When is It Orthodox, and When is It Heterodox?

By Bob Hockett

    Neil's thoughtful reflections in recent posts on a respectful debate underway between Paul Krugman and Tom Palley have me curious about what, precisely, it is that distinguishes 'orthodox' from 'heterodox' economists, hence what shifts of emphasis among economists count as changes of 'paradigm.'  This curiosity stems from three puzzles that the debate as recounted by Neil tends to raise - at least to my mind. 

 

    The first puzzle is the absence of any reference to Irving Fisher in the discussion.  The second is the absence of any reference to Keynes' view of the shape of the marginal propensity to consume (MPC) curve in the discussion.  And the third is the absence of any reference to Keynesian/Knightian uncertainty as distinguished from risk in the discussion.  I'll explain why I find these absences puzzling, and why the puzzles they raise feed into curiosity about what is orthodox and what heterodox, in the order just elaborated. 

 

1)    Irving Fisher: Orthodox or Heterodox?

 

    Fisher's account of the role played by private debt structures both in fueling credit-fueled asset price bubbles and in prolonging the debt-deflationary sequels that typically follow their bursting remains by far the most acute and, I think, influential account that there is - more influential, I think, even than the Diamond/Dybvig model of bank runs, more on which below.  It figures very much into Minsky's, Palley's, and other 'heterodox' understandings of crisis dynamics and 'Great' depressions and recessions, while also figuring prominently in much of Krugman's own popular writing on the subject.  Yet nobody seems ever to say whether Fisher was/is 'orthodox' or 'heterodox,' or even to say whether they think this question particularly important.  It might be important, however, if we wish to maintain that there is any true fundamental  distinction between orthodoxy and heterodoxy among macroeconomists.  (I'll accordingly suggest down below that we might wish to abandon this premise.) 

 

    So which was he?

 

    On the one hand, Fisher was certainly 'orthodox' in his day.  Indeed, he was and is reckoned by all who knew or know of him as the premier American economist of the early 20th century - highly esteemed both by Keynes and, later, by Friedman, among others, as well as a pioneer in the introduction of highly mathematized models to American economic analysis.  (Recall that he was roughly contemporary with Thorsten Veblen and you'll see at once how mathematization in those days, at least here in the States as distinguished from Jevons' Britain and Walras' Francophone Europe, would have been 'pioneering.')  Fisher was also, like many mathematically oriented economists, very much a 'marginalist' - a characterization often taken to mark the late 19th and early 20th century emergence of what now passes for 'neo-classical' orthodoxy. 

 

    On the other hand, very few people seem to mention Fisher by name any longer, or even to know who he was.  Those who do typically either are marginalized (sorry, pun unintended) as 'heterodox,' or remember Fisher only as the poor fellow who famously said, in the early autumn of 1929, that stock prices seemed to have reached permanently high new plateaus - then bet (hence ultimately lost) his own fortune accordingly. 

 

    So again I ask, which is he, ortho or hetero?  If he's the former, then many 'post-Keynesians' might be taken to be nearly as orthodox as is Krugman or, e.g., John Geanakoplos.  If he is hetero, then folk like the latter might  not be quite as 'mainstream' as they or as others tend to think that they are.

 

    A collateral curiosity I'll mention in this connection is Krugman's misleading suggestion in the discussion with Palley that the entirety of what we've just been through is attributable simply to shadow banking, which is not only incorrect but also in tension with his own appeals in other writings to Fisher.  Fisher does assign unregulated maturity transformation a critical role in crisis (hence his later advocacy of abandoning fractional reserve banking for what now is labeled 'narrow banking'), and in that sense can be viewed as a progenitor of the now-orthodox Diamond/Dybvig model of bank runs.  But he does not assign maturity transformation the exclusive  or even the principal 'starring' role in his longer-term boom, bust, and debt-deflation story; nor do Diamond and Dybvig, for their part, fix on the longer-term Fisher/Geanakoplos leverage cycle so much as they do on the eventual panics and runs that mark many a boom's close.   

 

2)    The Keynesian Marginal Propensity to Consume (MPC): Orthodox or Heterodox?     

 

    The second puzzle raised by the Krugman/Palley dispute, as mentioned above, concerns the MPC.  Central to many 'heterodox' economists' attention paid the role of wealth and income inequality in generating secular stagnation and financial volatility, I think, is Keynes' view of the propensity to consume's tending to diminish in wealth - that is, his view that as wealth and incomes rise, the proportions of wealth and income devoted to consumption expenditure shrink.  Wealth's skewing to the top of the distribution, if Keynes' view of the MPC is correct, will tend to result in consumer demand's falling further and further short of what is necessary to absorb growing national product, hence will both (a) threaten to place limits on that growth itself, and (b) induce greater and greater investment-dependence, hence fragility-inducing financialization, in the macroeconomy if growth and employment are to continue at desired rates. 

 

    It is easy to trace this dynamic through what we have recently experienced - indeed, much of my own work does just that - and so many of the economists typically labeled 'heterodox' can justly claim to have been less surprised by what we have just experienced than were many of those labeled 'orthodox.'  This is particularly so of those 'heteros' who saw reason for concern - not only justice-, but efficiency-related concern - in the skewing of incomes and wealth over the later decades of the 20th century and the first half-decade of the 21st.  But is Keynes' characterization of the MPC, to which the best of these economists have appealed, any less orthodox than was Irving Fisher? 

