Saturday, November 08, 2008

Why study the history of economic thought?

Why study the history of economic thought?

This is a fair enough question deserving of an answer. The presumption behind the question is that modern economics provides what is needed to conduct economic policy; that the subject has moved on considerably since ‘dead, mainly white, male economists’ wrote their treatises and most of what they wrote has been improved upon.

The average graduate economist, 23 years old and commencing her or his career knows about a far sharper economic reality that was ever imagined by Petty, Cantillon, Smith, Quesnay, Turgot, Say, Malthus, or Ricardo. Also, the world has moved on too (well parts of it have) from the mainly agricultural, pre-industrial economies of the 17th-18th, early 19th centuries.

And anyway, some tell us, students of physics do not study Newton’s Principia as part of their education (they couldn’t anyway, as few modern graduates can read Latin). But physics is about eternal verities – the solar system is unchanging for all intents and purposes – and once the orbits were understood when it emerged from the truly ‘dark ages’ of “God’s” Earth being the centre of the universe, now passed over in embarrassment, the subject moved on to yet further mysteries inside the atom and inside the creation of the universe in the so-called ‘Big Bang’.

Economics defies similar certainties despite a massive sophistication in the attempts of mathematics to crack the continuing mysteries of how economies work that prevent reliable predictions on what is about the happen next. Even after the early economists attempted to explain growth, modern economics has not yet satisfactorily found a solution. Growth economics is a prestigious research subject – the best brains of the best graduates are deployed in finding the crock of gold – and it has so far failed to explain growth. True, it is narrowing the search down, but even that is controversial.

While Adam Smith’s attempt a growth theory was dismissed in classes on growth economics for decades, the glaring fallacies of what passed for growth theory in the post-war years (Harrod-Domar, Solow, etc.,) remained highly regarded as the foundations from which a modern growth theory could be built. That work is still in progress (Paul Romer, etc.,), while whether there should be any growth at all is capturing political attention by creeping up the agenda among legislators and those who influence them.

Interestingly, a revised interest in Adam Smith’s contributions in growth related theory – divisions of inter-sector labour (the labourer’s common coat) – came to the attention of modern growth theorists in the form of increasing, rather than decreasing, returns from Allyn Young’s 1928 article in the Economic Journal.

Ricardo’s diminishing returns fitted the well-behaved, closed-system mathematics of the marginal revolution (from the 1870s onwards) and missed the essential dynamism implied in Smith’s much broader concept of the division of labour, misled by the narrow attention on the (in)famous pin factory and its restricted application as conceived by a host of economists, including Francis Horner (1800s), Ricardo (1817), Mill (1849), Marshall (1900s), the ‘Marginalist’ School (1870s onwards), and the moderns (including Schumpeter) since then.

Knowledge of the history of economic thought proves productive when it is practised.

5 Comments:

Blogger Brian Lee said...

John Maynard Keynes, himself now part of "the history of economic thought", believed in the importance of studying and applying the wisdom of earlier economists. His works are studded with references to earlier economists. This is obvious in "The General Theory", "Essays in Biography", and plenty of other places - just see his "Collected Writings"!

Markwell's highly apposite book on "Keynes and International Relations" highlights what Keynes drew from earlier economists - for example, there's a section on Keynes's role in the 1930s "rehabilitation of Malthus". Today we see a rehabilation of Keynes, where economists, policy-makers and commentators are all seeking wisdom from JMK. Keynes himself believed that the international economic institutions he helped create at Bretton Woods, combined with Keynesian (in his sense) domestic policies (preferably internationally coordinated) enabled "the wisdom of Burke and Adam Smith" to "come into its own again" (or words to that effect - see Markwell, page 253 on).

Although we must carefully consider what applies today and what does not, a study of the history of economic thought is surely excatly part of what we need today to help us deal with this current mess. Otherwise aren't we going to spend a great deal of time re-inventing the wheel - and probably doing it pretty badly?

3:37 am  
Blogger Bill Greene said...

I believe that the history of economic practices is a more useful field to plow than the history of economic thought. After all, economic thought is merely an attempt to draw conclusions about actual real world economic activity--and unfortunately, most economists wander off on a tangent pursuing theories that are based too much on intellectual abstractions rather than on practical results. And intellectual abstractions have an intrinsic weakness when applied to business activity--they ignore human nature.

There will never be any mathematical certainty in economics because all trade and exchange is based on the all too human motivation of the actors. The only certainty since 2,000 BC,when the Phoenicians began the manufacture and international trade of goods, has been the natural entrepreneurial and acquisitive instincts of individual human beings.

