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Why does neoclassical thinking still dominate economics?

The Sveriges Riksbank’s Prize in Economic Sciences - or the Nobel prize in economics - awarded last week to Thomas Sargent and Christopher Sims- implicitly claims that economics is a science. But how accurate…

Nobel Prize in Economics winners Christopher Sims and Thomas Sargent: in the neoclassic mold. AAP

The Sveriges Riksbank’s Prize in Economic Sciences - or the Nobel prize in economics - awarded last week to Thomas Sargent and Christopher Sims- implicitly claims that economics is a science.

But how accurate is this claim?

Since its establishment in 1968, many have decried the prize’s elevation of economics to the status of a science. This, they argue, gives economics more credit than it deserves.

The critics certainly have a point.

Unlike the subjects studied by the physical sciences, the economy does not obey universal laws, but is a historically contingent human creation.

And unlike many of the other sciences, economics can actually shape its subject of study – through the influence of economic theories on economic policy, for example.

All of this would seem to put economics on much shakier ground than the physical and natural sciences.

But while these criticisms have merit, there’s also a sense in which economics does behave as a science like any other.

Indeed, it is the characteristics it shares with other sciences that helps to explain the rather one-dimensional nature of the Nobel Prize itself.

Scientific paradigms

To appreciate this, it is useful to know a little about the work of Thomas Kuhn and the concept of scientific paradigms. Kuhn wrote about science; he wanted to understand how science changed.

Through detailed historical study, he concluded that the standard account of the scientific method - where scientists formulated hypotheses and then set about trying to falsify them through experiments - was wrong.

An Occupy Wall Street protester. Flickr/ David Shankbone

Instead, Kuhn argued scientific research is governed by “paradigms”.

These are the deep underlying assumptions of a branch of scientific knowledge at any particular time. For example, one could speak of a Darwinian paradigm within evolutionary biology.

Paradigms structure the everyday activities of scientists: what Kuhn called “normal science”. A paradigm determines what counts as legitimate knowledge within a scientific discipline.

“Ideologues and crackpots”

It determines the standards of proof, what kinds of questions should be asked and what methods should be used to solve them. Those who don’t adhere to the ruling paradigm’s assumptions are viewed as ideologues or crackpots, and definitely not scientists.

Kuhn argued that paradigms are sometimes replaced. This explains the occasional radical shifts in scientific knowledge.

Paradigms are replaced if an anomaly is discovered that can’t be explained using the tools of the reigning paradigm. The result is a new paradigm that scientists believe can better explain the anomaly.

More often, however, such anomalies are either ignored or are made to fit into the existing paradigm by using the paradigm’s tools in new and innovative ways. This is where Kuhn’s theories are helpful for understanding economics.

Neoclassical thinking

Modern economics is governed by a paradigm: the neoclassical paradigm.

Economist Paul Krugman bucks the trend. AAP

Neoclassical economics begins with the propositions that the economy is comprised of rational self-interested individuals (consumers and firms) who maximise their utility through voluntary exchanges in markets which, when free from external interferences, produce an efficient equilibrium.

While the paradigm has developed in sophistication since the 1870s, these central propositions remain at its core. Most of the winners of the Nobel Prize have come from the neoclassical paradigm.

This dominant neoclassical paradigm defines what counts as economics, and who counts as an economist. Anyone not sharing these assumptions is often deemed not to be an economist.

Because they don’t conform to the principles of the ruling paradigm, they find it difficult to get published in leading economic journals and to get recognised within the academy.

The problem is there are many scholars who study the economy, and who consider themselves economists, yet whose work is not considered legitimate by those working within the neoclassical paradigm.

Unorthodox economists

These unorthodox, or “heterodox” economists – such as Marxist, institutionalist, Post-Keynesian and feminist economists – use different ways of understanding the economy than the neoclassical paradigm.

This is why very few non-neoclassical economists have ever been awarded the Nobel Prize.

Indeed, many of the Nobel recipients won their awards for dealing with anomalies within the neoclassical paradigm.

Gary Becker for example, dealt with the neoclassical paradigm’s anomaly that individuals were assumed only to be rational self-interested and utility maximising in markets, by developing theories for understanding all human behaviour as self-interested and utility maximising – from personal relationships to smoking.

In doing so he extended the neoclassical paradigm to the study of all social spheres, not merely the economic.

Similarly, Ronald Coase dealt with the anomaly that firms are organised hierarchically, not voluntaristically as neoclassical economics assumes is the case for market participants.

He used the existing tools of neoclassical economics to develop the concept of “transaction costs” as a way of understanding this.

Useful insights

None of this is to deny that Nobel winners have made useful insights. Rather it is to highlight the narrowness of the criteria for the award itself. It necessarily discounts many valuable insights into the nature and dynamics of capitalist economies.

