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January 10, 2015

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From Arse To Elbow

I don't know that there is an affinity on the left with heterdox economics so much as a scepticism about orthodox theory that springs from an appreciation of ideology and (echoing your point about power) a recognition that many academic economists have been complicit in advancing a particular financial industry agenda (the Inside Job trope).

gastro george

"One is an ignorance of what the orthodoxy is ..."

An interesting question, partly because what orthodoxy is seems to be so slippery. Defences of orthodoxy by people such as SW-L take the not unreasonable line that they represent an orthodoxy that is different from the one that is most commonly recognised by leftists - which he and Chris would term "macromedia". Orthodoxy means different different things in the academic and political spheres.

Doug

I think many undergraduates who study "basic economics" don't parse out these fine points, and leave the class having rationalized and secured a version of free market fundamentalism.

Also, many of your points, like the efficient market hypothesis, while it would assert that investment bankers are overpaid, is also more plainly wrong. Better understandings could also assert that they're overpaid, and also explain why. MMT and demand-side economics are also v. important, politically relevant, and basically incontrovertible concepts that are ignored in the orthodoxy.

Luis Enrique

All good points, although if you are interested in heterogeneous agent models, network effects or wages determined by bargaining power then there's plenty of mainstream work on that. Which just reinforces your point that the mainstream has more to offer than many seem to think. Although the concern remains that these things havent permeated the mainstream as much as they need to.

gd

Heterodox economists are a marginalised group. Ergo, leftists sympathise.

David Friedman

Two points:

1. Rent seeking provides an argument against redistribution. The declining MUI argument works in a philosopher king model, but not so well in a world where who pays and who receives is determined by the logic of public choice, not the logic of maximum utility.

2. It's possible that stock pickers are overpaid, but I don't think efficient markets implies that. Markets are efficient in such models precisely because those people best able to predict make money by doing so, and in the process shift stock prices towards best estimates of long term value.

To put the point a little differently, efficient market theory implies that you can't make money off free information, but the expertise of the stock picker, if it exists, depends on information and skills not freely available to everyone.

Also, of course, several of your points might better be described as extreme right than extreme left—free immigration and drug legalization being the obvious examples. Liberal in the old sense, not the current sense.

tom michl

Have you or any of your commentators actually read any heterodox macro from the left? I've been a part of this community for a career, and you should be aware that far from being ignorant of orthodox economic theory, we, as critics must, probably understand it better than its practioners. (That's been my experience: my department colleagues get simple stuff like pareto efficiency wrong all the time.) Read a book like Duncan Foley's Adam's Fallacy or Lance Taylor's Maynard's Revenge and respond to something the left has actually said; that would be the start of a good conversation.

root_e

This is utterly delusional. From Econ 101 texts to advanced research papers, orthodox economics is simply jam packed with right wing bullshit. You may pull skepticism about managerial elites from Hayek, but Hayek took from his own work support for Pinochet's torture police. Sargent's hyperinflation work tells us military states in Latin America were practicing solid fiscal policy when they immiserated millions and tortured anyone who disagreed - except he throws in some diff eq to make it seem scientific. And intro Econ texts, like Mankiws are right wing tracts. http://krebscycle.tumblr.com/post/86549963821/who-is-noah-smith-kidding

Until right wing bullshit becomes something you cannot win Econ Nobel prizes for, your point is just wishful thinking.

Pat Connelan

The EMH is quite compatible with a left-wing view in that it questions the master-of-the-universe concept of finance, the idea that there are people who consistently beat the market (after fees). We know that any value they capture they keep for themselves and that the major source if their wealth is the greed and gullibility of their clients. If you must live in a capitalist system and you despise rent-seekers and sharpies, the EMH makes perfect sense.

George Hallam

root_e: I agree, Stumbling and Mumbling is badly wrong on this one. In theory, all manner of things are compatable with neoclassical precepts; in practice anything that challenges the satus quo is filtered out.

tom michl: What you say about conventional academic economists being ignorant of orthodox economic theory is very much in line with my experience of teaching economic in a British university. This is all part of the 'filtering' process.

