How Not to Criticise Economics

I like to question almost every aspect of economic orthodoxy. However, I am also interested in forming a coherent view of what is actually wrong with economics, rather than a caricature. So it pains me to see misguided criticisms such as Suzanne Moore’s piece a few weeks back, whose characterisations of economic theory will only serve to misguide the uninformed and elicit dismissive reactions from economists themselves. So here I present a list of things not to highlight when attacking neoclassical economics, in the hope of assisting would-be critics of the discipline.

Criticising early assumptions

Don’t get me wrong, criticising economist’s perversion of the use of assumptions is fair game. However, critics often go down the path of criticising ‘pure rationality’ or ‘perfect information.’ Whilst these are elements of core models (and these models should be attacked because of this, but with the caveat that the core models are the target), they are generally not found in the higher echelons of economics. Many of these assume imperfect information, bounded rationality, and can also incorporate other biases.

Most specifically, idea that economic theory assumes everybody is a selfish, emotionless self-maximiser is common trope, but as Chris Dillow noted in the link above, it’s not entirely true. More importantly, it is also defensible as an assumption – a heuristic by which to approximate behaviour, at least until something better comes along. It is important to distinguish between good and bad assumptions from a scientific standpoint, rather than how absurd they appear to be at first glance.

Equilibrium

Many critics of economics, including well-informed ones, make the mistake of arguing that economics always assumes the economy is in equilibrium, tending to equilibrium, oscillating closely around equilibrium, or something along these lines. It is true that many economic models do this; it is also true that economic models start from the assumption that the economy is in equilibrium, and see what happens from there. However, economists generally mean something very different  to other scientists when they say equilibrium. From the horse’s mouth:

An equilibrium in an economic model is characterized by two basic conditions which hold in all of the model’s time periods: i) all agents in the model solve the maximization problems implied by their preferences, resource constraints, information sets, etc; and ii) markets for all goods in the model “clear.” An equilibrium is not a snapshot of the model economy at one point in time. Instead, it is the model’s entire time path.

Even on first inspection, this type of equilibrium clearly has problems of its own, but I will save them for another post. The important thing to remember is that this, rather than a stable state, is what economists often mean when they talk about equilibrium.

Economist’s Political Beliefs

Economists are not all free marketeers – in fact, they generally lean to the left. Neoclassical economics, broadly speaking, concludes that we should: regulate oligopolies, monopolies and banking; do more to protect the environment and intervene in the case of other externalities; have some public provision of health, education and welfare; and as that survey shows, economists are generally approving of things such as safety regulations.

As I have said before, I think economic theory as taught lends itself to being used by free marketeers, because of the way the ‘market’ is presented as natural and the government ‘intervenes.’ I also object to the fact that economics applies the same analysis to every market from apples to education to labour. And it is true that the market is presented as generally equilibrating and efficient, except in a few choice cases. However, the impact of these things is not that all economists support ‘right wing’ policy prescriptions, but that neoclassical theory can generally be coopted to provide justification for them.

Naturally, I sympathise with many who try to criticise economics, as they correctly notice that the field’s empirical record (at least in macro) is not great; that many of the policy prescriptions seem to favour the rich whilst hurting the poor; that some of the models taught in economics are unintuitive and perverse. Economists are also partly to blame for not communicating their discipline well to the public, seemingly preferring to dismiss critics as ignorant and revel in their mastery of (what I consider a wholly useless) field.

Having said this, it’s important that in order to engage economists properly, the right questions are asked – ones that economists find difficult to answer. Economists have stock responses to many of the ‘pop’ criticisms of their discipline, so using them will only serve to reinforce economist’s belief in their own knowledge and create further barriers to engagement.

Of course, failing all of this, you can just repeat ‘why didn’t you see the crisis coming?’ over and over.

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  1. #1 by Hedlund on June 29, 2012 - 5:37 pm

    This article reminds me of this one. Maybe you’ll find it helpful!

  2. #2 by Min on June 29, 2012 - 7:50 pm

    The public is not generally critical of geology. But then again, geologists do not as a rule influence policy decisions that affect the lives and livelihoods of millions of people. Economists do.

    Given that, it is not unreasonable for citizens to infer class and political biases of economists from those policies and policy recommendations. If economists end up being misunderstood, then laying the onus upon the public for that misunderstanding, is, in a word, lame.

    • #3 by Matthew Schlichting (@MattSchlichting) on June 29, 2012 - 11:45 pm

      Not exactly. Just because certain economic theories are counterintuitive doesn’t mean you should blame economists when people don’t know what “counterintuitive” means.

