Heterodox
[embedded content]Jeremy Rudd addresses the Cambridge Society for Economic Pluralism Jeremy Rudd has written: Mainstream economics is replete with ideas that 'everyone knows' to be true, but that are actually arrant nonsense. For example, 'everyone knows' that: aggregate production functions (and aggregate measures of the capital stock) provide a good way to characterize the economy's supply side; over a sufficiently long span - specifically, one that allows necessary price adjustments to be made - the economy will return to a state of full market clearing; and the theory of household choice provides a solid justification for downward-sloping market demand curves. None of these propositions has any sort of empirical foundation; moreover, each one turns out to be seriously
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| Jeremy Rudd addresses the Cambridge Society for Economic Pluralism |
Jeremy Rudd has written:
Mainstream economics is replete with ideas that 'everyone knows' to be true, but that are actually arrant nonsense. For example, 'everyone knows' that:
- aggregate production functions (and aggregate measures of the capital stock) provide a good way to characterize the economy's supply side;
- over a sufficiently long span - specifically, one that allows necessary price adjustments to be made - the economy will return to a state of full market clearing; and
- the theory of household choice provides a solid justification for downward-sloping market demand curves.
None of these propositions has any sort of empirical foundation; moreover, each one turns out to be seriously deficient on theoretical grounds1. Nevertheless, economists continue to rely on these and similar ideas to organize their thinking about real-world economic phenomena. No doubt one reason why this situation arises is because the economy is a complicated system that is inherently difficult to understand, so propositions like these - even though wrong - are all that saves us from intellectual nihilism. Another, more prosaic reason is Stigler's (1983, p. 541) equally nihilistic observation that 'it takes a theory to beat a theory.'
Is this state of affairs ever harmful or dangerous? One natural source of concern is if dubious but widely held ideas serve as the basis for consequential policy decisions2.
1 For a useful brief against production functions, see Felipe and Fisher (2003); for the case against capital aggregates, see Brown (1980). The idea that the inherent stability of the economy is a concomitant of general-equilibrium theory is difficult to entertain seriously after giving Fisher (1983) close study; see Grandmont (1982) for some related macroeconomic arguments. Finally, Hildenbrand (1994) provides a sobering corrective to first-year demand theory.
2 I leave aside the deeper concern that the primary role of mainstream economics in our society is to provide an apologetics for a criminally oppressive, unsustainable, and unjust social order.
The above quote is from a paper about inflations expectations. I wondered how far and on what grounds Rudd thinks this arrant nonsense extends. The talk in the video linked to the top of this post helps answer this question.