The dismal science

For me, the most general problem with the neoclassical architecture is that it airbrushes out the negative consequences of a destructive behavioural mindset–selfish individualism. Indeed, it regards such behaviour not only as inevitable, but desirable. Whatever the purpose of its practitioners—many of whom are thoughtful people, with progressive views—this is the work that it does as ideology. Under the cloak of scientific rationalism, it smuggles in values that narrow the realm of the politically possible and entrench the powerful.

Most of modern economics is like this: empirical testing, often using new sources of data, addressing questions of immediate importance and relevance to policymakers, citizens and businesses. Economists are not in thrall to neoclassical economics and they certainly do not neglect the role of technology. Economics does not require that people be rational, calculating automatons. It very often has people interacting with each other rather than acting as atomistic individuals, despite Reed’s charge. As a matter of course, it assumes there is a fog of uncertainty, and that different people know different things: that there are asymmetries of information.

As the old saying goes, “if you have a hammer, everything looks like a nail”. Economists have two main hammers: choice models and variants thereof form the basis of most theoretical models (I include behavioural economics in this, which still uses the utility maximising framework). Linear regression is economists’ preferred empirical technique (again, commonly used variants such as panel methods or instrumental variables are still fundamentally linear). Research incentives typically mean adhering to at least one of these two techniques, despite the plethora of other techniques available. The aforementioned ‘institutional’ school of economics might prefer a theoretical lens which looks at social and legal structures over individual choice, and an empirical method which focuses on qualitative details over statistical techniques. This is just one of the many alternative methods available to economists.

While the paternity of the theoretical apparatus underlying the new neoclassical synthesis in macro is contested, there is wide agreement that the methodological framework was largely architected by Robert Lucas. What is debated is to what extent Lucas’s choices were intellectual or ideological. […] Yet the true reasons behind modeling choices are hard to pin down. Bringing a representative agent meant foregoing the possibility to tackle inequality, redistribution and justice concerns. Was it deliberate? How much does this choice owe to tractability? What macroeconomists were chasing, in these years, was a renewed explanation of the business cycle.