Interview with Geoffrey Hodgson
Geoffrey M. Hodgson is Research Professor in Business Studies at the University of Hertfordshire, UK. His books include From Pleasure Machines to Moral Communities (2013), Darwin’s Conjecture (with Thorbjoern Knudsen, 2010), The Evolution of Institutional Economics (2004), and How Economics Forgot History (2001). He has published over 130 articles in academic journals and he is Editor in Chief of the Journal of Institutional Economics.
In this piece, following what is becoming a standard format for the WEA Newsletter, he answers four questions posed by Stuart Birks.
Q.1 What led you to become a critic of mainstream economics?
My undergraduate degree (awarded in 1968) was in mathematics and philosophy. But I also started reading texts in economics. I have always been critical of key parts of mainstream theory. I was inspired from the beginning by critical writers, including at first Karl Marx, John Maynard Keynes, Piero Sraffa and Joan Robinson. But I took mainstream economics seriously and I tried to understand its core arguments and concepts.
I did not see the problem with mainstream economic theory as primarily one of policy. I learned that the neoclassical framework was quite adaptable, and could lead to different policy conclusions. For example, Pigovian neoclassical exponents of ‘market failure’ supported substantial state intervention. But Chicago-style neoclassical economics were more in favour of free markets. Furthermore, neoclassical theorists such as Oskar Lange, Jon Elster and John Roemer proposed socialist policies.
The fundamental problems lay elsewhere. I can remember being concerned about basic assumptions in both micro and macro. Macroeconomics models around 1970 were very crude. I experimented with some models of my own and I discovered (what we would call now) chaotic effects. With non-linear equations it is possible that the model becomes so sensitive to initial conditions that it becomes unpredictable. Chaos theory had not yet become popular and I lacked the ideas and confidence to explore this further in formal terms. Instead I became enduringly sceptical of the possibility of using models to predict outcomes in economics.
My scepticism spread to heterodox as well as mainstream models. Some Post Keynesian economists – with important exceptions such as George Shackle – were also devoted to the task of prediction. From my naïve belief in the 1960s that prediction was the Holy Grail, by the mid-1970s I took the view that economic systems were generally too complex to forecast. Instead the primary task for economists was to understand how the economic system functioned. It was more about explanation than prediction. Mainstream macroeconomics is now much more sophisticated than it was in the 1970s, but it still tries to ape its own image of physics and focus on prediction.
Disenchantment with most mainstream and many non-mainstream models diverted me into microeconomics. From the beginning I felt uneasy about the mainstream assumption of utility-maximizing ‘rational economic man’. One of my first concerns was that it seemed like an ex post rationalisation of behaviour, rather than its causal explanation. A remark by Joan Robinson in her Economic Philosophy (1964) impressed me. She wrote that utility was a concept of ‘impregnable circularity; utility is the quality in commodities that makes individuals want to buy them, and the fact that individuals want to buy them shows that they have utility.’
But I looked further into her work and that of other Post Keynesians and found very few attempts to develop an alternative account of human motivation to replace textbook utility-maximization. The writings of Marx were also of relatively little help in this regard. Keynes had a few psychological insights; he used terms such as ‘animal spirits’, and emphasized the uncertain nature of much decision-making. This underlined the limits of formal modelling but it did not constitute an adequate alternative theory of human motivation. Although much in Post Keynesian economics is of value, and I still regard myself as a kind of Keynesian when it comes to macro issues, its failure to develop an adequate alternative micro led me in a different direction.
In the late 1970s I came across the work of Herbert Simon, who was awarded the Nobel Prize in Economics in 1978. I found his work engaging and important. He has remained an enduring influence. But his consideration of the social, cultural and institutional context of decision-making was underdeveloped. I thought that institutions were important, and I was looking for something more.
In the early 1980s I began reading the works of Thorstein Veblen and other original American institutionalists. Among the many attractive features of Veblen’s writing were his critiques of utilitity maximisation and his use of alternative, Darwin-inspired psychological theories from William James and others. I also studied works in evolutionary economics by Richard Nelson and Sidney Winter, and new institutionalists such as Ronald Coase and Oliver Williamson. Also Friedrich Hayek’s emphasis on problems of knowledge had an impact on my thinking. By the publication of my Economics and Institutions book in 1988 I regarded myself as an institutional and evolutionary economist.
