Thursday, June 13, 2013

What is "neoclassical" economics?

New rule: the term "neo-" shall never be applied to anything other than Keanu Reeves' character in The Matrix.

OK, just kidding. But it's time to talk about one of my pet, peeves - the use of the term "neoclassical economists".

If you read econ blogs, especially blogs by "heterodox" bloggers (Austrians, Post-Keynesians, MMTers, etc.), then you know that the term "neoclassical" gets slung around quite a lot, usually as a pejorative. See herehere, here, and here for just a few examples. The idea is that "neoclassical" econ is the dominant paradigm, and that the "heterodox" schools are competing paradigms that lost out, and were, to use Kuhn's terminology, "simply read out of the profession...and subsequently ignored."

Well and good, but I have two problems with the way the term is used. First, I don't like the sloppiness of the way it's defined, and second, I don't like its application to people as opposed to ideas.

What kind of economics counts as "neoclassical"? Wikipedia defines it thus:
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by cost-constrained firms employing available information and factors of production, in accordance with rational choice theory.
OK, makes sense. Assumption of individual rationality, utility maximization, and supply/demand. One or more of things terms probably describes most of mainstream economics theory.

But does it describe most of maintstream economics research? Theory papers have declined from over half of top-journal econ papers in 1963 to less than 28% in 2011. Empirical papers make up most of the rest, with experimental economics growing to just over 8%.

How many of those empirical papers should be described as "neoclassical"? Some of them, no doubt. Some of them explicitly include neoclassical models; others test neoclassical theories developed in other papers. But many mainstream empirical papers contain no reference whatsoever to individual rationality, utility maximization, and supply/demand.

For example, take this famous paper by Acemoglu, Johnson, and Robinson, entitled "The Colonial Origins of Comparative Development: An Empirical Investigation" (American Economic Review, 2001). This paper measures the effect of institutions on growth. It does not make use of a neoclassical model. It does not test a neoclassical model. It does not include any assumption of rationality (or indeed, any model of individual behavior at all!). It does not include utility or supply/demand.

For an example from experimental econ, take "Bubbles and Experience: An Experiment", by Dufwenberg, Lindqvist, and Moore (American Economic Review, 2005). This experiment establishes conditions under which financial markets in a laboratory will result in asset price bubbles and crashes. No assumption of rationality is made, no model is referenced or tested, and no ideas of supply/demand or utility make an appearance.

These are mainstream papers, published in the most mainstream of econ journals. And there are many others like them. Does their very mainstream-ness automatically make them "neoclassical", even though they have zero of the elements that are commonly held to define neoclassical economics? If so, then I contend that the word "neoclassical" has lost all useful meaning.

"Neoclassical" should not be synonymous with "mainstream". "Neoclassical" should be used to describe a certain set of economic methods and/or ideas. Instead, "neoclassical" seems often to be used to describe anything that does not fall within a small well-known set of "heterodox" paradigms. I think that is wrong. The net effect of that type of thinking will be to block people from thinking of new ideas, because it defines any really new approach as "neoclassical". So people who want to subvert or replace econ's dominant paradigm will be shepherded toward old alternatives such as Austrianism, Post-Keynesianism, etc.

My second objection is related to the first. People who sling around the word "neoclassical" often apply it to people rather than ideas. "Oh, he's a neoclassical economist." Etc. Does that make sense? Take Daron Acemoglu for example. He writes papers that are clearly neoclassical. But he writes others that have none of the neoclassical elements. Should he be pigeonholed as a "neoclassical"? It seems obvious to me that he should not, but he probably is.

Or take me. I've never written a paper with individual optimization or supply/demand in it (though I'm working on some now). I've just done experiments and empirical stuff that didn't rely on any neoclassical idea. But people in the blogosphere have no qualms labeling me a "neoclassical", apparently because I've discussed neoclassical ideas on my blog. Not that I am mad, but it seems silly.

Shouldn't a researcher be free to work with a number of different types of analysis, and draw on a number of intellectual traditions, without getting pigeonholed? Isn't it counterproductive to scientific progress to enforce a "one-drop rule" for paradigms, so that any researcher who ever writes "max u(x)" on a legal pad is forever labeled a "neoclassical", and every paper (s)he ever writes as a "neoclassical" paper?

To reiterate, I suspect that the net effect of all this "neoclassical"-slinging is to discourage revolutions in econ. There are probably lots of revolutionary-minded young economists out there who would love to subvert the neoclassical paradigm. But when they try to find compatriots outside of the mainstream, they are told that if they don't join one of the pre-existing revolutionary groups, then they're a "neoclassical" and should go play with their fellow "neoclassicals". Which may have the effect of pushing them back into the arms of the actual neoclassicals, who of course are happy to welcome them into the fold...while the ancient "heterodox" movements retain their claim to be the only "real" revolutionaries out there...

A stable equilibrium, if you will.

Update: Lars Syll has a response to this post that perfectly illustrates the first of my two complaints:
The basic problem with [Wikipedia's] definition of neoclassical economics – basically arguing that the [defining characteristic] of neoclassical economics is its use of demand and supply, utility maximization and rational choice – is that it doesn’t get things quite right. As we all know, there is an endless list of mainstream models that more or less distance themselves from one or the other of these characteristics. So the heart of neoclassical economic theory lies elsewhere.
This is exactly the claim that "neoclassical" = "mainstream". The clear implication of Syll's syllogism is that no matter what sort of innovations mainstream economic theory embrace, no matter what old methods it discards, no matter what revolutions it undergoes, whatever it produces will be defined as "neoclassical" simply because it is in the mainstream. To me, that is clearly a counterproductive way of thinking about the world.


