t paying close attention. So when Andrew Haldane argued this week that new models of financial markets are necessary he is right. But the point should have been obvious for quite a while.21 When we argue that economists are to blame for the mess we’re in, what exactly are we referring to? Which flavour of “economics” are we objecting to? When “proper” economists move into the policy world and start to advocate for putting their theories into practice, what status does that activity have? Standard economics lays great emphasis upon the positive/normative distinction. The “science” of economics is the positive analysis of the world as it is. It has an aversion to normative claims. So when economists start lobbying policy makers for change because this or that theory says the world would be a better place if it were remoulded to conform more closely to the theory, is that even “economics”? Or is it something else entirely? Economics: somewhat less benighted If we restrict ourselves for a moment to “proper” economics the picture is, as Dill ow and Story point out, more complex than Moore appreciates. Economics is a global discipline which covers a range of perspectives. So to talk of “economics” as a unified body of thought is wrong-headed. But, at the same time, it is a discipline in which there is a strong orthodoxy, a reasonably clear global hierarchy, and a heterodox periphery. It is a more unified body of thought than any other science of society. The received wisdom is that heterodox economists struggle to be heard and largely participate in conversations parallel to the mainstream. These are not the people who shape the economic canon. Yet, there are signs that this may be changing slowly. The World Economics Association – which was launched last year by those unhappy with the perceived hegemony of orthodox approaches – is now the second biggest membership organisation in the field.22 Among heterodox economists a range of ontologies are deployed, many of them explicitly reject the sort of asocial models of the individual that Moore rails against. But it wouldn’t be right to look entirely to the dissidents to remake the discipline in a new image. Indeed, some heterodox economists operate with a somewhat caricatured – or, perhaps more accurately, outdated – understanding of what the mainstream is up to. For example, while rational choice approaches undoubtedly continue to dominate

See fn 1. http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech582.pdf (Last accessed: 21/11/13) 22 http://www.worldeconomicsassociation.org/ (Last accessed: 21/11/13)
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microeconomics, there is plenty going on under the heading of behavioural economics that moves the discipline away from simplistic models of narrowly defined and clear-eyed preference satisfaction. Some of the most interesting papers being produced at the moment are trying to wrestle with precisely the sort of qualitative, emotional or “non -rational” factors shaping behaviour that Moore identifies. The idea of bounded rationality is now commonplace, although frequently not used in the way that Herbert Simon intended. Equally, there is an explosion of interest in breaking away from atomistic conceptions of decision making to recognise a range of interaction effects – reference levels and relativities, peer groups, neighbourhood effects, herding and the like. This opens up possibilities for multiple equilibria, path dependency and all sorts of sub-optimal outcomes. Many of these developments therefore have the potential to transform our understanding of the welfare implications of market allocation mechanisms. Once you place “individual failure” alongside market failure and government failure the world starts to look rather different. Whether such moves ultimately lead to the transformation of the discipline remains an open question. In part this is because the implications of these ideas have yet to be worked through fully. But they also pose a threat. Some of these developments in economics are deeply uncongenial to those who hold to a conservative, free market ideology. You only have to look at the critical – at some times rather rabid – response to Sunstein and Thaler’s libertarian paternalism or Robert Frank’s arguments about income relativities and status effects to appreciate this. Yet, while mainstream economics now tolerates ideas that would have been ruled out of court a few years ago, there remain significant blind spots. For example, macroeconomics seems in thrall to market-clearing models that are not fit for purpose. The challenge is to change the path that theory has been pursuing for the last couple of decades. You would have thought that the spectacular failures to anticipate the global financial crisis would lead to a major rethink. While some prominent economists have called for this, it is by no means certain it will follow. It could be argued that the discipline has become locked into a suboptimal developmental path by its incentive structure, but that is an argument for a different day. Standing back We are going through a period of exploration and innovation in economics, but significant ontological issues remain largely unexamined. Ontological issues are at the heart of much that separates the social science disciplines and schools of thought within a discipline. But economists don’t tend to do philosophy. At a push they might venture into methodology. But rarely do you encounter explicit ontological or epistemological reflection. This is unfortunate because it can act as a brake on change and progress. We can contrast this with previous eras in which such philosophical reflection was a legitimate part of economic discourse. I was reminded of this last week during a Twitter

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discussion in which someone mentioned the Cambridge Capital Controversies.23 There was a time when puzzling over what precisely “aggregate capital” might refer to, and the dangers of the fallacy of composition, was a pressing issue at the centre of economic debate. It wasn’t banished to some darkened corner where economic methodologists gather. Hard to imagine today. One of the most obvious contemporary illustrations of this is the way in which economics treats uncertainty. We might think that recent events have rendered rational expectations approaches even more questionable than they were previously. But where next? Mainstream approaches tend to transform uncertainty into risk, albeit with a growing acceptance that risks in some markets may be fat-tailed rather than normally distributed (as discussed in the Haldane paper on financial markets cited above). Post-Keynesians, on the other hand, argue that genuine uncertainty cannot meaningfully be “tamed” by translating it into risk. Action in the face of radical uncertainty has to be the starting point of analysis, it cannot be abstracted away, even as a first step. Recent debates have disinterred the Keynesian concept of “animal spirits” in a bid to understand what is happening on the capital markets. But few have fully taken on board the implications of embracing caprice among market actors. Deep Keynesians like Shackle would argue that radical uncertainty transforms the methodology of economics and renders much of the formalism of orthodox economics beside the point, a position shared by many Austrian economists. And that is the reason why such ideas do not gain much traction. Logical consistency, parsimony and tractability are valued. Highly-prized formal methods are privileged over a plausible ontology. Constructive critique I welcome Suzanne Moore’s post. Not for the force of its argument but because, by inviting a response, it helps to sharpen the counter-arguments. It hints at some genuinely important questions not just about economic analysis but about the role that economic ideas play in the policy process. But it is not a very effective critique of those ideas. If anyone is interested in examining the current state of economic knowledge in a rather more informed and balanced way then I’d suggest starting with Roger Backhouse’s excellent short book from a couple of years ago.24

Harcourt, G.C. (1972) Some Cambridge controversies in the theory of capital, Cambridge: Cambridge University Press. 24 Backhouse, R.E. (2010) The puzzle of modern economics: science or ideology? , Cambridge: Cambridge University Press.
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The maths question in economics
24th October 2012 Over at Noahpinion last week a post on the role of maths in economics generated plenty of comment.25 This followed the award of the “Nobel Prize” in Economics to Shapley and Roth for work that is, in almost anyone’s book, highly mathematical. Noah Smith identified a number of reasons for using maths in economic analysis, each of which could be a good or a bad reason, depending on circumstance. His broad conclusion is that: Math is not always the most appropriate tool in economics. But the more real successes economics achieves, the more good math it will use. He argued that there are times when it would be appropriate to make less use of maths in economics. The argument here is summarised as: The only time not to use math in econ is when we haven’t found the right math yet. And in practice, I find that a few of the people calling for less math in economics … don’t seem to have any such goal in mind. There are a few people out there who would rather econ stay imprecise forever – so that nobody will ever be proved wrong or right, and we can let a million flowers bloom, and everyone’s scholarly opinion about the economy will be equally valid. This is a debate that I spent some time thinking about a while ago. I have written a little about it in relation to the specific applied field of housing economics. It was interesting to revisit the topic for the first time in a while. It strikes me, though, that this brief flurry of interest in the maths question is framing the discussion a bit too narrowly and missing some of the significant points. One problem with which economic analysis can be afflicted is that, without care, methodology drives ontology. If the only tool you’ve got in your toolbox is a hammer then everything looks like a nail. When econometricians were restricted to working primarily with linear functions then all curves were linear, by assumption and as an approximation. As the techniques of nonlinear dynamics became better understood and more widely used suddenly we were happy to accept all sorts of behaviours and possibilities – such as multiple equilibria or complex dynamics – that previous generations of economists couldn’t easily accommodate or actively sought to prove to be impossible.

http://noahpinionblog.blogspot.co.uk/2012/10/what-is-math-and-why-should-we-use-it.html (Last accessed: 21/11/13)
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That is just a variation on Smith’s point that ‘we haven’t found the right math yet’. Seeking to contort the economy on the procrustean bed of an inappropriate mathematical technique can disguise more than it reveals. But there is a more fundamental sense in which methodology – particularly mathematical formalism – can drive ontology. Perhaps the most famous example is the case of Hicks’ 1937 interpretation of Keynes’ General Theory.26 Hicks seemed to have managed to tame Keynes’ approach into an economic framework that was intelligible to conventional economists of the time. However, in doing so he emptied Keynes’ approach of some of its most novel components – particularly the role of genuine uncertainty – because they cannot easily be incorporated into the mathematical frameworks used at the time. In his later years Hicks recanted. He felt he’d sent the debate off in an unhelpful direction. The risk/uncertainty problem is still with us. You can’t travel too far down the road of an economic discussion of uncertainty before it is operationalised as probabilistic risk, which is a completely different phenomenon. That is why I would depart from Smith in his characterisation of the “less maths” brigade. I wouldn’t dispute that there are some with the motivation to insulate their theorising from any form of testing. But there have been some heterodox economists who eschew the use of much mathematics because they conceive of the economy as something that cannot be tamed and parameterised. They have an ontological stance which leads to a different methodological palette. If you conceive of the economy primarily as a discovery process involving agents operating in open systems making genuine choices under radical uncertainty, who use conventional decision rules and are subject to the double hermeneutic, then there is little to be gained from overly elaborate algebraic specification or heavy duty estimation. Structural stability is a chimera. The economy is an embodiment of Heraclitus’ famous aphorism: you cannot step into the same river twice. Equally importantly, the maths question is about the allocation of scarce resources. Maths undoubtedly has a part in economic analysis, but does it justify the pre-eminence it currently has? That depends on your view of what economics is trying to achieve. Given disciplinary incentives it makes absolute sense for individuals to focus on signalling advanced mathematical ability, because they know that’s what gets published in prestigious journals and plays well at hiring time. It delivers clever models and analysis honoured as being “deep”. But if the aim of economics is to advance our understanding of the economy then perhaps the allocation of effort to theory is less obviously justified. Twenty years ago Thomas Mayer argued that we can think of economic explanation as a chain.27 The economics profession seems intent on strengthening the links in the chain that are already the strongest – the models – to the detriment of improving the links in the chain that are weakest – the plausibility of assumptions, the behavioural foundations of the models, the

Hicks, J.R. (1937) Mr Keynes and the “Classics”: A suggested interpretati on, Econometrica, vol, 5, no 2, 147-159. 27 Mayer, T (1993) Truth versus precision in economics, Cheltenham: Edward Elgar.
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operationalisation of concepts, the quality of the data used to test the models. And if a chain is only as strong as its weakest link then that isn’t a wise strategy. Finally, there is the link between the mathematical models and the way in which they map on to the economy. One of the commenters on Noah Smith’s post cited Alfred Marshall’s famous quote: (1) Use mathematics as a shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in (4), burn (3). Smith is avowedly not a great fan of argumentum ad verecundiam, but this quote seems to me to have something useful to say. It can be interpreted in different ways. I tend to focus on point (4) and think of it as an anchor. It is a prescription for stopping economics drifting off into its own world of abstraction. It demands that the discipline is not engaged in mathematical pyrotechnics simply for the fun of it. The analysis has to be illustrated with examples from real life. And not by trivial examples or stylised facts but by examples that are of real world importance. Some economists who prefer to work with serious mathematics never lose sight of what the discipline is ultimately trying to achieve. They are willing to anchor discussion in “examples that are important in real life”. But it is hard to dispute that some have drifted off into the ether, perceiving no great need or obligation to root what they are doing in advancing our understanding of the economy. So students who come to economics to see if they can understand the world, address the pressing questions of the day, and maybe make the world a better place, end up having their heads stuffed full of maths which appears to have limited relevance to anything of significance. Master the technique; never mind the intuition, let alone the application. They may be mistaken in forming that impression, but it is understandable that they do. And that’s your problem right there.