Cameron Murray

I tend to agree with gastro george's comment - the 'orthodox' clan doesn't often know what it is, and what it knows. Sure, you can modify core models to get any result you want - but that doesn't mean that these modifications represent the core of the orthodoxy.

To give you an example, I submitted a paper about return-seeking as the objective function of firms, rather than profit maximisation (rather than maximise profit per firm, there is a maximisation of profit per dollar cost). The first three journal editors scoffed at the idea, and even after some back-and-forth exchanges and clarifications, the idea simply must have been wrong.

The next editor responded that there was nothing new or interesting and that the idea is implicit in the normal profit-maximising model.

Which leads me to believe that the very imprecise way in which parameters/variables/model inputs are used in economics is a MASSIVE problem (eg. utility, costs - which costs exactly, because it is actually implicitly a subset of costs only, as profits would be returns on equity, which themselves would be a cost, and they embed a normal return, whatever that means - and so forth).

So yes, there is this idea of the orthodoxy as explaining everything, which basically says it explains nothing (are there any falsifiable predictions?) The orthodoxy is then just a religious adherence to a single modelling method, which is the BIG problem all heterodox crowds have.

You mention networks. This is again on display. My reading of the economic attempts to use networks is that many simply add another variable to be optimised - optimise costs and benefits of investing in better networks. Which often misses the whole point about aggregation effects (though there is plenty of good work out there).

There are few ‘biggies’ in my view that the heterodox crowd has right, and gets to the heart of the matter. These are the problems with utility, capital, and the perfect market baseline. And even those who happen to align politically do so by adding whatever imperfections are necessary to their otherwise generic models to get their and justify their world view.

This view is reflected in teaching as well. Start with perfect markets, and imprecise view of what capital is, pretend utility functions are defined, then use this as the baseline for the rest of an economics degree. This really does indoctrinate a bias that more markets are better, and we see this in the language - market failures, missing markets, sticky wages, externalities, etc.

Can you even imagine how to teach economics without this imaginary baseline? What language would be used?

So to me the problem is not really one of the political right v left (though personally I think the heterodox economists on the left should keep these disputes out of the media because it undermines them politically). It is one of methods, usefulness of theories, knowing the limits to knowledge etc.

Rory

Leonid Hurwicz was another leftish (depending on definition) mainstreamer to add to that list. He opposed the Vietnam War and was an active Democrat until his death.

Deviation From The Mean

Isn't the main objection, from a Marxist point of view, to capitalism that it is a system of exploitation, where the workers produces value and part of this is appropriated by an exploiting class?

I also think it is a clever little distortion to claim orthodox economics is all about market failure! I think it would be closer to the truth to say that economics is all about arguing market failure is not really a problem anyone should worry about.

Eric Titus

One perfectly good answer is that there is, in fact, a lot wrong with the orthodoxy. My personal beefs would be, among others, that: representative agent models eliminate important network effects; that preferences aren't always exogenous and well-defined; that the idea that wages equal marginal product is deeply dubious; and that power and exploitation are serious issues.

There is a lot wrong with orthodox economics! I don't know that most leftists (or rightists) have a well-articulated objection to orthodoxy, but if you consider that they are objecting to the politics of economics and "technocrats," rather than economics itself, I think this makes more sense.

Heterodox economics is also, in a way, a response to incongruities between what orthodoxy is saying and what researchers are seeing "in real life." I think this is partly why heterodox economics has grabbed the imagination of some. The most visible economist voices for the past several decades were the efficient market folks, who were clearly on the center-right of a lot of issues.

There's also the irony that when senior economists come up with more "real-world" models it often isn't seen as heterodox. Alan Manning (neomonopsony), Akerlof/Yellen (efficiency wages), and even Dani Rodrik (industry-based development) have findings that move away from orthodoxy. If these were junior scholars they would likely be seen as heterodox--but because they are professionally in the mainstream I think they are seen as more orthodox than they are!

gastro george

@Cameron Murray - nice post, especially:

"Sure, you can modify core models to get any result you want - but that doesn't mean that these modifications represent the core of the orthodoxy."