  1. I agree that often the use of the term "neoclassical" is n the form of a masked ad hominum attack rather than a cogent criticism of another's position. It is laziness that many unfortunately find convincing.

    1. -- methodological individualism
      -- general equilibrium
      -- subjective

      -- emphasis upon consumption rather than contradictions within and between production And consumption.

  2. Anonymous5:26 PM

    Surely the relevant point is that neoclassical economics (ignoring Wikipedia for a moment, broadly speaking meaning marginalists + Keynes + Friedman + some degree of rational expectations) IS the mainstream. Therefore any article/economist which does not overtly challenge the above is deemed, by default, neoclassical

    1. Actually I make a pretty good argument against that idea in this post. Check it out.

    2. I LoL'd when I followed your link there.

      But Question: What do we call the present-day economists that fail to fit into our neoclassical insult-categorizing?

  3. Anonymous5:30 PM

    I think the distinction is in epistemology, rather than semantics. What you might call "Orthodox" economists are generally agnostic to methodology. There is some truth that is unknown (i.e. government spending and long-run GDP performance), orthodox economists will use whatever methodological or conceptual tool to approximate the most truthful answer, given available evidence. For heterodox, particularly Austrian, this doesn't seem to be the point. They already know the truth (whatever Hayek-VonMises said). The point is to persuade, not reveal. Consequently, the whole dialog gets bent toward labels. Ideological purity is paramount because truth is predetermined. It is more akin to evangelism than science.

  4. Anonymous5:33 PM

    Methinks thou doth protest too much.

    1. = "I didn't read the post"

    2. Anonymous8:11 PM

      Well said, Noah. The guy sounds like a bit of a nutter, TBH. Damage control? Seriously?

    3. Well said, Noah. The guy sounds like a bit of a nutter, TBH. Damage control? Seriously?

      Yup. I decided to just blow him off the comments. Obvious troll is obvious. :-)

  5. Stravinsky and Picasso went through neoclassical periods without being pigeonholed as a neoclassical composer or painter. Maybe you too can go through periods like that. One day a neoclassical economsit, the next a blue one.

  6. Pseudonymous6:06 PM

    I would say that "neoclassical" is used much more than "mainstream" if only because of the verbal/visual similarity to "neoliberal", which helps detractors easily (implicitly or explicitly) link mainstream research to the free marketeering that the general populace thinks those evil economists do. It's a rhetorical move, Noah!

    1. Hehehe. I think you're right, which is why I began the post the way I did... ;-)

    2. Pseudonymous6:14 PM

      And if you use it long enough, people will just use the two words interchangeably, somehow ignoring the "-classical" and "-liberal" and just focusing on the like "neo-"s. Just look at Marc Chandler below!

    3. Pseudonymous6:16 PM

      Unless he's trolling, too. I have a bad radar for it, but I still can't believe there really are educated people who think that analyzing events using an individual rationality framework somehow pulls triggers in your brain that make you believe that regulation is the worst thing on earth and the poor should just be lit afire in the streets.

  7. I have a pet theory that part of this stems from the pedagogy of economics departments, which teach the 'simple' models (which almost no economist 'believes') as an introduction to the discipline, or the economic way of thinking. This leads many who take Econ 101 to believe that what's taught in those courses is what 'economists' or 'neoclassical economists' think.

    There's also the fact that a lot of dialogue on economics comes from outside the economics profession, in the public sphere, etc. Labels are an important communication heuristic. A generalized 'neoclassical' enemy to fight against probably works to induce/sustain social solidarity among those who oppose it (whatever 'it' is)

  8. Sorry, I don't accept the simple definition of neoclassical here. You pretend that it is value neutral and more about methodology then content. Those assumptions itself accepts the philosophical basis of liberalism and neo-liberalism. I do not accept for a second that simply because a research paper does not use certain neoliberal categories that it means it is not neoliberal. That is just a silly argument. Neo--meaning like and liberal--referring to liberty and the rights of property. Why can't neoliberalism refer to all those economists, politicians and people who defend, expand and work within the bourgeois and positivist framework as it has evolved in the second half of the 20th century? I suggest that is how the term is often used. It is used to distinguish the ideology from the classic liberals and the more radical critical of political economy. It is also a helpful category to distinguish Anglo-American liberalism from the ordo-liberalism of Germany.

    1. Sorry, I don't accept the simple definition of neoclassical here.

      That's the cool thing about Wikipedia. You can go edit it, and if the world agrees, your edit will stick...

    2. I wish there was a thumbs down button for Marc Chandler's comment. After the first sentence it's just rambling.

    3. Dear Mark Chandler,

      This post was about neoclassical economics, not neoliberal philosophy. The two are distinct.

      Yours truly,

      Someone who bothered to read the post

  9. Question: "What Does It Say About a Discipline When the Term "Mainstream" Applies Equally to Joe Stiglitz and to Bob Lucas?"

    Answer: "Easy one. ...[I]t means that if you are 'out of the mainstream,' you must be a kook indeed."


  10. I wrote the first version of that Wikipedia article, based on an even earlier Usenet post of mine. But scholarship has evolved since then.

