HISTORY-ECONOMIC THOUGHT 125 (001) (Fall 2020)

1

Introduction

WHY DID NO ONE SEE IT COMING?

On 5 November 2008, Her Majesty Queen Elizabeth II was opening a new building at the London School of Economics. Speaking of the credit crunch, she turned to some of the economists present and said, `It's awful. Why did no one see it coming?' Journalists, not constrained to be diplomatic, were more forthright in condemning economists. For Anatol Kaletsky, one-time economics editor of the Times, `Economists are the guilty men' (the Times 5 February 2009). The economics editor of the Guardian, Larry Elliott, claimed that `as a profession, economics not only has nothing to say about what caused the world to come to the brink of financial collapse ... but also a supreme lack of interest' (the Guardian 1 June 2009). Writing in the same newspaper, Simon Jenkins attributed this failure to the fact that `Economists regard it as their duty fearlessly to offer government what it wants to hear. ... Don't rock the boat, says the modern profession, and the indexed pension is secure. The whole economics profession, he contended, had `suffered a collapse (12 November 2008).

Even more significantly, prominent economists have argued that the profession has gone astray. Nobel Laureate Paul Krugman, whose academic career has taken him through some ofthe world's leading economics departments - MIT, Yale and Princeton - has endorsed the view that blame for the crisis falls on economists as well as on financiers, bankers and policy makers. His assessment is that `the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth' (New York Times 6 September 2009). The charge is serious because Krugman is arguing not just that economists got something wrong but also that their failure was deeply rooted in values that are at the heart of the profession.

These are not isolated criticisms. They reflect widely held attitudes, not just in Britain, but also in the United States, Europe and, no doubt, in most countries affected by the economic crisis. Following one of the biggest economic policy failures since the 1930s, the economics profession is getting a bad press. Yet only a few years ago, the image it presented to the public was very different - that of a discipline that was not just successful but also overflowing with confidence. Economics was the key to understanding everything, as the titles appearing in bookstalls revealed: Everlasting Light Bulbs: How Economics Illuminates the World (Kay 2004); Freakonomics: A Rogue Economist Explains the Hidden Side of Everything (Levitt and Dubner 2006); More Sex Is Safer Sex: The Unconventional Wisdom of Economics (Landsburg 2007); The Logic of Life: The New Economics of Everything (Harford 2008); The Economic Naturalist: Why Economics Explains Almost Everything (Frank 2008).

The changed attitude towards economics is hardly surprising. The forces that drive the economy from boom to depression and back again remain a mystery to most people. In times of prosperity, people can leave esoteric matters, such as credit default swaps, collateralized debt obligations or the London inter-bank lending rate, to the professionals, trusting that they know what they are doing. It is only when something goes wrong that questions are asked and people demand explanations of why billions of dollars, euros and pounds of taxpayers' money are suddenly being poured in to prop up the financial system.

Yet there is more to it than this; criticism of economics did not begin with the banking crisis of July to September 2007. Far from it, there had long been unease about economics. Thus Diane Coyle, one-time economics editor of the Independent and the author of Sex, Drugs and Economics (2004), a book in the `economics is the key to everything' vein, saw a need to put the record straight. Economics, according to the title of her second book, was not the `dismal science' - it was The Soulful Science (2007). Shunning the popular themes of her previous book, she explained that

economists had begun to understand the role of innovation in economic growth and how to design policies that would eventually make poverty history. Critics of economics, she argued, simply did not understand the subject.

Coyle's target was what she called the `policy intelligensid, a term covering those who write in opinion columns in the New York Times, the Guardian or Le Monde, or the longer, seemingly more serious, pieces emanating from policy think tanks or published in New Republic or the Nation. In the aftermath of a financial crisis that precipitated a depression, her claims may look over-optimistic; nevertheless she hits many of her targets. What she missed, however, is the fact that not all critics of economics are journalists; they include insiders - academic economists who dissent from the views that dominate the profession.

