Helping Economists Escape Economics

There are plenty of economists who will happily admit the limits of their discipline, and be nominally open to the idea of other theories. However, I find that when pushed on this, they reveal that they simply cannot think any other way than roughly along the lines of neoclassical economics. My hypothesis is that this is because economist’s approach has a ‘neat and tidy’ feel to it: people are ‘well-behaved’; markets tend to clear, people are, on average, right about things, and so forth. Therefore, economist’s immediate reaction to criticisms is “if not our approach, then what? It would be modelling anarchy!”

One such example of this argument is Chris Dillow, in his discussion of rationality in economics:

Now, economists have conventionally assumed rational behaviour. There’s a reason for this.Such an assumption generates testable predictions, whereas if we assume people are mad then anything goes.

However, as I and others have pointed out, people do not have two mindsets: ‘rational’, where they maximise utility, and ‘irrational’, where they go completely insane and chuck cats at people. People can behave somewhat predictably without being strictly ‘rational’, in economists sense of the word, and falsifiable predictions and clear policy prescriptions can be made based on this behaviour.

One example of this is Daniel Kahneman’s ‘Type 1’ versus ‘Type 2’ thinking. Type 1 thinking is basically the things you do without thinking: making a cup of tea, walking, breathing. People use a lot of mental shortcuts and heuristics with Type 1 thinking, helping to avoid lengthy calculations for everyday actions. Type 2 thinking, on the other hand, is the type of thinking one does when learning something new or solving a problem. It is far slower and more careful, and time consuming. Hence, it is saved only for things that are new and/or important.

So what are the implications of this? Well, there are many, but a major thing it helps to explain are implied contracts. Most purchases do not require one to sign a contract, and even when one is signed, who really has the time or expertise to read through the whole thing? So studying how people think – or don’t – when engaging in everyday transactions can help courts decide what exactly they have agreed to. In fact, the Type 1/Type 2 disparity highlights an opportunity for exploitation: a company with a large legal department who can draft the terms of doing business with them, using ‘Type 2’ thinking, has an obvious advantage over a customer who wants to get in and out and has many other things to think about. Such considerations could be highly relevant when deciding whether or not someone ‘agreed’ to certain addons when buying a credit card.

So the discussion of rationality versus irrationality is something of a red herring. Yet I expect economists will still question how we can model people’s economic behaviour if we don’t appeal to some semi-rational ordering of preferences. This mentality was reflected in my comments by an occasional sparring partner of mine, Luis Enrique:

Even if you tried to discard utility…you would end up implicitly appealing to some thing very similar to utility (which is just a convenient means of representing preferences) if you want to say anything about what people buy at what prices.

The issue here is that economists are predisposed to believe that we need to appeal to individual preferences to understand consumption. They will then assert that all utility really requires is that people have preferences and that they don’t order them nonsensically, and ask what exactly the problem with utility is.

However, as I have previously argued, utility does not only require that preferences are complete, transitive and so forth, but also that they are fixed: that is, individuals have a set of preferences that remain the same for at least long enough to be useful for analysis (and in some neoclassical models, preferences are the same for an agent’s entire lifespan). However, evidence suggests that individual preferences are highly volatile, differing across time and being highly dependent on situation. How exactly could something so hard to pin down be useful?

The truth is that most preferences are shaped by social conventions, by situations and by how they are presented to the consumer. What’s more, these things tend to stick around longer than individual preferences. Fashion is the most obvious example here: ultimately, this season’s trends are determined by a relatively small group of people in key companies, and consumers simply copy everyone else. In many ways the individual preference does not exist; it is created by circumstance and copied. If we want to understand fashion choices there is little to be gained from building a model around a utility maximising individual in a vacuum: we can simply look at trends and assume a certain proportion of people will follow them. In other words, like all of economics, the micro level needs macrofoundations.

