A lively and long-overdue debate has emerged recently on the now widely-read East Asia Forum blog. Leading in to their forthcoming 6th edition textbook, economists McTaggart, Findlay and Parkin defended “The state of economics” against charges it failed to anticipate and address well the GFC. Another Australian economist, Steve Keen from UWS, responded with: “Why neoclassical economics is dead“. So Richard Pomfret from Adelaide objects that it is: “Too soon for obituaries: economics is alive and (reasonably) well“.
I can’t resist adding my two yen’s worth. Contrary to Pomfret, unfortunately ‘neoclassical economics’ is not a ‘straw man’ set up by Keen. Nor has it ‘moved on’ – enough, especially these days. To give only one example relevant to Australasia: J Mark Ramseyer’s simplistic application of Chicago School methodology to the economic analysis of virtually all aspects of Japanese law and the economy.
Craig Freedman and I debunked such Chicago Fundamentalism, methodologically and empirically, back in 2006. But Ramseyer at Harvard keeps churning out more research ‘proving’ that Japan is readily explicable by the most basic and ‘universal’ determinants. Allegedly:
– everyone else in wrong about eg the existence of ‘main banks’ or corporate ‘keiretsu’ groups (i.e., we don’t need to worry about distinctive parameters or exogenous variables, which might lead to complex inquiries into how and why those come into existence); and
– most fundamentally, basic Chicago School theory assumes that people are driven by narrow self-interested behaviour (no matter what they say or seem to do) and the Japanese must be no different.
Further, just like Milton Friedman and colleagues, this professes to be purely descriptive but the vision is also normative (see also now: Craig Freedman, Chicago Fundamentalism: Ideology and Methodology in Economics, 2008).
So in a February 2009 paper, Ramseyer et al find that listed companies in Japan don’t pay their execs too much when compared to smaller closely-held companies. I think we are supposed to draw the implications that (a) this holds elsewhere (like the US and Australia), and (b) we shouldn’t attempt to regulate any aspects of exec pay (unlike the debates now in both countries) because everyone is making informed choices.
Not too different from his 2006 study of Japanese bengoshi lawyer incomes. That found (a) a bifurcated Bar (like in Heinz et al found decades ago in Chicago): ‘smarter’ and therefore ‘appropriately’ richer corporate lawyers in Tokyo, vs other lawyers in smaller provincial law firms. Except that here we are told (b) the latter cohort earn ‘monopoly rents’ – so the normative implication we presumably are to draw is: ‘just liberalise all entry into the legal profession’.
So, how will die-hard (and real-life) Chicago School analysts like Ramseyer look at consumer credit markets in Japan or elsewhere, for example, even post-GFC? Souichirou Kozuka and I imagine their all-too-predictable view in a paper (just uploaded on SSRN.com), although the editors of the book it appears in (rightly) found it so unbelievable they had us cut out most of this Ramseyerian thought experiment! Our paper shows instead that those markets are instead better explained by information economics (Stiglitz) and especially behavioural economics, and our current writing considers more wide-ranging normative implications.
Yet it remains so hard to achieve prompt and meaningful reforms both in consumer credit reform, especially in Australia (see my Submission reproduced on this blog), and in consumer law reform more generally (as I pointed out on the East Asia Forum). And I am bemused at Prime Minister Rudd’s reshuffling of his front bench this weekend. Craig Emerson, the Minister for Small Business, is now responsible also for Consumer Affairs – replacing Chris Bowen, who has moved onto better things as a full Cabinet Minister charged with “Financial Services, Superannuation and Corporate Law”, and “Human Services” (whatever that means).
So I’m afraid the shadow of Chicago School (and neoclassical) economics still casts a long shadow in some Asia-Pacific settings. And Steve Keen’s broader point remains. Will economists and their policy audiences take this latest financial catastrophe as an opportunity to venture outside their comfort zone and risk sincerely reconsidering engrained ways of looking at and engaging with the world? Or will they tend again to batten down the hatches and hope for ‘business as usual’?