Heretics in Economics

Below is a bit from an intersting blog entry from Steve Keen, an Australian economist who wrote the book Debunking Economics: The Naked Emperor of the Social Sciences. The book was interesting but I found it too idiosyncratic and pedantic. On the other hand, I found the find to be relevant and pertinent:

Neoclassical economics contributed directly to this crisis by promoting a faith in the innate stability of a market economy, in a manner which in fact increased the tendency to instability of the financial system. With its false belief that all instability in the system can be traced to interventions in the market, rather than the market itself, it championed the deregulation of finance and a dramatic increase in income inequality. Its equilibrium vision of the functioning of finance markets led to the development of the very financial products that are now threatening the continued existence of capitalism itself.

Simultaneously it distracted economists from the obvious signs of an impending crisis—the asset market bubbles, and above all the rising private debt that was financing them. Paradoxically, as capitalism’s “perfect storm” approached, neoclassical macroeconomists were absorbed in smug self-congratulation over their apparent success in taming inflation and the trade cycle, in what they termed “The Great Moderation”.

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Given how severe this crisis has already proven to be, the reform of economic theory and education should be an easy and urgent task. But that is not how things will pan out. Though the “irresistible force” of the Global Financial Crisis is indeed immense, so to is the inertia of the “immovable object” of economic belief.

Despite the severity of the crisis in the real world, academic neoclassical economists will continue to teach from the same textbooks in 2009 and 2010 that they used in 2008 and earlier (laziness will be as influential a factor here as ideological commitment). Rebel economists will be emboldened to proclaim “I told you so” in their non-core subjects, but in the core micro, macro and finance units, it will be business as usual virtually everywhere. Many undergraduate economics students in the coming years will sit gobsmacked. as their lecturers recite textbook theory as if there is nothing extraordinarily different taking place in the real economy.

The same will happen in the academic journals. The editors of the American Economic Review and the Economic Journal are unlikely to convert to Post Keynesian or Evolutionary Economics or Econophysics any time soon—let alone to be replaced by editors who are already practitioners of non-orthodox thought. The battle against neoclassical economic orthodoxy within universities will be long and hard, even though its failure will be apparent to those in the non-academic world.

Much of this will be because neoclassical economists are genuinely naïve about their role in causing this crisis. From their perspective, they will interpret the crisis as due to poor regulation, and to government intervention in areas that should have been left to the market. Aspects of the crisis that cannot be solely attributed to those causes will be covered by appealing to embellishments to basic neoclassical theory. Thus, for example, the Subprimes Scam will be portrayed as something easily explained by the theory of asymmetric information.

They will seriously believe that the crisis calls not for the abolition of neoclassical economics, but for its teachings to be more widely known. The very thought that this financial crisis should require any change in what they do, let alone necessitate the rejection of neoclassical theory completely, will strike them as incredible.

In this sense, they are like the Maxwellian physicists about whom Max Planck remarked that “A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it” (Kuhn 1970, p. 150).

But physics is charmed in comparison to economics, since it is inherently an empirical discipline, and quantum mechanics gave the only explanation to the empirically quantifiable black body problem. Planck’s confidence that a new generation would take the place of the old was therefore well-founded. But in economics, not only will the neoclassical old guard resist change, they could, if economic circumstances stabilise, give rise to a new generation that accepts their interpretation of the crisis. The is how the success of the Keynesian counter-revolution came about, and it is why we have we entered this crisis with an even more rabid neoclassicism than confronted Keynes in the 1930s.

The first thing that the global financial crisis should therefore do to economics is to galvanise student protest about the lack of debate within academic economics itself, because dissident academic economists will be unable to shift the tuition of economics themselves without massive pressure from the student body.

I should go back and re-read Keen's book. It may well be that my initial impression was formed because of the novelty of his ideas and not the presentation style. At the time, I was less familiar with the many schools of thought trying to break out of the neoclassical school of economics. It may well be that my initial rejection of Keen stems from a common problem: the older you get, the quicker you are to reject something that doesn't fit you preconceptions and experience. Sadly we lose that child-like joy in novelty and new information.

But life is short. I doubt I will go back to his book. But I will now keep a sharper look-out for things by him to see if he lives up to my new-found appreciation for his ideas.