Simon Wren Lewis on Mainstream vs. Heterodox Macro

        Simon wants to know why heterodox economists are so willing to throw overboard mainstream macro, though he does admit the feelings mutual:

        "One of the notable things I find about the mainstream/heterodox divide is how strong it is. I think it’s fair to say that most mainstream macroeconomists care little about what goes on in the heterodox world. That was clearly a big mistake when it came to Minsky and financial crises. However, my impression is that sometimes this feeling is mutual. When I have heard or read heterodox economists, what often strikes me is the wholesale rejection of the mainstream."

       http://mainlymacro.blogspot.com/2012/07/heterodox-and-mainstream-macroeconomics.html?showComment=1342022146793#c1739245578611586796

       As he admits that mainstream macro cares little about what goes on in the heterodox world maybe this is part of his answer. He then goes on to offer a stylized description of the psyche of the heterodox economists:

       "What interests me is why the need for such wholesale rejection of the mainstream? I learnt one possible answer when young, which is the appeal of revolution rather than evolution. In Cambridge (UK) in the early 1970s, a significant group of the faculty called themselves Neo-Ricardians, and they too rejected neo-classical theory. Joan Robinson was an inspirational figure for this group, although the key influence was Piero Sraffa. They were strongly attracted to the ideas of the philosopher Thomas Kuhn, who talked about paradigm shifts in science. The mainstream was not going to evolve into something better: it was fundamentally flawed, and therefore had to be overthrown. Attractive stuff for undergraduates – too attractive in my case – but that particular paradigm shift never came."

      "A rejectionist strategy is of course unlikely to win friends within the mainstream. Even those quite critical of aspects of mainstream thought and teaching can be exasperated by the rejectionist attitude. My own view is very similar to that expressed by Diane Coyle in her review of Steve Keen’s ‘Debunking Economics: The Naked Emperor Dethroned’: “I have a lot of sympathy with the details of Professor Keen’s project, but not its ultimate ambition. For in the end I think the Naked Emperor needs to be reclothed rather than dethroned.”

     Of course we can easily get stuck in a chicken and an egg debate-does the mainstream ignore hetero because of a "rejectionist  strategy" or does heterdox adopt a rejectionist strategy because of mainstream indifference?

     Lewis does admit that the attitude of mainstream is hardly too accommodating:

     "However, within macro the mainstream is hardly more accommodating. It may advertise that it is open to new ideas, but in practice, to get into good journals, these ideas need to be cast in a rather simplistic microeconomic framework that in all other respects is uncontroversial from a mainstream point of view. In effect this excludes those who have problems with much of that simple micro theory."

     I think he probably chalks up too much to simple perversity among heterodox economists. Implicit in them is the desire to either be part of the mainstream-or of course remake it. Basically their goal it to win the world over to the point that they themselves are the mainstream.

    And is this not part of why mainstream macro is not so accommodating? Implicit in heterodox economics is a reproach against mainstream, a claim that it is inadequate or possibly mostly wrong. Probably it's inevitable that it will find heterodox views threatening.

    On the other hand Lewis seems skeptical of "paradigm shifts" here but why? The very name of his blog Mainly Macro is based on the largest paradigm shifts in econ history, when macro was born. Recall that previously all of economics was micro.

    It was thanks to the Keynesian revolution in GT that we have macro at all. Then in the 70s we had a counter-revolution with Milton Friedman and Robert Lucas. So Kuhn isn't wrong.

   What we are getting is that Lewis largely thinks macro doesn't need another paradigm shift.

    http://mainlymacro.blogspot.com/2012/06/teaching-macroeconomics-after-crisis.html?showComment=1342023116878#c7489309054357804555

     http://mainlymacro.blogspot.com/2012/07/crisis-what-crisis-arrogance-and-self.html?showComment=1342023616286#c7886108024210466826

    For my part, I am just an interested layman. My formal training was no more than Macro 101 and Micro 101 in college. What knowledge I have in economics doesn't come from these two classes- even though I aced them I had not yet really fallen in love with macro. Like Lars Christensen says it's less about "knowing the words than hearing the music."

