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Monday, May 28, 2007

The Hip Heterodoxy Meets Herd Mentality and the Neoclassical Mafia

Here are some highlights from Chris Hayes' longer article, "Hip Heterodoxy," followed by a few of the reactions:

Hip Heterodoxy, by Christopher Hayes, The Nation: ...Every year a sizable portion of the nation's economists descend on some lucky city for the Allied Social Science Associations Annual Meeting, the economics field's largest gathering... Most academic disciplines have a similar annual convention, but no other can boast the same influence on American politics and policy--after all, Presidents don't appoint a council of anthropological advisers...

This year's conference attendees are packed into the ... Chicago Hyatt. On the second evening, I come across two receptions... If you wanted to get a sense of the status hierarchies of the profession, this was a perfect tableau. On one side, a reception in honor of ... Milton Friedman... The room is packed and festive, with several Nobel laureates milling about... (A man behind me in line complains of the free drinks that "Milton wouldn't approve! Because we're not getting the true price of the drinks.") Across the hall, a reception hosted by the Economic Policy Institute (EPI), a left-liberal Washington think tank that advocates policies--higher minimum wage, easier paths to unionization, social insurance--that are in almost every detail the opposite of everything that Friedman stood for. In that room, perhaps thirty people gather, picking at the cheese cubes and shelling out $6 a drink... The EPI's Max Sawicky ... tells me the turnout is better than usual.

After grabbing a free drink in the Friedman reception, I strike up a conversation with economist Michael Perelman... Perelman, who is there for the EPI reception ... is one of a few hundred self-described "heterodox" economists at the conference. ... I ask him about how he relates to the so-called mainstream of his profession. "It's a mafia," he says quietly, his eyes roving over to the suits spilling out of the Freedom to Choose room.

Mafia is probably a tad hyperbolic, but there is undoubtedly something of a code of omertà within the discipline. Just ask Alan Blinder and David Card. ...[T]his past March, the Wall Street Journal ran a front-page article on Blinder's concerns about the massive dislocations that ... outsourcing trends might bring for American workers. He suddenly found himself under fire from fellow economists for stepping out of line. Card, a highly esteemed economist at the University of California, Berkeley, caught flak for his heresy not on trade but on the minimum wage. In 1994 he conducted a study to see whether an increase in the minimum wage in New Jersey had the negative effect on employment that basic neoclassical theory would predict. He found it didn't. ... The paper attracted a tremendous amount of ... criticism...

As Card's and Blinder's experiences show, the "mafia" still flexes its muscles, but there are also signs that its hold on power is slipping. While the discipline remains dominated by a "neoclassical" consensus that is generally pro-market and suspicious of government intervention, an explosion of new research programs and methods have provided strong evidence that many of the pillars of that consensus rest on a foundation of sand. In fact, just before the reception, AEA president George Akerlof, a Nobel laureate as respected in the profession as they come, gave what was in many senses a radical address, attacking some of the discipline's most basic assumptions about what drives human economic behavior. (Three men standing near me in the Friedman reception had referred to it as "crap.") ...

The Birth of Orthodoxy

The term "heterodox"--like, say, "infidel"--is necessarily imprecise; it categorizes people by what they don't believe rather than what they do. In the case of heterodox economists, what they don't believe is the neoclassical model... Classical economics refers to the theories laid out by Adam Smith and David Ricardo in the eighteenth and nineteenth centuries, which emphasized the power of the "invisible hand" of the market...

A hundred years after Smith, a group of "neoclassical" economists came along and added ... that humans are rational, utility-maximizing agents with fixed preferences, that they make decisions "at the margins" and that the mechanisms of supply and demand ... will lead to a general equilibrium whereby resources are allocated efficiently.

That view dominated for the next sixty years until John Maynard Keynes came along in a period of global economic crisis and proposed a new way of looking at the economy... In the wake of Keynes's work..., economists had a problem on their hands. They had two models for how an economy worked: the neoclassical account ... and Keynes's account... In the 1940s and '50s, a series of legendary economists formally fused the two, producing the "neoclassical synthesis." Many of the pioneers of this work, from Paul Samuelson to Kenneth Arrow, were famously liberal. But their work stressed the ways in which markets, functioning on their own without interference, tended to an interdependence described as "general equilibrium." In their wake came a parade of libertarian economists, like Milton Friedman and his Chicago School colleagues, who pushed the neoclassical model to leave Keynes behind completely...

[T]he cradle for much of our policy discussions can be found in the first chapter of just about any introductory economics textbook, where the basic precepts of the neoclassical framework are described under the rubric of "thinking like an economist."

