What Are We, Chopped Liver?

Thomas Palley writes at TPM Cafe:

Are Heterodox Economists Just Unhappy Whiners? | TPMCafe: I was not planning to make further formal contributions to this discussion. However, Diane Coyle’s... claim is that heterodox economists are just unhappy whiners (a.k.a. whingers)..... I would like to give a couple of concrete examples that counter Diane Coyle’s claim that heterodox economists have nothing to complain about. So please bear with me.

The last time a paper on macroeconomics with a Keynesian structure was published in the American Economic Review was in the early 1980s. Send in such a paper and it will be immediately rejected as “old” economics. That is a matter of taste. There is simply no scientific basis for rejecting the Keynesian description of how the economy works.... Whereas the orthodox cup is filled with hard-core orthodox theory, the lip of orthodox policy practice quickly and easily slips into Keynesian thinking. This suggests Keynesians may be more right than the orthodox.

One example of such slippage is the scare with deflation during the last recession. Suddenly, the orthodoxy started arguing at the policy level that [de]flation could be damaging and the economy might get trapped with sustained unemployment (as happened in Japan). This was exactly what Keynes claimed, yet the orthodoxy dismissed (and still dismisses) Keynesian theory on the grounds that perfectly flexible prices and wages will automatically solve real world unemployment...

What am I, chopped liver? Apparently. Not only am I chopped liver, but others are chopped liver as well. Google MIT for its advanced macroeconomics reading lists and one of the first things that pops up is Jordi Gali's module: http://web.mit.edu/14.461/www/part1/readinglist.pdf. This looks to me to be nearly 200-proof modern Keynesianism--it may not be the kind of Keynesianism Palley likes, but Keynesianism it is.

Here are some of the readings:

Calvo, Guillermo (1983): “Staggered Prices in a Utility Maximizing Framework,” Journal of Monetary Economics, 12, 383-398. Yun, Tack (1996): “Nominal Price Rigidity, Money Supply Endogeneity, and Business Cycles,” Journal of Monetary Economics 37, 345-370. King, Robert G., and Alexander L. Wolman (1996): “Inflation Targeting in a St. Louis Model of the 21st Century,” Federal Reserve Bank of St. Louis Review, vol. 78, no. 3. (NBER WP #5507). Fuhrer, Jeffrey C. and George R. Moore (1995): “Inflation Persistence”, Quarterly Journal of Economics, Vol. 110, February, pp 127-159. Galí, Jordi and Mark Gertler (1998): “Inflation Dynamics: A Structural Econometric Analysis,” Journal of Monetary Economics, vol 44, no. 2, 195-222. Sbordone, Argia (2002): “Prices and Unit Labor Costs: A New Test of Price Stickiness,” Journal of Monetary Economics, vol. 49, no. 2, 265-292. Galí, Jordi, Mark Gertler, David López-Salido (2001): “European Inflation Dynamics,” European Economic Review vol. 45, no. 7, 1237-1270. Galí, Jordi, Mark Gertler, David López-Salido (2005): “Robustness of the Estimates of the Hybrid New Keynesian Phillips Curve,” Journal of Monetary Economics, forthcoming. Eichenbaum, Martin and Jonas D.M. Fisher (2004): “Evaluating the Calvo Model of Sticky Prices,” NBER WP 10617. Mankiw, N. Gregory and Ricardo Reis (2002): “Sticky Information vs. Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve,” Quartely Journal of Economics, vol. CXVII, issue 4, 1295-1328. Rotemberg, Julio (1996): “Prices, Output, and Hours: An Empirical Analysis Based on a Sticky Price Model,” Journal of Monetary Economics 37, 505-533. Chari, V.V., Patrick J. Kehoe, Ellen R. McGrattan (2000): “Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?,” Econometrica, vol. 68, no. 5, 1151-1180. Wolman, Alexander (1999): “Sticky Prices, Marginal Cost, and the Behavior of Inflation,” Economic Quarterly, vol 85, no. 4, 29-48. Dotsey, Michael, Robert G. King, and Alexander L. Wolman (1999): “State Dependent Pricing and the General Equilibrium Dynamics of Money and Output,” Quarterly Journal of Economics, vol. CXIV, issue 2, 655-690. Dotsey, Michael, and Robert G. King (2005): “Implications of State Dependent Pricing for Dynamic Macroeconomic Models,” Journal of Monetary Economics, 52, 213-242. Golosov, Mikhail, Robert E. Lucas (2005): “Menu Costs and Phillips Curves” mimeo. Gertler, Mark and John Leahy (2005): “A Phillips Curve with an Ss Foundation,” mimeo...

