Where Economics Went Wrong: Chicago's Abandonment of Classical Liberalism
288
Where Economics Went Wrong: Chicago's Abandonment of Classical Liberalism
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Overview
Milton Friedman once predicted that advances in scientific economics would resolve debates about whether raising the minimum wage is good policy. Decades later, Friedman’s prediction has not come true. In Where Economics Went Wrong, David Colander and Craig Freedman argue that it never will. Why? Because economic policy, when done correctly, is an art and a craft. It is not, and cannot be, a science. The authors explain why classical liberal economists understood this essential difference, why modern economists abandoned it, and why now is the time for the profession to return to its classical liberal roots.
Carefully distinguishing policy from science and theory, classical liberal economists emphasized values and context, treating economic policy analysis as a moral science where a dialogue of sensibilities and judgments allowed for the same scientific basis to arrive at a variety of policy recommendations. Using the University of Chicago—one of the last bastions of classical liberal economics—as a case study, Colander and Freedman examine how both the MIT and Chicago variants of modern economics eschewed classical liberalism in their attempt to make economic policy analysis a science. By examining the way in which the discipline managed to lose its bearings, the authors delve into such issues as the development of welfare economics in relation to economic science, alternative voices within the Chicago School, and exactly how Friedman got it wrong.
Contending that the division between science and prescription needs to be restored, Where Economics Went Wrong makes the case for a more nuanced and self-aware policy analysis by economists.
Product Details
| ISBN-13: | 9780691179209 |
|---|---|
| Publisher: | Princeton University Press |
| Publication date: | 11/27/2018 |
| Pages: | 288 |
| Sales rank: | 313,989 |
| Product dimensions: | 6.30(w) x 9.30(h) x 0.90(d) |
About the Author
Read an Excerpt
CHAPTER 1
Sweet Science
ENGINEERING A NEW APPROACH TO ECONOMIC POLICY
Economic policy does not follow from economic theory. Instead, policy needs to be drawn from a complicated blend of judgments about ambiguous empirical evidence, normative judgements, and sensibilities that may be framed, but are not determined, by scientific theory. Put another way, economic policy is a blend of engineering and judgment — an "art and craft," not a scientific endeavor that follows from economic theory. Debates about policy are best treated as debates about the art and craft of economics, using a methodology appropriate for an art and craft. Policy debates should not be treated as debates about science, and should not be governed by a methodology more appropriate to science.
Unfortunately, modern economics doesn't treat policy in this way. Instead, it conceives of policy as an applied science, and uses the methodology of science to study policy issues. To some degree, that makes sense. Clearly, one wants evidenced-based, objective analysis of policy. An art and craft methodology uses theory and science whenever it can, meaning to the extent it is appropriate. But when dealing with the messy issues of policy, an art and craft methodology takes seriously the fact that statistical evidence needs interpretation and that one's views and analysis are inevitably influenced by one's normative judgments. An art and craft methodology recognizes that policy is intrinsically entangled and must be dealt with using a methodology designed to guide in such ambiguous, messy, and uncertain situations. To pretend otherwise undermines both the science of economics and economic policy discussions.
Early on, economists struggled with this policy/science divide. Advocates of various policy positions all claimed to have science and theory on their side. They inevitably attacked their opponents for being non-scientific. This struggle led Classical Liberal economists to embrace a methodological tradition that interpreted the science of economics narrowly and created a firewall between scientific pursuits and policy endeavors. This tradition is best found in the policy methodology of Classical Liberals such as John Stuart Mill and his followers. That methodology recognized the messiness of policy compared to the elegance of the theory underlying science.
To deal with that messiness, the policy methodology needed a branch of economics that was free of scientific certainty. One way to handle that problem would be to accept that no part of economics was a science. The second way — the path adopted by Classical Liberals — was to divide economics into different branches — a scientific branch concerned with agreed-upon empirical facts and logical implications of assumptions, in which normative values played as minimal a role as possible, and a policy branch in which values were seen as essential elements of the analysis. The policy branch of economics would use a different methodology than the scientific branch, and its conclusions would not be considered scientific conclusions.
