Mathematical economics ≠ free market, heterodox economics should ≠ Marxism
28 November 2013
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27 November 2013
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In recent weeks, there has been much fuss created by a group of students – supported it would seem by the Guardian and by people such as Ha-Joon Chang – who are complaining about their diet of neo-classical economics at Manchester University. Perhaps students are right to complain about the use of one paradigm and insufficient intellectual exploration in their course. As I explain below, that would not be an uncommon problem in university economics courses. However, their specific complaints and those echoed in the Guardian article are wide of the mark. Indeed, one wonders whether the complainants have really got to grips with their course and understand its implications properly.
For example, it is stated: ‘Joe Earle, a spokesman for the Post-Crash Economics Society and a final-year undergraduate, said academic departments were “ignoring the crisis” and that, by neglecting global developments and critics of the free market such as Keynes and Marx, the study of economics was “in danger of losing its broader relevance”.’ It is not clear to me that a study of Marx – at least since 1990 – would be relevant to any real life situation in economics except, perhaps, the study of catastrophe and human misery. Macro-economics is still entirely dominated by the Keynesian paradigm that involves the modelling of aggregate variables, even if it has improved from the 1980s so that rigidities (a concept emphasised by Keynes) tend to be explicitly modelled.
However, Earle is correct to argue that ‘multiple-choice and maths questions dominate the first two years of economics degrees…which…meant most students stayed away from modules that required reading and essay-writing, such as history of economic thought.’ But this approach is not used to demonstrate a dominant free-market paradigm as the complainants are arguing. As Von Mises pointed out, an overly mathematically formal approach to economics, in fact, tends towards a ‘regulatory correction’ paradigm which is the one that does, in fact, dominate economics faculties. It is generally argued that ‘market failure’ is a serious problem and can be corrected by regulatory interventions (such as carbon taxes, regulation of industries where there are information asymmetries and so on) which are modelled in the neo-classical framework.
As I have blogged before, an incident when visiting one particular university illustrated the point well, but the approach is common across universities.
Part of the explosion of maths has involved a huge growth in game theory in undergraduate economic courses. Indeed, some universities seem to think it should form the main pillar of study. When visiting a highly-ranked Midlands university for an open day, the head of department explained how game theory showed that free markets did not generally produce optimal results and he used the financial crisis as an example of how the pursuit of self-interest damaged welfare and how the outcome could therefore be improved upon by regulation.
In fact, the specific situation that the professor was explaining was one which would have been overcome by enforceable co-operation between the parties concerned. If the professor had taken a heterodox Austrian approach and not a neo-classical approach, he would have come to a very different conclusion. The best situation is that which allows the greatest scope to come to enforceable co-operative agreements with others. The market provides that forum for co-operation. Competition is the process by which the best forms of co-operation are discovered and are copied.
This conceptual understanding of the market and the process of entrepreneurial discovery is side-lined in modern university economics courses. Instead, they persist with the mathematical analysis of ‘market failures’ and their resolution though regulation and Pigouvian taxes, assuming knowledge that, in fact, can only be discovered by markets.
So, students may well be right to complain about the lack of alternative approaches to the neo-classical/new-Keynesian paradigm. However, the answer does not lie in Marx. The answer lies in alternative ways of thinking grounded in Austrian economics, experimental economics and institutional economics. These should form part of undergraduate economics – at least as options – every bit as much as Maths for Economists 1, Maths for Economists 2, Maths for Economists 3 and so on.
For example, it is stated: ‘Joe Earle, a spokesman for the Post-Crash Economics Society and a final-year undergraduate, said academic departments were “ignoring the crisis” and that, by neglecting global developments and critics of the free market such as Keynes and Marx, the study of economics was “in danger of losing its broader relevance”.’ It is not clear to me that a study of Marx – at least since 1990 – would be relevant to any real life situation in economics except, perhaps, the study of catastrophe and human misery. Macro-economics is still entirely dominated by the Keynesian paradigm that involves the modelling of aggregate variables, even if it has improved from the 1980s so that rigidities (a concept emphasised by Keynes) tend to be explicitly modelled.