    Noah links to Vernengo. Noah is probably unaware that Vernengo has edited a book on the topic on which Noah purports to blog. (Yanis Varoufakis is another author I like on this topic. I have not read his book, but I enjoyed his article, The Dance of the Meta-Axioms: On the Dynamic Mechanism by which the Inescapable Theoretical Failures of Neoclassical Economics Reinforce Its Dominance.)

    I do not know why Noah links to Syll, since the linked post is a quotation from another post on another blog.

    Keen has been a co-author with Fred Lee. Lee has documented in a long book the McCarthyism, arrogant nonsense, and non-cognitive behavior of mainstream economists. So Keen may know more about what he is talking about in the post to which Noah links that is immediately apparent to Noah.

    1. Anonymous8:07 PM

      Thanks for leading me to the Varoufakis article.

      Bob McManus (no email profile?)

    2. Anonymous8:34 PM

      As always, another list of people whose entire academic careers depend on mainstream thought being wrong. What incentive do they have to accurately represent it? (None, which is why they don't.)

    3. The update version of that Varoufakis article:

  11. gee...i always thought NEO classical economics involved people in pods powering programs full of paranoid fantasies full of guns, lots of guns

  12. I find it surprising that many economic careers are build on examining details of how the perfect market model fails under certain circumstances. Yet when a problem in a different context is proposed, these same economists who so thoroughly understand the limitations of the model want to simply apply it in the new context and assume away any real-life issues that render the assumptions useless.

    This attitude then resonates into policy debates. Because each real life policy problem is nested within a unique institutional structure, with its own social history, it is very difficult to get a grasp on all the interrelated issues. Most economists would simplify many situations into the neoclassical model in this case regardless of the merit in doing so.

    This is the way I define a neoclassical economist - one who defaults to a neoclassical style of model to understand a new situation.

    Which leads nicely to Jake's point
    "This leads many who take Econ 101 to believe that what's taught in those courses is what 'economists' or 'neoclassical economists' think"
    My experience is that they do default to these models when thinking about new problems.

    My reading of the concluding remarks of Acemoglu, Johnson, and Robinson is that they feel the urge to explain their observations by resorting to neoclassical models of incentives, property rights, supply and demand, utility maxmisation etc.

  13. Anonymous8:40 PM

    And usually when some person in the ruling hegemony demands to be "unlabeled" its end is, intentionally or not, labeling those out of the hegemony as invalid and illegitimate. Labeling theory.

    "I am just an economist (just human = hetero white (Japanese, etc) male). Those other guys, the Post Keynesians, Austrian, Marxians are also, well kinda sorta almost, economists. I guess."

    infamous Bob McManus who is not well-connected

    1. Alex Bollinger5:36 AM

      I don't think mainstream macro theorists (Smith only discussed non-neoclassical macro models) perhaps keeping other people's research out of the mainstream is comparable to slave ownership, rape, or internment camps.

  14. They complain about the dominant theory on economics, whether the number of papers published regarding theoretical models has decreased or not doesn't tell you anything regarding whether the theory has been abandoned.

  15. Anonymous9:08 PM

    Let me see, I like HET

    The Neo Classical Synthesis (or Neo-Keynesians) begat the New Classicals in the 60-70s begat the New Keynesians begat the New Neoclassical synthesis begat Woodford. All have decent articles at Wikipedia.

    I wish Randall Collins would write a book on economists.

    Last Bob McManus comment

  16. John S10:08 PM

    Perhaps "Neoclassical" has lost all useful meaning, as you say. But fwiw, according to that Wikipedia snippet, Austrians = Neoclassicals.

    "determination of prices, outputs, and income distributions in markets through supply and demand"--Yes.

    "maximization of utility by income-constrained individuals and of profits by cost-constrained firms employing available information and factors of production"--Yes.

    "rational choice theory"--Qualified yes. If defined this way:

    "Rational decision making entails choosing a "rational" action given one's preferences, the actions one could take, and expectations about the outcomes of those actions."

    Then "Hell, yes" (that's Mises).

    Austrians differ with the mainstream b/c Austrians are willing to apply the concepts of individual rationality, utility maximization, and supply/demand to the markets for money and banking, whereas mainstream economists aprioristically assume the necessity of a central bank with a monopoly on base money creation.

    Meanwhile, Post-Keynesians don't even accept the Law of Demand.

    Austrians may not be mainstream, but imo the heterodox label doesn't fit very well either. Mises and Rothbard took the importance of logical reasoning way too far with "praxeology," but modern Austrians absolutely acknowledge the importance of empirical evidence. So what's your beef? :)

    1. "Referring to the usual separation of economic theorists into three schools of thought, 'the Austrian and the Anglo-American schools and the School of Lausanne', Mises (citing Morgernstern) emphasizes that these groups 'differ only in their mode of expressing the same fundamental idea and that they are divided more by their terminology and by peculiarities of presentation than by substance of their teachings' (Mises 1960 [1933])." - Israel Kirzner in his New Palgrave article on the Austrian school.

    2. John S2:23 AM

      A lot of bloggers, like Unlearning Econ, also "see neoclassical and Austrians economics as broadly part of the same intellectual movement."

      I think the key word is "broadly." As is mentioned in the comments, Austrians differ from the mainstream in how they perceive equilibrium--basically most Austrians see the economy as being perpetually in disequilibrium, but moving towards equilibrium (which can never be reached, as underlying conditions are perpetually changing).

      For Austrians, the fact that the economy is in disequilibrium is what opens up entrepreneurial opportunities (as described by Kirzner), which are an equilibrating force.

