In 2008 as The Great Moderation came to an end, Queen Elizabeth II asked Mervyn King “Why did no-one see this coming?” Her Majesty had clearly not read either Irrational Exuberance by recent Nobel laureate Robert Shiller, or Crash Proof by Peter Schiff (probably not a Nobel candidate). If she had she would have realised that, in fact, at least two economists, albeit with very different approaches, did see this coming. There were warnings, but many chose to ignore them. But Her Majesty was on to something, the belief that the crash had caught economists napping became quite widespread.
This dissatisfaction with the orthodox macroeconomics practiced by policymakers and taught in universities on both sides of the Atlantic has sparked an increased interest in heterodox economics, such as inspired Manchester University’s Post-Crash Economics Society which declares “The world has changed, the syllabus hasn’t”. There is much to commend this trend – much orthodox macroeconomics is mathematically overelaborate bunk. But what exactly is the orthodox we should be shunning and the heterodox we should be embracing?
According to the Guardian, one of the economists backing the efforts of students like those in Manchester is Cambridge University’s Ha-Joon Chang who says “Students are not even prepared for the commercial world. Few [students] know what is going on in China and how it influences the global economic situation. Even worse, I’ve met American students who have never heard of Keynes.”
Really? I did my economics degree at Birkbeck College between 2007-2011. One of my modules was Macroeconomic Theory and Policy and the course text was 2007’s Macroeconomics by N. Gregory Mankiw and Mark P. Taylor. It contains eleven index entries under ‘Keynes, John Maynard’ (‘consumption function’, ‘economic theory’, ‘gold standard’, ‘inflation’, ‘inflation as taxation’, ‘interest rate determination’, ‘investments’, ‘IS curve’, ‘IS-LM model’, ‘real wages, cyclical behaviour of’, and ‘stock market speculation’) and a further nine under ‘Keynesian Cross’ (‘adjustments’, ‘decrease in taxes’, ‘dwindling in popularity of’, ‘economy in equilibrium’, ‘government purchases’, ‘planned expenditure’, ‘policy shifts and’, and ‘taxes’). In another module, Intermediate Macroeconomics, the course text was 2007’s Macroeconomics by Stephen Williamson. Solidly in the Real Business Cycle tradition even this book contains index references to ‘Keynesian business cycle theory’ (‘labor market in a sticky wage model’), eleven references under ‘Keynesian coordination failure model’, and one each for ‘Keynesian transmission mechanism for monetary policy’, and ‘Keynesian unemployment’.
Besides, the point of university is that you do much of the study off your own bat. At the end of my first year I had got so fed up reading textbooks telling you what was in The General Theory that I went and read it myself. Quite honestly, it is difficult to believe that Chang actually has met “American students who have never heard of Keynes” and if he did they would seem to be uninquisitive, unrepresentative idiots who a change of syllabus is unlikely to help.
In another Guardian article Mahim Husnain and Rikin Parekh of the Manchester society write that “in the education we receive as economics students, there is little stress on how a market could fail”. If this is true then the curriculum at Manchester University is very different to mine. In a module on Intermediate Microeconomics one of the textbooks we used was 2003’s Microeconomics by Robert S. Pindyck and Daniel L. Rubinfeld, the fourth and final part of which was called ‘Information, Market Failure, and the role of the Government’. We also used Hal R. Varian’s 2006 text Intermediate Microeconomics which included entire chapters on supposed sources of market failure such as ‘Monopoly’ and ‘Oligopoly’, ‘Public Goods’, ‘Externalities’, and ‘Asymmetric Information’.
Much of the microeconomics taught at universities is, in fact, based on notions of market failure and what the government can apparently do to remedy them, so much so in fact, that Joseph Stiglitz, George Akerlof, and Michael Spence won the Nobel prize in 2001 for their work on the subject. If you haven’t come across it either your university is letting you down or you’re not paying attention in class.
Michael Joffe, professor of economics at Imperial College, London, says “many reformers (have) called for economics courses to embrace the teachings of Marx and Keynes”. But heterodox economics should not simply mean any old rubbish. Some of it, like Marx with the ludicrous Labour Theory of Value as the keystone of his system, is heterodox for a very good reason. And the idea that Keynes is or was particularly neglected and that universities are teaching that markets can never fail is simply untrue; he is an integral part of the orthodox mainstream.
Economists should always be testing their theories against new ideas and to that extent the recent interest in different approaches is to be welcomed. But we should be wary of people trying to pass off the useless (Marx) or the thoroughly familiar (Keynes) as something fresh and challenging.