The economist’s mentality extends up to the highest echelons of economics modelling, and culminates in the ‘DSGE or die’ approach, described well on Noah Smith’s blog by Roger Farmer:

If one takes the more normal use of disequilibrium to mean agents trading at non-Walrasian prices, … I do not think we should revisit that agenda. Just as in classical and new-Keynesian models where there is a unique equilibrium, the concept of disequilibrium in multiple equilibrium models is an irrelevant distraction.

This spurred a puzzled rebuttal from J W Mason:

The thing about the equilibrium approach, as Farmer presents it, isn’t just that it rules out the possibility of people being systematically wrong; it rules out the possibility that they disagree. This strikes me as a strong and importantly empirically false proposition.

When questioned about his approach, Farmer would probably suggest that if we do not assume markets tend to clear, and that agents are, on average, correct, then what exactly do we assume? A harsh evaluation would be to suggest this is really an argument from personal incredulity. There is simply no need to assume markets tend to clear to build a theory – John Maynard Keynes showed us as much in The General Theory, a book economists seem to have a hard time understanding precisely because it doesn’t fit their approach. Furthermore, the physical sciences have shown us that systems can be chaotic but model-able, and even follow recognisable paths.

A great, simple and testable disequilbirium theory was given to us by Hyman Minsky with his Financial Instability Hypothesis. His idea was that in relatively stable times, investors and firms will make good returns on their various ventures. Seeing these good returns, they will decide that in the next period, they will invest a little more; take a little more risk; borrow a little more money. As long as they generate returns, this process will continue and the average risk-taking will increase. Eventually – and inevitably – some investors will overextend themselves into debt-fuelled speculation, creating bubbles and crashes. Once this has settled everyone will be far more cautious and the whole thing will start again. Clearly, constructing a disequilibrium scenario is not intellectual anarchy: in fact, the actors in this scenario are behaving pretty rationally.

Ultimately, the only thing stopping economists exploring new ideas is economists. There is a wide breadth of non-equilibrium, non-market clearing and non-rational modelling going on. Economists have a stock of reasons that these are wrong: the Lucas Critique, Milton Friedman’s methodology, the ‘as if‘ argument and so forth. Yet they often fail to listen to the counterarguments to these points and simply use them to defer to their preferred approach. If economists really want to broaden the scope of the discipline rather than merely tweaking it around the edges, they must be prepared to understand how alternative approaches work, and why they can be valid. Otherwise they will continue to give the impression – right or wrong – of ivory tower intellectuals, completely out of touch with reality and closed off from new ideas.


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  1. #1 by B on June 13, 2013 - 2:18 pm

    Spelling error in the fourth paragraph on Type 1 v. Type 2: ‘knew.’

    I’m glad to see a new post up! As an econ/phil student, I enjoy your website very much.

    • #2 by Unlearningecon on June 13, 2013 - 7:42 pm

      Thanks, and corrected the typo.

      • #3 by Jan on June 19, 2013 - 8:27 pm

        Yeah!Really nice to see your beck Unlearning!And a excellent article,thank you!Hope you have a nice summer!

  2. #4 by dkuehn on June 13, 2013 - 2:30 pm

    As a rule I find that people who regularly complain about how economists think about “rationality” don’t have a firm grasp on what economists mean by “rationality”.

    • #5 by Arkadi on June 13, 2013 - 4:20 pm

      The problem isn’t the ‘rationality’, but the completeness and rigid transitivity that economics has to assign to an agent when trying to glean insight into the workings of an economy.

    • #6 by Unlearningecon on June 13, 2013 - 7:41 pm

      ‘Rationality’ in economics almost has the opposite problem that lay critics attribute to it. They think it means ‘narrowly defined self interest’, and therefore does not capture enough of the nuances of human behaviour. In fact, it means ‘maximise utility’, and this can involve paying to bang your head on the wall half the time while spending the other half on rotten strawberries. Clearly, the problem is that rationality is not too strict but too broad!

      • #7 by Arkadi on June 13, 2013 - 9:55 pm

        But since it is too broad, economists simplify the whole notion to a set of monotonic functions which may or may not represent reality. And we’re back to square one.

