Ezra Klein: Forgetting The Neoclassics

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May 29, 2007

Forgetting The Neoclassics

The TPM Cafe discussion of Chris Hayes' article on heterodox economist is very interesting, but seems to be conflating a few different things. There's one question as to whether herd-think and job pressures and social influences subtly suppress heterodox work and lead to a misleading impression of the general findings of economists. And then there's another, which Chris went into in his article, as to whether the neoclassical model is a proven failure, and must now be replaced by something different.

That's a much sharper critique, and one that requires more evidentiary support than I'm currently seeing. Indeed, I find myself in line with Tyler Cowen's request "to see a simple list [of failures and rejected, but correct, theses] and start the debate there." There's no doubt that economics, like any other profession, has its sacraments, protects it orthodoxies, and exhibits group-think -- but those tendencies have, in my read, manifested more in the emphasis of certain conclusions over others (free trade boosterism over Dani Rodrik and Alan Blinder style concerns) than in the entire profession hewing to an outdated and insufficient intellectual framework. I'd be willing to believe differently, but I'm not seeing the proof. The profession actually seems quite flexible and adaptive when you dig into it. It's the public face which is somewhat less expressive.

May 29, 2007 in Economics | Permalink

Comments

Wrong link.

Posted by: Eric the Political Hack | May 29, 2007 8:59:37 PM

I cannot do a list, but I can bring your attention to one, fairly profound difficulty: the economic theory of production, as embodied in the production function.

The production function asserts that output is a function of inputs. The production function was introduced into economics as a theory of income distribution among the factors of production, but no one ever seems to notice that it does not fly as a theory of production. For one thing, it is not even a proper mathematical function (a problem inadequately addressed by asserting that "maximum" output is a function of inputs).

A few minutes of thought about production would lead to the conclusion that a realistic analysis of the economics of production would include, at a minimum, recognition of the role of energy, and the management or control of the process. The second law of thermodynamics dictates that any production process is going to (co-)produce waste and error.

This faulty theory of production, lying at the very foundation of economics, has serious consequences for the ability of economists to contribute, for example, to the problems posed by peak oil and global warming. Though productivity is logically related to energy consumption, and energy consumption is related pollution, and management/control of production processes is related to both productivity and pollution, economists have no framework, and no intuition, relating them. (At least, none any more sophisticated that the one you, dear Reader, have acquired by reading this paragraph.)

So, we get really ridiculous discussions about how our descendants in 2099 are going to be x times "rich" and more productive than we are, due to economic growth, and so, maybe, they should bear the costs of coping with global warming, or something. No recognition that productivity might be constrained by constrained energy consumption; no recognition that pollution might be related to energy consumption.

Similarly, in discussions of changing trends in income distribution, there's a lot of nonsensical hand-waving about high-skilled workers and low-skilled workers and why CEOs, maybe, earned those multi-million dollar compensation packages. To the extent that off-the-cuff analyses have any theoretical basis, it is the marginal product theory of income distribution, derived -- you guessed it -- from this same wholly inadequate theory of production: the production function, a theory that does not say anything at all about the role of management control in the production process.

Strictly speaking, what the production function says about the problems of management and technological engineering is that those problems are "assumed" to be solved. That assumption is contained in the assumption that "maximum" output is a function of inputs, the very assumption that makes a production function a mathematical function, in the first place.

Over half the U.S. population is employed by organizations, which have more than 100 employees. Bureaucratic managment and control of the production process has been an increasingly prominent feature of capitalism, at least since the founding of the first railroads around 1830. Nearly one hundred and eighty years later, economists have very little to say about them, and have yet to modify their theory of production to incorporate either management or fossil fuel energy -- two of the most prominent drivers of economic growth in the industrial revolution.

hmmpfh!

Posted by: Bruce Wilder | May 29, 2007 9:32:04 PM

The profession actually seems quite flexible and adaptive when you dig into it. It's the public face which is somewhat less expressive.

wow. amazing how two readers can come to such different conclusions on what the convo has said to date.

First, flexible and adaptive in the 'top' departments of universities and the premier academic journals? Excuse my snark, but abuse of the tenure process and selecting only the orthodox for advancement, setting up parallel departments to give the ascendency to the neo-classicists, refusal to publish or recognize any challenge to the existing order, and abusing those hardy souls that are within the order that stray from the ideology - such that they abandon that stream of inquiry, are not a sign of flexibility and adaptivity.

