The Strange History of Economics

  

 

  

 

  

           These days people like to call
  neoclassical economics “mainstream economics” because most universities offer
  nothing else.  The name also backhandedly
  stigmatizes as oddball, flaky, deviant, disreputable, perhaps un-American
  those economists who venture beyond the narrow confines of the neoclassical
  axioms.  To understand the powerful
  attraction of those axioms one must know a little about their origins.  They are not what an outsider might
  think.  Although today neoclassical
  economics cavorts with neoliberalism, it began as a
  honest intellectual and would-be scientific endeavour.  Its patron saint was neither an ideologue
  nor a political philosopher nor even an economist, but Sir Isaac Newton.  The founding fathers of neoclassical
  economics hoped to achieve, and their descendents living today believe they
  have, for the economic universe what Newton had achieved for the physical
  universe.

  

 

  

           This brief article roughly traces the
  strange history of economics from the 1870s through to the beginning of
  Post-Autistic Economics movement in the summer of 2000.

    
   Physics Envy
  

 

  

            Neoclassical
  economics began as a project to fashion an economic model in the image of
  Newtonian mechanics, one in which
  economic agents could be treated as if they were particles obeying mechanical
  laws, and all of whose behaviour could, in principle, be described
  simultaneously by a solvable system of equations.  This narrative required the treatment of
  human desires as fundamental data, which, like the masses of physical bodies
  in classical mechanics, are not affected by the relations being
  modelled.  It was to this end -- not to
  the understanding of economic phenomena -- that homo economicus
  or economic man and the hedonistic calculus were invented.  Thorstein
    Veblen sums up the core metaphysic as follows:

  

the human material with which the
  inquiry is concerned is conceived in hedonistic terms; that is to say, in
  terms of a passive and substantially inert and immutably given human
  nature.  . . .  The hedonistic conception of man is that of
  a lightning calculator of pleasure and pains, who oscillates like a
  homogeneous globule of desire of happiness under the impulse of stimuli that
  shift him about the area, but leave him intact.  He has neither antecedent nor consequent.  He is an isolated definitive human datum .
  . . 1

  

With this construct at its
  centre, the dream of a determinate model of the economic universe was
  realized in the 1870s by William Stanley Jevons
  and, especially, by Léon
  Walras,
  both of whom were in part physicists by training.  Called the model of general equilibrium,
  this elaborate mechanistic metaphor, proudly devoid of empirical content,
  remains the grand narrative of economic theory for students and economists
  everywhere.

  

 

  

            The model, which invariably is expressed in language so
  metaphorical that it would make a good poet blush, works by laying down a
  priori, like Euclidean geometry, a set of axioms.

   The economic universe is determinate. It exists in a void rather than in an ecosystem. All relations in an economy are self-regulating, in
       the sense that any disturbance “sets in motion forces tending to restore
       the balance”. These “forces” result exclusively from the
       behaviour of isolated individual agents. 
       The behaviour of these agents conforms to certain
       mathematical properties. For example, consumer choice is characterized
       by transitivity (if X is preferred to Y and Y to Z, then X is always
       preferred to Z), completeness (out of the set of all possible bundles of
       goods given her income, she considers her preference between every pair
       of them) and independence (consumers are not influenced by the choices
       of other consumers). 
  

              To their credit, few
  economists have tried to provide empirical support for these axioms.  Instead this is a realm in which
  formalistic expediency rules.  The
  entities of the model and relations between them must be conceived in a way
  that makes them isomorphic to those of 
  Newton’s model of the physical universe.  The exigencies of the grand metaphor rule
  even when the model is, as in the pedagogically popular Marshallian
  tradition, applied piecemeal and non-mathematically to individual
  markets.  For example consider the
  elementary and ubiquitous notion of market demand for a product X.   Because a macro mass is in fact an
  additive function of its micro masses, neoclassical economics defines
  market demand as the additive function of the demands for X of individual
  agents.  But this assumes that
  everyone’s demand for a product is independent of everyone else’s demand for
  that product, for example, that one’s choice of a disco is not influenced by
  whether it is crowded or dead empty. 
  Without this independence (that is, the absence of all intersubjective effects) market demand as understood by
  mainstream economics does not exist. 
  But as everyone knows – even neoclassical economists when they are
  off-duty-- in consumer societies strong intersubjective
  effects in markets are the rule rather than the exception.