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Economists in reflective mood
17th November 2012 Next weekend Bristol will host the Festival of Economics, organised under the auspices of the Festival of Ideas.28 The programme for the Festival of Economics has been assembled by Diane Coyle of Enlightenment Economics.29 It brings together economic journalists, applied academic economists, and economists in the think tank world who seek to talk directly to policy makers. Some are relatively mainstream in their orientation. Some are decidedly more heterodox. The arrival of the festival coincides with my finally getting the chance to finish Diane’s recent edited collection What’s the use of economics? Teaching the dismal science after the crisis (WTUOE).30 The book arises out of a seminar held back at the beginning of the year, which I would dearly have loved to have attended. Unfortunately it clashed with teaching my economics of public policy unit. The book comprises 22 brief chapters giving a range of perspectives on how economists should respond to the deficiencies exposed by the 20072008 financial crisis. At least some parts of the economics community are in reflective mood. One of the key questions contributors to WTUOE address is how the curriculum at undergraduate and postgraduate level should be changed to equip students with the knowledge they need to put economics to work in the real world. Much economics education, particularly at postgraduate level, is geared towards producing academic economists specialising in producing clever models addressing relatively esoteric concerns. But the vast majority of students with training in economics won’t go on to have academic careers in economics. Particularly relevant here are a couple of thought-provoking contributions on the role and activities of economists in government. Equally profoundly, how does economics need to change as a body of knowledge in response to the explanatory failures of existing approaches? The discussion of how economics students can be better equipped encompasses both macro and micro, while the discussions of the theoretical adequacy or otherwise of contemporary approaches is mostly macro oriented. Given that the starting point of the discussion is the financial crisis that is understandable. The contributors to WTUOE differ significantly in their views on how much established economic approaches need to be modified. The minority view among contributors is that mainstream approaches need a bit of tweaking. With more sensitivity to characteristics of real world economies which don’t typically feature in conventional RBC models of whatever flavour – institutional structures, the banking system, finance and debt – perhaps business can continue pretty much as usual. However, the view that a more profound shift is necessary is just as frequently encountered as you go through the chapters. Contributors
http://www.ideasfestival.co.uk/?p=4627 (Last accessed: 21/11/13) http://www.enlightenmenteconomics.com/ (Last accessed: 21/11/13) 30 Coyle, D. (ed) (2012) What’s the use of economics? Teaching the dismal science after the crash , London: London Publishing Partnership.
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argue that models that rely on representative agents and rational expectations, for example, are inappropriate tools for analysing networked societies of heterogenous agents interacting on the basis of bounded rationality. Alan Kirman provides a typically thoughtful contribution. The argument is not the sort of anti-formalist argument that some heterodox economists advance. Rather the argument is that economists have got stuck using the wrong sort of mathematics. They need to embrace a vision of the economy as an evolving complex system. And that implies fundamentally different modelling strategies. The contributors similarly differ in respect of the teaching of economics students. A minority view is that there isn’t a great deal that needs changing. But the more common argument is that economics education has become too specialist and too narrow. There is little space in the curriculum for the history of economic thought or economic history and the study of the evolution of economic institutions. Where student do applied work it often involves the secondary analysis of other people’s data. Rarely do students explore the problems associated with collecting primary data – either administrative data or through surveys. The judgements involved in transforming the messiness of the world into the neatness of the rectangular data matrix – problems of coding and classification – go unexamined. These are topics that other social scientists find squarely at the centre of their research methods training. But economists tend to be rather incurious about the processes by which the data arrive in the archive. Never mind “garbage in, garbage out”, it tends to be full speed ahead to apply the most complex statistical technique they know. I caricature. But only slightly. A number of contributions, particular those looking at the work of economists in government, highlight the emphasis of the economist’s education on deductive reasoning rather than also exploring processes of induction. The strand of macroeconomic thinking that views the core of macroeconomics as primarily being about models that can be run on computers, without the urgent need to bring those models into close dialogue with real world economies, is deprecated. Far from living a life of pure deductive reason, applied economists in the real world are often required to start by piecing together data before trying to make sense of it by applying some theory, while recognising the importance of institutional constraints and incentives in a way that much theory does not explicitly capture. The “science” requires a dose of the art of judgement in order to become useful. Indeed, there is a suggestion that economists could do with being, at the very least, sensitised to the sort of concerns that sociologists, political scientists and psychologists bring to the analysis of society in order to enhance their ability to interpret the world effectively with the aid of economic theory. A word that crops up several times in the contributions to WTUOE is “humility”. There is the suggestion that there has been an unwarranted arrogance about mainstream macroeconomics. Several contributors feel that, having had its deficiencies exposed and its certainties undermined, this attitude needs to change. Few of the contributors to the book framed their chapters explicitly in philosophical terms. Yet, much of the material was underpinned by some profound questions of ontology
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– what does “the economy” comprise? – and epistemology – how can we best represent and analyse “the economy”? In emphasizing the importance of the history of economic thought contributors raise important questions about how economic knowledge evolves. Indeed, whether it in any meaningful sense can be said to accumulate. In the absence of experiments or crucial empirical tests it is possible that knowledge evolves through fads, fashion or as a result of social factors. That opens up the possibility that good ideas were dropped for bad reasons. Or knowledge may move on as a result of real world events that demonstrate existing paradigms are inadequate. In this respect Wendy Carlin’s chapter on reforming the macroeconomic curriculum was particular interesting. She suggests that it is possible to weave together the content of economic theory, the history of economic thought and economic history to give an account of how economic crises generate paradigmatic shifts in thinking, which feed into policy, which in turn generate new crises. Students would not only come to understand the content of different theoretical approaches to macroeconomics but do so in a socially embedded way. This in itself should, if done effectively, deliver an appropriate degree of humility about whatever is considered to be the current state of the art. You’ll not be surprised to discover that I am in agreement with many of the contributors to WTUOE who argue for this more pluralist approach to economics education. I have no doubt it is beneficial. Certainly it is the way I try to structure my own approach. It is great to see some of these debates moving beyond the realm of the economic methodologists and edging closer to the mainstream. But I feel that there is still a way to go before it penetrates the heart of the citadel.

The reopening of the economic mind?
26th November 2012 Where is the revolutionary thinking in economics? That was one of the first questions posed by a speaker at the Festival of Economics held last weekend in a very damp Bristol. It is also one of the most pressing and the most intriguing. I was among the hardy souls who bought a season ticket for the event and got a feel for the range of material covered. But rather than review the whole event I want to consider the issue of revolutionary thinking – posed as part of the session on The future of capitalism – in the light of the discussion in the last session on Economics in crisis. The question about revolutionary thinking was part of a discussion reflecting upon the way in which paradigm shifts in economic thinking are associated with previous economic crises. Most notably, the rise of Keynesianism occurred in the aftermath of the Great Crash of the 1920s and the adoption of monetarism – and neoliberalism more broadly – took place after the apparent breakdown of Keynesianism and the appearance of stagflation in the 1970s. Where is the new thinking – the reconceptualisation of the macroeconomy and the role of the state – to go alongside the current crisis?

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If we think a bit harder about the two previous crises it is clear that the relationship between economic crisis and economic theory is rather less straightforward. While Keynes had been piecing together the fragments of his theory over a period of years its articulation largely followed the crisis. Yet, the ascent of neoliberalism – as Daniel Stedman Jones highlighted in his presentation – was rather more deliberate and took decades. The ground had been well prepared. Policy entrepreneurs were ready to introduce monetarism when the 1970s crisis opened a window for policy change. But that doesn’t detract from the basic point. The ecology of economics has in the past been more diverse. It was possible for distinctive schools of thought to coexist in a way that appears no longer to be the case. While one approach to economics was in the ascendant following the interventions of Samuelson, Arrow and Debreu it took a while to become embedded as the mainstream. In macro, real business cycle models continue to frame the debate. New Keynesian models may throw some grit into the frictionless world created by Kydland and Prescott but they are pressed from the same mould. And models that don’t show at least a family resemblance run the risk of being disdained as irredeemably ad hoc. There is limited tolerance of heterodoxy. This situation can be contrasted with the way microeconomics is developing. As Diane Coyle pointed out during the Economics in crisis session, microeconomics appears relatively open to new ideas and learning from outside economics – particularly in respect of the rapid movement of behavioural economics from the margins to the mainstream. This is perhaps all the more extraordinary once you start enumerating the key characteristics of the macro models – continuous market clearing, rational expectations, representative agents, the absence of an explicitly modelled financial sector. It is hardly surprising that such models are unable to capture the characteristics of the current crisis. Yet, as Coyle noted, some macroeconomists have a problem even recognising that there is a problem. Personally I wouldn’t want to overstate the extent to which microeconomics is cognitively open, but the contrast is illuminating. A point I have made repeatedly, from my rather semi-detached position, is that economics tends to prioritize methodology over ontology. Students spend a lot of time being drilled in the latest mathematical technique and solving problems. They spend less – or no – time thinking about what sort of an entity the economy is and how it should be modelled. The rational expectations assumption is one of the best examples. Sure it maintains mathematical tractability. But really? Even on average? When professional macroeconomists don’t have a particularly good grip on what the economy is going to do next? I studied macroeconomics just as RE models were coming to full prominence. I’ll be honest, I found them utterly implausible from the start, even as an approximation. They just felt misconceived at a foundational level. I guess that was part of the reason I fell out of love with much of the substance of economics and became more interested in the practices of economics.

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Of course, since those days things have got a whole lot worse. At Saturday’s session one student commented from the floor that he felt that he wasn’t really studying an MSc in economics but an MSc in maths. He finished his remarks by rather plaintively wondered whether there might be potential to study something a bit more clearly related to the real world economy. The presentations from the panel in the Economics in crisis session were fairly unified in their call for the economics curriculum to incorporate more consideration of the history of economic thought, economic history and the nature of economic institutions. These are all topics which have been progressively excised from the curriculum in many of the leading economics programmes. I would add to the mix the revival of the philosophy and methodology of economics; something which has also been sidelined to make space in the timetable for ever more ferociously complex mathematical and quantitative techniques. If there could be consideration of philosophy I would expand that to include ethics. Aditya Chakrabortty rightly referred to examples – such as those showcased in the film Inside Job – of economists facing substantial and self-evident conflicts of interest and nonetheless proceeding without reflection. This would be considered unethical practice in most other disciplines, but quite a few economists are nonplussed that the issue is even raised. I blogged about this in Economists, implicated back when the film was originally released. Another student in the audience asked when they might see some of these topics featuring in the curriculum of a degree programme. While work is underway to progress this agenda, it is not a transformation that will be effected rapidly. The panel also offered a general endorsement of the value of inter-disciplinary collaboration. Chakrabortty noted that some of the most interesting work on the economy is being done in places like Manchester’s Centre for Research in Socio-Cultural Change or the new Sheffield Political Economy Research Institute.31 These research centres may involve economists working with scholars from other disciplines, and they are surely doing interesting and important work, but it would be interesting to see whether any of that work would have the honorific “economics” bestowed upon it by a prominent member of the economics professional. That raises an issue that troubled me about the session. None of the speakers was a true defender of the faith. All were, at the very least, open to recognising the weaknesses of the economic approach and the possibility of learning from and collaborating with other scholars. But in this respect they were atypical of most of the economists of my acquaintance. The disciplinary incentives are massively stacked against this type of approach. Young academics know that research is all that counts in recruitment. Departments want recruits – or ‘hires’ as economists are wont to call them – who are doing work that is “clever” or “deep” and addresses a theoretical or empirical puzzle that is preoccupying some part of the discipline. Applicants know that being able to offer a job market paper targeted at a journal that is considered core to the discipline, with plenty of ABS stars, is
http://www.cresc.ac.uk/our-research/remaking-capitalism (Last accessed: 21/11/13); http://speri.dept.shef.ac.uk/ (Last accessed: 21/11/13).
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what counts. An R&R or acceptance in such a journal is even better. Applied work in field journals plays less well. Cross-disciplinary work can be frowned upon and considered rather third-rate: “not economics”. Academics with an interest in things like economic methodology or history of economic thought have a choice. Either they suppress that interest and do something deemed to be more important or they reconcile themselves to life in the academic slow lane. One can imagine that in the UK they might even end up in teaching-only positions so that their research doesn’t have to weaken the power , or sully the purity, of the department’s REF submission. If one wants to change this situation the challenge is formidable. The discipline has followed a path-dependant process to an equilibrium that is now self-reinforcing. Conventionally we might say that an exogenous shock would be required to change the trajectory of the system. But the exogenous shock would need to be bigger than the Global Financial Crisis. Because that hasn’t managed to trigger change and shift thinking at the core significantly. I wonder what it would take? I am reminded of a comment Paul Krugman made a while ago when he said he couldn’t see a way forward: he suggested that what was needed to work out how to change the discipline was a sociologist not an economist. Someone who understands the way in which strong group cultures are formed, sustained and can be changed. Now there’s an admission.