Comments

[tom]

Just nit-pciking, but none of those publications appear to be "American Economic Review".

[andres]

tom: A few of my elder economics professors said that the AER was good firewood kindling or empty shelf-space filler, but I don't believe such heresy ;-)

Brad, you look much too tasty to be chopped liver. From your mug shot at a glance, I'd say you're more like foie gras, and that's the fault of whoever it is that feeds you.

I can't speak for Thomas Palley, but I suspect he would retort "You're **** right that's not the Keynesian economics I like". I would go much further. With my economics education being antediluvian, I've only read a couple of the items on Gali's reading list, but I suspect simply from the titles that they would bear almost no resemblance to The General Theory or any other of Keynes's writings on the Great Depression and unemployment--feel free to correct me if I'm mistaken, but the General Theory did not have the obsession with microfoundations and sticky prices that the reading list seems to bear on the surface. And btw, I think both Robert E. Lucas and the Fed Bank of St. Louis would be surprised if you characterized their contributions as Keynesian.

Time to get on my soapbox: what I see in the reading list is a desperate and ongoing attempt to torture neoclassical microeconomics, procrustean style, into yielding Keynesian-style policy recommendations--a huge amount of brainpower and effort going into reinventing the wheel using solid stone rather than wooden spokes and axles. The whole focus seems to be on price rigidity as the fly in the ointment that prevents the economy from moving back to full employment equilibrium, even though both Keynes and Irving Fisher (1933) wrote about the destabilizing effects of "flexible" price deflation. In fact I believe a DeLong and Summers paper from the 1980's cited in an earlier post also talked about the destabilizing effects of price flexibility.

(Incidentally, several of the papers on the reading list deal with inflation, even though Keynes had little to add on that subject different from what Irving Fisher or even Milton Friedman might have written.)

In short, what I see in the reading list is not Keynesian economics but a continuing attempt to reconcile neoclassical microeconomics and monetarist inflation theory with Keynes. They are not the same. Ok, I'll shut up now and let my betters (ie those with more recent and deeper training in macroeconomics) tell me to STFU.

[Tomas]

Good post andres.

The question is, is a tortured version of neoclassical economics with sticky prices keynesian? It gets the right policy but for different reasons than Keynes.

Keynes emphasiced radical uncertainty as the source of the lack in the economy of a long run equilibrium (in my reading, correct me if im wrong on this). Since choices about investments are made under radical uncertainty, the state of expectations, based on whatever, decide the future outcome and the development of fundementals. I think thats sort of how the Post-keynesian argument goes.

[David]

Tomas,

You're right: you can't have Keynesianism without studying Keynesian uncertainty. Stiglitz is a true Keynesian. All this sticky price obsessed stuff is pseudokeynesian.

[anon]

Brad,

I cannot get your point.
Neither you nor any of the (currently alive) people on that list would be considered heterodox by any stretch of the imagination.

[Econ_HH]

I follow the debate from Germany with a great interest. In general in good old Europe we thought that academia in the States would deal with "ideological" disputes in a more pragmatic way but possibly this is a cliché ;-)

I can agree with Tomas' position. But irrespective what position you take in the discourse what Keynes really really really meant, it is clear, that the mainstream has a tendency to incorporate certain positions and has the power to re-define it in its own way. I worked for a research institute in Germany where we were evaluated by highly esteemed academics (OK, Germans ;-)) When using arguments by G. Akerlof, Laurence Ball and others, who give some role for demand management on long-term unemployment (this is Keynesian topic for both camps, even if people disgree on the word "long-term" but anyway) to present our "research agenda" -- we were accused to make "heresy".

From a sociological perspective this has to do with a certain power. Or to said it antother way: The mainstream has the power to decide what is "economics" and who are the party-poopers. I think this is an important lesson.

Another point: What matters are the motivations behind your decision to investigate a topic as a researcher and the views you have on the "relevance" of issues. New Keynesians decided to stay in the neoclassical camp by deciding that the main differences are: monopolistic market structures and sticky wages/prices. Both together was enough to deliver the foundations of a modern microfounded and integrated business cycle theory -- assuming that there is nothing wrong in believing that a long-run equilibrium exist. This is the common ground for neoclassical economics and integrates micro and macro aspects and --
according to the mainstream at least -- defines what can be counted as "economics". This makes it so difficult for "heterodox" economists to fight against it.

[dsquared]

Andres is right; all these papers by their titles appear to be sticky-price "New Keynesian" stuff. Which is fair enough but it doesn't really refute Palley's point, which is that the kind of Keynesianism he talks about can't get published in top tier journals and isn't on the syllabus.

