By the time the G20 met in Paris last weekend only the degree of fiscal rectitude was up for grabs, Obama having joined the consolidators. And as for the lofty goals of INET [Institute for New Economic Thinking], it is significant that their next meeting will be held at the Bretton Woods hotel where the post-war Keynesian order was assembled. These new economic thinkers seem to be searching for ‘Paradigms lost.’
All of which makes me wonder about the conditions under which the economic ideas that, as Keynes put it, “dominate the economic thought, both practical and theoretical, of the governing and academic classes of this generation” change? As I argue in a new piece for the journal Governance, if one views the problem of paradigm shift as one where some series of events act as anomaly generators that undermine the theory, leading to its eventual and ultimate collapse and replacement, then the 2008 crisis was as close to a perfect natural experiment as you can get. To list some of the howlers: prices were not right in any sense, liquidity turned out to be a social property after all, VaR and associated techniques of risk management proved to be worse than useless, and the whole experiment cost (so far) around $2-3 trillion dollars.
You might then think that given such large losses and red faces we really should now be living in a post-neoclassical world. Yet we are not. Here are two reasons why this is the case: one that I don’t buy and one that I do buy.
“There is (still) no Alternative” – There is No New Paradigm.
This is a very odd but powerful form of argument. Odd, when you consider that this blog, INET, and hundreds of other sources are actively building one. Powerful, in that by saying that ‘unless you replace one complete integrated mathematically perfect theory with another one you should stick with the one you have got.’
I have always been suspicious of this form of argument for three reasons. First, part of the pathology of the old paradigm was precisely its perfectly integrated general form, which made it quite useless for acting in the world. Any new paradigm should be robust to the world, which means partial and revisable in the light of experience. Economists tend not to like that idea.