It's Different for Lefties and Righties
My view is that the neoclassical economics toolkit can be very, very useful--no, stronger than that, is very useful and necessary--for everybody from the center on left. The methodological individualism of the toolkit forces you to look at real people and how situations help or hurt them. The competitive market benchmark assumed by the toolkit requires you to think carefully and specifically about just where the externalities are that keep you from relying on markets alone to solve whatever problem you are looking at. The equilibrium conditions established by the toolkit force you to check for unanticipated consequences, for blowback due to changes in incentives and so forth.
The result is that the neoclassical economics toolkit makes you a smarter, stronger, more powerful, more effective, more reality-based leftie.
By contrast, the neoclassical toolkit can be absolute poison for people right on center. It functions like a kind of crack, reducing their arguments to empty slogans: "the market takes care of that"; "acts of capitalism between consenting adults"; "they hired the money, didn't they?"; "it's not the government's, it's theirs." People right-of-center should be exposed to the neoclassical economics toolkit only after posting a $1M bond to cover collateral damage, and only under the supervision of trained professionals.
In teaching neoclassical economics, the restrictive conditions under which the theory of perfect competition applies needs to be repeatedly emphasized. People learning neoclassical economics need to understand that externalities, market power, and asymmetric information are the RULE, not the exception. People need to be taught that therefoe real world economies only have an INVISIBLE PAW, not an INVISIBLE HAND. The market works and is very powerful, but it works highly imperfectly, so that governments can do all kinds of things to improve its working, IF it chooses to do so. Of course, there is no guarantee that governments will choose to do things that make it work better. As the Bush administration has demonstrated, governments can also do things that make things worse. Therefore one has to be very careful who one elects to run the country.
May 31, 2007 3:30 PM | Reply | Permalink
A laissez faire economy can never be efficient (nor equitable) because of the most fundamental of all market imperfectins: Children cannot choose their parents. The distortion in the workings of the markets resulting from this uncorrectable condition needs to be matched by offsetting distortions in order to increase efficiency, such as government policies to increase equality of opportunity, according to the Theory of the Second Best.
May 31, 2007 3:37 PM | Reply | Permalink
TPM cafe has really started off a great discussion about neoclassical versus heterodox economics. Paul Krugman has participated and now Brad DeLong. Right On!
May 31, 2007 3:41 PM | Reply | Permalink
Among the reasons that mainstream (aka, neoclassical economics) is misleading is that it invariably presumes an impoverished notion of what a good human life is. I will, lacking the energy to develop this idea fully, simply invoke the work of Sen on functions and capacities to make my point.
Further, the mainstream approach of assuming "preferences" are exogenously determined (except for some trival exceptions) is a wild and unsupportable assumption that ignores key endogenous forces in capitalism that shape people (not necessarily for the better).
The simplistic notion is that the only way to show humans the proper respect is to take their preferences as given. But this is a debateable notion.
In addition, those using the NC approach want to present themselves as "value neutral scientists" but invariably slip in their own notion of "the good" when they make policy recommendations. And, contra Saint Lionel Robbins, they do this with without clearly indicating that they have done so. The fact that it is a creed of the profession that "free trade is generally good" shows that, by their own rules, NC economics is as "unscientific" as can be and this would offend (and did offend) Saint Robbins.
The NC approach of simplistically assuming that because someone "chose" something that this indicates that we must approve of this choice is also widely debateable and likely wrong too.
The use of the rationality and equilibrium approaches is not well motivated except that it allows the math to generally be determinant. The math need drives the assumption about human nature! Science? I think not. Equilibrium is presumed as without this assumption comparative statics can't be done and, for the most part, without comparative statics mainstream economists have nothing to contribute to the debate about policy. But why any system should achieve or even aim towards some "equilibrium" needs to be argued and not merely asserted as "obviously necessary."
Finally, the claim that NC economists can make statements about the "welfare" or "efficiency" properties of the real world by solving a wacko math model is so unsupportable that it defies belief.
I won't even go into the crazy notion of "normative vs. positive" (how 1920s is that!) that is essential to most NC economic theorizing.
May 31, 2007 5:46 PM | Reply | Permalink
"The competitive market benchmark assumed by the toolkit requires you to think carefully and specifically about just where the externalities are." Nicely said, and I fully appreciate Krugman's point as well that the model isn't the same as libertarianism. Ok, when I see a replacement for Wolfkowitz being tauted in the day's business section for his agenda of fighting corruption when he really wants to impose radical free markets on the third world, enough to make Stiglitz cry, I want to scream. But I realize it's the business section, in which all business people profiled are heroes. Advertising requires it.