Since our goal in this book is to talk about the methodology appropriate for applied policy, we do not distinguish between the "economics is not a science" and the "economic policy branch of economics is not a science" alternatives. The reason is that our interest is in applied policy, not the science of economics. We interpret the "no economic science" alternative, such as that proposed by some philosophers, for example, Hillary Putnam (2002) or Alexander Rosenberg (Rosenberg 1992), as being included in the Classical "separate branch" alternative. The "no economic science" alternative simply makes the further assumption that the science branch of economics is empty, an assumption we do not accept. But for our purposes these come to the same conclusion since, if there is no part of economics that is a science, then the applied policy branch of economics will not be guided by scientific methodology. If one believes, as Putnam and Rosenberg believe, that no part of economics is a science, it does not change our argument that applied policy should not be thought of as applied science — it strengthens it, since if there is no economic science, our argument — that applied policy economics should not be seen as applied science — becomes tautologically true.
Most classical economists accepted that there was a scientific branch of economics. But they also believed that policy did not follow from scientific theory, and they built that belief into their applied policy methodology. By doing so, Classical Liberalism sought to discourage the conflicting advocates of any policy issue from claiming the authority of scientific justification. Only a powerful firewall between theory and policy could accomplish that. For John Stuart Mill, policy was not based on science, and science did not concern policy. Instead, science was about a search for the truth. In pursuit of that truth, in order to see the scientific truth more clearly, one should ideally harbor no policy considerations whatsoever. Since that was practically impossible, one should attempt to guard, as much as possible, against a tendency to claim too much from science. Policy construction was meant to be about the search for answers to specific policy questions. That search required one to go far beyond the limits imposed by science. The objective was to integrate into the argument judgments that had no scientific basis, but that might have a philosophical basis. To keep the two separate, an economist needed to always lean over backward to confess that, in his or her role as an economic scientist, he or she had nothing to say about policy. That doesn't prevent him or her, when operating in a "statesman" role, from expressing views, and if he or she has expertise in that area, from offering them as the views of a specialist. But that expertise has to be broader than that of an economic scientist, and it must involve knowledge that goes far beyond science. Given the complexity of the economy it is an expertise that will emphasize its fallibility and view that often the best we can do in a complex world is to muddle through without definitive answers (Colander 2003).
The Abandonment of Classical Liberal Methodology
In the 1930s, the economics profession began to abandon the policy methodology of Classical Liberalism by removing the firewall between economic science and policy. This book is an exploration of that abandonment and a call for the profession to return to a more Classical Liberal methodology in policy matters. In our consideration of the abandonment of Classical Liberal methodology, we use the University of Chicago as a case study of this largely postwar phenomenon. We focus on Chicago, not because of the political inclinations or ideological leanings that characterized Chicago in this era, nor because Chicago was unique in abandoning this Classical firewall separating scientific theory from policy. Instead, we choose it because the stalwarts of the postwar Chicago School actually imagined themselves to be, and were seen by most economists as being, defenders of Classical Liberalism. In our view, the Chicago School failed to defend what was important in Classical Liberalism, namely its art and craft policy methodology.
The Chicago School was intent instead on maintaining a narrow interpretation of a laissez-faire policy precept. Chicago adopted a viewpoint which insisted that economic science effectively underpinned the conclusion that the market is capable of solving its own problems. Consequently, government policy interventions should be strongly discouraged. There were two problems with this. The first is that, in Classical Liberal thought, no policy precept followed directly from economic science. In this regard, the Chicago School failed to adhere to that Classical Liberal position. The second issue was the failure to recognize that the laissez-faire policy precept of Classical Liberalism was far more ambiguous than its Chicago interpretation. The Classical laissez-faire understanding could be held by economists with a wide disparity of views of government policy, ranging from John Maynard Keynes's policy activism to Frederick von Hayek's pro-market policy. Moreover, because it was a policy precept, it could change over time, as the problems faced by society changed, as sensibilities changed, and as government structures in turn changed. It was not for economic scientists to settle this debate about policy since the issues debated were, to a large extent, non-economic.