Revisiting Capitalism Unleashed
29th December 2012 Over Christmas I went back to Capitalism Unleashed by Andrew Glyn.32 It is simultaneously a sparse and a sprawling book. The text has fewer than 190 pages, and yet it covers an immense amount of territory. I returned to the book to look for clues. Glyn’s broad argument is that the post-Second World War period is a game of two halves. During the 1950s and 1960s western industrialised economies experienced an unprecedented period of stability and growth during which the division of economic output was renegotiated – in the face of full employment and better worker organisation – away from profits and towards wages. The crisis of the 1970s was followed by an extended period during which these gains for labour were eroded in the face of austerity politics, economic restructuring, globalisation, deregulation and privatisation. Glyn notes that capital account deregulation and financial innovation, in particular, reduced national autonomy, increased disruptive economic
Glyn, A. (2006) Capitalism Unleashed: Finance, Globalization, and Welfare, Oxford: Oxford University Press.
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volatility and created dysfunctional incentives for senior management. He uses the nowfamous example of the failure of Long-Term Capital Management and the contagion experienced during the Asian financial crisis to illustrate some of the key points. Environmental degradation sits ominously in the background as possibly placing an upper bound on future economic growth. Glyn notes that the post-1980 marketising and liberalising policy agenda was not notably successful in improving the performance of the relevant economies. It was, however, successful in reordering the beneficiaries of the fruits of economic activity. There was a rebalancing away from wages and towards a greater share to profits. More income was also derived from property. These changes led to increasing inequality. Glyn’s key observation is, however, about the resilience of social institutions, although he doesn’t quite frame it in those terms. Over an extended period there has b een a crossnational policy agenda – sponsored by International Organisations – directed at welfare retrenchment. However, the institutions of the welfare state have proved remarkably robust, particularly in continental European countries. Glyn sees this as a positive sign. He argues that the welfare state is worth fighting for. It is the most effective means of mitigating the “market inequality” exacerbated by liberalisation and of providing adequate social insurance. The book finishes with a brief discussion of the possibilities for introducing a Basic Income for all citizens. This is a means of moving away from the pernicious effects of meanstesting benefits. It is also a means of coping with the fact that achieving adequate living standards will not require everyone to work full time, and that there is more to life than paid employment. Achieving this goal is not an economic impossibility. The barriers are primarily political. You may be asking why, specifically, I was revisited Glyn’s book. What sort of clues was I looking for? The answer lies in the fact that the book was published in 2006. I was interested to see what it had to say about the implications of financial deregulation and innovation. A while ago there was a debate about who did or did not see the Global Financial Crisis coming. The Queen famously asked why economists hadn’t anticipated it. Others have argued that if you look beyond the economic mainstream, blinkered as it is by the use of a particular set of unsuitable economic tools, then there were plenty of people who foresaw the dangers. I couldn’t quite remember what Glyn had to say about it. It turns out that, while the prime suspects in triggered the Global Financial Crisis – subprime mortgage lending coupled with securitization – do not feature very prominently in Capitalism Unleashed, if you draw together the threads of Glyn’s argument, and those of the sources he cites, it’s pretty much all there. You would be justified in arriving at the rather pessimistic conclusion that it was a question of when rather than if the next financial crisis was going to arrive. And how bad it was going to be. To take a few examples:

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The Bank of International Settlements in… [i]ts Annual Report for 2005 noted that “The global system seems to have become prone to financial turbulence of various sorts”. A recent paper … from BIS argued that there seems to be a “common structural thread” linking the increasing number of financial crises: “Increased risk taking on the part of private sector participants in fi nancial markets has been facilitated by financial market deregulation and technical change. Liberalized financial systems seem inherently more prone to … intermittent financial crises than do repressed financial systems … Increased competition could bring a ‘sharpened dilemma’. Financial institutions find it harder to maintain rates of return even as shareholders demand that returns rise”. The author notes the tendency for the finance sector to take greater risks: “Consider how the loan losses to emerging market economies (EMEs) … in the 1970s seemed to spark a series of risky initiatives to reconstitute profits. In turn banks went into leveraged buyouts, property lending, proprietary trading and then lending to EMEs all over again”. He gloomily concludes that “the modern financial system seems to be subject to a wide range of problems: operational disruptions, institutional insolvencies, shortterm market volatility, medium-term misalignments and contagion across countries and markets”33 (pp.69-70) Although the bailout of LTCM prevented serious longer-term repercussions the crisis brought into sharp focus the potential fragility of the financial system at its most sophisticated end. This is a continuing worry for the financial authorities charged with regulating the sector and minimizing the likelihood of major crises. A recent, very sophisticated … analysis found that a conclusive assessment of the systemic risks posed by hedge funds required data that was unavailable and likely to remain so. However, the results of their modelling suggested that “we may be entering a challenging period” and that “systematic risk is increasing”.34 Moreover the banks are heavily involved with the hedge funds. “With margins in traditional business squeezed, big banks are falling over themselves to provide prime brokerage services to hedge funds, which include extending credit, securities dealing and settlement and so forth. Competition has led to an erosion of credit standards … One respondent [to a recent survey] even refers to pr ime brokerage as ‘the crack cocaine of the financial system’”35

White, W. (2004) Are changes in financial structure extending safety nets?, Bank of International Settlements Working Paper No 145. 34 Chan, N., Germansky, M., Haas, S. and Lo, A. (2005) Systemic risk and hedge funds, NBER Working Paper 11200, p 97. 35 Plender, J. (2005) Shock of the new: A changed financial landscape may be eroding resistance to systemic risk, Financial Times, 16 Feb.
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Problems like those at LTCM seem endemic given the search for ever more exotic ways of beating the market. In May 2005 where was a “near systemic meltdown” in the “Over the counter” derivatives market … This followed the reduced credit rating of GM and Ford bonds, which affected several popular hedge fund trading ploys. (p.72) The genie of financial competition and expansion has been released by deregulation and financial innovation. Whilst the worse effects of the resulting financial fragility have been felt in the Asian countries hit by the crisis of 1998, it would be wrong to assume that the greater sophistication of financial markets in OECD countries insures them against financial problems … the real economies of the USA and especially Japan have been scarred by financial excesses and the whole financial system can be threatened by the unrelenting search for “value” through ever more complex financial trades. Regulators are trying to secure the benefits from liberalization whilst limiting the risks, but this is formidably difficult and the chances of a major financial crisis must certainly have increased. The April 2005 issue of the IMF’s regular Financial Stability Report … expressed the worry ‘The combination of low risk premiums, complacency, and untested elements of risk management systems dealing with complex financial instruments could ultimately become hazardous for financial markets’. (pp.152-153) Glyn might perhaps have flagged up more explicitly the role fraud could potentially play in magnifying some of the dynamics identified, but apart from that all the ingredients for the crisis are there. Having looked again at Capitalism Unleashed, it would be fascinating to hear Glyn’s analysis of the Global Financial Crisis that began just a year after the book was published. Our understanding of the mess created and the damage wrought by the financial system would no doubt have been substantially enhanced if we were to benefit from his insight. But we are sadly denied that opportunity. Capitalism Unleashed was Glyn’s last word on these matters. It is a human tragedy that he died at a relatively young age in December 2007. But it is also a profound loss to the world of social analysis.

Economics Emperor: absence of clothes increasingly suspected
6th January 2013 In the period since the 2007 Financial Crisis “economics” has played an increasingly high profile role in shaping policy. The austerity policies implemented in many western countries, with significant negative impacts upon citizens’ well-being and the social fabric,

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come with the endorsement of many economists as the correct medicine to deal with our economic maladies. Yet, over the same period, the claims of the discipline of economics to any privileged insight into the workings of the economy and society have come under greater critical scrutiny than at any point over the last forty years. The sense of disillusionment with the value of mainstream economic approaches has undoubtedly grown. The empire may be crumbling. The latest instalment in this saga is the publication this week of an IMF working paper by Blanchard and Leigh in which they elaborate upon, and test the robustness of, a conclusion first reported briefly in the IMF’s World Economic Outlook back in October 2012.36 The conclusion is that the economists have got it wrong again. Specifically, forecasts of the impacts of rapid and aggressive austerity policies on economic growth were substantially understated. Austerity has had a much more negative effect upon countries’ economies than had been anticipated. This may not, perhaps, come as a huge shock to anyone else. Blanchard and Leigh argue that the problem was that the fiscal multipliers used to make the forecasts were not the right ones. The multipliers had been estimated in “normal times” (their term). While they may have been perfectly serviceable when economies are operating normally, during a period of extraordinary economic turbulence like the one we are currently experiencing – in particular the effect of the zero lower bound on nominal interest rates – the effective multipliers are much larger. It would only be by going back to the 1930s and estimating fiscal multipliers for that period that you might be able to recover values that would be more applicable to current circumstances. This has recently been attempted. And, obviously, the run of data emerging for the post-2008 austerity period is lengthening all the time, which allows new estimates of the relevant parameters under current conditions. Some commentators have used this paper as a basis for arguing that austerity policy has been a serious error and hugely damaging experiment, as its critics have maintained throughout. Alex Andreou at the New Statesman, for example, argues that George Osborne now finds himself as “an increasingly lonely poster boy for austerity”.37 While that is no doubt correct, Blanchard and Leigh do not conclude that their findings mean a rejection of austerity policy. They argue: Finally, it is worth emphasizing that deciding on the appropriate stance of fiscal policy requires much more than an assessment regarding the size of short-term fiscal multipliers. Thus, our results should not be construed as arguing for any specific fiscal policy stance in any specific country. In particular, the results do not imply that fiscal consolidation is undesirable. Virtually all advanced economies face the challenge of fiscal adjustment in response to elevated government debt levels and future pressures on public finances from demographic change. The short-term effects of fiscal policy on

http://www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf (Last accessed: 21/11/13) http://www.newstatesman.com/politics/2013/01/george-osborne-increasingly-lonely-poster-boyausterity (Last accessed: 21/11/13)
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economic activity are only one of the many factors that need to be considered in determining the appropriate pace of fiscal consolidation for any single country. The debate over austerity in practice is vitally important. But the Blanchard and Leigh paper is epistemologically interesting as well. The argument is that many of the macroeconomic models used to forecast the impact of austerity are likely to have used the “wrong” fiscal multiplier. But it is hard to tell because in many of the models the fiscal multiplier is an unreported and unexamined parameter. In some cases Blanchard and Leigh have worked backwards from the forecasts with the aim of inferring what the multiplier must have been. Their key argument is: However, our results need to be interpreted with care. As suggested by both theoretical considerations and the evidence in this and other empirical papers, there is no single multiplier for all times and all countries. Multipliers can be higher or lower across time and across economies. In some cases, confidence effects may partly offset direct effects. As economies recover, and economies exit the liquidity trap, multipliers are likely to return to their precrisis levels. Nevertheless, it seems safe for the time being, when thinking about fiscal consolidation, to assume higher multipliers than before the crisis. This can be read as saying no more than that macroeconomic models and the forecasts they generate need to be more sensitive to context. Alternatively, it can be read as saying that such modelling strategies are fundamentally flawed. Fiscal multipliers should not be treated as parameters. They are endogenous. That would imply that they should be modelled explicitly. But if confidence is a part of shaping their values then they may, in principle, be impossible to estimate. So a more radical reading – one which would no doubt be favoured by many more heterodox economists – is that this whole enterprise is doomed. The Blanchard and Leigh paper should be read as one more – and possibly the final – nail in the coffin of macroeconomic forecasting. All such forecasts should be treated as no more than guesswork. Blanchard and Leigh assert that “As economies recover … multipliers are likely to return to their precrisis levels”. How do they know? Economists didn’t expect the multipliers to go haywire once austerity was implemented, proving wrong what had previously been widely accepted as correct. Why should we expect things to return to “normal” once economies recover? Indeed, their argument takes the period 1997 -2008 to be “normal”: given the spectacular and unsustainable run up of public and private debt during this period, in what sense was it normal? It is possible that it offers us no guide to what is going to happen when economies recover, particularly as the political expectation is that even if the economy recovers austerity policy – if less aggressive – will be with us for a long time to come. The implications of this argument are therefore perhaps more profound than the authors intend. And they strengthen the hand of those who argue that we need different
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types of economic knowledge. Those are not necessarily new types of knowledge. The urgent task may be to recover what we lost as a result of the ascent of formalism über alles.