      • #4 by Bill Murray on June 30, 2012 - 6:37 am

        It doesn’t matter whether the ideas are counterintuitive, if they aren’t explained well enough for their audience to understand.

  3. #5 by mike sax (@evilsax) on June 29, 2012 - 10:44 pm

    Unlearning I’m trying to take your point-because I really want to understand economics properly but reading her piece I didn’t really see anything so bad though I agree saying it’s moral not economic is a bit facile. It’s not serous economics but more of a rant I agree.

    “Economists are not all free marketeers – in fact, they generally lean to the left. Neoclassical economics, broadly speaking, concludes that we should: regulate oligopolies, monopolies and banking; do more to protect the environment and intervene in the case of other externalities; have some public provision of health, education and welfare; and as that survey shows, economists are generally approving of things such as safety regulations”

    I agree you shouldn’t be too reductionist in inferiring a political agenda but take our mutual friend Scott Sumner and his MMers. Isn’t the political agenda pretty obvious with him?

    How many posts have contemtuously attacked “mind numbingly stupid Keynesianism” for not realizing that the “ffiscal multiplier is roughly zero?”

    It’s true though I guess that Krugman is a NeoClassical and he leans left.

  4. #6 by Dominic Scheirlinck on June 30, 2012 - 3:55 am

    > However, critics often go down the path of criticising ’pure rationality’ or ‘perfect information.’ Whilst these are elements of core models (and these models should be attacked because of this, but with the caveat that the core models are the target), they are generally not found in the higher echelons of economics

    I’ve only ever seen this as a specific criticism targeted at the Austrian school. Specifically, those who hold that empirical refutations of theory are impossible, and don’t see that as a problem. So, the charge is often less that the model involves or assumes “perfect information”, but just that it’s unfalsifiable.

    For example, I’ve been told by right-wing armchair folk-economists that no amount of empirical evidence of any kind would ever convince them they’re wrong about the effects of minimum wage policies.

  5. #7 by Min on June 30, 2012 - 7:25 am

    One reason, perhaps, that laymen attack unrealistic assumptions of economics is that they disagree with the conclusions reached through those assumptions, and refute the conclusions by denying the premises. Milton Friedman is right that science requires simplification. (Whether the assumption that economic actors are self-centered, amoral, calculating sociopaths is an appropriate simplification is another question.) The real test is how well the logical consequences of such assumptions tally with reality. Among the social sciences, economics is fortunate in that so many of its data are measurements. That means that it is easy to determine the errors in the predictions of theory, which provide a good test of the theory. One thing that bothers me in the public discussion of economics is the lack of mention of expected error. You see graphs of economic projections many years into the future, with no error bands. How can such projections be taken seriously? Yet people not only take them seriously, they argue as though they were facts. (!)

  6. #8 by Unlearningecon on June 30, 2012 - 8:33 am

    Maybe I should clarify my case. This post is in no way a defense of economists – I thought the intermittent snark would have made that clear!

    The purpose of this post (and blog in general) is to arm people against the discipline of economics. As long as ‘pop’ criticisms like Suzanne Moore’s (which I only used as an example, btw, and is not the focus of my piece) persist, the debate is framed on economist’s terms. However, if we abandon pop criticisms and ask the more difficult questions, the debate is no longer on their terms and they will be forced to consider alternative viewpoints, instead of simply dismissing them.

    Hedlund: thanks for the link, good article.

    Min: you sound like you’re disagreeing with me. But my last few paragraphs are fairly similar to your comment.

    evilsax: yes, but remember Sumner was trained at Chicago. I believe that economics is generally more biased in the US and in few places will it be worse than Chicago. I have been told a couple of times (though I’ve no evidence for this) that many economists were embarrassed by the likes of Laffer and Friedman, and would be by Sumner today. So take him with a pinch of salt.

    Dominic: what you say is true, but I’m not sure of your point, as I wasn’t really talking about empirics.

    • #9 by Min on July 2, 2012 - 5:24 am

      i do think that you are going too easy on economists. Otherwise, we pretty well agree, I think. :)

  7. #10 by docrichard on June 30, 2012 - 12:39 pm

    You begin by having a pop at Suzanne Moore, and end by saying “Economists …revel in their mastery of (what I consider a wholly useless) field”. Wasn’t that was what Suzanne was saying?

    The sad truth is that if economics didn’t exist, we would have to invent it.

