What is New in Economics?

I started my formal studies of econoimcs in 1979, and I earned my PhD 10 years later in 1989, and started teaching and research.  During my undergraduate and graduate studies I was exposed to a great number of ideas in economics --- classical economics (Smith and Say in particular), Austrian Economics, Virginia Political Economy, the Swedes, Chicago Price theory, UCLA property rights theory, UCLA coordination Keynesianism, post Keyensianism and radical subjectivism.  While I studied the ideas in these schools of thought intensely, I was also constantly trying to see how these older ideas fit with the exciting developments taking place in economics at the time.  I wrote papers (some published some not) during the 1980s and early 1990s on institutionalism, post Keyensianism, New Classical, New Keynesianism, New Growth, New Market Socialism, the New Learning in IO, and the New New Welfare Economics.  I was particularly fascinated by the writings of Joseph Stiglitz --- who I still consider the most challenging theorists of his geneation, though I do often find Bob Lucas's writings to also possess a certain logical consistency that demands the utmost respect.   I have disagreements with these "New" developments, but I also think they were major jumps forward in knowledge from the existing mainstream theory from which they departed.

G. L. S. Shackle refers to the period of his education and slightly after as the years of High Theory, and with the Nobel Award to Paul Krugman for New Trade Theory, I started to wonder whether my own educaitonal time was one also of years of High Theory ---- just look how many developments during the 1975-1990 period are described as "New".  New Classical, New Keynesian, New Trade, New Growth Theory, etc.

Since 1990, what do you consider to be the best economic theory innovations?  In my opinion, most of the developments since then that have captured our professional imagination are empirical questions and techniques, not theoretical innovations --- but perhaps I am wrong. Give your nominations --- but don't just list a name, but lets discuss the core insight the name is supposed to capture.

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P.S.: I do also want to call to everyone's attention the paper by David Skarbek that I linked to the other day.  Nobody commented on it, but I think the paper has an amazingly interesting result.  Hayek is the second most cited Nobel Prize winner behind only Arrow and ahead of Samuelson.  Please do comment on David's paper and what you think it means.

Comments

[Bob]

My nomination would be Behavioral Finance. The efficient markets are dead.

[Peter Boettke]

Bob,

Not sure that is technically the right way to think about behavioral finance. Look at Andrei Shleifer's book, Inefficient Markets. Of course, first-best efficient markets are out. But as Shleifer's points out, just because first-best efficiency is out the door, markets still can be effective devices for marshalling incentives and signalling information.

Anyway, I agree behavioral finance is one of the developments from 1990 that has been huge. One could also argue that complex adaptative systems (but that is more a technique than an idea).

Let's focus on ideas in economic theory since 1990.

Pete

[Mark]

In my view Peyton Young's work on the evolution of social norms may be the most promising and exciting work of the 1990s though at the moment it remains fairly abstract.

I also admire the work of Avner Greif. The theoretical innovation in his work does not lie in the modelling which is quite standard but in the attempt to derive theoretical explanations of historical institutions. I think this goes beyond what Douglass North and others achieved in the 1980s.

[matthew mueller]

I'm still trying to work my way up to 1990! I think I'm currently stuck somewhere in the 1940's.

[Tony]

I think Agent Based Computational Economics is a fascinating frontier of econ that is not heavily discussed but will become more fruitfull as it matures.

[Roger Koppl]

Pete mentioned complexity and Tony mentioned ACE. Pete suggested complexity is more technique than theory. I think complexity counts as an innovation in theory. You could say it's from before 1990, but the complex I volume came out in 1988 and the complex II volume was 1997. Lately, I've become a particular enthusiast for Velupillai's "computable economics." I give a user friendly introduction in a 2008 JEBO book review. In 2007 Velupillai came out with a really important result on decidability in policy:
Velupillai, Vela. 2007. “The Impossibility of an Effective Theory of Policy in a Complex Economy,” in Salzano, Massimo and David Colander (eds.), Complexity Hints for Economic Policy. Milan, Berlin, and elsewhere: Springer. He shows that if the economy is complex in the technical sense of "a dynamical system capable of computational universality," than an "effective theory of economic policy is impossible" for that economy. The term "effective" have a technical meaning from Goedel-type math. Basically, it comes down to the idea that you can't predict the results of policy. That's huge IMHO.