  

 

   Veblen and Keynes
  

 

  

            At the very end of the 19th Century, Thorstein
  Veblen launched a
  counter-revolution against the growing domination of the neoclassical
  approach in economics.  Besides
  critiquing the neoclassical assumptions, he analysed institutions as well as
  isolated individuals, emphasized emergent social phenomena, argued that habit
  influenced economic choice more than rational calculation, rejected all forms
  of reductionism, and stressed the importance of knowledge in economic
  evolution. This approach steadily gained adherents in the years leading up to
  WWI, and in 1917 one its leaders, John R. Commons, was elected president of
  the American Economics Association (AEA).  The following year at the AEA meetings this new school was christened
  “institutional economics” and embraced by the association as a means of
  making economic theory capable of addressing the problems of economic
  development that would follow the conclusion of the war.2   In the 1920s in the US the Institutionalists came to rival the Neoclassicals,
  but in the 1930s their numbers declined. 
  Like neoclassical economics, institutional economics had no
  explanation of or solution to the calamity that had befallen capitalist
  economies.

  

 

  

            In stepped John Maynard Keynes.  He offered a new theoretical interpretation
  of capitalist economies that both explained their collapse and pointed to
  practical measures that would, without interfering with their general
  principles, get them going again and keep them functioning smoothly.  Given the dire straights of capitalism and
  the growing fear of revolution, not even neoclassical economists dared for
  long to keep Keynes’ theory from being given a try.  When it was shown to work, that, at one
  level, ended the argument.  For
  example, henceforth all American presidents would in the basic management of
  the economy be Keynesians.  But at the
  theoretical level, which in the neoclassical tradition means theory that is
  axiom-led rather than empirically-led (else their axioms would have been
  abandoned long ago), the argument had only just begun.  In 1946 Keynes died and neoclassical
  economists began their counterinsurgency. 
  This time they would not be satisfied until most economics departments
  in the world had been cleansed of economists who voiced non-neoclassical
  ideas.

  

 

   The Pentagon
  

 

  

            Keynes had trained at Cambridge University as a
  mathematician.  In his mid-twenties he
  wrote Treatise on Probability, a book lauded by Whitehead
  and Russell (“it is impossible to praise too highly”) and that launched what
  has become known as the “logical-relationist”
  theory of probability.  When turning
  his attention to economics, he was shocked by the way mathematical economists
  abused mathematics, especially applying them in meaningless ways to
  unsuitable phenomena, and he made no secret of his professional contempt for
  their empty pretentiousness.  But these
  economists were soon to have their revenge. 
  Led by Paul Samuelson in the US and John Hicks in the UK, they set
  about mathematicising Keynes’s theory.  Or, more accurately, a part of his
  theory.  They left out all those bits
  that were inconsistent with the neoclassical axioms.  Their end product was a formalized version
  of Keynes that is like a Henry Miller novel without sex and profanity.  This bowdlerized version of Keynes, called
  “Keynesianism”, soon became standard fare in undergraduate courses.  Even graduate students were discouraged
  from reading the primary text.  With
  the real Keynes out of the way and Veblen and all
  the other free spirits forgotten, the road was now clear to establish a
  neoclassical tyranny.

  

 

  