I had reached this point by becoming a critic not only of mainstream economics but also of much non-mainstream thinking. I still think that heterodox economists have paid far too little attention to the task of providing an alternative and well-grounded theory of human motivation.
Q.2 Did you face much opposition from other economists?
Intellectual opposition is often a good thing. Science often progresses by putting new ideas under strong critical scrutiny. The ideas that survive have been tested in the crucible of informed criticism.
Much worse than opposition is silence. When I raised the problem of developing an alternative theory of human motivation in the late 1970s and early 1980s my heterodox friends were polite, but showed more interest in other things, such as capital theory controversies or macroeconomic modelling. Policy controversies got heightened, especially after the watershed elections to office of Margaret Thatcher in 1979 and Ronald Reagan in 1980. For many economists (including myself for a while) policy issues were a diversion from foundational theoretical tasks.
When I raised my criticisms of rational economic man with mainstream economists, their reaction was typically straightforward. The polite ones would simply say that my ideas were interesting, but that they were not economics. Economics, they alleged, was founded on the Robbins-style assumption of an individual chooser and utility-maximiser. If one chose to abandon this assumption, then one had to abandon economics. Take it or leave it. Go into sociology, or whatever.
By the 1990s it became more respectable for mainstream economists to challenge the assumption of utility-maximisation. But as Philip Larkin wrote in his poem ‘Annus Mirabilis’ about sex in the 1960s, this was ‘too late for me’. Furthermore, as mainstream economics became more tolerant of a few different assumptions, it narrowed in style and substance. It became increasingly interested in mathematical technique rather than real-world relevance. The only theory jobs in good departments of economics seemed to be in general equilibrium analysis, until the fashion quickly switched to game theory. Neither was my passion or forte.
By 1990 my problem was not that my ideas had met fierce opposition, but that they were not taken seriously by enough colleagues. I had a reasonable job in a lowly-ranked new university. But moving-on was increasingly difficult. In 1992 I gave up my professorial title and moved to an ordinary lectureship in the new business school at the University of Cambridge, with a mediocre salary. Doctrinally it offered a much more tolerant environment than any prominent department of economics. But after just over six years at Cambridge (and my shock discovery that its business school was not such a research-orientated institution as I had previously imagined), I moved to my current position. I was given a better salary and much more time to develop my research.
I can handle opposition. My career hurdles have been of a different nature. My struggle has been to find more time to develop, modify and strengthen my ideas. I have been exceptionally fortunate since 1999 in that I have been given this vital space and support from my university.
Q.3 Are there any practical applications of your work?
I would like to describe myself as an economic theorist, but that phrase has been hijacked by the mathematicians. Nevertheless, and notwithstanding my conceptual and philosophical orientation, I have always been concerned to develop theory that might eventually have real-world applications. But I do not believe that all research has to demonstrate immediate practical relevance, as many governments and funding agencies seem to think nowadays. If that were the case then few sciences would have made much progress since the eighteenth century.
As well as looking at fundamental problems of human motivation, and particularly in institutional contexts, I have been keen to help develop alternative, over-arching theoretical frameworks. I believe that these play a crucial role in the transition from one paradigm to another. For example, as Philip Mirowski has demonstrated in his 1989 book More Heat than Light, neoclassical economics was constituted by borrowing a conceptual framework with its formal content from late nineteenth-century physics. Physics envy is still prevalent in mainstream economics, exhibited by the enduring over-emphasis on building predictive models. For a long time I have been trying to help change the core paradigm, and this partly explains my interest in evolutionary ideas.
Theoretical paradigms – including neoclassical economics – operate at different levels. An over-arching conception of the world plays an omnipresent role, even if researchers don’t write about it much. Descending from this highest level, there is what the sociologist Robert Merton described as ‘middle-range theory’. This in my understanding means bridging the theoretical and the empirical. It does not mean testing everything in a theory: that in principle would be impossible. But it does mean using the theory to make claims that are open to empirical testing or scrutiny. The descent from high to middle-range theory typically involves the adoption of auxiliary assumptions that make key claims testable.