In an article in a recent number of _Entrepreneurship Theory and Practice_ I say, "Velupillai’s argument seems to have led him to an appreciation of Nobel laureate F. A. Hayek’s “lifelong skepticism on the scope for policy in economies that emerge and form spontaneous orders” (p. 288)." Thus, computable economics lets you pull an important epistemic result out of the math on computability. That's theoretical, new, and important.

[Roger Koppl]

Oops, I forgot to mention Mark's comment on another complexity guy, Peyton Young. Right on to that, too. I think David Colander is right to say that complexity has won the day.

[Eric]

Velluplai, an Austrian? Or even, sympathetic to Austrian ideas? I beg to disagree.

http://www-econo.economia.unitn.it/new/pubblicazioni/papers/7_03_vela.pdf

See especially, pp. 69-74.

[Eric]

You must be a very indulgent person, Dr. Koppl! (Let me add that I consider Vellupilai's criticism of your papers to be flawed.) Typical case of someone who does not really grasp Austrian economics before criticizing it.

[Pete Murphy]

My nomination is my own theory, which links population density and per capita consumption, predicting that rising unemployment and poverty are inescapable consequences of a population density which rises beyond some optimum level. Such consequences are also imported when a reasonably populated country attempts to trade freely with one that is much more densely populated.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at OpenWindowPublishingCo.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)

Please forgive me for the somewhat spammish nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

Pete Murphy
Author, "Five Short Blasts"

[Roger Koppl]

Haha! Thanks, Eric. I do think Velupillai was off the mark in his stabs at me. He got me, though, on a couple of embarrassing gaffes such as (face palm) mixing together the names of Walras father and son. You praise my patience, but you gotta take the truth from whence it comes.

I think Velupillai always had a pretty good appreciation for Hayek as an important and serious guy and so on. But it looks to me as if his appreciation for Hayek's knowledge arguments ramped up considerably with the 2007 impossibility result I cited. I view that as really good news. And it suggests that his understanding of what we call "Austrian" economics may be (or have become) lots better than his stabs at me would suggest. If so, why worry about a couple of unfortunate criticisms here and there?

He and Markose have both taken seriously the idea that you can make Hayekian points with the math of computability, proof theory, and so on. They have emphasized impossibility, whereas Robert Axtell has talked about "hard" computations. I like the impossibility results better, personally.

[Peter Boettke]

Roger,

This is probably going to be somewhat counter-productive, but my problem is that the work that you are pointing to are not recognized as breakthroughs in the same way that say Paul Roemer's New Growth Theory was recgonized as a breakthrough. And that is what I was asking for. All of these developments are "at the edge" of the professional acceptability. Certainly Peyton Young is important. But to point to work by David Colander is to point to "out of sync" economics and one might as well as point to you or me! Heck I produce PhD students, who then can produce PhD students (sort of how an idea gets legs and why the game is played this way).

I agree to a large extent with the intellectual excitement you have for BRICE, but I don't consider those movements the same way that Colander and Rosser do --- they are NOT changing the way we do economics, they are interesting ideas that some economist use. But Andrei Shleifer changes the practice of economics; Daron Acemoglu changes the practice of economics; Steve Levitt changes the practice of economics. Brian Arthur, Peyton Young, etc. do not (for good or bad is a different issue).

What ideas have proven themselves to have legs in the realm of theory since the wave of "New" in the 1975-1990 period? That was my question. Did you and I live through our own Years of High Theory with everything from New Economic History and New Institutionalism and New Learning to New Classical, New Growth, New Trade, and New Keyensianism.

Pete

[Roger Koppl]

Pete,

I'm afraid your "out of sync" remark is just wrong. I didn't point to Colander as an exemplar of frontline theory. I expressed agreement with his judgment that complexity has won the day. Hardly the same thing! David himself asserts his lack of influence and has embraced Craig Friedman's description of him as a court jester -- telling truths that proper courtiers cannot.

