Posts Tagged ‘economics as science’

David Ruccio hosts an excellent guest piece by Richard McIntyre and Michael Hilliard, which takes a balanced and heterodox look at the work that merited a Nobel Prize this week. First, their positive take on search theory:

The idea that workers and jobs are heterogeneous and that it takes time and effort to match them is a useful idea. Sweden’s “active labor market policy” sought to reduce frictional unemployment even before the now classic papers on search theory were published. Perhaps this is why the Swedish Central Bank made this award, although speculation about the reasoning behind these awards is not terribly productive in our opinion.

Worker and job heterogeneity means that the metaphor of the market is not an accurate representation of the exchange of labor power for a wage. Because it never occurs to most economists that the analytical apparatus of the market IS a metaphor this is not the usual interpretation of search theory. But those interested in the literary aspects of economics could make something out of search theory.’

However, a critique through the lens of class shows that search theory may be more of a distraction than anything:

More important to us is what search theorists don’t do. As Marx and others have pointed out, it is in the labor process, not the labor exchange, that exploitation occurs. And here employers clearly have the upper hand. Further, many labor market and labor process outcomes—employment, remuneration, working conditions, training—reflect what employers choose to do, except perhaps during short-lived moments of full employment. Since the 1970s, in the United States at least, the rhetoric of labor problems has been mainly about workers rather than employers, and mostly with what workers should do to make their labor time more salable. At best search theory tells us that people are doing something useful while they are unemployed. But for the most part it distracts us from the fact that employers have the upper hand in the labor market and that there is no such thing as democracy inside the firm, where Americans spend most of their waking time.

Of course, approaches to economics that use a class lens are not seen as having the theoretical rigor of neoclassical economics. Thus, I think Ruccio is rather apt to refer to this award at the Nobel Prize in Neoclassical Economics, because the criteria they use to give the award seem to exclude any other approaches.

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There are hardly any (mainstream) economist that will disagree with the claim that perfectly competitive markets lead to the most efficient outcomes. These markets should have no barriers to entry, nor be dominated by any agent or group of agents.

Mainstream economists are also eager to encroach on other fields of study, especially to do the other “lesser” social sciences better than the other social scientists. It would seem, then, only appropriate that they should eagerly apply their ideas to the study of knowledge. A neoclassical perspective on knowledge encourages what many have called a “marketplace of ideas.” This marketplace should have an abundance of competing hypothesis, all critically examined, to produce the best knowledge for our society. And there should be no dominant practitioners, who might exert excessive market power and find us in an inefficient market (of knowledge). Inefficient knowledge would mean that we would not have the best science possible.

But in the current state of economics, there are enormous barriers to entry and the “marketplace of ideas” is hardly competitive. Neoclassical practitioners keep the gate of the profession by controlling the economics departments at the top research universities and the “top” economic journals. Mainstream economists do not take any competing hypothesis critically because they do not even understand the basic ideas of any heterodox economic program, nor do they care to.

This exclusory attitude towards competing hypothesis is contradictory to the tenets of neoclassical economic theory.  Any hypothesis that competes with neoclassical economic theory is dismissed as “not economics.” It should then come as no surprise, even the logical conclusion, to the neoclassical economist that the current market for economic knowledge is inefficient. And our society cannot possibly have the best economic science. We can do better.

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This one is almost too easy. Krugman charges freshwater macroeconomists with epistemic closure. He writes,

Ask a grad student at Princeton or MIT, “How would a new classical macro guy answer this?”, and the student can do it; classes at freshwater departments teach real business cycle theory, and good students can tell you what it says even if their professors have a different view.

But students at freshwater schools — or, alas, many of their professors — can’t return the favor. It’s been painfully obvious since the crisis broke that people at Minnesota, or even many people at Chicago, have no idea what New Keynesian economics is all about. I don’t mean they disagree, or think it’s garbage, they literally have no idea what the concepts are. And that’s why they reinvent 80-year-old fallacies when they try to discuss the subject.

It’s interesting to ask why this sort of cocooning is a feature of the right but not the left. But it’s very real, and has a dire impact on economic as well as political discourse.

Of course, we can just as easily replace salt-water students in this analogy with students of heterodox economics/political economy, and freshwater economics with the whole mainstream. For instance, ask a post-Keynesian or a Marxian to hold court on IS/LM, and they can do it easily. This is not because these economists are heroic; instead, they realize that is essential to build a counter-theory by learning the original theory and its critique.

