A Guide to What's Wrong with Economics [Paperback]

This book is a useful and quick read for those interested in why academic economics sometimes seems to make so little sense. It is not about what is wrong with economics, it is more about what is wrong with neoclassical economics. However, in the public's mind and in most economics department neoclassical economics is economics. Unfortunately, the monopoly position of neoclassical economics leaves many students bewildered, especially those who are at least somewhat familiar with the ideas of the 19th century political economists.

The book is a collection of essays by a wide variety of economists, many with heterodox views.

The essays vary wildly in style, relevance, and value, but reading the book is justified not by the analytical excellence of every single essay, but by the few stand out essays which will allow the reader to pursue interesting strands of heterodox thought. In particular I found the essay by Steven Keen to be particularly worthwile. After reading it I decided to immediately buy his book "Debunking Economics."

It is vitally important that those studying economics have at least a passing familiarity with heterodox views, whether or not they agree with them. What heterodoxy provides is a better way of understanding, critiquing, and ultimately expanding and strengthening the current paradigm in economics. In other words, even the staunchest neoclassical economist will gain from reading this book because it will challenge one to think more critically about underlying assumptions. Of course, there is the possibility, ever so remote, that one strand of heterodox thought may succeed in overthrowing the dominant paradigm and become the new king of the hill in economic thought.

In June 2000, several Parisian economics students circulated a petition calling for the reform of their economics curriculum. Their complaint was the inability of the neoclassical economics they were studying to satisfy their need for a deep understanding of the operation of real-life economies. They called for a reform of the university curriculum that would tolerate analytical diversity and foster critical dialogue across contrasting approaches to economics. Their demand was taken up by large numbers of students, and a similar demand was formulated by Ph.D. students at Cambridge University in the UK the next year. This reform movement has grown in Europe, under the rubric of "post-autistic economics." This volume presents their case, but with voices of professional economists rather than students.

My interest in this book and this movement stems from my life-long battle against neoclassical orthodoxy. My conclusion from reading this edited volume is that the post-autistic economics critique is intellectually shoddy and incapable of leading to positive change in how economics is done and taught. Their central critique is that neoclassical economics does not describe real-world economies, and must be replaced by or supplemented with other approaches. This is just wrong. While the elementary courses are far from the real world, advanced courses in such areas as labor, international finance, macroeconomic policy, economic development, law and economics, environmental economics, and so on, are quite real-world. If undergraduate students left with a degree in economics that allowed them to understand The Economist and the Journal of Economic Perspectives, the level of economic awareness in the world would be considerably higher. If the undergraduate curriculum does not bring students to this level, the curriculum is, to my mind, faulty. Perhaps less stress on arcane theories that are relevant only to professional economists should be replaced by a more historical, institutional, and hands-on approach to microeconomic and macroeconomic issues. But, this is not a critique of neoclassical orthodoxy, and does require a move towards a "heterodox" analytical environment in the economics profession.

There is a reason that neoclassical theory has triumphed: it is the only promising approach to economics. Marxism, Keynesianism, Institutionalism, Syndicalism, Austrian economics, and the like developed strongly for a while and then foundered. They certainly do not present analytically interesting alternatives to neoclassical economics. My own view is that neoclassical economics has profound problems, but they can only be addressed from within, not by embracing some "heterodox" alternative. Nothing in this book even remotely shakes my confidence in this matter. With enemies like post-autistic economics, neoclassical economics doesn't need much in the way of friends.

[...] There is a short piece on behavioral economics, which has been one of the most vibrant areas in economics over the past 25 years, but the author makes the mistake of thinking that behavioral economics is an alternative to neoclassical economics. It is not. It uses decision theory and game theory to critique the Homo economicus of traditional economic theory, but the profession is responding by revising Homo economicus, not by rejecting behavioral economics (see recent papers in Econometrica, the Quarterly Journal of Economics, and other journals). I believe the post-autistic economics people are simply ignorant of the phenomenal work of Ernst Fehr, Abijit Banerjee and Esther Duflo, Colin Camerer, Samuel Bowles, George Loewenstein, Daniel Kahneman, Benoit Mandelbrot, Edward Glaeser, David Laibson, Matthew Rabin, Bruno Frey, Elinor Ostrom, Armin Falk, Simon Gaechter, Jean Tirole, Aldo Rustichini, and many others. They never heard of neuroeconomics or econophysics or the notion of the economy as a complex system, with its stress on agent-based modeling. All of these authors present profound critiques of standard neoclassical economics, and some actually would sympathize with the post-autistic critique. But, the current movement is to transform analytical economics to meet the empirical challenges posed by new data, not retreat to some defunct 19th century doctrine.

