Attacks on mainstream economics such as this by Aditya Chakrabortty leave me hopelessly conflicted.
On the one hand, I sympathise:
- Some mainstream economists certainly do try and use economic theory to defend elites - as in Greg Mankiw's defence (pdf) of the 1%.
- It could be that a belief in rational markets is performative, and did help to contribute to the bubble in credit derivatives. This is one message of Shleifer and Mendel's chasing noise (pdf) paper.
- Any economics course that doesn't teach its students some history of the discipline or some behavioural economics is both a lousy education and a poor preparation to be a practicing economist. One of my old bosses in investment banking used to say that the most depressing phrase in the English language was "I'm a trained economist" - the point being that economists should be educated, not trained.
But on the other hand:
- As Andrew points out, the fact that most economists failed to predict the crash is actually a vindication of mainstream economics, which says that such things should be unpredictable. I'd add that forecasting isn't part of proper economics at all, so a forecasting error tells us nothing about the merits or not of economics.
- Some of Aditya's claims, such as trying to blame Black-Scholes, are wrong: it might have been to blame for the 1987 crash, less so the 2008 one.
- The fact that the recovery from recession was so weak for so long actually vindicates mainstream Keynesianism - which, as Simon says, is "at the heart of any undergraduate macro course."
- The crisis was a failure not (just) of markets but of organizations. This can be usefully analysed with mainstream principal-agent theory.
Above all, though, I fear that Aditya is missing a bigger point. The division that matters is not so much between heterodox and mainstream economics, but between good economics and bad. I'll give just two examples of what I mean.
First, good economics tests itself against the facts. What makes Mankiw's defence of the 1% so risible is that it ducks out of the empirical question of whether neoclassical explanations for rising inequality are actually empirically valid. Just because something could be consistent with a theory does not mean that it is.
Secondly, good economics asks: which model (or better, which mechanism or which theory) fits the problem at hand? For example, if your question is "should I invest in this high-charging actively managed fund?" you must at least take the efficient market hypothesis as your starting point. But if you're asking "are markets prone to bubbles?" you might not. As Noah says, the EMH is a great guide for investors, but not so much for policy-makers.
It's in this sense that I don't like pieces like Aditya's. Ordinary everyday economics - of the sort that's useful for real people - isn't about bigthink and meta-theorizing, but about careful consideration of the facts.