    • #8 by srini on June 14, 2013 - 3:10 am

      As a rule, I find that most economists are not fully aware of the “rationality” assumptions that they unconsciously make are not self-evident truths but frequently violated in practice. As a rule, I find that critiques of neoclassical economics know more about the problems than most practitioners of neoclassical economics.

  3. #9 by gail bradbrook on June 13, 2013 - 4:20 pm

    An a “not an economist” I’d have thought the small matter of totally failing to predict the crash would be seen as a good reason to go back to the drawing board on the models…

    I have a background in physical science, I used to model protein -sugar interactions at a molecular level and that was hard enough! Isn’t this clearly a case where the system is way too complex- with all manner of positive and negative feedbacks. People can behave in allsorts of ways, environmentally determined, there’s plenty of evidence for that. We can barely predict the weather as a complex system. I do wonder if economists should park their maths for a while and go back to some pictorial models (it works well for much of chemistry but people don’t tend to get “chemistry envy” 😉

    Is the book More Heat than Light any good? Does anyone use a pictorial model that examines resource (resource = value) flow. Beyond that is politics isn’t it? Do you want relative equality or each for their own?

    ps. Good to have you back blogging- hope the exam marking wasn’t too painful

    • #10 by Unlearningecon on June 14, 2013 - 7:18 pm

      Is the book More Heat than Light any good

      Have not yet read it but it’s on the list!

      Beyond that is politics isn’t it?

      I agree. Sometimes I wonder if economics is even worthwhile: the whole thing seems to be a facile attempt to drag a science out of politics, making a bunch of value judgments and hiding them in the process. I guess there are some key concepts we could understand, but at the very least politics needs to play a bigger role. Relating this back to your earlier point, the funny thing about economic models is that there are so many of them, each trying to explain one concept, that they resemble the highly idealised stories you get in political philosophy more than science. Economists are forced to acknowledge that they can’t model the economy fully, yet they still go full steam ahead with all the maths.

      ps. Good to have you back blogging- hope the exam marking wasn’t painful

      I was being examined, not marking! But yes it went well, thanks.

  4. #11 by Alex on June 13, 2013 - 5:15 pm

    Question: Can you provide some good references, summaries, commentaries, reviews of Macrofoundations for Microeconomics?

    • #12 by Unlearningecon on June 13, 2013 - 7:59 pm

      Did you not read the Naked Keynes link?

      A quick google reveals this amusing paper, and there have also been some more specific models built with this in mind. The general idea is simple and obviously right: what’s going on with the economy in general, will have an impact on people’s decisions. Nobody exists in a vacuum.

      • #13 by Alex on June 13, 2013 - 8:02 pm

        I have read the Naked Keynes link, but I was more interested in specific models than a discussion of the Lucas Critique.

        As a mathematician/spectator, the term “Macrofoundations for Microeconomics” just sounds like a buzz-phrase without much substance…I was hoping to be wrong. (I’ll examine those papers, hoping to be in error after all!)

      • #14 by Unlearningecon on June 13, 2013 - 8:16 pm

        It is a buzz term, but it is simply a play on the already existing ‘microfoundations for macro’ endorsed by the orthodoxy of the profession. Don’t get me wrong – I’d rather have a pluralistic approach and drop the buzzwords!

  5. #15 by Ramanan on June 13, 2013 - 7:36 pm

    Dear Firstname Lastname,

    Nice post. Most of macroeconomics just seems to do a delta change in the old classical and quantity theory of money approach and just make it sound sophisticated rather than simply trashing it.

    Off topic. Have you read the work of …. backspace backspace backspace .. lol.

    On a serious note, did you happen check the speech of Bernanke I linked? Questions such as – wasn’t it shocking of him to say the things? Don’t you think he has changed his views of the world after the crisis? Any comment of yours will be useful.

