How to criticise economics

Aditya Chakrabortty wrote a characteristically acute and provocative column in yesterday’s Guardian about the sorry state of economics. Often I agree with him wholeheartedly, but not this time, not entirely.

There is certainly a need to reform the economics curriculum, as demanded by the wonderfully engaged students in the University of Manchester’s Post-Crash Economics group or in Rethinking Economics. This is why I’m enthusiastically helping Professor Wendy Carlin of UCL in her newly-launched project to develop a wholly new undergraduate curriculum – the launch workshop is taking place next Monday. I’ve been advocating curriculum reform since before the crisis – in The Soulful Science – because students have not been taught much or any of the most important recent developments in economics, from behavioural models to randomised control trial methodology. What’s more, as Michael Joffe of Imperial College points out in an article in the current Royal Economic Society newsletter, undergraduate textbooks often contain factual inaccuracies – he picks on the conventional model of the ‘U-shaped’ average cost curve. No serious subject allows textbooks to be just wrong.

(THE SOULFUL SCIENCE: WHAT ECONOMISTS REALLY DO AND WHY IT MATTERS (REVISED EDITION) (REVISED) ) BY COYLE, DIANE{AUTHOR}Paperback

There is also a strong whiff of denialism among some economists – mainly, I would say, in American universities and right-wing think tanks. There are people who do not see the crisis as any reason to reflect on how they believe the economy works. This is hard to understand – it calls for a psychologist, perhaps, or needs explaining in terms of the defence of institutional privilege. But the denialists are a minority, even though buttressed by the huge institutional inertia in the academic world, which rewards people for doing what they’ve always done and allows them to pat each other on the back for being so similar to themselves.

Where I part company with Aditya’s column and other similar responses is in the turn to the heterodox, the people for whom the mainstream will always be wrong. The column, and a list of its anti-economics economics books Verso put out in response, both highlight Philip Mirowski’s new book Never Let A Serious Crisis Go To Waste. I’ve got a review coming out in Antipode soon – for now, I’ll just say it’s a polemic, not a work of serious scholarship. It doesn’t have anything interesting to say about the state of economics.

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown

Chris Dillow as always is a must-read on this question of how to be critical of economics without jumping the shark. Noah Smith earlier this year blogged in a similar vein – his target was the cult of Steve Keen, rather than Philip Mirowski. Alex Marsh has a new response to Chris Auld on this same question – what distinguishes good from bad criticism of economics? Interestingly, he suggests that internal critique is palatable while external critique is not – the old business about who is allowed to make the jokes. I’m sure there’s some of that, and have been introspecting for evidence of defensiveness. However, I don’t think that’s all it is.

The problem with so many critiques of economics is that they have the same flaw they see in the mainstream, namely abstraction. The critics have a different mental model of the world. They want economics to adopt their worldview. What it really needs, instead, is to move away from abstraction and engage deeply with evidence – both in terms of data collection and econometrics, and non-quantitative evidence in the shape of history and context. The future for a revived economics will be in becoming a deeply, genuinely empirical subject, not a playground for competing political philosophies.

 

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16 thoughts on “How to criticise economics

  1. The data is only as good as the theories used to interpret it. Economists have a ‘worldview’ every bit as much as their critics. And if it is true that economics is somehow fundamentally wrong, its going to be tricky to find a way of that loop.

    • Oh, I think we do, but part of that worldview is that you change your worldview in the light of accumulated evidence – economics is an Enlightenment subject, patron ‘saint’ David Hume. Likewise, you can’t refute one world view with another – you need more.

  2. Keep on the good work. But it’s a long road. Nobel prices will have to be awarded to institutions like the ILO, which orchestrate the conceptual discussions behind our employment/unemployment statistics. Models based upon ‘loanable funds’ ideas will have to make place for models which are consistent with the utterly chartalist nature of monetary statistics. ‘General equilibrium’ ideas will have to make way for input-output models and supply and use tables. The weird thing: if it is consumer behaviour of monetary statistics or national accounts – the data and text- or handbooks for this transformation are already available and the estimated data are conceptually consistent with the wider body of economics, like organizational theory, consumer studies, business accounting, marketing and and the like. But not with neoclassical utility based economics. There is a reason why much of the mainstream curricula do not pay attention to the concepts behind the measurement of the economic world or the way how (macro-)data are measured.

  3. Michael Joffe’s evidence against the U-shaped average cost curve is actually pretty weak. He cites two sources.

    The first source is Eiteman and Guthrie’s 60 year old survey that basically just asked responding firms to pick which cost curve best represents their business and makes no attempt to determine whether they actually understand what they’re looking at.

