The Evolution of Neoclassical Economics

This perspective is evident in Landreth and Colander’s work, A History of Economic Thought (2001). They illustrate how “neoclassical” was originally a term used pejoratively by critics. Thorstein Veblen introduced the term to criticize Alfred Marshall’s theories.

> Veblen's use of “neoclassical” did not describe mainstream economics at the time. In the early 1900s, institutionalism was more prominent than neoclassical thought in the U.S. By the 1930s, however, Marshallian economics dominated academia, shaping the research agenda. The exploration of marginalist principles, focusing on individual optimization, transformed the profession's approach, leading to a shift from Marshallian to Walrasian frameworks centered around supply-demand equilibrium and rationality. Those who challenged this agenda found themselves outside the mainstream.

By the 1940s, the exploration of marginal concepts culminated in significant advancements, which evolved into a focus on logic and set theory. This led to Arrow and Debreu’s work on general equilibrium, which formalized the existence and stability of competitive market equilibria. By the late 1950s, the broad theoretical exploration of neoclassical economics reached its conclusion.

This evolution occurred alongside the Keynesian revolution of the 1930s, which introduced a fundamentally different macroeconomic perspective. Instead of starting from individual behaviors, Keynesian economics focused on aggregates, integrating microeconomic foundations as necessary. This approach contradicted neoclassical methodology, leading to significant resistance against Keynesian models. However, by the early 1960s, Keynesian economics gained widespread acceptance.

In Keynes’s framework, aggregate demand determined income levels, necessitating government intervention through fiscal and monetary policies. Conversely, neoclassical models were limited to the calculations of idealized rational agents.

The failure of Keynesian economists to predict the inflation of the 1970s sparked a new classical revolution, reverting to microeconomic foundations and superficially returning to neoclassical principles. However, by the late 1990s and early 2000s, macroeconomics lacked a unified approach, existing in a state of chaos.

Consequently, the focus shifted from the Keynesian-neoclassical debates to economic growth, with a transition from common-sense empiricism to modern econometrics. As neoclassical research reached its conclusion, the forefront of economics transitioned to formalistic and eclectic model-building.

> Economists have always engaged in modeling, but the modern approach is characterized by an almost exclusive reliance on formal mathematical models rather than heuristic ones. Alfred Marshall advocated for expressing ideas in words rather than relying solely on mathematics, whereas contemporary economics often discards concepts that cannot be expressed mathematically.

Unfortunately, the majority of economists remain decades behind those at the forefront, as undergraduate textbooks still reflect the neoclassical paradigm, making it challenging to teach the modeling approach. This discrepancy accounts for the differences between undergraduate and graduate texts.

The result is that if you suggest to an economist that they should abandon “neoclassical economics,” they may respond with indifference, as the neoclassical formulations have become outdated. Technically, these concepts are no longer relevant in economics, and economists now borrow from various neighboring disciplines, such as game theory and cognitive science.

What connects post-neoclassical economics is not the models themselves but the methodology employed in producing them:

> Much of contemporary economics is empirical and quantitative, involving a modeling approach that simplifies problems to create empirically testable models, which are then analyzed. Afterward, one must reintegrate the omitted elements and apply the insights to the original problem.

Narrow versus Broad Neoclassicism

“Neoclassical” can possess multiple meanings. Economists have a technical definition, as outlined above. Additionally, it can reflect a broader phenomenon, where the presence of capitalism infiltrates academia, turning ostensibly independent pursuits into vehicles for powerful private sector interests. Scientific inquiry can devolve into propaganda, similar to the Marxian notion of an ideological superstructure that preserves the material realities of class conflicts.

In this context, “neoclassical” encompasses both a narrow technical definition and a broader interpretation indicative of propagandistic tendencies in economics, exemplified by the enthusiastic promotion of the neoclassical research program. The broader definition reflects a spirit of propaganda.

However, if one were to levy sociological criticisms against the pseudoscientific aspects of economics, one must grapple with the distinction between these two interpretations. It raises questions about the propagandistic nature of the new eclectic model-building approach. If economics is no longer overtly ideological, how can economists still be considered allies of the wealthy elite? Isn’t that merely a caricature?