Economic theory and intuition-based policy
21st January 2013 For a few week’s I’ve been carrying a pdf of a working paper by one of the elder statesmen of economics – Richard Lipsey – around on my hard drive. Entitled Twenty five methodological issues in memory of Mark Blaug its focus is pretty self-evident.38 Today I had the opportunity to read it. I’m glad I did. If economics students encounter a methodology book then it is likely to be Mark Blaug’s The methodology of economics.39 That may be the only discussion of economic methodology they ever come across. Even though it rather overplays the possibility of falsifying theories, it’s a great book. In fact, its adherence to a somewhat outmoded Popperian philosophy makes it a better read. It’s generally quite negative about much of modern economics. Blaug was rather disillusioned. Economists seemed rather wedded to a set of core theoretical principles and beliefs. They seemed less committed to the robust empirical testing of the implications of those beliefs, and the rejection of those beliefs if they fail the test. Theology not science. The book is good knockabout stuff. Blaug died in 2011, hence Lipsey’s title. Lipsey’s short paper is a wide ranging overview of some key methodological issues and puzzles across both micro and macro. It’s very much in the spirit of Blaug’s writing. The core question is how do ideas persist – and not only persist but continue to dominate – in the face of demonstrable theoretical inadequacy or incoherence, or robust evidence that contradicts them. After a brief discussion of falsification Lipsey makes the following statement: In what follows, I distinguish two related types of policy advice. The first, which I call “theory based,” can be formally derived from a well-specified theory; the second, which I call “intuition based,” is not formally derived but is in the spirit of the theory in question and seems reasonable to those who accept that theory. A survey of advice given by economists shows that intuition-based policy advice is commonly given. Methodological issue 2: How should one assess intuition-based policy advice when it is based on a formal theory that is not generally accepted?

http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp12-18.pdf (Last accessed: 21/11/13) Blaug, M. (1992) The methodology of economics: or how economists explain, 2nd ed, Cambridge: Cambridge University Press.
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I’d not seen the distinction drawn in this way before, but as he proceeds it is clear that he has in mind something akin to the fallacy of misplaced concreteness. In framing this issue he touches on something that always troubles me when I kick off teaching micro in the public economics context, as I did last week. We teach that a complete competitive market economy will deliver a socially optimal allocation of resources. The first and second fundamental theorems of welfare economics follow. We observe that the conditions under which this result is obtained are eyewateringly strict. The Arrow-Debreu economy is nothing like any economy we’re ever likely to encounter in reality. We tell stories about diminishing marginal returns and upward sloping supply curves. We then most likely tell some stories about market adjustment as a process rather than end state. Those stories tend to skate over the question of how the market moves if everyone is a price taker. The stories imply market power, but the conclusions rule it out by assumption. The gap that opens up has been known about for a long time. We talk about market failures of various types and note that markets in reality are as likely to be monopolistically competitive or oligopolistic as they are to be competitive in the textbook sense. All these factors place a huge question mark over any general conclusion that markets will do the business in terms of maximising social welfare. That is perhaps most fully worked through in models with imperfect information. We might talk about the theory of second best – something that is, of course, close to Lipsey’s heart. This suggests piecemeal deregulation may move you further away from the social optimum, rather than closer to it. It suggests very careful analysis of the situation is required before policy conclusions are drawn. But it is rarer to wind back and say: right then, hang on a minute, given all these real world imperfections, do the first and second theorem of welfare economics have any relevance to anything? After all, they are the theory-based justification for thinking that a market economy is a good idea and government intervention is distortionary. If we’re saying they’ve got next to nothing to do with the real economy then what theory-based justification is there for thinking that the policy of marketising and deregulating are a good idea in practice? Blaug was pretty dismissive. He considered general equilibrium theorising “totally irrelevant: it has no empirical content and is incapable of answering any practical question that an economist might want to pose.” Lipsey is a little more measured. He argues that economists may have the ArrowDebreu result and the first and second theorem in the back of their mind when making policy recommendations, but what they are doing is making intuition-based recommendations. The intuition is that markets without distortions are generally better, even though that cannot be rigorously derived from any theory which aligns to a plausible characterisation of the real world. Lipsey poses pertinent questions: Methodological issue 4: Can we learn anything about the efficiency of real world market economies by studying the efficiency of Arrow-Debreu-style

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general equilibrium models? Is it not misleading to derive policy prescriptions that apply to this imaginary world and assume that they apply to the real world? I’m not entirely convinced Arrow-Debreu looms quite so large on the mental horizon of the contemporary economist, but, nonetheless, the thrust of the argument is valid. Lipsey goes on to explore a number of absolutely core issues such as the nature of competition (a process or an end-state), the nature of technological change and its role in economic growth, the significance of uncertainty – rather than risk – to real world investment decisions. On the macro- side he focuses on the “death” of Keynesianism declared in the 1970s and the subsequent search for the source of macroeconomic fluctuations on the supply side rather than the demand side. Throughout the paper Lipsey argues that the empirical evidence largely counts against the way in which neoclassical economics conceptualises the various issues. He places alongside the neoclassical approach an evolutionary approach which he argues does a better job of accounting for the way in which real world economies function. Lipsey’s argument is inevitably very broad brush. Some of the argument would perhaps have benefitted from a rather closer engagement with the current state of the relevant debates. They aren’t all debates that I’m familiar with, but where they are literatures that I know something about I felt that the current state of thinking is not quite as benighted as Lipsey portrays it. Nonetheless, the paper raises some profound questions. And I don’t think a closer engagement with the current state of the debates would have undermined the key point he is seeking to make. His paper suggests the weight of evidence is sufficient – across the range – to conclude that conventional approaches to some foundational issues are fatally flawed. And that seems like fair comment to me.

Looking to the past on expectations of the future
30th January 2013 The way in which economic agents form expectations about the future is one of the most important issues in economics. All economic theory has to take a position on the matter, whether it is discussed explicitly or the treatment is left implicit. For three decades now the rational expectations hypothesis has dominated, despite a persistent strand of criticism. The more tenacious and optimistic advocates of the REH might take the view that it has something meaningful to say about how people actually make decisions. A more common position is to adopt an instrumentalist as if position. The latter approach is more credible, though nonetheless still problematic.

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In a post yesterday at Noahpinion Noah Smith reviews developments in the theorisation of expectations.40 The stranglehold of the REH is undoubtedly weakening. A range of alternative approaches are now available and being actively explored. Much of this new thinking is inspired by the concern for decision-making biases and heuristics that characterises behavioural economics. Concepts such as recency bias or information cascades are invoked. These ideas may well bring us closer to an understanding of how expectations are formed in the real world. But they open up the prospect of irrational market movements that is nothing short of alarming for those committed to a vision of markets as a process of orderly and predictable adjustment. Smith notes that in looking for alternatives to REH not only can we draw on new theoretical resources but we can also look back to earlier approaches. Here F riedman’s approach based upon adaptive expectations is identified as relevant. I would advocate stepping back even further. When thinking about expectations I always start from Keynes’ famous 1937 paper in the Quarterly Journal of Economics.41 This is a paper which some claim distils the essence of Keynes’ General Theory. It focuses on uncertainty and its implications. The key passage is: By “uncertain” knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty … Or, again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth owners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know. Yet, we nonetheless have to act. So what should we do? Keynes continues: How do we manage in such circumstances to behave in a manner which saves our faces as rational, economic men? We have devised for the purpose a variety of techniques, of which much the most important are the three following: (1) We assume that the present is a much more serviceable guide to the future than a candid examination of past experience would show it to have been

http://noahpinionblog.blogspot.co.uk/2013/01/the-power-and-terror-of-irrational.html (Last accessed: 21/11/13) 41 Keynes, J.M. (1937) The general theory of employment, Quarterly Journal of Economics, vol 51, no 2, 209-223.
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hitherto. In other words we largely ignore the prospect of future changes about the actual character of which we know nothing. (2) We assume that the existing state of opinion as expressed in prices and the character of existing output is based on a correct summing up of future prospects, so that we can accept it as such unless and until something new and relevant comes into the picture. (3) Knowing that our own individual judgment is worthless we endeavor to fall back on the judgment of the rest of the world which is perhaps better informed. That is, we endeavor to conform with the behavior of the majority or the average. The psychology of a society of individuals each of whom is endeavoring to copy the others leads to what we may strictly term a conventional judgment. This notion of conventional judgment is crucial. It prefigures much of the recent discussion of herding and the like. The point, for Keynes, of highlighting these characteristics of uncertainty and expectations is that they lead to a theory of market behaviour which has a very different flavour: Now a practical theory of the future based on these three principles has certain marked characteristics. In particular, being based on so flimsy a foundation, it is subject to sudden and violent changes. The practice of calmness and immobility, of certainty and security, suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct. The forces of disillusion may suddenly impose a new conventional basis of valuation. All these pretty, polite techniques, made for a well-panelled Board Room and a nicely regulated market, are liable to collapse. At all times the vague panic fears and equally vague and unreasoned hopes are not really lulled, and lie but a little way below the surface. It strikes me that the post-REH literature is working its way back around to the position that Keynes had reached three quarters of a century ago. The point for Keynes was that these characteristics of markets under uncertainty made the pursuit of highly formal theory a questionable enterprise. Economics was far better characterised as the art of reading the economy and the application of judgement than it was as a branch of (applied) mathematics. In many ways that was the rock upon which the good ship Keynes foundered, as formalism became the virtue privileged above all others among economists. But that’s another story. The key message I take from Keynes is that economics may have to rethink some pretty foundational issues and rediscover some of the wisdom of a previous era before it can get back on track.

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Reinhart and Rogoff: replication and responsibility
18th April 2013 … the actions of economists today bear on the life chances of the world’s population far more substantially than do the actions of the members of most other professions. George DeMartino Replication is an activity that doesn’t attract enough attention, enough credit, or enough effort in the social sciences. But it is an activity that is getting a lot of attention at this precise moment. This has come courtesy of the exposure of both flaws and contestable methodological choices in Reinhart and Rogoff’s landmark study of public debt and economic growth. The economic blogosphere has exploded with debate over the issue. But, just in case you’re not following it, here are the key points. Reinhart and Rogoff followed up their major historical work looking at debt and economic growth This time is different with a paper called Growth in a time of debt published in the American Economic Review in 2010.42 Their key result is that levels of public debt in excess of 90% of GDP are associated with lower rates of economic growth. Indeed, the mean annual growth rate they report, once debt crosses the 90% threshold, is negative. This body of work is highly influential. A quick search on Google Scholar will tell you that the NBER version of Growth in a time of debt has been cited 450 times, while This time is different has been cited over 2000 times since 2009. That is a lot of citations for social science publications: you’re doing pretty well once citations for a piece get into double figures within four years. In a paper published this week, Thomas Herndon, Michael Ash, and Robert Pollin (HAP) of the University of Massachusetts, Amherst identify problems with the Reinhart and Rogoff result.43 There are three main issues: First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and averagegrowth countries. All three bias in favor of their result, and without them you don’t get their controversial result. Since the HAP paper has received publicity there has been a huge amount of debate. Reinhart and Rogoff have issued two responses. The second is rather more conciliatory than the first, inasmuch as it concedes the point that there was a data processing error. But
Reinhart, C.M. and Rogoff, K.S. (2009) This time is different: Eight centuries of financial folly, Princeton University Press. 43 http://www.peri.umass.edu/236/hash/31e2ff374b6377b2ddec04deaa6388b1/publication/566/ (Last accessed: 21/11/13)
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broadly-speaking their responses defend their existing position and argue that even if you correct the calculations their key finding still stands. Some commentators have stated, over the last day or so, that they never found the Reinhart and Rogoff result very convincing in the first place, particularly the idea that there was an identifiable threshold when debt hits 90% of GDP. If you graph the data one of the most striking things is that the data points are all over the place and therefore any association between debt and growth is decidedly sketchy. Also, whatever association can be found is driven by a few countries with particular characteristics and circumstances. If we’ve all been convinced all along that these results were so flaky, it is curious that they have achieved such prominence, rather than being rubbished or ignored. But that is by the by. The reason all this is important, rather than just being a bit of a spat over academic methodology, is that the Reinhart and Rogoff result has moved beyond academia to be hugely influential in policy terms. Reinhart and Rogoff are both at Harvard and are wellplaced within academic economics, but they have also worked at the IMF so are plugged in to economic policy debates at global level. What they say has influence. Their result has been absolutely central in buttressing arguments in favour of austerity. Azizonomics yesterday provided a selection of quotes from senior political figures invoking the Reinhart and Rogoff result as offering scientific justification for the benefits of fiscal consolidation.44 There is rather more debate over whether Reinhart and Rogoff themselves see their results as justifying austerity policy. This in part turns on the question of causation. Reinhart and Rogoff have defended their work with the argument that they were only pointing out an association between debt and economic growth, not suggesting that high levels of debt causes low economic growth. Indeed, it is highly likely that causation also runs the other way – hitting a period of low growth leads to ballooning public debt. That might well formally be true of the position Reinhart and Rogoff adopt, but their statements on the matter have not been a model of clarity or caveat. Commentators have pointed to various of their statements over the years which might be construed without too much difficulty as suggesting that Reinhart and Rogoff thought not only that the relationship was causal but also that austerity was the way to go, even if they didn’t quite set out their position in those terms.45 Whether it is possible to track down clear statements made by Reinhart and Rogoff that implicate them in supporting austerity isn’t the main issue. There are at least two points that are more important. First, if we accept their formal position at face value and conclude that all they have done is identified associations between variables, without making any sort of causal claim,

