How to make sense of so many conflicting theories and ideas in the field with an open mind? Is every school of economic thought as valid as the rest?

Question

'm a junior economics major and lately I've been in a sort of crisis because I feel like I'm not sure what economic ideas I believe in anymore. Don't get me wrong, I love reading anything that has to do with the subject. Thing is, I just feel like, for somebody as skeptical as me, it's tough to remain convinced of anything I learn. I used to blindly agree to mainstream econ when I first started studying this, but then I was introduced to different schools like Marxism, the Austrian School, New Keynesianism etc. and it made me realize things are not as simple as I supposed they were. Now, however, I feel like I don't have the tools to discern what is good and bad economics. Sure, I know marxist theory or austrian theory are not exempt of criticisms, but neither is orthodox economics. And what's worse is that I feel I'm not capable of criticising them on my own: I always depend on somebody else's analysis of the state of modern economics, his/her interpretation of Marx and Von Mises, etc etc.; so I don't know how much to trust their opinions either.

And I look around me and it seems as if everybody I study with just CHOOSES what to believe in (Austrian/Keynesian/New Classical/etc) instead of deeply analyzing all theories and accepting what seems to be the most rational school of thought for them.

So in summary, what is there to do for me? It's like there's a counterpoint for every argument and I'm not capable of sorting out on my own which is more reasonable. Is there anything I could read to find out what different methodologies each school of thought uses, where exactly do they differ and how scientifically valid are their theories?

I'm not sure if I'm asking for too much, but I'd honestly appreciate any kind of response.

Answer 1

This is how I view it. At the very core of economics, is each and every human on this earth making decisions he or her thinks are in his or hers best interest. In real life, we do not calculate utility before making a decision or compute any expected values; we do what feels right at the moment.

Taking the cross-section of human decisions, economists try to make sense of it all, and ultimately deduce some theory that resembles a law of physics to shed light some basic insight into the human condition.

This is a mighty hard task; near impossible. Its amazing to me we've made any progress at all, yet here we are.

As a field of knowledge, economics will never explain the world perfectly in whole, because the nature of what we study is far from perfect and certainly stochastic. There will never be a unified theory of economics, but that does not mean the small pieces of insight each economics paper tries to uncover is trash. It is still valuable to use what the data can tell us, to the best of our ability, to guide our future decisions, and analyze the decisions we've made in the past.

If anything, its interesting as hell.

Answer 2

You've asked a rather broad question. In a way, what you've asked, is "how do we learn?"

more than one tool for the job

Do you believe in circular saws? Do you believe in handsaws? How can you believe in both, when they both claim to do the same job, but are completely different things?

how not to pick an economic philosophy

At our worst, we humans pick an economic philosophy based on whatever suits our prejudices. So, for example, some people love Hayek, because he gives them a pseudo-intellectual justification for being selfish pricks. Some people love Hayek, because he offers an internally-consistent logic and offers the (false) hope of being able to ignore all the complexity in the real world in favour of some simple rules. Others love Marx or Friedman or some other icon for equally bad reasons.

the thing that makes it dismal, is what makes it so interesting

Economics done well can be a science. It's a pretty dismal science, and one reason for it being dismal, is that we rarely get chance to carry out controlled experiments in lab conditions; and even when we do, we know that the very fact that they've been carried out in lab conditions is very distorting, so we only learn something distorted about the real world. Another reason it's so dismal is that whenever we do empirical observations of the real world, the observations are very distorted, the effects we observe may only be weakly linked to what we think are causes, and there can be quite a time lag in between, during which lots of other things happen that might interfere with the result.

more than one tool for the job (reprise)

Another analogy. Something unknown is concealed inside a black box. Over time, we manage to implant some lenses in the fabric of the box, so that we can see what's inside, through each lens. Each lens is heavily distorting, and dirty, as well as looking in from a different angle. The inside of the box look completely different through each lens. Is one lens right and all other lenses wrong? How can we make sense of it all? The Austrian School is one lens; the neo-classical another; and so on.

Here's an analogy that Ben Goldacre wrote recently, for epidemiology; and it can be equally true of empirical economics:

We’ve found 12,000 switches hidden around the house. Some of them turn this lightbulb on, some of them don’t; some of them only work sometimes; and some of them work sometimes, but twenty years after you flick them. Some of the switches only work, sometimes, twenty years later, if one of the other switches is flicked too (and at the right time). In any case the wiring’s rusty, everything’s completely different in the house next door, and by the way there are lots of people selling spare bulbs who tell lies about houses, switches, and fingers.

we are are the best economists we can be, when we are the most scientific we can be

So, how do we learn, in economics? How do we weigh up these different paradigms? One way of looking at it, is to take the view that the process of science is of collecting observations, and building useful models out of them; and that that should be Economics' process too. In which case, we need some test(s) of what makes a model useful. So far, the best we can do, is to ask - which models enable us to make better decisions? And that largely means the same thing as: which models give us better predictions about the relative benefits of two or more different courses of action?

no shame - Bayes all the way

I'm a Bayesian. I make no bones about it. It's not an economic paradigm. It's a meta-paradigm - it gives us a way of choosing the right paradigm for the task at hand; it's based on ruthlessly rigorous mathematics; and it does seem to work rather well. The process is to constantly update our beliefs, based on available information. And to devise experiments that will give us the most new information to enable that updating process to happen.

Answer 3

"Is there anything I could read to find out what different methodologies each school of thought uses, where exactly do they differ and how scientifically valid are their theories ?"