The intriguing question lies not in the intentions of economists, who may view themselves as explorers of social science, but in the possibility that their efforts may not align with their perceptions. This dilemma is echoed by psychologists, philosophers, and literary critics, all of whom recognize the difficulty of self-awareness.

Thus, while economists are entitled to their interpretations, this does not eliminate the potential for economics to be perceived differently from an outsider’s perspective. There may be a significant disparity between what economists intend and the societal impact of their work.

In a similar vein, medieval Christian theology might have once seemed innovative, but in the Age of Reason, it appeared as an impediment, distorting core messages of Christianity. History often ridicules the past’s naivety and arrogance, encouraging us to understand our current position from a broader perspective. Philosophy serves this purpose.

The Pseudoscience of Economists’ “Empirical Models”

We can begin by challenging the notion that an economist’s “empirical model-building” is sufficiently scientific to resist the temptations to compromise their scientific and philosophical integrity in the face of political pressures.

Landreth and Colander articulate the dubious scientific validity of even contemporary macroeconomic models:

> Criticism of macroeconometric models stems from similar concerns that have historically plagued economists. Primarily, the validity of classical statistical tests requires theories to be developed independently from data. However, many empirical economic researchers engage in “data mining” to find the best-fitting theory, compromising statistical validity. Even when statistical tests are properly conducted, the limited availability of data necessitates the use of proxies, which may not always be suitable, rendering the validity of tests contingent upon the appropriateness of these proxies, which lacks a statistical measure. Moreover, economic theories often rely on immeasurable variables that can be invoked to explain discrepancies in statistical results. Lastly, replicating econometric tests is nearly impossible due to the inability to conduct controlled experiments, making the reliability of results dependent on subjective judgment.

Regarding the limitations of macroeconomic models, they quote Nobel laureate Robert Solow:

> It is not feasible to resolve these disputes through econometrics. I do not regard econometrics as a sufficiently powerful or practical tool for macroeconomic time series. Thus, one resorts to judgment about the economy’s structure. Models can always be devised to support any position, which is too convenient for both sides.

Landreth and Colander highlight that skepticism towards econometric testing has led many researchers to adopt a casual attitude toward their statistical work, resulting in studies that are rarely replicable and often contain errors.

It is important to note that the replication crisis is prevalent across social sciences, and even theoretical physics is facing challenges of dogmatism. The shortcomings of economics as a genuine science mirror those seen in other social sciences, where academic pressures lead to questionable practices. Academics must adapt to market dynamics, necessitating the publication of obscure findings to maintain their social standing. If their insights were merely common sense, few would attend lectures or respect professors.

However, the pretense of economists is particularly perilous due to the field's direct influence on societal structures such as businesses, employment, wealth distribution, taxation, and competition. Ironically, economists speak in abstract terms about issues that have concrete implications.

In an ideal scenario, experimental data would provide clarity. However, as Landreth and Colander point out, rigorous experiments cannot be conducted in macroeconomics, which deals with entire markets and economies. While these can be simulated, the proxies employed may be politically biased.

Additionally, an entire field could be dedicated to documenting statistical misuses. The pitfalls are numerous: one can manipulate statistics to support any argument through selective data, biased sampling, erroneous causality, data mining, or misinterpretations of error margins and hypotheses.

Returning to Solow’s remarks, the formal precision of mathematics is neither necessary nor sufficient for scientific inquiry. Even fantasy can be formalized, and mathematics is filled with such constructs that may or may not be scientifically relevant. The use of mathematical language aims to enhance objectivity by eliminating the subjective connotations of natural language. Nonetheless, formulating a problem mathematically does not guarantee its relevance to reality.

For instance, one could formalize the trend of crewmen in red shirts dying in old Star Trek episodes or derive a formula for generic romantic comedies. This analysis, while mathematically rigorous, does not constitute scientific inquiry. Such an approach could be considered pseudo-empiricism, akin to how fan clubs analyze their favorite fictional universes.

The Shifting Propaganda Needs of Capitalism

Having dismissed that pretense, we must examine how eclectic model-building aligns with the broader capture of economics by plutocratic interests.

The first observation is that by rigorously analyzing capitalism and labeling their models as “scientific,” economists present capitalism as a natural and inevitable system, akin to the laws of physics. By adopting concepts from physics, modern economists portray capitalism as an evolving system rather than a human construct shaped by choices and power dynamics.