 

    Krugman in other writings has questioned the empirical accuracy, at least in the present day, of Keynes's view of the shape of the MPC.  But that is not to characterize the idea itself as heterodox.  Indeed, as what would appear to be a straightforward entailment of the diminishing marginal utility of money, the Keynesian MPC would seem to be just as 'marginalist' and hence methodologically orthodox as any other proposition of 'mainstream' economics.  (Incidentally in this connection, I  have never been able to understand those among the 'neoclassical' economists who accuse Keynes' macroeconomics of lacking microfoundations - partly for this very reason.  If it is a 'fundamental psychological law,' as Keynes said it is, that the MPC has the shape that he says it has, then here is as micro a foundation as anyone could wish.  Add to this Keynes' view of the role of radical uncertainty in human decision-making, as discussed below, and you have here plenty of micro to undergird Keynes' macro.) 

 

    Why, then, do Krugman and Palley not join on the MPC, as well as on how best to understand Fisher and his influence, in hopes of determining whether there ought to be more 'heterodoxy' or merely some changes of emphasis in economics classrooms?  After all, if the distinction between orthodoxy and heterodoxy, where the MPC is concerned, takes the form solely of an empirical disagreement as to its shape, then there would seem to be no more 'deep' methodological dispute on this critical point than there is on the place and significance of Irving Fisher.  Hence we would find once again no deep distinction between 'orthodoxy' and 'heterodoxy.' 

 

3)    Keynesian/Knightian Uncertainty: Orthodox or Heterodox?    

 

    The third puzzle raised by the Krugman/Palley discussion, again, concerns the significance of uncertainty as distinguished from risk.  (Roughly speaking, the latter is what you face when you spin a standard roulette wheel; the former is what you face if you do not even know what numbers are assigned to the slots on the wheel.)  As central as are Fisher and the Keynesian MPC to much 'heterodox,' 'post-Keynesian' thought on financial and then macroeconomic dysfunction, of course, is the idea that radical uncertainty of the mentioned sort, as distinguished from mere risk, plays a critical role in engendering both bubbles and busts. 

    Because it is often quite difficult to determine whether 'fundamentals' or mere 'beautiful baby contest,' faddishly interactive decisions are driving a particular pattern of rising or falling asset prices, per this line of thinking, it often is necessary to base market decisions on the thin reeds of convention or 'past might be prologue' style thinking.  But each of us knows, 'deep inside,' that such reeds are weak, hence often we change our behavior quite radically and suddenly when new evidence that cuts in some other direction emerges.  This fact, too, plays a critical role in both manias and panics per 'heterodox' thinking.  Keynes says so explicitly in the splendid tour de force that is Chapter 12 of the General Theory.  And we know that this was no afterthought, since Keynes first developed the risk versus uncertainty distinction in his early 20th century doctoral dissertation at Cambridge, ultimately published as the Treatise on Probability.

 

    But now what about this: Much the same distinction as Keynes' was developed independently in the Cornell doctoral dissertation of another early 20th century economist - one who, in this case, became a darling of the 'orthodox.'  I refer to Frank Knight, who like Keynes ultimately published his dissertation in the form of a widely read monograph: Risk, Uncertainty, Profit.  Insofar as the Keynes view and the Knight view on uncertainty as distinguished from risk are very close if not the same, it would seem that here too the orthodox and the heterodox become difficult to distinguish.  So is an appeal to radical uncertainty in one's model orthodox or heterodox?  It doesn't seem to me necessarily to be either.  It can be 'both.' 

 

    So where does this leave us?  In light of the puzzles just stated, I am tempted to conclude that where the real differences between orthodox and heterodox lie are in respect of emphases and associated methodological nuance rather than bona fide fundamentals.  And surely no one, not even Krugman, would wish to deny that where our most recent calamity is concerned, those labeled 'heterodox' did a great deal better than did those labeled 'orthodox' in emphasizing the right elements and accordingly looking in the right directions.

 

    Against this backdrop, I would propose the following resolution of Krugman's and Palley's dispute:  Acknowledge, with Palley, that much that has often been unjustly marginalized (sorry again, pun now intended) and demeaned as 'heterodox' ought to be brought into graduate and undergraduate economics programs.  Read Minsky, read Palley, and especially read Neil Buchanan, Lance Taylor and Wynne Godley, for God's sake.  You can always read Cochrane and Fama and Lucas and others and laugh while you're at it if you find some of their fanciful premises unhelpful.  At the same time acknowledge, with Krugman, that this material need not be treated as 'heterodox' at all - a designation that in any case borders on insulting in any cooperative discipline that aspires to scientific status.  The putatively 'heterodox' material is generally consistent with, and at least as 'rational' as, anything proffered by the (I admit, sometimes crazy-looking) 'rational expectations' types who have tended to dominate the academy in recent decades.

 

    Out with the labels, then, and in with the substance of what is at stake!