My course in Marxian political economy began with a reschooling in intermediate micro and macro- we actually learned this stuff better a second time by being forced to think critically about it. However, ask Krugman or his friends at Princeton and MIT about the starting point for Marx’s critique (hint: use-value versus exchange value) or Polanyi’s (hint: embeddedness) and I fear their eyes might glaze over. If the mainstream response to my argument is that the aforementioned critiques are not “serious economics,” well, we no longer have anything to talk about.

P.S. (private message for David Ruccio)- since I’ve dispensed with this one easily enough, hopefully you can take some time to follow up on my post re: Sen/Smith.

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As this Newsweek article points out, the INET conference challenged much of the previously accepted wisdom in mainstream economics:

Again and again, in different ways, the most perspicacious observers at the Cambridge conference drove this point home: rational models don’t work because there are too many unknowns to justify them. There is no real equilibrium in the real world. The models don’t compute. Literally.

Of course, everyone involved in the conference viewed this as some sort of starting point for a renaissance in the discipline. Preeminent among the participants, I wager, is Joseph Stiglitz, the Nobel laureate who made his marbles by challenging the assumption of perfect information in neoclassical models.

His talk (video here, preliminary pdf here, via Thoma) presumably laid out an agenda for reform. Read it if you have time, or even skim the topic lines; it’s a good primer on the left edge of the mainstream, in which assumptions rationality, representative agents, and even equilibirum are challenged. All of this is good. However, after first reading, I had a nagging feeling that there was something lacking, and I couldn’t put my finger on it. I then went back to the intro, in which he framed the discussion by saying,

Most of the economics profession failed to predict the most important economic event to occur in the history of modern “scientific” economics. If economics is a science, it is presumably to be judged by its ability to predict. It has, by and large, failed that test.

So, as I mention above, he proceeds to dig into the methodological issues explaining why economics failed as a science. There are some really encouraging nuggets at the epistemological level:

This leads one naturally (if one wants to limit oneself to models with high degrees of rationality) to think about models in which there is uncertainty about the model itself, about the adequacy of its description of the world, or in which there is always a residue of fundamental uncertainty: perhaps the world has changed in a way in which this is not a bubble.

But then there are passages like this one:

I do think that policy measures (both macro- and regulatory) have to be addressed with dynamic models, within general equilibrium models and within models in which risk is central. The problem is, in part, that because even “toy” models are complex, there is a need for extensive simplifications, and the simplifications have left out almost everything that is important.

And the thing wraps up without Stiglitz ever really saying, “economics is not a science- we need to approach it as such.” He’s obviously aware of the host of issues explaining why it can’t be, and thus shouldn’t aspire to be, a science. Nevertheless, when it comes to synthesizing all of these issue, his neo-classical, math-addled brain somehow still aims to build better predictive models of the economy. Something doesn’t compute. I probably don’t have anywhere near the math or economics training necessary to make these critiques, but there just seems to be a dissonance withing this type of agenda. Is the issue credibility? A sort of deeply ingrained narrowness? I think we can do better. Of course, I think people like Stiglitz have would have a much better idea of how, but that will require removing their blinders.

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I don’t think I am reaching by saying that heterodox approaches to economics are epistemologically different from mainstream approaches. For example, many ecological economists simply disavow things that environmental economists. take as given, such as GDP. We can probably find similar discrepancies in terms of what different sub-disciplines view as valid or invalid types of data. It would also be interesting to see how these differences crop up at the country level. Daniel Little writes about a new paper by sociologist Gabriel Abend, which looks at epistemological differences between sociological articles published in Mexican versus American journals. The differences are striking:

U.S. sociologists see the burden of their work to fall in the category of testing or confirming sociological hypotheses.  Mexican sociologists see the burden of their work in detailing and analyzing complex social phenomena at a fairly factual level.  “93 percent of M-ART are principally driven by the comprehension of an empirical problem” (10)…

U.S. sociologists are strongly wedded to the hypothetico-deductive model of confirmation and explanation.  This model plays very little role in the arguments presented in the sample of articles from Mexican sociologists…

U.S. authors attempt to exclude value judgments; Mexican author incorporate value judgments into their empirical analysis.

