Intellectual Bubbles in Economics?

During the past few decades the subjects of economic history and the history of economic thought have been removed from the study programs of economics in many universities. In some institutions they are not taught any longer. Economics has lost its history. This move would be at least partly understandable, provided economics has all of a sudden turned into a subject in which only ‘correct’ doctrines and views are being elaborated and taught and made the foundation of ‘sound’ economic policy. Gilbert Faccarello and Heinz D. Kurz explain more.According to some of the protagonists of this move, economics has actually at long last managed to become a “hard science”, like physics. Whilst it was the privilege of authors of the past to commit blunders, it is the privilege of authors of today to tell what is correct and true. In the past one could still learn from economic history and the history of economic thought as storing places of what went and was wrong, and why, and which misleading ideas shaped our conception of the socio-economic world and policies ­– like Grimm’s Household Tales designed to scare children off from misbehaving. In modern times such draconic measures are no longer needed, because we have finally attained the best of all possible (theoretical) worlds.

But is that so? Obviously no. There is no sharp break between then and now, as some economists seem to think. “History is not was, it is”, as William Faulkner stressed, and “The past is never dead, It’s not even past.”

The market for economic ideas is not a perfectly functioning selection mechanism that preserves all that is correct and valuable and discards whatever is wrong and useless.

This should not come as a surprise: in a discipline dealing with as complex a subject matter as economics, it would be naive not to expect some intellectual “bubbles” in economics that sooner or later burst, necessitating, in principle, a fundamental re-orientation in the area of investigation under consideration. Bubbles in economics happened time and again and there is no presumption that they won’t happen again. The recent financial and economic crisis was to no small degree the result of economic policies advocated by economists of the “new classical-cum-rational expectations-cum- efficient markets-and so on” variety. Now, the disenchantment with the state of the art in macroeconomics, financial economics and other fields is widespread, as is evidenced by articles in leading newspapers and periodicals, such as The Economist. However, the financial and economic crisis does not seem to have been big enough to shake up the political and academic system. The failure of politics in regulating the financial markets is all too obvious. In academics, the huge sunk costs of those who have advocated and elaborated the economics of Dr Pangloss account for a remarkable intellectual inertia. The echo effect of the misallocation of resources, mental and other, in the discipline will accompany us for a long time. The marginalization of economic history and the history of economic thought in the economics curricula amounts to nothing more nor less than erasing any traces of the failures of parts of economics and the policy recommendations based on it. Who will in the future recall, for example, that in his presidential address to the American Economic Association in 2003 Robert Lucas boldly contended that the “central problem of depression prevention has been solved, for all practical purposes,” and that because of the progress made in macroeconomics “we are able to form a much sharper quantitative view of the potential of changes in policy to improve peoples’ lives than was possible a generation ago”?

A sweet dream burst together with, and as a part and parcel of, the financial bubble.

By worshipping for too long a single kind of orientation with doubtful credentials, the important parts of economics have manoeuvered themselves into a precarious situation. Economists ought to recognize swiftly an important finding of evolutionary theory: progress presupposes choice, and choice presupposes variety. Putting all of one’s eggs in a single basket is a very risky strategy. While bubbles cannot effectively be avoided in a field as difficult as economics, anyone acquainted with economic history and the history of economic analysis, both where it triumphed and where it went astray, will be aware of the danger and will be on guard.

There is another remarkable fact that deserves to be mentioned. Certain ideas and concepts in economics, cherished at one time, get submerged and are forgotten afterwards only to re-emerge in a new garb and liberated of some of its teething troubles at a later time. As Dennis Robertson once remarket with regard to the history of economics: “If you stand in the same place long enough, the hunted hare comes round again.” Or, as Alfred Marshall put it: “We continually meet with old friends in new dresses.” One of the most knowledgeable historian of economic thought ever, Joseph Alois Schumpeter, expressed the same view as follows: “Old friends come disguised to the party.”

Most economics today are the victims of a division of labour they are so highly praising in economic life. Many become exclusive technicians in very narrow fields, losing sight of the functioning of the system as a whole, and beyond that of the links that economics necessarily has with political and philosophical ideas. They should recall Smith and Condorcet’s warnings that any division of labour may be accompanied by serious drawbacks and their advocacy of education as a remedy. A good knowledge of the history of economic analysis is part of the preventive measures. As John Stuart Mill some 150 years ago put it aptly: “If a political economist is deficient in general knowledge, he will exaggerate the importance and universality of the limited class of truths which he knows. … The only security against this narrowness is a liberal mental cultivation, and all it proves is that a person is not likely to be a good political economist who is nothing else” — an idea rightly shared by such diverse authors as Keynes and Hayek.

Gilbert Faccarello is Professor of Economics at Panthéon-Assas University, Paris, France, and Heinz D. Kurz is Emeritus Professor of Economics at the University of Graz and Graz Schumpeter Centre, Austria.

The Handbook on the History of Economic Analysis, is out now:

Volume I: Great Economists since Petty and Boisguilbert;

Volume II: Schools of Economic Analysis

Volume III: Developments in Major Fields of Economics