What we are saying is that at the core of Classical Liberalism was a methodology that required separating out, as much as possible, one's consideration of scientific research from one's policy views. One could, and inevitably would, hold ideological and policy views, but, using a Classical Liberal methodology, debates about such matters were best separated from debates about science. As the economics profession progressively abandoned Classical Liberal policy views in a process extending from the 1930s to the 1960s, they simultaneously abandoned the corresponding methodological approach to policy.
The abandonment of these methodological views started with the development and acceptance of what would come to be called welfare economics. Welfare economics provided a formal scientific economic framework for thinking about policy. That framework proved extremely useful in shedding light on many policy questions and incorporating insights from economic thinking. The problem of coordinating responses to scarcity could be captured in a mathematical general equilibrium model and applied to a wide variety of situations. The power of this mathematical model was recognized by the profession, and it became central to the teaching of economics. It was subsequently supplemented by empirical work applying the theory, which could be carried out more rigorously due to developments in statistical analysis. These advances led many economists to believe that economics had become engaged in a series of scientific breakthroughs that would rescue economics from what many considered to be the realm of pseudoscience. Instead, the discipline would be invested with the much more welcomed foundation of formal science.
The general equilibrium model framed policy within a mathematical optimal control structure. The model implicitly assumed that a perfectly competitive market would optimally organize economies in most situations, but that government intervention would be needed to correct for market failures, such as externalities. This approach resulted in what was considered a scientifically based policy conclusion implying some need for government intervention if an economy was to run smoothly. The theory proceeded to develop formal marginal conditions that were capable of guiding policy makers. Laissez-faire was correspondingly non-optimal.
This welfare economics policy framework caught on like wildfire. Since the best way to understand the framework was to understand the mathematical structure of the general equilibrium system, adopting this framework changed the way economics was taught. Students were taught more math and statistics and less moral philosophy and institutional insights. With that change in place, the general equilibrium welfare policy framework eliminated the previously acknowledged firewall. What was considered scientific economic theory was connected directly to policy.
The change to a mathematical general equilibrium welfare economics framework occurred throughout the profession. It started slowly, but resistance decreased as new mathematically and statistically trained economists replaced those trained in the broader Classical Liberal discursive tradition. The art of policy was lost, and the craft of policy became synonymous with scientific theory. The policy/science firewall was fundamentally violated by this change.
Classical Liberals objected, arguing that thinking about policy in too rigid a mathematical fashion eliminated all types of issues that were important components of the policy debate. The general equilibrium model wasn't wrong, but it wasn't "the" sole economic model that should be employed. It was a model based on assumptions that for some issues was useful, but for others was not. Different assumptions could lead to different results. The problem with the model was that it didn't appropriately capture many of the debatable issues relevant to policy, and thus inappropriately limited the scope of policy discussion. Those objections were vigorous at first, and then tended to fade away. Economists advancing those arguments were attacked as being old-fashioned and unscientific. They were dismissed as lacking mathematical knowledge and skills. This change in methodology occurred throughout the English-speaking economics profession, but was led by economists at LSE (Hicks and Lerner), Cambridge (Pigou), as well as Harvard and MIT (Samuelson).
The Chicago Response
The incipient Chicago School (George Stigler, Milton Friedman, Aaron Director, and their associated colleagues) objected to the development of this general equilibrium welfare frame as a basis for policy. They saw it as a rejection of Classical precepts guiding both microeconomic and macroeconomic policy. Particular ire was directed at what they viewed as the malignant travesty encapsulated by the developing Keynesian (collective) policy. These Chicago economists insisted that the Keynesian model was a Trojan horse being used to advance statist ideology and collectivist ideas. They chose, however, not to argue in favor of Classical Liberal methodology. Nor did they reject the implicit contention that policy must follow from mathematically rigorous models. Instead, they responded to this challenge by developing an alternative "scientific" pathway that would lead to the desired laissez-faire policy precept. Specifically, they developed an alternative model demonstrating that the types of government intervention supported by the welfare economic framework, as well as the Keynesian macro framework, were fundamentally flawed theories. In their alternative scientific model, an economy would work best when left to its own devices.
