How Has Economics Failed?

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Robert Vienneau
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The Financial Times is having a debate about whether economics has failed. The first interchange is here, with some followups here. (I happen to have two tabs about neoliberalism open at the moment as well.)

Mainstream economics is a failure in so many dimensions that its failure cannot be characterized shortly in any comprehensive way. For example, I am not going to discuss funding sources and economics role as a system justification. Even so, you might find this post long and wandering.

As you can see, I do not take the claim to be that non-mainstream, heterodox economics has failed. In the comment section, for one FT page, Percy Pavilion writes, "So Marshall, Keynes, Kahn, Kaldor and Harcourt failed did they?" I think any opinion on whether Keynes, Kahn, Kaldor, and Harcourt were failures to be irrelevant to the topic. Was it Joan Robinson, commenting on the claim that it is all in Marshall, said something like, "The problem is that the opposite is also in Marshall, too"?

Anyways, I want to focus on the failure of economic theory. I think any well-trained economist in some field knows how to tweak assumptions to get any results that they want. Start with a model of perfect competition. Add an information asymmetry, a transaction cost, a search cost, sticky prices and a Calvo fairy, some monopoly or monopsony, whatever. Then you can argue that some policy will lead back to efficient markets. Or, if so inclined, that government failure prevents any some implementation.

Given this openness to such tweaks in mainstream economics, why is Sraffian economics or some other variety of heterodox economics not more widely accepted? Most of the time, when I or others put forward a model with Sraffa effects, we are not arguing about the implications of an imperfection. Rather, the argument is that the model of perfect competition does not work the way that mainstream economists teach. And this is usually in an open model with no way to resolve class interests in some utopian world. To understand such models, it is helpful to have some understanding of the history of political economy and alternative theories of value and distribution. As Mariana Mazzucato notes at the FT, mainstream economists are trained to be ignorant of such topics.

What to make of empirical research? Some of it, say, on malarial nets, is by researchers striving to be useful. One can raise questions about external validity and whether atheoretical research is possible or desirable. But this is a different direction from my comments above.

But how does the theory relate to the supposed empirical turn? Are textbooks updated to state that some theories (e.g., skills-biased technical change) have been rejected by the evidence? Can you point to an introductory textbook that includes a section on behavioral economics and empirical evidence? (I expect "Yes" to be an answer to this question.) But how many experiments decide between contrasting theories? It is my feeling that the ability to tweak a theory includes an ability to maintain it as consistent with any empirical evidence that shows up. And much empirical work takes a particular approach for granted, without testing it. I like reading Marshall Steinbaum, but will cite him as somebody that does not realize how many effects he takes as a consequence of monopsony might be consistent with Sraffian price theory, before adding in failures of competition.

I am unsure how to take a lot of applied research. I do not think tariffs on steel and aluminum should be imposed on the whim of an ignoramus. I suppose one can use Leontief matrices to trace through the effects of such tariffs on the automotive industry, aluminum cans and the beverage industry, etc. And I suppose that one can apply game theory after the fact to rationalize, say, the Chinese reaction. But can one say beforehand whether soy bean farmers in the mid west or Boeing executives trying to sell Dreamliners should have more to worry about? And is not the question of the long term effects of undermining the World Trade Organization more a qualitative question for historians that data-driven economists? I want to take analysis of the possible effects of the exhaustion of North Sea oil reserves on sustainable social spending in Norway as useful. But I suspect that if I look carefully, I will find theoretical errors embedded in many of the equations in supposedly applied research.

I am amused that Maurice Obstfeld shows up in the FT interchanges, when I have just demonstrated the failure of what Krugman and Obstfeld teach in one edition of their textbook on international trade. I am aware that the boundary between mainstream and non-mainstream economic theory is not necessarily well-defined. Nevertheless, I do not expect most mainstream economists to be able to conduct a reasonable conversation about the topics in this post. At the FT, Diane Coyle, Tony Yates, and Tim Harford exemplify my expectation. And much of what I am saying is old hat. You can see some of what I am saying as echoing Christian Arnsperger and Yanis Varoufakis. Or even Robert Solow.