Where did economics go wrong

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.

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6 thoughts on “Where did economics go wrong

  1. “The Chicago School upended this, the book continues, by “removing the firewall between economic science and policy” from the 1930s on.”

    Really… that didn’t happen with Keynes and his Cambridge crew? And Samuelson’s mathematical bulldozing certainly makes it easier to use partial derivative symbols to paper over moral concerns (though it’s not like economics wasn’t headed that way after the Marginal Revolution anyway).

    • I wouldn’t read Keynes that way. The book isn’t an argument against using maths at all, but what you do with it. Anyway, I’m no history of thought person so you’d need to take it up with the authors.

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  3. Economics went wrong when it was not given a chance to become sufficiently scientific. This began when the subject was introduced as one of humanities instead of one of an engineered social system. Because the humanists were so idealistic in their philosophies, their biased political views and their strong regard for intuitive approaches as distinct from logical ones, the subject has become very confusing with many schools of thought some of which contradict. As a result, students tend to concentrate on passing their examinations rather than trying to properly understand how the social system works!

    The following essay and book recommendation is the author’s way for rectifying this dismal state of affairs.

    Making Macroeconomics a More Exact Science
    Today macroeconomics is treated as an inexact topic within the humanities, because at a first look it appears to be a very complex and easily confused matter. But this attitude does not give it fair justice–we should be trying to find a better way to approach and examine the subject, in a good way that avoids these problems of complexity and confusion.

    Suppose we ask ourselves the question: “how many different KINDS of financial transactions occur within our society?” Then the simple answer is that only a limited number of them are possible.

    Although our society comprises of many millions of participants, to answer this question properly we should be ready to consider the aggregates of all the various kinds of activities (no matter who performs them), and then idealize these activities so that they fall into a acceptable number of more general terms, for the expression of a relatively small number of different but specific social functions.

    Here, each activity is found to apply between a particular pair of entities—with each entity being expressed by its having individual properties. Then to cover the whole social system of a country (excluding foreign trade), the author finds that it takes only 19 mutual flows of money for the purchase and payment of goods, services, access rights, taxes, credit, investments, valuable legal documents, etc. Also these flows are between only 6 different representative entities.

    The analysis that led to this unexpected result was performed by the author and it may be found in his working paper (on the internet) as SSRN 2865571 “Einstein’s Criterion Applied to Logical Macroeconomics Modeling”. In this model these 19 double flows of money verses goods, etc., are shown. They are found to pass between only 6 kinds of role-playing entities. Of course, there are a number of different configurations that are possible for this type of simplification, but if one tries to eliminate all the unnecessary complications and sticks to the basic activities, then these particular quantities provide the most concise result, and yet it is a fully comprehensive and satisfactory analysis.

    Surprisingly, past representation of our social system by this kind of an interpretation model has not been previously properly examined nor presented before. Other partial versions have been previously modeled (using 4 entities, by Professor Hudson), but they are inexact due to either their being over-simplified, or in the case of econometrics, much too complicated.

    These are the two reasons for the earlier non-scientific confusion by many economists and their failure to obtain a good understanding about the way the whole system works. The model being described here is unique, in being the first to include, along with some additional aspects, all 3 factors of production, of Adam Smith’s “Wealth of Nations” book of 1776. The three factors of production are Land, Labor and Capital and along with their returns of Ground-Rent, Wages and Interest/Dividends, respectively, which are all included in this presentation diagram.

    The diagram of this model is in my paper (noted above). It may need enlargement to see all of the aspects included in the one view. A mention of the related teaching process is also provided in my short working SSRN 2600103 “A Mechanical Model for Teaching Macroeconomics”. With this model in its different forms, the various parts and activities of the Big Picture of our social system can be properly identified and defined. Subsequently by analysis, the way our social system works can then be properly calculated and illustrated.

    It is done by the mathematics and logic that was devised by Nobel Laureate Wassiley W. Leontief, when he invented and introduced the important “Input-Output” matrix methodology (that he applied it to the production sector only). This short-hand method of modeling the whole system replaces the above-mentioned block-and-flow diagram. It enables one to really get to grips with what is going-on within our social system. Subsequently it will be found that it is the topology of the matrix which actually provides the key to this. The math is not hard and is suitable for high-school students who have been shown the basic properties of square matrices.

    By this technique it is comparatively easy to introduce a change to a pre-set social system that is theoretical in equilibrium (even though we know that this ideal is never actually attained)–it being a convenient way to begin the study. This change will then create an imbalance and we must then introduce a process for regaining equilibrium again. The introduction of sudden changes or policy decisions my thus be simulated and the effects determined, which will point the way to what policy is best. In my book about it (see below), 3 changes associated with taxation are investigated in hand-worked numerical examples and the logical and irrefutable results are a surprise even to this author!.

    Developments of these ideas about making our subject more truly scientific (thereby avoiding the past pseudo-science being taught at universities), may be found in my recent book: “Consequential Macroeconomics—Rationalizing About How Our Social System Works”. Please write to me at chesterdh@hotmail.com for a free e-copy of this 310 page book and for additional information.

  4. looking for a female arts and craft practicioner, what about Esther Duflo ? Susan Athey ?
    Doesn’t sound like Mr. Colander looked very hard did he ?

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