Brad's point reminds me of Sidelsky's review in NYRB that I previously referenced, about a critique of the assumptions. The reviewer replied that it shows when things don't meet the assumptions. Maybe it ain't always true, but it's still a fascinating point.
John
http://www.haberarts.com/
May 31, 2007 6:18 PM | Reply | Permalink
Which is how they see themselves. Gary Cooper at
High Noon.
Which sooner or later is apt to have adverse consequences for their company .
And almost eliminates any ability they might once have had to understand societal problems (remember Herblock showing Barry Goldwater snarling at a pan handler "Why didn't your father inherit a department store"?).
As well as unfitting them for pretty much any policy-making position in government.
May 31, 2007 6:44 PM | Reply | Permalink
I think as few assumptions as possible about people is ideal when it comes to economics. I don't think economics needs a lot of assumptions about people. The goals are steady growth, minimal inflation and mild and few recessions. I would add that assisting those who are disadvantaged and as much liberty as possible are also extremely important goals of economics. Clearly these goals conflict with each other. The problem then is an optimization problem. Given this optimzation problem there are certain economic policies and certain economic techniques that have proved efficious. Putting in theories on human nature is thrilling but the difficulty is that now a science of human nature is totally speculative. Economic theory is best and most useful when dismal rather when dealing with the profound problems of human nature.
May 31, 2007 7:14 PM | Reply | Permalink
I really don't expect any supporter of NC economics to address my concerns above. Why? Because they can't: most NC economists are not able to really defend what they do.
All they can do is such as Delong does: reassert what they do as if this is a good justification for what they do. Claims about the desirability of equilibrim models, competition, and externalities is only "convincing" to someone who already thinks this is what is important to do in economic analysis. But this approach generally works because most outside the profession are intimidated by these terms and, so, the NC economist appears to have proved his/her case.
Intellectual fraud...you bet!
Again, I don't expect any supporter of NC economics to respond because, well, they are not able to really offer a good justification for what they do other than repeat what they do as if that is a justification.
(eggs folks on ;> )
May 31, 2007 7:16 PM | Reply | Permalink
I'm not sure that "dismal" is the right word to describe it, maybe sensible? Because when I think about bits of economic knowledge that are non-obvious yet important, the very top one for me is that "a country is not a company". That is, that analyzing open systems (corporations, individuals) is *very* different from analyzing closed systems (countries, continents).
As laid out in Krugman's very instructive (for me) 1996 article, "A Country is not a Company"
http://www.pkarchive.org/trade/company.html
Yet that's not a dismal insight. It's the opposite of dismal to some extent, because it implies that in some cases (a recession) there *is* an easy way out, that busts are not just punishments for booms, and that it often isn't necessary to purge the rottenness out of the system.
May 31, 2007 9:49 PM | Reply | Permalink
The above is an example of buying into the basic neoclassicist economic politics -- which happens to be the most important political product by far of the hard-line way economics is taught today -- that the purpose of government economic policy is to force the economy to work more and more like the perfect competition model.
That's a very bad idea, as we know from observing those efforts over the last several decades (the late 70s to now) and what the results have been, and then comparing that with the prior era of strong govt intervention in economies (the post-war era up to the early 70s). Economic growth was faster and societies were more egalitarian.
May 31, 2007 11:42 PM | Reply | Permalink
The proof of the pudding is in the eating. Neoclassical economics stands or falls on the basis of whether its models do a better job of explaining and predicting how the economy functions than do alternative approaches, and on that basis it has, on the whole, been successful. Would the above author please provide some examples of where a heterodox approach has been more successful than neoclassical economics.
June 1, 2007 12:11 AM | Reply | Permalink
Post hoc ergo propter hoc. It does not follow that policies to make the economy more competitive were the reason economic growth slowed down. Incidentally, deregulation does not neccessarily make the economy more competitive. It may just increase the market power of oligopolies.
But if government policies could make the economy work like the perfectly competitive model (not feasible) the result would only be EFFICIENT. There is no reason to conclude that it would be EQUITABLE. Whether one would consider it equitable or not would depend on one's welfare judgements. I personally would not consider it equitable. Among other things, policies to increase equality of opportunity would still be needed to offset the fundamental market imperfection that children cannot choose their parents.
