Jan 22nd, 2013 by Ben
You’ve got to hand it to the US House of Representatives. Whenever there’s a problem with the world, it holds a hearing. The report below is from 2010 and carries the title, “Building a Science of Economics for the Real world.’
The picture quote is from Robert Solow, by his own admission ‘a quite traditional mainstream economist.’ Solow is concerned primarily with the dominance of the Dynamic Stochastic General Equilibrium (DSGE) model within modern macroeconomic analysis.
Solow’s statement is pp.12-15 of the report, but this is worth quoting in that Solow states his mainstream credentials (his belief that the economy a collection of roughly rational players), then goes on to criticize DSGE for its rationality in extremis.
Most economists are willing to believe that most individual “agents” - consumers, investors, borrowers, lenders, workers, employers - make their decisions so as to do the best that they can for themselves, given their possibilities and their information. clearly they do not always behave in this rational way, and systematic deviations are well worth studying. But this is not a bad approximation in many cases. The DSGE school populates its simplified economy - remember that all economics is about simplified economies just as biology is about simplified cells - with exactly one single combination worker-owner-consumer-everything-else who plans ahead carefully and lives forever. One important consequence of this “representative agent” is that there are no conflicts of interest, no incompatible expectations, no deceptions.
This all-purpose-decision-maker essentially runs the economy according to its own preferences. Not directly, of course: the economy has to operate through generally well-behaved markets and prices. Under pressure from skeptics and from the need to deal with actual data, DSGE modellers have worked hard to allow for various market frictions and imperfections like rigid prices and wages, asymmetries of information, time lags, and so on. This is all good. But the basic story always treats the whole economy as if it were like a person, trying consciously and rationally to do the best it can on behalf of the representative agent, given its circumstances. This can not be an adequate description of a national economy, which is pretty conspicuously not pursuing a consistent goal. A thoughtful person, faced with the thought that economic policy was being pursued on this basis, might reasonably wonder what planet he or she is on.
The full report is available here.
The idea of the economy as the sum of rational choices can be seen here in these comments by the Irish economist, Jim Power, on Tonight With Vincent Browne last year. The context is single parents in Ireland and, well, both Vincent Browne and Lousise Bayliss of SPARK take him to task.
Neither Louise nor Vincent say it directly of course, but what we are watching here is a clash between the assumptions of human behaviour as expressed in modern economics and the realities of human relationships as experienced by people in their everyday lives. And Professor Robert Solow in his evidence to the House Committee on “Building a Science of Economics for The Real World” is saying pretty much the same thing.
Finally, here’s an extract from Steve Keen’s Debunking Economics (2011). It gives a short introduction into the rise of neoclassical economics and the fallacies it contains. The piece from Keen is a way of highlighting that there are people working within economics who have a grounded view of who societies work - that it is not all one-sided; it is not all Jim Power and rational-choice theory.
It’s a broad church but the main term is heterodox economics and I would say that it is within heterodox economics that progressives and activists should reside.