      So there are significant differences with the mainstream about the nuts and bolts about how economic processes occur (which also inform Austrian ideas about the non-neutrality of money). But despite these differences, I still see Austrians as broadly falling under the neoclassical umbrella.

    3. From my understanding--though correct me if I'm wrong--the "classical" in neoclassical is because the school of thought reincorporates some of the classical cost of production analysis in with marginalism. So both consumer preferences and costs of production exert their effect. This is one of the differences with the Austrian school, which rejects objective, marginal cost analysis. In Man, Economy, and State Rothbard is adamant that objective cost analysis is spurious as everything traces back to marginal utilities; therefore, prices are determined by consumer demand schedules given a stock of goods: period.

  17. Three points.

    1) While I think I understand Noah's making experimental a third category, I would say that it is simply a subset of empirical.

    2) I am sitting in a dorm room at a history of economic conference in Richmond attended by David Colander. Dave long ago wrote a paper on "The Death of Neoclassical Economics," which he argued happened in the 1950s. This is taking a hard core hes view of what it is. The "neoclassical revolution" happened in the 1870s and was primarily associated with marginalism, that is, the use of differential calculus to study optimization and how this supposedly solved the old "paradox of value." In Colander's view, Samuelson's Foundations of Economic Analysis was the final culmination of this true neoclassical economics, and everything from GE and game theory and later really is post-neoclassical to be strictly correct. Oh, and the term was invented by Thorstein Veblen as a term of criticism (and Marx criticized "classical" economics, although he is now counted as classical, that is, pre-neoclassical).

    3) Dave and Ric Holt and I in 2004 distinguished "orthodox" and "mainstream," the first being an intellectual category, arguably associated with a fossilized version of neoclassical economics. "Mainstream" is sociological, meaning, those running the profession from the top schools, journals, granting agencies, etc. However, "heterodox" is both, which leads to much of the tumult and confusion in these discussions. It is useful to think of the category of "non-orthodox mainstream," which annoys a lot of people. Oh, and I am not someone to minimize the power of the mainstream establishment, whether it is getting rid of the old econ dept at Notre Dame or the one at Western Sydney more recently.

    1. The book, In Defense of Post-Keynesian and Heterodox Economics: Responses to their Critics (edited by Fred Lee and Marc Lavoie(Routledge, 2012)) contains a response to Colander, Holt, and Rosser. I thought there was a book with both sides - maybe I misrecall.)

      John B. Davis has a series of papers with a perspective close to Colander, Holt, and Rosser's.

    2. Robert,

      Funny, but you hit on a sensitive point. Dave, Ric, and I were indeed told that we would have a right to respond to Lee. That has not come to pass, and I shall not hesitate to call Fred out on this, although he is not responsible for what happened. Fred, get your ass together and fix this. You know who to talk to. While we disagree with you and certain points, you have played it straight. Others are being highly unprofessional, and I am this close to naming names of jerks, unprofessional jerks who are very close to having themselve outed in a very embarrassing way.

      Come clean, jerks, even though you are friends of mine. But you know who you are, and you really need to clean this up. It is rapidly becomng a serious public embarrassment, supposedly freedom-loving hets censoring and oppressing critical viewpoints in a massively unprofessional and embarrassing way. The sooner this is fixed, the sooner this will get smoothed over properly, without dragging names through stinky mud.

  18. Anonymous12:59 AM

    How about abolishing the whole economics profession and just going by gut instinct? I say the same thing with voting.

    The key for a good economic regime is organic. Post-Keynesians think that demand can be managed, but sometimes, it can't. Austrians think that being a market statist is good, but don't understand they are destroying culture. Monetarists think the central bank can always handle the financial system, no it can not.

    Lets feel a gut feeling for once. Stop voting with talking points.

    1. Anonymous9:59 PM

      Mr Moody, is that you?

  19. Your critic post is clearly understandable. Though, non-economists tend to look for the supossed "mainstream" economics/economists, and from that approach calling them neoclassical, keynesian o many other approaches. Their assumption is that those adjectives are not mere methodologies, soft-theories or approaches, but all-mighty theories, ideologies and foundations of any academic reasoning which are supposed to be stable and attached to the researcher. Thus, non-economist, economic journalists and public opinion don't get it right (the schools of thought), but still talk about it, so young undergraduate students risk to fail and apply that type of forced categorizations. What can we do to prevent this?

  20. Whether we like it or not, there is nothing scientific about economics and economists are only writers! So, to me schools of economic thoughts are much like "film genre" in the movie industry.

    Some economic writers prefer to write disaster plots while others choose science fiction instead. The point is, no matter how good the plot is, and regardless of the "genre" you prefer, at best, economic writing can only loosely emulate the reality or fantasize about an alternate reality.

    To me economics is all about being pragmatic without being too much anchored to any specific "genre". Every situation is different and every solution that has worked in the past may not work in the future (go figure!). May be we ought to stop trying to explain the world: there is no holy Grail!

  21. Alex Bollinger5:33 AM

    I'm guessing you have no evidence that economists who want to subvert economics are bullied by the post-keynesians, et al, into going mainstream, otherwise it would have appeared here.

    I really don't think that someone who already has an inchoate impulse to subvert an entire field is going to be so easily pushed around by a few fringe characters, or that said characters are so focused on purity of thought that they perform searches of offices for envelopes with Hamiltonians solved on the back before they'll work with anyone.

    The net effect is probably the same net effect of pigeon-holing generally: inefficiency. This is a sloppy way of speaking and it's good that you pointed it out.