            Following WWII, the United States
  increasingly came to determine (one might say dictate) the shape of economics
  worldwide, while within the United States the sources of influence became
  concentrated and circumscribed to an absurd degree.  This state of affairs, which persists to
  the present day, was engineered in significant part by the US Department of Defense, especially its Navy and Air Force.3   Beginning in the 1950s it lavishly funded
  university research in mathematical economics.  Military planners believed that game theory
  and linear programming had potential use for national defense.  And although now it seems ridiculous, they
  held out the same hope for mathematical solutions of “general equilibrium”,
  the theoretical core of Neoclassical economics.  In 1954 Kenneth Arrow and Gerard Debreu achieved for this mathematical puzzle a solution
  of sorts that has been the central show piece of academic economics ever
  since.  Arrow’s early research had been
  partly, in his words, “carried on at the RAND Corporation, a project of the
  United States Air Force.”4  
  In the 1960s, official publications of the Department of Defense praised the Arrow-Debreu
  project for its “modeling of conflict and
  cooperation whether if be [for] combat or procurement contracts or exchange
  of information among dispersed decision nodes.”   In 1965, RAND created a fellowship program
  for economics graduate students at the Universities of California, Harvard,
  Stanford, Yale, Chicago, Columbia and Princeton, and in addition provided
  postdoctoral funds for those who best fitted the mold.  These seven economics departments along
  with MIT’s, an institution long regarded by many as a branch of the Pentagon,
  have come to dominate economics globally to an astonishing extent.  Two examples will show what I mean.

  

 

  

            The American Economic
  Review (AER), the Quarterly Journal of Economics (QJE), and the Journal of Political Economy
  (JPE), have long been regarded as the
  world’s three most prestigious economics journals, the ones in which a
  publication adds the most value to an economist’s CV and most helps an
  economics department’s ranking and research funding. 

  

 

  

            A study has been made of the affiliation of the authors
  of full-length articles appearing in these journals from 1973 through 1978.5   For the QJE
  it found that the eight departments with the most articles were the seven
  favoured through RAND by the US Department of Defense
  plus MIT, and that this Big Eight accounted for 77.3 percent of the articles
  published.  In the JPE  all of the RAND Seven were in the top ten
  and together with MIT accounted for 63.1 percent of the articles
  published.  In the AER
  the top eight contributing departments were again the RAND Seven plus MIT,
  which together accounted for 59.3 percent of the articles published.  Even within this Big Eight there was an
  astonishing concentration of success. 
  In the QJE, which is controlled by
  Harvard, 33.3 percent of the articles were by Harvard-affiliated
  authors.  In the JPE,
  controlled by Chicago, 20.7 percent of the articles were by
  Chicago-affiliated authors.  In the AER, nearly half of whose editorial board during
  these years was from, in rank order, Chicago, MIT and Harvard, 14.0, 10.7 and
  7.1 percent of the articles were by authors from these departments
  respectively.  About 70% of the board members
  were from the Big Eight and nearly 60 percent of the members of the
  nominating committees for officers.  

  

Is it any
  wonder that the departments are “distinguished”? Thus the “best” departments
  are those who publish in their own journals, which are “best” since they
  publish the “best” departments.  This
  academic incest would be considered genetically unsound if it involved
  biological reproduction.”6
 

  

 

  

            A glance through the
  2003 edition of Penguin’s Dictionary of Economics illustrates the accentuated
  continuation of this tiny all-powerful closed shop.  The dictionary has entries for 29 living
  economists.  Of these, 26, 89.7
  percent, are from the US or have had all or the most important part of their
  careers there.  Think about that: 26
  for one country and 3 for the rest of world. 
  And that is in a British publication by a team of three British
  authors.  And what are the affiliations
  of the 26 US economists?  100% of them
  have either taught at or received their PhD from one of the Big Eight.

  

 

  

 

  

Notes

  

1.
  Thorstein
   Veblen, "Why is Economics not an Evolutionary Science?" Quarterly
  Journal of Economics, vol. 12, 1898, p373

  

2.
  Geoffrey M. Hodgson, How Economics Forgot History, Routledge
  2001, p155

  

3.
  This paragraph draws heavily on Michael A. Bernstein, “Rethinking Economics
  in Twentieth-Century American”, The Crisis in Economics, edited by
  Edward Fullbrook, Routledge,
  2003, pp154-61

  

4.
  Kenneth Arrow,
  Collected Papers of Kenneth J. Arrow: Volume 1: Social choice and Justice,
  Harvard University Press 1983, p1

  

5.
  E. Ray Canterbery and Robert J. Burkhardt,
  “What do we mean by asking whether economics is a science?”  Why Economics Is Not Yet a Science,
  edited by Alfred S. Eichner, Macmillan 1983,
  pp15-40

  

6.
  Ibid p28

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