“It doesn’t matter whether a cat is white or black, as long as it catches mice.” I was reminded of this quote from Deng Xiaoping by the debate between Simon, Brad and Unlearning Economics over the role of mainstream economics. For me, what matters isn’t whether economics is mainstream or not, but whether it does the job of explaining reality.
I’ll take three different examples.
The first is austerity. Brad’s right that some mainstream economists supported austerity. But so what? What matters is the strength of the arguments, not who makes them. And many mainstream arguments were weak. Reinhart and Rogoff’s claim that debt-GDP ratios above 90% reduced growth was just plain incorrect. And whilst Alberto Alesina was right to point out that there have been cases (pdf) of expansionary fiscal contraction, those cases aren’t relevant to the situation we’ve been in since 2010.
My second example comes from the day job: defensive stocks have for years done better than the textbook CAPM predicts around the world – a fact first pointed out by impeccably mainstream economists. This is a counter-example to Russ Roberts’ claim that “most economics claims are really not verifiable or replicable.”
There are (at least) three interpretations of this. The most mainstream, I suspect, is Frazzini and Pedersen’s (pdf) – that market imperfections (limits on borrowing) generate high demand for high-beta stocks, causing them to be overpriced. Alternatively, there might be a behavioural explanation: investors' lack of attention or overconfidence causes them to under-price defensives and over-price growth. (Is behavioural finance mainstream? I don’t give a damn). And even further from the mainstream is Falkenstein’s claim that there is in fact no trade-off between risk and return.
Which theory is most right? In one sense, it doesn’t matter. The fact that three different ideas both point to defensives doing well strengthens my belief that they’ll continue to do so.
My third example is inequality. It’s obvious that the simplest version of mainstream economics doesn’t explain a rising income share of the 1%: the idea that bosses are paid their marginal product fails because it implies that the men who brought down banks in 2008 should have had salaries of minus billions, which they did not. But what about the idea that inequality is due to superstar firms (pdf)? Or to agency failures? Or to shifts in bargaining (pdf) power? Are such theories “mainstream” or not? There might be a type of academic pedant who cares. But I don’t. What matters is: do they fit the facts? Do they do a better job than, say, Marxian theories?
What I’m trying to get at here is an agreement with both Simon and Unlearning Economics. I agree with Simon that economics should be a vocational subject which addresses real-world issues. But I also sympathize with UE. Economics should be more diverse simply because different perspectives help explain different problems: this is why we should study classical economic thought. The question is not: what’s mainstream? It is: what’s right?
* I’d be a lot more sympathetic to MMT if its proponents weren’t so damned longwinded.