David Colander and Craig Freedman have an answer. ‘Where Economics Went Wrong‘, to give the title of their new book, is answered by the subtitle: ‘Chicago’s Abandonment of Classical Liberalism’. They have something very specific in mind by this, namely the move from widespread acceptance by economists that economic policy does not follow from economic theory, but rather is “a blend of engineering and judgement”, an art rather than a scientific endeavour. They continue: “Clearly one wants evidence-based, objective analysis of policy. An art and craft methodology uses theory and science whenever it can.” But policy is messy and requires a methodology recognising the unavoidable role of normative judgments.” This is what they mean by classical liberalism.
The Chicago School upended this, the book continues, by “removing the firewall between economic science and policy” from the 1930s on. It did so to further a laissez faire agenda, insisting that economic science justified the conclusion in real life policy that the market should be left to its own devices. It merged economic theory and science with economic policy advice. This agenda held sway for some decades, embedded in policy by politics and the electoral success of Reagan and Thatcher.
I must say I found this argument confusing at first because of my own perspective that the problem for much of 20th century economics was the ‘separation protocol‘ between positive analysis and normative advice, expressed by Lionel Robbins and later by Milton Friedman. However, I think it’s a similar point in fact: the claim they made was that positive economic analysis was appropriate for policy, and value judgments could be coralled into the domain of political choice, about which economics has nothing to say.
Many economists probably still think this, but my sense is their number is diminishing. Colander and Freedman end the book with an overview of the work of six economists they perceive to be working in the ‘art and craft’ policy tradition: Dani Rodrik, Ed Leamer, Amartya Sen, Ariel Rubinstein (love his book Economic Fables), Alvin Roth, Paul Romer. A shame they’re all men but I for one approve of the selection, with that major caveat.
The book is an inside-the-beltway one, of interest mainly to history of thought folks I would guess. Having said that, it does highlight a key methodological issue of importance to all applied economists.