What killed theory? What theory?

So Noah Smith and Paul Krugman are again trying their hand at the history of economic ideas to understand what happened with the profession in the last three decades. Noah calls the changes in theory "more evolution than revolution," and suggests that the dominant view is still compatible with neoclassical economics, which is I think correct, even if it is more involution than evolution.

His understanding of the changes in economics is colored by his views on neoclassical economics, which are fundamentally flawed (see more here). He then brings back the issue of lack of theoretical papers and now refers to it as the "death of theory." He suggests that what led to the demise of conventional theoretical developments within the mainstream is behavioral economics (he might as well have said information economics; sure enough that's what Stiglitz claimed with his post-Walrasian/post-Marxist notion; subscription required).

In his words:
"Why did this happen? I'm not sure, but my guess is that the meteor that hit the economics dinosaurs, and set the field's evolution off in a new direction, was named Daniel Kahneman."
Again, utterly incorrect, and proof of why PhD students should get some history of economic thought (particularly with so many coming from other disciplines). Behavioral economics, as much as information economics, and all the new theories of the 1970s onwards (New Classical, New Trade, New Growth, New Economic History) are a response to the crisis of the mainstream brought by the capital debates (and Samuelson's admission of the failure of the research program), and go hand in hand with the demise of the political Keynesian consensus that allowed for progressive policies.*
The mainstream abandoned the core model, for the most part, and research was dedicated to the analysis of a series of imperfections, from information, to alternative ideas of rationality and so on. Krugman is in fact wrong to argue that in New Trade and Business Cycle the reasons for change differed. Yes the Dixit-Stiglitz model allowed for the formalization of imperfect competition, but the point remains that New Trade theory corresponded in the trade field to the New Keynesian imperfectionist arguments in macro.

The fact that the death of neoclassical theory (and the post-mortem was written by Samuelson, even if Sraffa is the one that fired that fatal shot, not Kahneman) led to a period of confusion or fragmentation, as Roncaglia calls it (in his good book on the history of ideas that Noah and Paul should read), is not new. And as I noted before, lack of publications on theory are to be expected for a research program that has been shown to be so problematic by the capital debates.

An equivalent period in the history of ideas occurred after the demise of Ricardian economics in the 1830s, before the rise of marginalism, in which no coherent or dominant approach was left in place. Stuart Mill represented a hybrid, with too many inconsistencies, and the field was dominated by vulgar economics defending laissez faire policies. Some if this issues are discussed in this paper.

* Note that, in fact, up to the 1970s heterodox groups were no segregated from the profession, and published in the same journals as the mainstream authors (the Journal of Post Keynesian Economics and the Cambridge Journal of Economics are from the 1970s). Also, crazy right wing economists like Hayek, that had vanished and were part of secret societies like the Mont Pelerin were brought back from the dead, in his case winning the Sveriges Riksbank Prize.


  1. You had said before that the Capital Debates were ignored by the mainstream and are unknown to neoclassicals. So how can they be the cause of the change of course for the research program if the orthodox people don't know about them?

    1. Hi Peter, read the post on the capital debates carefully. The capital debates forced the mainstream to change the notion of equilibrium. The mainstream moved from the aggregate model with long term uniform rate of profit to the Arrow-Debreu short-term equilibrium. And that is the basis for all the imperfectionist arguments around. So the capital debates did have an impact. But that does not mean that the PhD student has a clue on the capital debates, since its not taught. Hence, most are simply confused, and don't even know why the profession went in a particular direction. They think that Kahneman, rather than Sraffa changed the profession.

  2. Staffa is irrelevant. The capital debates are irrelevant. Nobody, really nobody, cares about the capital debates and that is why the vast majority of macroeconomic papers have aggregate production functions. Do not consume your own dope.

    1. Oi Irineu:
      You only display your lack of knowledge. There is a reason why Samuelson admitted that Sraffa was right and the aggregate production function and neoclassical parables are all wrong. And by the way, I only teach economics, do not go around telling countries what to do.

  3. 'proof of why PhD students should get some history of economic thought'. Absolutely. But how many PhD programs in the US even offer such a course? Or for that matter, undergraduate programs for their economics majors? My guess would be not more than 5 or 6 in the entire country. And I would ask, thinking about Geoffrey Hodgson's book 'how economics forgot history', how many departments still offer courses in economic history? History departments certainly do NOT...


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