Menu Close

Why does neoclassical thinking still dominate economics?

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.

Want to write?

Write an article and join a growing community of more than 186,800 academics and researchers from 4,994 institutions.

Register now