http://azizonomics.com/2013/04/17/of-reinhart-rogoff-the-emperors-new-clothes/ (Last accessed: 21/11/13) 45 http://www.bloomberg.com/news/2011-07-14/too-much-debt-means-economy-can-t-growcommentary-by-reinhart-and-rogoff.html (Last accessed: 21/11/13)
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then really you’ve only just started on the analysis. In fact, unless you are going to claim – or imply – causation the finding isn’t all that illuminating. As Noah Smith observes:46 I think that books like This Time Is Different are merely jumping-off points for an investigation of that hypothesis; they do not constitute any kind of proof. Naturalism is where understanding of the world begins, but not where it ends. It may be that similar looking patterns and associations between variables in different countries at different points in history are driven by entirely different causal processes. Until you’ve grappled with causation then you’ve not got very far. You can say very little. The second point about this episode is that it takes me back to some of the arguments advanced by George DeMartino in The Economist’s Oath, on the need for a professional ethics for economics.47 DeMartino’s position is that economists’ traditional resistance to the conscious cultivation of a professional ethic is unjustified and unacceptable. As noted in the epigraph, he argues that: … the actions of economists today bear on the life chances of the world’s population far more substantially than do the actions of members of most other professions. (p98) The Reinhart and Rogoff incident would seem to represent a paradigmatic example. Now, the conventional response to this would most probably be that Reinhart and Rogoff were just producing objective analysis in their role as economic scientists. They cannot be held responsible for the way in which that analysis was taken up, used and abused to further particular political agendas. DeMartino’s point is that this stance is inadequate. It is an abdication of responsibility. It is not acceptable to claim that one can only be held responsible for the intended consequences of one’s actions when “[u]nintended consequences are sometimes predictable, probable, and/or significant” (p92). Reinhart and Rogoff may wish to style their work as objective analysis that is tentative and to be treated with caution. But it was entirely predictable and probable that producing such work in 2009 and 2010 was going to give political actors further ammunition with which to justify the austerity drive that was already under way. And the consequences of this austerity drive have been hugely significant for populations all over the world. Many people have been reduced to destitution as a result. People have died. The institutional structures of a number of countries have been deeply, possibly fatally, undermined. Are Reinhart and Rogoff responsible for all this? Clearly not. Did they have any responsibility to think through how their work might have been put to use? The conventional answer to that is no. The more responsible answer would be yes. It may have
http://noahpinionblog.blogspot.co.uk/2013/04/what-if-all-those-times-really-were.html (Last accessed: 21/11/13) 47 See fn.2.
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led the work to be presented in different ways. It may have led to conclusions and caveats to be reframed in ways that reduced the possibility of the work being abused in pursue of a political agenda. And if Reinhart and Rogoff do not wish to align themselves with the austerity agenda, and feel that the invocation of their work in this context is misplaced, then should they not have responded before now? A comment from Colander and colleagues is entirely apposite:48 Researchers have an ethical responsibility to point out to the public when the tool that they developed is misused. It is the responsibility of the researcher to make clear from the outset the limitations and underlying assumptions of his model and warn of the dangers of their mechanical application. It would be interesting to reflect on the extent to which Reinhart and Rogoff had been actively seeking to highlight the misuse of their findings as a justification for austerity in the policy process, before everything kicked off this week. Few people outside of the world of economics would contest that economists and economic thinking have significant impact upon the lives and livelihoods of the world’s population. This would tend to suggest that deep ethical deliberation is necessary in order to ensure that such power is wielded with great care. Yet, economics has so far been pretty resolute in its rejection of the relevance of ethical reflection. Perhaps the Reinhart and Rogoff incident will rekindle the debate. Perhaps it will convince some of the doubters that simply denying an intimate connection between academic economics and practical action in no way means the connection ceases to exist. And therefore attention to ethics is a key professional responsibility.

Dr Smith and the “neoclassicals”
15th June 2013 Debates over the demarcation of different schools of economic thought are by no means new. Taxonomic disputes break out sporadically. Whether “mainstream”, “orthodox” and “neoclassical” economics ever have been, are, or could be synonymous is a question that has exercised several authors of a philosophical turn of mind. Lately the econ blogosphere has turned to the issue, with the focus on the identity and identification of neoclassical economics. Noah Smith made an intervention on the issue a couple of days ago.49

http://www.ifw-members.ifw-kiel.de/publications/the-financial-crisis-and-the-systemic-failure-ofacademic-economics/KWP_1489_ColanderetalFinancial%20Crisis.pdf (Last accessed: 21/11/13) 49 http://noahpinionblog.blogspot.co.uk/2013/06/what-is-neoclassical-economics.html (Last accessed: 21/11/13)
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Smith notes that the characteristics commonly associated with neoclassical economics, as defined by Wikipedia, look like this: Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by cost-constrained firms employing available information and factors of production, in accordance with rational choice theory. But, Smith argues, there are plenty of papers appearing in prestigious economics journals that don’t have all – or, in some cases, any – of these characteristics. There are authors who have written papers clearly in the spirit of neoclassical micro, but have also written papers without such characteristics. Is it sensible for such authors, having sinned once, to be forever labelled “neoclassical” by their critics? Smith goes on to argue that this incautious application of the label “neoclassical” is problematic for innovation in economic thought. To get to this conclusion it is necessary to take a view on the nature of non-neoclassical economics: “neoclassical” seems often to be used to describe anything that does not fall within a small well-known set of “heterodox” paradigms. I think that is wrong. The net effect of that type of thinking will be to block people from thinking of new ideas, because it defines any really new approach as “neoclassical”. So people who want to subvert or replace econ’s dominant paradigm will be shepherded toward old alternatives such as Austrianism, Post-Keynesianism, etc. This is an interesting way of framing the issue. It tends to suggest that it is the heterodox economists that exercise the power of classification. Which is a rather different reading of the situation to the more convention one: heterodoxy is banished to the margins by powerful actors in control of the mainstream of economics. Nonetheless, there is something to this suggestion. If a new idea is going to gain any traction then it most likely has to be located in relation to some existing body of thought. And if it does not align well to existing heterodoxies – many of which are in themselves rather diverse bodies of thought – then the idea may well have to make its way as part of the mainstream. Here I think that Smith elides the distinction between “neoclassical” and “mainstream”. Mainstream economics is, to my mind, a largely sociological construct. It is the type of economics that dominates the field at a particular point in time, attracts research effort at leading institutions, and attracts plaudits from senior members of the economics community. Much of it is embodied in the textbooks that introduce students to the subject and induct them into the academic community.

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Neoclassical economics is part of the mainstream. Twenty or thirty years ago neoclassical economics arguably was the mainstream. But a range of other approaches – drawing on behavioural economics or evolutionary game theory, for example – have arisen and now sit comfortably as part of the mainstream. If you go back to the 1920s, US-style institutionalism was at the heart of the mainstream. But it was toppled in the 1940s. The diagnosis of the constitution of the mainstream must refer to a specific point in time. The other intriguing issue here is that the features highlighted by Smith as characteristic of “neoclassical” economics are not necessarily those taken by heterodox economists as the most distinctive or problematic features of “mainstream”, including neoclassical, economics. It is just as likely that heterodox economists would see problems with the privileging of (excessive) mathematical formalism, such that knowledge (whether theoretical or empirical) that is not expressed in mathematical form is not considered “economic” knowledge at all. Or the disagreement would be at the more profound ontological level: the failure to take fundamental uncertainty seriously or the treatment of the social world as a closed and static system for modelling purposes. That leads to an objection to the pursuit of covering laws for the economy – that is, the whole nature of the mainstream economic enterprise is profoundly misconceived. Or critics might focus their concerns on the bedrock of explanation such as methodological individualism or fixed preferences: no credible explanation of economic behaviour can omit the constitutive role of institutions. Of course, these concerns may immediately give rise to challenge. It will no doubt lead to the counter-objection that some “neoclassical” economists have recognised that social institutions cannot be derived purely from the aggregation of individual decisions. Or that not only might preferences be endogenous, but that making preferences endogenous puts an entirely new complexion on the analysis. Similarly, it could be argued that there are economists of great eminence who are undoubtedly mainstream, if not avowedly neoclassical, who don’t have much truck with formalism. Someone such as Ronald Coase. And how would one describe Thomas Schelling? Mainstream? Certainly. Formal? A little. Perhaps we need a new category – “unorthodox”. In commenting on the absence of neoclassical characteristics from key papers, Smith notes: These are mainstream papers, published in the most mainstream of econ journals. And there are many others like them. Does their very mainstreamness automatically make them “neoclassical”, even though they have zero of the elements that are commonly held to define neoclassical economics? If so, then I contend that the word “neoclassical” has lost all useful meaning. Given my comments above, you will no doubt anticipate that I will say that it depends on what you identify as the key elements of neoclassical economics. A different definition of key characteristics and these papers are back in contention. But the other point I would make is that this isn’t an area in which the pursuit of hard and fast demarcation rules or definitive lists of characteristics is necessarily likely to yield a huge amount of insight.
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It would be more productive to think of the issue in terms of Wittgenstein ’s notion of family resemblance. He famously used the example of the notion of the “game”. There is no easy way to specify exactly what the characteristics of games – board games, team games, war games, non-competitive games, etc – are in general, but we recognise a game when we see one. This is mainly as a result of having seen many games and seen many non-games. When we talk of family resemblance we do not expect to see all characteristics present – he’s got his mother’s eyes and his grandfather’s smile, thank goodness he hasn’t inherited his father’s flat feet. The same sort of, often subconscious, process arguably applies to the recognition of “neoclassical” economic explanations. It is worth reflecting on what purpose is served by patrolling the boundaries between schools of economic thought. Smith suggests it creates barriers to innovation. That doesn’t seem an unreasonable claim. Border patrols certainly mean economics is a field of largely independent and parallel conversations, as Arjo Klamer has argued. And those on both sides of the border have contributed to this state of affairs. The question is whether it is possible to move beyond this situation. There has been quite a lot written recently about economic pluralism. Almost all of it is written outside the “mainstream”. The literature includes the argument that not only do we need to move beyond thinking of economics in terms of incommensurable Kuhnian paradigms but that this is entirely possible. Accepting that this is possible, the question then becomes do we want to? Whose interest would it serve? And whose interests might it serve to keep the border guards in place? It is not possible to go far in this sort of discussion without arriving at the need for some rather more sociological reflection. And if one thing’s for sure, that’s definitely not the sort of thing mainstream economists get up to.

