(This is for my friend, Obey, in partial fulfillment of his request.)
From Paul Krugman yesterday in an article about Fiscal Scare Tactics:
How did it come to pass that many people cannot tell the difference between cynical posturing and serious economic argument? I lay much of the blame at the feet of my own discipline, but how did the discipline of economics manage to accomplish this potentially tragic result?
Many years ago my working hypothesis assigned blame to Paul Samuelson (may he rest in peace) and the Cowles Commission on Research in Economics (1951); Paul because he was among the first to use the calculus of optimization to describe economic theory and formulate testable hypotheses about relationships among economic variables (in Foundations of Economic Analysis, 1947); the Cowles Commission because it seemed to be the most obvious point at which the physicists moved into economics and mathematized it. Hicks’ Value and Capital (1939) preceded Samuelson, but the post-WW II timing of Samuelson and Cowles (when military interests were dominant and operations research methods were the newest and next best thing to sliced bread) represented a powerful confluence of method and madness.
I absolved Samuelson rather quickly. One has only to read him to know that he was about way more than the math. And eventually, I realized it was silly to think that mathematizing what had once been a major component of moral philosophy would be enough to render economics insular and, to many, uninteresting or incomprehensible. Of course, it helped that economics became incomprehensible to anyone scoring less than 700 on the math GREs. It was necessary, but not sufficient. One has also to divorce economics from moral content to arrive at a state where “cynical posturing” is indistinguishable from “serious economic argument.”
So how did that happen?
I think we can lay some of the blame for the excision of economics from the body of moral philosophy at the feet of Lionel Robbins (may he rest in peace), who asserted that “economics is fundamentally distinct from Ethics” in his Essay on the Nature and Significance of Economic Science published in 1935.
Economics is neutral between ends. Economics cannot pronounce on the ultimate validity of judgment between ends....[Economics] is incapable of deciding as between the desirability of different ends.
It was a position taken earlier by John Neville Keynes (Maynard’s father) and by Pigou, but Robbins influence may have been greater because of the timing. The book was republished in 1948 just as mathematical momentum was building. It is probably also significant that Robbins’ pronouncement about the impossibility of interpersonal comparisons of utility gained widespread and rather uncritical acceptance among most economists even today. But that is a technical point better left to another blog.
Of course, all of this was unfolding in a world that had come to view science and the scientific method as the sole road to Truth and Beauty. Mathematization elevated economics above the other social sciences because it rested on magical mathematical foundations. Scientific rigor was ours!
The effect of this was to relegate discussions of economic welfare to narrow corners of discourse grounded in desolate Edgeworth boxes where the emphasis was on relative prices, trades to zero sum optima, and convex preferences with little or no attention paid to why person A started with so few resources relative to person B. The joys of being in the “core of the economy” were celebrated even if being situated at that efficient bliss point left person A holding only a few percentage points of total output while person B held all the rest.
Within the ever-popular Paretian framework, there was no possibility that person B might care about person A’s relative lack of resources, that B might be willing to give up something, transfer it to A to make A materially better off, while allowing B to become (at least in moral utility space) much better off. Or that B might be willing to tolerate some inefficiency in order to make A better off. Kaldor-Hicks introduced even more profound and possibly unjust principles, but that is another blog, too.
Back to my somewhat simplified story: economics was mathematized and divorced from moral philosophy, but it was the timing that mattered. The Great Depression had concentrated both policy and political interest on distributional aspects of allegedly efficient allocations. The events leading up to the Depression demonstrated the lie of market efficiency, at least in financial markets. And it showed that what happened at the top of the economic and social pyramid had dire consequences for the bottom of the pyramid and for the wealth of the nation as a whole (something that apparently would not have surprised Adam Smith). The Great Depression caused many to doubt the value of capitalism, except, of course, investment bankers who knew that speculation (as opposed to long-term investment) was quite lucrative as long as they got out before the crash or, as they have recently learned, as long as they can induce the taxpayers of the US to provide single-payer credit default insurance.
Because of the Depression, John Maynard Keynes’ (at the time) rather radical thoughts on employment, money, and interest increasingly gained acceptance. World War II provided the massive Keynesian stimulus needed to haul us out of depression and to cement Keynes ideas about the roles that government could and should play both during economic downturns and to prevent them. Of course, the increased regulation and taxation that accompanies such policies represented a major threat to business as usual particularly in financial markets where the lure of speculative gains is always irresistible.
Keynes, who advocated that government play a role in moderating the effects of peaks and troughs in the business cycle through regulation of investment banking and automatic demand stabilizers (for example, unemployment compensation and jobs creation through public works) became conflated (perhaps intentionally) with “socialism” and “communism.” When Lauri Tarshis tried to write about Keynesian economics in his 1947 textbook, he was effectively silenced in much the same way and by many of the same people who were so effective at silencing Samuelson on military spending. Samuelson’s text “contained no more than a few words on American defense spending, and none on its size in relation to the federal budget or its effect on the economy.” The Right would paint them as “red” and the Board of Regents of their universities would bring pressure to bear for writing subversive textbooks.
Economics, mathematized and divorced from moral philosophy, was effectively neutered after WW II, at the point when its relevance to “serious economic argument” might have been established and developed. The outcome was perfectly aligned with market forces that would continue to shift the national narrative in ways that would finally succeed in convincing people that “government is the problem”. It culminated in repeal of Great Depression era regulation, thereby freeing investment bankers for unfettered speculative gains supported by a seemingly unfettered single-payer credit default safety net.
Now add to this the promotion and tenure policies at even second rate economics departments that require and only reward publication in journals that favor morally vacant, mathematically rigorous, theoretically obtuse existence proofs that more often than not bear no relation to reality as we know it. One is then left with an economics literature that few people, including some who have majored in economics as undergrads, can truly understand, either in its content or in its relevance to the important moral and economic issues that confront us today.
It is no wonder that many people cannot “tell the difference between cynical posturing and serious economic argument.” This is a resounding indictment of economists and the economics profession. The market supported and promoted it. We as a profession benefited from it with higher salaries and consulting fees. Meanwhile, the “tragic consequences” of our failure include a country that inefficiently spends twice as much as any other developed country on health while leaving roughly 20% of the population with no cover, a 10% unemployment rate, and a growing home mortgage foreclosure rate, all while providing single-payer credit default insurance, financed by low and middle income taxpayers, to the richest portion of the population, the guys who ran us into the ditch; the guys who cannot be taxed for fear they will cease to provide us with the dubious benefits of their financial expertise and acumen.
We appear to be at a political impasse because the idea that “government is the problem” has become entrenched. A moral philosophy pretending to be a science devoid of normative judgment has aided and abetted that idea by elevating efficiency above any other possible moral or even economic consideration. The result is that many in the US and in the world who lack the math acumen to appreciate the subtleties of economic theory stand enthralled by sound bites derived from a handful of dead economists and one dead president.
Economics provided the theory and language that supported the drive to the ditch we find ourselves in. We did it by allowing economics to become divorced from moral philosophy. Now the economy is on life support and most people in this democracy can’t tell the “difference between cynical posturing and serious economic argument,” but they can and will vote.
If economists were physicians, we would be sued for malpractice.