The End of Economics

Michael Perelman

• Publisher: Routledge
• Year: 2002
• Edition: 1
• eBook ISBN:
  9781134775354
• Topic: Business
• Subtopic: Business General
• Index: Business

Most economic theory assumes a pure capitalism of perfect competition. Even when it is recognized that this does not exist, many politicians and captains of industry pay a great deal of lip service to the idea of the market. This book goes beyond the rhetoric to explore how, even in the United States, the most capitalist of all countries, the market has always been subjected to numerous constraints. As well as discussing the opinions of economists, the book looks at the opinions and practices of figures such as Henry Ford, J.P. Morgan, and Herbert Hoover.

1 THE END OF ECONOMICS

WHAT IS AN ECONOMIST?

What is an economist? We could say that an economist is a person who studies economies, but that answer leaves us with an even more difficult question: what is an economy?

We have all seen stores, farms, factories, and banks, as well as workers, employers, and government personnel. They would all seem to be part of an economy, but so too is a nursing mother who is rearing the next generation of workers. Schools, churches, and neighbors also help to shape the way people work. They may affect workers’ productivity just as surely as machines do. By the same token, an influence as nebulous as culture in general is a major economic force, even when it is not sold in the form of commodities, such as movies or recorded music. In short, we are hard pressed to find anything that we can exclude from the economy out of hand. This line of reasoning leads to the conclusion that the economy is an all-encompassing subject.

Few economists would feel comfortable describing themselves as experts in the broad field of life in general. If any economists would be foolhardy enough to present themselves in that fashion, they would appear pretentious, if not ridiculous, to the world in general.

Instead, we economists use the word, “economy,” in a far more narrow sense, implicitly confining our definition to matters within the business side of life. Luckily, few people will flinch at this use of the term “economy,” accepting the term without realizing how vague it really is. Consequently, we can bandy the term “economics” about with an air of breezy confidence, even though nobody can define just what constitutes the business side of life.

In short, the economy is a short-hand expression for a partial view of the world. Sometimes, these partial views—what we may call “abstractions”—serve us well. They simplify the world around us so that we can feel confident that we can make reasonable decisions.

For example, at some time, many people come into possession of some money to invest. Those individuals, who do not see themselves as speculators, prefer to put their funds in sound investments.

Unfortunately, no financial investment is inherently sound. Sometimes real estate pays off well. At other times, people would do better just putting their money in the bank or even under their mattress. In some periods, gold rises in value. During other times, it falls. Even government securities, often taken as the soundest of investments, can fall victim to inflationary erosion, as well as to military catastrophes or revolutions. No matter how you invest your money, you are engaged in a gamble—with one minor caveat: gamblers often have a sounder grasp of the odds than do even seasoned investors.

Now let us return to our initial question: what is an economist? Here is my best definition: an economist is a person trained to look at the world in a particular way.

We can refine our definition by adding that economists generally view the world through highly abstract, artificial models of the world that emphasize those parts of our world that are bought and sold. These models generally serve to teach us a single lesson: that we need to do very little to improve our lot, except to get out of the way of businesses in their intensive search for profits. It warns us that almost all reforms, except the elimination of taxation and regulation, are dangerous experiments that put our world at peril.

Alas, our prevailing economic theories reflect an economy that no longer exists, if it ever existed at all. Economists originally developed their models to capture the reality of a simple society with relatively simple methods of production—a world of artisans and craft workers, rather than a world of high technology and rapidly evolving international financial markets. These models may have had a good deal of merit before the American Revolutionary War, when Adam Smith was composing his Wealth of Nations.

These models may have helped Smith’s contemporaries to understand basic economic principles, such as supply and demand, but the basic model of the economy has changed little since then. Today, in the context of a modern economy, these same models have little relevance. Instead of revealing essential features of the economy, they blind us to important economic forces. In short, we have reached the point where we must abandon much of our thinking about the economy.

Both economics and the economy are at an impasse. Unless we change our ways soon, matters will become even worse.

So long as the prevailing, conventional economic theory obscures new opportunities and new ways of working and of living, it represents a threat. In this spirit, this book calls for an end of economics and the opening to a new, but unspecified way of organizing our material life.

SOCIOLOGY OF ECONOMICS

A brief history of the concept of economics

On a purely theoretical level, the call for an end of economics is not particularly revolutionary. After all, the term “economics” itself is a relatively new term, coined in the late nineteenth century.

Previously, people who theorized about the economy called themselves “political economists.” The elimination of the word, “political,” was not trivial. Certainly, it seemed to be a matter of great importance at the time to those who were intent on renaming the subject.

Toward the end of the late nineteenth century, academic political economists were concerned that anybody who voiced a position about the economy could deem herself or himself to be a political economist. As a result, a group of academic political economists, led by Alfred Marshall of Cambridge University, went to great lengths to reconstitute their subject as economics.