A similar study for economics would be very interesting. What epistemological criteria would we look at for either a cross-country or intra-discipline comparison? Reliance on boilerplate derivations of second-order utility functions? Embrace of “normative” criteria? Emphasis on the poliocy

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Via Econospeak (which is quickly becoming one of my favorite blogs), Thomas Palley has written a response to the Queen of England’s request for an explanation on why no one predicted the crisis. He was actually responding to a different response letter written by Tim Besley and Peter Hennessy, in which they argued that the failure was one of “collective imagination.” Palley writes,

The failure was due to the sociology of the economics profession. This failure was a long time in the making and was the product of the profession becoming increasingly arrogant, narrow, and closed minded. One was compelled to adhere to the dominant ideological construction of economics or face exclusion. That was the mindset of the IMF and the World Bank with their “Washington Consensus”, and it was the mindset of central bankers (including your own Bank of England) with their thinking about the sufficiency of inflation targeting and hostility to regulation…

Professors Besley and Hennessy’s letter is another example of the economics profession’s complete inability to come to grips with its sociological failure which produced massive intellectual failure with huge costs for society. This is a very serious social problem and we will all continue to pay the costs as long as it is unaddressed.

I inadequately blogged about Palley’s succinct and thorough examination of the crisis a few months back. He continues to be nearly spot-on.

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It’s been too long since I’ve been meaning to post this…

A devoted reader of this blog emailed me two articles recently; the first (pdf), by Therese Grijalva and Clifford Nowell, was published last year in the Southern Economic Journal. It endeavors to rank PhD programs in economics overall and by field. They essentially assign a productivity number to each faculty member based on the number of journal articles published and the quality of the journal in which they publish them.

The quality scores are based on two different methodologies, but ulimately boil down to citations. Their results aren’t earth-shattering, with many of the usualy suspects atop the list. A number of more marginal schools earn high marks in various subfields. My alma mater, the University of Notre Dame, is ranked 88th overall and misses the top 20 in all 18 subfields.

The second article, which is still in draft form (and I don’t know if I’m at liberty to publish it on this website), attempts to address the bias towards neoclassical economics in analyses like Grijalva and Nowell’s. They aim towards a “quality-equality” measure of economic programs, while still taking the bibliometric approach seen in other papers. They directly address G & N’s approach and write,

Instead our concerns are with two interrelated issues:  the assumption that in economics, scientific knowledge is homogeneous to which any quality index can be unambiguously applied and the limited coverage and partiality of the SSCI impact factor scores even when restricted to North American, Western European and English language journals.  Economics is about explaining the provisioning process, the real economic activities that connect the individual with goods and services, or more succinctly, economics is defined as the science of the provisioning process. As a field or discipline of scientific study, it consists of two distinctly different theoretical approaches to analyzing and delineating the provisioning process:  neoclassical or mainstream economics and heterodox economics (Lee, 2009a, 2009b).  Although they contest each other’s theoretical analysis, both mainstream and heterodox economics adhere to the discipline’s goal of producing scientific knowledge regarding the provisioning process.  But what constitutes scientific knowledge and its quality is determined by the scientific practices within the two sub-disciplines in economics.  Therefore, a quality index utilized for mainstream economics is not necessarily appropriate for identifying quality research in heterodox economics. Consequently, for a quality index to be used in an even handed way to rank departments in terms of the quality of research, it needs to be a synthesis of the separate ‘indexes’ used in the two sub-disciplines.

Of course, this concern is a direct affront to many neoclassical economists, who don’t consider much of the work of heterodox economists to be as rigorous as their own.

The other concern is that the citation-based quality ranking excludes six of the eleven well known heterodox journals, reducing productivity values for departments with faculty who publish in them. Thus, the authors create a heterodox quality index and combine it with the G & N quality index at parity.

Their approach, not surprisingly, gives the largest boost to heterodox programs like UMass Amherst and UMKC. What is interesting is that the big dogs, like Harvard, Chicago, etc. are still the top departments in their metric. UMass Amherst makes it up to 33.

In discussing the relevance of their findings, however, they choose to bring up Notre Dame and its department split. They observe that the ND department, in their ranking, is 92, while the exiled department, ECOP, is actually 74. Further, when adjusting for size instead of aggregate productivity, the exiled department actually is ranked 25 overall. Thus, they say,

In this case, the claims of the Dean and the chair are not at all supported and their decision to exile the heterodox economists essentially dismantled a better department and replaced it with one of a lesser rank…

The Notre Dame case dramatically illustrates how bibliometric (and peer review) based methods can be misused to silence dissenting voices and to render invisible heterodox ideas and departments in a contested discipline such as economics.  This paper does not disagree with the use of bibliometric methods to rank departments (and journals); but what is objected to is their misuse in the name of science and objectivity….  It is not that doctoral programs with a heterodox presence are better than programs without, but they are also not inferior to them—just different but equal.

