Is mainstream economics even neoclassical?

Ninety-Nine percent of the time, when people criticise ‘mainstream’ economics, they are in fact criticising neoclassical economics. I recently came across a paper titled “The turn in economics: neoclassical dominance to mainstream pluralism?” published in the Journal of Institutional Economics, which investigates the question ” why neoclassical economics no longer dominates mainstream economics.” Note that this paper was written in 2006, before the financial crisis. The paper attempts to explain trends in economic research over the last two decades including fields such as “game theory, experimental economics, behavioral economics, evolutionary economics, neuroeconomics, and non-linear complexity theory” and explores a few possible theories as to why neoclassical economics may no longer dominate the mainstream, concluding that “non-neoclassical development at the economics research frontier provides evidence that neoclassical dominance of economics is being supplanted by a new mainstream pluralism.” If you’re interested in this sort of stuff, I recommend you take a look at the paper, although I should warn you that it is a bit of a dry read.

In general I’d agree with the conclusion, at least with regards to the research frontier. A large chunk of modern economics does not resemble the caricatures of conventional neoclassical economics at all. First of all, I’d argue a huge amount of economics is largely just empirical work, much of it using minimal assumptions or just completely atheoretical in general. The state of empirical economics in most sub-fields is actually very good [pdf]. As for macroeconomics, while the empirical quality of new papers has not quite caught up with its microeconometric or experimental counterparts, recent trends in VAR modelling has seen a resurgence in macroeconometrics which is not bogged down in too many assumptions.

And on the theory side as well there are many trends which depart from the simplistic stereotype of neoclassical economics. Even considering models with strictly rational behaviour, modern micro almost entirely consists now of evaluating things like information asymmetry (which implies bounded rationality), moral hazard and adverse selection, giving very plausible insights as to how markets or institutions may fail even in ideal situations which would surely be invaluable to many policy makers. Further still, the literature on behavioural economics or other deviations from stricly rational markets has exploded as Chris Dillow notes, with books from Nobel prize winning economists like Animal Spirits receiving much acclaim from their colleagues.

As for instruction, I certainly agree that undergraduate core textbooks could do with a clean-up. But I think students gain most of their insights from optional/supplementary modules or from additional material given to students by their professors, in this regard core macro or micro textbooks are anything but a comprehensive coverage of economics education. In my MSc course, for instance,  the most popular courses students attended were modules such as experimental economics, micro-econometrics, economic history and developmental economics. It is perfectly possible, and in fact quite likely, that the majority of classes a 4th/post-graduate MSc student will take are not neoclassical in nature, at least in my university.

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4 comments
  1. It is true that large areas of economics are not marginalist and Daniel Kuehn often castigates me for my focus on marginalism (OK that’s an exaggeration).

    However DSGE models are what is used by policymakers, and what is known by those with a degree or masters. I don’t know why it takes such a long time studying economics before it becomes more diverse but it’s certainly something that needs to be addressed. Economists are also quick to defend marginalism, even when their field doesn’t really use it (see Krugman, whose field is trade).

    • I think policy-makers actually use a mix of models, in the Bank of England for instance they use DSGE but also traditional large scale macro-econometric models with a large amount of covariates as well as modern Vector Auto-Regressions and SVARs. On top of that they look into private sector forecasters from consultancies and banks who may use a diverse range of approaches. That’s why Bank of England forecasts are those large fan-charts rather than any precise traced path.

      As for DSGE, an undergraduate probably doesn’t do DSGE (not properly anyway, at least in the UK where undergrad is usually a three year course), what they know for macro (which is a small part of the whole degree) specifically is the Keynesian accounting relationships, Keynesian cross, AS/AD, IS-LM (and will typically look at the difference between monetarist beliefs and Keynesian beliefs in that framework), Mundell-Flemming, Philips Curve, Nairu, some monetarist algebra, exchange rates, some long run growth models and some detailed analysis of the role of expectations. Proper DSGE macro is actually not until masters or later. Which is why I’d argue that masters is possibly less diverse than undergrad; my point was to illustrate that even in the more technical and refined masters courses there is a good chance you wont be doing any neoclassical stuff in two thirds of your work.

  2. Nathanael said:

    “As for instruction, I certainly agree that undergraduate core textbooks could do with a clean-up.”

    A throw-out-and-start-over, really.

    I agree that the cutting edge of research has all been in “real” economics — empirical material. That’s the material most popular among students, too.

    But why are the “101” courses required, or even *present*, if all they contain is piles of bullshit which you then have to “unlearn”, in the words of “Unlearning Economics”? The freshman courses represent economics to a *huge* proportion of the population, and the freshman courses are *bogus*.

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