A very recent example is Economics Confronts the Economy (2006) in which Philip Klein argued that most economists were involved in peddling an unchanging laissez-faire view of the world. The face of economics is, he claimed, failing to change because academic economics is controlled by a comparatively small group of economists located in the top departments (University of Chicago, MIT, Stanford, Harvard and so on) who edit the leading journals and act as a barrier to the emergence of new ideas. Most research in the subject, Klein argues, is characterized by the trivialization of the subject and a search for elegance, irrespective of the costs. If we look elsewhere, we find A Guide to What's Wrong with Economics (Fullbrook 2004) in which no fewer than twentyseven authors wrote about different and allegedly fundamental flaws in the subject. Or Steven Marglin's Dismal Science: How Thinking Like an Economist Undermines Community (2008), the message of which is clear from its title. These books echo the views of many heterodox economists, who are convinced that most of their orthodox colleagues are taking the subject down the wrong path.

So why is it that intelligent, seemingly well-informed economists can have such different views of their subject? To put it another way, how can one economist take the view that the discipline is successfully solving the problems confronting society, whilst another sees the discipline as engaging in abstract theorizing that has no bearing on the real world? These are questions that need to be answered if we are to make sense of modern economics.

To place this discussion in context, it is important to be clear that these questions are not unique to economics. Of course, economics does exhibit more disagreement than the natural sciences. Physicists may question whether or not the universe started with a `big bang' or disagree over how to explain gravity, and biologists may disagree over specific processes of evolution. This says no more than that there are unanswered questions in science. But such disputes are conducted within a generally accepted framework: the laws of physics cannot simply be rejected (though they may periodically be seen in a new light), and within biology the principle of evolution through natural selection is not questioned, though the manner of its operation may be debated. But in the social sciences, fundamental disagreements exist and remain unresolved. The complexity of the problems that are dealt with in the social sciences and the way human societies are continually evolving, developing new institutions within which people interact in different ways means that the social sciences probably never will possess empirical bases that are as firm as those on which the natural sciences rest.

Even so, economics is unusual. The field has had a much stronger disciplinary identity than most other social sciences, with greater agreement on what the core of the subject comprises. In this, it is closer to the natural sciences than it is to, for example, psychology, its great rival within the social sciences. Psychology has what has been described as a `protean identity': it is a `trans-discipline that encompasses approaches that are as hard to reconcile as behaviourism and psychoanalysis and in which there is no agreement on something as basic (to an outsider) as whether `the mind' is even a meaningful concept. Sociology, too, despite the claims of those who see it as the master social science, is so varied that one can question whether it is even possible to speak of a single sociology rather than many sociologies. Similarly, political science comprises disciplines (political theory, political behaviour and international relations) between which there are clear divides.

But economics' strong disciplinary identity does not translate into agreement like that found in the natural sciences, for there remain economists who dissent from what, in the eyes of most of their colleagues, are basic

presuppositions that all economists should accept. In some cases this goes sufficiently far that dissenters effectively cease to communicate with other economists, creating communities that advocate alternative heterodox approaches to the subject. Thus, when the credit crunch called into question the conventional wisdom on the benefits of deregulated financial markets, there were groups that had always been sceptical about the stability of unregulated markets; they stood ready to claim that their views of the world had been vindicated.

THE PROSECUTION

A clear example of recent disquiet with economics is the movement known as Post-Autistic Economics, which was started in June 2000, when a group of students at Ecole normale superieure, in Paris, published a petition protesting the state of economics and the way it was taught. They claimed that economics had come to be concerned only with imaginary worlds, that mathematical techniques had become an end in themselves, and that the teaching of economics had become excessively dogmatic.

Most of us have chosen to study economics so as to acquire a deep understanding of economic phenomena with which the citizens of today are confronted. But the teaching that is offered, that is to say for the most part neoclassical theory or approaches derived from it, does not generally answer this expectation. Indeed, even when the theory legitimately detaches itself from contingencies in the first instance, it rarely carries out the necessary return to the facts. The empirical side (historical facts, functioning of institutions, study of the behaviours and strategies of agents ...) is almost non-existent. Furthermore, this gap in the teaching, this disregard for concrete realities, poses an enormous problem for those who would like to render themselves useful to economic and social actors. (Fullbrook 2004, p. 2)

This protest provoked strong reactions. A group of French economics teachers produced their own petition, echoing the students' call for greater pluralism in the teaching of the subject: teaching had become divorced from reality and the way to put this right was to broaden the curriculum. Only a more pluralistic economics would foster critical thinking and enable students to question the unthinking use of mathematics in economics. The issue became public on 21 June, when Le Monde published a symposium in which several economists supported the students' claims. The French education minister became involved, commissioning a report on the state of economics education in France.