Second, the evidence seems persuasive that when the profession interacts with public policy, it is straight orthodoxy that gets presented, accepted and adopted by legislators, the media, and corporate backers. The exceptions seem to be few and isolated.

Now, granted, this isn't as rigid as control of party doctrine in the old Soviet Union or today's China, but it is in the running for ideology control. It seems best when listening for signs of tight control that eliminates varying new ideas to realize that only the bravest and best will dare to speak out, and then only up to what they perceive are the limits of organizational tolerance. The rest will conform because they must if they wish to maintain their personal security.

To someone like our host who seems to thrive in looking for and understanding complex phenomena, I sure would tell them to stay the hell away from an academic career in economics - unless they wanted to pass the gate marked 'abandom hope all ye who enter here' regardless of warnings.

Posted by: JimPortlandOR | May 29, 2007 10:05:04 PM

Issues with transitivity of preferences, cost of information, dominance of satisficing over optimization, inability to define the utility function in any non-circular manner, inability to explain altruim (not to mention the Free Software movement) without reference to sociobiology, information asymmetry (as noted by Atrios today), winner-take-all behavior, agency problems, capture of regulatory agencies, outright purchase of legislative bodies (think copyright law in the US).

I could go on, but I am sure the neoclassicists will wave all these off with an epicycle. For some odd reason the advice that leading economists (all neoclassicists) have given to the public sector hasn't changed despite these challenges however: send more jobs overseas and give the CEOs 300% raises.

Cranky

Posted by: Cranky Observer | May 29, 2007 10:14:45 PM

Some interesting reads on classical economics

http://www.optimates.us/Greatbooks.htm

Posted by: GBRL | May 29, 2007 10:32:44 PM

There's one question as to whether herd-think and job pressures and social influences subtly suppress heterodox work and lead to a misleading impression of the general findings of [journalists!?!?!!!]

Posted by: rk | May 29, 2007 10:36:03 PM

Elitist Great Books Reading List

http://www.optimates.us/Greatbooks.htm

Posted by: Elitist Great Books Reading List | May 29, 2007 11:01:30 PM

Elitist Great Books Reading List

http://www.optimates.us/Greatbooks.htm

Posted by: Elitist Great Books Reading List | May 29, 2007 11:02:56 PM

I am an Econ prof and the I think the answer to the question depends on the topic. The reaction of my colleagues to Blinder's WSJ editorial was: "isn't that just what we teach our students?" And it is. But it isn't what Economists typically say in the paper because there is this idea that "the public" can't be trusted with a subtle argument and therefore the old "classical" verities, which are often counter-intuitive, need to be emphasized even though "we" understand their limitations.

Recall that Aklerlof, Stiglitz, etc. all got published very easily. And it would be hard today to publish a paper on true classical trade theory, whereas in the "new" standard theories it is easy to show problems with trade. So, the problem is about "public statements", not research.

On the other hand, a lot of self-labeled "Heterodox Economists" are folks who don't want to learn math and who want to lecture folks on the moral correctness of left-wing politics, without doing much research. When journals don't publish their op-ed pieces, they say there is a conspiracy against them. Bah.

Posted by: Econ Prof | May 29, 2007 11:19:09 PM

I love how guys like Blinder will complain about how the orthodoxy of the profession is hurting them somehow, when Blinder, Krueger, etc. are all professors at top programs and could easily get hired anywhere. Hell, I'm sure even Chicago would hire guys like Blinder, even if Heckman would throw a fit (but it seems like he does that over everything).

If you don't believe this, just look at who employs Richard Thaler who co-authored many of Kahneman's papers that are the foundation of behavioral economics. He is at Chicago.

Very good post Ezra, I'm glad to see that you were reasonable in your analysis of the article.

Posted by: Jar Jar Binks | May 29, 2007 11:48:27 PM

Dearest Ezra,

I may not be a vaunted EconProf, but at least I know my history. Perhaps the vaunted EconProf is just an arrogant dipshit.

Recall that Aklerlof, Stiglitz, etc. all got published very easily -- Not according to Akerlof they didn't

So what sort of EconProf a) doesn't know it's Akerlof and not Aklerlof, and b) doesn't know how hard it was for Akerlof to get published? Maybe its a neoclassical EconProf with his head up his ass.

