realitybase - Journal

Professor Mark Thoma, who hosts the best economics blog on the web, writes this:

Congress and the executive branch have, to a considerable extent, been devoted to business interests in recent years. In essence the argument is that what's good for business is good not just for America, but for the whole world. The ideological basis for this approach is that the interests of business and of greater society always coincide so that maximizing business interests maximizes social benefits at the same time, and that a hands off approach from government is the best way to allow those coincident interests to express themselves.

Unfortunately, however, this ideological foundation incorporated a flawed understanding of the interaction between market structure and social benefits, particularly the ability of markets to self-correct when the market structures deviate from the socially optimal structure. The result of this, particularly as it came to be applied in the political arena, contributed to the existence of cronyism, rent-seeking, institutions that became too big, interconnected, and too powerful to fail, and other problems. Political power combined with rigid ideology built upon a false premise - the doctrine of immediate self-correction by markets - gave us a result that was far from the competitive ideal presented in textbooks, a world that was far from the ideal competitive model that produces such large benefits for society.

I think there is some understanding that the approach of the past did not work, with the current state of the economy it's hard to argue that it did, and that we need to go in a new direction. And I'm sure we will try. But I wonder, when all is said and done, will anything really change?

There are millions of citizens and public officials who graduated from college believing that what they were taught in two semesters of economics was "true." That's how the text books are written, and teaching the current standard model may be the easiest way to cover a lot of material. For the rest of their lives, most of these graduates will start their thinking about every economic issue from these same core beliefs--including beliefs that professional consensus later finds objectively false or rarely relevant in the real world. Pete Peterson is an egregious but typical example.

In a little while, the standard model in economics texts will be revised, and some different set of "truths" will be instilled into the next generation of collegians. Whatever they are, these new truths will eventually be spectacularly contradicted by the real world and will be replaced, leaving millions of angry and distrusting believers unable to adjust. So updating the standard model does not get at the fundamental problem that economics is often taught, and even more often received, as a secular religion. Professors, you're more responsible for this than your alumni.

Perhaps if the first (for most students, the only) year of economics were taught as history of economic thought and political philosophy, professors would portray less certainty and, thus, do less long-lasting damage. Or teach the course by the case method in which students are exposed to a full range of conflicting arguments and materials and come to the realization that we don't know for sure why what happened happened, that subtle differences in the facts might have led to different outcomes, and that there is a lot more uncertainty in the real world than in the virtual reality models of economic "science." Perhaps graduates of such programs would be more apt to analyze unique real world problems with the tools of economics rather than to thoughtlessly apply the same "solution" to every problem.

Update on Tuesday, January 27, 2009 at 07:50AM by

Skeptic

On the other hand, David Brooks praises institutional conformity and indoctrination here.

As we go through life, we travel through institutions--first family and school, then the institutions of a profession or a craft. Each of these institutions comes with certain rules and obligations that tell us how to do what we are supposed to do. . . . New generations don't invent institutional practices. These practices are passed down and evolve. So the institutionalist has a deep reverence for those who came before and built up the rules that he has temporarily taken delivery of. . . . The rules of a profession or an institution are not like traffic regulations. They are deeply woven into the identity of the people who practice them.

He offers this in contrast to the vision of a faculty committee at Harvard on the purpose of education. “The aim of a liberal education” the report declared, “is to unsettle presumptions, to defamiliarize the familiar, to reveal what is going on beneath and behind appearances, to disorient young people and to help them to find ways to reorient themselves.”

Update on Monday, March 23, 2009 at 12:36PM by

Skeptic

Professor Steve Keen says recent events clearly expose the fatal flaws in neoclassical economics and argues that it should be obliterated from college curricula and economics journals. But he doubts it will happen.

Given how severe this crisis has already proven to be, the reform of economic theory and education should be an easy and urgent task. But that is not how things will pan out. Though the “irresistible force” of the Global Financial Crisis is indeed immense, so to is the inertia of the “immovable object” of economic belief.

Despite the severity of the crisis in the real world, academic neoclassical economists will continue to teach from the same textbooks in 2009 and 2010 that they used in 2008 and earlier (laziness will be as influential a factor here as ideological commitment). Rebel economists will be emboldened to proclaim “I told you so” in their non-core subjects, but in the core micro, macro and finance units, it will be business as usual virtually everywhere. Many undergraduate economics students in the coming years will sit gobsmacked. as their lecturers recite textbook theory as if there is nothing extraordinarily different taking place in the real economy.

The same will happen in the academic journals. The editors of the American Economic Review and the Economic Journal are unlikely to convert to Post-Keynesian or Evolutionary Economics or Econophysics any time soon—let alone to be replaced by editors who are already practitioners of non-orthodox thought. The battle against neoclassical economic orthodoxy within universities will be long and hard, even though its failure will be apparent to those in the non-academic world.

Much of this will be because neoclassical economists are genuinely naïve about their role in causing this crisis. From their perspective, they will interpret the crisis as due to poor regulation, and to government intervention in areas that should have been left to the market. Aspects of the crisis that cannot be solely attributed to those causes will be covered by appealing to embellishments to basic neoclassical theory. Thus, for example, the Subprimes Scam will be portrayed as something easily explained by the theory of asymmetric information.

They will seriously believe that the crisis calls not for the abolition of neoclassical economics, but for its teachings to be more widely known. The very thought that this financial crisis should require any change in what they do, let alone necessitate the rejection of neoclassical theory completely, will strike them as incredible.