Neo Fights (Slightly Wonkish and Vague)
Paul Krugman
Via Mark Thoma, David Glasner gets upset over claims by Austrians to have rejected or superseded neoclassical economics. Hayek was a neoclassical economist,Glasner declares.
Glasner makes the case in terms of history of thought, which is fine. But I thought I’d offer some meditations on how we do economics — and how some people pretend to do economics.
So, what is neoclassical economics? There’s a historical definition, having to do with the “marginal revolution” of the late 19th century and all that, but what I think we mean in practice is economics based on maximization-with-equilibrium. We imagine an economy consisting of rational, self-interested players, and suppose that economic outcomes reflect a situation in which each player is doing the best he, she, or it can given the actions of all the other players. If nobody has market power, this comes down to the textbook picture of perfectly competitive markets with all the marginal whatevers equal.
Some economists really really believe that life is like this — and they have a significant impact on our discourse. But the rest of us are well aware that this is nothing but a metaphor; nonetheless, most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point or baseline, which is then modified — but not too much — in the direction of realism.
This is, not to put too fine a point on it, very much true of Keynesian economics as practiced (leave aside discussions of What Keynes Really Meant and whether we’re all apostates). New Keynesian models are intertemporal maximization modified with sticky prices and a few other deviations (such as balance-sheet constraints). Even IS-LM loosely appeals to maximization arguments to derive the slopes of the curves, while analyzing outcomes by comparing equilibria.
Why do things this way? Simplicity and clarity. In the real world, people are fairly rational and more or less self-interested; the qualifiers are complicated to model, so it makes sense to see what you can learn by dropping them. And dynamics are hard, whereas looking at the presumed end state of a dynamic process — an equilibrium — may tell you much of what you want to know.
These motives are the reason why other fields facing similar concerns adopt similar strategies. As I wrote long ago, evolutionary theory — the biological kind — looks remarkably like neoclassical economics.
What would truly non-neoclassical economics look like? It would involve rejecting both the simplification of maximizing behavior, going for full behavioral, and rejecting the simplification of equilibrium, going for a dynamic story with no end state.
And there is economics like this: agent-based economics. It’s a project that relies heavily on computing, to keep track of the complexities, and at this point makes simplifying assumptions that are in their own way as unrealistic — but in a different direction! — as those of neoclassical work. Still, it’s a good thing to pursue.
But the people that have Glasner mad aren’t doing anything like this. They claim to reject neoclassical economics, but their alternative is not an alternative model but a lot of verbiage; they talk at the economy, and imagine that by so doing they achieve a higher level of sophistication and realism than economists who try to express their ideas in terms of little models.
And they’re kidding themselves; all they’ve done is hide their implicit models and prejudices behind a dust cloud. And that’s one reason they have been so disastrously wrong at every stage of this crisis.