    I agree with the -ists/-ics distinction. Whenever I hear "neoclassical economists," I think people are talking about Pareto, Walras, etc., not people alive today. At the point where "utility" stopped being an actual thing - happiness, pleasure, whatever - and started just being a way to manipulate preference schedules, that the neoclassical era was over.

    That's not how everyone uses the term, but it seems like a huge development to me, that economists stopped trying to say what exactly utility is and what it means to be "maximized" and made the field more empirical and less about guessing psychological states. A few developments that would mark the end of the era would be Sameulson's push to scientificity, Friedman's opposition to analyzing assumptions instead of examining results, and the ordinal revolution (incomplete as it is).

    And, hell, it's been more than a century since the marginal revolution; don't we get to be in a new era?

    1. I'm guessing you have no evidence that economists who want to subvert economics are bullied by the post-keynesians, et al, into going mainstream, otherwise it would have appeared here.

      A) What sort of data would you consider "evidence" in favor of that conjecture?

      B) I don't think it's "bullying". I think "heterodox" folks just fail to embrace new revolutions. That means new revolutionaries find it hard to find allies among the "heterodox".

    2. John S2:38 AM

      I think "heterodox" folks just fail to embrace new revolutions.

      Specifically, which new revolutions would you have in mind? Behavioral economics? Experimental economics?

      Interestingly, Vernon Smith himself has been considerably influenced by Hayek and Austrian ideas. So I don't see "the Austrian school" as it lives on in the GMU tradition as any kind of barrier to progress in economic thought.

  22. When I use the term neo classical I am referring to any economist who believes;
    1) money is neutral and econ is essentially studying barter economies
    2) money is exogenous and CBs control supply of it (in USA)
    3) borrowers are using the money of savers when taking a loan
    4) govts need taxpayer money before they can spend or that they must balance taxes with spending or bond markets will punish them (ie they believe that US Treasuries are how the US govt borrows money from taxpayers or trade partners to spend)

    This is not an exhaustive list but this represents the most talked about and most relevant topics at most times, it also represents why, in my view, we are stuck where we are because we cant stop thinking of money as a thing, like gold which has essentially zero sum dynamics.

    1. Typically, the people you're talking about are referred to as "New Classicals"...

    2. I believe "neo" means new does it not? This sounds a bit pedantic.

    3. Anonymous1:15 AM

      Greg: New Classical refers to a specific school of neoclassical economics. Think of Robert Lucas. Many neoclassical economists differ from him greatly. 'Neo' and 'new" refer to much more than their immediate definitions in this context

    4. What exactly from 1-4 doesn't apply to New Keynesians Noah? I'm pretty sure you know NK and NC accept all of that, are you being misleading on purpose?

    5. What exactly from 1-4 doesn't apply to New Keynesians Noah?

      Number 1. New Keynesians believe that money is non-neutral.

      I'm pretty sure you know NK and NC accept all of that, are you being misleading on purpose?

      Do you come from a land where almost everyone is a giant asshole, and being intentionally misleading is standard practice? Because where I come from, being intentionally misleading is a rare behavior.

    6. NK reject money neutrality in the short run, not the long run, quoting Krugman for the old days of less than a week ago:

      "Or to put it differently, you do want somehow to make clear the notion (which even fairly Keynesian guys like me share) that money is neutral in the long run."

  23. It looks like Tim Taylor reads your blog (although not mentioning you by name).

  24. The way Post Keynesians generally frame the distinction is between assuming or not assuming some sort of equilibrium. Keynes rejected equilibrium as an assumption. PKE considers economists that accept some sort of equilibrium to be "neoclassical." Bastard Keynesianism and New Keynesianism are held to be based on neoclassical synthesis.

    Paul Davidson frames the distinction as the difference between assuming ergodicity or non-ergodicity.

    But I also think that a bottom-line criterion is the assumption of the role of government. In general "neoclassical" means the economic counterpart of neoliberalism as the preference for minimal government "intrusion" in markets. Keynesians permit much more of a role for government. Basically, it's loading the assumptions with a view to policy formulation.

    As an analytic philosopher, I am wary of attempting to provide precise definition of words that have a variety of non-technically specified uses. Neoclassical means different things in different POVs. I don't think that it has a precise denotation in economics, as far as I have been to tell, and it has various connotations depending on who is using it.

    I generally use it in the broad sense of the economic POV corresponding to the neoliberal POV politically, including so-called Keynesians that accept the Samuelson neoclassical synthesis that made Keynesianism socially acceptable after the Tarshis incident, to the degree they differ from Keynes, Old Keynesianism, and Post Keynesianism.

    So if you want a rule of thumb criterion for distinguishing the mainstream orthodoxy, whatever label it is given, look at how it differs from what it regards as "heterodoxy' wrt to assumptions.

    Another point is that the mainstream in general presupposes that the methodological controversy is over and there is a normal paradigm for doing economics. Heterodox economists are those not working in that paradigm or who contest it on methodological grounds — Mirowski, for instance.

  25. Anonymous12:04 PM

    I've been reading Contending Economic Theories by Wolff and Resnick. In this book they explain how they see the differences between Keynesian, neoclassical, and heterodox thought. It appears that the definitions of these schools of thought depend upon the starting points of their analysis. Individual behavior determining social outcomes is the neoclassical starting point, institutional structures and its effect on individual behavior is the starting point of Keynesian thought, and the interpersonal relationships between people and its effects on behavior is the starting point of heterodox thought (there is a lot of social feedback in this approach). I haven't finished the book so my interpretation of their meaning is tentative. The important part of this analysis is the fact that the tools or beliefs of the economists aren't important. It is the point from which they start their analysis that defines the type of study. This definition makes almost all DSGE models neoclassical since they start with a "representative consumer", meaning that individual behavior determines social outcomes.

