Do the heterodox lefties have a better grasp on reality than the neoclassical lefties?

Yes, says Tom Palley in a contribution to the debate at the TPM Cafe.You know that anything that begins with "Dani Rodrik is a brilliant progressive neo-classical economist" has got go downhill from here, which is why my first instinct was to read no further. But that would have been a pity. Unlike many of the heterodox, Tom is intimately familiar with what the neoclassicals do, and is himself an occasional employer of their tools. So he makes a number of good points. They can be summarized with these two statements: (a) there are other ways of being rigorous, and (b) the neoclassicals' method results in a whole bunch of blind spots where real economies are concerned.

Tom describes the kind of economics that I do quite well:

The orthodox leftie neo-classical research program involves taking simplified parable versions of the Arrow – Debreu model and then making one small change after another – perhaps to the utility function, perhaps to the agents’ information sets, perhaps regarding firms’ market power or managers’ behaviors. The problem is that when you start in Wonderland, pieces of Wonderland stick with you and distort your vision even though you may try to shake off other pieces.

I agree that this is a possibility, but I evaluate the risks and the alternatives differently. I think the best antidote against the blind spots is neoclassical economics itself, and I am pretty sure that alternative methodologies suffer from their own tunnel vision.   

Ultimately the proof of the pudding is in the eating, and it would be good to have illustrations of actual failings of neoclassicals to grapple with reality.  Here I have more trouble with Tom's discussion. Consider for example this:

There is one place that even orthodox lefties dare not go. That untouchable place is marginal product theory of income distribution, which basically says that competitive markets ensure that people are paid their contribution to production. This theory provides both a justification and an explanation of income distribution.

I am not at all sure that this does justice to the large empirical literature on determination of pay, and in particular the impact of unions and other institutions on the wage distribution. At the risk of getting too self-referential, my paper on "Democracies Pay Higher Wages" explicitly shows that the bargaining environment, and especially the degree to which the political system is democratic, exerts a significant impact on labor's share of the surplus. While productivity is of course the main driver of pay--who would disagree with that?--being more or less democratic can make a difference of 50% or more to the level of wages (holding productivity constant). If this does not depart from the marginal productivity theory of income distribution, I don't know what does. I hasten to add that this paper was published in one of the establishment journals that is supposed to be closed to such work (QJE).   

Comments

[paine]

seems to be a lot of shadow boxing here and there over a structure endemic to all
tiered "merit"
climb structures

mandarins
always faction

and the real mafia like insight
is the internecine war between the various
"made " clans
chicago or the two cambridges
or stockholm
to look back and laff at an earler bear skin wearing stage

the hets
annouce
their bold paradigms
their taboos
then slink toward
the same real new jerusalem as one or other ortho clan

face it
hets are square pegs
and also rans

i'm a marxist i ought to know

but at least we're ...
really above the rat race
we're pre figurative
social philosphers
gadflies
and social prophets

we're not packing
useable brain equipment
in the first place

[paine]

and oh
like many lefticulated union econ cons
i've read
poor tom palley
hasn't let anything
cutting edge "neo"
register
since he left grad school

my advice he and they
all need to stare hard
and careful
at "whither socialism "
by stigasaaurus rex

there i think
the left neo gauntlet is thrown down best and hardest
--- at least
in easy to grasp
general word form---

tom go
rip that apart
and then check back in

hell its nearly twenty years old now ....

and btw
my mentor bill vickery
played a mean rad hand
and entirely thru
neo classical glasses

[Jean-Francois]

But was he talking about empirical or theoretical work (or both)? I mean a lot of empirical work is done based on realistic observations that do not fit theory at all. I think the criticism is that orthodox economists refuse to develop theoretical model that do not fit with the orthodoxy, rather than them refusing to do empirical work properly. I mean - you mostly don't need to believe anything about theoretical economics to do good empirical work. If you do empirical work showing that pay is related to productivity only for about 50% of compensation, then you simply have to search for a better theory. It is that step that most orthodox economists refuse to take.