The debate was not confined to France. Prominent American economists became involved in the French debate, some defending the status quo. The following June, a group of Ph.D. students at the University of Cambridge circulated a petition criticizing the narrowness of economics and calling for a debate over its foundations. They collected hundreds of signatures from academic economists in a wide variety of countries. Making use of the Internet, and taking up a phrase used in the original French students' petition, the Post-Autistic Economics Network was set up to ensure that the debate continued. Autism was used as a metaphor for the way economics had lost its sense of perspective, emphasizing one approach to the exclusion of others and not relating to the real world in any meaningful way.

If it were an isolated event, the flurry of debate over Post-Autistic Economics would not be very significant. A few hundred signatures may sound like a large number, but they represent no more than a tiny fraction of the total number of economists in the world (the American Economic Association alone has more than 20,000 members) and even of those studying economics in France. It is safe to say that, for the bulk of the profession, it was not a significant issue even after they heard about it. Most economists will have agreed with the reaction of Robert Solow, professor at MIT and winner of the Nobel Memorial Prize in Economic Science for his work on growth theory, who is widely regarded as openminded - just the sort of economist one might expect to sympathize with the students' call for greater pluralism - that these criticisms were misconceived. He argued in Le Monde (3 January 2001) that any alternative theory worth taking seriously must obey the rules of logic, take account of the facts and be parsimonious, and that he could not think of a single `alternative approach' that met these criteria. It was wrong, Solow claimed, to

argue that valuable alternative approaches were being pushed aside: the dominance of American economics, to which the French students had objected, arose simply because of the size and competitiveness of the U.S. academic system.

But the French students' complaint was not an isolated event. In 2003 a group of students at Harvard argued a similar case, wanting a curriculum that would be more critical of conventional ways of thinking. Disquiet about the content of Ph.D. programmes was not confined to students. In the late 1980s there had been concern with the content of American Ph.D. programmes, prompted by a survey that found that students were highly cynical about what they were studying and that there was a widely held belief among doctoral students that many of those trained in top graduate programmes did not have a sufficiently broad education to teach undergraduates in liberal arts colleges. The problem was that graduate students in economics learned advanced mathematical techniques and could prove theorems, but they knew nothing about economic institutions, economic statistics or the issues involved in policy making. Proficiency in mathematics and the ability to solve puzzles were considered far more important to making it through graduate programmes in economics than knowing anything about the economy. Success involved being good at playing intellectual games, irrespective of whether they revealed anything about the real world. The result was that the American Economic Association established a Commission on Graduate Education in Economics (COGEE) that produced a report recommending a series of changes, though little changed as a result.

The view that the economics curriculum has become excessively narrow and places excessive emphasis on mathematical technique is held by a wide variety of economists. Some do not object to the use of mathematical theory per se - they merely want to encourage a broader, more open-minded approach to the subject. For them, the metaphor of autism suggests merely that there has been a loss of perspective - that the discipline has got its priorities wrong. They do technical work that is published in the leading journals and work alongside colleagues who are entirely happy with the status quo, and they are merely arguing for a change in direction.

