1. As the title of your blog suggests, you’re critical of the current state of economics in practice, in classrooms, and in popular discussion. You’ve argued that (at least part of) the solution is econometrics: an inductive, evidence-based approach rather than the deductive, axiomatic approach of mainstream/neoclassical/marginalist economics. In a nutshell, what is the problem with the current pedagogy of most econ classes? And what would an econometrics-based alternative look like, in terms of concrete lessons?
I think economics hamstrings itself through the insistence on building models up from axiomatic foundations. Instead of learning economic history, how people and institutions behave, how policy is formed and how research is done, students are taught to memorise and regurgitate entire theories, often unquestioningly. For example, far more emphasis is placed on memorising the axioms of consumer and producer theory than discussing how people actually consume and produce. This kind of stuff might be useful for those who are going to go into academia, but most people who study economics are not and so they don’t need to know these abstract theoretical foundations. Most courses actually refrain from teaching undergraduates econometric theory while managing to teach them econometrics in practice, so clearly it’s possible to avoid this kind of abstraction. I’m not saying that all of these theories are wrong, but neither does their complexity and mathematical nature give them a status above other approaches. After all, you can solve a bunch of equations and say they are supposed to be models of the economy, but if – and this is true in a lot of undergraduate economics – there are no rigorous attempts to relate these equations to the real world, do they really qualify as ‘models’? Or are they just systems of equations? The relevance of this question becomes especially apparent if you start to think about the properties and units of some of the variables in economic theory, which all too often are not well-defined (utility and total factor productivity spring to mind).
2. You also defend (parts of) heterodox economics, and identify as a socialist. What’s the biggest insight of heterodox economics that students in intro econ classes are missing out on? And what’s the biggest mistake that heterodoxists continue to make?
It’s not an original answer, but the biggest thing missing from economics is the study of how banks work. Despite economists’ frequent protestations that they themselves understand banking, the textbooks still promulgate the idea that banks first receive money and then lend it out. This model is completely at odds with reality – as central bankers, heterodox economists and many others have been pointing out for a long time. It was a major factor in why the dominant macroeconomic models missed the crash and continue to misunderstand it. The biggest mistake heterodox economists make? Well, I feel like I’m not qualified to answer that question, but I’ll try anyway. Heterodox economics is very negative – I mean, just look at the title of my blog! This is understandable because the grip ‘mainstream’ economic thinking has on debates inside and outside the discipline can be quite frustrating and often has to be countered explicitly before actual debate can begin. However, ultimately you could have the most impeccable critique of a theory possible, and yet when people are faced with the choice between existing theory and nothing, existing theory will always win. Old ideas are overturned when new ones come along, and that should be the focus of heterodox economics. I’d also suggest heterodox economists should focus more on learning the kind of dynamic mathematics used in weather modelling, as economists frequently try to pull the mathematics card on their critics, despite the fact that the maths used in economics is actually pretty basic by the standards of physicists/mathematicians).
3. “Wait, what? You’re a socialist and an economist? That’s like a flat-earth geographer!” Please respond.
I’m sure most economists would deny that I count as an economist. However, this kind of incredulity makes the interconnected nature of politics and economics quite clear. Economists may argue that they simply study “how the world works” (as the authors of Freakonomics do), rather than “how it should work”, but in practice all this means is that they take existing social reality (ie capitalism) as a given and therefore place it outside the bounds of debate. The result is that few economists, even heterodox ones, are able to have serious historical debates about capitalism – all too often their models (for example the Domar Serfdom model) seem to imply that capitalism was always there and that other things just got in the way. After all, the best way to win debates about the status quo is not to have them! Essentially, I think there is a way that economic models serve to obscure and abstract from the inherently social nature of the discipline. Economic theory gives a lot of prevalence to the impersonal price mechanism, which supposedly coordinates scarcity and preferences. Yet ultimately every transaction, employer-employee relationship and so forth is a social relation between different people, between groups of people or between people and society. This doesn’t mean there aren’t real, economic restrictions on what we can and can’t do, but the role of these is overstated in economic models. In fact, studies tend to suggest prices are much less important in the real world than economic models imply. What does this rambling have to do with socialism? Well, all the talk of the importance of incentives, the information conveyed by prices, and of decentralisation becomes a bit empty when you realise that underneath this, capitalism largely relies on people cooperating with each other. This occurs inside and outside institutions and also when there’s no obvious or immediate gain from doing so. The idea that we can take prices and capitalism away, and still produce and allocate resources effectively, becomes more feasible once you realise this. (Note that by ‘socialism’ I mean worker ownership, not state ownership, of production).
4. You’ve singled out textbook author Gregory Mankiw as an apologist for the 1%. The majority of economics textbooks used at Seattle Central Community College (home of the Central Circuit) are authored by Mankiw. What advice do you have for our economics students and faculty? Is there a better text(s) you’d recommend?
In fairness to Mankiw and other economists, neither his textbook nor many of the others endorse the kind of caricature conservatism in that paper, which was deservedly mocked both inside and outside the profession. Economics may have something of a ‘pro-market’ or conservative bias, but I don’t think that’s necessarily the fundamental issue with its textbooks. The main advice I’d give to students is to think of what they are learning as just one set of theories, one way of viewing the world. You can (and should) make up your own mind about how much of it you believe, but don’t be given the impression that the assumptions and models you learn are timeless regularities that should always form the starting point for economic debate. I’d recommend the book ‘Modern Political Economics’ by Varoufakis et al for an interesting overview and history of economics as a discipline.
5. How is economics different from other social sciences? Does it have more authority than it deserves? Do economists have physics-envy?
For whatever reason, the mathematisation of economics, and the relative certainty (and brevity) of the answers it offers, seems to have conferred upon it a special status. Take a utility-maximising individual, some cost-benefit analysis and/or the idea that “people respond to incentives”, and you can find an answer to any social problem you want: for example, Gary Becker’s idea that criminals commit crime because the benefits outweigh the costs. Whether or not this answer is relevant often doesn’t matter, as its seeming rigour and precision elevates it above the uncertainties of other social sciences. The oft-used self-interest clause also makes economics seem harsh and realistic next to sociological and political proclamations that people are generally good. Yet the fact is that empirically, economists’ explanation of social phenomena is often incredibly lacking.
Now, I actually tend to agree with one of the forefathers of modern economics, William Stanley Jevons, who said that “economics deals with quantities, therefore it should be mathematical”. However, I think economists have jumped from thinking maths can be used to give us important insights to thinking that using it necessarily gives important insights. I rarely see an economist acknowledge that a particular mathematical model is inapplicable and tells us nothing. So, economics overuses maths, and in this sense it does seem to have a touch of the classical physics notion that everything can be reduced to calculus. If you ask me, economics is more comparable to biology, which makes some use of maths but also uses a lot of other research methods. The focus on simple, ceteris paribus causal mechanisms between isolated variables, is useful and important, but it only forms one part of the picture. More pluralism in methodology and research methods would be a great thing to see in economics.