Did Economics “Go Wrong?”

A couple of recent books by well-regarded journalists – Binyamin Appelbaum and Nicholas Lemann, have blamed economists for the current state of the world. Reviewing these in Foreign Affairs last week, the peripatetic New York University economist Paul Romer embraced the authors’ judgments and added his own.

Having lost track of the distinction between positive and normative economics (is vs. ought), the profession has come to think of itself and be thought of by others as a tribe of philosopher-kings, Romer wrote. Citing the OxyContin epidemic and the 2008 financial crisis, he summed up in “The Dismal Kingdom

Simply put, a system that delegates to economists the responsibility for answering normative questions may yield many reasonable decisions when the stakes are low, but it will fail and cause enormous damage when powerful industries are brought into the mix. And it takes only a few huge failures to offset whatever positive difference smaller, successful interventions have made.

A third book, Where Economics Went Wrong: Chicago’s Abandonment of Classical Liberalism, by economists David Colander and Craig Freedman (Princeton, 2019), mentioned by Romer, hasn’t received as much attention. It sets out the case in detail, with clarity and in depth.  A fourth book, In Search of the Two-Handed Economist: Ideology, Methodology and Marketing in Economics, by Freedman (Palgrave 2016), offers the deepest dive of all, but hardly ever comes up outside of professional circles (where it is often discussed with hand-rubbing, lip-smacking  enthusiasm, thanks to the extensive interviews it contains).

Accoding to Colander and Freedman, economics began to go off-course in the 1930s, when it embraced an ambitious new program that came to be known as “welfare economics,” replacing the “classical liberalism” of John Stuart Mill. The new framework developed slowly, led by John Hicks and Abba Lerner at the London School of Economics, Arthur Pigou at Cambridge University, and Paul Samuelson at Harvard University and The Massachusetts Institute of Technology, but in the 1950s, seemed to virtually take over the profession, coming to be associated simply with the macroeconomics of John Maynard Keynes.

The new framework was conducted with mathematical and statistical models instead of arguments about moral philosophy and curiosity about, even respect for, existing institutions. Believing itself to be an understanding superior to what had gone before, This new approach – now simply “the new economics,” abandoned the traditional firewall between science and policy.

Irked and, for a time, flummoxed by welfare economics’ assertiveness, especially in its Keynesian form, young economists from all over congregated at the University of Chicago, starting in 1943.  Led by Milton Friedman, George Stigler, and Aaron Director, they began to look for flaws in Keynesian doctrines, which they viewed as “a Trojan horse being used to advance statist ideology and collectivist ideals,” Colander and Freeland say.

Secure in their belief that markets could, to a considerable extent, take care of themselves, thanks to the powerful solvent of competition, the Chicagoans responded to normative science with more stringent normative science. They devised an alternative “scientific” pathway that would lead to their intuited laissez-faire vision.

“Because of their impressive rhetorical and intuitive marketing skills, the Chicago economists eventually managed to engineer a successful partial counterrevolution against [the] general equilibrium welfare economic framework,” write Colander and Freedman. But embracing cost-benefit analysis required abandoning the tenets of debate focused on judgements and sensibilities – “argumentation for the sake of heaven,” as the authors prefer to put it

So what does a present-day hero of classical liberalism look like? Colander and Freedman cite six well-known exemplars: Edward Leamer,  who wrote a classic 1983 critique of scientific pretension, “Taking the Con Out of Econometrics”; Ariel Rubinstein, a distinguished game theorist who describes models as no more compelling than economic fables; Dani Rodrik, a rigorous trade theorist who asked as long ago as 1997, Has Globalization Gone Too Far?; Nobel laureate Alvin Roth, who likens the role of many economist to that of an engineer;  Amartya Sen, another laureate, recognized for his “scientific” work on collective decision-making but honored for his policy work on the development of capabilities; and Romer, another laureate perhaps better known for his biting criticism of “mathiness,” akin to “truthiness,” among leaders of the profession.

All are excellent economists.  But almost certainly it was not the economics profession that led the world down a garden path to its present state of discombobulation. In his Foreign Affairs review, Romer asserts,

For the past 60 years, the United States has run what amounts to a natural experiment designed to answer a simple question: What happens when a government starts conducting its business in the foreign language of economists? After 1960, anyone who wanted to discuss almost any aspect of US public policy – from how to make cars safer to whether to abolish the draft, from how to support the housing market to whether to regulate the financial sector – had to speak economics. Economists bring scientific precision and rigor to government interventions, the thinking went, promised expertise and fact-based analysis.

Far more persuasive were the natural experiments conducted in the language of the Cold War. They include the rise of Japan in the global economy; the decision of China’s leaders to follow its neighbors’ example and join the global market system; the slow decline and rapid final collapse of the Soviet empire; the financial-asset boom that followed Western central bankers’ success in quelling inflation; the globalization that accompanied a burst of “deregulation”; the integration that accompanied the invention of computers, satellites, and the Internet; and the escape from extreme poverty of 1.1 billion people, a seventh of the world’s population.

Rivalries among nations were far more influential in precipitating these changes than were contests among Keynesians and Monetarists, even their magazines and television debates. Political choices produced the present world – grass roots, top-down, and everywhere in between. Economists scrambled to keep up.

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