Friday 9 November 2012

The Strange History of Economics


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These days people like to call neoclassical economics “mainstream economics” because most universities offer nothing else.  The name also backhandedly stigmatizes as oddball, flaky, deviant, disreputable, perhaps un-American those economists who venture beyond the narrow confines of the neoclassical axioms.  To understand the powerful attraction of those axioms one must know a little about their origins.  They are not what an outsider might think.  Although today neoclassical economics cavorts with neoliberalism, it began as a honest intellectual and would-be scientific endeavour.  Its patron saint was neither an ideologue nor a political philosopher nor even an economist, but Sir Isaac Newton.  The founding fathers of neoclassical economics hoped to achieve, and their descendents living today believe they have, for the economic universe what Newton had achieved for the physical universe.

           This brief article roughly traces the strange history of economics from the 1870s through to the beginning of Post-Autistic Economics movement in the summer of 2000.

 

Physics Envy


            Neoclassical economics began as a project to fashion an economic model in the image of Newtonian mechanics, one in which economic agents could be treated as if they were particles obeying mechanical laws, and all of whose behaviour could, in principle, be described simultaneously by a solvable system of equations.  This narrative required the treatment of human desires as fundamental data, which, like the masses of physical bodies in classical mechanics, are not affected by the relations being modelled.  It was to this end -- not to the understanding of economic phenomena -- that homo economicus or economic man and the hedonistic calculus were invented.  Thorstein Veblen sums up the core metaphysic as follows:
the human material with which the inquiry is concerned is conceived in hedonistic terms; that is to say, in terms of a passive and substantially inert and immutably given human nature.  . . .  The hedonistic conception of man is that of a lightning calculator of pleasure and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact.  He has neither antecedent nor consequent.  He is an isolated definitive human datum . . . 1
With this construct at its centre, the dream of a determinate model of the economic universe was realized in the 1870s by William Stanley Jevons and, especially, by Léon Walras, both of whom were in part physicists by training.  Called the model of general equilibrium, this elaborate mechanistic metaphor, proudly devoid of empirical content, remains the grand narrative of economic theory for students and economists everywhere.

            The model, which invariably is expressed in language so metaphorical that it would make a good poet blush, works by laying down a priori, like Euclidean geometry, a set of axioms.
  1. The economic universe is determinate.
  2. It exists in a void rather than in an ecosystem.
  3. All relations in an economy are self-regulating, in the sense that any disturbance “sets in motion forces tending to restore the balance”.
  4. These “forces” result exclusively from the behaviour of isolated individual agents. 
  5. The behaviour of these agents conforms to certain mathematical properties. For example, consumer choice is characterized by transitivity (if X is preferred to Y and Y to Z, then X is always preferred to Z), completeness (out of the set of all possible bundles of goods given her income, she considers her preference between every pair of them) and independence (consumers are not influenced by the choices of other consumers). 

            To their credit, few economists have tried to provide empirical support for these axioms.  Instead this is a realm in which formalistic expediency rules.  The entities of the model and relations between them must be conceived in a way that makes them isomorphic to those of  Newton’s model of the physical universe.  The exigencies of the grand metaphor rule even when the model is, as in the pedagogically popular Marshallian tradition, applied piecemeal and non-mathematically to individual markets.  For example consider the elementary and ubiquitous notion of market demand for a product X.   Because a macro mass is in fact an additive function of its micro masses, neoclassical economics defines market demand as the additive function of the demands for X of individual agents.  But this assumes that everyone’s demand for a product is independent of everyone else’s demand for that product, for example, that one’s choice of a disco is not influenced by whether it is crowded or dead empty.  Without this independence (that is, the absence of all intersubjective effects) market demand as understood by mainstream economics does not exist.  But as everyone knows – even neoclassical economists when they are off-duty-- in consumer societies strong intersubjective effects in markets are the rule rather than the exception.

Veblen and Keynes


            At the very end of the 19th Century, Thorstein Veblen launched a counter-revolution against the growing domination of the neoclassical approach in economics.  Besides critiquing the neoclassical assumptions, he analysed institutions as well as isolated individuals, emphasized emergent social phenomena, argued that habit influenced economic choice more than rational calculation, rejected all forms of reductionism, and stressed the importance of knowledge in economic evolution. This approach steadily gained adherents in the years leading up to WWI, and in 1917 one its leaders, John R. Commons, was elected president of the American Economics Association (AEA).  The following year at the AEA meetings this new school was christened “institutional economics” and embraced by the association as a means of making economic theory capable of addressing the problems of economic development that would follow the conclusion of the war.2   In the 1920s in the US the Institutionalists came to rival the Neoclassicals, but in the 1930s their numbers declined.  Like neoclassical economics, institutional economics had no explanation of or solution to the calamity that had befallen capitalist economies.

            In stepped John Maynard Keynes.  He offered a new theoretical interpretation of capitalist economies that both explained their collapse and pointed to practical measures that would, without interfering with their general principles, get them going again and keep them functioning smoothly.  Given the dire straights of capitalism and the growing fear of revolution, not even neoclassical economists dared for long to keep Keynes’ theory from being given a try.  When it was shown to work, that, at one level, ended the argument.  For example, henceforth all American presidents would in the basic management of the economy be Keynesians.  But at the theoretical level, which in the neoclassical tradition means theory that is axiom-led rather than empirically-led (else their axioms would have been abandoned long ago), the argument had only just begun.  In 1946 Keynes died and neoclassical economists began their counterinsurgency.  This time they would not be satisfied until most economics departments in the world had been cleansed of economists who voiced non-neoclassical ideas.

