My old friend, and occasional co-author, Howard Reed has an excellent article just out in Prospect magazine. His theme is the failure of neoclassical economics.
As Howard argues:
After 10 years in the shadow of the crisis, the profession's more open minds have recognised there is serious re-thinking to be done. Behavioural economics, which takes the trouble to watch and learn from how real people interact in experimental settings, has moved from the margins to become a speciality that can win Nobel prizes. Under the auspices of the Institute for New Economic Thinking, Adair Turner has been floating radical ideas about the government printing its way out of debt. The “Rethinking Economics” initiative has brought together students unhappy with the old textbooks and academics willing to debate what they teach. This is all very much to the good.
But the truth is that most of the “reforms” have been about adding modules to the basic template, leaving the core of the old discipline essentially intact. My view is that this is insufficient, and treats the symptoms rather than the underlying malaise. The real problems go to the theoretical core of modern economic theory–the so-called “neoclassical” paradigm.
This has underpinned the academic discipline for well over a century, and has more recently come to warp public policy too. Its tentacles reach far and wide–from our universities, which are now run on economistic lines that do not deem the humanities worthy of a teaching subsidy, to the bewildering structures of the NHS internal market.
What we need is not more tweaks, but a “deconomics,” which decontaminates the discipline, deconstructs its theoretical heart, and rebuilds from first principles. This may sound melodramatic, and–coming from a career economist–perhaps perverse. I retain enough of an economist's instinct to be aware of the costs of starting over with an analytical blank slate. The admission of near total uncertainty would create a frightening void which could only be filled by vast and expensive new research. It can only be countenanced if the core tenets of “neoclassical” theory are not only awry, but so badly misleading that it would sometimes be better to operate without any theory at all. This, however, is the judgment that I have reluctantly reached.
I strongly recommend reading what Howard has to say thereafter. This is an incredibly helpful contribution to debate.
You may also want to read Prof Diane Coyle's response, the tone of which can be guessed from its opening paragraph:
Do the “tenets of neoclassicism” shape our day-to-day work as economists, as Howard Reed puts it in his ill-informed diatribe for Prospect? No–they do not.
From thereon the article is simply not credible. But failed philosophies never depart without a fight.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
So a part of the world knows that something is wrong but the people in control are doing very nicely, thank you. It’s almost like the situation I’m in where I know my vegetable plot needs digging over but I can’t afford to pay myself to dig it even though I have nothing else to do.
Rod White says:
” I know my vegetable plot needs digging over but I can’t afford to pay myself to dig it even though I have nothing else to do. ”
You’ll just have to do it voluntarily then. Get with the ‘Big Society’ ethos, Rod.
Have you forgotten the wise teachings of Dave ‘Piggy’ Cameron so quickly. 🙂
“I see what you mean about Diane Coyle’s response.”
You seriously think anyone sentient ‘may also want to read’ it ?
I’d be better employed polishing my toenails.
I am writing a response to it
Does it merit such recognition?
As I said, I haven’t bothered to read it.
It’s hard to summon up any enthusiasm to read a response which starts with a sneer – Is ‘ill-informed diatribe’ really what passes for ‘peer review’ these days?
Interesting….Howard Reed says:
“…any statement about the economy that goes beyond descriptive statistics (for example: “the annual rate of CPI inflation was 2.7 per cent last month”) is a value judgement…..”
I wouldn’t even grant him that as being not a ‘value judgement’.
CPI, and most other economic stats, are manipulated in particular ways. Inflation figures are collated in such away that housing costs may or may not be included. RPI is dependent on what is deemed appropriate to include in the ‘shopping basket’. Unemployment figures are massively malleable. And so on…
Figures are so often designed to make a case rather than be neutral measures free from political colouring. Numbers are more often used to bamboozle than to clarify.
I have tio admit I had that exact thought
COPI is decidely value judgemental
That’s a good point Andy – if I were doing the article again I wouldn’t have used CPI! Although most economic statistics contain hidden value judgements (e.g. the debate about how to treat illegal goods and services in GDP, the ILO definition of unemployed people, etc. etc…. there’s an interesting topic for an article or book in itself).
Indeed
Thanks for calling in Howard
Larry has given you a good review this morning in the Guardian
Of Howard’s article as a whole I would say: A very interesting article.
I don’t expect it will gain much traction because it demands people with ‘expert’ status would have to think. As Henry Ford observed, ‘Thinking is the hardest work there is which is why so few people do it’.
“In the beginner’s mind there are many possibilities but in the expert’s there are few.”
