28 Aug 2008

Neoclassical Failure

Read this interesting overview of the gap between mainstream economics (neoclassical, theoretical, mathematical) and reality.

The article begins with an interview with Bill Rees, who invented the concept of "ecological footprint" to gain some traction with "real economists" who claim that there are no limits to growth. (I have said elsewhere that there are no limits to resources -- just higher prices -- but there are limits to the environment, which does limit growth.)
The news these days is full of stories that show how the global economy is becoming more vulnerable to environmental change caused by humans. The fear of climate change has led to subsidies for biofuels, which has resulted in grain shortages, soaring prices, hunger and riots. The price of gas suggests peak oil is upon us, promising many years of difficult and expensive transition for our gluttonous and polluting economies. And although people like Rees have invented new tools for understanding what happens when the economy presses against ecological limits, it seems that on university campuses only the mainstream, limits-denying school of economic thought has the official stamp of approval. The big issues of our era – and the theories that might help explain them – are not being discussed in economics lectures.
The main point is that a large share of economic teaching and research at top schools has little to do with the real world.* Because of this, many students do not bother to study economics; those that do persist tend to emerge with an "autistic" sense of reality that is either useless or harmful.** That doesn't mean they are not successful (since they get published in journals edited by other autistic economists and thereby get tenure) -- it just means that their time and abilities are wasted in a world that needs more, not less, applied economics.

[Env-Econ disagrees, saying that "ecological economics" is NOT real economics.]

I contemplate these questions daily as I "commute" between the blogging/policy world and the academic world. My postdoc at Berkeley is one of the best positions I could ever hope for, but it will end in 1-2 years. Will I continue in the academic world or not? The most important factor in my decision will be my perception of impact, i.e., will I be able to do more as an academic or less? Every time I get a rejection letter written by someone who took neither time nor care to read my paper, I move away from the academic world. Every time I have a real conversation about real issues with someone, I move towards the "real" world. Sure, academic life is cushy, but I am not interested in comfort -- I am interested in teaching and impact. We'll see.

Bottom Line: Economics MUST be useful to people if it is going to survive, let alone thrive. Otherwise it will go bankrupt in the market of ideas and only survive on subsidies, beneath our contempt.

* This post is partially dedicated to my former classmates who are today retaking the "microeconomic theory" exam at UC Davis. The exam is widely regarded as an exercise in mathurbation that reflects economic theory of 15 years ago. Very little of that test would make sense to any normal person; very few economists reflecting on real-world problems would consider those ideas as solutions. The trouble is that everyone has to pass such an exam to get a PhD, and our pool of candidates shrinks to those who with adequate skills in mathematics -- and perhaps not much else.

** I use autistic intentionally -- not to slight autistics, but in honor of the movement for a post-autistic economics.

hattip to Marginal Revolution


  1. David: I agree with the env econ people that the critics are attacking a strawman. Neoclassicals *already* don't accept existing GDP as be-all end-all measures of economic strength. I've had exactly that conversation with a left-wing critic (my brother's girlfriend): She asked me about GDP, and I said that there are a lot of problems with it, but it's useful as a crude measure so long as you know its limitations.

    I then asked what she thought was wrong with it and couldn't quite get a coherent answer. You might be interested in the transcript.

    Anyway, in the link, odograph criticized GDP, but ends up saying ... exactly what neoclassicals think! So, another example there.

  2. Dan in Euroland28 Aug 2008, 20:53:00

    I am a little unclear on how economics has not been useful to people. Just check out Shleifer's The Age of Milton Friedman to see the tremendous impact that economics has had on people's lives.

    Also, look at the important innovations in financial sector, the administrative agencies, and the impact that economics has had on understanding/creating the law.

    I get the impression that you want more economists to focus on environmental issues, and maybe they should. But that doesn't mean economics has been anything but tremendously useful.

    Furthermore, I disagree with your claim that economics is fundamentally a question of usefulness. Economics is one method that we use to understand the world around us. A core goal of economics is simply to explain and nothing else. For some people that is not enough, and that is fine. But, for others understanding is all they are interested in. I think understanding is an intrinsic good, and thus economics is an intrinsic good, as well as an instrumental good.

  3. Silas and Dan -- good points.

    My POV is NOT that economics is useless (far from it!) but that many economists spend time on less-useful methods (not areas) of research, i.e., crazy econometrics, elaborate models, etc.


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