    1. Good point. At the outset of De ente et essentia, Aquinas paraphrases Aristotle as saying, "A small mistake at the beginning becomes a great one by the end." One of the chief starting points in systematic thinking is the choice of method and methodological assumptions.

      In economics, for example, the choice of a representative agent is a methodological convenience that makes otherwise intractable models tractable. No one argues with simple models are useful in teaching economics, but it is questionable how useful they are in doing economics since their use raises the question as to whether the modeling is representational of a much more complex reality than the world that is modeled.

      Models describe imaginary worlds, and scientific models do this in general terms, allowing for predictions as hypotheses about how things actually stand. This enables the imaginary world of the model to be compared in certain respects to the actual world, generally though falsification rather than confirmation.

      The objective of science is to explain and predict, not only the ordinary but also the extraordinary. In fact, predicting the extraordinary may be more important pragmatically than predicting the ordinary course of events.

      So beginning in economics with assumption of equilibrium and ergodicity dynamics produces different results than assuming disequilibrium and non-ergodicity. What this implies is that an approach that assumes equilibrium and ergodicity may produce tractable models that are not well-predictive in a non-ergodic environment like human populations. Or the assumption of disequilibrium and non-ergodicity may make precise modeling quite intractable while achieving outlines that are more predictive than highly tractable models that don't fit the case due to the methodological assumptions.

      Without considering methodology, the debate among different approaches will be unfruitful, and the result will be trading recriminations.

  26. It gets even sloppier when "Neoclassical" is used ad a synonimus for "Neoliberal"

    1. two beers6:55 PM

      Why? Neoclassical is a (spurious) school of (erroneous) economics. Neoliberalsim is (bad) economic policy based on the aforementioned neoclassical economics.

  27. Noah: "Neoclassical" should not be synonymous with "mainstream". "Neoclassical" should be used to describe a certain set of economic methods and/or ideas. Instead, "neoclassical" seems often to be used to describe anything that does not fall within a small well-known set of "heterodox" paradigms. I think that is wrong. The net effect of that type of thinking will be to block people from thinking of new ideas, because it defines any really new approach as "neoclassical". So people who want to subvert or replace econ's dominant paradigm will be shepherded toward old alternatives such as Austrianism, Post-Keynesianism, etc.

    I agree with this POV. A good example is Joseph Schumpter, who explicitly refused to be pigeonholed in this way. And interestingly, his background was in Austrian economics, and his most famous student was Hyman Minsky, who also defies simple classification. Perhaps because of this Minsky could strike out on his own and attempt to integrate finance into economics.

    Evolutionary theorists know that evolution proceeds by exploring options in the face of emergent challenges characteristic of complex adaptive systems, and that evolutionary success is determined by adaptive rate. Moreover, return on coordination greatly exceeds the cost of coordination and therefore increases adaptive rate. Maybe there are lessons there. For instance, Kenneth Boulding was one economist-philosopher who thought this and developed an eclectic and transdisciplinary POV. The thought based on investigation of complexity, for example, at the Santa Fe Institute, is pursuing this methodological line. Evolutionary theorist David Sloan Wilson has a blog series on economics and evolution.

    The purpose of debate is to advance knowledge, as Socrates emphasized according to the reports we have of him. This has been the basis of Western thought and it underlies liberalism.

    I don't think that this debate can proceed constructively without addressing methodological issues, as well as interdisciplinary knowledge. As an outsider looking on, this seems to be an area needing improvement in economics as it is practiced.

    1. Anonymous1:11 AM

      Yes Tom,you on to something.One thing i regonised as both economic historian and economist,are that the so called "mainstream" was much more open for what we now call hetereodox ideas lets say roughly before around 1945-50.There was not the same
      sing a long homogen group as nowadays.A maverick like Schumpeter could teach at Harvard along with a John Galbraith and even a Paul Sweezy.I can´t see that such is even thinkabel today!Even radical marxist as Oscar Lange teached at Chicago fo such as Friedman,and Friedman was doctoral advisor to the radical Andre Gunder Frank ust mention a few.I come to think about your topic philosophy,i see a lot bright Philosophy professors,but in my view not the real exceptional pathfinding original philosophers.Like a Sartre or all the other from Frankfurt Sorbonne, Marburg ,Heidelberg or Chicago etc. I maybee wrong but now it is technical skilled,but very dull conformism that matter.I can´t say that i see a progress in that Ken Rogoff and his clones occupy Harvard instead of Schumpeter,Galbraith or Sweezy,even if he learn to handle excel data and with no doubt is very bright.I can´t see the progress,but maybee i just to god damn out of touch of todays reality.

  28. Anonymous2:12 PM

    "Neo", "Keanu Reeves", "pet reeves..." i get it! you're a funny one, mr smith. or should i call you.... agent smith?!?!??!

  29. Anonymous2:26 PM

    "Shouldn't a researcher be free to work with a number of different types of analysis, and draw on a number of intellectual traditions, without getting pigeonholed? "

    Does it matter? What is the cost of pigeonholing? On whom is that cost imposed? If most of the juice in assigning labels is of a low, emotional nature - as everything discussed on blogs tends to be, right? - then isn't it OK to ignore it and go on writing research with no obvious theoretical importance, er, that is to say, no particular theoretical bias?

