Mankiw’s Ten Principles of Economics Part 11: Conclusions

The introduction to this series is here.
Part 1 is here.
Part 2 is here.
Part 3 is here.
Part 4 is here.
Part 5 is here.
Part 6 is here.
Part 7 is here.
Part 8 is here.
Part 9 is here.
Part 10 is here.

This series is an outgrowth of a series of short essays [links here] on Thomas Kuhn’s The Structure of Scientific Change. Economists desperately want people to think they are scientists, so much so that they will put on lab coats as in this delightful story.

Donning customized white lab coats, University of Delaware officials cut the ribbon on the new Center for Experimental and Applied Economics at UD’s College of Agriculture and Natural Resources last week.

“Our experiments pay people cash to analyze their decisions,” said Kent Messer, a professor … .

Chapter 2 of Mankiw’s introductory textbook has a section titled “The Economist as Scientist”. He claims that just like physical scientists, economists “… devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories.” P. 22. Based on this section, I thought he was saying that the 10 principles I’ve discussed in this series were in the nature of scientific principles. I suggested that with the addition of methodological ideas and some basic assumptions about the goals of a society, they could be treated as a paradigm in the sense Kuhn describes.

The goals of this series were: 1. to examine that possibility; 2. to see if these principles served as a structure for neoliberal economic theory, and 3. to see if there were other ways of looking at these principles that would be enlightening.

The first goal seemed perfectly reasonable. According to Kuhn, you don’t write a physical science textbook unless the community of scientists who study that area agree on a paradigm of the discipline. But my brief looks at these principles makes me think that they are either vacuously true, reductive to the point of absurdity, or hotly contested by other economists. I think I have shown that these principles do not operate as a statement of agreed-upon ideas about the way the economy works. They barely describe individual activity in any useful way.

Consider Principle 4, People Respond to Incentives. Of course they do sometimes, and sometimes not. And sometimes they respond in wildly disparate but perfectly reasonable ways. You see a car advertisement offering a price break for buying right now. Does Principle 4 help you understand how I might respond? Here’s a harder example. Interest rates go up. That creates an incentive to do what? Buy a house before rates go up further? Wait to see if higher interest rates cool off the housing market so houses are cheaper, so maybe even with higher interest rates your mortgage payment will be lower? Consume less and save more money? Wait for the stock market to go down and buy stocks? What conclusions can be drawn from this principle? How is it useful? Any time you might want to apply it, you have to look at the specifics of the situation, including the people who are supposedly going to respond to the incentives. Also, lacking data, there is a strong tendency to assume other people think like you do.

The function of the paradigm for Kuhn is to provide a platform for further research in what he calls normal science. There is an economics example in Part 10, the effort to figure out the relation between inflation and employment. People like Laurence Ball and Sandeep Mazumder of the International Fund, whose work I quote, can make a living working on ways to find an historical relationship, regardless of whether it says anything about the future. But surely if the relationship cannot actually be specified usefully after years of effort, it isn’t a real principle, and it doesn’t form the basis for a sensible research program. Morgenerally, Mankiw admits that in this blog post that there is much about macroeconomics that people don’t know.

Kuhn says that there is a difference between physics and chemistry textbooks and social sciences textbooks.

In history, philosophy, and the social sciences … the elementary college course employs parallel readings in original sources, some of them the “classics” of the field, others the contemporary research reports that practitioners write for each other. As a result, the student in any one of these disciplines is constantly made aware of the immense variety of problems that the members of his future group have, in the course of time, attempted to solve. Even more important, he has constantly before him a number of competing and incommensurable solutions to these problems, solutions that he must ultimately evaluate for himself. P 164

That does not describe Mankiw’s textbook which reads just like the physics and chemistry textbooks Kuhn describes. There are summary remarks about historical figures in the field, and the discipline is presented as a cumulative result of a steady progress of understanding. There is no question about the truth content of a single statement in Mankiw’s text, no hint that respectable economists reject his conclusions. Any student who only takes intro to economics using Mankiw’s textbook will never learn about the massive differences among schools of economics, will never learn that there are alternatives to the monetarist/neoliberal views implicit in the book, and will never have a way to examine economic policy problems from any perspective other than Mankiw’s.

That is what makes this textbook approach so dangerous. Mankiw presents a finished survey of the field, with the imprimatur of authority, when there is no consensus. It’s a fair reading of this book to call Introduction to Neoliberal Economics. It’s not fair to call it a balanced presentation of a discipline shot through with contested assertions.

I think I’ve shown that the discipline of economics has not reached the stage at which it is possible to create universal principles. That is a waste of time, and I will not spend any more time thinking about it. But it isn’t just that there aren’t any universal principles. As Kuhn would point out, with so many schools of economics there is no platform from which to evaluate any principle. The various schools conflict with each other on every possible level, and there is no way to test any theory that will satisfy the proponents of the exact opposite theory.

The worst part is that the rich have a death grip on economic policy. They choose to support policies that benefit them at the expense of the rest of us, and they hide behind a veneer of economics professionals who say the things that they want to hear. Those people teach economics using textbooks like Mankiw’s and that of Samuelson and Nordhaus. They control policy, because they have taught the leaders of today.

