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July 2024

Stiglitz on New Economic Thinking

Stiglitz’ FT interview:

Economist Magazine had a related article on the state of economics:

IN 1996, David Colander of Middlebury College, in Vermont, expressed his dissatisfaction with decades of economics by invoking a lofty analogy. He felt macroeconomists had clawed their way up a mountain, only to discover, when they broke through the clouds, that a neighbouring mountain would have taken them higher.

There was gentle resistance from some well-adjusted economists. Mr Colander’s analogy does not imply that economists are getting nowhere: they can make progress up their chosen peak, even if other, higher mountains beckon. Mainstream models of the macroeconomy, for example, are more sophisticated than they were, allowing for different kinds of shocks, better statistical testing and a variety of dramatis personae beyond the economic Everyman of yore. This progress is the result of hard theoretical work in response to successive rounds of criticism. The critics, who don’t think the climb is worth the effort, may not always appreciate quite how far the leading economists have ascended.

The twin peaks image has a further, unsettling, implication. To get from one peak to the other, economists will have to lose a lot of altitude first. To tackle questions in a fresh way, they may have to set aside many of their favourite techniques and methods. This prospect probably explains a lot of the resistance to new economic thinking. Economists tend to cling to whatever assumptions are required to use the techniques they favour