Liberals compete for the soul of economics

The main economic debate in the coming years will play out between two competing trends in liberal economic thinking


Photo: Bloomberg
Photo: Bloomberg

In 2015, Forbes writer Adam Ozimek suggested that a “new liberal consensus” is forming in the economic-policy world. The data back him up. Many economics professors now tend to favour government intervention in the economy more than the general public. And the profession’s biggest public stars, from Paul Krugman to Thomas Piketty to Joseph Stiglitz, are now more likely to lean to the left than to the right. Meanwhile, I’ve tried to document the flood of new research showing that policies like public housing, welfare and public education spending are more beneficial than conservatives have recognized in decades past.

But there are not one, but two big trends in liberal economic thinking. One wants to modify the economic thinking of the past few decades, and the other wants to rip it up. I expect to see a lot of the economic debate in the coming years play out not between the left and right, but between these two strains of thought.

The research and people I’ve been writing about fit into what we might call the New Centre-Left Consensus. This strain of thought is based on data and empiricism. Support for higher minimum wages, for example, has grown among economists because a large amount of careful empirical analysis has shown that minimum wage hikes don’t usually cause sizable immediate disruptions in local labour markets. These economists aren’t ignorant of the basic theory of labour supply and demand. They just realize that it might not be the right theory in this case.

The New Centre-Left Consensus is attractive to academics and policy wonks. It draws on an eclectic mix of mainstream economic theory, empirical studies and historical experience. It refuses to assume, as many conservatives and libertarians do, that free markets are always the best unless there is a glaring case for government intervention. It’s more willing to entertain all kinds of ways that government can improve the economy, from welfare to infrastructure spending to regulation, but it also recognizes that these won’t always work. It embraces a philosophy of careful experimentation. Sometimes the new centre-left is in favour of deregulation—for example, loosening zoning restrictions and reducing occupational licensing. It’s not ideologically opposed to the free market.

The best evangelist of the New Centre-Left Consensus might be US President Barack Obama. In an amazingly well-informed editorial in The Economist, he recently laid out a comprehensive picture of the economy and policy. I have little doubt that Obama’s understanding was heavily informed by his chief economic adviser, Jason Furman, who has become a titan of centre-left policy advocacy. Obama mixes a healthy respect for capitalism with a desire to use government to temper the market’s excesses.

But there’s a second strain of progressive economic thinking that is gaining attention and strength. This alternative could be called the New Heterodox Explosion. It’s basically a movement to purge mainstream economics from progressive policymaking and thought.The New Heterodox Explosion rose in large part out of strongly left-leaning intellectual circles, particularly sociology, the humanities and other disciplines outside economics. It has also found a home in the economics departments in other countries (most notably the UK). Recently, it has started to permeate blogs and the media.

The new website Evonomics, for example, is heavily devoted to strongly worded critiques of the entire edifice of modern economics and it’s where the work of many of the most outspoken champions of the New Heterodox Explosion appears. These include evolutionary biologist David Sloan Wilson, activist and venture capitalist Nick Hanauer, speechwriter Eric Liu and Eric Beinhocker of the Institute for New Economic Thinking. In a spate of recent blog posts and editorials, these thinkers have advocated replacing mainstream economic theory with thinking based on evolution, and/or on complexity theory.

Though it’s difficult to boil down these critiques to a few sentences, one basic theme of Wilson, Hanauer, et al’s thinking is that modern economics is based on selfishness. Mainstream theories model human beings as atomistic individuals pursuing their own wants. But, say these Evonomics writers, people are social beings who care a lot about their fellow humans, and are also deeply embedded in larger social structures and organizations like communities, nations and cultures.

I’m sympathetic to this point of view. I’m not at all sure that economies can be completely understood by looking at individual decisions, any more than I’m certain the growth of a tree can be understood simply by looking at the motions of the particles in the leaves and roots. And I do wish that economists dedicated a lot more thought and attention to the phenomena they call “externalities” and “social preferences”.

But I’m also very wary of applying the Evonomics ideas to policymaking without a lot more work. First, the connection to evolution and complexity theory often seems less than solid. Nobody really knows if economies evolve the way organisms do. And efforts to connect complexity theory to economics, led by the Santa Fe Institute, have been going on for quite some time without any dramatic breakthroughs.

So while the New Centre-Left Consensus is fully formed and ready for application in the real world, the New Heterodox Explosion is still in its infancy. Centre-left ideas have tons of very careful academic empirical work behind them, while those wishing to tear up economics and start over are still working mostly with broad analogies. I hope that the New Heterodox Explosion—which of course extends far beyond the few writers and ideas I’ve cited in this post—becomes a rich source of new and innovative economic ideas. But it still has a long way to go to match the intellectual heft of the centre-left. BLOOMBERG

Noah Smith is a Bloomberg View columnist.

Comments are welcome at theirview@livemint.com

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