Thursday, May 01, 2014

The Argument on the Left: Does the Great Recession Justify a Paradigm Shift? (Part 1)

-- Posted by Neil H. Buchanan

When I was in graduate school back in the early 1980's (yikes), a friend and I were doing what many graduate students at that time did.  We were complaining about the ridiculous turn that the economics profession had recently taken, including a fetishistic reliance on ever-more-abstract mathematics, and a narrowing of acceptable theoretical approaches to building economic models.  This was the heyday of the "rational expectations" revolution, which saw even the supposedly liberal economics departments in the U.S. insisting on hiring only young men (yes, almost exclusively men) who accepted rational-actor models, and who generally disdained anyone who criticized their models for being unrealistic.

During this particular conversation, I offered the grim idea that, one day, after a real-world catastrophe had inevitably exposed the economics profession's inherent fraudulence, there would be renewed room for people who were willing to write and talk about economic policy in realistic ways.  It might require years of working in the wilderness, I admitted, but at some point, the people who had continued to fight the good fight would be needed.

Remember, this is a conversation between two grad students who had, until they took a break to have this conversation, been trying to figure out whether a particular matrix was positive hemi-semi-definite.  (I am not making that up.)  We needed to think about something else, and we were young and naive.  Moreover, there was a basis for predicting that the future would play out in the way that I imagined it might.  After all, the Great Depression had turned the world of economics upside down, with people who had rejected Keynesian-style ideas suddenly finding Keynes to be the man of the hour.  Before long, the economics profession on both sides of the Atlantic had abandoned its pre-Depression faith in laissez-faire theory, because world events had provided a decisive repudiation of the idea that the government could do nothing to improve upon untrammeled markets.

Of course, this academic openness turned out to be short-lived.  The very success of Keynesian policies allowed the lessons of the Thirties to fade, so that by the Seventies and Eighties, pre-Keynesian policies had been repackaged as "new classical economics," and a generation of graduate students was being told that the Keynesian paradigm was "ad hoc," or "not based on deep parameters," or "insufficiently grounded in individual maximization," or whatever.  Even liberal-leaning economists started to play by the academic right's rules, so that by the Nineties we had a Democratic president -- very much at the behest of his blue chip academic advisors -- dismantling financial regulations and bragging about balancing the federal budget.

With the inevitable economic collapse having played out from 2008 onward, and with a "new normal" that looks an awful lot like long-term stagnation, it is no surprise that the people who never bought into the new classical orthodoxy now want their moment in the sun.  (I am not one of them, of course.  Because of a growing interest in interdisciplinarity that simply could not be pursued from within the confines of an economics department, I happily moved on to the legal academy.)

The debate among rival camps of left-leaning economists is now precisely about whether the Great Recession is a reason to reject the ex ante orthodoxy to which most mainstream nominal Keynesians subscribed for decades, in favor of what amounts to the academic equivalent of a shadow government that is finally ready for its close-up.  As one who has no current stake in this fight, I find the debate fascinating.

On one side is Paul Krugman and his high-prestige allies, including people like Larry Summers, Janet Yellen, and Simon Wren-Lewis.  Each of these scholars attained academic positions at the very top departments during the rise of new classicism, and Summers and Yellen have served at the top levels of Democratic administrations (with Yellen now chairing the Fed).  On the other side is a loosely defined group of people, recently given voice by the estimable Tom Palley, who is a "heterodox" economist of renown who has been doing important work for many years outside of the academic mainstream.  (One of Palley's posts is here.  Krugman's riposte is here.)

This debate is, in part, about ideas, but it is also about personnel.  That is, there are two ways for a paradigm change to happen: (1) The existing order is swept out, replaced by those who saw the truth all along, or (2) The people who got it wrong see the light, changing their ways and moving forward with important lessons learned.

On the latter point, it is worth remembering the details of the historical precedent to which I alluded earlier in this post.  John Maynard Keynes was not some mere struggling academic, suffering for his craft while waiting for his moment to arrive.  He was as much of an insider as one could possibly be, holding positions at Cambridge University and advising British politicians as a well-known man of letters.  Moreover, the people who became the leaders of Keynesianism from the 1930's onward were not a group who had been academically marginalized.  They were largely younger academics and graduate students who were adept enough to see a new way forward.  They were, however, also joined by highly placed academics who had been skeptical of Keynes prior to the Great Depression, but who used their positions at Cambridge and elsewhere to remain relevant in a Keynesian world.  (Lionel Robbins, of the London School of Economics, is an instructively complicated example.)

This point should not be underestimated.  If the hope of those on the outside of the power structure is that "our moment has come," then there is bound to be a great deal of disappointment.  (My impression of Palley specifically, by the way, is that this is NOT his belief, nor is it what appears to motivate him.)  During that long-ago conversation with my graduate school classmate, he said, "Look, even if the economy completely tanks, Larry Summers will still be an economics professor at Harvard.  And he's intellectually agile enough to try to make lemonade out of lemons (or maybe even lemons out of lemonade), even though he's currently very much embracing the dominant paradigm.  When the deluge comes, he'll come through it just fine."

To a large extent, Krugman's argument is pretty strong evidence that my friend was right.  Like Summers, Krugman made his bones in the face of the rational expectations revolution.  Being mathematically adept, Krugman was able to play within the confines of the new orthodoxy, producing work that won him the highest awards, even while sufficiently holding onto a sense of reality that allowed him to see that what he was doing was not The Only Way to Do Economics.  Krugman even mentions Yellen and Summers specifically to show that they have been open-minded about some heterodox approaches.

That at least half of the economics profession has not even reconsidered the orthodoxy is not Krugman's fault.  In fact, he has been indefatigable in upbraiding his colleagues for failing to notice simple reality.  But even if that huge bloc of dead-enders did not exist, there would still be no general changing of the guard in the economics profession.  My friend was right.  The insiders will stay inside, and everyone else can only hope that the conversation on the inside improves.

In tomorrow's post, I will return to the substantive question of whether the Great Recession should actually lead to an embrace of heterodox approaches within that conversation, or whether (per Krugman) it does no such thing.