Prof. Hodgson’s latest book is How Economics Forgot History: The Problem of Historical Specificity in Social Science.
Also see Geoffrey Hodgson’s website
Comment on Bernard Guerrien’s Essay
Response to Guerrien’s Essay
For Guerrien… and beyond
Two Perspectives to Guerrien’s Question
Towards a New Economics
Yes, There is Something Worth Keeping in Microeconomics
Can we please move on? A note on the Guerrien debate
Once Again on Microeconomics
Essentially, neoclassical theory involves actors who are rational in that their behaviour is consistent with the maximisation of utility with a given preference function. Two other features follow. The concept of maximisation points towards equilibrium outcomes and a disposition towards equilibrium conceptions and solutions. Furthermore, the concept of capable preference involves a more-or-less well-defined choice set, involving either certainties or calculable probabilities. As a result, chronic information problems such as radical uncertainty, ignorance or interpretative ambiguity are excluded.
I would prefer to define neoclassical economics in this way, and not in terms of any ideology or predisposition towards competition or markets. I agree entirely with Bernard Guerrien on this point. Theorists have attempted to apply the neoclassical approach to socialist planning and capitalist monopoly, as well as to competitive markets. Just as we have individualistic, pro-market neoclassical economists (such as Milton Friedman) we have liberal or social-democratic neoclassical economists (such as Kenneth Arrow and Paul Samuelson) and
also ’Marxist’ neoclassical economists (such as Oskar Lange, John Roemer and Jon Elster). The essential core of neoclassical theory involves rationality, equilibrium and adequate information. This theoretical core is quite adaptable, and has served a variety of ideological positions, from left and right.
Having defined neoclassical theory, we can now attempt to answer Guerrien’s question. What is ’worth keeping’? Many mainstream economists today, especially in the last 20 years, accept some of the limitations of the neoclassical core theory. For example, Herbert Simon’s concept of bounded rationality is now acknowledged. Many experimental economists are sceptical of the neoclassical axioms. Yet still the core neoclassical assumptions still dominate the journals and textbooks.
When we ask ’what is worth keeping?’ there are really two questions here. One concerns what should be taught on the economics curriculum. The second concerns the adoption, application or development of a theory by a researcher. I’ll deal mainly with the first question and touch briefly on the second.
There are several reasons why the curriculum is still dominated by the neoclassical approach. Among these, economics has almost turned into a branch of applied mathematics, where the application and development of the technique has become more important than the explanation of the (economic) phenomena involved.
A second reason is equally important: heterodox critics of neoclassicism have failed to develop a substantial alternative theory that addresses the questions of individual agency and choice that should be part of the core of any viable analysis. The development of such a theoretical alternative is a major priority. There is progress, but it is frustratingly slow, and it is discouraged by the prevailing incentive structures of modern academic economics.
So, where do we go from here? The first injunction is: concepts have first priority, mathematical techniques second. Those that complain that it is necessary to devote an entire curriculum to neoclassical theory, on the grounds that there is ’not enough time available’ to teach anything else, are typically driven by techniques, not by concepts. They stress the paraphernalia of technique rather than core ideas. They are often ignorant of the theoretical alternatives that do exist.
Pedagogic economies can and must be made. The core ideas of neoclassical theory should not be excluded from the curriculum but placed alongside alternatives. For example, the psychological assumptions that underlie ’rational economic man’ should be made explicit and compared with other psychological approaches. Just as much emphasis should be placed on the conceptual limitations of game theory as on its techniques. Students should be
encouraged to identify, compare, contrast and criticise key ideas. One of the problems now is that teachers of economics have been trained in a technical fashion and are ignorant of from where the key concepts come. Economists should regain and enhance the capacity to scrutinise concepts, and give those abilities more weight than mere competence with techniques. The awful truth is that the reform of economics may now require the retraining of a whole generation of teachers of economics.
An important first step in revitalising economics would be to give more space and prestige to the methodology of economics and the history of economic thought, where greater understanding of the meaning and historical evolution of concepts and ideas can be obtained. Conceptually minded and critically able economists will once again be attracted to the profession.
Another vital step would be to introduce a plurality of theoretical approaches. Overall, in the curriculum, neoclassical theory should be just one approach alongside institutional, evolutionary, behaviouralist and other alternatives.
Turning to the second question: what use is neoclassical economics as a theoretical approach? This question is very complicated and an adequate answer would take much more space than I have available here. But I would like to stress the following points. First, for all their defects, the different versions of neoclassical theory have enormous heuristic power. It is a good intellectual work-out to read and criticise some parts of neoclassical theory. Second, neoclassical theorists such as Alfred Marshall, Leon Walras and Vilfredo Pareto were subtle and powerful thinkers and it is still worth reading their texts. Third, and above all, neoclassical approaches are deeply flawed but we have not yet developed an adequate alternative.
The development of an alternative to neoclassical theory must involve adequate answers to a number of key questions. For example: how are market prices formed? I do not believe that Marxian or Sraffian theories are sufficient here because they both lack an adequate conceptualisation of the human agency and decision-making processes. Evolutionary and institutional approaches may provide an answer, but as yet one has not emerged.
Of course, a new economics will create new questions, as well as providing new answers to old questions. But it will not replace neoclassical theory unless it can show overall superiority in both respects. The task of developing a new theory is an urgent priority.
What is required is a new generation of theorists, with a broad and critical training in economics, which is lacking in the modern curriculum. Dealing with the first ’what is worth keeping?’ question may well provide a solution to the problem raised with the second.