What Will The Conventional Wisdom in Economics Be After 2008?

jk galbraith

I am currently rereading JK Galbraith’s The Affluent Society. It was one of the first books on economics that I ever read and I must say that it is well worth a reread, as there is much in it that I only now appreciate. It is a very rich book filled with interesting insights, not only regarding economics and the nature of economics but also regarding the nature of economists.

In the famous second chapter in which Galbraith coins the now commonplace term ‘conventional wisdom’ we find what I think to be a fascinating discussion. Galbraith starts by, in his own way, telling the reader clearly and in no uncertain terms that economics, together with the other social sciences, is a non-ergodic discipline and cannot be properly approached with the assumption that there exists fixed and timeless relationships. This then leads Galbraith to the interesting conclusion that this allows ample space for emotional or ideological thinking.

Economic, like other social, life does not conform to a simple and coherent pattern. On the contrary, it often seems incoherent, inchoate and intellectually frustrating. But one must have an explanation or interpretation of economic behavior. Neither man’s curiosity nor his inherent ego allows him to remain contentedly oblivious to anything that is so close to his life. Because economic and social phenomena are so forbidding, or at least so seem, and because they yield few hard tests of what exists and what does not, they afford to the individual a luxury not given by physical phenomena. Within a considerable range, he is permitted to believe what he pleases. He may hold whatever view of this world he finds most agreeable or otherwise to his taste. (p17)

There is a lot of truth in this statement. But it is what comes later that is particularly interesting. Galbraith ties this strange status of economics and its inherent enmeshment in what he calls the conventional wisdom with the way scholarship is structured within the discipline. He writes,

The conventional wisdom having been made more or less identical with sound scholarship, its position is virtually impregnable. The skeptic is disqualified by his very tendency to go brashly from the old to the new. Were he a sound scholar, he would remain with the conventional wisdom. (p19)

This is, of course, perfectly true and in this statement many will recognise how heterodox ideas have been pushed to one side for decades in the profession; they have been disqualified on the basis that “this is not how things are done”. One would also think of the profession’s tendency — and in this, the heterodox profession are not completely innocent — of favouring econometric over normal, empirical inquiry. This, I think, constrains economic discourse in a very extreme manner, as the results of such inquiries are often basically meaningless and their structure ensures that real debate does not take place.

Galbraith then goes on to make an interesting statement: he claims that it is not ideas that successfully challenge the conventional wisdom, but rather events. He writes,

The enemy of the conventional wisdom is not ideas but the march of events. As I have noted, the conventional wisdom accommodates itself not to the world that it is meant to interpret but to the audience’s view of the world. Since the latter remains with the comfortable and the familiar while the world moves on, the conventional wisdom is always in danger of obsolescence. This is not immediately fatal. The fatal blow to the conventional wisdom comes when the conventional ideas fail signally to deal with some contingency to which obsolescence has made them palpably inapplicable. (p22)

With this in mind Galbraith goes on to make what I think is his most interesting point in the whole chapter. He writes,

This, sooner or later, must be the fate of ideas which have lost their relation to the world. At this stage, the irrelevance will often be dramatized by some individual. To him will accrue the credit for overthrowing the conventional wisdom and for installing the new ideas. In fact, he will have only crystallized in words what the events have made clear, although this function is not a minor one. (p22)

Here Galbraith has in mind Keynes — or, at least, Keynes as a figure rather than as a thinker — whose individual person became symbolic of the change of ideas brought about by the Great Depression and the Second World War. He makes this clear in what follows.

In [1936], John Maynard Keynes launched his formal assault in The General Theory of Employment Interest and Money. Thereafter, the conventional insistence on the balanced budget under all circumstances and at all levels of economic activity was in retreat, and Keynes was on his way to being the new fountainhead of conventional wisdom. By the very late sixties a Republican President would proclaim himself a Keynesian. It would be an article of conventional faith that the Keynesian remedies, when put in reverse, would be a cure for inflation, a faith that circumstances would soon undermine. (p25)

Naturally, Galbraith thinks this whole drama rather amusing. Keynes, who truly went against the conventional wisdom of his time, was soon installed as the “new fountainhead of conventional wisdom”. In this, his ideas were, of course, formalised and watered down. They became congealed and useless in the hands of, for example, Paul Samuelson and other American neo-Keynesians.

We are now in a period in which the conventional wisdom that ruled from between the late-1970s and 2008 is crumbling. Economists, at least the younger ones and the more sensible ones, are changing their tune to a very large degree. The question then remains: who will be the fountainhead of the new conventional wisdom?

Will it be someone like Paul Krugman who is trying to resurrect the old Samuelsonian neo-Keynesian? This, I doubt. Krugman is a good populariser and much loved by liberals in the US for his politics, but he does not strike me as having the originality of Samuelson. So, who do we turn to then? I will give what I think are the two most likely cases.

The first is that economists turn en masse to some watered down version of Hyman Minsky’s economics. Although this seems like a radical proposal now, I see more and more young economists interested in Minsky’s work. I also see ample possibility that it might be sanitised into some sort of dominant paradigm. In a world obsessed with debt, it would be an easy sell. I can even guess what form it might take: it will focus on the idea that debt drives economic growth — since debt = money, this is not far from a sort of quasi Post-Keynesian form of monetarism.

The other possibility is that Keynes becomes, once again, the new fountainhead of the conventional wisdom. This may be even more appealing to having him be the fountainhead in 1936, because he is dead and can no longer speak; so people can do what they like with his ideas. This is a very strong possibility, I think. And most of the ideas that need to be picked up — like the ISLM — are already intact and waiting to be updated by, say, the insertion of a Taylor Rule. (In fact, David Romer has already done this in a paper where he laments that he has not seen this yet penetrate the textbooks. Watch this space…).

Ultimately, however, these are just speculations. But I think there is a fair chance that I am correct. I am also almost certain that any ideas that truly disturb the conventional wisdom of economics — that is, how it is structured as a discipline — will be scrupulously avoided. And with that in mind I leave the reader with a final quote from Galbraith.

With so extensive a demand, it follows that a very large part of our social comment — and nearly all that is well regarded — is devoted at any time to articulating the conventional wisdom. To some extent, this has been professionalized. Individuals, most notably the great television and radio commentators, make a profession of knowing and saying with elegance and unction what their audience will find most acceptable. But, in general, the articulation of the conventional wisdom is a prerogative of academic, public or business position. (pp20-21)


About pilkingtonphil

Philip Pilkington is a macroeconomist and investment professional. Writing about all things macro and investment. Views my own.You can follow him on Twitter at @philippilk.
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1 Response to What Will The Conventional Wisdom in Economics Be After 2008?

  1. arijitbanik says:

    Another crisis or two in short order would be required before the the storming of the Bastille of Conventional Wisdom would be fruitful in my opinion. Look at the list of possible future winners of the Sveriges Riksbank Prize (e.g. Fama and French) as a leading indicator of how the profession is (not) changing despite the paucity in real world relevance. Will the INET YSI be willing to risk tenure and not publish in standard journals and thus perish by taking the ‘heterodox’ path of most resistance? Of course, I don’t know but would be surprised if there were changes afoot.

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