What is Economics Today?

by Mario Rizzo

I was recently at the Summer University in Aix-en-Provence. I heard more than once about the need to educate people in economics in order to get better public policy.

My purpose in this post is not to go over the issue of the relative power of ideas about the “general welfare” as compared to special interests in determining public policy. Instead, I want to raise the question of whether today’s economics is homogeneous enough to teach basic lessons about the desirability of free markets. Let us put aside the old socialism and central planning issue. We can say that “economics” defeated that.

I want to suggest that many threats to free markets come from “respectable” economics in today’s world. There are at least three major areas:

  1. Externality environmentalism. By this I mean the view that Pareto-relevant externalities abound. Many of these arise from environmental considerations but others can be found in networks of all sorts. Economists following this approach craft policies that, in principle, could make things better as they see it. They do not think that the public choice issues are their business.
  2. The revival of Keynesianism. Perhaps there are not more Keynesians in the economics profession today than before the financial crisis but those that are around have gained credibility with the educated public. But, even more basically, so much of the standard analysis is of the income-expenditure variety that one must wonder about where “Keynesianism” begins and ends.
  3. Behavioral economics. Behavioral economics has successfully sewn confusion among neoclassical economics about the meaning, validity, and applicability of the rationality assumption. The “market failure” idea that dominates much of the literature in the externality area has been supplemented with “decisionmaking failure” in welfare economics, securities and consumer regulation and so forth. Economists cannot so easily claim that “free exchange” tends to benefit both parties.

So which economics? Some of us (myself included) are in a kind of bubble. Good economics is so obviously good. Teach people economics and things will be better (or at least no worse). Maybe. Perhaps even the worst economics is better than none. But I am not so sure.

What I do know is that many threats to free markets and the free society are emanating from economics today.


17 thoughts on “What is Economics Today?

  1. People forget this all too easily. At several occasions I wanted to intervene to remind the panel that if there had been such economic education into public policies in France in the 60s people would have been educated into Maoism, but couldn’t find the opportunity.

  2. It’s homogenous enough to teach people the broken window and i Pencil narratives.

    It’s homogenous enough to point out the agreements and disagreements between the top down (Keynesian and redistributive) and bottom up (classical liberal and libertarian) camps – and the strengths and weaknesses of each.

    It’s homogenous enough to point out that the differences between countries is a matter of ‘preferences with consequences’.

    It’s divergent enough that artifices and arts we use in the modern state are just that – artifices and arts that are remnants of agrarian and shipping eras. And that the economist often mixes truths, preferences and conveniences – while calling all of them truths.

    It’s divergent enough that the major questions of the day cannot be answered by modern theory. That is, that the mora hazards we create with our policies are not worse than the circumstances we seek to avoid by employing them.

    It’s divergent enough that the issue of cultural homogeneity and immigration cannot be answered, because we have no way of measuring the costs of norms – although we can visibly see that norms ar the highest cost than any society can develop – particularly non-corruption, and non-privatization.

    In the broader context of the question, the American Public has decided that monetary policy produces externalities that they are no longer willing to pay for. This fact is completely lost on economists, who say that the public is ill informed or ignorant or just plain stupid. However, there is another alternative answer: that economists are simply wrong. People will pay a great deal to preserve what they value. And they value their identity, their culture, their social status, their political power, and their norms. So it is quite possible that they are acting quite rationally. And it is not possible to refute them with the current state of our art. They are choosing to starve the beast even if they themselves must also lose a little weight by doing so.

    I am beating the drum for stimulus through industrial policy for this reason.

    It should be obvious to anyone that it is logically impossible for people to both seek equality while at the same time to ignore the presence of a large bureaucracy, that does not share their pain on the way down, so to speak.

    Economics is a moral art, not a physical science. Money is but one part of the human experience. And for humans the accounting system is social status. The upper tiers of the Maslowian pyramid are determined by the number of people affected by one’s actions.

  3. I’m not sure we need homogeneity for economics to contribute to the advance or preservation of freedom. I tend to think economic science in all its heterogeneity has nevertheless had a positive influence in many times and places. Imagine the history of the 20th century without Mises, Hayek, Friedman and others. Wouldn’t it have been much worse? There are skeptics, “radicals,” Marxists, Keynesians, and even anti-economists within the economics profession. But they wouldn’t exist if it weren’t for the “mainline economics” (as Pete Boettke calls it) of Adam Smith and his adherents. Without the mainline you would still have advocates of illiberal policy, but they might not call themselves “economists.”

    I tend to think of mainline economics as the essential core of economics. Within the mainline there are differences of opinion about policy, but the analysis generally supports broadly liberal views.

    Mainline economics + beneficence —> liberalism

    That is Adam Smith’s legacy. Without the mainline core of economics, you would have policy analysis, but it would not be “economics,” I think. The existence of “economics” pulls lots of arguments under its umbrella that would otherwise exist under some other classificatory umbrella. So it’s the good stuff that keeps the enterprise going and keeps arguments about unintended consequences before the intellectuals and the general public. In this way, I think, the whole enterprise of economic science has promoted liberty and will continue to do so in the future.

