Harvard starts its own PAECON against Mankiw

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Sev­er­al cor­re­spon­dents have just told me that some of Greg Manki­w’s stu­dents at Har­vard are stag­ing a walk­out from his first year class. They’ve writ­ten an open let­ter to Mankiw to explain why:

An Open Letter to Greg Mankiw

I applaud them for this move. Manki­w’s var­i­ous eco­nom­ics texts are among the most sim­plis­tic of the many neo­clas­si­cal text­books that parade this flawed par­a­digm as a flaw­less jew­el of human rea­son­ing. I’m delight­ed that his stu­dents have tak­en the rebel­lion against this par­a­digm to one of its key pro­mul­ga­tors.

I did like­wise forty years ago–against far less well-known advo­cates of neo­clas­si­cism. At the time, I prob­a­bly knew as much as these stu­dents do today of the enor­mous lit­er­a­ture that estab­lish­es how fal­la­cious neo­clas­si­cal the­o­ry is, and which of course neo­clas­si­cal texts like Manki­w’s com­plete­ly ignore.

These stu­dents will undoubt­ed­ly be told that they have mis­un­der­stood and mis­judged both the the­o­ry and Manki­w’s course–which I was also told when I revolt­ed against Simk­in’s eco­nom­ics at Syd­ney Uni­ver­si­ty back in 1972. They are cer­tain­ly lack­ing knowl­edge of the literature–and they right­ly attribute this to the “edu­ca­tion” they are receiv­ing in Manki­w’s course:

A legit­i­mate aca­d­e­m­ic study of eco­nom­ics must include a crit­i­cal dis­cus­sion of both the ben­e­fits and flaws of dif­fer­ent eco­nom­ic sim­pli­fy­ing mod­els. As your class does not include pri­ma­ry sources and rarely fea­tures arti­cles from aca­d­e­m­ic jour­nals, we have very lit­tle access to alter­na­tive approach­es to eco­nom­ics.

Already, anoth­er stu­dent has pub­lished a rebuke to these rebels along the lines that they don’t appre­ci­ate the depth and wis­dom in the sub­ject:

In Defense of Ec 10

The fol­low­ing extract from this defence is worth high­light­ing–for the sake of the argu­ment being made by the rebels. The author observes that much of the course fol­lows Manki­w’s text, in which there is a sum­ma­ry of ten main points of neo­clas­si­cal wis­dom:

Sec­tions large­ly fol­low The Prin­ci­ples of Eco­nom­ics by N. Gre­go­ry Mankiw, and to recon­struct what stu­dents learn at these class meet­ings, I dug out my notes from fresh­man year. Here are the sup­pos­ed­ly biased take­away points that Mankiw’s pro­pa­gan­da machine pounds home in sec­tion:

  • Trade and spe­cial­iza­tion of labor can make soci­ety bet­ter off.
  • Demand curves slope down­ward and sup­ply curves slope upward (usu­al­ly).
  • Some­times, things hap­pen that make demand curves and sup­ply curves shift.
  • Com­par­a­tive sta­t­ics can be a use­ful way of think­ing about how changes in some vari­ables will affect changes in oth­er vari­ables.
  • Some goods are elastic–more volatile to changes in quan­ti­ty con­sumed for a giv­en price change–and some goods are inelas­tic.
  • Tax­es, sub­si­dies, price floors, and price ceil­ings can change equi­lib­ri­um out­comes, and some­times this caus­es dead­weight loss.
  • Tar­iffs and quo­tas often cause a loss in total social sur­plus.
  • Exter­nal­i­ties cause free-mar­ket out­comes to be dif­fer­ent from social­ly opti­mal out­comes.
  • Pub­lic goods are nei­ther exclud­able nor rival.

I won’t indulge in a root-and-branch cri­tique of the entire list, but there are just a few that are prov­ably false:

Demand curves slope downward”

There is a con­vo­lut­ed pro­ce­dure used to prove that indi­vid­ual demand curves slope down­wards, but it has been proven, in what are known as the Son­nen­schein-Man­tel-Debreu con­di­tions, that a mar­ket demand curve can have any (poly­no­mi­al) shape at all. Here’s an extract from the Hand­book of Math­e­mat­i­cal Eco­nom­ics on that one:

First, when pref­er­ences are homo­thetic and the dis­tri­b­u­tion of income (val­ue of wealth) is inde­pen­dent of prices, then the mar­ket demand func­tion (mar­ket excess demand func­tion) has all the prop­er­ties of a con­sumer demand func­tion …

Sec­ond, with gen­er­al (in par­tic­u­lar non-homo­thetic) pref­er­ences, even if the dis­tri­b­u­tion of income is fixed, mar­ket demand func­tions need not sat­is­fy in any way the clas­si­cal restric­tions which char­ac­ter­ize con­sumer demand func­tions…

The impor­tance of the above results is clear: strong restric­tions are need­ed in order to jus­ti­fy the hypoth­e­sis that a mar­ket demand func­tion has the char­ac­ter­is­tics of a con­sumer demand func­tion. Only in spe­cial cas­es can an econ­o­my be expect­ed to act as an ‘ide­al­ized con­sumer’. The util­i­ty hypoth­e­sis tells us noth­ing about mar­ket demand unless it is aug­ment­ed by addi­tion­al require­ments. (Shafer, W. & Son­nen­schein, H., (1982). ‘Mar­ket demand and excess demand func­tions’, in K.J. Arrow, and M. D. Intrili­ga­tor (eds), Hand­book of Math­e­mat­i­cal Eco­nom­ics (Vol. II), North-Hol­land, Ams­ter­dam, pp. 671–693)

supply curves slope upward (usually)”

This has been empir­i­cal­ly dis­proven by so many researchers that it’s sim­ply an insult to intel­li­gence that econ­o­mists con­tin­ue ped­dling this. The last one to empir­i­cal­ly fal­si­fy this propostion–unintentionally I might add!–was Alan Blind­er:

The over­whelm­ing­ly bad news here (for eco­nom­ic the­o­ry) is that, appar­ent­ly, only 11 per­cent of GDP is pro­duced under con­di­tions of ris­ing mar­gin­al cost

Firms report hav­ing very high fixed costs-rough­ly 40 per­cent of total costs on aver­age. And many more com­pa­nies state that they have falling, rather than ris­ing, mar­gin­al cost curves. While there are rea­sons to won­der whether respon­dents inter­pret­ed these ques­tions about costs cor­rect­ly, their answers paint an image of the cost struc­ture of the typ­i­cal firm that is very dif­fer­ent from the one immor­tal­ized in text­books.” (105) (Blind­er, A. S. (1998). Ask­ing about prices: a new approach to under­stand­ing price stick­i­ness. New York, Rus­sell Sage Foun­da­tion., pp. 102, 105; emphases added)

Comparative statics can be a useful way of thinking about how changes in some variables will affect changes in other variables”

Com­par­a­tive sta­t­ics assumes that the econ­o­my is nor­mal­ly in equi­lib­ri­um, and will return to it after a dis­tur­bance. That is utter­ly igno­rant of the wis­dom now accu­mu­lat­ed in the area known as com­plex sys­tems, in which the norm is for most dynam­ics sys­tems to be in a state of per­ma­nent dis­e­qui­lib­ri­um.

So, “Con­cerned stu­dents of Eco­nom­ics 10”, you have every rea­son to be con­cerned. Now, as the unin­formed advo­cates of neo­clas­si­cal eco­nom­ics try to brow-beat you into sub­mis­sion, dive in and learn the lit­er­a­ture that estab­lish­es that your gut-feel­ings about the the­o­ry are right.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.