Monday, April 5, 2010

Stiglitz on "Reforming Economics"

In his new book, Freefall: America, Free Markets, and the Sinking of the World Economy, Joseph Stiglitz of Columbia University has some things to say about economics and the economics profession at the end of the book. I suppose it's no coincidence that many of the points he makes echo what we have to say in The Economics Anti-Textbook; we make numerous references to Stiglitz's work. After all, one of our central points is that the textbooks fail to reflect what economists know -- or should know -- about economic theory.
   Stiglitz writes of recent decades: "Economics had moved -- more than economists would like to think -- from being a scientific discipline into becoming free market capitalism's biggest cheerleader." (p.238). (I could quibble about it being a "scientific discipline" in the good old days, but let that pass.)
   He makes it clear that many economists start with a particular view of the world and choose a theoretical model that reflects it and ignore inconvenient theoretical results, notably those written by Stiglitz and his colleagues. In a series of papers in the 1970s and 1980s, Stiglitz and his collaborators showed that even small deviations from the restrictive assumptions of the competitive model (eg. perfect information) had big effects. Yet the belief persisted among many devotees of the 'free market' that the market economy was 'almost efficient'. As Stiglitz writes: "It was a theological position, and it soon became clear that no piece of evidence or theoretical research would budge them from it." (p.244) The case we make in The Economics Anti-Textbook is that this is, in fact, the view students are invited to accept by textbook authors.