With the help of PhD students and others I have made some forays into middle-range theory. Some of us are trying to develop middle-range discourses that sit below more abstract work on the generalisation of Darwinian principles to cover socio-economic evolution. (The high theory is presented in Darwin’s Conjecture (2010), which I co-authored with Thorbjørn Knudsen.) For example, we are developing middle-range theories in order to understand the evolution of firms and industries. We add hypotheses concerning firm adaptation and selection, and these have been tested using survey data within the over-arching conceptual framework.
Other bits of my work are amenable to empirical testing. For example, my conception and emphasis on habit is similar to that of psychologists such as Wendy Wood in the United States. She and her colleagues have conducted some powerful experiments showing the role of habit.
From 1989 I published several articles on the institutional foundations of economic growth. They include econometric tests. In 2006 I published another empirical article on the transitional economies, addressing institutional determinants of post-1990 growth. Since 2000, rising stars like Daron Acemoglu and James Robinson have got similar empirical institutional work published in leading American mainstream journals. But they are much better econometricians and their work surpasses my earlier efforts.
Policy issues are also important. In my 2013 book From Pleasure Machines to Moral Communities, I address matters of policy, using an evolutionary approach incorporating moral components. With the backing of strong evidence from other researchers, I claim that economic agents are often morally motivated as well as self-interested. The non-utilitarian arguments in that book are applied to areas such as business management, corruption, the health sector, and environmental policy.
But I must also raise some qualms about policy debates. For half a century I have been in contact with economists like myself who are critical of the mainstream. It has always struck me that among the heterodox there has been an abundance of policy stances, but a famine of sufficiently viable alternative theory. Pronouncing on policy is too easy. We are all concerned about growing inequality, rising unemployment, job discrimination, poverty, underdevelopment and many other ills. Heterodox economists have done much good empirical work in these areas, but so too have mainstream economists.
One has to show how different theoretical approaches vary in robustness or lead to different policy outcomes. Many heterodox economists would claim to have done just that. For example, I recently attended a conference in Poland that included a few sessions on the great Marxist-Keynesian economist Michal Kalecki. One speaker developed a three-sector Kalecki-type macro-model and showed that if wages were increased then employment would not decrease. He then claimed that rising wages are not the cause of unemployment. But he had not demonstrated that. Instead he had shown that rising wages would not lead to unemployment in his model, but not necessarily in the real world. The big question concerning how one can claim that results from an artificial model apply to real-world circumstances was ignored by the speaker.
This illustrates a weakness of many attempts by heterodox economists to develop theoretical alternatives to inform policy. Mainstream economists can simply brush three-sector and other limited models aside, claiming (often rightly) that their own models are more sophisticated and can (say) accommodate far more economic agents. To shift modelling in a different direction one has to displace the mainstream paradigm. It is in this respect that the challenge for dissident economists is at its greatest, and where (so far) efforts have been weak or sparse.
Q.4 How do you see economics evolving?
In 1997 the late Mark Blaug pronounced in an article that ‘modern economics is sick’. He argued that economics ‘has increasingly become an intellectual game played for its own sake and not for its practical consequences for understanding the economic world. Economists have converted the subject into a sort of social mathematics in which analytical rigour is everything and practical relevance is nothing.’ Three years earlier, but for different reasons, Paul Ormerod had published a bestselling book entitled The Death of Economics.
As the joke goes, old professors do not die, they simply lose their faculties. Economics is not dead, but (at least in university departments of economics) it has clearly lost its senses. The Great Crash of 2008 passed it by, regarded by many as an unfortunate blip that required relatively minor adjustments to its models.
The greatest world financial crisis since the 1930s jitters on, but even students of ‘money and finance’ are taught little about crucial debates on the nature of money (and its possible relation to state sovereignty) or about real-world banking and financial institutions.
In the half century that I have been involved with economics, the whole style and substance of the discipline has changed. In the 1970s economics in some senses was a more open discipline. Although narrow core assumptions were used to define the subject, it embraced quite different areas of discourse. While mathematical economics was on the rise, there were frequent discussions of the history of economic thought, economic history, philosophy and much else. A faculty member of a department of economics was still expected to have some knowledge of other disciplines. As Keynes wrote in 1924:
the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher — in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of a man’s nature or his institutions must lie entirely outside his regard.
