From Economics Imperialism to Freakonomics

The Shifting Boundaries between Economics and other Social Sciences

Ben Fine, Dimitris Milonakis

• Publisher: Routledge
• Year: 2009
• ISBN:
  9781134099368
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

Is or has economics ever been the imperial social science? Could or should it ever be so? These are the central concerns of this book. It involves a critical reflection on the process of how economics became the way it is, in terms of a narrow and intolerant orthodoxy, that has, nonetheless, increasingly directed its attention to appropriating the subject matter of other social sciences through the process termed "economics imperialism". In other words, the book addresses the shifting boundaries between economics and the other social sciences as seen from the confines of the dismal science, with some reflection on the responses to the economic imperialists by other disciplines.

Significantly, an old economics imperialism is identified of the "as if market" style most closely associated with Gary Becker, the public choice theory of Buchanan and Tullock and cliometrics. But this has given way to a more "revolutionary" form of economics imperialism associated with the information-theoretic economics of Akerlof and Stiglitz, and the new institutional economics of Coase, Wiliamson and North. Embracing one "new" field after another, economics imperialism reaches its most extreme version in the form of "freakonomics", the economic theory of everything on the basis of the most shallow principles.

By way of contrast and as a guiding critical thread, a thorough review is offered of the appropriate principles underpinning political economy and its relationship to social science, and how these have been and continue to be deployed. The case is made for political economy with an interdisciplinary character, able to bridge the gap between economics and other social sciences, and draw upon and interrogate the nature of contemporary capitalism.

1
Introduction and overview

So economics is an imperial science: it has been aggressive in addressing central problems in a considerable number of neighboring social disciplines, and without any invitations.

George Stigler (1984, p. 311)

Populating economic models with ‘flesh-and-blood human beings’ was never the objective of economists.

Faruk Gul and Wolfgang Pesendorfer (2005, p. 43)

1 Preliminaries

Is or has economics ever been the imperial social science? Could it ever be one? And should it be so? These are just a few of the questions this book tries to answer. It involves a critical reflection on the literature of the process of what has been called ‘economic imperialism’ or ‘economics imperialism’, our preferred term.¹ By this is meant the colonisation of the subject matter of other social sciences by economics. Put in other words, the subject matter of the book at hand is the shifting boundaries between economics and social sciences as seen from the confines of the dismal science, with some reflection on the responses to the economic imperialists by other social sciences.

Economics imperialism as explicitly and consciously practised by economists is a relatively recent phenomenon. Although as an idea it essentially first emerges with the consolidation of mainstream economics, from the 1930s onwards, it only becomes a force to be reckoned with from the late 1950s. In order, however, to grasp this phenomenon fully and to trace its progress, it is necessary to go further back to the processes that led to the desocialisation and dehistoricisation of economics and the consolidation of the core principles of mainstream economics in the passage from classical political economy to neoclassical economics, through the marginalist revolution. We have covered these processes in detail in our earlier, companion volume, Milonakis and Fine (2009), From Political Economy to Economics. So here we will present the basic argument in a nutshell.

2 From reductionism …

Prior to the marginalist revolution, and with classical political economy, theory was concerned with explaining the capitalist economy, drawing upon whatever historical and social factors were considered to be relevant. From Adam Smith to John Stuart Mill and Karl Marx, the economy was treated as part of its wider social and historical milieu, with political economy as a sort of a unified social science to cover this wide terrain. To the extent that political economy did stake out a field of study, it was not one that was artificially separated from other disciplines or fields of study, which in any case were still to emerge. In such a setting, the question of economics imperialism(s) did not arise. More than that, it was irrelevant. Instead there is at most a dispute over what factors are relevant for economic analysis and what is the method by which they should be deployed. Thus, Smith uses both deductive and inductive types of reasoning, mixing history with theoretical analysis throughout, in developing his individualistic theory of economic development (based as it is around self-interest and natural human propensities), or his microtheory of market exchange, or his more structuralist and collectivist theory of distribution. Marx’s use of the dialectical method allowed him to use a complex combination of abstract, social, systemic and historically dynamic content. In this way he saw himself as both drawing upon and breaking with classical political economy.