The problem, then, that heterodox economists face is that they are economists who don't "think like economists." Many point out that humans aren't ... nearly as rational as the theory would have them be... Others point out that humans are social creatures ... and ... institutions, habits, social mores and culture all mediate and drive economic behavior. Others say that ... prices don't arise from the simple intersection of supply and demand curves, while some argue that unequal power between different sectors of society affects how markets operate. Dissent from the mainstream of economics is not new; indeed, it's nearly as old as the profession itself. Marx was a kind of heterodox economist, as was Thorstein Veblen. John Kenneth Galbraith spent his whole life as an economic dissident...

The chief complaint of heterodox economists is that the social hierarchy of the profession prevents their ideas from getting the hearing they deserve. Thomas Palley, a dissident economist who received his PhD from Yale and once worked for the AFL-CIO, says that many heterodox ideas "can't be rejected on scientific grounds. They meet all the tests of the profession--they don't meet tastes of the profession. So then you have to answer where the tastes come from."

As a parable of how the boundaries of "taste" and acceptability are enforced, the tale of Notre Dame's economics department is instructive. For the past few decades Notre Dame has had one of the few economics departments where grad students interested in non-mainstream topics could study... But the faculty's heterodox focus froze it out of the top-ranked journals... In the early part of the decade, as Notre Dame pushed to raise its national stature, the department's poor ranking came under increased scrutiny...

"They wanted a more highly ranked economics department...," David Ruccio told me... Ruccio emerged as de facto spokesperson for his heterodox brethren at Notre Dame. The administration  ... decided to create a new 'real department of economics' and make us the department of 'flaky economics.'" One department, which would focus on neoclassical economics, would get the name Department of Economics and Econometrics, as well as the money to hire several new tenure-track professors and the bulk of grad students, and the other, called the Department of Economics and Policy Studies, would be the home of the heterodox economists (who, it should be noted, constituted the majority of the department). Crucially, though, the heterodox department would be frozen out of the graduate student admissions process...

Richard Jensen, the neoclassical chair of the department, defended the split as solely an issue of "standards." But it's precisely the validity of those standards that's at issue. "They don't see themselves as cleansing alternative approaches," says Frederic Lee. "They simply see themselves as saying, This is good economics, and that's bad economics."

Of course, all disciplines set up boundaries, basic methodologies and ways of knowing and deny membership and recognition to those practitioners who work outside those boundaries. Doctors will say faith healers--or midwives, or acupuncturists--aren't engaging in medicine... [S]ome mainstream economists dismiss heterodox work as quackery...

[E]nvironmental economist John Gowdy referred to this as the "Clint Eastwood defense: 'We ain't like that no more.'" ... There's a wide variety of empirical work being published." The empirical work that Gowdy and other heterodox economists tend to cite most is that of behavioral economists... What they routinely find is that the rational utility maximizer of the neoclassical model is a convenient fiction. A growing literature shows humans to be systematically biased in their calculations of risk, disposed to punish antisocial behavior, even at a cost to themselves. ... If you were to draw an intellectual Venn diagram of mainstream and heterodox economics, the behavioral economists would be in the intersecting section.

But despite the fact that much of their work is devoted to upending Homo economicus, the behavioralists have achieved widespread mainstream acceptance. Daniel Kahneman ... won the Nobel Prize for his work in 2002. So then one has to ask, Just what set of characteristics defines what gets to be called "mainstream economics"? And the answer can seem maddeningly circular: Mainstream economics isn't defined so much by some limited set of ideas or approaches. Mainstream economics is that work done by mainstream economists and published in mainstream journals.

The More Things Change...

...A month after the conference, I went to talk more with David Ruccio...[He said] "... Behavioral economists ... don't generally argue for abandoning the general equilibrium model, instead choosing to see their work as adding "frictions" to it. "It's what drives people like me crazy," Ruccio went on. "Because the more disturbing questions are ignored--unequal power or exploitation, those critiques never come in. They say, Look, we've changed. And we look and say, No, you haven't."

'Shoots of Spring'

No one would call Berkeley's George Akerlof a heterodox economist, but his ideas have always been iconoclastic. Back in the 1960s, he noticed that there was something systematically wrong with the market for used cars. His insight was that the problem was "asymmetric information"... Initially no journal would accept his paper "The Market for Lemons," but eventually it was published to much acclaim, and asymmetric information was recognized as a serious breakthrough. He shared the 2001 Nobel Prize for his work on the topic.

Akerlof's AEA address was titled "The Missing Motivation in Macroeconomics," and its purpose was to argue that the basic theory of human behavior upon which neoclassical economics rests is incomplete and that the incompleteness leads to a host of theoretical errors. The "missing motivation" of the title were social norms, people's conceptions of how they should act, which Akerlof argued played a central role in people's economic activity. Once these social norms are integrated into economic theory, Akerlof argued, many of the anti-Keynesian arguments made by Friedman and his ilk begin to fall apart. ...

