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Pragmatic Capitalism

Practical Views on Money, Finance & Life

“Heterodox” Economics is not so Heterodox Anymore

Noah Smith says that “heterodox” economics is occult (mystical) because someone in his Twitter feed was bothering him.¹  Noah also says there just isn’t any accessible research on heterodox economics.²  Both of these statements are incorrect.

I’ve noticed a strong trend in the last 10 years where heterodox economics is becoming increasingly mainstream where the rubber meets the road – on Wall Street.  Now, Noah has a different perspective on things than I do because he teaches economics in a university, but as far as market practitioners go I don’t see heterodox economics as being all that heterodox anymore.  I personally know dozens of people at large banks  and financial institutions who use a heterodox model for understanding the financial system and the economy. Some more public figures include:

  • Jan Hatzius, Chief Economist of Goldman Sachs.
  • Paul Sheard, Chief Economist of Standard and Poors.
  • James Montier, Market Strategist at GMO.
  • Paul McCulley, Former Chief Economist at PIMCO

Those aren’t exactly lightweights. We’re talking about some of the heaviest hitters in the most important institutions in the world.  This makes sense since heterodox theories like Post-Keynesian Economics focus a good deal on accounting, stock-flow consistent models, banking, etc.  The fact is, A LOT of people on Wall Street find PKE insights to be very useful because they reflect a highly accurate description of the way the financial system works. In my opinion, if you work on Wall Street and you don’t understand Post-Keynesian Econ then you’re at a major disadvantage.

Meanwhile, mainstream economics went into the Great Financial Crisis basically saying that banks and money don’t matter.  So yes, maybe heterodox economics is still in the shadows in mainstream university economics where the models still reflect some alternative reality where the financial system doesn’t matter, but it’s becoming increasingly mainstream on Wall Street where people rely on economic models that reflect the world we live in and not the one academics dream up.

¹ – Noah seems to be confusing heterodox schools such as “Post-Keynesian”, MMT and Austrian economics as all being under one big tent.  I have stated in the past that I think MMT, which is a subset of PKE, has a tendency to overreach and that Austrian economics is largely just politics.  I do, however, find parts of Post-Keynesian economics very useful and I would describe my own financial modeling as being highly consistent with PKE views.  

² – Here ya go, slide decks and papers just as Noah likes:

My paper, Understanding the Modern Monetary System is also consistent with a Post-Keynesian perspective although it’s more designed around the operational construct of the monetary system and less about economic modeling. It’s also “mainstream” in some ways.  I don’t really think it’s right to place my work under one “school” since it’s broader and more descriptive in nature, but it definitely has a PKE influence in it.

Update – Added Paul McCulley to notable market practioner’s list.

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC.Orcam is a financial services firm offering low fee asset management, private advisory, institutional consulting and educational services.Cullen is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Cullen Roche

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