Saturday, June 15, 2013

What is really neoclassical economics?

So Noah Smith thinks that I, Lars Syll and Steve Keen, and other heterodox bloggers (in which he adds Austrians; you see why they should teach History of Thought?* For a discussion of the meaning of heterodox economics, including why Austrians are not so, go here) use the term neoclassical economics as a pejorative term. In fact, in the post he links to, in which I do criticize his views on Graber's work, I do say this on neoclassical economics: "mainstream (neoclassical) notions about debt are really problematic." So nothing derogatory or abusive is suggested. What is said there is that certain views of that particular school of thought are not necessarily free of problems. So no, neoclassical is not a slur.

But before I get back to what I think Noah is trying to get to, we need to address the actual meaning of neoclassical economics. For starters neoclassical is a bit of a misnomer. Veblen invented the term to suggest continuity between the old classical school and the new marginalist school of his time, fundamentally based on Laissez Faire providing an intellectual link between both groups. But the continuity between classical authors and marginalists is not defensible, once one goes beyond certain policy stances and concentrates on the main theoretical propositions of both schools [in this respect the book by Krishna Bharadwaj is still worth reading]. But we are to some extent stuck with the name. So be it.

The core propositions in neoclassical economics are associated to what Garegnani referred to as the data of the system, that is, the variables that are taken as exogenous and allow explaining the functioning of the system, namely: the endowments of factors of production, the preferences of the economic agents, and technology. On the basis of these variables the supply and demand functions of all goods, including the so-called factors of production (capital, labor and land), can be determined, and as a result the relative prices of all goods and the efficient allocation of resources is established. Central to the approach is that supply and demand for labor and capital determine the remuneration of these factors of production, and as a result, and in contrast to classical political economy and Marx, income distribution is endogenously determined [there are insurmountable problems with this theory, as Paul Samuelson accepted, subscription required; for more go here]. And there are differences between the old version of neoclassical models based on the notion of a long term equilibrium (which is what is still taught in undergrad courses) and the intertemporal version, but for our purposes we can just omit the differences.

Note that Noah says that neoclassical economics is: "Assumption of individual rationality, utility maximization, and supply/demand." But this is at best incomplete, and at worst simply incorrect. Yes they assume individual rationality, but that was also true of classical authors like Smith, Ricardo and Marx, who wouldn't assume that capitalists did not rationally pursue profits. And a more relevant discussion would be about types of rationality, substantive or bounded (like in Simon, but I'll leave that for another post). And also, social utility, not personal individual subjective utility, was essential for classical authors, since nothing that didn't have use value (utility) would be produced. Finally, market prices, but not long term natural or production prices, were determined by supply and demand, and disequilibrium played a role in gravitation towards normal prices. So the three characteristics are not enough to distinguish Ricardo and Marx from Marshall or Noah Smith. The essential thing is that supply and demand determine the long term normal prices of everything including factors of production (endogenous distribution).

Noah then points out that papers that deal with the issues in the core are almost not published. He says that publication of papers that deal with the theoretical core fell "from over half of top-journal econ papers in 1963 to less than 28% in 2011." As it should be, in particular with a core that has been revealed to be so full of problems since the capital debates. And yes, most developments like the Acemoglu et al. paper (discusses here in various places by Cesaratto and I, also here) are orthogonal to the core. But these are developments outside the core, but still within the so-called protective belt of the neoclassical paradigm or research program (for protective belts and paradigms go here and here). The problem is that they still presume that the neoclassical theory in the core holds. Note that they suggest that a minimal government that protects private property rights is enough for development, something that goes hand in hand with the neoclassical core. So a lot of the time what seems to be the use of neoclassical economics as an insult is just frustration about the inconsistencies that appear between the empirical research in the protective belt and the incoherence in the core.

Mind you, as students and newly minted PhDs like Noah have never heard or read on the capital debates, and have not been exposed to the authors of the surplus approach and Marx (besides reading less in other disciplines in the social sciences) it is not surprising that the term neoclassical is seen as an insult hurled at them by crazy and older heterodox economists. But it's not. Don't get me wrong, the core of neoclassical economics is not good or bad in itself, but it is logically flawed.

* By the way, it should be required at both the graduate and undergraduate level, since many graduate students come from other disciplines. A discipline that does not understand its own history is bound to move blindly rediscovering old truths, accepting already discarded myths, and forgetting useful ideas. And you might have, also, the paradoxical situation of a neoclassical economist that does not know what neoclassical economics is (like Dave Chappelle's black white supremacist).

PS: Note that Noah is not responsible for the definition of neoclassical economics he uses, which was lifted from Wikipedia. And yes Wikipedia is not the best source.