  4. Mario–
    I don’t think the three areas you describe are in and of themselves threats to free markets. One can recognize that there are externalities and that behavior is subject to systemic biases, without necessarily advocating increased government intrusion to counteract these things. Interventionism is a result of not recognizing how the government works and the actual overall results of the policies. You write re environmental externalities that “Economists following this approach craft policies that, in principle, could make things better as they see it. They do not think that the public choice issues are their business.” The same can be said for the other ares. Interventionism is justified by a false comparison of real world market issues with unreal theoretical policies.

  5. Roger,

    I think Mattieu’s suggestion that we currently do teach economics (or rather teach it by implication) in grade school and college – but it’s bad economics. And that if we teach it, we might continue to teach some form of bad economics. It’s not like we’re doing a very good job with history at the moment, and that’s pretty simple by comparison.

  6. Following my previous comment … Come to think of it, the socialist planning debate was a major example of this. In theory planning advocates could produce a general equilibrium system and show how they’d solve it. In reality, the information problems Hayek pointed out combined with incentive problems to create ghastly dysfunction.

  7. Curt: ? I was responding to Mario, not Mathieu, although Mathieu’s comment was apposite. Pol Pot was educated in Paris and I have seen some trace his policies to that training. I don’t know whether one can really make the link since he studied, I think, electronics. But some have made the link.

    Chidem: Which is not to deny that the problem was not theory vs. practice, but good vs. bad theory, right?

  8. The question is sometimes put: Is economics a set of substantive conclusions or a language for discussing certain kinds of problems or both? I think if you go back to the 19th or early 20th century you will find more emphasis on a set of conclusions. But this gradually began to change. I think many economic theorists today would argue that it is simply a language. But we can go beyond the theorists here.

    Take the “broken window” problem a la Bastiat. I believe that there is real diasagreement here. Keynesians would argue that in the current economy there is a free lunch — destroying wealth can increase wealth overall because it stimulates otherwise idle cash balances and so forth. Of course, one may argue using the language of economics that this is wrong. Some would say we could then appeal to empirical evidence. But the empirical evidence is not often decisive.

    I am not arguing that economics ought to be more homogeneous in its substantive conclusions. What do I know about “ought”? It just isn’t.

    All I am saying is that simply talking economics does not preclude all sorts of statist positions. People make many “respectable” arguments using the language of economics that lead to paternalism, stimulus spending,environmental controls, etc.

    Making people more economically literate *alone* just changes the language — it doesn’t even refute the broken window argument in a neat, clean fashion.

  9. Re Chidem: Then why don’t more people interested in these issues become political scientists?

    No, not public choice theorists or rational choice theorists (economists doing political science), but real political scientists?

    Political science is a wonderful field chock full of actual data about how political decision making takes place, and how *erroneous* political decision making is likely to be. All one needs to use these data in brand new ways is a little bit of skepticism about the political side of the political/market institutional comparison. Then one can intelligently question the desirability of extending the political sphere a la behavioral economics.

    The “bubble” to which Mario refers steers people into getting training in an “economic way of thinking” that has very little applicability to the real world of ideologues, activists, and social-science bureaucrats. The only way Mario’s problematique can be addressed is if today’s young Austrians study political science, not economics, so they can redress the gigantic imbalance of effort that has gone into learning about the economy, not the polity.

  10. The TECHNOLOGIES of economics are not fit subjects for teaching to the masses, and probably wouldn’t be even if they were: (a) monolithic (free of internal contradictions); and (b) intuitive and easy to grasp.

    The VALUES of individual freedom and anti-interventionism (anti-coercion) are all that is fit, and not so much for teaching as for inculcation (=teaching plus advocacy, a process appropriate to the dissemination of values). Done successfully, this would solve a lot more than “mere” economic problems.

    Economics CAN help in this process, but NOT the other way around.

  11. Barro has the right approach. Contrast the audacious claims of Keynesian economics with “regular economics.” Keynesian economics bears the same relationship with “regular economics” as bloodletting does with “regular medicine.”

  12. Jeffrey Friedman–
    your question “Then why don’t more people interested in these issues become political scientists?” is interesting. It assumes that you have to be either a data-oriented political scientist or an economist. But one can study public choice economics and do empirical work. If you’re suggesting that there should be more empirical research on political behavior and it should be taken into account in public discussions, absolutely yes. But that can be done by public choice economists as well as by political scientists. The more the merrier, I’d say.

  13. Chidem–There are three problems with the happy solution that you propose.

    1. To be a public-choice theorist, in any meaningful conceptual sense, is to be someone on the lookout for incentives problems in politics. But incentives problems are rarely at issue when dealing with phenomena like ideology and with cases of error due to radical ignorance. Ideologues have very high incentives to be right–they are devoting their lives, in many cases, to their cause–but it just doesn’t help, because the world is open to so many plausible interpretations that one can really believe are true. Moreover, radical ignorance is immune to incentives: one cannot learn what one does not know one needs to learn, no matter how big the payoff would be if you learned it.