  30. Anonymous2:28 PM

    Noah, couldn't one say the same about the way you use "Post-Keynesian"? It's a huge body of work about a lot of different topics, but you pigeonhole it pretty regularly...

  31. Noah, couldn't one say the same about the way you use "Post-Keynesian"? It's a huge body of work about a lot of different topics, but you pigeonhole it pretty regularly..

    Good point. To the point of some pretty nasty debates in PKE. Homogenous it's not.

    1. Well, I never said it was! Homogeneity is not the point of this post...

  32. In Australia there has been a tide of concern over an alleged decline in multi-factor productivity (MFP) (mainly because of a decline in estimated capital services productivity) over past few years.

    This has justified calls for measures that erode worker's conditions, including job security, wages, etc.

    Here is what the Australian Bureau of Statistics says:

    "The ABS approach for measuring MFP is based on neoclassical
    theory using a translog production function in conjunction
    with two assumptions, constant returns to scale and the
    marginal products of capital and labour being equal to their
    respective real market prices."

    In fact the second of those two assumptions is built on a whole series of assumptions (perfect competition etc), while the production function itself depends on a number of assumptions (like the aggregatability of firms' production functions, which Solow conspicuously glossed over early in his 1957 paper that all this is based on and moved quickly along).

    The end result of all these assumptions and fudges is the pre-determined conclusion that the wage and profit share of income is determined by the marginal products of capital and labour. That's the reason in particular for the constant returns to scale assumption - it means marginal product and average product are the same.

    Of course, the conclusion is modified in years when profits fall so far or become negative that it would imply the marginal and average product of capital were negative, and we can't have that can we, so a more convenient assumption is that profits never fall below a certain rate even when they do. Go figure.

    The interesting thing about all this is that, the acceptance of these MFP figures as unalloyed fact seems to suit the agendas of so many people - from business groups, to media pundits and politicians of all stripes, that the flimsy theoretical foundations have gone virtually unchallenged.

    The ABS itself offers a half-hearted critique (in 5260.0.55.001 Information Paper - Experimental Estimates of Industry Multifactor Productivity - Australia 2007 ), but even that is ignored and the ABS figures are just about universally treated as Gospel.

    This is neoclassical economics in its role as the dominant paradigm.

    It's not only dominant, it's apparent beyond criticism.

  33. LOL, Noah Smith!

    Thanks for making my day! I was wondering when somebody would use a picture of a building in the neoclassical architectural style in connection with the term "neoclassical economics" on the econoblogosphere...thanks for finally answering that beck and call, even if I didn't go around announcing it!

  34. [i]"I've never written a paper with individual optimization or supply/demand in it"[/i]

    Sounds good.

    [i] (though I'm working on some now). [/i]

    Oh. Why? What's the point? Isn't just doing empirical work much more interesting and useful?

    1. Oh. Why? What's the point? Isn't just doing empirical work much more interesting and useful?

      Well, the neoclassical framework is very useful for communicating ideas to other economists, because they are mostly trained in the neoclassical framework.

    2. Yeah, I guess you're right. It's a common language shared by economists.

      By the way, when're you gonna do your "behavioural finance as the real revolution" post?

      If you don't do it soon, I'm gonna beat you to it!

    3. Hehe...that's up next...

  35. Anonymous12:41 PM

    You might be interested in this article Noah

    Neoclassical used to be a meaningful term, when it was commonly associated with the marginalists. Now, however, its appearance should raise suspicion because I constantly find it used in the work of non-economist critics of "orthodox" economics in a bid to sound like they know what they are talking about.

  36. two beers7:03 PM

    Neoclassical economics posited marginalism and rational actors as an alternative explanation to Marx's labor theory of value, which, unchallenged, threatened the moral authority which capitalism bestowed upon itself. That the models of neoclassical economics can neither predict nor explain economic phenomena is the elephant in the room, but, boy, is it ever a well-appointed and comfy room, so what rational actor wants to notice the elephant?

    1. This seems unlikely. Adam Smith presents a labour theory of value in The Wealth of Nations, and he was a big fan of free markets(though I don't recall him ever using the word "capitalism").
      That and from memory Marx's theories also struck me as being based on rational actors, each class acting as it was compelled to do by its place in history.

  37. Anonymous8:00 PM

    Noah, did you take macroeconomics? This post and the first 15 or so comments seem to reveal a very shallow understanding of macroeconomics. Classical economics involves the theories of the early 19th and 20th century economist who sincerely believed in the classical dichotomy of nominal and real variables. That is to say that they believed that nominal variables had no effect on real ones. Keynes and mid century economists stressed that prices are relatively fixed in the short run and that markets wouldn't immediately adjust prices to increases in demand. NeoClassical economists on the other hand see a smaller role for government and monetary policy since they theorize that prices adjust too quickly for meaningful deviations from the long run, full employment, level of output. If you understand these things you should be able to spot a neoclassicist a mile away.

    1. Noah, did you take macroeconomics?

      Whoa! Now that you mention it, no I didn't! I knew there was something I had forgotten to do...


      seriousness of commenter = f(inappropriate capitalization), where f'(*)<0

  38. Anonymous8:15 PM

    Noah, this Roy Weintraub piece is particularly about critiques of formalism, but it hits upon the same things concerning you I think.