    • #16 by Grant McDermott on June 13, 2013 - 7:53 pm


    • #18 by Unlearningecon on June 13, 2013 - 8:31 pm

      I just watched it and yes I was quite impressed. I guess he shows that policy makers do not necessarily inhabit an alternative universe after all, but are simply constrained by circumstance and ideas. Refreshing.

      • #19 by Ramanan on June 14, 2013 - 12:39 pm

        Yeah tend to think that the crisis has changed him a bit. Hope he mentions more of his changed ideas (ie I think he changed) regularly.

    • #20 by srini on June 13, 2013 - 10:27 pm

      Which speech of Bernanke are you referring to?

  6. #22 by metatone on June 13, 2013 - 8:00 pm

    It’s been interesting to me – over the period you’ve been on hiatus – first we had Diane Coyle (“Enlightened”) circling the wagons around Reinhart & Rogoff. Then recently Noah Smith’s been on a hippy bashing binge where he flails around about modelling and repeatedly pulls out the “you people just don’t understand this” in comments (see also dkeuhn above in comments here.)

    (Coyle’s post was particularly disappointing as she (a) did the economist shuffle between academic and policy statements and (b) quoted a large number of working papers with known deficiencies as “proofs.”)

    What’s it all about? Economists who have been on a tear criticising the profession, suddenly defending it? I think the profession is retrenching – and closing off against change.

    • #23 by Unlearningecon on June 13, 2013 - 8:20 pm

      Quite possibly – I actually unfollowed Noah during that period – but remember that he has always been annoying, and dismissive towards Keen. He also revealed in no uncertain terms that he himself barely understands Keen’s model, so I wouldn’t worry too much.

      Which exact Coyle post are you talking about? She’s always had an ‘oh well, economics is just a theory, leave it alone!’ approach when it comes down to it – I remember that much in her review of Keen’s book.

      • #25 by Unlearningecon on June 14, 2013 - 12:43 pm

        I find people repeating the ‘there is a correlation’ mantra so incredibly infuriating when people have been pointing out for years that correlation =/= causation. Can’t believe Coyle did the same.

      • #26 by Ramanan on June 14, 2013 - 12:45 pm

        I was shocked about his post on Japan. Silly. People confuse public debt and national debt. Japan although has a high public debt, is a net creditor of the rest of the world. It can easily drive the world economy for some time including its own. Instead he predicts a crisis where none exists or exists due to dangerous ideas such as his post. Hope Krugman thrashes him. Others won’t have any effect on him.

  7. #27 by jayarava on June 13, 2013 - 8:25 pm

    I can’t help it. I start reading about the kinds of assumptions make in order to get their equations to do anything at all and I can’t help thinking they’re all batshit crazy. Nothing seems to make any difference after that. Even with your caveats on what rationality means. It’s all based on cockamamie 19th century ideas about humanity – updated with bloody Game Theory, which makes even odder assumptions about humanity.

    I agree with the other non-economist that failing to see the worst economic crisis in history coming ought to lead to more soul searching than we’re seeing. And not just this massive crisis but Africa in the 1970s, South America in the 1980s, South East Asia and Japan in the 1990s and now Europe and the US. And probably China next, gods help us. It’s like the profession knows it’s getting everything wrong, but has decided to just run with the story that everything is fine.

    I only flirt round the edges and even then I’m finding I don’t really have the time to keep up as other priorities take up my time. But I see politicians, economists, and the media all spouting the same nonsense. Since 1997 the left wing have essentially the same economic paradigm as the right-wing. There’s no critique from the mainstream media because they all studied the same kind of economics and see things the same way. There’s a weird consensus which produces consistently wrong answers but is impervious to criticism.

    It gets all exciting when you realise there are alternatives (saw Steve Keen on TV and was blown away because I understood his argument). But then you realise that there’s not a snowball’s chance in hell of any shift because all the major players rely on the status quo in order to exploit the system to their advantage. It’s not going to change.