Marshall was not the first economist to use the term “economics” in the title of a major treatise. Authors of lesser known works at the time, such as those of J. M.Sturtevant (1877) and H.D.Macleod (1878), had preceded him in this respect (see Arndt 1984). However, nobody matched Marshall’s obsession with reconstituting the subject as a science (Groenewegen 1985).

Marshall deeply resented the fact that anybody could pretend to be competent to carry on a conversation about political economy. This problem came to a head in 1869, when Gladstone, by virtue of his position as Prime Minister appointed Sir John Robert Seeley to the Regius Professorship in Modern History. Seeley, who emphasized the policy role of the chair, was convinced that political economy fell within the scope of his subject.

How could a mere historian aspire to speak about weighty matters of political economy? Renaming the discipline “economics” might help to bar people such as Seeley from meddling in economic controversies. Marshall hoped that, once political economy took on more scientific pretensions, only those people who had undergone formal training in economics would be deemed to be qualified to participate in debates over economic questions.

Marshall and his wife, writing in their Economics of Industry, explained that they thought it better to drop “political” since “political interests generally mean the interest of some part or parts of the nation” rather than the nation as a whole (Marshall and Marshall 1879:2). This stance allowed economists to dismiss anyone who questioned their objectivity as being mistaken or representing some nefarious special interest.

Marshall’s interpretation of the notion of political economy is misleading in two respects. To begin with, the term “political economy” had actually been intended to assert a community of interests. Indeed, the term “economy,” without the modifier “political,” had originally referred to parochial self-interest.

Before people began to write on political economy, an extensive body of writing had developed on the subject of managing the economy of large feudal estates (see Tribe 1978). The early political economists consciously appended the word “political” to suggest a broad extension of the idea of economy. Where economy had previously concerned only the rational management of a private household, the early political economists widened the scope of economy to the polis—the community as a whole. Just as the early manuals could instruct estate managers how to get the most production out of their land, political economy was intended to guide national leaders in ruling their dominions.

The role of interests within political economy

In the age of classical political economy, say from Adam Smith’s Wealth of Nations (1776) until around 1830, political economists generally ceased to view the economy from the perspective of the crown. Instead, they sided with the rising middle class. Accordingly, the emphasis in political economy shifted (see Kanth 1986). Writers, such as Smith and David Ricardo, called for political changes that would make the economy conform to the norms of laissez faire (Perelman 1983).

Since the rules of laissez faire required sacrifices from both the aristocracy and the poor, clashing interests within the economy began to play an increasingly important role within classical political economy.

The classical political economists condemned the aristocracy, who defended their existing privileges, impeding the freedom of business. They were also critical of the demands for improvement by the poor.

Although the classical political economists advocated measures that would primarily benefit the well-to-do commercial and manufacturing interests, they still maintained that their recommendations were in the best interest of society. They reasoned that the interests of the rising business community somehow coincided with the interests of society as a whole.

Not everybody accepted that classical political economy was as disinterested as its practitioners maintained. For example, Karl Marx’s Capital, published in 1867, forcefully argued that classical political economy callously took the side of employers vis a vis labor (Marx 1977). Marx brilliantly showed how the analysis of classical political economy, built around the analysis of production, could be turned to support the idea that the employers exploited their workers.

Although most professional economists rejected Marx’s contention, they were troubled by the widespread acceptance of his ideas among leaders of the working classes. As a result, many economists felt a need to recast economics as a science of exchange rather than production. Around 1870, the founders of this new brand of theory, William Stanley Jevons, Léon Walras, and Karl Menger, published their respective masterworks (see Perelman 1987:89).

This new emphasis on exchange had several appeals. Although political economists could hardly claim a monopoly on the science of production, no other discipline could claim to be a science of exchange. By stressing the formal mathematics of exchange relationships, economists could take on a more scientific pose. Moreover, analysis of the economy from the perspective of exchange seemed to be relatively effective in obscuring conflict. Both parties must benefit from voluntary exchange; otherwise the exchange would never have occurred in the first place.

This rechristening of political economy as economics reaffirmed the change in emphasis from production to exchange. In fact, Marshall seems to have been attracted to H.D.Macleod’s approach in using the term “economics” in his “What is Political Economy?” (1875) specifically because it succeeded in forcefully linking the science of economics with exchange rather than production, where the appearance of conflict was more likely (see Groenewegen 1985).

In addition, economics had long considered physics to be the premier science. The seemingly more scientific term, “economics” even sounded scientific—like physics.

Presumably, Marshall expected that his readers would join him in accepting economics as an objective science, capable of representing the interests of society as a whole. This new science of economics would supposedly prove that the interests of capitalists as a whole (as distinguished from individual capitalists) are in the best interest of society.