If the heterodox economists were nonplussed or only grudgingly positive about the speech, many mainstream economists weren't psyched about it either. NYU's Mark Gertler ...[said]Akerlof was "stepping out of line," and one Chicago School economist I e-mailed said he "hated it" and added that it had made one of his colleagues "depressed."

The word "depressed" caught my eye. You only get depressed by something you disagree with if you think others are going to find it persuasive--that is, if you think that the pendulum isn't swinging your way.

"There's a recognition that it's pretty hard to believe in the rational expectations and equilibria which were sold to students in the 1980s, when you had to read them, and not only read them but send them up as your benchmark," Thomas Palley, the former AFL-CIO economist, told me. "In 1983 there were more voices and more possibility, but the world was closing. Now we're coming from a black hole and there are shoots of spring."

I don't have the time I'd hoped to talk about this, so for the moment I'll pass along a piece of advice to any aspiring heterodox economists and then outsource the commentary from there.

Here's the advice. When I was a first year graduate student, during discussions surrounding the work of Kuhn and Popper we were told something like:

It's fine if you want to challenge the neoclassical model. But before doing so, you had better learn the neoclassical model just as well, or better than the people you will be challenging.

It was good advice. It did not allow you to avoid learning the neoclassical model thoroughly even if you had doubts about it. Orthodox economists will question the ideas of heterodox economists from a neoclassical perspective and if they don't seem to understand all the subtleties of the standard model, they are less likely to be taken seriously.

Here are some of the reactions to the article. First, Dani Rodrik:

Is neoclassical economics a mafia?, by Dani Rodrik: Sort of, says Christopher Hayes in a very well-written and very interesting piece in The Nation. He says orthodox economists are a close-knit group and are quick to penalize those among them or from outside who overstep the boundaries. ...

Hayes makes a number of good points about how ideology permeates a lot of thinking by orthodox economists. Anybody who strays from conventional wisdom is in danger of being ostracized. Some years ago, when I first presented an empirical paper questioning some of the conventional views on trade to a high profile economics conference, a member of the audience (a very prominent economist and a former co-author of mine) shocked me with the question "why are you doing this?"

On the other hand I have never found neoclassical methodology too constraining when it comes to thinking about the real world in novel and unconventional ways. ... To me it represents nothing other than a methodological predilection for deriving aggregate social phenomena from individual behavior--and as such it is a very useful discipline for any social science. You say people have some preferences, they face certain constraints, take others' actions into account, and go from there. Neoclassical economics teaches you how to think, not what to think.

So it has always been a bit difficult for me to understand the critique that neoclassical economics is necessarily driven by ideology or leads to foregone conclusions. ...

George Borjas:

Herd Mentality Among Economists, by George Borjas: ...Christopher Hayes ... is asking whether the "mafia" of neoclassical economists marginalize those economists who do not blindly follow the main assumptions of the neoclassical model, a model that many often mischaracterize as having pro-market ideological underpinnings.

The article leaves unexplored one interesting anthropological aspect of Life Among the Econ: its herd mentality. The kind of research many economists do is motivated by, well, by the fact that other economists are doing it too. These research fads are most evident at the American Economic Association meetings... The meetings ... serve the purpose of being the job market... Anyone who has repeatedly sat down to interview the newly minted prospects can spot how the emergence of new topics or methodologies is immediately incorporated into the doctoral dissertations of a disproportionately large number of these newly minted economists.

A personal anecdote helps makes the point. Around 1983 or 1984, in some of my first work on immigration, I ... discovered that the newer waves of immigrants were relatively less skilled than the older waves. I traveled around the country presenting the paper in many academic seminars.

After one such seminar, a leading light of the labor economics profession took me aside and kindly said, "George, it's interesting. But why are you wasting your time on this?" The economist honestly felt that he was giving me good advice...

Immigration as a topic worth studying was nowhere in the radar screen of most economists back then. The fads in labor economics at the time instead included implicit contract theory, the study of unions, and state dependence models, and there was the potential of my being left behind. I can't remember what I replied but, needless to say, I ignored the advice.

Max Sawicky:

Nerds on Parade, MaxSpeak: ...The Blinder and Card episodes are very telling. They point up the self-perpetuating elite of the profession as a vicious, reactionary priesthood. (Obviously there are exceptions.)

[Update: David Warsh at Economics Principles has more along these lines in Outside, Inside. This post from Brad DeLong is also related.]

    Posted by on Monday, May 28, 2007 at 12:09 AM in Economics, Methodology | Permalink  TrackBack (0)  Comments (22)


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