    The second source is Blinder’s book “Asking about Prices”, which is much more rigorous and finds similar results for manufacturing. But you have to take those results with a grain of salt, since Blinder explicitly notes that respondents had a hard time even conceptually distinguishing between fixed costs and variable costs! Joffe even admits that Blinder’s methodology can be questioned (in a footnote of course).

    I honestly don’t see how you can jump from this evidence to saying that teaching a U-shaped average cost curve is “just wrong”. The data do not warrant this conclusion.

    • Of course I didn’t read all his sources, but what he says is absolutely consistent with my experience over many years looking at different companies’ cost structures either in competition inquiries or consultancy. The fact that business people can’t conceptualise their costs in the way economists do is not decisive.

      • “The fact that business people can’t conceptualise their costs in the way economists do is not decisive.”

        Agreed.

        So citing surveys of business people that are based on how economists conceptualize costs is…just wrong. Right?

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  5. There are people who do not see the crisis as any reason to reflect on how they believe the economy works. This is hard to understand – it calls for a psychologist, perhaps, or needs explaining in terms of the defence of institutional privilege.

    “The state of macro is good” — or isn´t it (who out of the “minority” was the one talking about this…. hm… ) ?

    The future for a revived economics will be in becoming a deeply, genuinely empirical subject, not a playground for competing political philosophies.

    Looking back – was economics a playground for political (or more ideological) philosophies (or better: “schools”)?
    I think that people change not or very slowly their mind. That´s normally (more) easy for young people wich have not told a generation of students “wrong”(tm) tales about economy.

    Reading in econ-journals – the same names as before, changing their mind? What do you think?

  6. Whatever the situation with the supply curve–and, I agree: economists need to interrogate firms’ management acounting data, not their managers– pretty much every firm appears convinced that it faces a downward-sloping demand curve.

    Again, solid data are needed. In the mean time, however, a modern survey course for non-advancing students should teach the monopoly model, not the perfect competition one, because it better describes the world as it appears to be right now.

    As well as the basics of preferences, incentives and scarcity, and the importance of flows rather than stocks, and the accounting identities, I suggest sketches of the social, institutional and regulatory scaffolding required for markets to function, increasing returns to scale and agglomeration, uncertainty, frictions, constraints, asymmetries, externalities, together with a survey of the pitfalls and traps of data interpretation: these could be the basis for such a course. And of course the examples ought to shift away from manufacturing towards services which is by far the largest, and only growing, sector. And even in manufacturing, Adam Smith’s pin factory needs to be disaggregated, with one worker in Malaysia, one in Bangladesh, two in China, and three (in sales, design, and legal & finance) in Scotland.

    Such a course would be a very quick skate over the surface, but that’s the point. The take-away message ought to be: the topic is complicated. Current models are contingent, fragile and weak–we need more data, and also to learn how to interpret them. Or: we have fairly good theory for some phenomena; for others, it looks like we might have something in another generation or two if we keep plugging away.

    I’m focussing on the survey course because it’s the only exposure to economics that the vast majority of people get. It’s vital that the course should lean against the idea that there are simple, universal “right answers”.

    • I agree with you. My impression is that business schools are much more likely to teach like this already – closer to what businesses are actually like.

      • “pretty much every firm appears convinced that it faces a downward-sloping demand curve.”

        Interestingly, there are counterpoints to even this argument in certain industries:

        “Where reported … business enterprises stated that variations in their prices within practical limits, given the prices of their competitors, produced virtually no change in their sales, and that variations in the market price, especially downward, produced little if any changes in market sales in the short term. Moreover, when the price change is significant enough to result in a non-insignificant change in sales, the impact on profits has been sufficiently negative to persuade enterprises not to try the experiment again.”

        http://socialdemocracy21stcentury.blogspot.co.uk/2013/10/lees-post-keynesian-price-theory_26.html?m=1

        Perhaps this suggests that peoples’ preferences follow discontinuous ‘zones’ of acceptable prices, outside which they will buy nothing at all but inside which they will buy some previously decided amount. This would be quite consistent with behavioural traits such as ‘satisficing’.

        Obviously, as you say, more data is needed. But it’s curious nonetheless.

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  8. “The future for a revived economics will be in becoming a deeply, genuinely empirical subject, not a playground for competing political philosophies.”

    Although I agree that economics must be a genuinely empirical subject, and note that you mention behavioural models, economics is not, nor can it ever be, value-neutral.

    • I didn’t mean to imply that. What I intended to say is that economics can’t be only or mainly theoretical or about political philosophy, whereas many critics of economics are all/mainly about the philosophy.

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