I think complexity theory counts as, well . . . theory. And it has changed practice as you can see from the journals. I'm surprised you consider Rob Axtell, Paul David, Brian Arthur, Herb Gintis, Buz Brock, Steven Durlauf, and so on to be "at the edge of professional acceptability." You do acknowledge the importance of Peyton Young.

I'm not disparaging Shleifer (upon whom I build after all) or Acemoglu or others. Of course not. I'm not saying there is only complexity and all else must be cast out. I'm just saying it fits the category you asked about, which seems pretty hard to deny. It seems as if you want to resist that notion and I don't really "get" that.

[Eric]

You can add Ken Arrow to your list (Axtell, David, and so on), Dr. Koppl! Ken Arrow was one of the founders of the Santa Fe Institute. One can hardly say that Arrow is at the edge of professional acceptability. He's the most cited Nobel Prize (cf. Boettke's post scriptum).

There's something that bothers me in this kind of discussion, the tendency to conflate "good" or "best economic theory" with citations counts, professional acceptability and other criteria. I am not an Austrian economist (but merely someone who reads Austrian economists just like I read the writings of other economists), but if I were one, I would recall that neither Mises nor even Hayek, let alone Rothbard, were widely accepted or cited in the 1940s through the 1960s. So, good, sound, or best economics does not necessarily equate with all kinds of artificial criteria. I also recall reading a superb comment by Israel Kirzner a few years back: "To be given a recipe for converting the profession overnight to sympathetic support for Austrian economics, might indeed be to live a heady dream. But the euphoria associated with such a dream would derive from the pleasure of seeing the validity of one's scientific conclusions finally confirmed by a respected audience-not from the empty pleasure of being applauded in what is, at best, nothing more than a Keynesian beauty contest (in which the objective is not to vote for the most beautiful of the contestants, but for the contestant who commands the most votes in the contest)." Fortunately, the vast majority of Austrian economists today do not seek the empty pleasure of being applauded in a Keynesian beauty contest.

[Roger Koppl]

Good point on Arrow, Eric. You're right, I should have listed him, too.

Your quote from Kirzner is great. I don't recall seeing that before. I don't know if Israel would object, however, to paying attention to the sociology of the profession. Science is an exercise in persuasion, so you've got to know who's who and so on. I don't think we should let the sociology of science crowd out truth seeking. But you do need to know the score, I think.

Hayek and Mises were important figures who played important roles shaping post-war orthodoxy. There was indeed something of an Austrian eclipse between, say, 1940 and 1974. But the big guys were inside players. Mises' neglect in America was not as bad as it it sometimes made out to be. He didn't come here until he was just about retirement age. He refused to live anywhere but NYC. And he seems to have been difficult regarding interviews and such.

[Robert]

Where would remaking economics in the light of game theory fit? Before your time, during the period of the question, or still a program that will be completed?

[Eric]

Dr. Koppl, Kirzner's comment appeared in his contribution to a symposium edited by Peter Boettke on Heilbroner and Milberg's "The Crisis of Vision" (Advances in Austrian Economics, 1997).

[Roger Koppl]

Thanks for the cite, Eric.

I'm not sure to whom Robert's question was directed. I would say, anyway, that it has been and continues to be an ongoing process still to be completed. Somewhere around 1980 began a second stage for game theory, when it became more accepted and used than previously. Behavioral and evolutionary game theory increased the use and, IMHO, utility of game theory. Now its just part of how we all think. I don't know what it would mean to say we're "done" integrating game theory thinking or tools into economics or social science, so I figure there's more to come in that regard.

[Pedro P Romero]

Another economist to look at is Axel Leijonhufvud here a paper that was published in the Economy as an Evolving Complex system Vol. II Santa Fe Inst. series. Anderson et. al.
http://www-ceel.economia.unitn.it/staff/leijonhufvud/files/macro.pdf

We might ask: why Arrow and Leijonhufvud would care about 'heterogeneity' in agents and markets as Complex Adaptive Systems? Both came from 'mainstream' schools and were finishing their careers when got involved in these ideas. Arrow even had a Nobel...due to his development of the GET very conventional approach.