Posted by: jerry | May 30, 2007 2:14:08 AM

Uhh, you do realize that Akerlof is a neoclassical economist & this paper in particular is part of the general canon of graduate level economics?

I know you might be in over your head here, but simply tossing around buzzwords like "neoclassical" wedded to ad hominem attacks doesen't trick people into thinking you know what you are talking about.

Posted by: DRR | May 30, 2007 8:09:41 AM

Apparently the good work being done at the research level doesn't make it to the public. Fundamentalist Econ 101 types make up a big part of the hard-core free-market right.

The major products of the econ biz are, in order, 1.) undergrad teaching, 2.) policy recommendations at various levels 3.) influence on public opinion and 4.) high-level research. If the high-level research doesn't make it to levels 1, 2, and 3, isn't the profession culpable? Doesn't economics have quality control standards?

Note also that Akelof and others are criticized for being successful but still complaining, whereas heterodox economists are dismissed because they aren't successful. So whose criticiwsm would be regarded as valid? This is a shell game.

Economists have entrenched institutional power and they're not going to relinquish it voluntarily.

Posted by: John Emerson | May 30, 2007 9:24:59 AM

I don't want to beat a dead horse, having made this same point everywhere.

Neo-classical economics or perhaps better Friedman/Rand perhaps even Mises/Hayek economics is not particularly grounded in empiricism, it is fundamentally ideological, it has drawn the straight line Markets=Freedom. I found the most straightforward expression of this at the book review of Road to Serfdom at the Mises Institute site.

Actually I found two. The first is a literal cartoon version, in 18 panels it shows how government planning leads to job firing by firing squad.
http://www.mises.org/TRTS.htm
Note, this is not a parody, this is the Randite/Hayekian vision of reality. Now for the book review of Road to Serfdom with some bolding added.
Road to Serfdom

"What F.A. Hayek saw, and what most all his contemporaries missed, was that every step away from the free market and toward government planning represented a compromise of human freedom generally and a step toward a form of dictatorship--and this is true in all times and places. He demonstrated this against every claim that government control was really only a means of increasing social well-being. Hayek said that government planning would make society less liveable, more brutal, more despotic. Socialism in all its forms is contrary to freedom.
Nazism, he wrote, is not different in kind from Communism. Further, he showed that the very forms of government that England and America were supposedly fighting abroad were being enacted at home, if under a different guise. Further steps down this road, he said, can only end in the abolition of effective liberty for everyone."

The slippery slope down the Road to Serfdom starts with the very first step. I don't suggest that every Chicago School economist has totally internalized this, but it does a long way towards explaining the vehemence they show whenever someone challenges their views of Free Trade or Minimum Wage. For these people arguments that start from a position of Equity are no different than arguing 'From each according to his means, to each according to his needs'.

The concept that through the democratic process we can come to some sort of rational balance between efficiency and equity is dismissed from the start. Government never being part of the solution, government always being part of the problem. It's not just a Reaganite slogan, it is the foundation of a belief system that permeates orthodox economics

Posted by: Bruce Webb | May 30, 2007 12:35:45 PM

DRR, I am not sure if you were responding to my post, but assuming you are...

Pointing out that someone identified as "EconProf" got his facts wrong and providing links is not an ad-hominem attack.

Saying that someone that that identifies as EconProf got their facts wrong may be an arrogant dipshit is not an ad-hominem attack. It is simple name calling.

An ad-hominem attack works in the other direction.

DRR is a mumbling idiot and therefore DRR has no valid arguments and shouldn't be listened to.

That would be an ad-hominem attack if anyone would make it.

Name calling is not the same as ad-hominem attack. You might be in over your head, but simply throwing arounds words like "ad hominem" really doesn't indicate you know jack shit about making an argument.

(BTW, I read Akerlof in graduate school, and my point was that while he finds it easy to be published now, he found it very difficult to get the original paper published, perhaps because it was considered heterodox.)

Now if you weren't attacking me, well carry on, then.

Posted by: jerry | May 30, 2007 12:42:26 PM

Of course, signing your posts "EconProf" is another logical fallacy, it is simply "appeal to authority"

My argument is better than your argument, not because I have better references or better facts or better equations but merely because I have credentials.

