Wednesday, July 22, 2009

The Economist On Modern Economic Theory Melting Down

The most recent issue of The Economist has three articles about The Crisis of Modern Economics, with a book on the cover whose title is "Modern Economic Theory" appearing to melt down, with the most interesting one being the one on macroeconomics. All three articles are linked to in a post by Menzie Chinn on Econbrowser, where he also links to Austrian, Mario Rizzo, criticizing mathematical modeling. While recognizing some of the arguments in The Economist to be valid, Chinn definitely defends mathematical modeling, and seems to be not too critical of the dominant DSGE models. Mark Thoma at Economist's View also linked to all three articles, along with a link to Mark Gertler's mini-course that attempts to try to show how the DSGE models might be fixed to do better (an effort that I think fails).

The main arguments in the article on macroeconomics (the main other one is on financial economics) involve failures to include behavioral economics, failures to do heterogeneous agent modeling, and a general failure to model bubbles well, with Minsky being mentioned, although also dismissed as not mathematical (despite work by Steve Keen and me and others). While these arguments are correct, there is all too much defense of the DSGE models for "benchmark" purposes, although my observation is that the people working on these models, which totally dominate central bank modeling, take them all too seriously and think that models assuming rational expectations by homogeneous agents in general equilibrium can be solved with minor tweaking (and think their inclusion of sticky prices and wages is some great breakthrough to ingenuity, a point Thoma pokes at, and that many Post Keynesians have argued is neither Keynesian nor even useful, with flexprice models often less stable than fixprice ones). There is also the general ignoring of deeper problems in microeconomics in these articles, such as those pointed out in Steve Keen's _Debunking Economics_, even if I disagree with some of what he has to say in that book.


Sandwichman said...

You can rest assured that The Economist features an article on the meltdown of modern economic theory so that it can frame whatever comes next to serve the same masters as what came before.

Anonymous said...

I kinda look at it as a pep talk from the coach: "To all you economists out there: shake it off and get back out there misleading the masses..."

Anonymous said...

I guess misleading is a harsh term (I am trying to work on my people skills). It is probably just a case of sharing the same superficial, uninformed, and simplistic view of the world with those they lead over the cliff...

Max said...


Have you seen Dirk Bezener's paper ( "No one saw it coming" ). One bunch of people who seem to have seen it coming were post-Keynesians. Minsky's ideas now seem to be getting some traction.

Could you point to a survey of PK ideas? Preferably available online and if possible one technical and one not so technical.

Max said...

Max (is that really you???),
Have just scanned the references and not the paper. Had not seen it and know nothing about the author. I shall think about your request and see if I can come up with proper answers.
Of course I think that by and large Post Keynesians as a group were more likely to call this (although a lot of Austrians will claim they did as well, and then say it was because we were not on the gold standard, or something equally bizarre). I note that the paper you mentione cites several papers by Steve Keen, who is played up in my post, and does rate as a Post Keynesian with a strongly Minskyan orientation.
Let me think about what are good surveys along lines you asked for, presumably ones addressing how they dealt with this mess rather than more general ones, of which there are many. said...


This is probably not going to please you, but this is what you are going to get as I go out the door for a busy weekend.

So, two things online that are not really surveys, but may give Post Keynesian views to some extent of the current situation are a keynote address by James Galbraith from last November 14 at http://www/ From around the same time the interview with Steve Keen cited by Bazemer is along similar lines, but neither is a summary of PK econ, either technical or non-technical, more how they view what has been going on, again with Keen being especially focused on Minsky.

A book that has a broad presentation is _A New Guide to Post Keynesian Economics_, ed. by Richard P.F. Holt and Steven Pressman, Routledge, 2001.

An book chapter that attempts to argue that complexity might be able to overcome the various divides within PK econ (and thus describes them) is one by me, and thus available on my website in some form, "Complex Dynamics and Post Keynesian Economics," in _Complexity, Endogenous Money and Macroeconomics: Essays in Honour of Basil J. Moore, ed. by Mark Setterfield, Edward Elgar, 2006, pp. 74-98, although this is a bit more technical.

Hope these are of some use. said...

Along the lines of the Holt-Pressman volume, but much more thorough and recent is _The Elgar Companion to Post Keynesian Economics_, edited by John E. King, 2003.

Max said...

Barkley Rosser:
Max (is that really you???)

I guess not. Sorry for the confusion.

Thanks for the detailed response!
Will have a look at these references.

A minor niggle: Why do you keep the papers in doc format? I thought everybody used LaTeX these days. pdf would be much more convenient -and non-editable to boot.

Thanks again. said...

Max (whichever one you are),
I am lazy, plus path dependence. Sorry. So busy trying to keep up with the ideas, and a lot of other stuff (very very busy; my wife thinks I should not even be "wasting" my time with this or other blogs), I am behind on the tech.

Max said...

Barkley Rosser:
' wife thinks I should not even be "wasting" my time with this or other blogs'

We are glad you do!

Minor correction: James Galbraith's keynote address is here:

Max Sawicky said...

No it wasn't me. said...

Go back to your bunker, Max!