Thursday, April 2, 2015

Addendum to the Quodlibet (Not Required)

We already covered DH's question in this class's quodlibet (normally I keep them separate, but in this case I've pasted the question and my response to it from the G drive into the bottom of this post). Since that question was already tested on Exam 2, this post won't be required for other tests.

Anyway, I saw an interesting follow-up about this today on Quora. In particular, I like the answer from Alex Tabarrok, which is currently the top vote-getter.

The question was about whether they taught neo-classical economics in the Soviet Union. Tabarrok's answer points out that the Soviets assigned a mathematician to work out production planning for a plywood factory. That mathematician was Leonid Kantorovich, and in that work he (independently of others) developed parts of what we now call linear programming (which Kim Craft does in Decision Modeling, ECON 3170, and which I do for MBA's in Spreadsheet Engineering Craft, ECON 6100).

The thing is, he noticed that the answers he got from his new technique of linear programming ended up looking a lot like what the neo-classical economists were getting by coming at the problems from a completely different direction. It's not foolproof, but if you have two different fields converging on the same answers, it's a probable indicator that you're on the right track. Of course, it was a problem for the Marxists in the Soviet Union that Kantorovich's work didn't align with their theory. Kantorovich got a Nobel Prize in 1975.

P.S. During the exam I flashed that April Fool's joke on the screen. That post I was reading broadly relates to these topics. It had some interesting thoughts about the faults of Marx and Marxism from a non-economist.
If you admit that, [after the revolution envisioned by Marxists] capitalists having disappeared, there’s still going to be competition, positive and negative sum games, free rider problems, tragedies of the commons, and all the rest, then you’ve got to invent a system that solves all of those issues better than capitalism does. That seems to be the real challenge Marxist intellectuals should be setting themselves, and I hope to eventually discover some who have good answers to it. But at least from the little I learned from Singer, I see no reason to believe Marx had the clarity of thought to even understand the question.
FWIW, neo-classical economics gives pretty good answers to all of those, which supports my contention in the quodlibet pasted below.


In class the suggestion was made that macroeconomics has been shifting back slowly towards classical economics. What has led to this occurrence?

I give up: I can’t find the answer I wrote to this question. So here’s attempt # 2.

Yes, macroeconomics has shifted back towards the classical viewpoint over the last few decades. More generally, economics has as well.

Would it be fair to say that this is because that viewpoint has been ridiculously successful, or would that make me look biased?

One big overarching reason for this shift is that since from the mid 19th century, Marxism was “the wave of the future”. It’s really only the last 30 years or so that this wave has receded. And obviously it hasn’t done that yet in some fields. So any movement back towards the classical view is a movement away from that predominant tide. And don’t forget that many people consider the Keynesian macro we’ve moved away from a form of “Marxism Lite”.

What we now think of as economics was barely a field when Marx was writing. The outstanding problem then was understanding how values for items came to be. Marx’s idea was the labor theory of value. This has some superficial plausibility; and you need to remember that Marx was pushing the frontier with this. That theory had problems, and economists’ response to that was to back out of that branch of thinking and go in a new direction. Just about of all of what we think of as economics today follows that new branch (through the marginal revolution that solved the diamonds vs. water paradox). Non-economists latched on to the superficial appeal of Marx’s labor theory of value and are still holding on. We call that new branch the neoclassical paradigm: it’s all about optimal behavior, the importance of marginal thinking, and rationality.

The thing is, economics spent about a century trying to figure out how to test the implications of the neoclassical paradigm. Think about it: we didn’t have supply and demand in a formal textbook before Marshall in 1890, and we couldn’t even estimate supply and demand until the mid 1950’s. Keynes had split macro off from the rest of economics (now called micro) in 1935, so there were a lot of problems there that needed to thought through too: the Keynesian model is inconsistent with the neoclassical paradigm in a number of important ways (just that consumption depends on current income to begin with).

In the mid-1960’s, first Edmund Phelps (Nobel Prize in 2006) and then Milton Friedman (Nobel Prize in 1976) started pointing out that if we’re going to take the neoclassical paradigm seriously, then most of Keynesian macro had been just a wild goose chase.

What we’ve seen since then is a pretty much consistent string of intellectual victories of the neoclassical paradigm over both the Keynesian theory and Marxist positions. Most of those have confirmed the classical viewpoints, thus the sense that there’s been a return to those positions. But it’s also true that many politically progressive economists have used neoclassical techniques to address problems that the classical economists never conceived of (e.g., Akerlof’s 2001 Nobel Prize for his theory markets for lemons).

This has not generally made economists very popular in academia. Almost all of this shift back towards classical viewpoints (now call new classical as opposed to neoclassical) has either led to more politically conservative viewpoints (e.g., that policy should follow rules rather than discretion, first set forth by Kydland and Prescott who won their Nobel Prize in 2004), or has been interpreted as supporting politically conservative viewpoints (e.g., the idea that raising the minimum wage hurts more than it helps). Think about it: Larry Summers, an economist operating completely within the neoclassical paradigm, and solidly progressive enough to serve in Clinton’s cabinet, and Obama’s White House … was considered too conservative by the faculty of Harvard, and lost a no confidence vote as that university’s president. If you need a second example, Greg Mankiw, who essentially single-handedly founded the strain of literature called New Keynesian with a paper he wrote as an undergraduate (!!!) is regarded as so conservative by people outside economics that his class was boycotted as part of the Occupy Wall Street movement a few years back.

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