Secondly, the need for propaganda evolves with circumstances. Capitalism has faced two significant crises: the rise of Marxism and the Great Depression. William Barber notes in A History of Economic Thought (1967):

> Marx’s analysis has profoundly influenced subsequent economic thought. He emphasized that economic phenomena cannot be divorced from their historical and sociological contexts. The breadth of his claims compelled those rejecting his conclusions to define their positions more precisely, effectively shaping neoclassical economics as a means to divert discourse away from Marxian perspectives.

The neoclassical focus on capitalism, rather than addressing its inherent contradictions and historical context, aided in diminishing the Marxian critique. Economists needed to appear neutral and scientific to integrate into a capitalist establishment, sidelining radical viewpoints.

(Note that Marx's pseudoscientific approach to “material logic” similarly impacted communism.)

Once neoclassical economics solidified economists' roles as defenders of capitalism, they confronted a second crisis during the Great Depression, which led to the Keynesian revolution and the New Deal. The fantastical narratives surrounding free markets were disrupted by harsh realities, paving the way for hybrid economic approaches.

Once free-market advocates identified their opportunity in the 1970s, they launched a comprehensive attack on Keynesianism, exemplified by the Powell Memo of 1971, which initiated a campaign against government interventions designed to protect society from the excesses of unregulated capitalism, a trend that persisted under presidents like Ronald Reagan and Bill Clinton.

In academic economics departments, chaos ensued. Nonetheless, there was less need for overt free-market propaganda since the groundwork had already been laid. Decades of myth-making by classical and neoclassical economists — including concepts like Adam Smith’s “invisible hand” and the myth of Homo economicus, the ideal utility maximizer — had ingrained the cultural narrative in the U.S. that equates greed with virtue.

In the Gilded Age, monopolists influenced the discourse through regulatory capture and physical suppression of labor movements. By the 1980s, however, big businesses adopted a more subtle strategy, promoting capitalist narratives through sophisticated advertising across various media.

In this context — following these crises and counter-revolutions, as consumerism flourished, and with the collapse of Soviet communism — even Democratic leaders like Bill Clinton and Barack Obama turned to free-market proponents for economic guidance. Economists had to adapt to the dominant culture, which did not necessarily require them to amplify the existing laissez-faire rhetoric but rather to step aside.

Economics departments could have remained relevant, particularly if they lacked the resources to challenge consumerist ideologies systematically.

Relativism and Agnotology

In this light, eclectic model-building assumes a new significance. The more diverse and seemingly arbitrary the subject matter and statistical assessments, the less relevant economics becomes as a counterbalance to American plutocracy.

If economists collectively demonstrated that unregulated capitalism, amid consumer infantilization and ecological crises, would be not just reckless but catastrophic, they could establish their profession as a true science by opposing the business community's calls for deregulation.

However, works like Thomas Piketty’s Capital in the Twenty-First Century often fade from public consciousness despite initial acclaim. The pursuit of diverse models leads to a lack of cumulative knowledge, resulting in a series of passing trends.

Consequently, contemporary post-neoclassical economics contributes to agnotology, the generation of ignorance. Each new trend creates an illusion of knowledge, but as one model succeeds another, the net cognitive outcome is negligible.

The broader cultural dilemma here is relativism, making it problematic for economists to transform their discipline into a generator of diverse models and solutions. This eclecticism may mask the ideological divide between conservative and progressive economists, a division that jeopardizes the scientific integrity of the discipline.

This is not to suggest a conspiracy or that economists intentionally deceive. However, these trends reflect the evolution of economics. The necessity of thriving in a capitalistic environment shifted from overtly propagating myths to allowing autonomous sources of cheerleading within the business sector.

Economists resemble Doctor Frankenstein: after creating a metaphorical monster, it follows its own path and no longer requires their assistance. If they continue to advocate for the model or monstrosity, their role may become one of confusing the angry public.

Whether these new roles within the economics profession should still be labeled “neoclassical” is a semantic question. More crucial is whether modern economics has ever genuinely fulfilled the criteria of a science, from its classical to econometric phases, or whether economists have primarily served as apologists for the plutocracy that capitalism tends to generate.