Is economics undergoing a paradigm shift? From today's New York Times.
SSL
_____________________________________________________________
Sheen S. Levine, PhD (Wharton)
View my research on SSRN:
http://ssrn.com/author=398352
_____________________________________________________________
http://www.nytimes.com/2007/07/11/education/11economics.html?pagewanted=
print
July 11, 2007
In Economics Departments, a Growing Will to Debate Fundamental
Assumptions
By PATRICIA COHEN
For many economists, questioning free-market orthodoxy is akin to
expressing a belief in intelligent design at a Darwin convention: Those
who doubt the naturally beneficial workings of the market are considered
either deluded or crazy.
But in recent months, economists have engaged in an impassioned debate
over the way their specialty is taught in universities around the
country, and practiced in Washington, questioning the profession's most
cherished ideas about not interfering in the economy.
"There is much too much ideology," said Alan S. Blinder, a professor at
Princeton and a former vice chairman of the Federal Reserve Board.
Economics, he added, is "often a triumph of theory over fact." Mr.
Blinder helped kindle the discussion by publicly warning in speeches and
articles this year that as many as 30 million to 40 million Americans
could lose their jobs to lower-paid workers abroad. Just by raising
doubts about the unmitigated benefits of free trade, he made headlines
and had colleagues rubbing their eyes in astonishment.
"What I've learned is anyone who says anything even obliquely that
sounds hostile to free trade is treated as an apostate," Mr. Blinder
said.
And free trade is not the only sacred subject, Mr. Blinder and other
like-minded economists say. Most efforts to intervene in the markets -
like setting a minimum wage, instituting industrial policy or regulating
prices - are viewed askance by mainstream economists, as are analyses
that do not rely on mathematical modeling.
That attitude, the critics argue, has seriously harmed the discipline,
suppressing original, creative thinking and distorting policy debates.
"You lose your ticket as a certified economist if you don't say any kind
of price regulation is bad and free trade is good," said David Card, an
economist at the University of California, Berkeley, who has done
groundbreaking research on the effect of the minimum wage.
Most economists are still devoted to what is known as the neoclassical
model. Philip J. Reny, chairman of the economics department at the
University of Chicago - the temple of free-market economics - said the
theory and methods were "taught to avoid personal biases and conclusions
that aren't found in the data." Like any science, he said, the field
changes course slowly: "It requires evidence, and if evidence is there,
it will accumulate and positions will move." He added, "I personally
have a lot of faith in the discipline."
But as issues like income inequality, free trade and protectionism have
become part of the presidential candidates' stump speeches, more
thinkers have joined the debate. In addition to Mr. Blinder, other
eminent economists like Lawrence H. Summers and the Nobel Prize-winner
George A. Akerlof have pointed out what they see as the failings of
laissez-faire economics.
"Economists can't pretend that the consensus for free markets and free
trade that existed 30 years ago is still here," said Robert B. Reich, a
public policy professor at Berkeley who served in President Bill
Clinton's cabinet.
Part of the reason is the growing income inequality and dislocation that
global markets and a revolution in communications have helped create.
Economists who question the free-market theories "want to speak to the
reality of our time," Mr. Reich said.
Meanwhile, critics have also pointed out the limits of standard
cost-benefit accounting to measure items like the cost of inequality or
damage to the ecosystem.
The degree to which economists wander from the mainstream varies widely.
Dani Rodrik, an economist at the Kennedy School of Government at
Harvard, for instance, said, "I fall into the methods of the mainstream,
but not the faith," which he defines as the belief that more markets and
free trade are always good and government regulation is always bad.
Thinkers like these may come up with controversial ideas but are hardly
marginalized. Other economists, however, go much further, and try to
chip away at the field's underlying theoretical foundations. So while
Mr. Blinder, Mr. Card and Mr. Rodrik might be considered mere heretics,
this second group has earned the label "heterodox."
Although the meaning of the term is slippery, Frederic S. Lee, an
economist at the University of Missouri-Kansas City who edits the
Heterodox Economics Newsletter, says it refers to those who reject the
neoclassical model, which Milton Friedman helped create, and which
Ronald Reagan championed when he took over the White House.
Mr. Reny and others point out that the increasing popularity in the
mainstream of behavioral economics, which looks at people's complex
psychological reactions to events, has offered a fuller picture of how
consumers operate in the marketplace. Still, Mr. Lee criticizes
neoclassical economics for maintaining that the market, if left alone,
would ultimately find a happy balance. He also takes the discipline to
task for relying on abstract theories and mathematical modeling instead
of observation and sociological analysis.
In Mr. Lee's view, for example, oil companies - not the natural workings
of the market - determine gas prices, and the federal deficit is a
meaningless term because the federal government prints money in the
first place.
According to his estimates, 5 to 10 percent of America's 15,000
economists are heterodox, which includes an array of professors on the
right and the left (post-Keynesians, Marxists, feminists and social
economists).
Heterodox economists complain that they are almost completely shut out
by their more influential neoclassical colleagues who dominate most
American university departments and prestigious peer-reviewed journals
that are essential to gaining tenure. There are a few university
departments where these iconoclasts are welcome, like Amherst in
Massachusetts, the New School in New York and Professor Lee's home, the
University of Missouri-Kansas City, but these are exceptions.
The experience of Mr. Card's graduate students suggests how the process
can work. Mr. Card is by no means on the fringe, but he said his
research on the minimum wage in New Jersey "caused a huge amount of
trouble." He and Alan B. Krueger, an economist at Princeton, found that
contrary to what free-market theory predicts, employment actually rose
after an increase in the minimum wage.
When Mr. Card's graduate students went on job interviews, he said other
economists would ask questions like "What's wrong with your adviser? Has
he started drinking?"
This is why Mr. Blinder said he advises graduate students "not to do
what I do" when it comes to challenging the standard model.
Criticizing the approach that currently dominates the field, Mr. Blinder
said economists must look more closely at the real world instead of
modeling it in the lab. "Economics is insufficiently scientific," he
said. "Mathematics may be useful, but mathematics is not scientific. It
doesn't generate refutable hypotheses." In a recent issue of The Nation,
Christopher Hayes spurred an energetic debate on the Web by suggesting
that some precepts of heterodoxy were being incorporated into the
mainstream - even if many heterodox economists were not.
Max B. Sawicky at the Economic Policy Institute in Washington, a
nonprofit research organization that is a bulwark of heterodoxy, wrote
in a discussion on tpmcafe.com that, "The duty of orthodoxy is clear:
deny departmental positions and resources to inferior research programs
and purify the top journals of incorrect thinking, all understood as
maintaining high standards."
This is the point where Mr. Rodrik, who has written extensively on the
downside of globalization, departs from both Mr. Sawicky and Mr.
Blinder. Although he acknowledged that inflexible rules about how one
makes an argument and what counts as evidence can create blind spots,
but insisted that once those rules were accepted, there was tremendous
openness inside the academy.
The problem is outside, where economists are expected to "regurgitate
ideas" about the glories of the free market. Most mainstream economists
think that voicing any skepticism or doubt provides "ammunition to the
barbarians," he said, and allows narrow-minded people to "hijack any
argument to suit their purpose."
Mr. Rodrik said he used to worry about this until he realized that "on
any issue, there are barbarians on both sides," so there was no point in
shading an argument to "suit one set of barbarians over the other."
"And I've slept a lot better since."