This and the preceding series have been really depressing to me. There is a tiny ray of hope. Bernie Sanders is the ranking minority member of the Senate Budget Committee. He appointed Stephanie Kelton as Chief Economist. She is the brilliant economist who chaired the Economics Department at the University of Missouri-Kansas City, and she is a noted scholar in the field of modern money theory. That is a completely different way forward, and one that works for progressives and frightens conservatives. That’s got to be a good thing.

Paradigm Change in Science and Economics

In this post, I discussed normal science, a term used by Thomas Kuhn in The Structure of Scientific Revolutions to describe the day to day work of scientists, focusing on the example of my brother’s work on transmission of pain in the body. In normal science, Kuhn explains, people expect the puzzles they choose to work on will have solutions that can be worked out using the paradigm, and if the first try doesn’t get the solution, scientists just keep plugging away, sharpening their instruments, their theories, their rules of engagement and trying to eliminate prejudices until they get a solution. And mostly, they do. That’s a good description of my brother’s work.

If not, generally they assume they failed, not that the answer doesn’t have a solution inside the paradigm’s limits. They put that problem to the side, and work on a related problem or maybe just move on to something different. Frequently the problem disappears as more and better techniques are created, measurements become better, theories evolve and prejudices are conquered. But if unsolved puzzles accumulate, there is growing pressure on the paradigm, and growing unease among the scientists working in the area. Kuhn gives examples:

The state of Ptolemaic astronomy was a scandal before Copernicus’ announcement. Galileo’s contributions to the study of motion depended closely upon difficulties discovered in Aristotle’s theory by scholastic critics. Newton’s new theory of light and color originated in the discovery that none of the existing pre-paradigm theories would account for the length of the spectrum, and the wave theory that replaced Newton’s was announced in the midst of growing concern about anomalies in the relation of diffraction and polarization effects to Newton’s theory. P. 67, fn omitted.

This is the crisis state. It is a necessary, but not sufficient, condition for a change in the paradigm. Kuhn analogizes the situation to political revolutions:

Political revolutions are inaugurated by a growing sense, often restricted to a segment of the political community, that existing institutions have ceased adequately to meet the problems posed by an environment that they have in part created. In much the same way, scientific revolutions are inaugurated by a growing sense, again often restricted to a narrow subdivision of the scientific community, that an existing paradigm has ceased to function adequately in the exploration of an aspect of nature to which that paradigm itself had previously led the way. P. 92

Another necessary condition for a paradigm shift is the existence of a new paradigm. Scientists cannot work without a paradigm, so until a new one obtains a concensus, they struggle on under the old one. New paradigms are suggested and tested, but Kuhn points out that there isn’t any way to prove that one is better than the other, because proofs only exist inside paradigms. The new paradigm has to satisfy the relevant scientific community that it will solve the old problems, and open the way to new problems. But this is a matter of persuasion, not of scientific proof, because the standards of proof are connected to a paradigm; they do not exist in some Platonic state above it all.

One final point. Kuhn says that in scientific revolutions, the new paradigm completely replaces the old one, and he gives plenty of examples.

There’s more to be said about the process of paradigm change, but this will suffice for this post. In the wake of Kuhn’s work, several papers were published trying to identify paradigm shifts on the order of the Copernican Revolution in the history of economics. One such is The “Structure of Revolutions” in Economic Thought, a 1971 article by Martin Bronfenbrenner. He thinks the history of economics is more like the Hegelian dialectic, thesis, antithesis and synthesis, than the catastrophic destruction of the previous paradigm.

Bronfenbrenner identifies three revolutions in economics as

1. The classical school, based on Adam Smith’s Wealth of Nations and David Hume’s Political Discourses.
2. The marginal utility revolution, dating to about 1870, led by John Stuart Mill and David Ricardo.
3. The Keynesian revolution, about 1936.

He adds the response of the Chicago school as a possible fourth, and time has proved his suggestion correct.

It should be obvious that none of these revolutions destroyed the older view. Instead, they sit side-by-side, if uneasily and with some overlap. Bronfenbrenner doesn’t see a problem with the survival of the natural law as a partial explanation of 20st Century capitalism, and assumes that the future will include some of those ideas as well. This is clear from his approval of Paul Samuelson’s textbook. I point out the problems with that view in several posts here and at Naked Capitalism, including this one.

Like others, Bronfenbrenner points out that Kuhn’s definition of the term “paradigm” is loose at best. For purposes of this post, it’s sufficient to regard it as the entire set of theories, understandings, prejudices, instruments, and interpretations of the measurements of instruments that guide the scientist in the course of normal science. It is, however, important to note that neither Bronfenbrenner nor any of the other writers I’ve seen so far try to explain the sense in which the Classical School, the Marginal Utility School, the Keynesians or the Chicago School, or, for that matter, any of the other schools, constitute a paradigm in a way similar to the way General Relativity acts as a paradigm for physicists and astronomers.

That offers two more or less neutral explanations of why economists aren’t all freaked out by the failure of their theories demonstrated by the Great Crash. First, they may well assume that events like the Great Crash are just anomalies that future work will solve. That would explain the response of Gary Becker, “You need a theory to beat a theory.” Link here. Becker couldn’t imagine an alternative theory, so he just continued to work inside his old one, as if his Chicago School were a paradigm.

Second, Bronfenbrenner is right that old economic theories never die. They cannot die. Instead, in his view, they will be assumed into the heaven of some synthesis, hopefully with the favorite views of each economist on top.

As a road map for the rest of this series, what does all this say about the claims of authority of economists?