  39. I don't agree with everything in this article but I believe that it has a valid point about the counterproductive nature of labeling and counterlabeling. Heterodox economics is wide ranging- the Marxists criticise neoclassical economics for its acceptance of property (Lebowitz for example, arguing that neoclassical economics is the study of how individuals make decisions with regard to their property)while many others don't see either the assumption of individual decision making or acceptance towards property rights as a problem, some heterodox economists argue against private monopolies while others accept them as a part of creative destruction. Similarly, differences exist as to the determination of the value of money and the role of monetary policy as also the question of microfoundations to macroeconomics.

    Nonetheless, the wars of labelling and counter labelling happen because some schools of thought are marginalised -for example, Post Keynesian models are barely taught outside certain universities. Similarly, Kondratiev cycles, questions of political economy, even the school of thought that believes models must come out of empirical work rather than the other way round are usually dismissed -and often, in a way that isn't convincing. Marxian models -despite being very, very relevant, are completely dished and rarely ever taught in classrooms.

    Given this, there is a mushrooming of "heterodox" schools as there is a desire to explore questions that are marginalised elsewhere. This gives the schools an identity of their own and they preserve it by distinguishing themselves from the neoclassical schools -often by giving less or no emphasis to "neoclassical" literature.It's a polarisation and polarisations aren't pretty.

  40. Krugman describes himself as kind of an equilibrium, utility maximization kind of guy. You paint yourself as someone dissatisfied with the mainstream yet you are willing to give credence to neoclassical approaches who’s basic assumptions are empirically false, have extremely poor correlation to real world data and virtually nil predictive power and yet you dismiss the various hetrodox approaches with wilful abandon.

    Krugman is a neoclassical dressed up as a Keynesian, you are a neoclassical dressed up as a hetrodox. Both neoclassicals in drag, if you will. The result is the same and a sad indictment of economics.

    Moreover you seem to have turned in to a kind of attack dog for establishment economics, excusing them for missing the crisis and lauding them when they put down alternative views. Emboldened by your beloved Krug-tron giving you 'props' on his blog you have directly attacked those with alternative views such as Graeber and especially Keen. Ad hominem attacks replete with straw men, deliberate misreading and obfuscation that would make even Friedman blush.

    You might be clever Noah Smith but clever does not mean right, and I mean that in the empirical and the moral sense.

  41. Hellestal4:14 PM

    >>But does it describe most of maintstream economics research? Theory papers have declined from over half of top-journal econ papers in 1963 to less than 28% in 2011. Empirical papers make up most of the rest, with experimental economics growing to just over 8%.<<

    What percent of those theory papers are non-neoclassical?

    0%? 1%? 5%?

    >>How many of those empirical papers should be described as "neoclassical"? Some of them, no doubt. Some of them explicitly include neoclassical models; others test neoclassical theories developed in other papers.<<

    Of the empirical papers that test theory, what percent of them test non-neoclassical theory?

    0%? 1%? 5%?

    It's possible you have a point here, but so far the argument as you've presented it is fatuous. If they always reach for neoclassical theory when it's time for them to consider theory, then mainstream economics is clearly neoclassical, even if much of the work is empirical. The empirical work is floating in a background of one single overarching methodology that brooks no competition.

    You even admit yourself that when it's finally time for you to reach for theory, you reach for neoclassical theory, and in the comments you explicitly admit that you do so in order to more easily communicate with others, which lends yet more evidence to the notion that inside the realm of mainstream theory, there is no real alternative to the neoclassical framework.

    This makes you a neoclassical. If you reach for neoclassical theory whenever it's time for you to reach for theory, then that's what you are. You can only dodge a label if it truly doesn't apply. If you genuinely feel this doesn't accurately characterize you, then it would help make your case if you could tell us of any heterodox theoretical work you've done. If you feel that neoclassical theory doesn't have a stranglehold, then you need to provide evidence on the percentage of theory papers that present an alternate viewpoint.

    I'm not saying you can't possibly do this. I genuinely don't know. But you clearly haven't even begun to make your case here.

  42. Thank you for sharing this very nice post, please keep continue the sharing of this types of information. Here we are waiting for more

  43. Udsmykning med mærkevarer og et attraktivt ur er i dag ganske vigtigt. I disse tider er man vidne til at folk bliver mere mode og stil bevidst og et armbåndsur virker i denne henseende som en forbedring. Mange urmærker, fremstiller mange forskellige urmodeller, der passer til forskellige smag hos os forbrugerer.

  44. I am not sure the percentage could be a good picture of number of theory papers. Has the total number of theory papers gone up or done relative to how many economics professors there are. If the productivity of professors making empirical papers increases all other things equal won't theory papers make up less of a share of journals.

  45. While you are still free to claim that this or this paper is not neoclassical in its nature, I would say that you´d be wrong almost always. That´s because you (and Wikipedia) have the wrong, in my opinion, definition of what is neoclassical economics. Even though Kuhn´s theory does pretty good, I´d say that Lakatos is clearer. You are defining neoclassical by its protective belt and, as you should know, you can get away from it without leaving the research program. You don´t need to say a word about those things (individual rationality, utility maximization, and supply/demand...) and still be neoclassical. What defines it is the underlying logic.
    On more concrete ground, you seem to make a methodological mistake when you put empirical research on a different classification. Empirical research is always, very, full of theoretical propositions. Of course you won´t find the neoclassical market description in a empirical paper, but that doesn´t mean it isn´t neoclassical in its logic.
    Congratulations nonetheless. You are one of the few keeping the debate alive, don´t stop it!