However, there are others who go much further in their criticisms. These are heterodox economists whose identity as economists rests on standing out against the orthodoxy that dominates the discipline. That orthodoxy may sometimes be defined in terms of specific beliefs about the economy; more often, it is defined as hostility to the methods that are used to justify such policies. A good example of such a wholesale rejection of commonly accepted methods and practices can be found in the book Economics and Reality (1997) by Tony Lawson. He argued that orthodox economic theory and the statistical methods used to apply that theory to real-world data are deeply flawed, being relevant only to a world that exhibits stable empirical regularities. Such regularities, he claims, are simply not to be found in economic phenomena, rendering the whole enterprise fruitless. His rejection of mainstream economics was so decisive that accommodation was clearly impossible: most economists were bound to reject the book out of hand, and it was inevitable that it would appeal only to a minority. However, the book clearly struck a chord with journalists and some academics, both inside and outside economics. For many, the title said it all - economics was widely perceived as having lost touch with reality, and the book faced up to this. Ormerod's The Death of Economics (1994) got a similar response. Echoing the title of a West End show, the line `No reality please, we're economists' was used as the title of a number of critical pieces about economics. Scepticism about economics runs deep.

Heterodox economists often find inspiration in figures from the past, looking back to economists such as Karl Marx, John Maynard Keynes, Thorstein Veblen (the late-nineteenth-century critic of America's 'leisure class' or the late-nineteenth-century Austrians who defended the free-market economy against its Marxist critics). What these heterodox economists have in common is that none of them engage in modern, technical economics. In each case, they claim that orthodox economics has failed to see the full significance of their favoured economists' ideas. For example, Post-Keynesians argue that, although orthodox economists learned something from Keynes, they failed to see the significance of what he wrote about fundamental uncertainty (i.e., uncertain events to which it is impossible to attach meaningful numerical probabilities) and that this failure fatally undermines orthodox theory. Other heterodox economists are driven by specific concerns. For the Union for Radical Political Economy these concerns

are overtly political: orthodoxy fails to take account of class, power and income distribution. Feminist economics points to hidden, gendered, presuppositions in orthodox theory, aiming for an economics that is free of such biases.

All disciplines attract criticism from dissenters whom few practitioners take seriously. It is enough to list supporters of `alternative' medical therapies such as homeopathy; creationists who espouse `intelligent design' as an alternative to evolution; parapsychologists and astrologers. In most cases they can be dismissed as cranks. Peer reviewing in academic journals is, after all, about ensuring that only respectable work gets published, and professional qualifications are about excluding those who do not follow accepted practices in fields such as medicine or psychology. Heterodox economists may feel that their place in the profession is tenuous, a view that is borne out by the widespread ignorance of their work. But heterodoxy is a phenomenon that has been around a long time.

THE DEFENCE

Most critics write from the belief that economics is dominated by an orthodoxy that prescribes the use of a particular, highly abstract theory and a tightly circumscribed range of methods that together serve to exclude serious treatment of real-world problems. The normal response is that, even if it were once correct, this characterization is so out of date as to amount to a caricature of what is going on in the field. It may have been the case in, say, the 1960s, or even the 1980s, but there has also been such a proliferation of radically new approaches to economics that the charge of methodological narrowness is impossible to sustain. If there is a central theoretical framework for the subject, it is game theory, which can be used to analyse issues of strategy and power, not the theory of general competitive equilibrium on which critics often focus. Furthermore, because game theory yields results that are highly sensitive to context, it forces economists to pay attention to institutional details. Such details might include the procedures according to which wage bargaining is conducted, the remuneration packages received by managers, the barriers to establishing new firms, or the use of anti-competitive practices.

Not only that, but economists have been able to use their `excessively abstract' theories to help create markets where none previously existed. When John McMillan, a New Zealander whose career at Stanford ended with his untimely death in 2007, who specialized in the theory of auctions, wrote Reinventing the Bazaar (2002), he had in mind a phenomenon that was not just the result of politicians being willing to consider market solutions to economic problems but also the result of economists' applying their theories to real-world problems. Theory made it possible to establish where markets could be made to work and how they should be designed. Similarly, critics were for a long time sceptical about `experimental economics' in which human subjects have to make decisions in a controlled environment with a researcher monitoring their actions. But such experiments, like game theory, have been used to help design new markets and to solve real-world problems.