    The situation is analogous to the Catholic Church stating as dogma, 400 years ago, that everything revolves around the sun and that celestial bodies are all perfect spheres. Economics is in the same state that celestial mechanics was as when Galileo noticed Jupiter’s moons in 1610. And about as receptive to the new information as the Church was back then. Either we’re about to have a renaissance or another dark age. I fear it looks like being the latter. Certainly we seem to be blundering our way to the next economic crisis.

    • #28 by Peter Whitehead on June 14, 2013 - 3:46 am

      Suggest a major factor as to why economists ‘think’ the way they do is that is the way they are taught to think. Under-graduates soon realise that if their thinking does not conform, if they question the norm or suggest alternatives they will not pass their exams. They are not taught to think outside the box, to question. Although accredited by universities few seem to have a academic, scientific attitude.

      When I went back to uni I was astonished with Eco 101 where the sole text (produced by the Prof) had 1) almost no hint that there might be alternative theories and 2) no references or footnotes. [Revised by rote and passed the exams with ease, but had no incentive to continue on]

      • #29 by Anonymous on June 14, 2013 - 10:37 am

        My campus modified copy of Macroeconomics by Olivier Blanchard had no references. There was no way to find out where stuff came from or the original material.

    • #30 by Anonymous on June 14, 2013 - 5:31 am

      But, at that time and before, fortunately other cultures were quite advanced.

      Other cultures, sciences, industries, management systems, and trades were not previously influenced by closed minded politico Catholicism. I’m wondering if the European Renascence* was actually due to a large part of increasing almost simultaneous contact with multiple advanced other cultures and the printing press all near 1500. Rather unhampered superior knowledge being some of the most valuable imports along with new species of plants and animals (more valuable than all
      the gold swiped).

      There were sun centered solar system theories in India, and Greece. In India and Greece there were moon orbiting the earth theories also. No need to wait for telescopes. Who knows other cultures might have had telescopes. The Americas had moon orbiting the earth models and predicted eclipses. Maybe the Americas had sun centered theories too but their books were burned. I don’t know about in China or other countries but it could certainly be possible.

      Some people say, “Mother India.”

      The Babylonians were known as great observational and theoretical astronomers.
      The Babylonian method is one of the fastest ways of calculating the square root
      of 2, too any accuracy. And it is very quick. Still used today.

      For example Hindu numbers and calculations systems were reintroduced to Europe near the 1500s even though they didn’t take in the 1200s with Fibonacci’s introduction from North Africa. By then Indians were using algebra and infinite series to calculate pi and the trigonometric functions, and inverse trigonometric functions to any accuracy desired. Besides for practical purposes, their trigonometry was for their computational astronomy. They were even using calculus concepts for astronomy and trigonometry. Absolutely amazing.

      Are there any other cultures that have better economic ideas than us? Australia for sure. Others? That are unhampered by dogmas?

      *Definition of Renascence: the revival of something dormant. (Strange definition applied to Europe.)

      • #31 by Anonymous on June 14, 2013 - 5:40 am

        The history of the Library of Alexandria is also very interesting. That was in Egypt, North Africa.

        If I have left out contributions of Africa or other cultures, it is because of my Ignorance.

      • #32 by Unlearningecon on June 14, 2013 - 7:54 pm

        Are there any other cultures that have better economic ideas than us? Australia for sure. Others? That are unhampered by dogmas?

        From what I hear Chinese policymakers and universities are pretty keen on classical and Sraffian economics. Perhaps dogma is quite a Western Thing…

    • #33 by Unlearningecon on June 14, 2013 - 8:00 pm

      Yeah, I’ve said before that most economic models are simply wrong because of their assumptions, and actually we don’t need to go any further. Unfortunately, to get anyone’s attention, you have to take their assumptions as a given and then criticise them internally or empirically. Hopefully it won’t always be that way, but it is for now.

  8. #34 by Doug Prishpreed on June 13, 2013 - 9:51 pm

    I have an unrelated question.

    If I am a capitalist in a area with a fixed gold standard and only one coin of gold…And I take that piece of gold and split it into two pieces, half for labor, half for materials. Then if I sell my commodity on the market there is no way I am going to get more gold than I started with, (no profit)…How is this overcome?

