The early 2000s were supposed to be a time of change for the field of economics. In 2001, Joseph Stiglitz won the Nobel Prize for proving that, contrary to basic assumptions of neoclassical economics, imperfect information is present in pretty much any market. Holding on to the assumption of so-called perfect information, according to Stiglitz, was proving disastrous for all kinds of economies, ranging from Gary, Indiana, to Kenya. The following year, the Nobel Prize was awarded to Daniel Kahneman for providing another blow to a fundamental assumption of economics: humans behave in ways that are explicitly (and predictably) irrational. Recent advances in behavioral and empirical economics have further punctured the neoclassical perspective. One would think that with such condemnation, the teaching and learning of economics would have since evolved in some way.
Unfortunately, no such revolution has occurred. Economics still teaches the same basic assumptions; many academics still operate from those same flawed beliefs. Ignoring the falsehoods from within and ignoring critiques from outside, the field of economics has intellectually stunted itself into half-accurate theories at best and pure delusion at worst.
Milton Friedman famously stated that unrealistic assumptions in economics don’t matter if the theory’s predictions prove true. Prior to the 2007 financial crisis, ex-Federal Chairman Alan Greenspan was a huge advocate of subprime mortgages, unregulated derivatives and free-market solutions to “irrational exuberance,” believing that “weeds” in the economy would die off naturally. Likewise, famed Yale economist Irving Fisher claimed days before the 1929 market crash that “stock prices have reached a permanently high plateau.” After the crash, citing several economic models, he stated that stocks would soon rise in prices and that the market crash was merely “shaking out the lunatic fringe.” Friedman, Greenspan and Fisher bought into unrealistic assumptions and the unrealistic theories that grew out of them; the truth is that poor assumptions lead to poor theories, just as bad economists lead to catastrophic results.
Abstract assumptions and theories are one thing, but what about the models we depend on? The New York Times’ Upshot, for example, recently covered the Phillips curve, which claims that inflation rises when unemployment goes down. The Phillips curve plays a central part in macroeconomic theory; rumor has it that Federal Chairwoman Janet Yellen wants to raise interest rates based on its implications. But the curve has proven widely inaccurate for the past few decades. Federal Reserve Governor Lael Brainard has said that “the Phillips curve is, at best, very weak,” and Fed Governor Daniel Tarullo similarly stated that “the Phillips curve [hasn’t] been working effectively for 10 years now.” Looking at history supports these conclusions: The early 1970s had both high inflation and high unemployment, an impossibility according to the model. Perhaps, like our neoclassical assumptions and theories, our neoclassical models don’t truly represent reality, and depending on such models can lead us astray.
But economics isn’t just flawed internally; it also shuns many critiques in other fields. Decades ago many social sciences underwent the “cultural turn,” shifting from a purely reason-driven approach to one that incorporates “culture” as an independent variable in their analyses. But economics today continues to ignore subjective influences on prices, demands, even on economic behavior itself. Economist Robert Frank, for example, conducted a study where college students, after taking two semesters of introductory economics, became more selfish and less cooperative. Apparently, studying neoclassical economics makes us behave like, well, self-interested agents in neoclassical theory. Culture, norms and value systems indelibly affect our interpretations and behaviors. The “economics” that is taught today as a result is only one normative perspective of many, ignoring its cultural context and relativity.
If economics is so flawed with its assumptions, theories, models and feigned objectivity, why hasn’t it changed? How can one of the most respected academic fields be so intellectually myopic? In his Nobel Prize lecture, Joseph Stiglitz answered this question, noting that, “one cannot ignore the possibility that the survival of the [neoclassical] paradigm was partly because the belief in that paradigm, and the policy prescriptions, has served certain interests.” At the risk of sounding conspiratorial, I will posit that “certain interests” definitely have a stake in certain forms of economics over others. With one-fourth of graduating Yalies working in finance or consulting and many economics professors doubling up as consultants for banks and corporations, “certain interests” do appear to be intertwined with the teaching and learning of economics. Even our massive and widening wealth inequality is not some unexplainable event but rather a consequence of bizarre convictions in neoclassical thought.
Upton Sinclair once said, “It is difficult to get a man to understand something when his job depends on him not understanding it.” Perhaps we Yalies — as students at a top economics university — can provide the intellectual challenge necessary to open up the field. And in that process, the garbage that is economics today can evolve into something a little more genuine for the future.
David Toppelberg is a sophomore in Davenport College. Contact him at firstname.lastname@example.org .