[Luis Enrique]

I'm confused by this line of argument. The way I was taught it (or at least, understood it), orthodox theory says workers will be paid marginal product if various assumptions about markets hold. If those assumptions do not hold, as far as I can see orthodoxy theory has no problem with the idea that firms will maximize profits and exploit market imperfections, perhaps to pay workers as little as they can get away with, and that considerations other than marginal product will determine the wage. So where's the theoretical step that orthodox economists are unwilling to take?

Also, are labour market models like the Mortensen Pissarides matching model, efficiency wage ideas and the volumes written on wage bargaining etc. 'orthodox' or not?

It looks to me like such ideas are very much in the mainstream, hence orthodox economists have searched for better theories.

[Kramladen]

Neoclassical economics is a strong tool for research because it allows to logically deduce hypothesis that can be empirically tested.

I do not agree with Thomas Palley when he states that marginal productivity is the point where neoclassical economists stop: There is a lot of research by those who stay in the basic neoclassical framework about labour markets: Search theory and informational asymmetries are cases in point. Monopsony theories of the labour market provide you with a lot of reasons to rebuff the simple marginal productivity = real wages theory.

A sencond, macroeconomic strand, that relies on models of monopolistic competition incorporates not only marginal productivity but also cost of capital, intensity of competition, structure of wage bargaining and so on to analyse the labour market.

However, as Akerloff has shown in his AEA speech, economists should open their research to sociological approaches. This is the point where I fully agree with Palley - economics must not always start in Wonderland but could also start in the real world. Economics should open itself to sociological research. Akerloff does that - he incorporates the homo sociologicus, the man following social norms into economic models. And he does so with sociological research. This is a fascinating new development in economics that should be encouraged.

Do not forget that Herbert Simon with his notion of "bounded rationality" won the Nobel prize. The same is true for Kahneman. So, I think the field of economics is much more open than many people think - and many "rightist" neoclassicals state.

Best,

Kramladen

[Barkley Rosser]

Regarding the marginal productivity theory of distribution, the more serious problem is with capital, as even the existence of a marginal product of capital at the aggregate level was pretty much shown to be complete nonsense. For individual workers, marginal product is more meaningful, although I am perfectly willing to grant that many mainstream, if not fully orthodox, economists study a variety of models besides marginal productivity to understand wage formation.

It is also clear that while he defends "neoclassical economics," Professor Rodrik is another who is probably more describably as being "mainstream, but not (fully) orthodox."

I would also agree that there are plenty of situations where textbook orthodoxy is extremely useful, as for example in looking at many basic micro markets where the good old Marshallian version of the law of supply and demand is pretty much the way to go.

However, I have two points I would like to make and a question for Prof. Rodrik. In this recent dustup coming out of the Nation article on hip heterodoxy and neoclassical mafias, at TPM and here and other blogs, the really harsh example of mainstream orthodoxy repressing heterodoxy was the case at Notre Dame University, where the clearly heterodox economics department had its grad program taken away and handed to a newly created, orthodox department. Even Robert Solow denounced this, saying that "what we do not need is another fourth rate version of the MIT economics department." It is not clear that it was the heterodoxy, per se, of the econ dept. at Notre Dame that was its sin, as that they published more in books than in articles, especially articles in the top four journals. However, I would contend that the heterodox books of Phil Mirowski are far more influential and important than 95% of what appears in articles in those top four journals.

So, Prof. Rodrik, do you support what was done at Notre Dame?

The other issue is the tendency for mainstream economists to fail to cite heterodox economists when they borrow their ideas and move them into the mainstream. There are lots of examples of this, and it contributes to the continued marginalization of those heterodox economists, and the sort of unpleasant outcome we got at Notre Dame.

[suresh]

Professor Rosser,

You say ...the really harsh example of mainstream orthodoxy repressing heterodoxy was the case at Notre Dame University, where the clearly heterodox economics department had its grad program taken away and handed to a newly created, orthodox department.

How is this the fault of the "orthodoxy"? Can you clarify? Are you suggesting that some "mafia" organisation like the AEA or the Econometric Society is responsible? Or is it some leading "orthodox" economists have got together to get rid of the heterodox department at Notre Dame?