Interpreting Osborne
10th September 2013 The more I think about economic policy the more I think that there isn’t a big enough dose of interpretivism applied to it. This thought recurred yesterday reading George Osborne’s set piece speech in which he, as Isabel Hardman of the Spectator put it, “trashed” Plan B.50 I think trash-talk would perhaps be a better description of his approach. One thing that – some – economists have learnt from the Great Recession of 2007-08 is that our understanding of the economy is rather more partial than had hitherto been assumed. That doesn’t mean that economists don’t have interesting and useful things to say. But the economy can behave in ways that economists found difficult to read. Some would
http://blogs.spectator.co.uk/the-spectator/2013/09/george-osbornes-speech-on-the-economy-fulltext/ (Last accessed: 21/11/13)
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say this means models need to be refined, respecified, recalibrated. Other would take a more radical stance and say that the economy and economics needs to be rethought. Conventional models and methods don’t have room for some of the characteristics that are fundamental to the way the economy functions. Chris Dillow highlighted some key points last week in the context of a post about the difficulties of forecasting.51 If you were thinking about it in terms of narratives you might suggest that what is needed is a change of root metaphor. Much economic writing still treats the economy as a machine that obeys the laws of Newtonian physics. Hence we talk about calibrating relationships that are linear or linearized. We talk about removing frictions. We talk about linkages and transmission mechanisms. We talk of velocities of circulation. Well, some do. If we instead rooted our thinking in a biological metaphor then we would think more in terms of time, development and change; expectations, knowledge and learning. There would be space for market sentiment; for births and deaths; for evolution. That is hardly a new point.52 Some might say that the root metaphor is what distinguishes the real economics of the academy from the ersatz economics of the business commentariat. That may largely be true. But the presumption is that this casts the academic approach in the more favourable light. And that may not be the case. The uncertainties in economic knowledge open up possibilities for competing readings of events. And that in large part was Osborne’s theme yesterday. The fluidity of the situation opens up a discursive space. He sought to impose his preferred reading on unfolding events while, at the same time, launching a pre-emptive strike to undermine the alternative reading of the situation offered by his critics: or, rather, to undermine his interpretation of their reading. I am not going to offer an in-depth deconstruction of his speech. I’m not sure I’ve got the energy. But I wanted to make a few points. The first point is that Osborne gives an assured presentation of his reading of the situation. Yet just about every claim he makes is highly contestable. When he comments on what has happened to the economy, what is happening to the economy, what effect Plan A has had, what effect Plan B would have, and the adequacy of the policy responses around regulation and microeconomic reform he is seeking to stabilize a particular reading of the situation, underpinned by a range of debateable causal claims. These are truth-claims that perhaps make sense from within a particular worldview. But it would be perfectly possible to wheel out counter-claims that, for example, the action the Government has taken on banking reform, or macroprudential regulation, or to deal with levels of private debt are wholly inadequate. Or that headline claims about jobs generated, reducing levels of

http://www.investorschronicle.co.uk/2013/09/03/comment/chris-dillow/why-we-can-t-predictCBw6Z40EZFbzw09qOKBRyK/article.html (Last accessed: 21/11/13) 52 See, for example, Mirowski, P. and Goodwin, C.D. (eds) (1994) Natural images in economic thought: Markets read in tooth and claw, Cambridge: Cambridge University Press.
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economic inactivity, or the impact of tuition fees on university finances are being given a misleading spin. The second point is that, for me, the speech doesn’t really frame the issue in the right way. Were critics of plan A saying that the economy would never recover if plan A were followed? I don’t think so. At least not if they were sensible. They were saying that plan A inflicted unnecessary pain and prolonged the pain for longer than was necessary, while at the same time doing longer-term damage to the productive capacity of the economy. That argument is not invalidated by signs that the economy is picking up. And given that much of the recent growth in GDP is attributable to exports it is as much about what is happening in the rest of the world as it is anything that can be attributed to government action. Equally, the speech has some noticeable silences. A major theme is cost of living. Osborne argues that the real way to deal with cost of living problems is to get the macroeconomic framework right: you don’t solve the pressure on cost of living with simply a shopping list of interventions and government regulation. Of course, there are important improvements we can make to the scale of energy and water bills, the cost of housing, the fees paid for everyday financial services, the expense of rail and road travel. These are a burden on families – and we are doing everything we can do to reduce their cost – with more to come this autumn. We know every penny counts for hardworking people. But by themselves these changes don’t amount to an economic policy. And to focus exclusively on these things alone, important as they are, is to miss the wood for the trees. I know that times are tough and that family budgets are squeezed. But fundamentally, Britain is poorer than it was not because government didn’t intervene enough, or rail regulation wasn’t tough enough, or rental policies weren’t fair enough. He glides on from here without offering any great insight into the “important improvements” concerned. And of course “can make” is rather ambiguous. It doesn’t mean we are going to make them. In most of the policy areas listed here the “doing everything we can do” has not so far amounted to very much. It is either disingenuous – because there is more that could be done but we choose not to do it – or an admission that government is powerless to address oligopolistic utilities markets, the problems of speculators cornering commodities markets, and the like. Finally, the points about narrative and interpretation come out very clearly in Osborne’s references to housing. He makes much of the venue for the speech – 1 Commercial Street. He explains that as a development this stalled with the crash of 2008 but it is now moving ahead again towards completion. Osborne reads this as a wholly positive sign that the economy is turning the corner.
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Yet you can read the housing market, and specifically the development at 1 Commercial Street, rather differently. But I don’t need to discuss that in detail because Jules Birch has already done it beautifully. Go read it here.53

Seeking a post-crash economics
30th October 2013 Mathematics brought rigor to economics. Unfortunately, it also brought mortis. Attributed to Kenneth Boulding From a couple of posts in the Guardian over the last week you could get the sense that the move to recast economics is gathering momentum. Last Thursday the emergence of the PostCrash Economics Society received some publicity.54 Undergraduate students at the University of Manchester have formed the group to campaign for a broader-based economics curriculum which breaks away from an exclusive focus upon the formalist, orthodox paradigm. The article also notes the launch of Rethinking Economics, an organisation championing a more pluralist approach to economics education.55 Yesterday Aditya Chakrabortty reported on an event at Downing College Cambridge, where dominant approaches were similarly deprecated and calls were made for the valuing of alternative perspectives.56 In the light of the perceived failings of the dominant economics paradigm there is plenty of agitation for new approaches. These represent just two of the most recent developments. But is it having any impact? We might consider Andrew Lilico’s article in yesterday’s City AM in which he asserts that existing economic approaches have done a good job of accounting for the financial crisis and the subsequent performance of the global financial system.57 He summarily dismisses anyone who criticises these approaches as “cranks”. Is this a sign that the champions of orthodoxy are rattled? Fighting a rearguard action based on denigration? It might be. Or, for all I know, it may just be that Lilico likes routinely to label anyone who happens to disagree with him as a crank. It would certainly be fair to say that what’s happening in the pages of City AM is probably not a great guide to the state of the debate in economics education. Chakrabortty concludes his piece:
http://julesbirch.wordpress.com/2013/09/09/osbornes-symbol-of-turning-a-corner/ (Last accessed: 21/11/13) 54 http://www.post-crasheconomics.com/ (Last accessed: 21/11/13) 55 http://www.rethinkecon.co.uk/ (Last accessed: 23/11/13) 56 http://www.theguardian.com/commentisfree/2013/oct/28/mainstream-economics-denial-worldchanged (Last accessed: 21/11/13) 57 http://www.cityam.com/article/1383008010/ignore-cranks-orthodox-economics-can-account-2008financial-crash (Last accessed: 21/11/13)
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Economics ought to be a magpie discipline, taking in philosophy, history and politics. But heterodox approaches have long since been banished from most faculties, claims Tony Lawson. In the 1970s, when he started teaching at Cambridge … “There were big debates, and students would study politics, the history of economic thought.” And now? “Nothing. No debates, no politics or history of economic thought and the courses are nearly all maths.” How do elites remain in charge? If the tale of the economists is any guide, by clearing out the opposition and then blocking their ears to reality. The result is the one we’re all paying for. This narrowing of the compass of the economics curriculum has been evident for some time. One of the most telling passages in the piece about the Post-Crash Economics Society was the response from a Manchester University spokeman: … as at other university courses around the world, economics teaching at Manchester “focuses on mainstream approaches, reflecting the current state of the discipline”. He added: “It is also important for students’ career prospects that they have an effective grounding in the core elements of the subject”. “Many students at Manchester study economics in an interdisciplinary context alongside other social sciences, especially philosophy, politics and sociology. Such students gain knowledge of different kinds of approaches to examining social phenomena … “ This would appear to be an implicit concession that if you want a rounded understanding of the economy – to be a well-equipped student of production, allocation and exchange – then you won’t get there by studying economics alone. Many might well agree. Indeed, the point might be seen as unexceptional. But a comment of this type being made about chemistry, physics or biology might feel a bit more incongruous. Yet I don’t think this is necessarily the product of some grand strategy to silence heterodox perspectives. Rather, it’s a product of disciplinary incentives. If your starting point for hiring decisions is to value the potential to publish in the top five economics journals above everything else, and you have an accepted global ranking of journal quality, then that is a recipe for, incrementally, recruiting those whose work speaks to what are currently defined as the core concerns of the discipline, as arbitrated by a small number of US-based journal editors. The ability to contribute to the delivery of broad-based pluralist curriculum doesn’t necessarily get much of a look in. Indeed, the narrow research focus of individual hires means that over time what precisely constitutes the “core elements of the subject” becomes more tightly defined. The challenge is that this is a strongly path-dependent process. Having reached a neoclassical equilibrium it makes limited sense at the level of the individual hiring decision
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to depart from the current strategy. So dominant practices and perspectives are not only sustained but strengthened. The question is how to break out of this process. Something has to disrupt the established processes driving the reproduction of economic labour. An exogenous shock is required. Many hoped the poor performance of conventional macroeconomics in accounting for the financial crisis was that shock. But it looks increasingly like that wasn’t sufficient to cause a substantial shift away from business as usual. Perhaps a bottom up process of student campaigning might do the trick. That would present economists with an interesting test of their belief in consumer sovereignty, as @unlearningecon observed on Twitter the other day. I think the sort of coalition of support being built by Rethinking Economics has a greater chance of exerting leverage. And these sorts of initiatives are, of course, not mutually exclusive. It strikes me that one area that could benefit from further exploration is the economicsethics nexus. Economists, unlike most other social scientists, are formally wedded to the clear distinction between positive and the normative analysis. Yet, there is strand of argument that this distinction is fundamentally unsustainable. Economic analysis is shot through with ethical judgements masquerading as value-free science. Working this particular seam could be productive. The argument is not that economic analysis needs to switch away from ‘neoclassicism’ to an alternative paradigm. It would seem that those arguments have so far been rather successfully rebuffed by the disciplinary powers-that-be. The argument is rather that the current paradigm is not what you think it is and isn’t doing what you think it’s doing. That is a more indirect – but perhaps ultimately more successful – route to the same destination. If this isn’t an area that you are familiar with then something like Jonathan Aldred’s The Skeptical Economist: Revealing the ethics inside economics is a relatively gentle and reasonably engaging introduction. Then it might be interesting to graduate to something like Hausman and McPherson’s Economic analysis, moral philosophy and public policy. Sen’s On ethics and economics is brief, to the point, and a bit of a classic. But it maybe isn’t the place to start.58 If a stronger ethical awareness could be coupled with an appreciation of the performative dimension of economic analysis that would represent a hugely powerful combination. However, we know that if engaging with ethical deliberation is a challenge, engaging most economists with performativity would be mind-blowing. One step at a time. An acceptance of the irreducibly ethical basis for economic analysis – something that the founding fathers of economics would have been reasonably comfortable with – would require a fundamental reappraisal of the value and values of much contemporary analysis. It would make economics more humble in its aspirations and modest in its claims. It would make economic analysis more reflexive and open to dialogue. It would moderate disciplinary aspirations to embody norms of scientific investigation that have been
Aldred, J. (2009) The sceptical economist: Revealing the ethics inside economics, Abingdon: Earthscan. Hausman, D and McPherson, M. (2006) Economic analysis, moral philosophy and public policy , Cambridge, CUP. Sen, A. (1987) On ethics and economics, Cambridge, CUP.
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questioned in the natural sciences for several generations. It would, in fact, make economics understand that it is genuinely a social science. And that that is what it needs to be for it to make a positive contribution to the understanding of society.