Another case: Hayek in the Monetary Theory and Trade Cycle even in Prices and Production but specially in the first part of the Pure Theory of Capital... emphasized the equilibrium approach... as a 'necessary' benchmark... but the very same Hayek since 50s and 60s moved more towards The Theory of Complex phenomena...not just to explain or understand spontaneous order. But also to explain the evolution of institutions...

[Pedro P Romero]

"As I wrote in my first letter, one of the most fertile areas in economics is the modelling of complexity. Three examples: the evolution of firms; the development of national economic clusters such as South Korea’s memory chip industry; and the spread of social norms like honesty, obesity or smoking. These new complexity models are producing brilliant new results despite riding roughshod over psychological insight."
That is not from someone from SFI but from Tim Harford...debating about behavioral economics...belos the link.
http://www.prospect-magazine.co.uk/article_details.php?id=10359

[Peter Boettke]

Roger and others,

Excuse me, but I asked a specific question about breakthroughs in economics. I personally think many of the ideas that are being discussed are interesting, I am not sure how "new" they are. But I do know they are NOT breaking through in the same way that say "New Classical Economics" or "New Growth Theory" or "New Trade Theory" did. So Roger, I repeat, these are slightly out of sync contributions. They are not coming from the top 10, let alone top 5 departments (while there are 15 to 20 schools who all claim to be top 10, the top 5 are amazingly stable (though in no particular order) Harvard, Chicago, Stanford, Princeton, MIT). This is where the real action is at in terms of changing the direction of professional research in economics.

Now there are mechanisms by which the out of sync idea can become the new major fashion of the moment, but you will need to explain how that is being done in these cases. I just don't see it (I am willing to admit I might be wrong). But is there a John Bates Clark Award I am unaware of, etc.

Pete

[Roger Koppl]

Pete,

You're kidding, right? The original complexity guys were Stanford professors, namely David and Arthur. Anyway, you keep moving the goal posts, so I'll let this be my last word on the subject.

[Eric]

Uh? Complexity theory is not breaking through in the same way as New Trade Theory and New Growth Theory are? You cannot be serious...

Krugman's The Self-Organizing Economy (1996) is one of the most amazing work that builds upon complexity theory and increasing returns - and applies them to economic geography. His paper in the AER, Complex Landscapes in Economic Geography, did the same, at a more sophisticated level though. In the same way, what would New Growth Theory look like without increasing returns? OK, there are different varieties of increasing returns and complexity, but this is true of so many issues in economics. Aren't there different varieties of subjectivism, e.g.?

An additional word on "fashion". As I said above, I do not quite understand this fascination with fashionable ideas, and especially the equation between good economics and fashionable ideas (which is dead wrong according to me). In his famous attack on equilibrium economics, Kaldor wrote that "Each year new fashions sweep the " politico-economic complex " only to disappear again with equal suddenness... These sudden bursts of fashion are a sure sign of the " pre-scientific " stage, where any crazy idea can get a hearing simply because nothing is known with sufficient confidence to rule it out."

Complexity theory and increasing returns may not be fashionable as other areas of research in economics are (I'm tempted to say, Thanks God!), but one thing is clear (and Kaldor did stress it in his paper), the difference between the new fashions which appear only to disappear a few years later, and increasing returns or complexity, is that the latter imply a " a major act of demolition", "[a genuine] destr[uction] of the basic conceptual framework" of economics. It will thus take time to make its impact felt-even though it has already done so in areas such as New Trade Theory or New Growth Theory.

Anyway, like Dr. Koppl, this is my last word on the subject.

[LVDH]

But note that Hayek had already cited Gödel´s results a couple of times, and had since long developed an interest in cognitive science, complexity science etc. so yes this is plainly Austrian, or at least Hayekian...