This, for Keynes, was the lofty ideal, which he found expressed in Alfred Marshall and a few others. But while the rest of us will never rise so high, this ideal is a benchmark to measure our achievement. By these standards of inter-disciplinarity, economics has been on a downward slide at least since 1950.
Hence the problem with modern economics is not simply the dominance of mathematical technique. An impairment that it shares with other disciplines is of over-specialisation at the expense of synthesis and a strong, over-arching, inclusive discourse. We have now what Uskali Mäki describes as the ‘new kiosk economics of everything’.
Specialisation may partly explain the aforementioned increase in tolerance concerning some basic assumptions. Behavioural economists do their thing and rational choice theorists sit close by and do theirs. This arrangement works as long as they have sufficient communality of aim and style. Most in the mainstream seem to agree on the foremost aim of prediction, and on model-building as the foremost means to that end.
Positive-feedback loops have worked their wicked way within the discipline. Unlike much ordinary discourse, mathematics is always right or wrong. So excellence in mathematics is used as the principal screening criterion in academic journals, faculty appointments and student enrolment. This leads to a discipline that is more mathematically inclined, and henceforth likely to enforce such criteria more stringently. And so it goes on, like the evolution of the peacock’s tail. It has now lasted for a generation or two, and the economics professors of today bear little academic resemblance to their predecessors of the 1970s.
But I must emphasise that I am not against the use of mathematics in economics. My objections are to the types of mathematics that dominate, the way mathematics crowds out other modes of discourse, and its exclusive use as an ritualistic selection mechanism to determine the priesthood in our discipline.
Any undergraduate with an inkling of Marshall- or Keynes-like vision will be put off by the standard fare at all levels. Many courses in economic theory have become dry, mechanised and boring. They generate model-driven questions with yes/no answers, rather than training economists to grapple with messy, real-world complexity.
It is hard to see how this vicious circle can be broken. But an insistence on the complexity of economic phenomena, on the prevalence of uncertainty, and on the heterogeneity of agents is a vital first step. The standard post-Robbins view of economics, as being about optimal decisions facing well-defined choices with adequate information, has to go. The real world, with its complexity, uncertainty and information scarcity, has to be brought to bear on economic reasoning.
Another vital recommendation is for greater dialogue with other disciplines. In particular, viable rationales for the division between economics and sociology have now disappeared. Yet rapport between these two disciplines remains rare. Sociology can teach economists a lot about how financial and other institutions work. Similar remarks apply to psychology, philosophy, history and other subjects. Economists have often treated other disciplines as areas for ‘imperialist’ invasion, in the sense of attempting to show that neoclassical assumptions can be imposed on the chosen territory of the discipline. But especially after the financial crash, economists should have more humility. Instead of merely imposing their ideas on other territories, economists should learn from other disciplines.
Models have to be put in their place alongside conceptual, philosophical, historical and other considerations. We need to be able to criticise assumptions and discriminate between models. Given that decisive empirical tests are rarely possible, other factors have to be taken into account when evaluating different models. Broadly-trained judgement is vital.
I have no more than a glimmer of hope that such measures will take hold, and thereby cure economics of its sickness. Maybe for a many years the more broad-minded economist will have to retreat to havens in business schools, economic sociology, economic geography, innovation studies and elsewhere.
Perhaps that is not so remarkable. In 2012 the BBC screened an interesting series by Stephanie Flanders on three of the greatest-ever economists – Karl Marx, John Maynard Keynes and Friedrich Hayek. Significantly, Marx and Keynes were never employed in a department of economics, and Hayek spent most of his adult life in other quarters. Economics has always had a life outside departments of economics. Perhaps it is there that it will be reborn.
The interviewee thanks Bruce Caldwell, Denise Dollimore, Francesca Gagliardi, Stephen Herman, Thorbjörn Knudsen, Uskali Mäki and Deirdre McCloskey, for useful feedback on earlier draft answers.
From: Pp.9-12 of World Economics Association Newsletter 2(6), December 2012 https://www.worldeconomicsassociation.org/files/newsletters/Issue2-6.pdf