On signs you’re reading bad criticism of economics
4th November 2013 A couple of weeks ago Chris Auld’s blog carried a post entitled 18 signs you’re reading bad criticism of economics.59 Auld is seeking to help the reader differentiate bad criticism from ‘solid’ criticism. The post generated plenty of debate below the line and was retweeted into my timeline several times. I’ve been thinking about the post for a few days. There are a whole bunch of issues tangled up in Auld’s 18 signs. Some of them are relatively technical points. Some of them are rather more far-reaching. I have a suspicion that underlying Auld’s distinction between good and bad criticism there is the division between internal and external critique. That is, good criticism is internal criticism – it is generated from within a particular academic community by people working from within broadly the same intellectual paradigm. External criticism originates, surprisingly enough, from outside that paradigm. We generally find that economists – like most people – are rather more tolerant of and amenable to internal than external critique. Auld dismissed bad criticism as crankery, which is a label that mainstream economists have a tendency to apply rather indiscriminately to perspectives that differ too much from their own. One person’s crankery is another person’s foundational critique. But if proponent and critic operate from profoundly different social ontologies then most likely all that will result is mutual incomprehension. That doesn’t necessarily make criticism from a non mainstream economic perspective wrong. Except from the perspective of the mainstream economist, of course. I won’t run through Auld’s points in detail, but I wanted touch on all of them. I’ll start by observing that Auld uses the term ‘economists’ as many critics do – in a rather undifferentiated manner. He is therefore right that critics who claim that ‘economists’ claim that people are always rational (Sign 8) are engaging in bad criticism. Not all economists claim this to be the case. Which isn’t the same as saying no economist does. Auld identifies several jargon terms that bad critics misconstrue: not only ‘rational’ (Sign 12) but also ‘efficiency’ (Sign 13) and ‘externality’ (Sign 14). It would be fair to say that it isn’t unknown for economists to fail to keep the infor mational and allocative definitions of efficiency clearly separate. However, whether criticism is invalidated by terminological inexactitude rather depends on how badly wrong you are in the use of the term and what, precisely, the criticism is.
http://chrisauld.com/2013/10/23/18-signs-youre-reading-bad-criticism-of-economics/ (Last accessed: 21/11/13)
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Some of Auld’s signs of bad criticism are empirical. He is surely right that if a critic were to claim that economics is not empirical that would be bad criticism (Sign 10). But there is surely some good criticism in asking precisely what sort of empirical endeavour economics might be and what it has achieved or can achieve. He sees the claim that the financial crisis has disproved mainstream economics (Sign 9) as bad criticism. But it strikes me this is rather more debatable. Of course it depends on how broadly one wants to define ‘mainstream’, but I think that credible criticism is possible on issues like the empirical performance of the efficient markets hypothesis or the empirical adequacy – or even relevance – of DSGE models. That some of the most high profile proponents of this type of mainstream macro have declared it to have emerged from the crisis unscathed does not ipso facto demonstrate that it is fit for purpose. Auld considers criticism that treats all of economics as if it were battles between schools of macroeconomics (Sign 11) to be bad criticism. That is an interesting point, because it depends on what is intended. On the one hand, it is clearly true because such criticism leaves out all of microeconomics and much else besides. On the other, the criticism that much of the debate between “schools” of macroeconomics is about the implications of rather modest variations in detailed assumptions might constitute rather good criticism. Those with radically different views of how the macroeconomy operates aren’t even inv ited to join in the party. We know that mainstream economics is generally intolerant of heterodox approaches. So it is perhaps not a great surprise that Auld sees any criticism of economics that cites Debunking Economics as crankery (Sign 18). Whether you agree with Steve Keen or not, he has asked some important ontological and epistemological questions of dominant approaches to economic analysis. That the mainstream economics community has dismissed him rather than engaged with his arguments – which in many ways simply echo the more pluralist debates within the economics community that existed prior to the 1980s – reflects rather worse on the economics community than it does on him. The claim that all economists care about is money (Sign 15) and that economists ignore the environment (Sign 16) are common complaints, and they are not unrelated. Stated in these bald terms then they clearly are bad criticism. Again, however, they can be reframed into slightly softer terms – for example, that converting everything into the common metric of money both requires unacceptable compromises and loses something important in translation – and they could then constitute perfectly respectable criticism. Auld highlights the indiscriminate use of the term ‘neoclassical’ (Sign 3) and the reference to “the” neoclassical model of Walras (Sign 4) as problematic. I would agree that it certainly could be problematic. However, the term ‘Walrasian’ is often used by critics in a rather allusive way to signal the prioritising of mathematical elegance over real world relevance – even if the mythical auctioneer is not explicitly invoked. Does that make it bad criticism? Quite possibly, but it depends what the point is. The elision of the distinction between ‘neoclassical’ and ‘mainstream’ economics (Sign 5) is certainly common. We can accept that the neoclassical school no longer represents the

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entirety of the mainstream in the way it once did. But the distinction between the two is elusive and by no means unproblematic. The last few signs of bad criticism Auld identifies operate in a rather different register and get us into rather deeper water. Treating macroeconomic forecasting as the major goal of economic analysis (Sign 1) is clearly wrong, if only because much economic analysis has nothing to do with the macroeconomy let alone forecasting. We might all agree that forecasting is not a major goal of respectable economic analysis. We might also agree that anything close to a point estimate of a future economic magnitude is almost certainly wrong. The best you might aspire to is qualitative predictions about the broad range of values within which an outcome might fall. But we can’t deny that there is quite lot of forecasting going on. Or that most of it is wrong. Clearly, this point might be a reference to all the criticism after 2008 that economists singularly failed to see the crash coming. But I’m not sure that was a failure of forecasting so much as a rather more fundamental analytical failure. Auld identifies a bunch of bad criticisms that move us into more sociological territory. He cautions against criticism that frames the issue in terms of politics and claims that economists are market fundamentalists (Sign 2). Criticisms that refer to “corporate masters” or imply economists are shills for the wealthy or corporations (Sign 7) and any criticism that uses the term “neoliberal” (Sign 6) are considered bad criticism. There is plenty going on in these statements and I’m not going to unpack it all here. The first point is usually addressed by reference to the profile of academic economists’ own political beliefs, which, at least in the US, tend to be less right wing than non-economists would imagine. But we then have to explore which “economists” we are talking about. In particular, we might inquire into the political profile of the economists who have genuine leverage over policy. We might ask what sort of economic analysis spews from the think tank industry telling simple stories about the market and marketization being the solution to most policy woes. When critics look at the effects of economics on the world that is more likely what they are thinking about. Similarly, claims that all economists are shills for corporate interests are clearly false. But the claim that some high profile economists are compromised by conflicts of interest, which in any other walk of life would be seen as deeply problematic, can hardly be disputed.60 As for neoliberalism, it is often used as a general pejorative applied to those whose policy proposals one happens to disagree with. That is bad criticism. But we cannot conclude from this that neoliberalism is not a phenomenon of considerable contemporary significance. And while I don’t think “economics” as a body of thought can meaningfully be labelled as neoliberal, I don’t think we can dismiss the possibility that certain types of economic analysis allied with particular political interests are implicated in the neoliberalisation of society. But that is a topic for another day. Finally, Auld see any criticism that goes out of its way to point out that the Economics Nobel is not a real Nobel is bad criticism. I disagree. Economics has done its darnedest to
http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_201-250/WP239.pdf (Last accessed: 23/11/13)
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claim some of the reflected glory of the Nobel committee without any great justification. Critics tend to see this as saying much about economists’ pretensions to being scientists like natural scientists rather than scientists like social scientists. Pointing out to economists that the “Nobel Prize” is more correctly called the Sveriges Riksbank Prize in Economic Sciences is just tweaking their noses. I like to think that is me showing my usual tolerance. But it may be, of course, that I’m a crank too.

On mainstream economics and neoliberalism
10th November 2013 One of the most intriguing questions facing the merry band of wanderers interested in the philosophy and history of economics is how mainstream economic approaches appear to have emerged relatively unscathed from the Global Financial Crisis. Casual observers might well find this a bit of a puzzle. A body of knowledge that professed itself unable to shed any light on one of the most profound social events of recent human history, even though it was squarely in the middle of the relevant intellectual terrain, is on the face of it paradoxical. Of course, the response from the cognoscenti, bolstered by unfalsifiable doctrines such as the efficient markets hypothesis, is that events such as the GFC are fundamentally unpredictable. So economics cannot be held deficient for failing to do so. And, anyway, mainstream economic ideas such as incentive-incapability in markets subject to significant information asymmetries can do a good job of explaining key aspects of the crisis in retrospect. If that’s any help. Less enlightened souls might retort that had economists stepped out the ivory tower, removed their theoretical blinkers, and spent a bit more time getting down on the frontline trying to understand the way institutions and behaviours were changing in an increasingly financialised economy then perhaps they wouldn’t have been quite so surprised when a Global Crisis they considered theoretically impossible actually happened. Economics after the crash The resilience of mainstream economics is a key question that motivates Phi lip Mirowski’s most recent book Never let a serious crisis go to waste.61 And a key part of his answer is the way the economics discipline has changed. Having largely purged itself of the need for the serious study of history, philosophy, methodology or heterodoxy the discipline has a serious case of groupthink. And the economists’ response to the GFC can be illuminated with

Mirowski, P. (2013) Never let a serious crisis go to waste: How neoliberalism survived the financial meltdown, London: Verso.
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another core social psychological concept – the management of cognitive dissonance. Economists cleave even closer to their beliefs, despite the contrary evidence. But Mirowski does not restrict himself to an inquiry into the epistemological inadequacies of mainstream economics. His intellectual project has greater ambition. Mirowski seeks to embed an understanding of how economics has responded to the crisis within a broader understanding of the activities of what he terms the “Neoli beral Thought Collective” (NTC). The Neoliberal Thought Collective The core of the book’s argument is that the NTC has played the long game on multiple fronts. Starting from the foundation of the Mont Pelerin Society in the 1940s it has engaged in a utopian project to remake society in the image of entrepreneur and the market. Starting from Hayek’s beliefs regarding the limits of human knowledge, and his subsidiary critique of expertise, the project is founded upon the belief that the market is a more efficient information aggregator than any other human institution. So all must be subservient to the benign munificence of the market. The neoliberal project departs from classical liberalism and libertarianism in rejecting the idea of a minimal or nightwatchman state. Instead, the genius of neoliberalism is to create a veneer of small-state liberalism while retaining at its core the belief that a strong state is required to deliver its vision. For example, populations might consider that rendering their welfare, in all its dimensions, subservient to the whim of the market is unacceptable. They might consider it unacceptable for governments to sign away their rights to shape their own destiny within their own border in the name of globalising trade. So it is imperative to ensure governments are fully signed up to the neoliberal ideal. They must possess a willingness to ignore or override the views of their own electorate, if the logic of marketization demands it. In outline this story is not so different from histories of neoliberalism that exist elsewhere. Mirowski expands on the idea of the NTC by suggesting it isn’t a closely -coupled conspiracy but a rather looser collection of fellow travellers that has expanded from the MPS to include a range of think tanks, media outlets, academics and other thinkers. He uses the metaphor of a Russian Doll, and argues that the appearance of the project on the exterior and the appearance at the core can be very different. While Mirowski rejects the idea that he is positing a global conspiracy, the NTC plays a rather elusive role in his argument. It is invoked repeatedly as moving behind the scenes to realize desired geopolitical outcomes. The argument is strongest when it descends a level and starts to identify the capillaries through which power is exercised – for example, the way in which a substantial proportion of the academic economics profession in the US is beholden to the Fed or the way in which the Koch brothers directly intervene to ensure the academic appointments they fund have the correct ideological complexion. But overall the idea of the NTC is rather undeveloped. It is not quite the deus ex machina of the story but it is never very clearly identified nor is agency very explicitly theorized. The NTC has an elusive and protean nature.
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Neoliberalism after the crash Mirowski is not, however, simply interested in the rise of neoliberalism. He is more interested in the fate of neoliberalism after the GFC and the way in which economics has responded. Here he does a good job of laying out the ways in which economists have both intervened in the crisis as it evolved and provided rationalisations for retaining bodies of economic thought that might be viewed as ripe for rejection. His is also an argument about how economists aligned with financial interests to argue against substantial reform of the finance industry. Some significant individual conflicts of interest are laid bare. He provides a valuable account of the rather unedifying role some leading economists – but not necessarily “economics” in general – have played in supporting and advancing a particular set of sectional interests. Unusually for a book about economics and the crisis, in chapter three Mirowski takes what appears at first sight to be a significant detour into the neoliberalization of the individual. While the entrepreneurialisation of the self is something that you’ll find discussed in particular branches of the sociological literature, it more rarely penetrates analysis that is rooted in economics. The central importance of the entrepreneurial self to his argument gradually becomes clear. It is integral to his reflection on why effective alternatives to neoliberalism have struggled to develop. The argument is that after 30 years of largely undiluted neoliberalism our subjectivity has been well and truly colonised, although Mirowski doesn’t quite put it like that. Most people view the world through neoliberal spectacles. Genuinely critical analysis – such as analysis in terms of class interests – is impossible if everyone accepts the idea that individuals are in charge of their own destiny, treats their life as a project with risks to be mitigated, and views failure as weakness of individual will rather than a product of structural inequalities. In Mirowski’s view acts of resistance such as the Occupy movement ultimately fail to escape a neoliberal mindset and hence are ultimately ineffective. My feeling is that Mirowski is right to highlight this issue, and isn’t the first to do so, but he overdoes it slightly. His argument can be read as suggesting that the NTC has created an effective totalizing discourse. But, if nothing else, the fact that Mirowski’s argument is from an Archimedean point suggests that the discourse of entrepreneurialisation has boundaries. The full-spectrum approach One of the most intriguing elements of Mirowski’s argument is what he calls “the full spectrum approach to neoliberal political mobilization”. Here he is joining the dots and arguing that a pattern emerges. The neoliberal response to a problem takes short-term, medium-term and long-term forms. It may be that responses over different timescales appear to emanate from very different social locations, but they are directed to a common aim of realizing the neoliberal utopia of market pre-eminence. Mirowski argues this pattern can be detected in different policy areas. He takes the example of climate change. The short-term neoliberal response is to engage in agnotological
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activity – in this case climate change denial. This is not necessarily because climate change is doubted. The aim is to manufacture sufficient doubt to undermine the justification for or consensus about swift policy intervention. The underlying aim is to buy time in order to develop, propose and embed market-based “solutions” to the problem. In this case the solution is carbon trading. As a solution this makes traders a lot of money, costs polluters at lot of money, and does almost nothing to reduce carbon emissions in practice. That is the intention. Meanwhile governments delay making any more serious direct interventions. The long term response is geo-engineering. Because carbon trading will ultimately fail and source of the problem – level of emissions – has not been addressed, a market will develop for novel solutions like cloud seeding or reflectors in space. These are all technologies that can be patented and from which vast amounts of money can be made by the corporate sector. Mirowski argues that you can trace the same moves from the neoliberal playbook in the response to the financial crisis. The short-term response was to muddy the debate and distract from the finance industry as the source of the problem. Mirowski argues that neoliberals in the US have had considerable success in implanting the idea that government regulatory behaviour and Government-Sponsored Entities (Fannie Mae and Freddy Mac) were the cause of the GFC, even though there is no evidence for this at all. Secondly, the medium term response was a selection of market-based mechanisms for state purchase of poor performing assets, the privatisation of gains and the socialisation of losses. The longerterm objective is to fundamentally weaken the role of government and increase the role of the corporate sector in governing our lives. The imposition of austerity leading to waves of privatisation and withdrawal of state services moves the agenda forward. While Mirowski’s argument here is not compelling, he is absolutely right to be standing back and trying to discern the big picture. It would be well worth developing the argument and testing it against other policy areas. Placing the protagonist An interesting question is quite where Mirowski is coming from on these issues, politically and theoretically. He is clearly a man of the left, but he has little time for those seen as on the left in the economics debate (eg Krugman, Stiglitz) and nor does he have a very positive view of responses to the GFC such as the Occupy movement. He laments the absence of an effective counter-narrative to neoliberalism. But he argues that this is partly a product of the entrepreneurialisation of the self – people are so imbued with neoliberal identities that they cannot think beyond it to a different form of social order. Again, while there is something in this argument, it would benefit from refinement. In theoretical terms, Mirowski draws on an eclectic range of resources but rarely does he do so uncritically. He draws quite heavily on Foucault circa Discipline and Punish and, particularly, the Birth of Biopolitics, but considers that Foucault succumbed to the very neoliberal tendencies he presciently identified. He is quite critical of materialist analysts of