Economics has also become much more empirical than its critics imply. Looking at the U.S. academic job market in 2007, Angus Deaton, a Princeton professor who was involved in the university's hiring process, observed that it had become normal for Ph.D. students looking for jobs to offer papers based on extensive empirical work, the result of searching through large data sets (RES Newsletter April 2007, p. 5). Topics he encountered included the prison parole system in Georgia, HIV/AIDS in Africa, child immunization in India, political bias in newspapers, child soldiers, racial profiling, leisure choices, mosquito nets, treating leukaemia, child development, and the relationships to each other of war, television, bilingualism and democracy. This list is given in full to show its variety. Furthermore, few of these, Deaton claimed, relied substantially on either economic theory or the most advanced econometric (statistical) techniques. Most of the job candidates he encountered were weak on traditional price theory but possessed considerable data-handling skills.

One of the best illustrations of the changes that have taken place in economics is the theory of finance. During the 1980s and 1990s, evidence accumulated that rational behaviour could not explain fluctuations in stock market prices: prices fluctuated much more than could be explained by the `fundamentals, such as corporate profits, that

should have explained them if investors were rational. To explain this, economists turned to psychology. Investors might assume that past trends would continue, investing in stocks whose prices had risen; they might attribute successful investments to their own skill, whilst blaming unsuccessful ones on bad luck; or they might hold on to some stocks too long, because taking losses was so painful. Stories may begin to circulate about why certain stocks are doing well (perhaps due to the emergence of a `new economy' or new sources of profit via the Internet), apparently verified by rising stock prices, causing a speculative bubble to develop. All of this could be used to help explain what was termed `excess volatility'. To test such psychological or `behavioural' explanations, economists constructed experiments: they had human subjects in laboratories taking investment decisions (for real money, even if their possible rewards and losses were less than they might have got on the real stock exchange) under controlled conditions. Economists also looked hard for `natural experiments', such as dramatic booms and collapses in countries with weak regulatory regimes, such as Albania in 1996-7.

HOW CAN THEY SEE THE SUBJECT SO DIFFERENTLY?

How is it that supporters can see economics as engaging with the real world, providing the tools that enable economists to solve fundamental problems and guide policy, whilst critics see it as arid mathematical formalism that either has no practical implications or is positively harmful?

One possible answer is that people are looking at different things. Defenders of the subject naturally look at the best examples, for that is what matters given that once research is in the public domain people can select the best and ignore substandard work. After all, few would wish to judge science by the research highlighted in the journal of Irreproducible Results or the Annals of Improbable Research. Critics, on the other hand, may be focusing on the `average' piece of academic research, or even responding to the larger quantity of unimaginative, routine work that is of much less value. Economics is so vast, that by looking in different places it is possible to see very different things: the articles in the journal of Economic Theory or the Journal of Mathematical Economics, for example, are typically more mathematical and more abstract - less obviously related to the real world - than those in American Economic Review, let alone the Brookings Papers on Economic Activity or journals in applied fields. Articles that one journal would reject as unsuitable for its readership are often welcomed by a different journal. However, whilst economics is extremely diverse and many economists have become specialists in comparatively narrow fields, this is not the whole story: there has to be a reason why economists cannot see outside their own field. Moreover, it would not explain why different economists have very different standards of what constitutes a persuasive argument: for some economists, it is theoretical arguments that are ultimately persuasive; for others, theory that is not backed up by statistical evidence is unpersuasive.

Another dimension to the problem is the difference between research and teaching. Some critics focus on economics teaching (this was the original complaint of the Paris students and what underlay the COGEE report discussed earlier in this chapter), but those who defend the vitality of modern economics focus on the latest research. It would be no surprise to find a lag between research findings and academic curriculum - indeed, it could hardly be otherwise. Diane Coyle, one of the defenders of modern economics, has appealed to teachers to update their curricula, so that potential graduate students are not turned away from economics by being exposed to theories that convey none of the excitement that is found in the latest economic research (RES Newsletter April 2007, p. 10). But again, this cannot be the complete explanation: not only do many critics focus on research and topics that do not appear in any but the most advanced curricula, but it also begs the question of why there is such a chasm between teaching and research. There will be some lags, but nothing that can explain why perceptions differ so much.