From my limited observation, I think most "orthodox" economists are either unaware of or completely indifferent to what happens to the Notre Dame department...they might be concerned if, say, the MIT department imploded (unlikely!) but I don't think most really care about Notre Dame.

It would be interesting to know the history behind the split of the Notre Dame department; in particular, the role played by the university administration - after all, the split could only have been authorized by them.

[Barkley Rosser]

Suresh,

You are right that most do not care. That is indeed the problem. I did not charge any big conspiracy here. The role of the established mainstream has been more indirect, in setting a general pattern where departments are to be judged by their publications in a small set of journals, which in turn publish little heterodox work. This leads to the inadvertent weeding out of heterodox departments, of which there are very few that have grad programs, maybe about five or six. So, this was a noticeable decline.

The history briefly is that it was due to the dean of arts and sciences in which the econ department is located. There was already an existing, more conventional economics department on campus, located in the College of Business. If they had wanted, they could have established a conventional grad econ program there. However, the dean in question was obsessed with official rankings based on journal articles in top journals of departments that he oversees. I gather there were a few faculty members who did not like the heterodox members, who encouraged the dean, even though it was the heterodox who were the main publishers, if more of books. So, a new department has been established that has the grad program.

The old department is also the HQ of the highly heterodox journal, Rethinking Marxism, whose editor is David Ruccio, who was quoted in the Nation article.

So, Suresh, maybe it does not matter, it is just the law of something or other. But there is a perception that a rather mechanical process led to the ending of one of the few heterodox econ grad programs around, a mechanical process that could be used to justify getting rid of all of them. Lots of economists protested to the president of Notre Dame in this case, myself included, and even some people like Robert Solow, but it made no difference.

Perhaps the heterodox are just whining and being paranoid, but for better or for worse this case is very much in the public eye and on peoples' minds. It has fueled the ferocity of this recent debate on TPM and all over the blogosphere.

[Barkley Rosser]

It is probably the case that I am being rude in asking Prof. Rodrik to answer the question that I asked, although I think it is in the end pretty simple. Must all econ grad programs be judged by identical standards? Is there not some room for diversity? Really, this seems like a no-brainer, Suresh, presumably of Berkeley. But, of course, this is his blog so he can not answer if he does not feel like doing so.

[suresh]

Barkley,

Of course, the mainstream sets "standards" against which departments and individuals are judged. Anyone challenging this is always going to face problems. I remember reading about the highly regarded journal - Econometrica - that it was started mainly because "mathematical" economists found their submissions being consistently rejected by the then prevalent economics journals. (Difficult to believe given the current state of the profession!) I would not doubt that if "heterodox economics" was the norm, then any "neoclassical economist" challenging the norm was going to run into problems of the type you describe...

So, at one level, I agree with your call for diversity in the profession, even though I place myself firmly in the neoclassical camp. The harder issue is, what would you have us - the neoclassicals - do? This is not at all clear. As you yourself note, the Notre Dame imbroglio was the result of clashes within that university, and the "orthodoxy" was involved only indirectly, if at all. The only suggestion of yours in this regard that I think can be implemented is that "neoclassicals" acknowledge properly whenever they use the ideas of "heterodox" economists. This is fair but you will appreciate that failure to do so is often not deliberate. Many times, the contributions of other neoclassical economists are not acknowledged, particularly if they are in relatively obscure journals. Still, your point is well-taken.

[Barkley Rosser]

Suresh,

I appreciate your thoughtful reply. I think the answer to your answer is for there to be a more organized support of such departments, ones that are not "highly rated" but are good on other measures, such as influential book production or serving as houses for influential but unorthodox journals, both of which were the case at Notre Dame. There were some mainstream economists like Solow (I don't count as mainstream, although David Colander claims that I am) who did. Maybe that is not sufficient, but it is better than just standing aside and saying, "oh well, that is the business of their deans and provosts and presidents, rationally responding to our glorious universal standards, which are inevitable, tough." This does latter just does not cut it.