Does this matter? Only if relevance matters. Consider this – Marxist economists understand crises as inherent, recurring elements of capitalist economies.

Several Marxists argued that the most recent economic boom was based upon unsustainable dynamics and would likely end in crisis. Very few neoclassical economists took this view.

We now know who was right. Yet no Marxist economist has ever been awarded the Nobel Prize in Economics. Nor are they likely to be, so long as the neoclassical paradigm continues to define what counts as economic science.

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8 Comments sorted by

  1. Alister Air

    logged in via Twitter

    "Several Marxists argued that the most recent economic boom was based upon unsustainable dynamics and would likely end in crisis. Very few neoclassical economists took this view. We now know who was right."

    Indeed. Marxist economists have predicted twelve of the last three recessions.

  2. Andrew Hassell


    Thank you Damien. An important article on economics group-think.

    How humans organise to trade.

    Not even any mathematics, necessarily, in that definition of economics.

    - an irrational man

  3. Steve Geoghegan

    Manufacturing engineer (electronics)

    Economics is a science, but one in its infancy; comparable in its understanding of natural principals to the state of the science of physics a century or two ago - and thus rather superstitious and shambolic.
    Economics DOES obey natural laws, but, as with all laws governing behaviour in the physical world, these laws need to be understood before they can be utilised.

    A good place to start garnering some real understanding of the forces in play within the economics sphere would be the book "Progress and Poverty" by Henry George.

  4. Andrew Hack

    IT Project Manager

    Ridiculous. Marxists do not understand that the current economic system is not capitalist and is far from it. Free-market capitalism is the exclusion of government interference in the economy. The booms and busts are clearly caused by the intervention of government through the expansion of credit and the money supply which creates an artificial boom. With the resulting bust the market's reaction to remedy the malinvestment.

    This is not a component of capitalism but that of corporatism and Keynesianism.

    The economic theory of the free-marketeers is preferred because history has proven its worth. 19th century USA is a prime example of the prosperity that a free-market capitalist system can achieve. What exactly has Marxism achieved? If Marxism actually worked then the West would have lost the Cold War and we would probably be having this discussion in Russian (except for that we probably wouldn't be allowed to have this discussion).

    1. Andrew Hack

      IT Project Manager

      In reply to Andrew Hack

      From the research I have done I have found that only the Austrians understand the fully how these systems work and why they behave the way that they do.

      Daniel Hannan wrote a blog article recently about Von Mises and how his previous insights reign true now more than ever:

      What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit expansion is built on the sands of banknotes and deposits. It must collapse.
      Human Action…

      Read more
  5. Bernie Masters

    environmental consultant at FIA Technology Pty Ltd, B K Masters and Associates

    Maybe Damien could provide us with some examples of successful national economies which are based on Marxist economic theories? I can't think of one, not even in the last 100 years of human history? Cuba, USSR, North Korea, Albania, Yugoslavia,....?
    I think the message to come out of the GFC and the current European debt problems is that the only sound economic theory that works is capitalist (with or without the neo- prefix) provided that it is subject to reasonable controls placed on it by governments and their citizens. Mind you, it was Bill Clinton who relaxed the home loan lending rules in the USA which led to the sub-prime mortgage crisis which started off the GFC. And I'd be interested in finding out the political colour - socialist or conservative - of the successive Greek governments over the last 15 years that have deliberately lied to the EU about national debt levels, GDP, productivity, etc. I suspect most of them were socialist.

    1. Amanda McCormack

      Student (post-graduate)

      In reply to Bernie Masters

      @Bernie Masters - you seem to be engaging in a straw person argument. No where does Damien Cahill equate marxist economists/economics with a marxist/communist/socialist economy.

      I would go on to say that adopting a marxist approach to economics does not necessarily infer that that the way to organise an economy is through a Marxian approach.

    2. Emma Anderson

      Artist and Science Junkie

      In reply to Amanda McCormack

      Amanda is correct. There are plenty of social scientists that will adopt some of the ideas from a given theory in order to critique an existing phenomena but may not draw the same conclusions as the source theory or theorist.

      Marxism is a pretty good example of that. Marxist theory offers an insightful critique of the structure and functions of economic power. But socialism in practice, re what has purportedly happened? No thanks. Right questions, but probably the wrong answers.

      Also, this false capitalism versus socialism dichotomy is giving me the irrates (not yours Amanda) I mean in general.

      RE: Original article - thanks for pointing out that there are heterodox economists. However is neoclassical the school in charge? Or is it neoliberalism, or monetarism? None of these are identical....but I've seen the terms interchanged and it would be very useful to learn about the differences.