June 1, 2007 12:35 AM | Reply | Permalink
"I think as few assumptions as possible about people is ideal when it comes to economics."
Things should be made as simple as possible BUT NOT MORE SO.
"I don't think economics needs a lot of assumptions about people."
George Akerloff has agued, in his Presidential Address at the American Economic Association meeting this January, that incorporating social norms into peoples' utility functions makes it possible to explain observed economic behavior that neoclassical theory so far has not explained very successfully. But note that this approach permits social norms to be incorporated into neoclassical economic theory.
However, this idea will not be welcomed by the New Classical School.
June 1, 2007 12:47 AM | Reply | Permalink
"Finally, the claim that NC economists can make statements about the "welfare" or "efficiency" properties of the real world by solving a wacko math model is so unsupportable that it defies belief."
That is name calling, not logical argument. Where is your proof?
The conditions for efficiency can be derived using the neoclassical models. But to make assertions about welfare, value judgements from outside of economics have to be added to the results of the theoretical models. Too often such value judgements are slipped in implicitly instead of being explicitly stated. This is something that rightly deserves to be criticised.
June 1, 2007 12:55 AM | Reply | Permalink
"But why any system should achieve or even aim towards some "equilibrium" needs to be argued and not merely asserted as "obviously necessary."
Economic theory includes extensive analyis of the existence and stability of equilibria. Stabiltity analysis examines whether market forces will be able to push the economy toward the relevant equilibrium or actually push the economy away from it.
June 1, 2007 12:59 AM | Reply | Permalink
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June 1, 2007 1:53 AM | Reply | Permalink
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June 1, 2007 1:55 AM | Reply | Permalink
Brad DeLong makes a very, very important point. Toolsets and methodologies must compliment the user's strengths and correct his/her deficiencies.
Frequently we see left leaning people too far gone on the happy-hippy Marxist talk; just as right leaning people are often too far gone on the free-market Social Darwinism speak. Both tend towards empty ideology.
Instead of delving further into the dogma of one's own sphere (bubble?) one should always make an effort to be open minded and dedicate time/effort to contrary opinions and other methodologies in technical fields.
June 1, 2007 3:35 AM | Reply | Permalink
"the neoclassical toolkit can be absolute poison"
Never more so when the tool in question is the efficient markets hypothesis. George Soros articulates a robust critique of the EMH - though really the critique is more properly directed at pointy-heads who regard the EMH as the holy grail, and practitioners (hello, LTCM) who forget that the EMH is just a model.
LTCM's equilibrium-based trading model was quite hilariously summarized by Britain's top regulator as follows:
"The LTCM risk model told them that the loss they incurred on one day at the end of August 1998 should have occurred once every 80 trillion years. It happened again the following week."
Absolute poison indeed.
June 1, 2007 5:12 AM | Reply | Permalink
A response, along with more pudding, will soon appear appended to the main thread. Right now I need coffee, to change the cat litter box, and more coffee.
June 1, 2007 8:22 AM | Reply | Permalink
Re CaptainPudding’s (response to one of my postings):
“Neoclassical economics stands or falls on the basis of whether its models do a better job of explaining and predicting how the economy functions than do alternative approaches, and on that basis it has, on the whole, been successful. Would the above author please provide some examples of where a heterodox approach has been more successful than neoclassical economics.”
Pulling a DeLong let me throw in some gratuitous jive talk: I must, first, unpack your request to provide examples of “better performing” heterodox models.
CaptainPudding is assuming that neoclassical economics (NE) and heterodox economics (HE) are concerned with predicting the SAME things and have the SAME idea of what exists within “the economy.”
And, so CP assumes, all we have to do is compare how well they predict this SAME stuff.
But this is an unwarranted assumption: NE has built within it theoretical and ideological notions about what is important to predict and what exists within the economy that are generated from its own vision of the world. What NE sees as important to predict might be different or partly different from what HE believes is important to predict. (If indeed predict we must!)
My question to CP is, “how do you know that you’re concerned with the right stuff in the economy? How to you justify your focus?”
This is a fundamental question that NE is not interesting in considering. NE assumes that “it is obvious” what they should focus on and, so, they don’t need to provide any justification for their focus. Ahhhh, if only intellectual activity was so simple!
(It is also possible that NE does a reasonable job at helping us understand some economic stuff but a really really bad job at helping us understand other stuff.)
CP would like to frame the question in this way: how well does HE predict the concerns of NE?
