When Thomas R. Malthus, Jean-Baptiste Say and David Ricardo were writing their books on “principles of political economy” several decades after Adam Smith published Wealth of Nations in 1776, their thinking was heavily influenced by the subsistence-level agrarian/mercantile economies that still prevailed in England and France. They were principled, objective thinkers, out to discover economic truth and dedicated to the goal of optimizing the welfare of their societies.
By the middle of the 19th Century the basic features of capitalism as we know it had formed. In the industrial revolution, the functions of landlords and capitalists were combined in trusts and corporations, and capital’s share of revenue was growing. Class warfare was breaking out between capital and labor. Faithful to the moral traditions of their predecessors, the next group of classical economists, notably John Stuart Mill, Karl Marx and the American Henry George, became increasingly concerned about the inequitable distribution of wealth and the repression of labor. Marx perceived a sea change in the “science” of Political Economy accompanying these developments, which he set forth in the Afterward to his second German edition of Das Capital (1873):
Since 1848 capitalist production has developed rapidly in Germany, and at the present time it is in the full bloom of speculation and swindling. But fate is still unpropitious to our professional economists. At the time when they were able to deal with Political Economy in a straightforward fashion, modern economic conditions did not actually exist in Germany. And as soon as these conditions did come into existence, they did so under circumstances that no longer allowed of their being really and impartially investigated within the bounds of the bourgeois horizon. In so far as . . . the capitalist regime is looked upon as the absolutely final form of social production, instead of as a passing historical phase of its evolution, Political Economy can remain a science only so long as the class struggle is latent or manifests itself only in isolated and sporadic phenomena.
Let us take England. Its Political Economy belongs to the period in which the class struggle was as yet undeveloped. Its last great representative, Ricardo, in the end, consciously makes the antagonism of class interests, of wages and profits, of profits and rent, the starting point of his investigations, naively taking this antagonism for a social law of Nature. * * *
In France and in England the bourgeoisie had conquered political power. Thenceforth, the class struggle, practically as well as theoretically, took on more and more outspoken and threatening forms. It sounded the knell of scientific bourgeois economy. It was thenceforth no longer a question, whether this theorem or that was true, but whether it was useful to capital or harmful, expedient or inexpedient, politically dangerous or not. In place of disinterested inquirers, there were hired prize fighters; in place of genuine scientific research, the bad conscience and the evil intent of apologetic. * * * The Continental revolution of 1848-9 also had its reaction in England. Men who still claimed some scientific standing tried to harmonize the Political Economy of capital with the claims, no longer to be ignored, of the proletariat. Hence a shallow syncretism of which John Stuart Mill is the best representative.
With the class warfare, as might be expected, the competition for economic orthodoxy and ideas had begun, and objective, scientific Political Economy would likely never be quite the same again.
Flash forward to the present moment, October 23, 2013. There is big-time economic warfare going on, as Warren Buffet has been telling us for several years. The recent movie “Inequality for All” produced by and starring Robert Reich, one of the most stalwart champions of America’s middle and working classes, is making the rounds of theaters across the nation. Yesterday, Reich posted in his blog “The Triumph of the Right” (here) which opened with this:
Conservative Republicans have lost their fight over the shutdown and debt ceiling, and they probably won’t get major spending cuts in upcoming negotiations over the budget. But they’re winning the big one: How the nation understands our biggest domestic problem. They say the biggest problem is the size of government and the budget deficit. In fact our biggest problem is the decline of the middle class and increasing ranks of the poor, while almost all the economic gains go to the top.
Whichever you think is the biggest problem depends of your understanding of economics. So, yes, the contest between economic ideas has been the major battlefield in class warfare. Recently I have been studying the mythology associated with classical economists, and just as I was reviewing ideas about the mysterious “invisible hand” of Adam Smith, on Monday, October 21, 2013, the New York Times arrived with an Op-Ed by a Harvard economist, Raj Chetty, entitled “Yes, Economics is a Science” (here). Of course, I was extremely interested in what he had to say.
Chetty was defending the awarding of this year’s Nobel Memorial Prize in Economic Science earlier this month to three economists, two of whom (Eugene F. Fama of the University of Chicago and Robert J. Shiller of Yale) “might be seen as having conflicting views about the workings of financial markets.” Indeed: the simplest version of the “inconsistency” claim being that one of them found financial markets to be basically stable while the other found them to be unstable.
He began his defense with this: “What kind of science, people wondered, bestows its most distinguished honor on scholars with opposing ideas?” Now, I will admit to being mildly disappointed when the announcement was made that the award did not go to Thomas Piketty, Emmanuel Saez and Stephanie Stantcheva, who have done pioneering work on income inequality and the income elasticity of the top marginal tax rates, but that was just my preference. I was fully prepared to agree with what I expected Chetty to argue — hobgoblins and foolish consistencies being what they are — and being unfamiliar with the work of the recipients, I had no reason to doubt that they had truly done significant work.
Chetty’s actual defense, however, had nothing to do with the particulars of the award-winning work. Instead, he offered a general refutation of claims that this award shows economics to be a “confused discipline,” and a “fake science.” The differences between their findings, he argued, are “less significant than the profound agreement in their scientific approach to economic questions, which is characterized by formulating and testing precise hypotheses.” Really? I had to reread that a couple of times: Was Chetty arguing they deserved the Nobel Prize just for “doing” science, never mind the results? Was their “profound” consistency in following the “scientific method” (here) the only noteworthy, and award-worthy, significance of their work?
Again, I do believe that any criticism of these awards based on inconsistencies is superficial and unfair, without careful review of the studies’ results and their significance. Still, Chetty’s defense was remarkably shallow: “An emerging body of work,” he argued, is building on the “scientific approach” of the winners. Was he merely reemphasizing the approach of “formulating and testing precise hypotheses”? Or suggesting that this work had stimulated more work on the stability of financial markets? I found myself wondering what, exactly, Chetty had meant — and what he was not telling us.