    For *Austrians* in particular to funnel their research on politics through the straight-up Chicago lens of public choice is, in my view, a tragic failure to take advantage of Austrians’ comparative advantage.

    2. To be *trained* as a public-choice theorist is to be trained as an economist. What is the value added of such training compared to training as a political scientist?

    What we get from public-choice theorists is spectacularly uninformed by most of the realities with which political science Ph.D.s are routinely familiar. This is why public choice, as opposed to rational choice (game theory, with no motives specified), has had virtually no impact on political science. All political scientists are already acutely aware of self-interest as a causal force in politics, as is the ordinary citizen. If anything, attention to this problem is much overblown.

    In short, not only would Austrians pursuing the public-choice route fail to take advantage of their comparative strength, but they would just become another of thousands of scholars with an eagle eye for incentives problems. Why waste your life on something that’s being done to death by so many others?

    3. To be trained as a political scientist is to be exposed to a wealth of ideas and data one would never know about otherwise. On this you’ll have to trust me: as a political philosopher with an informal Austrian background, I found myself far more interested in the empirical subdisciplines of political science when I was in grad school than in political philosophy per se–because the empirical subdisciplines so strongly support the Austrian emphasis on radical ignorance. Now I’m bringing Austrian empirical considerations to bear on normative political theory in a way nobody has done before, which is quite exciting (for me). But the really big opportunities are for those with even a little Austrian “training”–just enough to grasp the concept of radical ignorance–who go into the empirical subdisciplines of political science.

    Two such students of mine are now tenure-track political scientists at Yale, as was a third at the University of Illinois who had to quit for personal reasons. These are the only three who have tried what I am suggesting, so the record thus far is 3 wins, no losses. The originality of their contribution, its ability to build on well-established political science literature, and, let’s be frank, the MUCH easier job situation in political science added up to far more possibilities for their success–tenure at top-tier universities and colleges, routine publishing in the top journals, and teaching the very best students–than are available in economics.

    On the last point, Obama was a pol sci major at Columbia, Bush fils et pere were pol sci majors at Yale, Bill Clinton was at Georgetown, Hillary was at Wellesley. Jobs in which one could influence students like those are easily within reach for Austrian-influenced scholars who just think a little before doing the unimaginative thing and becoming an economist, public choice or not.

    Any student interested in pursuing the political science option should feel free to contact me at edcritrev@gmail.com. The other route is pretty much a ticket to the unemployment for an Austrian, so why be eager to take it?

  14. Jeffrey —

    Thanks for the thought-provoking comment.

    1. Re research “through the straight-up Chicago lens of public choice” I suspect you’re right. Ideology and radical ignorance certainly are important aspects of the political landscape, though it does not follow that incentives are less important.

    But my reference was to studies more closely inspired by James Buchanan and Gordon Tullock, who take a broader view of the behavior of political actors. By comparison, the Chicago approach is indeed narrow.

    2. Re “All political scientists are already acutely aware of self-interest as a causal force in politics, as is the ordinary citizen.” I wonder. Regulation is routinely justified as necessary for the public good with no reference whatsoever to the incentives of elected and appointed public officials. Thus the mammoth 2010 Dodd-Frank financial law was passed with almost no mainstream recognition of what in practice officials are likely to do with it, given their incentives.

    3. Re training as a political scientist vs. economist, anyone contemplating going to graduate school in one of these two areas certainly needs to think carefully about the choice. They should read your comment! Then ask a couple of economists for a response.

  15. First of all i want to congrats to float such a debate on the subject of utmost importance. It is my observation that it is a little bit confusing to get the exact meaning of economics in the modern and fast changing world. from my view point, “economics is a science which deals about the human behavior which he shows to satisfy his needs by any means and still there is an urge to get more. It deals with all the activities which are performed to get ones needs satisfied,socially,religiously,ethically,morally or other way. That is why new emerging areas in economics are coming in today’s world like neuroeconomics,digitital economics and many more e.g. economics of happiness and freakonomics. each human being is doing his/her activities directly or indirectly,knowingly or unknowingly which are related with economics. In world when the equations are changing at a very fast rate. economies are taking new shapes there is also a dire need to re define the meaning of economics. that is why economics is a normative science which tells how best can be achieved at individual regional national and international level. There should be a conference of the academicians,intellectuals. policy former,planners,scientists engineers to sit together and find a best solution for the people of this planet to get a best way to survive for the centuries to come. Economics may be defined according to the nature,climate, environment, location,geographical conditions of each and every country in the world.

  16. the posted comments by varous thinkers on this site are worth appreciating bt the one posted bt dr. mohd. salim made meh understand economics more nicely i want him to advice me something about it bcoz i find it a lill difficult to understand dis subject hope to have a response from your side soon

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