Sports analogy time! This is like a pole vaulter saying to a long jumper, “I will judge your athletic ability by now high you can jump!” This, of course, ignores the fact that the long jumper does a different athletic act than the pole vaulter. And then judging long jumpers as a group would involve: “I see your records of long jumping but it doesn’t look like you’re getting very high off the ground. You loser!” Our pole vaulter continues, “Here, long jumper, if you’re such a great athlete take this pole and show me what you got!” You might forgive the long jumper for thinking that the pole vaulter is missing some important point here.
But, so far, the above might appear to be a not-so-clever dodge to avoid an empirical death match between NE and HE. It might be. Quoting the philosopher Fats Waller, “One never knows, do one?”
But I will return later.
June 1, 2007 8:50 AM | Reply | Permalink
I think you missed my point. The perfectly competitive economic model is absurd, and I think we agree it has very little to do with the real world. So it's frustrating to see you arguing with it, even now. I hate to see your fine mind wasted debating with schizophrenics in an insane asylum, but that is apparently what 'mainstream' neoclassical economics forces people in the field to do, endlessly and without making any headway. It will not advance economic thinking for the real world to 'argue' with the crazy idea of perfectly competitive markets.
(About 'efficient': one person's efficiency is another person's inefficiency. Perhaps you meant 'economic efficiency'.)
I hope you can see in the crazy but very important context of currently dominant economic thinking how the reality of economic history can be helpful. Of course history is not a research laboratory or a mathematical equation, but it is quite clear on the relative prosperity of the pre-and-post Friedman-ite economics eras. I'll take that, and if I were a policymaker or politician I'd favor the policies that 'seemed' to be working during that prosperous era. (These included, importantly, 'infant industries' strategies, 'incomes' policies, and restricting the export of domestic capital).
As you know, the deregulatory argument when Friedman's economic thinking came to dominate policy has been that deregulation makes the economy more competitive, pushes it toward that 'perfect' econ 1A model. Of course this was not true, deregulation often makes the economy less competitive, and frequently such policies advance and entrench 'natural' monopoly and oligopoly. But it is utterly counterproductive to answer that argument with a search for alternative ways to advance us toward the perfect competition model. I think that is where you may be stuck.
Instead of still attempting unrealistically to advance reality toward a simplistic model of unknown real world effects, why not simply advocate economic policy that has seemed -- using real economic measures of real economies -- to work in the past? And if construction of models and theories is your orientation, then form theory around the facts of post-war history rather than the baby talk of Econ 1A.
June 1, 2007 9:08 AM | Reply | Permalink
Yet again, pudding and response appear below.
June 1, 2007 9:12 AM | Reply | Permalink
Re CaptainPudding's: "That is name calling, not logical argument. Where is your proof?"
Can you explain why the conclusions of an abstract mathematical model (built on seemingly untrue assumptions about people and the economy) tell us anything about the efficiency and welfare properties of "the real world" (tm)?
Hard to do except by unexamined assumption, right?
RE "The conditions for efficiency can be derived using the neoclassical models. But to make assertions about welfare, value judgements from outside of economics have to be added to the results of the theoretical models."
Is not a concern with "efficiency" (sic) a statement about what is valuable in the world? Is this not imposing (in a hidden fashion) a value judgment from the very beginning? (Of course how neoclassical economists define "efficiency" is a very unusual and not obviously valid).
In any case, neoclassical economics is infused by value judgments from the very beginning and the (apparent) excising of utility theory (and the rejection of Bergson-like social welfare functions) has not eliminated them.
Among the many ideas hidden in neoclassical theory is the claim that the only relevant information you need to know about how good an economy is is the consequences. (This makes it based on utilitarian theory despite the banning of happiness talk).
But, you know, I'm sure you know all this because you are obviously a well-trained economist.
June 1, 2007 9:33 AM | Reply | Permalink
Your statement doesn't seem to say anything as to why this is so important. Why do economic models need to have unique and stable equilibria?
June 1, 2007 9:57 AM | Reply | Permalink
If one keeps the limitations of the theory of perfect competition in mind, it actually does provide a useful first approximation for many individual markets, but certainly not all. In macroeconomics, it performs well for modeling the long run, but not the short run. So the model is far from useless. The problem with the New Classical economists is that they tried to turn it into a universal truth and force all of Macroeconomics to conform to it.
June 4, 2007 12:38 AM | Reply | Permalink