The major exception within the latter to a mixed method was to be found in David Ricardo’s deductivism, especially through use of his version of the labour theory of value for which a focus on the narrowly economic (prices, profits and so on) was central. Ricardo was heavily responsible for pioneering the deductive method, long before marginalism so fully embraced it. In doing so, the mixture and balance of deduction and induction to be found in Smith is, to a large extent, set aside in the period leading up to the marginalist revolution, with the major exception of the Marxian dialectical method. Even for Ricardo, however, although history played virtually no role, the social element was important not least in his reliance upon a class analysis of the capitalist economy, with emphasis upon the distribution of wages, profits and rents between classes and the impact of this upon the accumulation of capital.

This all changed with the marginalist revolution out of which economics was established as a discipline. In its wake, the dispute that started with the first skirmishes between Ricardo and Thomas Malthus over the relative merits of deduction versus induction, reached a climax in the Methodenstreit, the battle between the marginalist Carl Menger and the leader of the German historical school, Gustav Schmoller. This concerned the relative virtues of abstract, theoretical analysis vis-à-vis the historical method. Indeed, the whole period between the marginalist revolution and the Second World War was a period of pluralism in economic science and of intense debates between the various schools that were flourishing in different parts of the world at roughly the same time, be it in the form of marginalism in Great Britain and other parts of Europe, the Historical School in Germany, or American (or old) institutionalism on the other side of the Atlantic. To a large extent, the historicists and the marginalists had a common point of departure. Following the crisis of the Ricardian (and Millian) system of classical political economy, both historicists and the marginalists sought to transform political economy. But while the historicists objected to its deductive abstractions being motivated by the goal of social reform, the marginalists welcomed deductivism but sought to wed it to some form of Benthamite utilitarianism. There is no doubt that there was a total reconstruction of political economy, not least in terminology, as it became economics. But, whilst the marginalists may have won the day, it was a hard fought and revealing battle in many respects, with original intentions and reservations both discarded and forgotten.

Despite its pluralistic aspect, then, the period following the marginalist revolution witnessed the further consolidation of the neoclassical school based on marginalist principles, and the beginning of its domination of economic science. Alfred Marshall played a key role in this process. Despite taking sides with the abstract, theoretical side of the dispute, Marshall was more rounded and more conciliatory towards other methodological approaches, the historical method being a chief example. Despite Marshall’s roundedness, however, the rise of neoclassical economics in the following years was accomplished in part by extracting the formal, axiomatic and deductive content from his ‘old marginalism’ and developing this prodigiously in its own right.

This involved a triple reductionism which, other than in token ways (but that can be important in allowing for economics imperialism), remains characteristic of orthodoxy to the present day. First is the reductionism to the individual as the key analytical building block and through which collective agents, not least classes, are replaced in extreme by representative individuals as the basic unit of analysis, that is if they are considered at all. And the economy becomes treated as if it is a simple consequence of the aggregation over its individual elements. Second, the economy is reduced in being treated as if it were confined to market supply and demand in the absence of consideration of other ‘non-economic’ or social factors, as if market relations could prevail independently of the broader social context. By the same token and third, economic analysis is based on principles that have no attachment to history other than in their application, not least with the idea of distinctly capitalistic categories, such as profits and wages, being merely the equivalent of factor rewards characteristic of any society. In other words, quite apart from collective agents and the social, historical specificity is lost and economic science becomes totally divorced from history. This huge transformation in economic science, as reflected in the move from political economy to economics, heralded the separation of the latter from other social sciences.

Two important features are crucial in the taking of the social out of the economy. First, the focus of analysis not only shifted to the individual but also to the particular form of optimising behaviour through utility maximisation, or psychological individualism. Profit maximisation by firms or entrepreneurs followed as a corollary as production, cost minimisation and sale all become intermediate steps, through monetary gain, in the path to consumer satisfaction. Second, the economy as market relations now constituted a distinct object of study, with the discipline of economics to undertake the task, by focusing on the economic aspects of behaviour in abstraction from any other social influences, and also within an equilibrium framework, with broader social and political relations fading into the exogenously given background. Space was thus created for the emergence of other social sciences, which would fill the gaps created by the desocialisation and the dehistoricisation of economics.

