David Andolfatto and Mark Thoma have written extensive posts defending mainstream economics against its critics (see here and here). These are two very very smart economists who make many salient points and if this is a debate that interests you then you should read their posts. I’ll outline my general thoughts here given that I have been a critic of mainstream (and heterodox) economics over the last few years:
- Heterodox economists go overboard in their criticisms of “mainstream” economics. I’ve spent much of the last 5 years writing this blog blasting ideas from heterodox schools like the “Austrian” school and I (embarrassingly) wrote a 70+ page critique of Modern Monetary Theory. It’s my opinion that while these schools make many positive contributions they tend to veer towards extremes that appear to be politically motivated. Further, they are shunned by the mainstream and therefore spend an irrational amount of time focused on the idea that we need a whole new “paradigm” for economics. Yes, they make some important points, but it often goes way overboard. I sympathize with many of the points that Post-Keynesians make regularly, but like any school of economics it has its own flaws and agendas. As I’ve stated before, economics doesn’t need a whole new paradigm. It just needs to keep improving on the current paradigm.
- The fact that mainstream economics didn’t predict the financial crisis is unimportant. If this is the measure by which we rate the quality of economics then Peter Schiff is our economic God. Nevermind that he has been wrong about just about everything since the financial crisis and the Austrian econ model has been proven to have king sized holes in many of its core understandings. Our ability to predict tail risks in the future shouldn’t be the measuring stick by which we judge economics. If anything, economics should spend most of its time understanding how the economy operates outside of financial crises given that this is where the economy resides the vast majority of the time. Tail risk events are important, but shouldn’t drive econ thinking any more so than market crashes drive portfolio management.
- We don’t really know what “Mainstream” economics is. This debate is a bit muddled to begin with because “mainstream” economists don’t even agree with each other on everything. If you follow the conversations in the econoblogosphere you likely see an endless back and forth. This is the result of many competing schools. When people refer to “mainstream economics” they are being pretty vague. After all, we have two major schools (fresh water and salt water) and schools within those schools. The biggest critics of “mainstream economics” is generally, well, other mainstream economists….This, in my view, is a big problem because the so-called experts don’t even really agree on how the economic system works so it’s only natural that the results from some of the economic modelling appear consistently deficient.
- Much of mainstream economics appears out of touch with reality. I think the biggest complaint from the average person after the financial crisis was that the theories which mainstream econ are founded on simply don’t appear consistent with the way the actual world works. For instance, before the crisis many macroeconomists ignored the financial system and the importance of money/debt. The average market practitioner or layperson finds this incredulous. How can a theory about how the economy works ignore such vital pieces of the economy? This disconnect has proven highly problematic and remains a serious point of contention. In fact, if the heterodox economists have something very right to criticize the mainstream about then this is usually a key point. And it’s a big one in my view. There has been some progress here in recent years, but there’s still regular calls from prominent economists saying that banking and finance just don’t matter at all. This just doesn’t make any sense to anyone who actually operates in the real economy….
Economics is a social science. After all, human interaction is hardly all that scientific to begin with and that’s ultimately a big piece of the economic puzzle. Like anything, economics is imperfect and worthy of criticism. The fact that we don’t have all the answers is actually good news so long as we acknowledge that there are flaws in the current thinking. Hopefully the prominent “mainstream” economists will continue to view their own work and the work of others with skepticism with the hope that criticism will lead to a better overall construct.