People and Place

Mainstream economics is in a muddle. That’s the story behind “Hip Heterodoxy,” a wonderfully engaging piece by Christopher Hayes that ran in The Nation last month. “It’s a Friday night in January,” relates Mr. Hayes, “and I am searching for a free drink among 9,000 economists.”

With Mr. Hayes as a guide, we get a peek behind the scenes at the Allied Social Science Associations Annual Meeting to find that a few erstwhile heterodox ideas are enjoying a certain currency. Thus the hipness in the title.

For the better part of the 20th century, the economics discipline operated under the influence of “neoclassical” assumptions. In a nutshell: Efficient allocation of resources constitutes the proper focus of study; perfectly rational and self-interested individuals maximize their economic utility; and a freely competitive economy reaches an optimal “general equilibrium.” But now, flying high on a 2002 Nobel Prize, a formerly heterodox field called behavioral economics has stormed the convention. Offering a more nuanced picture of economic decision making as mediated by social mores and institutions, it has challenged the second of the three major premises. Très hip.

This shifting of the economic terrain is more than just an intramural flap among minds that excel at outsized mathematical modeling. It’s crucially important stuff. “Ideas have consequences” runs the conservative adage. And narrowly defined economic ideas have contributed to some potentially calamitous climate consequences, just for starters.

“Hip Heterodoxy” has generated quite a bit of online discussion, thanks largely to its selection by the TPM Cafe Book Club, which gathered a roundtable of thoughtful commentators, including economists Paul Krugman and James K. Galbraith.

Mr. Krugman strikes a cautious note: “I’d like to warn against an error I think both sides tend to fall into: assuming that you have to use heterodox economics to reach conclusions critical of free markets. … It’s perfectly possible to believe in extensive market failure, demand a lot more government intervention in the economy, while still believing that [the neoclassical approach of] maximization-plus-equilibrium is a nifty way to think about lots of problems.”

The Economist blog weighs in as well - with similar criticism but a decidedly less sympathetic tone. Blasting one of the economists quoted by Mr. Hayes, they write, “This is not heterodoxy; it is a tantrum.”

My own reading of the article seeks a discussion of the heterodoxies that, unlike behavioral economics, are still out in the cold. Take the neoclassical focus on allocating scarce resources, for example. An important correction in ecological economics would insist that natural assets be distinguished from manufactured ones. “You cannot make the same house by substituting more saws for less wood,” writes ecological economist Herman Daly. Très heterodox.

Other writers have taken aim at the third neoclassical precept, the general equilibrium. Economist Frank Ackerman performs a postmortem in the paper, “Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory.” To wit: “General equilibrium is widely cited as providing the rigorous theoretical version of Adam Smith’s invisible hand. But repeated application of the most high-powered mathematics to this problem has ended in failure. If the foundation of everyone’s favorite economics story is now known to be unsound, then the profession owes the world a bit of an explanation.”

Holy heresy! As we might suspect, though, such challenges are not easily reconciled with the mainstream. Instead, a more gradual accommodation is the order of the day. In “The Death of Neoclassical Economics,” economic historian David Colander emphasizes the profession’s capacity for adaptation: “There is not much to like in current economics; but slurring it, by calling it neoclassical economics does not add to [our] understanding of the current failings. Economists today are not neoclassical according to any reasonable definition of the term. They are far more eclectic.”

And so, weaving the thread of this post back to its beginning, we might see the convention covered by Mr. Hayes, in which a handful of heterodoxies are all the rage, as a time-slice in the growing eclecticism chronicled by Mr. Colander.

Mainstream economics is, you see, in a muddle. None too soon, either – for change is needed.

More to come.