One example of this is provided by the foundation of economic history as a distinct field of study (see Milonakis and Fine (forthcoming) for a full account). Gradually, the historical economics of the Historical School gave way to economic history proper. This separation of economics from the other social sciences, and history in particular, had always been the common goal of the three founders of the marginalist revolution, Willam Stanley Jevons, Leon Walras and Carl Menger. Whilst each had different views on how economics should relate to history, the marginalist principles that they sought to promote were unacceptable to the goals of the more inductive historical economics, as much as the historical method was unacceptable to them. Despite Marshall’s conciliatory mood, the total divorce proved the only way forward in practice. With the increasing influence of marginalism, especially in the UK, economic history survived in the interwar period by becoming more associated with history than with economics.

A similar story can be told around the relations between economics and the social, as then increasingly being represented in the fledgling discipline of sociology. It could, and did, increasingly occupy the social space vacated by the individualism of marginalism and its confinement to market relations. For Vilfredo Pareto, for example, the economic became synonymous with rationality, defining the social as the residually non-rational (his own terms are ‘logical’ and ‘nonlogical’). In this way, sociology occupied the territory not only of the non-rational but also of the non-market, especially where the domain of rationality and pursuit of self-interest did not seem to apply, as in the marriage ‘market’, bureaucracy, the logic of organisations, and deviancy of whatever type. Significantly, once such separations took place between disciplines, their subject matter and their methods, attempts to retain some sort of unity across them seemed to doom to fail, no matter how prestigious those attempting the task. Figures as prominent as Max Weber and Joseph Schumpeter sought to retain a relationship between economics and other social sciences, even if as separate disciplines, through proposing a programme for social economics (Sozialökonomik). But they failed, as is neatly symbolised by the extreme extent to which one is remembered as sociologist and the other as economist, and the total neglect of the latter by mainstream economics other than in token ways. As a result, the interwar period witnessed the more or less complete separation between the disciplines of economics and sociology.

At the same time, developments within mainstream economics were taking place at a rapid pace. Following Robbins’s (1935 [1932]) definition of economics as ‘the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses’, economics was no longer to be identified with a specific subject matter, be it the economy, the market or what have you. Instead it was to concern itself with questions involving scarcity, hence becoming the science of choice. Grand concerns with distribution between classes, the pace of capital accumulation, the rise and fall of nations or ‘plutology’, as Hicks (1975, p. 323) would have it, gave way to ‘catallactics’, or focus upon the allocation of scarce resources, with corresponding attention to the individual, choice, efficiency and equilibrium. Paradoxically, though, this immediately gave economics a rationale for expanding into areas and fields which, following the separation of the social sciences, were initially considered as lying outside its scope. For should not the individual, choice, efficiency and even equilibrium, if acceptable and accepted at all, be of wider applicability than to the market alone? It is no accident that economic imperialism as a phrase was first coined by Ralph William Souter in 1933 immediately following and as a response to Robbins’s book (see Chapter 2 in this volume). But economics imperialism had another quarter of a century or so to wait before becoming a more or less accepted practice by economists, with Gary Becker at the forefront.

This was because of the need for the technical apparatus associated with neoclassical economics to become both perfected and fully accepted within the discipline itself. The domination of neoclassical economics following the marginalist revolution took the form of an increasingly formalistic, axiomatic and deductive analytical framework. From the 1930s onwards this was accompanied by the revitalisation of the Walrasian general equilibrium system which had been neglected up to this point, being overshadowed by the total dominance of the Marshallian partial equilibrium model.

Long before Robbins wrote his treatise, following the marginalist revolution, economic rationality of a particular type had come to the fore, yielding the technical apparatus around utility and production functions, equilibrium, efficiency and so on. These continue to underpin the theory of supply and demand. Aggregating over such optimising individuals allowed for Walrasian general equilibrium theory, and for this to serve as a prototype for the economy as a whole, albeit derived from microeconomic principles. As chance would have it, the technical apparatus associated with the marginalist principles acquired a two-sided perfection more or less at the same time. The Hicks-Slutsky-Samuelson account of the consequences of individual optimisation was rapidly accompanied by the proof of the theorems associated with general equilibrium. This was done through a prodigious reductionism across a number of dimensions. The individual was reduced to a given set of preferences, acting upon them as a matter of a choice over given goods. The technical assumptions necessary for this exercise to be accomplished, together with aggregation over individuals for general equilibrium, were simply assumed to be – and have become taken for granted as – a conventional wisdom. Utility and production functions, with corresponding convexity assumptions, have stripped down production and consumption to simple equations.