And we all know it is more likely that EconProf is 13 year old kid that just read Atlas Shrugged than an actual EconProf. The proof for that is that when you make four swings on the internet, the odds are you will hit a law prof's blog twice, than an econ prof's blog, and finally a myspace page. They are rarely so shy as to require a sig saying "EconProf"

Posted by: jerry | May 30, 2007 12:45:49 PM

The Notre Dame split put the formidable Amitava Dutt
http://www.nd.edu/~adutt/documents/CVAKD.pdf
into the heterodox department, and I'll betcha dollars to donuts that Dutt's CV is better, and his work more mathematically astute, than the hack who signed above as "Econ Prof." The math bit is a red herring.

If Econ Prof is right that heterodox work consists of moralizing op-eds then he (we can bank on the gender) is welcome to come up with examples. But so far not one of the heterodoxy-deriding economists I've run into online has the slightest familiarity with heterodox econ -- they take their own ignorance as evidence that there's nothing worth knowing.

Posted by: c | May 30, 2007 3:41:28 PM

How could Von Mises be considered part of the foundations of "orthodox economics?" Von Mises was, at the very least, highly heterodox, and at most, not an economist at all, but a praxeologist -- to use his own term for the kind of work he did.

Posted by: Julian Elson | May 30, 2007 6:26:17 PM

Bruce Wilder, go read some environmental economics, we spend a lot of time thinking about joint outputs (i.e. pollution wastes) and byproducts of production. the Premier Env. Econ think tank RFF has an extraordinarily detailed model of evey power generation station in the U.S. and its particular production process. This work is somewhat outside of the mainstream and Economics doesn't reward people much who spend a lot of time understanding particular production processes, but the models are out there and get published in environmental econ field journals.

I think its a real indictment of the profession that the gatekeepers at AER, etc. get bored with articles that go into real detail on various coal generation processes and what that means for a carbon tax. but there are real economists doing this work.

Posted by: CalDem | May 30, 2007 8:23:14 PM

Ezra, it doesn't sound much like you've dug into economics. Start with Akerlof's lecture. Recall Akerlof is made, and doesn't want to rock the boat.

Then, moving further afield, think for a minute about rational expectations, and try not to laugh.

Posted by: david | May 30, 2007 9:23:51 PM

Tyler Cowen wrote this:

Since so many homes were destroyed, the natural inclination is to build safer or perhaps impregnable structures. But that is the wrong response. No one should or will rebuild or insure expensive homes on vulnerable ground, such as the devastated Ninth Ward. And it is impossible to make homes perfectly safe against every conceivable act of nature.
Instead, the city should help create cheap housing by reducing legal restrictions on building quality, building safety, and required insurance. This means the Ninth Ward need not remain empty. Once the current ruined structures are razed, governmental authorities should make it possible for entrepreneurs to put up less-expensive buildings. Many of these will be serviceable, but not all will be pretty. We could call them structures with expected lives of less than 50 years. Or we could call them shacks.
...To be sure, the shantytowns could bring socioeconomic costs. Yet crime, lack of safety, and racial tension were all features of New Orleans ex ante. The city has long thrived as more dangerous than average, more multicultural than average, and more precarious than average for the United States. And people who decide the cheap housing isn't safe enough will be free to look elsewhere—or remain in Utah with their insurance checks.
Shantytowns might well be more creative than a dead city core. Some of the best Brazilian music came from the favelas of Salvador and Rio. The slums of Kingston, Jamaica, bred reggae. New Orleans experienced its greatest cultural blossoming in the early 20th century, when it was full of shanties. Low rents make it possible to live on a shoestring, while the population density blends cultural influences. Cheap real estate could make the city a desirable place for struggling artists to live. The cultural heyday of New Orleans lies in the past. Katrina rebuilding gives the city a chance to become an innovator once again.

There are two questions here, which one could easily conflate. One is whether or not Tyler Cowen is an asshole. I think that it's quite clear that he is. The other is whether he's an idiot. I think he's that as well, but that's too long a discussion for this post. But the article quoted above is titled "An Economist visits New Orleans," not "a neoclassical economist" but an economist, as if he were to say a chemist a lawyer a physicist or an auto mechanic.
discuss amongst yourselves.

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