The Pentagon


            Keynes had trained at Cambridge University as a mathematician.  In his mid-twenties he wrote Treatise on Probability, a book lauded by Whitehead and Russell (“it is impossible to praise too highly”) and that launched what has become known as the “logical-relationist” theory of probability.  When turning his attention to economics, he was shocked by the way mathematical economists abused mathematics, especially applying them in meaningless ways to unsuitable phenomena, and he made no secret of his professional contempt for their empty pretentiousness.  But these economists were soon to have their revenge.  Led by Paul Samuelson in the US and John Hicks in the UK, they set about mathematicising Keynes’s theory.  Or, more accurately, a part of his theory.  They left out all those bits that were inconsistent with the neoclassical axioms.  Their end product was a formalized version of Keynes that is like a Henry Miller novel without sex and profanity.  This bowdlerized version of Keynes, called “Keynesianism”, soon became standard fare in undergraduate courses.  Even graduate students were discouraged from reading the primary text.  With the real Keynes out of the way and Veblen and all the other free spirits forgotten, the road was now clear to establish a neoclassical tyranny.

            Following WWII, the United States increasingly came to determine (one might say dictate) the shape of economics worldwide, while within the United States the sources of influence became concentrated and circumscribed to an absurd degree.  This state of affairs, which persists to the present day, was engineered in significant part by the US Department of Defense, especially its Navy and Air Force.3   Beginning in the 1950s it lavishly funded university research in mathematical economics.  Military planners believed that game theory and linear programming had potential use for national defense.  And although now it seems ridiculous, they held out the same hope for mathematical solutions of “general equilibrium”, the theoretical core of Neoclassical economics.  In 1954 Kenneth Arrow and Gerard Debreu achieved for this mathematical puzzle a solution of sorts that has been the central show piece of academic economics ever since.  Arrow’s early research had been partly, in his words, “carried on at the RAND Corporation, a project of the United States Air Force.”4   In the 1960s, official publications of the Department of Defense praised the Arrow-Debreu project for its “modeling of conflict and cooperation whether if be [for] combat or procurement contracts or exchange of information among dispersed decision nodes.”   In 1965, RAND created a fellowship program for economics graduate students at the Universities of California, Harvard, Stanford, Yale, Chicago, Columbia and Princeton, and in addition provided postdoctoral funds for those who best fitted the mold.  These seven economics departments along with MIT’s, an institution long regarded by many as a branch of the Pentagon, have come to dominate economics globally to an astonishing extent.  Two examples will show what I mean.

            The American Economic Review (AER), the Quarterly Journal of Economics (QJE), and the Journal of Political Economy (JPE), have long been regarded as the world’s three most prestigious economics journals, the ones in which a publication adds the most value to an economist’s CV and most helps an economics department’s ranking and research funding. 

            A study has been made of the affiliation of the authors of full-length articles appearing in these journals from 1973 through 1978.5   For the QJE it found that the eight departments with the most articles were the seven favoured through RAND by the US Department of Defense plus MIT, and that this Big Eight accounted for 77.3 percent of the articles published.  In the JPE  all of the RAND Seven were in the top ten and together with MIT accounted for 63.1 percent of the articles published.  In the AER the top eight contributing departments were again the RAND Seven plus MIT, which together accounted for 59.3 percent of the articles published.  Even within this Big Eight there was an astonishing concentration of success.  In the QJE, which is controlled by Harvard, 33.3 percent of the articles were by Harvard-affiliated authors.  In the JPE, controlled by Chicago, 20.7 percent of the articles were by Chicago-affiliated authors.  In the AER, nearly half of whose editorial board during these years was from, in rank order, Chicago, MIT and Harvard, 14.0, 10.7 and 7.1 percent of the articles were by authors from these departments respectively.  About 70% of the board members were from the Big Eight and nearly 60 percent of the members of the nominating committees for officers.  
Is it any wonder that the departments are “distinguished”? Thus the “best” departments are those who publish in their own journals, which are “best” since they publish the “best” departments.  This academic incest would be considered genetically unsound if it involved biological reproduction.”6

            A glance through the 2003 edition of Penguin’s Dictionary of Economics illustrates the accentuated continuation of this tiny all-powerful closed shop.  The dictionary has entries for 29 living economists.  Of these, 26, 89.7 percent, are from the US or have had all or the most important part of their careers there.  Think about that: 26 for one country and 3 for the rest of world.  And that is in a British publication by a team of three British authors.  And what are the affiliations of the 26 US economists?  100% of them have either taught at or received their PhD from one of the Big Eight.


Notes
1. Thorstein Veblen, "Why is Economics not an Evolutionary Science?" Quarterly Journal of Economics, vol. 12, 1898, p373
2. Geoffrey M. Hodgson, How Economics Forgot History, Routledge 2001, p155
3. This paragraph draws heavily on Michael A. Bernstein, “Rethinking Economics in Twentieth-Century American”, The Crisis in Economics, edited by Edward Fullbrook, Routledge, 2003, pp154-61
4. Kenneth Arrow, Collected Papers of Kenneth J. Arrow: Volume 1: Social choice and Justice, Harvard University Press 1983, p1
5. E. Ray Canterbery and Robert J. Burkhardt, “What do we mean by asking whether economics is a science?”  Why Economics Is Not Yet a Science, edited by Alfred S. Eichner, Macmillan 1983, pp15-40
6. Ibid p28




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