15 comments:

  1. When it comes to radical stuff, anarchism, Marx etc Noah gets very wobbly.

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  2. So this is nitpicking, but you realize your definition of heterodox is one definition of heterodox that is widely used, but it's not the one used by all historians of thought - don't you? I'd put Austrians in heterodox not because one definition is any better than another but because the PK definition is pretty much only used by PKs.

    Definitions that only a small community of people use that would confuse most other people are typically definitions that are going to be avoided by historians of economic thought. When I'm among PKs I know what that use of the term means and everything is fine, but I'd never write up a HET paper using it that way unless the audience was largely PKs. It just doesn't make any sense.

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    1. Hi Daniel. History of thought is not a popularity contest. So most economists are neoclassical (like Blaug) and think that classical and neoclassical economics are compatible. They are not. That is a demonstrable fact. So even if the majority uses another definition it does not make it right. The same goes for my definition (used by all Sraffian economists) of heterodox economics. If there is something you think is incorrect with the definition I'm open to discuss it, and if I'm wrong to change my mind. Otherwise, I'll stick with it.

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    2. I'd agree classical and neoclassical aren't compatible (well put it this way - you could make a model that has neoclassical features that was structured like a classical model.... but that's a different discussion) - did I ever suggest they were?? I thought we were talking "heterodox".

      Definitions are definitions. It's not a matter of being "incorrect". Yours works fine - like I said when I work with PKs (and I have and I will) know exactly what their definition is. What doesn't make sense is to browbeat Noah and pretend people don't understand HET if they happen to not use your definition.

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    3. It is a matter of being 'correct'- correct enough to describe the reality which we are trying to understand (let us try not to be post-modern here).

      Noah has taken the typical mainstream way out - by claiming the mainstream isn't the mainstream. And by your comments, your conceptualization seems to follow Noah's.

      In effect, everything is heterodox (definitions are just definitions after all, right?), which seems like a poor argument to make. Everything gets put into the 'canon' and the dissenters are silenced.

      The true measure is whether the core of neoclassical economics is taught without exposure to other theories (price theory is logically incoherent, but still dominantly taught). My school, UMKC, teaches both canons - although we (and I) favor empirically grounded theories following Fred Lee (for micro).

      Also, with the interactions I've had with 'mainstream' economists, I feel no love lost by telling them they don't understand heterodox economics. They don't. As a litmus test, ask the majority of mainstream graduate students how much history of thought or alternative theories of price they've read. Your answers will be disappointing.

      Besides, lack of understanding now does not imply lack of understanding in the future. I welcome Noah into our community for discussion.

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    4. "I'd put Austrians in heterodox not because one definition is any better than another but because the PK definition is pretty much only used by PKs."

      Right. "Heterodox" has a normal everyday meaning: not orthodox. Adding qualifications like "not orthodox PLUS believes certain special things I believe" is kind of dumb.

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  3. It sounds kind of like you want to define "heterodox" and "neoclassical" as the poles on a left-right political axis...

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    1. Hi Noah:
      Nope quite the opposite. Neoclassical economics (and heterodox also) are defined by their analytical structures. The core in classical economics took as given the real wage (at subsistence), output, and technology to determine social surplus. The core of neoclassical economics is described in the post. Hence, some classical authors were radical like Marx, but others like Smith were not like Smith, sort of a Whig, but close friend with Tories like Hume. And some neoclassicals like Wicksell were lefties, often described as a Socialist, while others like Jevons were definitely not.

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    2. By the way, in my view heterodox ideas should be based on the old classical political economy ideas, plus Keynes' effective demand.

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    3. I disagree that they should be "based" on those ideas, though I do think that most heterodox ideas would by definition consist of those ideas plus some sort of institutionalism. Economics does not need to be based on the analytic structure created by the fathers, if it did only this then economics itself could never have a normative outlook that would be acceptable to others (such as including ethics within economics, which is not easy as simply creating a set of rules or simply talking about ethics).

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    4. Please do all of us a favor and do some reading such as the suggestion given above on Krishna Bharadwaj's book on "Themes in Value and Distribution" so you get a good handle of what you're talking about regarding neoclassical economics. You can't continue pulling things out of your butt without doing any reading, it's simply annoying and inappropriate for someone of your professional caliber, even if it is on a blog. Thanks.

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  4. since everyone is talking about definitions, I'd like to know where would you put non-surplus+effective demand theories that are usually considered heterodox? In this I mean some strands of PKs, most of latin american structuralism, institutional economics, and etc..

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    1. As confused. Hey, no big deal. If a good chunk of neoclassical economists are confused, why heterodox ones cannot also be. But I'm glad they do like Effective Demand. And don't forget the surplus approach ones that don't like effective demand, and the Marxists that like marginalism. There are all kinds of things out there. And by the way, from a sociological point of view the more the merrier. The mainstream used to be more accommodating to accepting everybody in their journals and universities. And that pluralism was certainly good for the profession.

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  5. note the last comment was for Noah, the prior one for Dr. Vernengo.

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