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Is economics the key to everything or do we need to look for completely new ways of explaining what is going on in the world?
By “economics” I mean the discipline of economics—the theories and ideas produced by economists. And I look at some examples of economics being used to solve problems that everyone knows are important—such as finance, the Russian transition from communism to capitalism, or reducing sulfur dioxide emissions from power stations.
I argue that whilst there have been some big successes, economics hasn’t been nearly as successful when the problems get too big and complicated.
But if economics is all about solving real problems, how is it that so much of economics seems to be abstract mathematics, dealing with abstract, completely rational “economic agents” who don’t seem to bear any relation to people we have ever met—except, perhaps, some economists or traders on Wall Street?
When economists use their abstract math to claim that free markets can solve problems, is this because that is what they want to find, or is it because there are strong economic reasons for the market to achieve better than what government intervention could achieve?
The way I like to approach such big questions is by seeing where something has come from. I am a historian, so I go back into history. Not a long way back, just to the Second World War—you won’t find Adam Smith or Karl Marx in this book.
The key idea here is that economists have been working hard to make economics scientific. I look at how they have tried to do this, which sets things up to tackle the problem of ideology head on, and to think about why economists disagree so much.
To go back to the beginning, how is it that there are economists who think economics is doing brilliantly and other economists who think it is a disaster?
“Economists would, I believe, be taken more seriously if they were more modest in their claims. Of course, they are not helped by a public culture that polarizes all views in the interests of generating excitement.”
The Puzzle of Modern Economics starts by looking at the financial crisis of 2008, when the Queen of England opened a new building at the London School of Economics and said to her hosts, “This crisis is terrible. Why didn’t anyone see it coming?” (These may not be the Queen’s exact words, but they seem to be reported differently in different newspapers anyway.)
Of course, the right answer is that quite a few economists did see the crisis coming, but no one wanted to listen to them. But the Queen’s question is a good lead into the different ways people look at economics.
That is not where the project had begun. My original proposal, in 2002, was to bring together work I had done on the history of the economics profession since the Second World War. Writing the book, however, I found that I needed to take a different approach from the one used in my articles in academic journals.
My editor at Cambridge University Press suggested I move the discussion of “successes and failures of economics” from the end of the book to the beginning. This quickly expanded to become almost half the book. I then realized I needed to write new chapters on the attempt to make economics scientific.
Much material on the economics profession that had originally been central to the project had to be cut. But discussions of the Second World War, McCarthyism, and the rise of free market think tanks could remain. The result is a book that changed considerably since the original outline.
So how do the case studies fit with the history? The problem raised by the case studies is how economics came to be dominated by theories that are in some ways incredibly powerful—but which are at the same time very narrow, serving as blinkers.
I approach this from three perspectives.
The first is to see how economics was shaped by the attempt to make it a science. This was tied up with a particular conception of what economics is—the science that deals with the allocation of scarce resources—which helped to shape economists’ ideas about what was, and was not, legitimate economics.
The second is to consider the role of ideology in shaping the subject, and here I turn to some factors that affected the social sciences in general. This is a dimension of economics where one has to be very cautious, and to avoid conspiracy theories. But it seems reasonable to suggest that the new sources of funding in the period since the Second World War may have had some influence on the drive towards mathematically rigorous theorizing.
Finally, I look at dissent in economics, returning to the problem with which I started: how economists can view their subject in such different ways.
How can there be so much scope for disagreement? Take the assumption of rationality. There are some economists who have an ideological commitment to the assumption that people are rational, just as there are others who are equally convinced that they are not. But the reason the assumption is widely used is that, though most economists do not believe people are rational all the time, they have found that theories that assume rationality can be very powerful, explaining a lot of what happens in the world.
One would hope that these theories would be tested rigorously against evidence, and that we would find out who was right. Economists do try to do this, but often the evidence is not powerful enough to adjudicate between competing theories. This leaves room for ideology to intrude, or for preconceptions about what constitutes a persuasive argument.
Modern economics emerged after the Second World War. Many crucial developments came earlier, for the 1930s was an incredibly fertile period for economic thinking. But the Second World War mobilized economists for the war effort, and after 1945 hundreds of technically trained men and women (though mostly men) went from government service into academic positions, helping to contribute to a transformation of the discipline over the next two decades.
