by From Michel Zouboulaki and RWER issue 82 An outstanding neoclassical microeconomist, Hal Varian, asked the emphatic question of “What use is economic theory?” To answer the question, he started by recognizing the obvious: “Economics is a policy science and, as such, the contribution of economic theory to economics should be measured on how well economic theory contributes to the understanding and conduct of economic policy” (1997, 109). But this acknowledgement should have led Varian in the opposite direction to the one he took. Instead, he claimed that although “it offers a useful insight in explaining an economic phenomenon” (ib., 115), “no theory in Economics is ever exactly true” (sic), since – as Friedman said 44 years ago – it focuses unilaterally onto one dimension of economic
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from Michel Zouboulaki and RWER issue 82
An outstanding neoclassical microeconomist, Hal Varian, asked the emphatic question of “What use is economic theory?” To answer the question, he started by recognizing the obvious: “Economics is a policy science and, as such, the contribution of economic theory to economics should be measured on how well economic theory contributes to the understanding and conduct of economic policy” (1997, 109). But this acknowledgement should have led Varian in the opposite direction to the one he took. Instead, he claimed that although “it offers a useful insight in explaining an economic phenomenon” (ib., 115), “no theory in Economics is ever exactly true” (sic), since – as Friedman said 44 years ago – it focuses unilaterally onto one dimension of economic phenomena. Varian feels comfortable in admitting that “any method is better than none” (ib., 116), even if it leads to error.[1] What a rigorous theorist should do instead is to promote only theories based on assumptions that sufficiently correspond to the operating frame of the real economy.
A commonly held view is that the Great Depression established Keynesian macroeconomics. However, the specialists know that it also greatly facilitated the process of mathematical formalization. A plausible explanation refers to the demand of the labor market for economists: business and research institutions wanted more technically skilled economists instead of broadly educated ones. The same demand for technical expertise was explicit in organizations such as the IMF, the OECD and, even more, the Rand Corporation. Thus,
“Economics suffered in a peculiar way because it had established a type and degree of formalism that allowed research output to be assessed principally in terms of mathematical interest and elegance. Economists were judged and became employable for their aptitudes for statistical analysis or predictive models” (Hodgson, 2009, 1216).
The homogenization of economic knowledge seen above, was obtained through the elevation of formal technique, as opposed to its substance. As Keynes wrote to Roy Harrod in 1938: “In economics … to convert a model into a quantitative formula is to destroy its usefulness as an instrument of thought” (quoted in Hodgson 2013, 11). In that sense, the solution to the crisis in economic education coincides with the search for more useful economics.
We have seen already that this call goes back to 1991 and the COGEE Report in the US. Colander et al. (2004) have reported that mainstream economics changed during these last two decades before the crisis. Recent empirical surveys among graduate students of economics in seven major American universities (Colander, 2005, 181), show a hopeful change in their perception of the importance of knowledge of the real world economy, as against formal modeling, although they continue to complain about the lack of policy relevance just as they have done 20 years before (Klamer and Colander, 1990; Krueger et al., 1991). As argued here, and judging from the lack of apprehension of the biggest economic destabilization since 1929, apparently mainstream economics hasn’t changed enough. Even if there are actually more “elite mainstream economists working at the edge”[2] and many of their graduate students perceive their differences, it is excessively unsafe to announce the arrival of a “Kuhnian shift” by this time; the suggestion that we are living the moment of the gradual transition time lag from the old conception of the market economy as a self-equilibrating mechanism to a new one “centered on dynamics, recursive methods and complexity theory” is too good to be true. Core microeconomic theory today, continues to suffer from the 19th century “Physics’ envy” and shares the same “icon of scientificity” since Jevons and Walras (Mirowski, 1989).
The multiplication of papers, books and conferences around the world are hopeful signs of a change that will remain unfinished as long as it is not disseminated through the undergraduate economic education. Our suggestion here is to disseminate the idea for a need for educational reform in undergraduate programs inside the department of economics. In Greece for example, severely touched by the crisis, after seven continuous years of depression and with an accumulated loss of GDP of roughly -25%, what are the changes already made in our undergraduate curricula? Looking at the outlines of the courses taught at the 11 undergraduate economics departments I am afraid, there have been very little changes.[3]
I end with an example of a good textbook. Joan Robinson and John Eatwell (1973) have more than 40 years ago suggested an alternative textbook that is very close to what I have in mind as relevant microeconomics. It offers sufficient space for the history of our discipline, it analyzes succinctly the factors of production, it makes a realistic description of the market mechanism and pricing of goods and services and introduces the student smoothly to a solid theory of capital and profit, not without reconsidering the fake division between micro and macroeconomic theory. There are of course many other fine works which are serving the same purpose, without the obsolete chapters on socialist planning. I have in mind Understanding Microeconomics by Robert Heilbroner and Lester Thurow (1984), and Understanding Capitalism by Samuel Bowles, Robert Edwards and Frank Roosevelt (2005).[4] They all ask the right questions: what is production and consumption for? By whom? For whom?
[1] Actually Varian confused Roger Bacon (1214-1292) with Francis Bacon (1561-1626) and distorted the meaning of the latter’s moto “truth emerges more readily from error than from confusion”, writing “more truth arises through error than confusion”. A fundamental rule of logical inference – called “modus Tollens” – says that “if p implies q and q is a false proposition, then p is not a true proposition”. On the contrary it is invalid to deny the antecedent, that is to say “if p implies q and p is false, then, q is false”. Truth “arises” only from the first kind, although confusion helps not the truth to emerge, as Francis B. meant.[2] Colander et al. (2004) made the distinction between orthodox and mainstream economists, in order to identify those neoclassical economists who are critical of the standard theory and work “at the edges” of orthodoxy. In their survey they include in that category Paul Samuelson, Kenneth Arrow, Robert Solow, Thomas Schelling, Amartya Sen, Joseph Stiglitz, Chris Sims, Michael Woodford, George Akerlof, Richard Thaler, Anne Krueger, and Jagdish Bhagwati (2004, 493).
[3] By chronological order of their “date of birth” Greece has the following economic departments at the universities of Athens, Thessaloniki, Economic, Macedonia, Piraeus, Patras, Crete, Thessaly, Ioannina, Peloponnese, and Thrace. The first three were “born” before the WWII, the next two in the late 1950s, Patras and Crete in the late 1980s, the next two in 1999 and the last two after 2002.
[4] Fred Lee (2005) makes another proposal of what he calls “Heterodox Microeconomics” with a lot of suggestions for further reading.