Then came the admission that blew me away, and reminded me of Marx’s insight:
It is true that the answers to many “big picture” macroeconomic questions – like the causes of recessions or the determinants of growth – remain elusive.
Ah, but these are the big macroeconomic questions! I am writing a book about them, and from my own experience, I can tell you that much of the knowledge needed to answer these questions can be arrived at fairly quickly, even by a retired economics professional like myself (albeit one with an excellent education and significant career experience in relevant areas of economics), working at home alone. And I can tell you that most of my efforts over the past year have been devoted to determining exactly why these answers have eluded virtually the entire discipline of economics.
The truth is that these questions could and should have been answered long ago: I now know that in 1776 Adam Smith himself (in Wealth of Nations, Book II, Ch 3) intuitively grasped the connection between demand and growth, a connection that was not to be developed until Keynes established the dynamic principle of “effective demand” in 1935 (The General Theory, Book I, Ch. 3), and also the connection between growth and the distribution of wealth, a connection that apparently did not surface again until Simon Kuznets noticed the inverse relationship between income inequality and growth in the 1950s. Adequate wealth and income distribution data were always needed for a clear focus on the big picture, but sufficient data to thoroughly revamp macroeconomics have long been available. Surprisingly, though, Chetty argued:
As is the case with epidemiologists, the fundamental challenge faced by economists – and the root cause of many disagreements in the field – is our limited ability to run experiments. If we could randomize policy decisions and then observe what happens to the economy and people’s lives, we would be able to get a precise understanding of how the economy works.
Chetty tried to sell the idea that economics must take small “empirical” steps, “even as the ‘macro’ questions … remained contested.” But that is not at all what’s going on. Back in May and June of 2013, I posted two articles (here and here) thoroughly addressing the issues raised in the firestorm that erupted over Carmen Reinhart and Kenneth Rogoff’s study “Growth in a Time of Debt” (GITD). Recall that statistical errors were discovered that invalidated their thesis, leading them to withdraw their conclusions. These researchers had, indeed, been “contesting” a “macro” question; they had, in fact, gone for the whole enchilada, attempting to validate the “austerity doctrine” by proving its converse, that growth declines when the ratio of public debt to annual GDP reaches a threshold “tipping point.” The study had been Paul Ryan’s sole “scientific” justification for his draconian federal budget in both 2012 and 2013, and with its collapse came the empirical demise of the austerity doctrine itself.
I cannot prove that the Reinhart/Rogoff study was politically motivated, but I am entitled to assume that the researchers were neither unaware of nor completely disinterested in its political significance. Those of us who studied economics before 1980 are aware of differences in the way economics is taught and practiced today, and in what is regarded as objective “science.” It is no secret that Milton Friedman’s “Capitalism and Freedom” had a remarkable impact on what his followers wanted to try to demonstrate; and it appears to have influenced the selection and design of the consumption function for which he himself was awarded a Nobel Prize.
The first requirement for legitimate progress in science is a sensible hypothesis to test, and you have to genuinely want to know the answer. In selecting a topic for research, you are naturally less likely to look for answers you expect to be uncomfortable with. In economics, there have been political and monetary disincentives to work on questions related to distribution and taxation, because the interests of wealth do not support optimizing welfare.
Why is it, then, as this Harvard economist has candidly conceded, that economics still can’t comprehend “how the economy works”? Why are relationships that Adam Smith could figure out, without even being able to verify them statistically, still not common knowledge, or even acknowledged, 237 years later?
Is economics a science?
Yes. And No.
Of course there is a science of economics, and it has a few intrepid practitioners who are not driven or controlled by the ulterior motives and the agendas of wealth. But there is also a vast, non-scientific ideology of economics that is controlled by those motives and agendas, and that ideology has been around for many years. It holds sway today, ever since about 1980, greatly corrupting the field and leading it into a dark wilderness.
The “triumph of the right” Reich speaks of has been made possible by the triumph of ideology in economics. It has been the triumph of “trickle down” and “austerity” and the suppression of scientific reality, which has been involuntarily sidelined, left unemployed like the millions of people around the world who are jobless and starving because of ideology’s false “wisdom.”
Other sciences have their competing ideologies, too — sciences like evolutionary biology and climate change. Many of these sciences are under heavy attack as well, but they still survive, and are practiced, subject to ever-shrinking budgets. Medicine is doing all right, although it too is plagued by perverse economic incentives that can favor sickness to wellness, as the “invisible hand” of self-interest directs its investigations toward perverse alternatives. But only the discipline of economics, so far as I can tell, has been so completely dominated by false ideology, all in the name of “capitalism and freedom.”
There is plenty of real science available for the economists at Harvard, Yale, the University of Chicago, and everywhere else. As I suggested in my analysis of the Reinhart/Rogoff controversy, the vast Reinhart/Rogoff database of public debt-to-GDP ratios could be combined with the Piketty/Saez database for an empirical study, over the last century, of the relationship in the United States between growth and bottom 99% GDP, or top 1% income, or even more refined variations. The correlation between public debt and top 1% wealth (net worth) also needs thorough study. We need an improved understanding of the money supply, and the relationships between the amount and the velocity of money. The entire area of “stagflation” is overdue for an overhaul, since we now know that a high inflation rate can coexist indefinitely in an economy with rapidly rising inequality and public debt. And so on.
There is no shortage of real, scientific work for economists, or the data needed to get it done. First, however, the existence of this work has to be recognized, along with the urgent importance to survival of doing that work. For that, economists will have to catch up on what they should already have learned.
Then they’ll have to find someone willing to pay for it.
JMH — 10/23 and 24/2013