By claiming to be objective scientists, economists could presume to be above politics. Those who disagreed with the economist’s conclusions could be dismissed as being merely political. For example, Joseph Schumpeter wrote, political economy had become, in the eyes of orthodox practitioners of economics, “economic policies that its author advocates [on a nonscientific basis] on the strength of certain unifying (normative) principles” (Schumpeter 1954:38).

Certainly, Marshall understood the stakes in the new terminology. He already displayed an acute concern with labor problems when he first began to lecture on economics. Now with the challenge to the pretensions of classical political economy, he sought to lay claim for a scientific basis of economics with an eye to winning support for his own preferred policies.

The community of academic political economists enthusiastically adopted the Marshalls’ terminology. For example, in his second edition of his Theory of Political Economy, published in the same year as the Marshalls’ work, Jevons felt the need to apologize for the title (Jevons 1879:48).

Those who continued to describe their work as political economy in later years, tended to do so to underline the overtly political objective of their work (see the contributions in Whynes 1984). In retribution, professional economists condemned such works as unscientific. Political economy was hereafter written off as the arena of heretics, cranks and malcontents.

Economics as a science

Over time, professionalization of economics took on a momentum of its own with less than desirable results. Economists adopted a false air of objectivity and impartiality. They pretended that their scientific analysis allowed them to represent the best interests of society.

The idea that economics could be an objective science is rather ironic to say the least. Although economics is based on the assumption of people acting in their own self-interest, economists, even those with wildly partisan or even mercenary intentions, invariably deny that self-interest could color their own work. Instead, they pride themselves on their own scientific objectivity. As George Stigler, himself a Nobel Prize-winning economist, noted:

economists do not relish an explanation of their own scientific behavior in ordinary economic terms. To tell an economist that he chooses that type of work and viewpoint which will maximize his income is, he will hotly say, a studied insult.

(Stigler 1982b:60)

Of course, economics is not a science at all. Chemists or physicists can create controlled experiments to analyze their materials. Economists have little or no opportunity for controlled experiments.

Instead, economists merely perform thought experiments on data that they find at hand. These thought experiments can range from the commonplace to the highly abstract.

In the early years of economic theory, these commonplace experiments generally yielded about the same conclusions as common sense. In more recent times economists have discovered more and more ingenious methods for validating their preconceived preferences in economic policy. More often than not, they have been developing justifications for expanding the frontier of market relations to new and uncharted areas, such as the purchase and sale of babies or human organs.

The highly abstract model of economics, which girds this theory, depends on a number of unrealistic assumptions. Typically, we have no way of knowing whether or not any particular model provides a guide to economic policy that improves on common sense because of the enormous gap between conditions in the real world and the unworldly assumptions made in constructing the model.

What then has economics accomplished? At times, economists have helped to root out logical errors in our common sense thinking about the economy. In this sense they do a great service. For example, John Maynard Keynes was able to demonstrate that merely reducing wages might not help to eliminate unemployment (Keynes 1936). At other times, economists have propagated errors of their own, which have been codified in disastrous public policies.

Economic rhetoric

Rather than seeing economics as a science, we will do better to look at economics from an altogether different perspective. Despite its admittedly impressive scientific apparatus, deep down, economics consists of a collection of stories about how the economy works (see McCloskey 1985).

In this context, economists measure their success by one of two paths. First of all, they win professional respect by developing ever more sophisticated techniques for telling their stories, such as new mathematical theorems or a novel statistical procedure. The realism of the story is of secondary importance. This path puts a premium on technical virtuosity for its own sake.

Although this technical virtuosity resembles science, it is very different. For example, Lawrence Summers, who is presently Undersecretary of the Treasury and was previously Vice President and Chief Economist to the World Bank, has charged that elegant statistical demonstrations have never succeeded in convincing the community of economists of anything except the skill of the practitioner (Summers 1991:130).

The second path to professional status depends upon an ability to craft a new story or a variant of an old one. These altered stories must be capable of convincing other economists to revise their understanding of some feature or features of the economy. To make the new story cr...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• ROUTLEDGE FRONTIERS OF POLITICAL ECONOMY
• INTRODUCTION
• 1 THE END OF ECONOMICS
• 2 ECONOMIC THEORY AND THE HISTORICAL INCREASE OF FIXED CAPITAL
• 3 RAILROADS AND THE INCREASE IN FIXED CAPITAL
• 4 THE ROLE OF FINANCE
• 5 INDUSTRY TAKES COMMAND THE RISE OF WELFARE CAPITALISM
• 6 MODERN FINANCE CAPITAL
• 7 THE DEPRESSION
• 8 THE GOLDEN AGE
• 9 CONCLUSION
• BIBLIOGRAPHY