This process was reinforced by the expansion of higher education, in which many students, including many members of the armed forces taking advantage of the GI Bill, chose to study social sciences, including economics. For many of them, the Great Depression had stimulated their desire to understand how an economy could fail so badly.
The Second World War led pretty rapidly into the Cold War—and further hot war in Korea. The result was a transformation of science funding, and economics benefited from this, as did all the social sciences.
One of the most influential sponsors of economic research was the RAND Corporation, a US Air Force think tank, where much game theory was developed. At the same time the Cold War fostered anti-communism, symbolized by Joe McCarthy’s attempt to root out communist sympathizers. The charge of “communism” could be levied against anyone arguing for significant state intervention in the economy. At the same time, there were well-funded conservative groups arguing against government intervention.
What effect did all of these have on economics?
Most economists claim that it had no effect at all. The US Air Force and the Navy put money into economic research, often not knowing what they wanted, giving economists considerable freedom to determine what they wanted to do. And whilst free-market think tanks may have influenced politicians, they will not have affected academic research.
However, it is hard to believe that there was no connection between funding and the move towards a more self-consciously “scientific” economics. In the same way that the changes in economics that took place at the end of the nineteenth century were linked to the move of economics into universities, it would be surprising that changes in the way science was funded did not affect the discipline.
Game theory and technical economics were more congenial to funding agencies than some less technical types of economics. The case with free-market think tanks is different. But it seems hard to avoid the conclusion that they contributed to a climate of opinion in which economists proposing free-market ideas found it easier to find an audience for their ideas, even if their academic colleagues were more concerned with their technical proficiency than with their policy conclusions.
None of this is to deny that economists were striving to be scientific. They were doing that. But there are many ways to do science. To explain the path that was taken we need to understand the culture in which economists were operating, and these ideological factors were a part of it.
“It is often those who are firmly ‘inside’ the profession, and who take seriously the mathematical models and other techniques that critics don’t like, who come up with most promising new ideas.”
The Puzzle of Modern Economics is aimed at non-economists, or those who know a little economics. I hope these readers will take a more balanced view of economics.
Modern economics does have serious faults. But a lot of economists agree that there are problems—and they are working hard to improve economics. Their success may be limited, but a lot of economic problems are very difficult. Moreover it is often those who are firmly “inside” the profession, and who take seriously the mathematical models and other techniques that critics don’t like, who come up with most promising new ideas.
This may not sound like a startling position—but it usually gets lost in the cacophony of voices, from insiders as well as outsiders, either praising the subject or condemning it.
If the book sparked some debate among economists, there will be those economists who will think I have been far too critical and others who will think I should have been much more critical.
Economists would, I believe, be taken more seriously if they were more modest in their claims. Of course, they are not helped by a public culture that polarizes all views in the interests of generating excitement.
I would also be very happy if the book helped to promote an interest in the recent history of economics—and indeed in the recent history of the social sciences. I have, in fact, edited a book, together with Philippe Fontaine, titled The History of the Social Sciences since 1945; it is also just published by Cambridge.
Economics and the other social sciences have been an integral part of society for much of the twentieth century, yet their history is neglected. For many years, history of economic thought meant the exegesis of old books, Adam Smith or Karl Marx. This is no longer the case: serious historical work is being done on modern economics, engaging with historians, as the term is usually understood.
Only by understanding the history of the economics—taking the history seriously, not reading the potted accounts of progress that are retailed in economics textbooks—can we understand the discipline we have today.
Roger Backhouse is Professor of the History and Philosophy of Economics at the University of Birmingham, England, and has a part-time position at Erasmus University Rotterdam. He started his academic career in the 1970s, as a macroeconomist, writing theoretical articles and two intermediate macro textbooks. In the 1980s he changed direction and moved into the history of economics writing a series of books, of which The Ordinary Business of Life (Princeton University Press 2002) was aimed at general readers. Besides The Puzzle of Modern Economics, featured in his Rorotoko interview, he recently also edited, with Philippe Fontaine, The History of the Social Sciences since 1945 (Cambridge University Press 2010).