Paul Krugman Tries To Explain The Problems With Contemporary Economics

Needless to say, it has both good points and bad, as you might expect from an American Keynsian who also happens to be quite smart. 


So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds.


Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions.


The birth of economics as a discipline is usually credited to Adam Smith, who published “The Wealth of Nations” in 1776. Over the next 160 years an extensive body of economic theory was developed, whose central message was: Trust the market. Yes, economists admitted that there were cases in which markets might fail, of which the most important was the case of “externalities” — costs that people impose on others without paying the price, like traffic congestion or pollution. But the basic presumption of “neoclassical” economics (named after the late-19th-century theorists who elaborated on the concepts of their “classical” predecessors) was that we should have faith in the market system.

So we have an article that attempts to pinpoint oversights by the field of economics, but doesn't mention Marx in the history of economics or encourage exploration of alternatives to Keynes like post-Marxists, sustainable development economists, and others that are heterodox.  I haven't read the article in depth, so I'm not going to comment on it in depth or on the specifics which are probably very smart (in the technical sense) but compose a big picture that is very blinkered (like I said, an American Keynsian).

Many economists will find these changes deeply disturbing.

It's the point of a science - and even social science - to unsettle conventional understandings if they fail.  But you don't replace them with new ones that you can already predict in advance will be just as incomplete or incoherent or incongruous with observed realities from as many vantage points as is possible to take in.  Doing that isn't critique - it's critique + imposition of a new ideological hegemony.

By: on 8 Sep 2009


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Earlier this year, the

Earlier this year, the NYTimes published an article titled 'Ivory Tower Unswayed by Crashing Economy' that mentions a few of important (though not all) heterodox schools of economic thought in the U.S.

Thanks for the link!  I think

Thanks for the link!  I think I had taken a glance at that at the time and looked at it again just now.  It mentions a few departments, but the problem is that there is not broader discussion of the actual ideas that are considered heterodox- even if they're correct.  The following rant is not directed at you, but comes from my frustration with American economics as a discourse, so please bear with me  :)

For example, there is a near-consensus now that India's GDP began to increase sharply after 1980, not after 1991.  Any number of explanations can be found for this and you can even make neoclassical arguments for it (e.g. that the de facto state interference through the licensing system had already collapsed).  However, the trouble is that there has been only one explanation put forward - a very narrow and very particular version of explanation, and universalised everywhere.

So Krugman is right to reject this.  However, if that was the problem, the financial crisis has broken that hegemony, which creates some space to explore alternatives in a slightly more mainstream context (like a several thousand word article in the NY Times Magazine).  But we don't get that - which is mind boggling.  Even if you don't agree with class-based analysis or dependency theory or world-systems theory, surely it can contribute something to your understanding or at least is worth examining in an American context.  It is often applied in other contexts by people from other places, but until ecnomists in the United States are willing to be a bit more honest about reality, it won't happen.

And until they're willing to assess the reasons their field is broken, they won't get there.  Hell, even if they won't draw on other fields or even other schools within economics, they could at least apply neoclassical ideas to study the labor market for economists and supply of economics jobs to try to explain it - but at least try.  

Instead, we just get either a defense of the old broken and increasingly discredited hegemony or attempts to replace it with a new one (based on Keynes) - which also serves market needs in the way of legitimizing government support.  Lost in the balance are the needs of ordinary people in the United States - to say nothing of the 6 point however many billion people outside.

/end rant

Again, thanks.

"It's the point of a science

"It's the point of a science - and even social science - to unsettle conventional understandings if they fail.  But you don't replace them with new ones that you can already predict in advance will be just as incomplete or incoherent or incongruous with observed realities from as many vantage points as is possible to take in.  Doing that isn't critique - it's critique + imposition of a new ideological hegemony."

Is it not the case that average professional economist in the U.S. is an organic intellectual attached to the power elite?  In my opinion, the dominant section of these organic intellectuals were indeed challenged by the most recent economic crisis.  I agree when you write "the financial crisis has broken that hegemony, which creates some space to explore alternatives in a slightly more mainstream context (like a several thousand word article in the NY Times Magazine)."

Sadly, what appears to be happening is that despite the opening of this space, it is being occupied by a different faction of the American Keyenesians (e.g., Krugman, DeLong, Rodrik), behavioral economists, and others with similar affinities.  Here is an example from Amartya Sen in the New York Review of Books:

However, Keynes can be our savior only to a very partial extent, and there is a need to look beyond him in understanding the present crisis. One economist whose current relevance has been far less recognized is Keynes's rival Arthur Cecil Pigou, who, like Keynes, was also in Cambridge, indeed also in Kings College, in Keynes's time. Pigou was much more concerned than Keynes with economic psychology and the ways it could influence business cycles and sharpen and harden an economic recession that could take us toward a depression (as indeed we are seeing now). Pigou attributed economic fluctuations partly to "psychological causes" consisting of

"variations in the tone of mind of persons whose action controls industry, emerging in errors of undue optimism or undue pessimism in their business forecasts."[5]

It is hard to ignore the fact that today, in addition to the Keynesian effects of mutually reinforced decline, we are strongly in the presence of "errors of...undue pessimism." Pigou focused particularly on the need to unfreeze the credit market when the economy is in the grip of excessive pessimism:

"Hence, other things being equal, the actual occurrence of business failures will be more or less widespread, according [to whether] bankers' loans, in the face of crisis of demands, are less or more readily obtainable."[6]

Despite huge injections of fresh liquidity into the American and European economies, largely from the government, the banks and financial institutions have until now remained unwilling to unfreeze the credit market. Other businesses also continue to fail, partly in response to already diminished demand (the Keynesian "multiplier" process), but also in response to fear of even less demand in the future, in a climate of general gloom (the Pigovian process of infectious pessimism).