3 … To expansionism

As mentioned, these marginalist principles had not only to be advanced on their own terms, they also had to be accepted and adopted professionally within the discipline of economics itself. This needed to occur despite the extraordinary reductionism involved from the point of view of economic analysis, let alone that of a broader social science. Significantly, in the decade after the Second World War, such developments were attached to what has been dubbed a formalist revolution in economics (see, for example, Blaug 1999, 2001 and 2003).²

The result in the first instance of establishing this technical apparatus, prior to the formalist revolution, was to delimit both the scope and the methodological and theoretical content of the analysis. By the same token, it also had the effect of divorcing mainstream theory from any serious claims to realism, certainly relative to what had gone before and the Marshallian tradition of old marginalism (where marginalist principles are perceived as at most one part of economics), let alone classical political economy. At this time, then, such reductionism was accommodated by leaving the bigger questions either to the newly emerged Keynesian macroeconomics or to more longstanding but, from the perspective of orthodoxy, increasingly heterodox analyses, such as American institutionalism.

Yet, precisely because the core marginalist principles were so heavily reduced in content and application in the first instance – and granted the new definition of economics as the science of choice – this opened the way for them to be extended to new areas once they had been accepted in the wake of the formalist revolution and for them to be given content and not just mathematical form. Indeed, economics in the marginalist tradition had been so successively and successfully reduced that an outward expansion was almost inevitable. The old marginalists accepted a limited scope of application of core principles in deference to other forms of behaviour and other factors such as the role of institutions, and economics itself as a discipline was perceived to be the study of supply and demand for given markets. Economics became a method and a set of techniques rather than a subject matter. As Posner (1987, p. 2) claims:

There is an open-ended set of concepts (such concepts as perfect competition, utility maximization, equilibrium, marginal cost, consumers’ surplus, elasticity of demand, and opportunity cost), most of which are derived from a common set of assumptions about individual behavior and can be used to make predictions about social behavior; and that when used in sufficient density these concepts make a work of scholarship ‘economic’ regardless of its subject matter or its author’s degree. When economics is ‘defined’ in this way, there is nothing that makes the study of marriage and divorce less suitable a priori for economics than the study of the automobile industry or the inflation rate [emphasis added].

So economic principles are open-ended and for some, with Becker for example to the fore as will be seen, this meant they should be equally ambitious of scope in practice.

Economics moreover was also claimed to be able to be a positive science without normative content. To emphasise the point, the marginalist principles and concepts are universal – just think of marginal utility or marginal product, applicable without reference to time, place, or even humans and the market. So even if marginalism was initially intended, and accepted as such, as only to describe part of human behaviour in particular circumstances, it came up with an analysis that was essentially unlimited in scope. Hence, Pareto’s distinction between logical and non-logical action, or between rational and non-rational behaviour, became redundant. As such, marginalism is caught in a perpetual tension between the logical implication of being universally applicable and the practical implication of thereby being rendered unrealistic or vacuous from the perspective of other more rounded disciplines and methodologies. As Coase (1978, p. 207) has perceptively put it:

There are, at present, two tendencies in operation in economics which seem to be inconsistent but which, in fact, are not. The first consists of the enlargement of the scope of economists’ interests so far as subject matter is concerned. The second is a narrowing of professional interest to formal, technical, commonly mathematical, analysis. This more formal analysis tends to have greater generality. It may say less, or leave much unsaid, about the economic system, but, because of its generality, the analysis becomes applicable to all social systems. It is this generality of their analytical systems which, I believe, has facilitated the movement of economists into other social sciences, where they will presumably repeat the successes (and failures) which they have had within economics itself [emphasis added].

Certainly then the decade following the Second World War does represent a divide within mainstream economics in the extent of use of mathematical modelling. But it also represents much more than this. First is a change in direction from making assumptions to establish a core technical apparatus on the basis of marginalism to the application of that technical apparatus. Second is a shift from narrowing the scope of application to a part of economics to one of extending it across economic and non-economic issues, thus setting off the process of economics imperialism.

But what exactly is economics imperialism? For those at all in...