Freefall, Joseph Stiglitz’s most recent book on the economic crisis, contains an interesting chapter dedicated to “Reforming Economics” where the author explains that “Economics had moved… from being a scientific discipline into becoming free market capitalism’s biggest cheerleader.” For a mainstream economist, he makes some strong critiques of neoclassical economics. For example, he writes that Arrow and DeBreu proved the existence of general Walrasian equilibrium under conditions “so restrictive as to question the relevance of the view that markets were efficient at all.” He challenges the existence of perfect information and that preferences should simply be taken as given. Regarding the notion of rationality: “I soon realized that my colleagues were irrationally committed to the assumption of rationality.” He also challenges the use of the representative agent in macroeconomics, which is the core of the Dynamic Stochastic General Equilibrium models used in graduate macro courses everywhere across the country.
What strikes me most, however, is how little of these ideas undergraduate economics majors are exposed to (much less the general public). Even intermediate theory courses do not touch on DSGE or the restrictions necessary to prove the existence of full General Walrasian Equilibrium or ask why preferences are simply taken as given. Undergrads are lucky if they even learn the names of Arrow and DeBreu. I agree with Stiglitz that these reforms sound nice. But how can this reform actually happen? Especially when no one can assess to what extent the ideas of economists caused the crisis because even undergraduates are not taught what economists really believe.