    • #35 by Anonymous on June 14, 2013 - 5:27 am

      If you study double entry bookkeeping you would learn that if you increase your tangible assets the increase for the year could be profit. Note that does require any increase in money.

      For instance if you had a factory you might increase your productive capital machinery and increase your inventories to be sold in the future. You have increased the amount of stuff you have. You are more wealthy! With out more money (gold)! If your rate of sales went up the increase inventories could be a boon an not a problem.

      Wealth is not just money. It can include any thing.

      Now with credit things could even get better.

      • #36 by Anonymous on June 14, 2013 - 5:36 am

        Last sentence in the 2nd paragraph should have read:

        If your rate of sales went up, the increase in inventories could be a boon an not a problem.

      • #37 by Anonymous on June 14, 2013 - 5:44 am

        Correction: The last sentence of the first paragraph should read:

        Note: that does not require any increase in money. Or, could include a decrease of money less than the increase of tangible assets.

    • #38 by Anonymous on June 14, 2013 - 5:50 am

      It is a related question. It is a question of profits! Profits with out money at the end of the period.

    • #39 by Anonymous on June 14, 2013 - 6:06 am

      For instance from your point of view.

      You are wealthier if you have a house, a new car, productive machine shop, productive farm land, a gym business, 2000 shares of stock, $200,000 in bonds, and 1 gold coin all free and clear, than if you had 14 gold coins.

      If in the next year you were able to add an full occupancy office building, a fleet of rental airplanes, a rail road, and 5 grocery stores, you made a tangible profit!

    • #40 by Anonymous on June 14, 2013 - 6:10 am

      See how learning about other things are more valuable than just learning “impure” economic theory?

      • #41 by Unlearningecon on June 14, 2013 - 5:49 pm

        Hey anon thanks for answering the question but try to keep it down to 1 reply per point. Don’t flood the threads please.

    • #42 by Unlearningecon on June 14, 2013 - 7:20 pm

      No more gold, but there would be more resources if you’d produced something.

      • #43 by Doug Prishpreed on June 14, 2013 - 9:21 pm

        Yeah I just wanted to hear that question answered by someone.

        Do you think that that undermines the gold standard idea?

        being that (probably) most of the wealth in society cannot be represented by gold?

      • #44 by Unlearningecon on June 15, 2013 - 12:12 pm

        Yes, that is, in a nutshell, the problem with a fixed money supply – we wouldn’t have enough money to represent our resources, leading to deflation etc.

  9. #45 by Blue Aurora on June 14, 2013 - 5:29 am

    One could make that argument that Kahneman and Tversky also define rationality in a very badly flawed way, as they still use Subjective Expected Utility decision theory for prescriptive purposes, and argue that normal decision-makers are “irrational” because they lack mathematical training.

    Also, Unlearningecon, why didn’t you refer to this earlier comment I made on one of your earlier posts? I think the decision-theoretic foundations in economics are perfectly relevant for discussion here.

    • #46 by Unlearningecon on June 14, 2013 - 8:01 pm

      Perhaps but that stuff is a bit more in-depth: I was making a general point about economists and economic theory, not SEU in particular.

      • #47 by Blue Aurora on June 15, 2013 - 4:23 am

        Perhaps you missed my point, Unlearningecon…

        Many, many, many, models of decision-makers in economics *DO USE* Subjective Expected Utility (SEU) decision theory as the underlying foundation for descripive and prescriptive purposes.

        The definition of rationality in SEU decision theory is at best, a highly limited case…

      • #48 by Unlearningecon on June 16, 2013 - 9:05 pm

        I agree.

      • #49 by Blue Aurora on June 20, 2013 - 1:26 pm

        If you do agree then, why don’t you take more time to look into decision theory and write more posts about it? I ought to do this myself, but you already have a blog up… 😉

  10. #50 by NeilW on June 14, 2013 - 8:10 am

    I think the best approach is simply to wall up the current economists and start again.