However, Earle is correct to argue that ‘multiple-choice and maths questions dominate the first two years of economics degrees…which…meant most students stayed away from modules that required reading and essay-writing, such as history of economic thought.’ But this approach is not used to demonstrate a dominant free-market paradigm as the complainants are arguing. As Von Mises pointed out, an overly mathematically formal approach to economics, in fact, tends towards a ‘regulatory correction’ paradigm which is the one that does, in fact, dominate economics faculties. It is generally argued that ‘market failure’ is a serious problem and can be corrected by regulatory interventions (such as carbon taxes, regulation of industries where there are information asymmetries and so on) which are modelled in the neo-classical framework.
As I have blogged before, an incident when visiting one particular university illustrated the point well, but the approach is common across universities.
Part of the explosion of maths has involved a huge growth in game theory in undergraduate economic courses. Indeed, some universities seem to think it should form the main pillar of study. When visiting a highly-ranked Midlands university for an open day, the head of department explained how game theory showed that free markets did not generally produce optimal results and he used the financial crisis as an example of how the pursuit of self-interest damaged welfare and how the outcome could therefore be improved upon by regulation.
In fact, the specific situation that the professor was explaining was one which would have been overcome by enforceable co-operation between the parties concerned. If the professor had taken a heterodox Austrian approach and not a neo-classical approach, he would have come to a very different conclusion. The best situation is that which allows the greatest scope to come to enforceable co-operative agreements with others. The market provides that forum for co-operation. Competition is the process by which the best forms of co-operation are discovered and are copied.
This conceptual understanding of the market and the process of entrepreneurial discovery is side-lined in modern university economics courses. Instead, they persist with the mathematical analysis of ‘market failures’ and their resolution though regulation and Pigouvian taxes, assuming knowledge that, in fact, can only be discovered by markets.
So, students may well be right to complain about the lack of alternative approaches to the neo-classical/new-Keynesian paradigm. However, the answer does not lie in Marx. The answer lies in alternative ways of thinking grounded in Austrian economics, experimental economics and institutional economics. These should form part of undergraduate economics – at least as options – every bit as much as Maths for Economists 1, Maths for Economists 2, Maths for Economists 3 and so on.
4 thoughts on “Mathematical economics ≠ free market, heterodox economics should ≠ Marxism”
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It’s easy to see where this confounding comes from: Most students don’t like mathematics, and most students don’t like free markets, so they’re tempted to establish a connection between these two baddies. Their true relationship, though, is best expressed as a coordinate plot, with the degree of mathematisation on the X-axis and the degree of pro-market orientation on the Y-axis. Keynesians would then be high on the X-axis but low on the Y-axis, while the opposite would be true for Austrians.
Hi from the post crash society.
Just quick note: despite the way the Guardian interpreted us (if you pay close attention to the quote marks, you’ll see where they end and we begin), we aren’t equating mathematical economics and free market economics, and neither are we ‘against either of them. A lot of heterodox economics is mathematical, and some of it is ‘free market’, too. We are just campaigning for a more pluralistic education, which is grounded in empiricism from the start and also shows more appreciation for other disciplines.
However, regardless what you think of Marxism, it has always been and remains a tool for understanding capitalism, rather than a blueprint for alternative societies. We believe that given the continued prevalence of the business cycle, and numerous other phenomena which Marxism seeks to explain, the theories deserve a look in. There’s no reason to reject the large amount of empirical work being done on this because of your priors against socialism/communism. Also, New Keynesianism may currently be taught, but post-Keynesian – which represents an actual alternative to the neoclassical paradigm – is certainly not. When we say Keynesianism’ we mean the latter, as the former is just another version of the neoclassical optimisation and equilibrium models.
PCES – good and thoughtful comment (and not meaning to sound patronising by saying that)
I’ve been advocating people look more closely at Schumpeter, for a long time, for clear and considered applications of the theory of the Business Cycle. He has written widely on this, to great acclaim, yet is all too easily overlooked. He also, extensively, covers the theory of entrepreneurship and entrepreneurial discovery. Strikingly, along with PCES and many others, he too is also a keen fan of Marx’s depth of historical understanding as to the underpinnings of industrial activity, though his differs with Marx’s recommendations in Kapital…
On the maths in economics debate, please allow me to direct you to my own contribution, having just been through a thorough mathematical rinsing! –
http://merciar.com/2013/01/02/economics-x-0-the-debate-continues/