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TheStateofModernEconomics
TheProblems
with
Formalism
Interview
with
Mark
Blaug
36 1998
Challenge/May-June
The ProblemswithFormalism
1998
Challenge/May-June 37
withMarkBlaug
Interview
V^^ Whatexamplescanyounameinwhichevidencehasbeen
overwhelming and yeteconomicshas notabandoneda theory?
A. Rationalexpectations and thenewclassicalmacroeconom-
ics.Theimplication thatno government policycan possiblyin-
fluencetherealoutput,income,and employment ofan economy
has beenrefutedagainand again.And thecontrary evidenceis
indeedacknowledgedtoa considerable extentbythosewho are
theleadingspokespersons forthisclassicalmacroeconomics. Yet
newclassicalmacroeconomics is stilltaughtinall thetextbooks,
and thereare stillmanymacroeconomists who go on fervently
believingthatnew classicalmacroeconomics is based on a firm
foundation and thatpeopleindeedholdexpectations rationally
Thereis eventheevidencein thestockmarkets.Stockmarkets
areone ofthebestplacestotesttheidea because,ofall markets,
theyaretheonethatmostmotivates peopletobe wellinformed.
Yetthe stockmarketis litteredwithanomalies,withmarket
bubbles,whichareimpossibletoexplainifall tradersinthestock
marketholdexpectations rationally
Q. In yourarticlein thisissue ofChallenge you makemuchof
formalmodelingand theevolutionfromtheworkofKenneth
Arrowand GerardDebreu.Whydo you believethatsuchfor-
mal mathematical modelinghas takensuch a firmhold? Why
has theprofession gonein thatdirection?
A. I willgiveyou thestandardanswer,althoughI thinkitis a
verydifficult issue.Thisis a deep questionaboutthehistoryof
ideas. How did we get like this?If I could answerthatques-
tion- ifI thoughtI could confidently answerit- I would cer-
tainlyrushto printwiththe answer.I am not surethatI can
confidently answerit.Buta standardapproachamongpeople
who have thoughtaboutthisis that,sometimeafterWorldWar
II,economicsbegantomodelitselfafterhardscience.Itwanted
tobe theonesocialsciencethatlookedexactlylikephysics.This
38 1998
Challenge/May-June
The ProblemswithFormalism
Wehaveturnedeconomicsintoa kindofsocial
mathematics.
1998
Challenge/May-June 39
withMarkBlaug
Interview
40 1998
Challenge/May-June
The ProblemswithFormalism
1998
Challenge/May-June 41
Interview
withMarkBlaug
So itappeareda wonderful
exampleofelegantquasi-mathematical
proof,anditseemedtoelevateeconomics almostimmediately toa
subjectrather
likemathematics, appliedmathematics.
certainly
Q. You arguethatsuchmodelsrequirehighlysimplifiedas-
sumptionsin orderto work.And you pointout that,ifthese
assumptionsare relaxed,theconclusionsdo nothold up. But
do economiststryto relax these assumptionsand testtheir
conclusions?
A. Yes.Therearemanyeconomists who lookat relaxingthese
assumptions."Letus see ifwe relaxtheassumptions - willthe
answerstillhold?"Butthiscanbecomeratheralarming because,
Wespendlittletimestudying
theinstitutional
in whichmarkets
structures areimbeddedand
withoutwhichtheycannotwork.
42 1998
Challenge/May-June
The ProblemswithFormalism
1998
Challenge/May-June 43
Interview
withMarkBlaug
in data,surveyingpeople,askingopinion,monitoring behav-
ior- yes,all ofthat.
Q. In theUnitedStatesthereseems to be some movement
towardmoreempiricalexperimentation anywayHave youno-
ticedthis?
A. I thinka movetowardexperimental economicsis veryhope-
ful.The amazingthingis the enormousresistancethatit has
encountered.
Q. Whatexamplecan you nameofthat?
A. Talkto anyoftheleadingexperimental economists.They
willtellyou abouttheenormousresistancethattheirworkhas
run into.It is veryhard to push experimental economicsbe-
cause you arerunningagainstthisgrainofformalmodeling.It
has made forwardprogressin recentyears,but I am amazed
how difficult it has been to interesteconomistsin it and how
littleofitis partofmainstream economicsas taughtin graduate
school.
44 1998
Challenge/May-June
The ProblemswithFormalism
1998
Challenge/May-June 45