    It’s the Reformation or Wesleyianism all over again.

    Assuming the aggregate from individual behaviour is the reason we have tax laws allowing large companies to avoid tax. It discounts the emergent behaviour you get from aggregation.

    • #51 by Unlearningecon on June 14, 2013 - 5:50 pm

      Yeah I agree. I sometimes just feel like we should jail economists and let, say, meteorologists loose on the matter.

  11. #52 by Magpie on June 14, 2013 - 1:49 pm

    And speaking of the devil: Noah Smith has a similar post.

    If you read Smith or Dillow carefully, you’ll find a common denominator. Bear with me.

    I’ve once read somewhere that, provided a neoclassical author has ever written something remotely outside of neoclassical orthodoxy, guys like Smith and Dillow will claim there is no such a thing as neoclassical orthodoxy. No matter how obscure, marginal or ignored a dissident paper is, for these guys, its mere existence is proof that there is no such thing as a monolithic theoretical body.

    The fallacy (which ironically Smith himself drew my attention to) is that they are talking about theory, not practice. The devil is in the detail.

    In practice, whatever these “dissident” neoclassicals might say, it never reaches business, government and journalism schools. It never influences policy.

    What reaches these schools and influences policy-making are very orthodox texts, like Paul Samuelson’s “Economics”. It is these texts, not empirical literature, that shape the thought of decision-makers all over the world. The only exposure those people have to any economics is provided by books like those.

    Don’t believe me? This is what the NYTimes had to say in Samuelson’s obituary:

    “Mr. Samuelson wrote one of the most widely used college textbooks in the history of American education. The book, ‘Economics,’ first published in 1948, was the nation’s best-selling textbook for nearly 30 years. Translated into 20 languages, it was selling 50,000 copies a year a half century after it first appeared.
    ‘ “I don’t care who writes a nation’s laws — or crafts its advanced treatises — if I can write its economics textbooks,’ Mr. Samuelson said.”

    There you have it: straight from the horse’s mouth.


    PS: Nice to see you posting again!

    • #53 by Unlearningecon on June 14, 2013 - 7:23 pm

      Great comment, and so true. I am going to write a post that touches on Noah’s point – I had it planned already, he sort of beat me to the punch. Obviously most economists are just doing empirical work, but the truth is that scarcely matters. The theories that are taught and used are incredibly resistant to falsification.

      While we’re on Samuleson, I recently saw this 2009 interview with him. He doesn’t seem too enamored with the modern profession!

    • #55 by Blue Aurora on June 15, 2013 - 4:32 am

      Regarding Paul A. Samuelson’s textbook…was it really that evil?

      My father enjoyed Paul A. Samuelson’s textbook, even though he did not use the original 1948 edition, as he came to the subject in the early 1980ies. I think he used an edition with William Nordhaus as a co-author.

      That stated, here’s an review of the original 1948 edition of Paul A. Samuelson’s textbook. Even though the 45-degree Keynesian Cross is a greatly simplified version of John Maynard Keynes’s intellectual thought, it is at least good for introductory purposes.

      • #56 by Magpie on June 15, 2013 - 9:50 pm

        Hi Blue,

        “Regarding Paul A. Samuelson’s textbook…was it really that evil?”

        Who ever said it was “evil”? 🙂

        “My father enjoyed Paul A. Samuelson’s textbook”

        Actually, I used to own it myself. And I liked it, too: full of pretty figures and such.


        The point is not whether the book is “evil” or “virtuous”. The point is that a book, any book, by necessity, reflects the views of its author. I suppose this should not be controversial.

        But if so, Samuelson’s book, too, should reflect Samuelson’s views.

        Now, if only Samuelson’s views get taught at school, because all schools adopted Samuelson’s book, all students risk repeating the same mistakes Samuelson would have made (read here what Samuelson said about the run against the USD in the interview, second part).

        What’s more, by only reading Samuelson, students risk learning Samuelson’s prejudices as if they were universal truths.

        Makes sense?

