Posted by: Dirk | May 21, 2014

John Kay on economic methodology: no heterodox, please – we’re INET

John Kay writes about alternatives to the economics we have today. He kind of sympathizes with the Manchester students:

Their demand for more pluralism in the economics curriculum is well made. Yet much of the “heterodox economics” the Manchester students suggest including is flaky, the creation of people with their own political agenda, whether Marxist or neoliberal; or of those who cannot do the mathematics the dominant rational choice paradigm requires. Their professors reject the introduction of these alternative schemes for the same good reasons their science colleagues would reject phlogiston theory or creationism.

So, professors reject much of the “heterodox economics” […] “for the same good reasons their science colleagues would reject phlogiston theory or creationism”. Is that so?

It is the same old theme: only neo-classical economics / rational choice / DSGE models are acceptable because they are neutral. There is no “own political agenda” behind these approaches, as in all other “heterodox economics”. It is in way useful for financial market players that economists using DSGE models do not have a clue about what is really going on and more often than not cannot explain the difference between reserves and deposits. It is impossible to assume that they will not try to regulate financial markets because they don’t understand them. Hence, DSGE models are useful for everybody and the financial innovations will be beneficial to the public. Without financialization, unemployment in Greece and Spain would be 40%!

Also, Kay completely ignores that social science is not like the natural sciences. Obviously, we cannot falsify because we cannot run experiments. Darwin beat the creationist ideas because of the natural experiments that seem to support his view. Phologiston was also rejected because of experiments. However, economic theory cannot be rejected when we find one instance in which the theory is incompatible with the facts – we would have no theories! Think about it: with natural laws one can make predictions. With economic theory, there are no laws – the social structure is constantly changing, and it is not independent from the measurements of economists. Think about the role GDP plays in our societies. So, Kay’s comparison is off the mark: social science theories are not rejected by experiments, and hence one cannot argue that the theories we have are there because obviously they have been the best. It is up to us to change the curriculum as we like. What are economic problems? In the last 20-30 years, inflation featured high on that list. However, today mass unemployment and financial crisis are high on the list.

Kay continues to advertise the CORE project:

This eclecticism is reflected in the curriculum proposals being developed by the Institute for New Economic Thinking, led by Professor Wendy Carlin of University College London, on whose advisory board I sit. The subject of economics is not a method of analysis but a set of problems – the problems that drew students to the subject in the first place. The proper scope of economics is any and all ideas that bear usefully on these topics: just as the proper scope of medicine is any and all therapies that help the patient.

The CORE project is hotly disputed behind the scenes since some say that first Robert Skidelsky, the biographer of Keynes, was chosen to coordinate the project. He is currently working on a text that explains what has happened (I’ll publish a link asap). If Skidelsky was kicked out as Carlin was brought in, it would be a political statement saying: we don’t want heterodox economics, and we don’t want pluralism. After all, INET could have funded two projects. As it stands, the CORE project – with John Kay – that is developed now will not include any heterodox themes and hence will only be an update on neo-classical theory. This is inconsistent with the original spirit of INET. In August 2010, about three and a half years ago, INET proudly featured an article titled ‘Needed: a new paradigm for economics’ by Joseph Stiglitz in the FT on its own website:

INET advisor and Nobel Laureate Joseph Stiglitz made the case for creating a new economic paradigm in a recent letter to the Financial Times. “Today, not only is our economy in a shambles,” Stiglitz writes, “but so too is the economic paradigm that predominated in the years before the crisis – or at least it should be.”

He goes on to note deficiencies in the current economic paradigm and models, and ends the letter with a rousing endorsement of INET and its mission. He writes: “a new paradigm, I believe, is within our grasp: the intellectual building blocks are there and the Institute for New Economic Thinking is providing a framework for bringing the diverse group of scholars striving to create this new paradigm together.”

It seems that INET has been drifting away from its own past targets, making a U-turn on its most important message. Here is what INET says about itself (my highlighting):

The Institute for New Economic Thinking was created to broaden and accelerate the development of new economic thinking that can lead to solutions for the great challenges of the 21st century.

The havoc wrought by our recent global financial crisis has vividly demonstrated the deficiencies in our outdated current economic theories, and shown the need for new economic thinking – right now.

The Institute is supporting this fundamental shift in economic thinking through research funding, community building, and spreading the word about the need for change.

It seems to me that INET stands at a crossroads. Continuing along its path, it would abandon its mission and instead of a “fundamental shift in economic thinking through research funding” etc aim for a minor remake of the theories that had been in use before the crisis and that Soros himself has critisized, as Tony Lawson has noted. INET would lose its credibility with students and academics alike, I would suppose, as the hopes that it has fed in many publications, speeches (Robert Johnson at various YSI events) and conference (‘Paradigm lost’) were quite high. Another conservative think tank is not what the world needs. Perhaps some new economic thinking at INET can still be hoped for?



  1. Not to speak of the fact that the empirical (um, “scientific”) support for the “dominant rational choice paradigm” is as thin as that for phlogiston…

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