This volume shows that the leaders of the post-autistic economics movement prefer quantity to quality. The papers in this book are generally quite lacking in challenge for the professional economist. Many are just silly, and some are egregiously incorrect. Perhaps the worst is the paper by Bernard Guerrien, "Can We Expect Anything From Game Theory?" Guerrien asserts, without evidence, that "game theory models are always `stories', like fables or parables, with no relation to real-life situations." Really? What about auction theory, which has been so successful in organizing the sale of bandwidth in many countries? How does one explain the role of game theory in revolutionizing Industrial Organization? Moreover, game theory is the basis for all of behavioral economics, and accounts for its experimental success in large part. Guerrien's description of game theory is quite faulty. "...players are supposed to choose separately and simultaneously one element of their strategy set...", says Guerrien, and launches a broad critique on that basis. But, he is just wrong. Evidently he never heard of extensive form games or behavioral strategies. In short, the intellectual level of this critique is abysmally low.

This book is just on the wrong track. It's as simple as that. They argue that the success of neoclassical economics is due to bureaucracy, ideology, and partisan politics. In fact, it is the only game in town, although it is a flawed game that deserves to be treated with continual hostility---but hostility from within, since there is no credible alterative. Let me be even more positive: I find contemporary economic theory extremely deep and challenging, and I believe it has some of the answers, and will aid in the development of other areas in which its answers are stupid and absurd. For instance, in perhaps the best piece in the book, Geoffrey M. Hodgson asks "Can Economics Start from the Individual Alone?" He argues persuasively that it cannot. However, traditional institutional economics is hardly the remedy. Rather I suspect that a fundamental theorem of Robert Aumann on the relationship between correlated equilibrium and Bayesian rationality is the key to transcending neoclassical economics' methodological individualism. But, the post-autistic people probably haven't a clue what Robert Aumann has written, and if they did, they would write incredibly sloppy critiques, on the order of Guerrien's critique of game theory.

While this book attempts to provide a comprehensive critique of (neoclassic) economics, it's hard not to come away feeling, "If that's all there is, then I feel pretty good about economics!"

Perhaps the book's objective is best described by one of its contributors, Peter Söderbaum, who admits, "Those of us who depart from the neoclassical mainstream do it in many cases for ideological reasons rather than scientific reasons..." we do not like the ideology... and regard (its) monopoly position as an essential part of the problems faced by modern society." The small number of chapters on the environment and human welfare get at these concerns although hardly in ways that haven't already been covered much more effectively elsewhere and then often with simplistic and highly biased one-sided logic. These arguments unfortunately seem half hearted

The first half of the book (along with its critique of mathematics) attempts to undermine neoclassical economics by using the flawed strategy of presenting a one-sided and disconnected laundry list of complaints that merely show that economic theories and models are gross simplifications for a very complex reality. Only the most naïve students of economics will be surprised by these ideas. Ironically, the book frequently cites the (behavioral) work of recent Nobel Prize winners to make its case.

Perhaps this flaw is best illustrated by its contributors, Richard Wolff's, argument that, the world is so complex, comparisons of cost and benefit between alternatives are necessarily political. For those of us in the real world, that's hardly news. But what's the alternative, to make no attempt at all? Wolff, of course, offers none. Without comparing one alternative approach to another while making a strong two-side case for one of the two alternatives, the reader is left with little that they might use to make better decisions.

The second half (third) of the book is typified by a Jean Gadrey contribution that, in part, argues that growth in GNP does not fully account for human welfare. Surely that's true, but the arguments put forward that human welfare has not improved at all are simplistic to the point of being silly. A reasonable argument would likely need to dispute Dollar and Kraay's (2002) argument that growth in the incomes of the poor worldwide has been tightly correlated to overall economic growth and further that the poor don't benefit greatly from increased income (likely more so than the rich). Hopefully, Gadrey's preposterous argument that we could grow GNP by hiring workers to intentionally damage cars (so they could be repaired) requires no need for negation. Much of the book's logic is similar.

I debated about whether to give the book 3 stars because it rightly, fairly and comprehensively summarizes the many cases against economics. Perhaps it's not the book's fault that the case is weak. But I settled on 2 because surely a sharper account of the differences between morality and measurable economics utility can be made.