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neoliberalism for being too deterministic and of sociologists of science such as Donald MacKenzie for lacking an adequate political economy. He also has limited time for those one might naively have assumed were kindred spirits. For example, the Institute for New Economic Thinking is dismissed as not saying anything particularly new.62 I can see why he says that, but I don’t think it’s entirely fair. I’ve no particular association with the INET, but it is a relatively broad church and some strands of work under its banner are trying to do something different. It would be fair to say that Mirowski isn’t on a mission to recruit a coalition of the willing to charge the neoliberal citadel. Perhaps the group that gets away most lightly under Mirowski’s gimlet eye is Old Institutional Economists like Veblen and Galbraith. It’s a little unfortunate that the ranks of the OIE are rather depleted these days. Where next? Mirowski’s book is an attempt to answer the question “Why did the neoliberals come through the crisis stronger than ever?”. At the end of the book he notes that he has “passed lightly over some other highly contentious collateral issues”. These include:   What were the key causes of the crisis? Have economists of any stripe managed to produce a coherent and plausible narrative, at least so far? What role have heterodox economists played in the dispute? What are the major political weaknesses of the contemporary neoliberal movements? What is the current topography of the Neoliberal Thought Collective? What lessons should the left learn from the neoliberals, and which should they abjure? What would a vital counternarrative to the epistemological commitments of the neoliberals look like? Is there a coherent alternative framework within which to understand the interaction of the financialization of the economy with the larger ebbs and flows of political economy in the global transformations of capitalism?

    

If one were convinced by Mirowski’s analysis then addressing these questions would appear a sensible next step. But at the same time it feels like we need the answers to some of these questions before we are likely to be convinced by Mirowski’s analysis. While some of it is plausibly evidenced, some of it is rather more assertive. The issue of the “topography” of the Neoliberal Thought Collective seems fundamental. I don’t think Mirowski’s analysis, at its current stage of development, is anywhere near compelling on this point. Following this list of questions, Mirowski goes on to observe (p356):

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These are serious inquiries, demanding lavishly documented advocacy and lengthy disputation (and maybe a different species of Mont Pelerin Society to hash them out?), which should be on the agenda of the left. Of course, there may not be the luxury of decades of time similar to that available to the neoliberals back in the 1940s (with tipping points looming for world climate and corporate domination). I think he is right to note the issue of tipping points. Whether or not we accept the argument that the NTC is acting as Eminence Grise in the whole affair, it is clear that current trajectories represent the progressive self-disempowerment of states and increased corporate domination. That may be a neoliberal utopia, but it is a dystopian future for any democrat.63 I found Never let a serious crisis an intriguing but frustrating book. It is passionately argued and it addresses a topic of the utmost significance. There are many passages that are illuminating. It offers ideas and hypotheses that are pregnant with possibility and worthy of further exploration. The author lands quite a few of his punches. But, equally, he frequently swings and, in my view, misses. The argument becomes a little too strident and a little too assertive. The book is erudite and ambitious. But the argument is a bit baggy. I’m not entirely sure who the book is aimed at. Those who are already concerned about the rise of neoliberalism and corporate power will no doubt enjoy it. But I don’t think Mirowski sees himself as purely preaching to the converted. Yet, it is unlikely to be sufficiently closely argued to convince the sceptic. There is a suggestion that it is aimed at the general public, but it’s pretty heavy-going for the non-specialist reader and unnecessarily sesquipedalian at times. One thing is for sure – if there are any mainstream economists willing to do battle with the book then they are almost certain to hate it.

Would post-crash economics be a step backward?
21st November 2013 Discussion of the need for the reform of economics in the post-crash world continues to gather momentum and prominence in parts of the econosphere. Wendy Carlin set out a case for change at the FT on Sunday, while a group of post-Keynesian economists stuck their head above the parapet in a letter to the Guardian on Monday.64 The thrust of the post-crash economics argument is not that mainstream economic approaches should be rejected in favour of an alternative. Rather it is the more modest plea
http://www.theguardian.com/commentisfree/2013/nov/04/us-trade-deal-full-frontal-assault-ondemocracy (Last accessed: 21/11/13) 64 http://www.ft.com/cms/s/0/74cd0b94-4de6-11e3-8fa5-00144feabdc0.html (Last accessed: 23/11/13); http://www.theguardian.com/education/2013/nov/18/post-keynesians-comeback (Last accessed: 21/11/13); http://www.theguardian.com/commentisfree/2013/nov/20/orthodox-economists-failedmarket-test (Last accessed: 21/11/13)
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that economics should be taught more pluralistically and contextually. Mainstream approaches should be set alongside alternative bodies of thought. Economics students would benefit from rediscovering economic history, genuinely institutional analysis, a dose of philosophy, and the history of economic thought. It’s an agenda with which I have a lot of sympathy.65 We are seeing bits and pieces of a backlash. That is inevitable. If one embraces the belief that economics is a science characterised by the ongoing accumulation of knowledge then these calls for recognising pluralism and a historical sensibility will seem highly peculiar. To accept that there might be something to be gained from studying Friedman, Keynes, Knight, Marshall, Ricardo or Smith – genuinely studying what they had to say not just invoking their names – would be to concede the possibility that, in fact, the discipline isn’t accumulating knowledge but, somewhere along the line, took a wrong turning. To depart from what might be considered the historical thread of the mainstream and seriously consider Samuels, Galbraith, Straffa, Commons, Veblen, Marx and the like would be more like admitting the possibility that we are on the wrong track altogether. What a pluralist and contextual economics education would or should look like is an intriguing question. There are plenty of people now working on it. Who might be in a position to teach it is an equally interesting question, given that part of the problem is that the discipline is suffering from amnesia. But, of course, pluralism doesn’t necessarily mean the curriculum has to become more backwards looking. A couple of weeks ago I suggested that a focus upon ethics and the unavoidable ethical commitments of all economic theorising would inject a valuable contemporary critical dimension to economics education. Another possibility is, rather than simply looking backwards, to explore alternative economics perspectives that are currently active research programmes. I’ve just scooted through Brian Arthur’s Complexity economics: a different framework for economic thought.66 Complexity economics is an obvious candidate for an alternative paradigm. Arthur argues it is a fundamental reconceptualisation of the economy. Equilibrium and substantive rationality are rejected as the starting point for analysis. The economy is algorithmic and evolving: A picture is now emerging of the economy different from the standard equilibrium one. To the degree that uncertainty and technological changes are present in the economy – and certainly both are pervasive at all levels – agents must explore their way forward, must “learn” about the decision problem they are in, must respond to the opportunities confronting them. We are in a world where beliefs, strategies, and actions of agents are being “tested” for survival within a situation or outcome or “ecology” that these

See http://www.alexsarchives.org/is-a-little-economics-dangerous/ http://ineteconomics.org/research_note/complexity-economics-different-framework-economicthought (Last accessed: 20/11/13)
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beliefs, strategies and actions together create. Further, and more subtly, these very explorations alter the economy itself and the situations agents encounter. So agents are not just reacting to a problem they are trying to make sense of; their very actions in doing so collectively re-form the current outcome, which requires them to adjust afresh. We are, in other words, in a world of complexity, a complexity closely associated with nonequilibrium. Arthur neatly encapsulates how embracing complexity changes the perspective. It transforms the focus of analysis in a way that addresses the weakness of classic comparative static analysis. Rather than focusing on equilibrium states and telling informal stories about how we get from one to the other, the analysis focuses on the movement: Until now, economics has been a noun-based rather than verb-based science. It has pictured changes over time in the economy function as changes in levels of fixed noun-entities—employment, production, consumption, prices. Now it is shifting toward seeing these changes as a series of verb-actions— forecast, respond, innovate, replace—that cause further actions. If equilibrium is achieved it is temporary and more or less transient. Structures emerge as mesolevel phenomena. From a complexity perspective time and history matter. To some extent complexity economics is rediscovering themes that economics has forgotten. The argument is that when economics decided to model itself on nineteenthcentury physics the focus narrowed to questions of allocating fixed resources. Had economics instead chosen biology as its model then the focus would have been on the formation of the economy and its evolution: how the economy emerges in the first place and how it changes structurally over time. These are not questions that can be satisfactorily answered in an equilibrium framework. These are, however, themes that early classical economists were entirely comfortable addressing. Indeed, they were thought to be the core of economic thought. But they are themes mainstream economics rather misplaced after the late nineteenth century. They nonetheless continued to preoccupy many flavours of non-orthodox economics. The story of how economics came to expunge historical time and its implications from its core theoretical concerns is fascinating in itself. For anyone interested, Hodgson’s How economics forgot history provides a valuable intellectual history.67 Arguably complexity economics simply allows a return to old questions using new tools. Tools which, though computational rather than analytical, may not be written off as irredeemably “ad hoc” by mainstream economists. Complexity economics is, of course, not new. It started to develop some momentum in the 1980s through the work of the Santa Fe Institute. But it is now gaining broader interest and acceptance. That has probably been helped by the fact that it has been effectively

Hodgson, G.M. (2001) How economics forgot history: The problem of historical specificity in social science , London: Routledge.
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popularized. Indeed, perhaps the best place to encounter complexity economics for the first time is Beinhocker’s The origin of wealth.68 The complexity economics research programme is by no means unproblematic. It raises all sorts of interesting ontological and epistemological questions, particularly about the scope for transferring learning from computer-based simulations to real world economies. It could be argued that it represents no more than a way of taking the concerns of Austrian economists with uncertainty, knowledge, and the entrepreneur and draping them in a new more ‘scientific’ garb. It is susceptible to similar criticisms. Institutional economists, for example, would highlight that complexity economics can lead to some quite conservative conclusions about the wisdom of market mechanisms and a similarly inadequate understanding of social structures and social power. My aim is not to advocate on behalf of complexity economics specifically, but rather to observe that there is plenty going on within contemporary economics – broadly conceived – that is grappling with some of the major social questions that mainstream economics barely touches upon. Of course this resonates with classical economics. It could be no other way. To address these questions is not to succumb to an unhealthy and unproductive preoccupation with historical curiosities that the truly enlightened have long moved beyond. Questions of co-ordination, learning and change over time are at the heart of social life. That hasn’t changed. And it isn’t going to. They need to be at the heart of an education in economics.

Beinhocker, E.D. (2006) The origin of wealth: Evolution, complexity and the radical remaking of economics , London: Random House.
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