I claimed to be a methodological individualist – and I think that’s a useful way of thinking about the world on Saturdays – but on Wednesdays something changes. Let me explain that idea. [Roger E. A. Farmer]
In 2017 I gave a talk at the University of Greenwich where I met Phil Armstrong. Phil was finishing up a PhD in economics at the University of Southampton Solent and he asked me if I would agree to be interviewed for his dissertation on heterodox economists and to recruit some other mainstream economists to be interviewed for the book. Having recently written a piece that aimed to reunite Post-Keynesians with New-Keynesians, Phil figured that that I would be a good person for that role.
Phil and I met up again at a pub in York in 2018 where I was giving a talk at the York Festival of Ideas. We had a very pleasant and substantive interview that Phil’s daughter transcribed and that appeared in Phil’s book Can Heterodox Economics Make a Difference, published by Edward Elgar in 2020. I encourage everyone to read the book. If you have access to a university library with a subscription to Elgar Online, the complete book is available to read electronically. Even if you do not, the chapter featuring myself, and the chapter featuring Tim Congden, are open access and are free for anyone to download. Here is a link to the Table Of Contents, and a link to the biographies of all the economists interviewed for the project.
The interview is quite long but I have broken it down into four manageable parts for readers of my blog. I have made a few edits to each of the posts to make them more concise but the original interview in its entirety is available here. I plan to put out a different part each week. Here is the first part.
Part 1: On Economic Methodology
PA: Thank you for doing the interview. Which field of economics do you consider to be your specialism?
RF: Macroeconomics
PA: And within that specialism, what would you consider to be the main issues relating to your field?
RF: Oh, there are many. Much of my career has been spent on introducing beliefs as an independent driver of business cycles. I’m particularly interested in business cycles, business fluctuations, inflation, interest rates and unemployment – how those things are all related to each other – and how the fact that beliefs matter should shape our approach to economic policy.
PA: Quite a wide range there! How would you describe the underlying axioms or principles of your view?
RF: How long do you have?
PA: As long as it takes, within reason…
RF: Oh, goodness. I think that, to a large extent, I’d say methodological individualism, with lots of caveats. So, let me tell you how I think about that, and this is going to be a discursive discussion. If you go back to ‘what is methodological individualism?’ I take it to be the notion that a human being pops into the world at the age of eighteen with a preference ordering that makes him or her capable of making choices over every conceivable option that they might ever face in their life. That view of a human being arrived into economics sometime in the 19th century when Walras started to formulate the notion that markets work well.
There were other schools in England – but the Lausanne School in Switzerland – specifically Walras, developed general equilibrium theory, followed by Pareto who introduced the notion of what it means for an outcome to be good in some sense. What Walras and Pareto were doing at that time was formalising Adam Smith’s notion of the invisible hand. In order to do that, they needed a concept of choice – if markets work well – what does that mean? What it means to Pareto is the very narrow sense that market economies are not wasting things. Now in order to develop that idea, you have to have – first of all – a concept of what people want. That’s where the notion of a human being as a preference ordering enters economics.
There’s another notion of a human being that predates Walras and can be found in the work of Adam Smith. Smith wrote ‘The Wealth of Nations’, but he also wrote ‘The Theory of Moral Sentiments’, which contains a view of human nature that is the furthest thing from the notion of a selfish human being that you can get. The selfish human being is very useful for thinking about economic liberty, and in particular, the efficiency of markets. However, it’s not at all useful for thinking about another component of the role of individuals in society, and that’s political liberty. The development of general equilibrium theory by the Lausanne School is the point where economics breaks off from the other social sciences.
I have a view, now somewhat unfashionable, that John Stuart Mill’s essay ‘on liberty’ should be on the reading list of every high school and university. In Mill’s essay, it’s impossible to think of a human being in the same way that a person is pictured in Walras and Pareto because Mill’s conception of liberty is that you and I can change our minds. When we have a conversation – and we’re having one now – and you tell me, “Roger, I’m a modern monetary theorist for these reasons”, and I say to you, “Philip, that’s nonsense, because…”, and I give you an argument ... and perhaps the argument changes your mind; or maybe not. Maybe you respond with an opinion that causes me to change my mind and, as a consequence of that conversation, I go out into the world and do something differently. I make a choice that was not the same one I would have made before we had the conversation.
If you come from the view of homoeconomicus developed by Walras and Pareto, the only way that you can conceive of what just passed in our conversation is that one of us acquired information that was not previously in our information set; information that helped us to make the choices that we would otherwise not have made. Now that, I think, is not a very useful way of thinking about conversations. Conversations, that is, human interactions, change our preference orderings.