Because of their impressive rhetorical and intuitive marketing skills, the Chicago economists eventually managed to engineer a successful partial counterrevolution against this general equilibrium welfare economics framework. But, in engineering that counterrevolution to save the Classical Liberal policy precept of laissez-faire, they abandoned the most essential part of Classical Liberalism — its methodological foundations. In doing so they, like the advocates of the general equilibrium welfare policy framework, abandoned the Classical Liberal firewall that had previously separated science from policy. Once they accepted that policy necessarily followed from a scientific model, the economic policy debate became inextricably focused on whose science was correct. The bone of contention no longer survived as a debate focused on judgments and sensibilities, which is where Classical Liberal methodology placed it. Serious discussion concerning the subtleties and judgments underlying these differing views became impossible. Each side characterized the other as ideology masquerading as science. These pointed accusations were precisely the type of futile debate that the Classical Liberal firewall had been designed to avoid.
Our concern in this book is not focused on which policy view is correct. Instead, our interest lies in the manner in which the debate about those policy views should be conducted. Should it be primarily a debate about science, formal models, and statistical tests of empirical evidence? Or should it be primarily a debate about sensibilities and judgments that are informed, but not determined, by science? Our argument is that Classical Liberal support for the market was a precept upon which good economists could disagree. It was not a fundamental conclusion based on economic science. Although science and theory can provide some guidance about policy, resolution of such debates is not to be found in theory, but rather in vigorous "argumentation for the sake of heaven," a term that designates a process of cordial argumentation that attempts to seek out the best estimate of truth that is possible. It is not argumentation that focuses primarily on winning policy debates.
(Continues…)
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Table of Contents
Preface, ix,
1 Sweet Science: Engineering a New Approach to Economic Policy, 1,
2 A Classical Garden of Liberal Economics: Policy versus Abstraction, 20,
3 Planting the Seeds of a Chicago Tradition, 36,
4 Ashes and Diamonds: The Rise of the Chicago School, 51,
5 What Has Chicago Wrought? Painting Policy by the Numbers, 66,
6 Economic Policy Becomes a Science: The Rise of Welfare Economics, and the Chicago Alternative, 82,
7 Roads Not Taken: The Stillborn Virginia School of Economics, 102,
8 The Classical Liberal "Argumentation for the Sake of Heaven" Alternative, 120,
9 The Art and Craft of Economics: The Classical Liberal Attitude, 139,
Notes, 163,
References, 241,
Index, 255,
What People are Saying About This
"A heartfelt call for economics to return to its methodological roots in scrupulously separating judgements about economic policy from what can be known as a matter of scientific, empirical evidence. If economists take the advice offered in this book, the subject will become more humble, and humane, as it once used to be."—Diane Coyle, Bennett Professor of Public Policy, University of Cambridge “Colander and Freedman’s wonderful book argues for a return to the discussion tradition of classical liberalism in which one offers a point of view, and recognizing one’s limitations, encourages other points of view. This careful book is based on numerous interviews with participants and opponents of the Chicago School from whom the authors are able to examine and understand many issues.”—David M. Levy, George Mason University“George Stigler once joked that John Stuart Mill was the first economist to treat his opponents’ arguments with full respect: ‘The experiment,’ Stigler continued, ‘was never repeated.’ Colander and Freedman wisely want to revive a Millean and classical liberalism in method, a respectful one, which is under attack currently by misled scientists and populists. This deep yet cheerful book focuses on scientific rhetoric and shows that we’ll never understand economic science or policy until we recognize the force of language, in the economy and among economists.”—Deirdre McCloskey, Distinguished Professor of Economics, History, English, and Communication, University of Illinois at Chicago“Colander and Freedman argue in this fascinating book that economists began to go wrong when they tore down the firewall between theory and policy—the first scientific and objective, the second judgmental and subjective. Once they forgot that their science does not, or rather cannot, produce clear and unambiguous policy advice, all kinds of mischief followed. Drawing on the history of economic thought as well as contemporary debate, the authors provide an account that is as engaging as it is challenging to professional economists.”—Dani Rodrik, author of Straight Talk on Trade