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What is wrong (and right) in economics?

From Dani Rodrik's weblog:

1. How would you briefly state your perspective on economics?

I would say I am pretty conventional and mainstream on methods, but generally much more heterodox on policy conclusions. I have never thought of neoclassical economics as a hindrance to an understanding of social and economic problems. To the contrary, I think there are certain habits of mind that come with thinking about the world in mainstream economic terms that are quite useful: you need to state your ideas clearly, you need to ensure they are internally consistent, with clear assumptions and causal links, and you need to be rigorous in your use of empirical evidence.

Now, this does not mean that neoclassical economics has all the answers or that it is all we need. Too often, people who work with mainstream economic tools lack the ambition to ask broad questions and the imagination to go outside the box they are used to working in. But that is true of all “normal science.” Truly great economists use neoclassical methods for leverage, to reach new heights of understanding, not to dumb down our understanding. Economists such as George Akerlof, Paul Krugman, and Joe Stiglitz are some of the names that come to mind who exemplify this tradition. Each of them has questioned conventional wisdom, but from within rather than from outside.

A typical complaint against mainstream economics is that it is too limiting in the conclusions it leads to. Mainstream economists are often seen as ideologues of the market economy. I would concede that most of my economist colleagues tend to view markets as inherently desirable and government intervention as inherently unwelcome. But in reality what we teach our students in the classroom – the advanced students if not the undergraduates –and what we talk about in the seminar room are typically much more about the myriad ways in which markets fail. I love an old quote from Carlos Diaz-Alejandro who once said something along the lines of “by now any graduate student can come up with any policy conclusion he desires by building appropriate assumptions into his model.” And that was some thirty years ago! We have plenty more models that generate unorthodox conclusions now.

One reaction I get when I say this is the following: “how can economics be useful if you have a model for every possible outcome?” Well, the world is complicated, and we understand it by simplifying it. A market behaves differently when there are many sellers than when there are a few. Even when there are a few sellers, the outcomes differ depending on the nature of strategic interactions among them. When we add imperfect information, we get even more possibilities. The best we can do is to understand the structure of behaviour in each one of these cases, and then have an empirical method that helps us apply the right model to the particular context we are interested in. So we have “one economics, many recipes,” as the sub-title of one of my books puts it. Unlike the natural sciences, I think economics advances not by newer models superseding old ones, but through a richer set of models that shed ever-brighter light at the variety of social experience.

However, contemporary economics in North America has one great weakness, and that is the excessive focus on methods at the expense of breadth in terms of social and historical perspective. PhD programs now train applied mathematicians and statisticians rather than real economists. To become a true economist, you need to do all sorts of reading – from history, sociology, and political science among other disciplines – that you are never required to do as a graduate student. The best economists today find a way of filling this gap in their education. I consider myself very lucky that I was a political science major and did a master’s in public affairs (as it is called at Princeton) before I turned to economics. I say lucky, because some of my best work – by my judgement, at least – was stimulated by questions or arguments I encountered outside of neoclassical economics.

2. How does this compare to the mainstream?


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