I claimed to be a methodological individualist – and I think that’s a useful way of thinking about the world on Saturdays – but on Wednesdays something changes. Let me explain that idea.
The framework I use to think about macroeconomics goes back to John Hicks. Hicks wrote ‘Value and Capital’ where he develops a concept that today we call temporary equilibrium theory.[1] People meet on Saturdays. They bring some goods to market. They make choices, they have beliefs about what they think is going to unfold in the future and there’s some mechanism by which they trade. In temporary equilibrium theory that mechanism is the Walrasian concept of market clearing. People go away and they come back next Saturday, and they trade again.
Almost all macroeconomics can be thought of in that framework, whether you’re a heterodox economist, a classical economist, or any other flavour of economist. Different schools of macroeconomic thought have their own views about how people trade on Saturdays. If you’re an economist, all you need to develop a theory of the macroeconomy is a conception of time and a model of how economic transactions occur. Other social scientists don’t see the world in the same way.
A sociologist or a political scientist is not going to be comfortable with Hick’s notion of temporary equilibrium theory as a complete description of economic interaction in markets because they have a different view of the nature of human beings. The economist’s view of human beings and the sociologist’s view are perfectly consistent with each other. They describe different aspects of human interaction in social structures.
The way to integrate the economist’s and the sociologist’s concepts of human beings is to think about sequences of interlaced interactions. On Saturday we all go to market and trade with each other; given a fixed set of preferences. Then, on Wednesdays, we read a newspaper, or we read a book, or we have conversations. You open your iPad and you go on the internet – the social interaction that ensues changes the preference ordering that you take to the market on the following Saturday. Now, economists have been very opposed to thinking about changing preferences, simply because once you take on that point of view you lose the ability to make value-free judgements about market allocations. The preferences you have might be changing. Economists want to believe that preferences are fixed because they want to make value-free statements about what is – and what is not – a good social outcome.
PA: Well, some answers will be longer than others, that’s absolutely fine. In your work, to what extent would you say that history has a role to play?
RF: History is important – but so is the history of thought, so is mathematics and so is statistics. I’ve been asked many times if economics is a science, and my answer to that question is that it’s definitely a science, but it’s not an experimental science. Macroeconomics, in particular, is a little bit like sitting in the late nineteenth century, assembling a group of chemists, giving them an unknown substance and saying, ‘What is that? Find out what it is. But you can only conduct three experiments a century, and you can’t read the research notes of your predecessors.’ The history of thought is analogous to the research notes of our predecessors. The three experiments I refer to are big natural events like the Great Depression or the stagflation of the 1970s, and I would count the Great Recession we’ve just been through as the third big experiment in the last century.[2] These big natural experiments shake up the way we think.
History is important because it represents our data. It is to a macroeconomist what a record of the heavens is to an astronomer. Neither astronomers nor macroeconomists can conduct controlled experiments. Nature conducts those experiments for us.
Mathematics is also an important skill because it ensures that our thinking is logically consistent. I think it was Marshall who wrote a letter to Bowley, he of the Edgeworth-Bowley Box; do you know that letter?
PA: I don’t know the letter – I know about the Edgeworth Bowley Box, but not the letter.
RF: Marshall’s letter is a statement to the young Bowley about the uses of mathematics, and roughly speaking, he says, “Figure out a good problem, a good idea, and formalise it with mathematics.” And then – I may be getting the order wrong here – “… translate it back into English and throw away the mathematics. Next look for some examples, and if you can’t find any good examples, throw away the English.”
As a profession we’re not very good at following Marshall’s advice. I use a lot of mathematics in my own work. As far as possible I try to bury it in the appendix, but there are just some parts where you can’t do without mathematics. There’s good economic writing that uses mathematics, and there’s bad economic writing that uses mathematics. An example of good economic writing is anything Ken Arrow ever wrote; the mathematics is there, but it’s explained in words, it’s not superfluous, and it’s key to everything he writes. For bad uses of mathematics in economic writing, read 90% of any modern economics journal.
PA: Didn’t Marshall put most of his maths in the footnotes?
RF: Yes, I think that’s right.
Stay tuned for Part 2 on Monetary Theory
[1] (Hicks, 1939).
[2] I am editing this transcript in March of 2020 and I would add a fourth natural experiment; coronavirus. The effects of that event are playing out as I write, and it is certain to be transformative for macroeconomics in ways that will help us sort between alternative theories.
