Recently, Noah Smith wrote an article for Bloomberg View, titled Economics Without Math Is Trendy, But It Doesn’t Add Up.
Smith’s attitude is the following:
- Heterodox economics is vague and neoclassical economists are mathematical geniuses.
- Heterodox authors somehow manage to sneak in some model of the economy.
How about something opposite? That stock flow consistent/coherent models come close to describing the real world and neoclassical models don’t even start in the right foot? The usage of mathematics in neoclassical economics looks silly to me to say the least. Heterodox authors on the other hand have made important breakthroughs with stock-flow consistent models. In these models, the description of how stocks and flows affect each other leading to macrodynamics describing the real world is obtained.
Neoclassical models (which the phrase I use for the “new consensus”) not only doesn’t have anything as mathematical as this but it fails in the first place to identify the correct tools to describe economic behaviour.
Morris Copeland writing in Social Accounting For Moneyflows in Flow-of-Funds Analysis: A Handbook for Practitioners (1996) [article originally published in 1949] said:
The subject of money, credit and moneyflows is a highly technical one, but it is also one that has a wide popular appeal. For centuries it has attracted quacks as well as serious students, and there has too often been difficulty in distinguishing a widely held popular belief from a completely formulated and tested scientific hypothesis.
I have said that the subject of money and moneyflows lends itself to a social accounting approach. Let me go one step farther. I am convinced that only with such an approach will economists be able to rid this subject of the quackery and misconceptions that have hitherto been prevalent in it.
Morris Copeland’s work is what led the U.S. flow of funds which is published by the Federal Reserve every quarter. National accounts have also improved since their first version to incorporate Copeland’s ideas. See the 2008 SNA and the Balance of Payments And International Investment Position Manual, Sixth Edition for example.
Apart from stock-flow consistent/coherent models, models of the economy don’t even come close to describing the economy, because they miss the most important aspect: flow of funds.
So Goldman Sachs’ chief economist, Jan Hatzius for example uses this approach. See his paper The Private Sector Deficit Meets The GSFCI : A Financial Balances Model Of The US Economy, Global Economics Paper No. 98, Goldman Sachs, Sep 18, 2003.
So it is not that neoclassical economists have great mathematical tools. It’s that by failing to incorporate the framework of flow of funds, they are showing their incompetence in mathematical reasoning.