On Pluralism: A Response to John Kay

John Kay recently wrote an article about the campaign for pluralism, criticising those who want to include heterodox economics in the curriculum on the grounds that “no one would cross a bridge built by a heterodox engineer”. However, he is wrong to make comparison between economics and harder sciences like engineering or medicine. These disciplines, though undoubtedly influenced by politics, ethics and culture, study phenomena which can be subjected to controlled and repeated experiments, the results of which can be generalised to uncover regularities and even laws. Economics, on the other hand, is a social science, and social interactions can have different results depending on the context and motivations of the entities involved. For example, research shows that attitudes toward taxation and the state change the effect an increase in tax has on economic activity. Social reality also changes: the monetary system of the 1890s is very different to the monetary system we have today. This means that although they might like to believe otherwise, economists have not and cannot uncover the ‘true’ model of the economy.

Kay’s article would benefit from some substantive discussion of what he calls heterodox economics. He references Jean Tirole’s dismissal of other schools of thought to support his argument, but as a response to professor Tirole’s statements by the French Association for Political Economy pointed out, major advances in academia – even in the hard sciences – are often made at the margins of disciplines, where people are more willing to challenge central assumptions of the mainstream. Since the mainstream is unwilling to recognise these advances, they can remain undiscovered for a long time. The famous physicist Max Planck put this rather more morbidly as “science advances one funeral at a time”. Ironically, economists such as Tirole often criticise monopolies, but in this case they seem to believe that the dominance of one school of thought is the fit and proper situation.

This is especially puzzling since the mainstream has hardly covered itself in glory since the financial crisis, failing to foresee even the possibility of such an event. The Reinhart and Rogoff scandal also saw embarrassing errors revealed in major research by a graduate student at Amherst, which would probably be considered a ‘heterodox’ university. Engineers and doctors would be in similar disrepute if the methods they used failed so repeatedly and spectacularly. The economist Stephen Kinsella likens it to doctors missing the presence of bleeding in a patient. Indeed, the recent financial crisis illustrates the gains that could be made by paying attention to marginal thinkers such as Hyman Minsky. His Financial Instability Hypothesis fit the mechanics of the crisis so well that the phrase ‘Minsky Moment’ became popular in the press and his theories are now being integrated into mainstream economics, but he was very much a marginal thinker while he was alive. Similarly, the theory of endogenous money – a staple of post-Keynesian economics for decades – was recently acknowledged as a correct description of how banking works by the Bank of England.

No other social science has the hubris to believe one methodology is unquestionable; they all learned long ago that this kind of approach quickly leads to hand waving and tautologies as every problem is shoehorned into an unsuitable framework (the obvious example being Freudian psychology in the 1950s). We would not go so far as to argue that in economics, “the value for both students and researchers lies mainly in the debate itself”, but there would be value in economists learning to have at least some debate outside the confines of their preferred approach. The closed-mindedness of some areas of the profession is a powerful barrier to reform and progression post-financial crisis.

Pluralism would not be about “relativism of knowledge” but about teaching students to critically evaluate all theories which may be relevant for a particular situation instead of assuming one framework can be applied universally. Theory choice is an essential part of all academic practice and deciding the criteria on which to evaluate economic theory is also contestable. Empirical accuracy, logical consistency, generality, realism, explanatory power, predictive power, simplicity, heuristic value and research potential are all potentially valid ways to evaluate a theory. Of course, other perspectives fall short on criteria deemed important by mainstream economics but the art of teaching economics is to give students the tools to judge the rigour and value of theory in a broader sense. Hopefully this would ensure the next generation of economists were better able to address the ongoing economic problems faced by society. The skill of being critical is often associated deconstructing and dismantling arguments but all successful business people will know that internal challenge and debate is an essential part of building a successful organisation. The same is true for economics and for society.

Many economists claim that there are already alternative and competing ideas within the mainstream. Recent examples might include behavioural economics, which criticises rationality assumptions, or Hyman Minsky’s insights into the causes of financial instability. However, when these ideas are incorporated into the mainstream they are made to conform to certain assumptions (optimising behaviour, microfoundations, regression analysis and equilibrium) which alternative perspectives reject. For example, Paul Krugman labelled one of his recent macro models ‘A Fisher-Minsky-Koo Approach’ in a clear attempt to incorporate heterodox economic ideas. Yet the paper relies on equilibrium analysis, explicitly rejected by both Fisher and Minsky, and does not include endogenous money, the financial instability hypothesis, or even a real financial sector (agents simply borrow from each other in the form of riskless bonds), all of which are central to Minsky’s theories.

The fact that competing ideas have to be adapted into this kind of framework before they are accepted as good economics narrows the parameters of debate and the scope for innovation. When there are only competing ideas but not competing frameworks most methodological questions are taken as axiomatic. As a result we aren’t able to understand how the tools we use shape the questions we ask and the scope of the results we can obtain, or to evaluate our framework’s strengths and weaknesses.

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