Study of such past successful trading economies is vital to the understanding of how it all works. Economists prefer to ignore what has actually happened in order to pursue the idea of "How can I make it better?" That is why I have urged the "case method" as a means of teaching because it grounds the student in actual techniques employed and results obtained. Note that history reveals how the academics' complex theories about specialization of labor, the elasticity of demand, marginal propensity to consume,and the relationship between supply and demand, were all understood and availed of by simple uneducated businessmen thousands of years ago. There is little new or profound in such concepts.

History also reveals that the one unchanging "truth" that prevailed throughout history's many experiments with government and economics was that the economic activity of a people proved most enriching when the many individual actors had freedom of action. That situation prevailed only in the very few locales where government provided security but held regulation to a minimum--thus empowering the individual citizen's natural inclinations.

Keynes produced many scholarly tracts on all this but like most economists emphasized theoretical possibilities while ignoring human nature. The idea of international agencies might have been helpful if they had advocated the freeing up of a nation's people--removing barriers to their economic action, providing security for their property, and enabling legal and financial systems that supported every individual's economic rights.

Instead, most international agencies are run "top-down" where the elites in the agencies attempt the impossible feat of pump priming macro-economic policies on a helpless populace. Typical is Ms Slaughter of Princeton's prestigious Woodrow Wilson School. In her book, "A New World Order," she advocates an increasingly complex, global web of "government networks." She suggests that these organizations can help nations to "participate in global regulatory processes," and "promote convergence, compliance with international agreements, and improved cooperation among institutions on a wide range of regulatory and judicial issues."

Slaughter and Keynes illustrate the common intellectual theorists disease--they want to rule from the top. "Cooperation" means doing what they tell you! They love the words "regulatory"and "compliance."And they ignore the half-century failure by the World Bank and the IMF to help under-developed nations actually advance.

There are economists like Hernando de Soto and groups like the Grameen Bank and the Women's World Bank that know what is needed--but they are out of the mainstream of today's economic elite. Instead of lecturing in ivory towers and attending international summits, they are out in the streets helping micro-businesses in the Third World and working to remove impediments to free enterprise.

The difference between Slaughter and De Soto illustrates the difference between "economic thought" and "economic practice." The former is useful only if it remains close to the latter.

2:26 pm  
Blogger Bruce Wilder said...

Heidegger, or someone like that, proposed that the energy is in the question, not the answer. In studying the history of economic thought, we have an opportunity not just to reconsider obsolete or rejected answers, but also to reconsider the question.

Reconsidering the question can be extremely valuable, an opportunity to fathom our ignorance and rekindle our curiosity.

5:21 pm  
Blogger Gavin Kennedy said...

Bruce

Interesting approach. Many faculty economists used to joke that while the questions they set of examining their students’ competency were roughly the same each Diet, the answers were different and that this was the real test of a student’s grade standard.

Bill

I have often remarked to those of my colleagues who are in the forecasting business that they should study the past performance of their earlier forecasts. Perhaps all who pay for these forecasts should test the value of their past expenditures; how many were right, nearly right, or absolutely wrong?

Human nature, alas, lies outside the expertise of most modern economists, The current vogue for applying Homo economicus rationality to everyday decisions reveals a carelessness with the kind of questions we should expect from students who were paying attention.

I read a perfectly reasonable explanation for example, of why teenage girls in difficult social circumstances get pregnant – rational rewards from welfare incomes formed a large part of the answer - but what was missing was a rational explanation for why many teenage girls in the same social circumstances don’t get pregnant? Similarly, with young male’s who carry knives, and so on. If rational motives explain everything, I worry for the relevance of ‘rational’ motives.

With much of your comment I tend to agree. If you don’t study the past you are condemned to repeat it.

Brian

I agree. It’s not as if economic problems are new to the planet or the current epoch.

4:20 pm  
Blogger Gavin Kennedy said...

Bruce

Interesting approach. Many faculty economists used to joke that while the questions they set of examining their students’ competency were roughly the same each Diet, the answers were different and that this was the real test of a student’s grade standard.

Bill

I have often remarked to those of my colleagues who are in the forecasting business that they should study the past performance of their earlier forecasts. Perhaps all who pay for these forecasts should test the value of their past expenditures; how many were right, nearly right, or absolutely wrong?

Human nature, alas, lies outside the expertise of most modern economists, The current vogue for applying Homo economicus rationality to everyday decisions reveals a carelessness with the kind of questions we should expect from students who were paying attention.

I read a perfectly reasonable explanation for example, of why teenage girls in difficult social circumstances get pregnant – rational rewards from welfare incomes formed a large part of the answer - but what was missing was a rational explanation for why many teenage girls in the same social circumstances don’t get pregnant? Similarly, with young male’s who carry knives, and so on. If rational motives explain everything, I worry for the relevance of ‘rational’ motives.

With much of your comment I tend to agree. If you don’t study the past you are condemned to repeat it.

Brian

I agree. It’s not as if economic problems are new to the planet or the current epoch.

4:20 pm  

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