[John Emerson]

Hodgson claims that the real work in economics is done by ad hoc tweaks which bring the underlying theory into concordance with reality. It sounds like epicycles to me.

I rather doubt that the Econ 101 theory has the same status in econ that classical mechanics does in physics. That's always the claim -- that econ theory uses simplifying assumptions the way physics does. But physics has spent centuries taking into account the "exceptions" -- e.g. thermodynamics, relativity, and quantum theory. In order to take these "exceptions" into account, some of the theoretical claims of the original physicists had to be revised and moderated.

Econ theory seems to be systematically used in education as a form of deliberate political indoctrination. "Econ 101" thinking is not regarded as a problem by physicists, but just as an exoteric version of the truth -- the best that the plebs can understand.

In my lifetime the application of economic analysis ("Learn to think like an economist!") to the environment, the family, community, the nation, "labor" (i.e., the part of the human race that lives on wages), and public goods, has produced as much misunderstanding and bad policy as it has enlightenment. I'd say more -- economists have finally started to catch up with public opinion on the environment, for example, but they're very late to the party.

It's true that you have to fight fire with fire, and that's what both DeLong and Gintis have said. In the same way, in a Communist country reformers would quote Marx, and ina Catholic country reformers would quote Aquinas. To my mind, however, the disestablishment of Econ 101 would be a good thing.

[John Emerson]

"Econ 101 thinking is not regarded as a problem by physicists"
should read "by economists".

[Chip Poirot]

John,

I think you can make a lot of interesting and useful points to students in 101 and 102 even using a perfectly mainstream text like Krugman's. Even some of the more conservative texts allow for discussion of important topics.

I've come to the conclusion that much of econ 101 and 102 is about how you present the material.

Other than that I think people have hit the nail on the head: of course you can submit New Keynesian (of a sort) papers to the AER. What you cannot submit are "Old Keynesian" or "Post Keynesian".

A point that is often lost about Keynes' views on expectations is that Keynes allowed both subjective and objective factors to influence expectations formation.

[John Emerson]

My understanding at this point (and I've suspected something like this) is that the political bias and theoretical narrowness of Econ 101 are the result of a deliberate political bias, and that the real analytic work being done by economists is much more realistic.

While this may bear on the question of whether orthodox fundamental theory must be replaced by some other fundamental theory, the involvement of the economics profession as a whole in mis-teaching and indoctrination is highly blameworthy.

As a profession , economics produces undergraduate and graduate econ teaching, op-eds and public philosophy, and policy advice in the business world and in government. At least two of these jobs are being done badly at the moment.

Several of the liberal defenders of orthodoxy (e.g. Gintis at Sawicky's) could be interpreted to say that they were forced to accept the orthodox framework or they would have been frozen out. This meshes with the claims of various non-orthodox economists to have been frozen out.

[DRR]

Except that Economics is a different discipline than Physics, and the way it is taught in elementary courses as it pertains to what economists actually do is different also.

For a useful primer on this I recommend reading the paper "What We Teach And What We Do" by David Colander, a colleague of Barkley Rosser and one of those "Heterodox" Economists that are so hip & hot these days.

http://www.middlebury.edu/services/econ/repec/mdl/ancoec/0426.pdf

A few summarized planks.

1. The way Principles of Macro & Micro (101,102) are taught today has not changed all that much in 50 years.

2. 50 years ago, the Principles courses could be accurately stated as a bare bones simplistic sketch of how economics was being carried out at the grown-up level. Today the Principles curriculum bears a much more distant resemblance to what Economists actually do.

3. Trying to incorporate the work of the most modern cutting edge economics into the introductory courses would not only be very difficult, it wouldn't be particularly useful.

4. Despite the more distant relationship between the economics of the introductory courses & what economists actually do, the introductory Samuelsonian curriculum is actually a surprisingly effective way of introducing core economics concepts & facillitating economic thought.

5. In the future development & refinment of the introductory curriculum, more pains should be taken to emphasize to the student that some of the concepts explained theirin, like "equilibrium", while useful, should be understood as only applying to the figure or the model illustrated, and not the economy as a whole.

As they say. Read the whole thing.

Of course, for some, John Emerson in particular, the concern has never been so much worrying & aching over the terrible possibility that our young people are getting an insufficient or substandard education in economics, as it is that students could potentially be less inclined to support certain public policies he likes than had they taken no economics courses at all. For that, I can give no comfort.

[Chip Poirot]

DRR,

You make some good points but I think what conclusions you draw from principles depends a lot on how you interpret it. I personally don't believe economics (or any other discipline) should be taught with the express goal of making students believe or disbelieve in any particular policy stance.