Regarding the citations business, this is complicated, and as a journal editor (JEBO), I see it from multiple perspectives. Thus, journal editors are regularly telling authors to shorten, please shorten, your papers, including References. So, sometimes these older, but more fundamental and arguably important cites get chucked and then later get forgotten, given the massive and growing ignorance of history of economics in economics. Also, even if they are trying to do good, but being forced by evil journal editors to edit, shorten, and chuck, there is the motive I already mentioned, avoiding looking weird or heterodox by citing somebody with such a rep, even if they are brilliant and correct (many examples, Minsky just one). Or, there is the nastier one of plagiarism, and I as a journal editor have had to deal with accusations along those lines more than once, a nasty and difficult business. All of these are in play in this stew that tends to sideswipe the deserving heterodox when it comes to intellectual credit.

BTW, I should say that I have also asked Brad DeLong the same question I have asked Dani Rodrik. Neither has so far deigned to answer me. If neither does, and soon, I shall post on the matter on maxspeak, where I am a co-blogger.

[Peter]

I have tried to avoid this discussion, but I would like to raise one issue that I think is crucial. Except perhaps for the Post Keynesians and Sraffians, what distinguishes most heterodox economists is their interdisciplinarity -- a core part of their theory and method straddles economics and other disciplines, like sociology, politics, history and philosophy. This is true for Austrians, institutionalists, Marxists, feminist economists, ecological economists, etc. To work honestly within their perspective, they need to employ methods that are simply unacceptable to most mainstream economists.

I will speak from personal experience. I spent years studying the theory and evidence surrounding compensating wage differentials for dangerous work. Small theoretical and empirical fragments of this project were published in "normal" econ journals, but other aspects -- in my view, just as important -- were simply unpublishable. For instance, the theory predicts that firms will rationally set safety conditions and wages to maximize profits subject to the constraint of workers' preference maps. So I did a survey of all available safety management textbooks. Everyone of them has a section on cost-benefit analysis, since safety managers must justify their expenditures to higher levels within the firm. These chapters, I must say, were very creative in the strategies they employed for amplifying the financial benefits of safety programs. Yet not one ever mentioned the need to pay higher wages to workers if their jobs were perceived as more dangerous. To me, this is serious evidence against the neoclassical story. From a scientific point of view, it is not enough to establish a general statistical relationship between factor X and outcome Y (which, in my opinion, is still up in the air in this particular field), one must identify and demonstrate the causal process. This is what science is, folks: understanding the processes that yield the results we see in the world. But tell me, what are my chances of publishing an article based on my safety management textbook survey in any mainstream economics journal, even as a short note? Or suppose I had done field work within a particular firm, closely observing the decision-making of safety officials to see what factors contributed to safety outcomes -- could I have published my writeup as a journal article? And if not, what does this mean for my employability, my department's rankings, etc.?

The one area where this barrier is breaking down is behavioral/experimental economics. Here there seems to be a real engagement with causal processes and interdisciplinary work. I know heterodox people who are publishing actively along these lines. But the rest of the discipline is not so open.

[guest]

"These chapters, I must say, were very creative in the strategies they employed for amplifying the financial benefits of safety programs. Yet not one ever mentioned the need to pay higher wages to workers if their jobs were perceived as more dangerous."

Did they mention the need to compensate injured workers in the event of a safety accident? If so, this is equivalent to paying higher wages, with risk being transfered from workers to the firm.

[Peter]

Different books use different formulas, but in general they calculate the number of days workers would have to be paid without being productive. (This is complicated by workers comp.) But this is not compensating wage differentials as seen by economists. First, workers would not interpret this as an extra form of compensation ex ante; indeed, what it infers is that wages will not *fall* as a result of accidents. Second, this would not show up statistically in any study of wage compensation for risk.

[guest]

My point was that ex-post comp complicates the theoretical case for wage differentials. Transfer of injury risk is a difficult issue: see David Friedman (1982) "What is 'fair compensation' for death or injury?" International Review of Law and Economics, 2, (1982), pp. 81-93.

[Barkley Rosser]

I note that I did put up a posting on this matter on maxspeak about "Mainstream Progressive Economists Not Supporting Notre Dame." Both Brad DeLong and Dani Rodrik have posted comments there in reply. I am about to reply in detail to Dani's there, but will note broadly what he said and my view here for those not wanting to get into that swamp. Needless to say, he can correct me here if I am misrepresenting his views.

