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Is there a new "new economics"?

Author(s): Matias Vernengo

From Naked Keynesianism:

INET has posted a piece by Eric Beinhocker on what he calls the “new economics” [sic]. That used to be Keynesian economics, back in the 1960s. Now it’s a mesh of New Institutionalism, Behavioral Economics, and Complexity Analysis. He argues that:
“New economics does not accept the orthodox theory that has dominated economics for the past several decades that humans are perfectly rational, markets are perfectly efficient, institutions are optimally designed and economies are self-correcting equilibrium systems that invariably find a state that maximises social welfare."
This new “new economics” should be more realistic than mainstream economics. And the author does explain that it’s not new, and that it builds on heterodox traditions. Again, in his words:
"It should also be emphasised that new economics is not necessarily new. Rather it builds on well-established heterodox traditions in economics such as behavioural economics, institutional economics, evolutionary economics, and studies of economic history, as well as newer streams such as complex systems studies, network theory, and experimental economics. Over the past several decades a number of Nobel prizes have been given to researchers working in what today might be called the new economics tradition, including Friedrich von Hayek, Herbert Simon, Douglass North, James Heckman, Amartya Sen, Daniel Kahneman, Thomas Schelling and Elinor Ostrom."*
The problem is that not even one of the authors cited above is heterodox (yes, not even Sen, what you guys expected North or Simon?). For the most part, all these authors and traditions accept mainstream marginalist theories as logically consistent, but incomplete and somewhat unrealistic. The problem with neoclassical economics, in this view, is that it’s not realistic. The heterodoxy is supposedly the result of more realistic and relevant theories. Fundamentally regarding individual behavior. Because the new “new economics” has a methodological individualist vein, or so it seems (see the chart Beinhocker provides for the differences with the mainstream, in the macro part, you won’t find a critique of the natural rate hypothesis, it’s all about heterogeneous agents, and some sort of path-dependency; the latter is closer to being relevant; on that go here). Note that in the policy discussion one of the key macro stories is the Geanokoplos et al. model on the possibilities of bubbles (and he does believe in the relevance of conventional overlapping generations and Arrow-Debreu model, of course).

Don’t get me wrong. I’m all for external critiques of mainstream economics. And I think there are important lessons from some of these fields. But they are all about imperfections. In my view, economics has to be rebuilt on the foundations of old economics. The old economics of the classical authors and Marx, that understood that distribution reflects social conflict, in particular, class conflict, and the old “new economics” of Keynes, that understood that causality implied that demand determines supply (and not vice versa as in Say’s Law). Sure you might add complexity, and heterogeneous agents, and institutions (perhaps more than property rights?), and that helps too. But complexity, heterogeneous agents and other 'imperfections' are there, as I noted in my debate with Colander et al. as a way of making the mainstream more reasonable, and not to bring down a theory with insurmountable logical problems. My two cents.

* As promised I'll discuss Hayek when I have the time to write a response to Mirowski. And yes, many authors that believe they have abandoned marginalism still use it. Keynes himself was not completely able to get rid of the old ideas. As he said: "The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds."

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