Harvard Starts Its Own PAECON Against Mankiw


Several correspondents have just told me that some of Greg Mankiw’s students at Harvard are staging a walkout from his first year class. They’ve written an open letter to Mankiw to explain why:

BySteve Keen

An Open Letter to Greg Mankiw

I applaud them for this move. Mankiw’s various economics texts are among the most simplistic of the many neoclassical textbooks that parade this flawed paradigm as a flawless jewel of human reasoning. I’m delighted that his students have taken the rebellion against this paradigm to one of its key promulgators.

I did likewise forty years ago–against far less well-known advocates of neoclassicism. At the time, I probably knew as much as these students do today of the enormous literature that establishes how fallacious neoclassical theory is, and which of course neoclassical texts like Mankiw’s completely ignore.

These students will undoubtedly be told that they have misunderstood and misjudged both the theory and Mankiw’s course–which I was also told when I revolted against Simkin’s economics at Sydney University back in 1972. They are certainly lacking knowledge of the literature–and they rightly attribute this to the “education” they are receiving in Mankiw’s course:

A legitimate academic study of economics must include a critical discussion of both the benefits and flaws of different economic simplifying models. As your class does not include primary sources and rarely features articles from academic journals, we have very little access to alternative approaches to economics.

Already, another student has published a rebuke to these rebels along the lines that they don’t appreciate the depth and wisdom in the subject:

In Defense of Ec 10

The following extract from this defence is worth highlighting–for the sake of the argument being made by the rebels. The author observes that much of the course follows Mankiw’s text, in which there is a summary of ten main points of neoclassical wisdom:

Sections largely follow The Principles of Economics by N. Gregory Mankiw, and to reconstruct what students learn at these class meetings, I dug out my notes from freshman year. Here are the supposedly biased takeaway points that Mankiw’s propaganda machine pounds home in section:

  • Trade and specialization of labor can make society better off.
  • Demand curves slope downward and supply curves slope upward (usually).
  • Sometimes, things happen that make demand curves and supply curves shift.
  • Comparative statics can be a useful way of thinking about how changes in some variables will affect changes in other variables.
  • Some goods are elastic–more volatile to changes in quantity consumed for a given price change–and some goods are inelastic.
  • Taxes, subsidies, price floors, and price ceilings can change equilibrium outcomes, and sometimes this causes deadweight loss.
  • Tariffs and quotas often cause a loss in total social surplus.
  • Externalities cause free-market outcomes to be different from socially optimal outcomes.
  • Public goods are neither excludable nor rival.

I won’t indulge in a root-and-branch critique of the entire list, but there are just a few that are provably false:

“Demand curves slope downward”

There is a convoluted procedure used to prove that individual demand curves slope downwards, but it has been proven, in what are known as the Sonnenschein-Mantel-Debreu conditions, that a market demand curve can have any (polynomial) shape at all. Here’s an extract from the Handbook of Mathematical Economics on that one:

First, when preferences are homothetic and the distribution of income (value of wealth) is independent of prices, then the market demand function (market excess demand function) has all the properties of a consumer demand function . . .

Second, with general (in particular non-homothetic) preferences, even if the distribution of income is fixed, market demand functions need not satisfy in any way the classical restrictions which characterize consumer demand functions…

The importance of the above results is clear: strong restrictions are needed in order to justify the hypothesis that a market demand function has the characteristics of a consumer demand function. Only in special cases can an economy be expected to act as an ‘idealized consumer’. The utility hypothesis tells us nothing about market demand unless it is augmented by additional requirements. (Shafer, W. & Sonnenschein, H., (1982). ‘Market demand and excess demand functions’, in K.J. Arrow, and M. D. Intriligator (eds), Handbook of Mathematical Economics (Vol. II), North-Holland, Amsterdam, pp. 671-693)

“supply curves slope upward (usually)”

This has been empirically disproven by so many researchers that it’s simply an insult to intelligence that economists continue peddling this. The last one to empirically falsify this propostion–unintentionally I might add!–was Alan Blinder:

The overwhelmingly bad news here (for economic theory) is that, apparently, only 11 percent of GDP is produced under conditions of rising marginal cost

Firms report having very high fixed costs-roughly 40 percent of total costs on average. And many more companies state that they have falling, rather than rising, marginal cost curves. While there are reasons to wonder whether respondents interpreted these questions about costs correctly, their answers paint an image of the cost structure of the typical firm that is very different from the one immortalized in textbooks.” (105) (Blinder, A. S. (1998). Asking about prices: a new approach to understanding price stickiness. New York, Russell Sage Foundation., pp. 102, 105; emphases added)

“Comparative statics can be a useful way of thinking about how changes in some variables will affect changes in other variables”

Comparative statics assumes that the economy is normally in equilibrium, and will return to it after a disturbance. That is utterly ignorant of the wisdom now accumulated in the area known as complex systems, in which the norm is for most dynamics systems to be in a state of permanent disequilibrium.

So, “Concerned students of Economics 10″, you have every reason to be concerned. Now, as the uninformed advocates of neoclassical economics try to brow-beat you into submission, dive in and learn the literature that establishes that your gut-feelings about the theory are right.