About Marx :

• I heard the first and best critique of his theory is from the Austrian Böhm-Bawerk, "Karl Marx and the close of his system" (1896, in english here : https://archive.org/details/karlmarxandclos00macdgoog)

• Joan Robinson, 'An essay on marxian economics' (1942, http://digamo.free.fr/robimarx.pdf) compares Das Kapital, the neoclassical economics of her time and keynesianism. It is quite clear but does not give definitive answers.

About the debates in macro between Post-keynesian and neoclassicals :

• the models produced on each "side" are very aggregate models, and that means that they can hardly be interpreted as more than "parables"

• you can have a look about the debates on Keynes' concept of "underemployment equilibrium" : Modigliani, Patinkin, Clower, Leijonhufvud. The outcome seems to be that this concept is dubious and that one has to choose between underunemployment in disequilibrium and "full-employment" equilibrium.

About method in general :

• I think you should always be looking for "microfoundations". That does not mean that the economy has to behave like a "representative agent". It means that whatever aggregate behavior you're talking about, you should be able to explain how it comes from the interactions of the behavior of groups and individuals. This does not mean writing the decision as the outcome of maximization under constraint, but you should be able to explain this behavior in some reasonable way. If you can not do this (and often it is not easy) about an aggregate behavior, then just say you observed it and don't pretend you explained it.

• Be careful about the equilibrium assumption. It is not implied by the other traditional assumptions of standard theory. It is a very strong assumption with not much to support it, except that we need "equilibrium equations" to solve the models.

• But even if you assume equilibrium, the general equilibrium model will not tell you much. Cf Sonnenschein theorem. So be careful about aggregation too.

P.S. I gave the references which I think are the best ones, but probably not the easiest ones. P.P.S. I have nothing specific to say about Austrians, sorry.

Answer 4

I think its great that you have discovered all these different economic theories, Marxism,Austrian school, Keynesianism and you should learn them all as some variation of each influences the world today.

It seems you are asking which one do I use as my worldview and in summary I would say none of them, because then you would be following an ideology.

I used to be a Marxist and then I evolved into an advocate of the Austrian school of thought, today I am neither.

What I am suggesting here is you understand the strengths and limitations of each school of thought.

Since the last ideology I clinged to before I liberated my mind and decided to live in the real-world with the real-economy was the Austrian school, until I realized the limitations of the markets just as I realized the limitation of the State with my previous ideology.

Let's take a look at the limits of both.

This idea that the market and/or the state can fix what's broken runs into intrinsic limits of both structures.

The States ontological imperative is to ceaselessly expand its control and budget, lest anything outside its control become a threat. In integrative stages, this expansion appears beneficial, potentially yielding some version of the much admired Scandinavian model of the state managing a vibrant private sector to provide generous universal welfare benefits to all.

But that is not the present story of life at least here in the United States.

Let's just say history has not been kind to states that continue to expand complexity, regulation and enforcement in disintegrative eras, especially expansions funded by borrowing money on a vast scale.

Now the Austrian school and its libertarian followers of which I used to be one would agree with what I just wrote but here is where I part ways with them.

Markets are intrinsically incapable of differentiating between much very different things.

For example, in the logic of the market, the last schools of wild tuna fetch a nice price for being scarce, while farmed fish offer a ready substitute. But wild fisheries, being the complex ecosystems that they are, are qualitatively different from fish farms. The market equates the two because it is incapable of valuing ecosystems and externalities such as biodiversity. Markets price scarcity and demand in the present moment and thus they are ontologically incapable of valuing everything that cannot be reduced to a price discovered by supply and demand.

For many people like me, social cohesion, shared purpose, meaningful work and a great many other essential components of the social construct we call the economy are important, but these things cannot be reduced to a market, despite best efforts.

So on the left we have those who believe the answer is Universal Basic Income, which is essentially a more entrenched welfare system for all, funded by higher taxes on the wealthy. This would give everyone the money needed to buy more goods and services, that is, expand aggregate demand, thus driving growth which drives prosperity, but resources are finite so infinite growth is impossible and this is why you have innovative thinking investors and other wealthy people waxing on and on about nanotechnology, alternative energy, space exploration, life extension, biological engineering, robotics, distributed manufacturing, artificial intelligence, computer science and virtual reality.

The investors that tout the above topics believe that the problem is that markets have been hobbled by the state and the solution is simple: free markets will solve all problems by discovering the price of everything and thus incentivize everyone to develop substitutes for whatever is scarce, farmed fish substituted for wild fisheries, solar panels and wind turbines for oil, raw materials on Mars and other planets. The belief is that unfettered markets will drive growth which drives prosperity.

Let's take these beliefs back in time with us to the Western Roman Empire circa 456 AD, 20 years before the final implosion of the empire. Alternatively, we could go back in time to the Qing Dynasty China in 1892, 20 years prior to the final collapse of the dynasty. What ailed both of these systems was not a lack of aggregate demand or hobbled markets; these systems were structurally brittle and fragile, completely lacking the flexibility and adaptability needed to navigate non-linear upheavals.

So of the two unrealistic solutions, on the left we have more entrenched welfare with Universal Basic Income and your Marxists, socialists and others are on that side of the fence and on the right we have the unfettered markets thinkers such as the Austrian school and other neoliberal economists. What I find interesting about both sides is that their solutions don't require any changes in the power structure.

So what I am saying to you is, read all of it, study all of it and then live your life and see what seems applicable and what does not. You may come to one set of conclusions now and as you gain more life experience and read more and study more, you will slowly but surely gain a healthier understanding and require even less the asking of the question, which ideology should be my life-preserver?

In short, believe nothing, study everything, arrive at your own conclusions. Best wishes.