This sort of argument isn’t what neoclassical crusaders want to hear. Nevertheless, a more open and rigorous debate is needed about what is and is not economics, so valid approaches are not unfairly crowded out.

Update: While electing not to provide the text of the draft article I discuss, I forgot to provide the title and authors. The title is “Ranking Economics Departments In A Contested Discipline:  A Bibliometric Approach To Quality Equality Among Theoretically Distinct Sub-Disciplines”.

Two of this second paper’s authors wrote the first article, Therese Grijalva and Clifford Nowell. The third author is Frederic Lee. This may clear up some confusion, as I seemed to pit the two against one another. It’s important to keep in mind, though, that the bibliometric style approach is consistent in both.

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Robert Skidlesky has an opinion piece in the Financial Times (h/t Mark Thoma) in which he injects the insight of Keynes and the notion of intellectual battles into current debates. Skidelsky is an important scholar of Keynes, and wrote an award-winning three-volume biography about his life and work.

Skidlesky begins by distinguishing economics from the natural sciences:

In the social sciences, the situation is different. There have been famous battles galore, but no decisive victories. Indeed, it is characteristic of the social sciences that their battles are interminable, temporary defeats being followed by the regrouping of the defeated forces for a renewed assault.That economics is not a natural science is clear from the inconclusive engagements that have punctuated its own history.

A hundred years ago the classical theory reigned supreme…

Then along came the Great Depression of 1929-32 and John Maynard Keynes. Keynes “proved” that markets had no automatic tendency to full employment…

For 30 years or so Keynesianism ruled the roost of economics – and economic policy. Harvard was queen, Chicago was nowhere. But Chicago was merely licking its wounds. In the 1960s it counter-attacked. The new assault was led by Milton Friedman and followed up by a galaxy of clever young disciples…

No policymaker understood the maths, but they got the message: markets were good, governments bad.

He then contextualizes a current debate, between Niall Ferguson and Paul Krugman, in these intellectual battles. While ultimately siding with Krugman, I think he makes an extremely important point:

In this particular debate, I am on Prof Krugman’s side, but I do not agree that Prof Ferguson’s position represents a retreat to a phlogiston state of economics. This is to take economics to be like a natural science, which Keynes never believed it was, because he thought its subject matter was much too variable over time.Keynes’s view was that we need different economic models at different times. The beauty of his General Theory of Employment, Interest and Money was that it was general enough to accommodate a variety of models applicable to different conditions. Markets could behave in ways described by the classical and New Classical theories, but they need not. So it was important to take precautions against bad behaviour. Ultimately, the Keynesian revolution was a triumph not of good science over bad science, but of good judgment over bad judgment.

Judgment is something often overlooked as extremely important in economics and in finance. This morning, I listened to the This American Life podcast from last week, which looked at the regulatory failures leading up to the current crisis from both the government and rating agency points of view. When talking with people from the ratings agencies in particular, it was clear that there was an utter refusal to exercise judgment. The equations were the equations. So what if the data might seem logically unapplicable? The future will reflect the past, etc.

So, the question of the day is, given all we now know about the causes of this economic crisis, what sort of judgment will be applied, both in academia and in the policy world? What factors will people in power choose to ignore? Sadly, I think the wage-stagnation/class-based argument, which has been well-outlined by Richard Wolff, will probably be ignored.

Is there a new Keynes for this generation, who will restore “good judgment” to the dominant economic paradigm? Perhaps Keynes will be the new Keynes. I think these are important open questions as the discipline’s introspection continues.

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I was on Mankiw’s blog today. He had a brag about the Quarterly Journal of Economics (published at Harvard, where he works) earning the number one ranking in a new journal ranking paper.

Harvard’s QJE is number one, natch.

For the unacquainted, “natch” is slang for naturally. Ugh. Anyways, that’s not the point of this post.