... and:

"So yes, there is this idea of the orthodoxy as explaining everything, which basically says it explains nothing (are there any falsifiable predictions?)"

That is the core of the complaints about orthodoxy (however it's defined) IMHO.

Magpie

Chris,

I'll be the first to admit it: I am sure that a lot of people prefer heterodox over orthodox, partly or entirely, out of ignorance. I myself have written about that.

Having said that, what about the remainder? You remarked above that there are some things wrong in orthodoxy. What about the other things heterodox people are constantly complaining about? For instance the MMT people? Should they just shut up, because orthodox professors don't feel the need to examine and engage with their proposals?

I'll also admit this: I haven't read Roemer's "Free to Loose", where he gives his interpretation of exploitation. Maybe what he calls exploitation is what other Marxists call exploitation (frankly, I don't know; if you say that's the real McCoy, I'll buy the book right now).

Speaking on my behalf only (nobody elected me as spokesman), I however, think you are overlooking something: every single one of the points you present is correct. In many cases, they can be fixed or at least ameliorated with measures devised thanks to mainstream economics, maintaining other aspects of the normal operation of capitalism.

But you cannot fix exploitation, within capitalism. Until you or other orthodox manage to solve this problem within capitalism, I'll remain heterodox and lefty and Marxist, thank you very much.

------------

Prof. David Ruccio, replying to some comments by Branko Milanovic, put things this way (you might find it interesting):

https://anticap.wordpress.com/2015/01/04/markets-and-exploitation/

Luis Enrique

gastro

if those are the core complaints about orthodoxy, they are not very persuasive.

it's not much of a criticism that mainstream economic theory is broad and flexible enough to be able to articulate more or less any hypothesis. But any one given model will (may) make falsifiable predictions, and there are thousands of papers published every year comparing theory against data.

it think Cameron might be getting at the idea that the idea people make choices in light of exog preferences is consistent with any observed choices (unfalsifiable). That might be true in a one-off situation studied in isolation, but it's not true otherwise. I am used to reading heterodox critics complaining that utility maximization has been proven false, so which is it? Falsified or unfalsifiable, make your mind up.

Luis Enrique

sorry, also core complaint is that core of orthodoxy does not contain left leaning elements that exist on fringes.

some merit to this (I can think of important omissions from undergrad curriculum) but orthodox core (what undergrads taught) includes: fiscal stimulus good idea, unjust initial endowments remain unjust after market operates, redistribution raises welfare, monopoly, government intervention needed for public goods, correct externalities, self-interest leading to bad outcomes (game theory), assorted market failures (i.e endorses state over market medical insurance).

gastro george

@Luis Yes, I think I was probably over-stating my case there. But to look in more detail at one aspect:

"But any one given model will (may) make falsifiable predictions, and there are thousands of papers published every year comparing theory against data."

Sure, but what concerns me is that, of those predictions, far too many turn out to be false, which is actually the point. The models can then be tweaked to fit the outcomes, but is there any utility in models that only look backwards? The further problem here is that it can lead to the cherry-picking of results. "Look this set of data fits my model perfectly" isn't so valid when a host of other data sets don't.

Luis Enrique

gastro

well the glass half full view is that economics is still a young subject which has a long way to go but is busy testing and developing its theories. I don't need to tell you the glass half empty version.

An Alien Visitor

Luis said,

"but orthodox core (what undergrads taught) includes: fiscal stimulus good idea, unjust initial endowments remain unjust after market operates, redistribution raises welfare, monopoly, government intervention needed for public goods, correct externalities, self-interest leading to bad outcomes (game theory), assorted market failures (i.e endorses state over market medical insurance)."

I think I must have attended a different learning establishment to you and read different text books.

Maybe there are different orthodoxies or perhaps (and I think this is the answer) the definition of orthodoxy needs narrowing a bit?

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