        Incidentally, I’d say that Samuelson himself was aware of that: “I don’t care who writes a nation’s laws — or crafts its advanced treatises — if I can write its economics textbooks”.

        Now, from that I can’t conclude Samuelson or his book were “evil”. But, it sure sounds pretty arrogant, to me.

      • #57 by Blue Aurora on June 20, 2013 - 1:33 pm

        Magpie: My mistake for being presumptuous and stuffing words into people’s mouths (at least in this case). Regarding what Paul Samuelson once said: “I don’t care who writes a nation’s laws — or crafts its advanced treatises — if I can write its economics textbooks.

        Perhaps it might be arrogant of Paul Samuelson to say such a thing, but isn’t it absolutely human of him to take pride in the fact that his introductory economics textbook had a wide impact in educating people about the subject? Yes, his textbook isn’t perfect and it probably did propagate views that were prejudiced and potentially not borne out by reality, but I wasn’t saying that his textbook was perfect either – and I think Paul Samuelson was both smart and wise enough to know that his textbook had its limitations for all its acclaim, and at least acknowledge that fact to himself.

  12. #58 by Luis Enrique on June 19, 2013 - 6:41 pm

    in lieu of my reply, which would have tried to correct what I still think are some misunderstandings on your part plus asked you to show me how non-economists might think by explaining prices without reference to the idea people prefer some things to other things (for whatever reason, genetic, cultural, chance) … get stuck into this!


    • #59 by Unlearningecon on June 24, 2013 - 4:12 pm

      Thanks for the link.

      I will return the favour with this brief piece on post-Keynesian consumer theory.

  13. #60 by thehobbesian on July 1, 2013 - 10:19 pm

    Great post, pretty much mirrors much of what I have been talking about in my latest few posts. My basic thought is that utility still remains useful in a static sense, that is to say looking at specific individual transactions, but in terms of a dynamic approach, utility is really not good for many of the reasons you pointed out here. Thomas Hobbes himself was really the first theorist to talk about how man is acting on his material preferences, but he still made room for the primitive, intangible aspect of human psychology in his overall theory. Then of course Bentham came along and tried to turn it into a math equation with utility. But in reality, its no much that utility is wrong, its just that there are many intangibles weighing on utility which make quantifying it difficult, if not outright futile. There’s no easy solution, but one of the things I stressed in my latest post “Breaking Free From Widget Economics”( is that perhaps the best way is to keep economics open ended, and to try to work from real world observation and work backwards, rather than to start from theoretical assumptions and then try to explain how stupid people are in not adhering to “economic laws”. In fact, I would go as far to say that many of the so called Economists in the neoclassical and libertarian camps are not in fact experts on the real economy, but rather experts on neoclassical theory. And because of that, they have become masters of confirmation bias, making creative excuses as to why the real world doesn’t match their models. Thus, instead of quietly observing the world and taking notes (which is what scientists actually do!) they are simply litigating their arguments and achieving very few new insights. And every now and then reality comes crashing down on their heads like in 2008 and causes some of them to change their minds (like how many in the New Keynesian School did a complete 180 from their free market mindset of the 90s). However, others may simply be beyond hope, the most we can do is convince the public that they should not be listened to.

    • #61 by Unlearningecon on July 3, 2013 - 2:58 pm

      As Lars P Syll noted, neoclassical economics is defined by its axiomatic-deductive approach, which, instead of going from real world observations to rules, tends to do things the other way round. The result is that all too often, the real world must be interpreted through the axioms in order to appear ‘credible’ and ‘rigorous’ to them.

      Economists have stocks of reasons, such as Friedman’s methodology, or the Lucas Critique, that their approach is correct, and when you question them they inevitably bring these up (I sometimes feel like I’m following a script). However, these fall apart on close inspection, and an inductive approach just seems to be superior.

  1. What stops economists exploring new ideas | LARS P SYLL
  2. The Search for Alternatives | Pearltrees
  3. In Praise of Econometrics | Unlearning Economics