    Therefore I am going to add my own 2p. Which is that economics should be built on ecology, for obvious etymological reasons. If it started by asking “How can homo “sapiens” so arrange things that we can live a decent fulfilled life now and for future generations in the biosphere that sustains our existence?”, I think we might come up with a better set of equations than if we just ask how best to produce, distribute and consume goods and services in terms of money.

    • #11 by Unlearningecon on June 30, 2012 - 1:19 pm

      I wouldn’t say I ‘had a pop’ at her – I said her criticism was misguided and economists reacted dismissively to it. The whole point of this post is to restructure the debate so that it is not on terms economists are used to and have no trouble dismissing.

  8. #12 by isomorphismes on June 30, 2012 - 5:28 pm

    Regarding the equilibrium issue. When I taught economics I would always note to students that the only time the human body reaches homeostatic equilibrium is at death. Nevertheless the equilibrium solution tells us which way things should be heading. (hopefully)

    • #13 by Unlearningecon on July 2, 2012 - 11:58 am

      Of course that doesn’t tell us anything about human life, though. Or was that your point?

      • #14 by isomorphismes on July 2, 2012 - 6:49 pm

        It doesn’t tell us EVERYthing about metabolism. Reactions are always heading towards homeostasis but never get there.

  9. #15 by Tyler DiPietrantonio on July 2, 2012 - 7:09 am

    “The important thing to remember is that this, rather than a stable state, is what economists often mean when they talk about equilibrium.”

    Walrasian equlibria are stable states, they can easily be modelled as fixed points in a given phase space. The whole point of the criticism of general equilibrium theory from a dynamical systems perspective is that there is no reason to suspect that economy is always at one of these fixed points or even necessarily tends toward them.

    • #16 by Unlearningecon on July 2, 2012 - 11:57 am

      Perhaps ‘often’ should have been ‘sometimes.’ They do sometimes use it to mean a fixed point; sometimes it is the definition above. They are slippery customers.

  10. #17 by Isaac "Izzy" Marmolejo on July 2, 2012 - 3:33 pm

    On criticizing early assumptions, most good critics of neoclassical Econ acknowledge that we are not dealing with problems of perfect knowledge, where decision makers don’t have expectations or special preferences etc. As Jack Wiseman said about modern Econ theories : 

    “…[T]hese approaches satisfy many condition required by my initial formulation. Decision makers have expectations as well as preferences , plans may be incompatible, preferences and expectations may change as a result of new information: in this sense at least (but in a restricted sense) decision makers can ‘learn’. These more sophisticated models of the universe are undoubtedly an advance upon the earlier competitive ‘perfect knowledge’ one, and in some directions they lead to useful insights. But in fact, in one way or another they follow that earlier model in their emasculation of the nature of ignorance of the future. The future is no longer pre ordained, but not is it unknowable. Instead of the Walrasian god in the machine -the known general equilibrium conditions – we know have known probabilities and risk attitudes, or equilibrium defined as conformity of individual ‘theories’ and policies with emerging outcomes. 

    In Littlechild’s graphic phrase, the decision makers are clockwork Bayesians programmed to respond to changes in conditions, but in pre ordained ways and within a totally defined system. To use Shackle’s terminology, the decision makers cannot experience surprise; nor can they perceive new opportunities not anticipated as possibilities in the model; and they can learn only in the very restricted sense that they programme new information in the fashion prescribed by the model. ”

    In other words, new economic models have the same overall problem as earlier models but are indeed more sophisticated than them. They still rely on a ‘god’, this is to say, they still assume that the future is known. 

    • #18 by Unlearningecon on July 2, 2012 - 7:03 pm

      You are correct about uncertainty.

      In my experience more advanced neoclassical ‘modifications’ tend to create more problems than they solve and these are only dealt with by introducing more and more ridiculous assumptions, like having a benevolent dictator redistribute resources prior to trade (used to get rid of the problems with market demand curves).

  11. #19 by severn on July 5, 2012 - 3:55 pm

    I think your third point is the really important one from the public’s point of view. We don’t see much of the research papers and academic debate, and those no doubt are much more refined and carefully reasoned than what we see in the media.

    But the economics that the public sees is almost always in the political arena, supporting one policy positiion or another – primarily on one side of the political divide. And a lot of this involves clearly bad reasoning.

    it’s interesting though, that the boot is on the other foot here, so to speak. Economists lead the pack in denial of anthropogenic global warming, using arguments that make the scientists scream.

    • #20 by Unlearningecon on July 5, 2012 - 8:40 pm

      I’m not really defending economics just because they have some half decent policy conclusions, I still think the theory is highly flawed. I just want to make sure we hit the right targets, else layman critics risk being blinded with ‘science’ by economists.

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