Thus, Sen attempts here to shift the explanation onto behavioral variables (e.g., "infectious pessimism"), which is not exactly Sen at his best.

Things are not looking good for the economics profession in the U.S.

I agree with your point about

I agree with your point about ther social basis of economists' worldviews; my suggestion was that a) this is problematic :) and b) that people use whatever agency they have at their disposal to focus on promoting a genuine pluralism rather than shifting orthodoxies.  

Which is basically saying that we need to find a way to undo the link they you're talking about, if it's possible, whether within or outside academia.  The other, complementary process, is to attack the legitimacy of the field of economics as a whole.  These are two sides of the same coin, imo, in terms of the effects they produce rather than the intent of the people involved though they will present themselves as 'opposite' strategies.

I don't know the field, but it seems there has been one dominant faction - the market fundamentalists - and then a secondary faction which sees itself as excluded and is now seeking to gain - the Krugmans, Sens, etc. of the world - and then everybody else who collectively have less power than the first or the second and are probably smaller in number than the first plus the second in the economics field.   This is why i think focusing on genuine equality is a useful bridge between liberal and radical positions.

 Politically, the liberals

 Politically, the liberals share a very different political space from the heterodox economists, so imo while occasional alliances are possible, they are unlikely to be sustained.

In a separate, yet related point, it should be noted that the liberals (such as Sen and Krugman), in fact, are not as unpalatable to the political or academic mainstream as the heterodox economists are. This is evidenced by their plum positions in Ivy league universities and their Nobel prizes - they are very much part of the "in-group".

The points about promoting pluralism and challenging the legitimacy of the field - heterodoxy is making a valiant (and lets hope an ultimately successful) effort . ICAPE (International Confederation of Pluralist Economists) is one.

Founded in 1993, ICAPE is a consortium of over 30 groups in economics working cooperatively to maintain diversity and innovation in methods, approaches, policy analyses, and higher education in the profession. This network of groups seeks to foster intellectual pluralism and a sense of collective purpose and strength among these heterodox organizations.

ICAPE is dedicated to the idea that pluralism and intellectual progress are complements. This is not to say “anything goes,” but that each tradition of thought (Austrian, feminist, old and new institutionalist, Marxian, neoclassical, Post Keynesian, social economics, Sraffian, etc.) adds something unique and valuable to economic scholarship. Achieving productive discussion and debate across schools of economic thought is not a simple matter. There are many institutional and practical obstacles to pluralism. It is precisely by helping to remove those obstacles that ICAPE hopes to render a service to the community of economists throughout the world.

The Post-Autistic Economics Movement is another.

One of Post-Autistic Economics’ (PAE) projects has been to expose some of the many conceptual lunacies of today’s mainstream, both in terms of the concepts it uses and the concepts it lacks.





Thanks gherao!  that's reall

Thanks gherao!  that's reall helpful.  one of my former professors has written for post-autistics economics journals - curious term. :)

I regret that I must be the

I regret that I must be the bearer of bad news.  The heterdox economics department at Notre Dame in the U.S. shall be closed.  Here is an except from the current issue of the Heterodox Economics Newsletter on this recent development:

The breaking news is that the University of Notre Dame has decided to close down the Department of Economics and Policy Studies over the next two years. In 2003, the University decided to place the heterodox economists and other economists they did not think much of in the above Department. The then existing economics department was renamed as the Department of Economics and Econometrics and the only economists really allowed in it were mainstream economists of a very narrow sort. One of the reasons given for splitting the Economics Department in 2003 was the low ranking of the doctoral program. Recent research shows that at the time of the ‘splitting’ of the Department, the ‘heterodox-pluralist’ department had much better research productivity than the mainstream department (click here for the research). Thus, the powers at Notre Dame have opted for scholarly mediocrity over excellence. For additional information, see the following:

This is very depressing.

This isn't depressing for me

This isn't depressing for me as much as angering.  I was in a cranky mood from evren before I read this, so perhaps I am missing something - maybe the faculty will be restored back to the more mainline economics department?  Otherwise, it just brings up a lot of old resentments i have about my fate as an undergraduate in the United Statess at a 'good' school that refused to teach India at all properly but was perfectly willing to overcharge foreign students and have several billion dollars in the market and treat its students like crap in terms of democratic accountability (i.e. none). 

I suppose I ask way too much, but one would hope that a paradigm collapse might trigger some emphasis on pluralism rather than a closing of the ranks.  Of course, I've read enough stories about cults whose apocalypse never comes and how they dig their heels in even further...

It also angers me. But I

It also angers me.

But I don't know the answer to your question. I suspect that some proportion shall rejoin the orthodox department; some proportion shall be shifted to other departments (e.g., history); some proportion shall retire; and some proportion shall shift to other universities.

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