The article he linked (pdf download) attempted to construct and “ambition-based” ranking of journals. That’s not really the point of the post either. I perused the list of 69 journals they had selected, and realized that none of the eleven heterodox economic journals (which I will talk about in a post next week) were on it. I was a little miffed, so I decided to pick one of these journals (Journal of Economic Issues) and go through their methodology on the Web of Science and see what was going on. Well, as it turned out, at no point from 2001-2007 was an article in JEI written in those seven years cited in one of the seven “general-interest” journals. That would earn JEI a whopping zero on any rating with this methodology.

The authors of this new ranking acknowledge the subjectivity of their (and any) methodology, and patted themselves on the back for being so explicit about the reasons for each methodological choice. That’s well and good. However, it still leaves heterodox economics in the cold and with no necessary disclaimer. The methodology naturally excludes it.

Of course, this whole ranking business is a vicious cycle. Rankings like this one remove any credibility within the mainstream from journals like JEI. As a result, any self-respecting (or ambitious) author in the seven general-interest journals will think long and hard before citing one of these articles. So they get no citiations in the mainstream, etc.

Rankings-obsessed people like Mankiw have a very rigid definition of knowledge. I would obviously admit that knowledge is a social process; this does not mean it has to be a hegemonic one. Crowding out research with seemingly foreign methodologies is convenient, because as a mainstream economist, it allows you to not have to worry about the implications of this research.

The effects are not limited to journal rankings or citations, however. I’ll post next week about an article that details the marginalization of the heterodox journals and the implications for heterodox economics departments. Spolier alert: this vicious cycle has ramifications far beyond the world of journals; it affects economics as a discipline, both in terms of future research and future pedagogy.

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At Understanding Society, Daniel Little has an excellent post about the different views towards pragmatism in intellectual circles.

Intellectuals are sometimes accused of being out of touch with the real world. But there is a strong thread of intellectual life that proceeds on the basis of a commitment to linking thought to action, theory to practical outcomes. Karl Marx and John Dewey had at least this in common: they both urged intellectuals to commit themselves to joining the intellectual realm with the solution of humanity’s challenges. This isn’t a universal view; [...]

According to a pragmatic perspective, science is not a free-standing system for its own sake; rather, science serves humanity. There should be consequences that flow from research and inquiry that somehow or other lead to resolution of problems that we care about…

A second implication of “pragmatism” in research comes down to expectations about methodology and epistemology. A pragmatic conception of research defines the epistemic values of research results “practically.” A theory or set of measurements should be “good enough” for the needs of the problem, rather than aspiring to an abstract notion of perfect precision…

But there is a little bit of a paradox underlying these comments. We don’t generally know what kind of theoretical advance will be needed or constructive in application to a particular problem. Solving problems requires valid understandings of the mechanisms that give rise to these problems; but discovery of underlying mechanisms may proceed best from apparently unrelated theoretical research. So this seems to imply that the research community as a whole will be most pragmatically successful, if there is some division of labor within the community between “curiosity-driven researchers” and “problem-solver researchers.” (This seems to correspond roughly to the distinction between pure research and applied research.) [...]

It is also interesting to realize that there is a parallel theme in Marx’s thought. Marx’s insistence on the unity of theory and practice falls in this general area, as does his eleventh thesis on Feuerbach: “The philosophers have sought only to understand the world; the point, however, is to change it” (link). Marx didn’t diminish the importance or value of theoretical research; but he insisted on the importance of keeping in mind the relationship between theory and practice, between knowledge and social improvement…

The Chicago sociologists regularly went back and forth between assessment of the current material and social problems that the city of Chicago was experiencing, and formulation of theories and analytical constructs that might assist in better understanding and addressing these problems…

So there is a coherent position to take concerning the relationship between intellectual inquiry and practical outcomes. We might say that one of the responsibilities of intellectuals is to assure that their work ultimately has value, and an important manifestation of value is “contribution to the solution of practical human problems.” However, it is also true that there are other ways in which intellectual work can have value; so the pragmatic approach cannot be considered to be an exclusive one.

Little provides an example of how this balance was struck with Chicago sociologists. Is a similar balance being struck in economics? In general, economics seems to value theoretical work over empirical work. Many Nobel Prize winners happen to be theoriticians (Paul Krugman is the most recent example, although his work is more grounded in practical questions). On the other hand, a number of recent John Bates Clark medalists have been empiricists, notably Steven Leavitt and Emmanuel Saez. I don’t think a discipline is best defined by what happens in the top strata, however. So, this is more of an open question: is economics as a whole putting too much emphasis on theoretical research that leads to little practical application?

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