The article by Anatole Kaletsky I posted earlier today, Goodbye, homo economicus, did not get the best reception here and elsewhere, and there were also protests that arrived by email. Here's a follow-up on one aspect of the article, the use of formal mathematical models in economics. This article is by David Colander:
Marshallian General Equilibrium Analysis, by David Colander: In an assessment of Alfred Marshall, Paul Samuelson (1967) writes that “The ambiguities of Alfred Marshall paralyzed the best brains in the Anglo-Saxon branch of our profession for three decades.“ In making this assessment he carried on a tradition of Marshall-bashing that has a long history in economics, dating back to Stanley Jevons and F. Y. Edgeworth, who accused Marshallian economists of being seduced by “zig zag windings of the flowery path of literature.” (Edgeworth, 1925)
These harsh assessments of Marshall and his approach to economics have had their influence on the modern profession and, other than historians of economic thought, few young economists know much about him. Fewer still would see themselves as Marshallians.
Today, Marshall is best remembered for his contribution to partial equilibrium supply and demand analysis. For the true economic theorists of the 1990s, however, this contribution is de minimus; the partial equilibrium approach is for novice economists with no stomach for real economic theory—general equilibrium. The profession’s collective view of Marshall in the 1990s is that Marshall is passé--at most a pedagogical stepping stone for undergraduate students, but otherwise quite irrelevant to modern economics.
The motto of recent 20th century economics has been:
Marshall is for kids and liberal arts professors; real economists (professors at universities) do Walras.
Since Marshall’s name is synonymous with partial equilibrium analysis, the title of this paper will seem strange to many. (One well known economist, upon hearing it, labeled the title an oxymoron.) Most economists think of general equilibrium analysis as synonymous with Walrasian general equilibrium analysis. In this paper I argue that this is not true. Marshall was centrally concerned with general equilibrium analysis; he was, after all, a classical economist, and he drew on, and saw his work as extending, the work of Adam Smith, David Ricardo, and John Stuart Mill, all of whom were concerned with general equilibrium, not partial equilibrium, issues.
I shall also argue that the profession’s negative assessment of Marshall is wrong. Specifically, I shall argue that, conceptually, Marshallian general equilibrium analysis is at a much higher level than Walrasian general equilibrium analysis, and, because it is, is far more compatible with modern developments in economics than is Walrasian general equilibrium.
Thus, Marshall's work is not a stepping stone to Walras, but is instead a stepping stone beyond Walras. It is consistent with a fundamentally different conception of general equilibrium, one which recognizes that the mathematical formulation of a meaningful general equilibrium model is much more intractable than those with which Walras and later Walrasians dealt.
To make my point clear, let me continue the Paul Samuelson attack on Marshall with which I started this talk.
I have come to feel that Marshall’s dictum that “it seems doubtful whether any one spends his time well in reading lengthy translations of economic doctrines into mathematics, that has not been done by himself” should be exactly reversed. The laborious literary working over of essentially simple mathematical concepts such as is characteristic of much modern economic theory is not only unrewarding from the standpoint of advancing science, but involves as well mental gymnastics of a peculiarly depraved type. (Samuelson, 1955. pg 6. )
In the 1940s and 1950s, in certain aspects of economics Samuelson was, I have no doubt, right. At that time there were many issues to be cleared up, and his Foundations did clear up numerous issues. But the fact that there then existed some poor intuitive literary economic analysis should not condemn all intuitive literary economics, just as the fact that today that there is some poor mathematical economics should not condemn all mathematical economics.
What I am arguing is that there is a symbiotic relationship between intuitive literary economics and formal mathematical economics. Both are necessary; both can advance our knowledge. Some aspects of good literary economics of a period become the core of good formal economics of a later period. But we will only know which aspects when the formal math catches up with the intuition. The ideal would be a peaceful coexistence of the two.
But peaceful coexistence does not seem to be a stable equilibrium and instead the profession seems to experience these cycles when Marshal’s Dictum or Samuelson’s Dictum predominates. (Consider, for example, the Ricardo-Mill cycle.) Whether Samuelson’s Dictum or Marshall’s Dictum is relevant depends on what part of the cycle we are in. The 1930s-50s was a time for formal mathematical economics to export ideas to intuitive economics. In my view, the 1990s is a time for the reverse. More and more top economists are accepting that we have come as far as we can with static Walrasian general equilibrium.
The new reality of the 1990s is an acceptance that the general equilibrium system relevant to our economy is formally complex. Because that is the case, in the 1990s, Samuelson’s condemnation of Marshall needs to be reversed. Thus, for the 1990s I suggest that the pendulum has swung and the following reworking of Samuelson's above quotation is relevant.
Specifically: “The laborious mathematical working over of essentially simple intuitive concepts such as is characteristic of much modern economic theory is not only unrewarding from the standpoint of advancing science, but involves mental gymnastics of a peculiarly depraved type.” “The intuitive ambiguities of Walras’s general equilibrium, and Samuelson’s expansion of it, have paralyzed the best brains in economics for the last five decades.” It is only now that the profession is returning to the understanding of economic issues that Marshall had at the turn of the century
1Until recently Chicago economists, especially Milton Friedman, saw themselves as working in a Marshallian tradition. More recently, however, younger Chicago economists know little of Marshall, and work in the same Walrasian general equilibrium framework as does the majority of the profession.
2 Even here, Marshall’s contribution is questioned. As Humpries and (to come) (1994) argue, Marshall was neither first, nor clearest, in his presentation of partial equilibrium supply and demand.
With the breakdown of our formal models lately, this may be one of those times when we need to return to intuitive analysis until "the formal math catches up with the intuition." But to abandon the mathematical, formal model approach altogether would be a mistake, and a large step backward.
Update: Link (jstor) to Edgeworth's 1889 article in the EJ, "On the Application of Economics to Political Economy."
Update: I probably should have noted Paul Krugman's Two Cheers for Formalism.