Andy,
“I don’t expect it will gain much traction”
Depends what you mean by traction
No offence to Howard but calls for an overthrow of neo-classical shite are hardly new, certainly not in this century, and they have accelerated since the GFC.
Diane Coyle says in her rebuttal of Howard Reed
“Most economists, though, and especially those working on areas relevant to public policy, take care to separate technical or empirical judgements from the more value-laden aspects.”
Aye Right. 🙂
And I find this telling: “Almost everybody agrees that macroeconomics–which looks at growth, inflation, interest rates and the economy as a whole–is in a troubled state. But this area is a minority field: contrary to popular belief the great majority of economists don’t study it.”
Minority field it may be but getting the foundational principles right is arguably fairly fundamental and and that we are not doing this (or perhaps belatedly thinking about doing some research to ‘to encourage some fresh approaches’.) seems to me validates much of the thrust of Howard Reed’s case.
“What we need is not more tweaks, but a “deconomics,” which decontaminates the discipline, deconstructs its theoretical heart, and rebuilds from first principles.”
I am wondering whether, less radically, as a start, we should just take seriously what neoclassical economics really says. For example, looking at a classic textbook by Mas-Colell-Whinston-Green, the Part III on Equilibria contains one chapter with a simplified model in which equilibria exist and then 4 further chapters showing that the equilibria approach to economics does not work anymore if the model is extended ever so slightly to make it a little more realistic.
The problem seems to me to be not in the results that economics has accumulated but rather in the way that they are interpreted.
Howard makes clear that this is known – and then ignored
But let’s also be clear, the model makes that possible
It does, again as Howard says, treat equilibrium as the norm and then anything lese as deviance
ovcers powerful messages. In effect is is ‘comply or explain’ and ‘expect a hard time if you have to eplain’ so it is easier not to do so.
This is the real problem. Everyone knows it is broke: getting people to admit it is soemthing else.
Howard Reed is right and where better to start than a study of money . Given the extent of the ignorance among both economists and the public at large as to how money is created in the 21st Century and its inextricable connection to tax how could we even imagine a new economics that left out money like the current one does. As Steve Keen put it so succinctly a few weeks ago ‘ Fundamentally we do not live in a barter economy . Everybody except economists realise that . Economists model the world as if it’s a barter system. They leave money out of their thinking entirely . No banks whatsoever. No money is necessary . Everything’s barter . And then they start giving guidance about how much money you should create . In their theory the only thing money creation can cause is inflation . They completely ignore the actual process of creating money . If you live in the real world ….it uses money . ‘
David Mamet said it so well ‘ Everyone needs money , that’s why they call it money ‘.
[…] Reed has argued that we need to rebuild economics, and I agree. He calls the process deconomics beause it requires a deconstruction and rebuidling of all that […]
“failed philosophies never depart without a fight.”
Paradoxically it was Milton Friedman himself, in a 1950’s essay called “Neo-liberalism and its Prospects”, who may have nailed that particular point by arguing that legislators and other people of influence who came of age holding the values or beliefs of a certain era, retained those attitudes until they retired (or died). Therefore to get a major, philosphical shift you have to wait for generational change.
He was basically saying that neo-liberalism wouldn’t have any great prospects until the legislators of the 1950’s and ’60’s had moved on. Needless to say he was more or less right in that instance. Its here in the first two paragraphs:
https://miltonfriedman.hoover.org/friedman_images/Collections/2016c21/Farmand_02_17_1951.pdf
“Men may deviate in emphasis from basic social values and beliefs but few can hold a thoroughly different philosophy, can fail to be infected by the intellectual air they breathe”.
‘Infected’ indeed.
Marco,
“…Therefore to get a major, philosophical shift you have to wait for generational change…..”
They shoot horses don’t they ?
Perhaps that would be regarded as harsh, but maybe old professors who lose their faculties should lose their faculties. 🙂
Ow….
Actually, I agree
[…] noted Howard Reed’s erudite and timely essay on what he has called Deconomics on Saturday. The original was posted in Prospect, who also […]
[…] ideology was key here: I hate to say it, but that exactly proves Howard Reed's point on economics. So what can be done? This is the Guardian's […]
I note that the decade’s most influental economists *outside banking* come from a background in the social sciences – sociology and ethnography.
Thomas Piketty, David Graeber, and Sudhir Venkatesh spring to mind.
Nile says:
“I note that the decade’s most influental economists *outside banking* come from a background in the social sciences — ….”
The which makes a lot of sense. If Economics is not a social science WTF else is it ?
It sure as hell ain’t physics. And only imperfectly susceptible to a mathematical analysis.
Arguably it could be classed with theology or religious studies, but I think they are still firmly within the social sciences by most peoples’ reckoning.