'Shoots of Spring'
No one would call Berkeley's George Akerlof a heterodox economist, but his ideas have always been iconoclastic. Back in the 1960s, he noticed that there was something systematically wrong with the market for used cars. His insight was that the problem was "asymmetric information"; the dealer knew if the car was a lemon, and you didn't. Initially no journal would accept his paper "The Market for Lemons," but eventually it was published to much acclaim, and asymmetric information was recognized as a serious breakthrough. He shared the 2001 Nobel Prize for his work on the topic.
Akerlof's AEA address was titled "The Missing Motivation in Macroeconomics," and its purpose was to argue that the basic theory of human behavior upon which neoclassical economics rests is incomplete and that the incompleteness leads to a host of theoretical errors. The "missing motivation" of the title were social norms, people's conceptions of how they should act, which Akerlof argued played a central role in people's economic activity. Once these social norms are integrated into economic theory, Akerlof argued, many of the anti-Keynesian arguments made by Friedman and his ilk begin to fall apart. "The Keynesians based their models on their observation of motivations," Akerlof notes, "rather than on abstract derivations. If there is a difference between real behavior and behavior derived from abstract preferences, New Classical economics has no way to pick up those differences. In contrast, models with norms based on observation will systematically incorporate such behavior." Writing in the New York Times, Louis Uchitelle said the talk could "push prevailing economic theory further away from the free market approach that has generally held sway for the last four decades."
If the heterodox economists were nonplussed or only grudgingly positive about the speech, many mainstream economists weren't psyched about it either. NYU's Mark Gertler told Uchitelle that Akerlof was "stepping out of line," and one Chicago School economist I e-mailed said he "hated it" and added that it had made one of his colleagues "depressed."
The word "depressed" caught my eye. You only get depressed by something you disagree with if you think others are going to find it persuasive--that is, if you think that the pendulum isn't swinging your way.
"There's a recognition that it's pretty hard to believe in the rational expectations and equilibria which were sold to students in the 1980s, when you had to read them, and not only read them but send them up as your benchmark," Thomas Palley, the former AFL-CIO economist, told me. "In 1983 there were more voices and more possibility, but the world was closing. Now we're coming from a black hole and there are shoots of spring."