    Milton Friedman suggested that it's not about school, you either have that feel for it or you don't. Learning the words is the easy part.

     My interest in econ is understanding it well and maybe figuring out how econ could give us a better world. Basically I want to understand the world and maybe improve it. I wouldn't say that I came in with a bias towards heterodox over the mainstream. However I do think that certain questions aren't answered very well by mainstream macro.

    One example is the Volcker disinflation. I've long since suspected that this imposed considerable macro and social costs that aren't appreciated. However, nowhere did I read anyone in the mainstream even touch on this.

    The other day in reading Billy Mitchell's Billy Blog I came across this point for the first time in any econ literature I've read.  In the mainstream macro guys at best it might be acknowledged that there are short term losses from disinflation, but never long term.

     "OECD economies. Some economists argue that inflation-first monetary policy (of which inflation targeting is an evolved form) has caused the lack of jobs, especially in European economies, over the 1990s."

     "While some extreme elements of the profession, who still consider rational expectations to be a reasonable assumption, will deny any real output effects, most economists acknowledge that any disinflation engendered by this approach will be accompanied by a period of reduced output and increased unemployment (and related social costs) because a period of (temporary) slack is required to break inflationary expectations."

      "To measure the real losses economists have used the concept of a sacrifice ratio which is the accumulated loss of output during a disinflation episode as a percentage of initial output expressed as ratio of the accumulated reduction in the inflation rate. So if the sacrifice ratio was two it would mean that a one-point reduction in the trend inflation rate is associated with a GDP loss equivalent to 2 per cent of initial output."

     "The hardcore mainstream deny they exist in any meaningful way while other less manic mainstream economists suggest that they exist in the short-run only and are modest and ephemeral."

       http://bilbo.economicoutlook.net/blog/?p=7554

      Do any mainstream economists admit this? Krugman might, I'm not sure. He would likely at least admit that there are short term losses-he might admit long term. What disinflation really came down to was a quid pro quo.

    In exchange for "price stability" that is low prices, the monetary authorities have deliberately tolerated a much larger level of slack in the economy. Basically in exchange for lower inflation we also have had lower unemployment, and lower GDP.

   In saying this of course I am certainly breaking another mainstream tenet-that there is no way for policy to impact the long term trend of growth.  Ironically, Scott Sumner touched on this issue himself recently by way of sticking his foot in his mouth. He was talking about stagflation-which he actually doesn't even have a working definition actually.

   Yet in between this rather shocking confusion-here is a big time economist and titular head of a big movement like the Market Monetarists-Sumner didn't even know what stagflation really is; yet this confusion was in some sense fertile.

   Sumner seems to think stagflation is lower RGDP and higher inflation rather than high unemployment and high inflation-which was the whole point of the Phillips Curve debate. His commentators and friends from other Market Monetarist blogs all rushed in to gently correct him while still assuring him that he wasn't wrong-that he simply had a "different" definition of stagflation than the conventional one.

   "Why does stagflation have such a bad rap? I think it’s because stagflation is often misdiagnosed. Under a NGDP growth target of 5%, stagflation is likely to be about 1% RGDP growth and 4% inflation—something like late 2007 and early 2008. Not good, but not the end of the world."

     http://www.themoneyillusion.com/?p=14924

      Yet there are some other interesting implications in Sumner's error. He implied that in the 70s when you had NGDP numbers like say 18%, with say 15% inflation and 3% GDP if only there had been a 5% NGDP we would have had 3% GDP with only 2% inflation.

      Maybe he thinks this because of the false belief in stable trend RGDP over time. What we have seen is that inflation and RGDP have come down together. But Sumner seems to think that you could really drop inflation that much that quickly with no input on output.