Basically he said that he did not know enough about the Notre Dame case to judge it. Certainly that is a legitimate position, and suggests that those trying to defend a department experiencing the sort of problem the one at Notre Dame did need to get their case around more widely to obtain whatever support they can.

Regarding the broader issue, Dani notes that he works in a multidisciplinary context and is open to all kinds of approaches, but argues that quality standards must be maintained, whatever the approach. That triggered further comments by others about whether in leading journals this may simply lead to certain approaches being ruled out, and so forth.

I would add a remark of my own (which will show up over there also) that I have in the past worked in multi-disciplinary groups also. Even though I have always tended to have a heterodox stance to economics, in such groups I have often found myself in effect defending more conventional, orthodox, approaches against what I thought were ignorant or mindless critiques by those from other disciplines. I know "what is really wrong with economics," but these others need to deal with this obvious point that is correct in the situation that is implied by the correct parts of conventional economics, blah blah blah.

[wjd123]

The cause of a phenomenon and how that phenomenon functions in society are two separate questions. Knowing which, the cause or the function, would be the greatest help to economists recommending one policy over another? Clearly the latter

It would be irresponsible to intervene into a society without studying its underlying structure and how its parts function. Economists who recommend policy need sociology.

Heterodox economist are more open to the social sciences. As a result they are more creative. They are the true gnostics of the economic profession.

Orthodox economist are just mad because heterodox openness gums up the beauty of their economic models. They are also jealous of heterodox creativity. Jealous, jealous, jealous. Or maybe, exasperated, exasperated, exasperated. Yet again, scared, scared, scared.

They won't publish heterodox theory in their journals because the orthodox rightly perceive that to do so would fracture economics into a thousand pieces.

Who better to understand that than the powers at Notre Dame. Who better to know the the difficulty of maintaining orthodoxy. Who better to know the consequences of heresy.

Where does that leave getting intervention right?

[Jesus Felipe]

There is no such a thing as the neoclassical theory of income distribution. This is a misnomer. There is something called the neoclassical theory of factor pricing, but this is a microeconomic theory.
Long time ago, and for weird reasons, some economists suddenly started "aggregating" and came up with the story of (aggregate) income distribution that Joan Robinson and others fought for years. But one does not have to go to the Cambridge-Cambridge debates. In the U.S. (and at the same time that the Cambridge debates were going on), Franklin Fisher at MIT (among others) developed the conditions to aggregate micro production functions into an aggregate production function. The conclusion was simple: the conditions to aggregate were so stringent that one could not believe that actual economies satisfy them. For all practical purposes, the starting point should be that aggregate production functions do not exist. What does this mean? Very simple: there is no such a thing as Y=F(K,L), i.e., there is no such a thing as "the technology of the economy", the idea that "aggretate" inputs are transformed into "aggregate" output.
Solow was and is very well aware of these results. But he argued that as long as aggregate production functions "work" in applied work, there was no reason to stop using them. Then, another strand of research showed why aggregate production functions "work" despite that they do not exist. The reason is that all estimations of different specifications of Y=F(K,L) do is to approximate the income accounting identity according to which output equals the sum of the wage bill plus profits. Robert Solow knows this; and so do Samuelson and Herbert Simon (and many others), who have written papers on the issue.
These arguments are so damaging that they invalidate all empirical work that uses aggregate production functions as well as constructs derived from them (e.g., labor demand curves). Discussions in the leading journals about the relevance of the endogenous growth models, estimations of TFP, and many other issues, are affected by this problem. All neoclassical growth theory and empirics is useless, both theoretically (due to the aggregation problem) and empirically (all it does is to approximate identities). The literature on this is abundant....but not published in the orthodox journals.
While many heterodox economists know very well these results, orthodox economists are absolutely ignorant and do not want to hear about them. The idea of questioning the basic blocs of their knowledge and tools is out of the box.

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There is one place that even orthodox lefties dare not go. That untouchable place is marginal product theory of income distribution, which basically says that competitive markets ensure that people are paid their contribution to production.

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