Do we need a new theory?

Students at the University of Manchester have a sharp critique for the current economics curriculum, and they believe that the neoclassical school of thought is seriously deficient. As they write in The Guardian,

The Post-Crash Economics Society is a group of economics students at the University of Manchester who believe that neoclassical economic theory should no longer have a monopoly within our economics courses. Societies at Cambridge, UCL and LSE have been founded to highlight similar issues and we hope this will spread to other universities too. At the moment an undergraduate, graduate or even a professional economist could easily go through their career without knowing anything substantive about other schools of thought, such as post-Keynesian, Austrian, institutional, Marxist, evolutionary, ecological or feminist economics. Such schools of thought are simply considered inferior or irrelevant for economic "science".

We are taught to memorise and regurgitate neoclassical economic theories and models. Our tutorials consist of copying problem sets off the board and critical discussion is non-existent. We studied our modules and found out that only 11 out of 48 even mentioned the words "critical", "evaluate" or "compare" in their course guides. Eighteen out of 50 of our modules have 50% or more of their marks awarded by multiple-choice exam and in nine of these it is more than 90%. This, combined with the fact that economics students don't have the option to do a dissertation, means that many accept economics as truth, rather than as contested theory.

Their article brings up a couple of issues. The first concerns the definition of "neoclassical" economics, and its conflation with mainstream economics. As Noah Smith explains, a common lazy critique of mainstream economics is to call it "neoclassical," without offering a particularly rigorous definition of the term. The UM students fall into this trap, since their entire mainstream curriculum is brusquely written off as "neoclassical." While the term can roughly cover economics that focus on "[a]ssumption of individual rationality, utility maximization, and supply/demand", a lot of actual economics doesn't cover focus on this. As Noah explains,

But does it describe most of maintstream economics research? Theory papers have declined from over half of top-journal econ papers in 1963 to less than 28% in 2011. Empirical papers make up most of the rest, with experimental economics growing to just over 8%.

How many of those empirical papers should be described as "neoclassical"? Some of them, no doubt. Some of them explicitly include neoclassical models; others test neoclassical theories developed in other papers. But many mainstream empirical papers contain no reference whatsoever to individual rationality, utility maximization, and supply/demand.

For example, take this famous paper by Acemoglu, Johnson, and Robinson, entitled "The Colonial Origins of Comparative Development: An Empirical Investigation" (American Economic Review, 2001). This paper measures the effect of institutions on growth. It does not make use of a neoclassical model. It does not test a neoclassical model. It does not include any assumption of rationality (or indeed, any model of individual behavior at all!). It does not include utility or supply/demand.

For an example from experimental econ, take "Bubbles and Experience: An Experiment", by Dufwenberg, Lindqvist, and Moore (American Economic Review, 2005). This experiment establishes conditions under which financial markets in a laboratory will result in asset price bubbles and crashes. No assumption of rationality is made, no model is referenced or tested, and no ideas of supply/demand or utility make an appearance.

These are mainstream papers, published in the most mainstream of econ journals. And there are many others like them. Does their very mainstream-ness automatically make them "neoclassical", even though they have zero of the elements that are commonly held to define neoclassical economics? If so, then I contend that the word "neoclassical" has lost all useful meaning.

"Neoclassical" should not be synonymous with "mainstream". "Neoclassical" should be used to describe a certain set of economic methods and/or ideas. Instead, "neoclassical" seems often to be used to describe anything that does not fall within a small well-known set of "heterodox" paradigms. I think that is wrong. The net effect of that type of thinking will be to block people from thinking of new ideas, because it defines any really new approach as "neoclassical". So people who want to subvert or replace econ's dominant paradigm will be shepherded toward old alternatives such as Austrianism, Post-Keynesianism, etc.

This gets to the real heart of the problem with the students' assessment of their curriculum. I think there is a lot of worthwhile ground for addressing the problems of equilibrium and instrumentalism in modeling, but I'm just not a good enough econometrician or too invested in any school of theory to try and pick that fight. I'll let Christian Arnsperger and Yanis Varoufakis do that sort of work.

A more important issue is at stake. As the New Yorker explains, there have been major institutional changes in how science sees itself over the last decade. Reproducibility, transparency and shared data are quickly becoming fundamental aspects of scientific publication, and it should go a long way towards cleaning up science's biggest biases (like publication bias and researchers' unwillingness to publish negative results). Economics pedagogy needs a similar housecleaning. It needs to become closer to modern economics research and practice.

By and large, I don't think the problem with economics is one of theory, regardless of whether this theory adheres to a particular school. More broadly, the biggest problem in economics is empirical. All branches of economics have too much theory that is entirely untested (labor economics is one of my favorite punching bags). Some of this comes from economics' "creep" into other social sciences (like the Freakonomics problem), but the bulk of the problem comes from economics' tradition as a moral philosophy, a method of historical explanation and a tool of political ideology. As Krugman is wont to say, you can find an economist to support any political platform. This is obviously a problem.

Predicting crises may not be a good metric for assessing the quality of a specific economic institution, but it can be a good measure for charlatanism. The most recent economic crisis has shown that economics, as it is practiced in America's premiere institutions, is in pretty good shape. The Fed may not have been far ahead in its predictions of economic disaster, but its response proven to be very effective, miles ahead of the bank's response to previous crises (and that of other central banks, like in Europe). The current economic problems facing the US have a lot more to do with political institutions than economic ones, and economics is not able to solve political problems (nor should it).

The students at Manchester should be welcome to criticize the school of theory they're forced to learn, but I'm much more concerned about their ability to acquire the tools to assess the accuracy of the all theories they're interested in. Theory has a bad habit of providing a false sense of veracity, and developing a skeptical, empirically-driven mindset takes a lot of hard work. We're fortunate to have the tools to make this attitude widespread in the discipline, but this requires teaching the computer science and statistics skills that remain absent in most economics programs. An economics student who can data munge will ultimately be much more beneficial to society than one that can recite all of the assumptions of the ISLM model, and I'm looking forward to students writing The Guardian to ask for that.