My problem with what Barkeley and Colander do is that they stretch the mainstream model. In stretching it, they include a lot of important stuff. I've used Colander's text before and now use Krugman's (there isn't much difference save that Krugman's is a bit easier). This is a clear case of path dependency. Because the mainstream defines the profession students need to learn the mainstream basics. Therefore, whether you believe the mainstream model is right or wrong, you still need to teach it and teach it well at the principles level, or you are doing students a disservice.

In doing so, you can bring in a lot of Post Keynesian and Institutionalist points. The problem is you do so at the risk of confusing students.

For example, Krugman's chapters on monetary policy and the Phillipp's curve stress:
1. neutrality of money in the long run
2. the correspondence of the NAIRU and Natural Rate;
3. A long run vertical Phillipp's curve;
4. The view that inflation is ultimately caused by the FED trying to push unemployment rates too low.

All four of these points are IMO, conceptually and logically confused and empirically wrong.

[Tomas]

DDR,

some good points.

From where I study there seem to be two schools of thought on introductory economics classes.

1) the crawl before you can walk approach: Students need to learn the basic outlines of the neoclassical approach because its a universial frame of reference for economist and the basis of the dominant research program in economy. Here introductory economics is thought as a part of longer economics training program, so it is just to get people started to think and not meant to give a overview. Sure economics may seem monolithic when introduced but all the debates and stuff we can cover later.

2) Historical-Pluralist introduction:
The students need to get a overview of the field and the controversies that spawned it. Here introductionary economics is thought of as trying to impart a general understanding of the whole field (and the dissenting views ). The important thing here is to capture the imagination of students and get students to get a feel for various aspects of field.

I personally think both has some merit, however a problem that i have observed is that curious and creative people will be turned off economics by the introduction and decide to do something relevant instead. So the people who are left are the accountant types who dont care about research or who are fascinated by the math in it self.

I think it makes more boring economist to go with 1) tbh.

[John Emerson]

I'm not sure what DRR means, but my concern is that intro econ students are being given political indoctrination.

Economists always say "Emerson just disagrees with the political consequences of the truth", but seemingly the actual results of developed economics are quite different than what Econ 101 students go away thinking they are. Defenders of economic science try to wave this away as not really very important, but I believe that it's deliberate and dishonest political indoctrination.

[Ralph]

Orthodoxy versus heterodoxy makes my head spin. As a non-economist I have long been aware of the primacy of neo-classical economics in academic economics but the extent to which those within the church exclude the unbelievers in orthodoxy is mind boggling. A recent article in the Nation tries to penetrate the labyrinth of the inner sanctum of economics. "Hip Heterodoxy" by Christopher Hayes. The url is //www.thenation.com/doc/20070611/hayes.

[student from hamburg]

As a student I can confirm that the mainstream has the power to define what economics actual is and what child's play is. They have there special assumptions and stuck on it, even if others contradict it logically or empirically. The reply on it: "Maybe you are right, but it does not affect our statement."
But why is neo-classical theory or the hotchpotch of new-keynesianism so widely accepted?
At first I think it is a problem of tradition: A student learns what the professor teaches and will teach it to his students. The student comes to the university and has no idea of economics. He hears that Keynesianism was once the ruling theory (about Marxism or post-Keynesianism he will never hear anything at the university), until the 1970s when it failed to describe and solve the problem of stagflation.
Monetarism and the neo-classical knew how to solve it. The student accepts this without questioning anything. He learns that "fine-tuning" is not accepted any more, political control has no influence in the long-run and the distribution of income does not affect growth positively.
The second problem is about ideology: I would agree with Joan Robinson (Economic Philosophy) that the problem of accepting Keynesian theory (we ought to extend this on heterodox theory) is especially a problem of its political and social implications. The equilibrium theory with its liberal background in the tradition of Adam Smith argues that the egoism of an individual brings the best result for the whole society. Keynes contradicted this sharply in "The End of Laissez-Faire". The economical equilibrium becomes a social equilibrium without any problems of class-conflicts or distribution conflicts.
On the other side equilibrium theory has a certain aesthetic and psychological influence on the mind.
The last point is about the mechanism of selection: A young economist wants to make a career. He knows that he has to publish some articles in a well-known journal. But as long as the power of definition lies on the side of the journal the young economist has to adapt to the journal's definition of economics. Thus the selection mechanism suffocate any heterodoxy.

But I am optimistic that this will change because even the mainstream has to prove their theory at the reality and the social and political circumstances.