” If you haven’t come across it either your university is letting you down or you’re not paying attention in class.” I agree.
Marx was not so Heterodox… A. Smith has been making use of the same theory about the labour-content of goods (he sometimes even wrote that a lawyer’s work valued nothing, as no goods are producted which “contain” labour). Maybe Marx can be Heterodox because Orthodoxy today is something else.
In Italian universities you are stuck in courses on Keynes (IS-LM covers more than half of Macroeconomics) and about how to regulate the markets (for them not to fail). Classics are treated as pre-history, and Monetarism as dispersed fragment of ideas about money-caused inflation. Austrians… who?
So… 1) what’s orthodox today? 2) is orthodoxy just the same as mainstream?
Excellent points there. Yes, Marx was, in his day, thoroughly orthodox; he simply followed the economics of Ricardo to the conclusions Ricardo had blanched from. But then came Jevons, Walras, and Menger and the jig was up.
Thanks for sharing an Italian experience. Mine was divided between a very New Keynesian course and one based on DSGE models, RBC stuff. In terms of orthodoxy I think those are the two contenders.
I think it was Mises who said that, in the end, there was only good economics and bad economics.
Gosh, John, I forgot a master course in finance (Italy, 2003), fully pegged to the new keynesian paradigm… I subscribe: NK and DSGE can be seen as the current orthodoxy.
I would like to repeat a question, which I cannot actually answer: is orthodoxy just the same as mainstream? Or should we give orthodoxy a different meaning? I expose my point: I call Austrian Orthodoxy (Austrodossy) those who claim themselves as the “pure” Austrian, usually alligned with Rothbard’s thoughts and interpretations. I don’t mean my definition is “true”, it’s just a means by which I classify a particular thread within Austrism. But… should we make a deeper point of what hetero/othodoxy is and what mainstream (/alternative) economics are? Does it make sense?
Well Leonardo, if I understand your question correctly the answer is a lemon.
As John Phelan reminds us Mises said there was only good economics and bad economics. By that I believe he meant common sense or stupidity.
Dwell on it for a while.
First the Guardian lies about everything – so the fact that they lie about economics courses should not astonish anyone.
They have an agenda – to blame “capitalism” for the present and future economic crises (a crises actually caused by monetary expansion, credit bubble economics, and a looming government fiscal breakdown – even if the Central Banks were not demented, and they are demented, the Welfare States would bring down the international economy anyway).
Now on to other matters……
Adam Smith is mixed – in his old age he seemed to forget things that he had understood when younger. For example when younger Adam Smith understood there was no “paradox of value” – as one did not value “water” versus “diamonds”, one values a specific amount of water against a specific diamond in a specific time and place.
As for Karl Marx he really got the Labour Theory of Value from David Ricardo (Ricardo was refuted by many economists at the time, such as Samuel Bailey and Richard Whately, but Marx ignored the refutations), but part of Marx’s thought is as old as a fallacy of Aristotle.
The fallacy I am thinking of is the idea that Aristotle has that people exchange “equal values” or that one party is exploiting the other. One can see how this would distort economic thinking – as it means that if one party profits from trade the other party must LOSE (it reduces both international and domestic trade to a zero sum game).
In reality economic value is SUBJECTIVE – buyers and sellers of goods and services (labour) value what they are buying and selling DIFFERENTLY. This means that BOTH buyers and sellers benefit from an exchange.
As for predicting what is going to happen in advance……..
Well one can do that in general terms – but not the specific day.
Take the gold and silver markets.
The demand for physical gold and silver is going up and up – and supply is not.
Yes the price of gold and silver is NOT going up and up – the laws of supply and demand are being violated.
This means the market (the gold market and the silver market) is being RIGGED.
This rigging (by Central Banks and so on) will break down – now there is a prediction.
But WHAT DAY will it break down?
This is far harder to predict.
This divides an economist (who can tell people that a market is being rigged – and that supply and demand will win in the end) and market player – who needs to be able to predict the exact time the rigging will break down.
“Much of the microeconomics taught at universities is, in fact, based on notions of market failure and what the government can apparently do to remedy them.”
That’s the problem. Economics should analyze how economies work, not produce potential government interventions to remedy the failures of previous government interventions. Since Isaac Newton every scientific field has attempted to move past description to modification. Theorizing over Newton’s falling apple has given way to escaping the earth’s gravitational pull. The practical use of scientific knowledge has been extended to the psuedo-sciences as well, in particular economics. Since the keystone of science is predictability, which is impossible in individual human behavior, economics, the centerpiece of the social sciences, can’t justifiably be used proscriptively.