A further possibility is that some economists judge economics solely by its policy relevance, whereas others see it as a `purer' science. There are undoubtedly differences here, but they fail to capture the contrast between orthodox and heterodox views. They do lead to the question of when and how economists decide that it is justifiable to draw policy conclusions from their analyses. Again, policy relevance versus pure science may be part of the story, but it does not fully answer the question, for it begs the question of how there could be such differing view of what

economics involves without economists themselves being aware of it. Physical geography and human geography are radically different subjects and may be a source of friction to the extent that their cohabitation under the label `geography' can sometimes be difficult; yet this disparity does not cause confusion in the field. Neither does the range of types of psychology or sociology. There is something peculiar about economics.

It is also possible that the difference might be ideological. One of the characteristics of heterodox economic groups is that many of them are associated with a particular political position. Austrian economists, a school of economic thought that traces its ancestry back to economists based in late-nineteenth century Vienna, are clearly committed to free markets and are generally hostile to the state for reasons that are political as much as economic. Radicals, Post-Keynesians, old-style Institutionalists and Marxists envisage a substantial role for the state. In contrast, though orthodox economists clearly have ideological positions (it could not be otherwise), and though economists are probably on average politically to the right of other social scientists, their groupings are, at least not ostensibly, premised on any political beliefs. And yet, the outrage expressed by some orthodox economists at any questioning of central doctrines does suggest that ideology may be more significant than their claims to being `scientific' may suggest. Why else would economists have reacted so strongly to the widely reported finding by David Card and Alan Krueger in the mid-1990s that imposing a minimum wage in New Jersey had not raised unemployment compared with neighbouring Pennsylvania, where there was no minimum wage, and it might even have reduced it? The evidence may have been open to question, but so too is much of the empirical work that is regularly published in leading journals, and it does not elicit anything like the same degree of criticism. Moreover, the finding that any effect was small should not have been surprising in that economists have been trying, and failing, for decades to find a relationship between minimum wages and unemployment. Why else would mainstream economists liken any attack on free trade to astrology as something that does not merit being taken seriously, given that the imposition of free trade, even if beneficial in the long run, usually has costs that need to be weighed against the benefits?

Or is it simply, as many orthodox economists maintain, that those who question what is going on in economics simply cannot understand what is going on, often because they have never developed the necessary technical skills? Heterodox economists, they claim, do not even read the most up-to-date literature and persist in doing economics in an old-fashioned way. On the other hand, perhaps orthodox economists are simply so committed to the tools they have invested so much time in learning that they cannot afford to take a broader view of what is going on in their subject? But in both cases it is easy to point to exceptions that make such simple answers problematic. There are orthodox economists whose knowledge and sympathies cause them to look beyond the confines of economic theory, drawing on history, sociology, psychology and philosophy to create complex explanations that go beyond any orthodox paradigm. And there are heterodox economists whose command of technical material would enable them, if they chose, to work along more orthodox lines.

SOLVING THE PUZZLE

Is economics the most rigorous of the social sciences, then, or little more than the expression of a free-market ideology? And is there something about the discipline that explains the persistence of such contrasting views of what it can achieve? To answer such questions, the best place to start is with some examples, to see what happens when economists use their ideas to tackle problems of economic policy. The reason for this is not to divert attention from the abstract theories attacked by critics; it is because this is where we would expect to find evidence about what economics can and cannot do. Chapters 2 to 5, therefore, explore a range of case studies, from controlling sulphur dioxide emissions to the Russian transition to capitalism to recent monetary policy. These case studies have been chosen because they illustrate the discipline's strengths and weaknesses. Chapters 6 to 9 then offer a historical perspective on the body of ideas and techniques that make up economics today. The reason for offering this perspective is to try to make sense of the variety of approaches found within economics today by looking at the ways economic theory has been shaped by economists' attempts to make their discipline scientific, and to tackle the

questions of ideology and dissent head-on. These problems are both ones where the key lies in what has happened in the discipline since the Second World War. These themes are then brought together in Chapter 10, which tries to make sense of modern economics, avoiding the Scylla of uncritical praise and the Charybdis of denunciation, by reflecting on the different ways in which economic knowledge is created and the relationship between economic science and the creation and criticism of economic myths.