I believe we live in a time of exciting new economic
thinking. I would make two suggestions regarding moving forward.
The first suggestion has to do with the Earth’s
biosphere. In the time of Adam Smith, or even of Marx and Keynes, the natural
environment is taken as an infinite given. Mankind can take as much resources
as we want from the nature, and dump as much trash back as we please. Air
(atmosphere, ozone, etc.), water (rivers, oceans, glaciers, etc.) and many
other public goods are both free and boundless. “Sustainability” wasn’t even in
the vocabulary.
However, as we enter the 21st century, for
the first time in human history, we as an entire species have hit the limit of
our biosphere. The era “Anthropocene” has arrived. Human activities have become
the dominant force in shaping the nature. Economic activities today are
overdrafting our future. The biosphere is not longer an externality to be
brushed off. It has become an integral part of our economic calculation and wellbeing.
The new economic theory must account for the human interaction with nature, and
demonstrate how we can live within our ecological means.
One key component of such new economic thinking should
include the accounting of what I call “GDD” --- Gross Domestic Damage. We
should calculate the environmental and institutional cost of our economic activities.
For example, the cost of a coal-fired power plant is not just its construction
and operational cost; it should include the rising health care cost due to
pollution, the cost of policing protests from local residents, the cost of
restoring destroyed landscape due to coal mining, the cost of carbon, and the
hidden cost of crowding out investment in new energy industry. In today’s GDP
accounting, however, these costs would in fact increase GDP through higher
health care bill, insurance bill, police expenditure, etc. This needs to be
remedied.
My second suggestion on moving forward has to do with
the notion of reflexivity. Simply stated, I believe that economic theory is both the cause and the effect of economic reality, therefore the theory
could never catch up with the reality. A more elaborate explanation of
reflexivity in economics would go like this: a theory comes from studying the
reality. Once the theory is produced and popularized, it has an impact on the
real world and changes how the world functions, to a greater or lesser degree.
So as soon as a theory is adopted, it is out of date because the world has
changed thanks to the adoption of exactly that theory.
The reflexive phenomenon is especially relevant to
economics because our economy has evolved so much over the past three hundred
years, often due to the arrival of new ideas and theories. It would help illustrate
this point if we compare economics to physics. The discovery of gravity doesn’t
change the gravity; no matter how we transform our physical world, it still
follows the same physical laws. However, in economics, the invention and
acceptance of a theory have a deep and unpredictable impact on how the economy
works, through policy making and even personal choices. So, even the best
theory would still be one step behind the reality because it couldn’t account
for the impact of itself. Marx is, again, probably the best case in point. His
economic theory has had profound impact on the trajectory of historical events,
which he himself couldn’t possibly take into account as a part of his theory.
Much disproof of Marx’s theory is actually a result of taking Marx seriously
and modifying how capitalism works. In a sense, the success of Marx’s theory
has defeated itself: thanks to Marx, the capitalists saw the crises coming, so
they scrambled to change their behavior and saves themselves, thus disproved
Marx.
What a dilemma for the economists! But such a dilemma
has only been the exclusive privilege of a handful of great thinkers, who have
truly contributed to the progress in economic thought. Let’s hope more future
economists would join this troubled club.
The above is a part of my paper for a class "History of Economic Thought" with Professor Moseley at Mount Holyoke College. Highly recommended!! Below is the entire paper.
Has Economics Progressed?
Introduction
Has economics progressed? That is the question.
Throughout the entire semester, as we delve into one theory after another, we have
been asking ourselves: has there been progress in economic thoughts? What do we
mean by “progress”? As the semester comes to an end, we have only more
questions --- and this is a good thing.
Interestingly, most professional economists don’t know
the answer, either. One respected economist even said that progress in economics
“is a bit like how the Supreme Court defines pornography. You will recognize it
if you ever see it.[1]” No
wonder that there has been little progress in economics.
Many people have raised different criteria and given various
answers to this ultimate question. In this paper, I will explain how Blaug and
Moseley evaluate progress in economics, and follow it up by my own ideas.
Before I start, I would like to take one step back:
why are we asking this question? Why are we obsessed with progress? Indeed,
Confucius and many other great minds worshiped the past and called on us to
return to the good old days. The word “progress” doesn’t exist in the Chinese vocabulary
until two centuries ago. Is the notion of “progress” itself a product of the
West and of modernity? Can we have a better life without progress? Since when
has progress become a virtue and a must? We will keep these questions in mind
as we go on.
Blaug
Blaug is very aware of the elephant in the room ---
progress in economic theory, which is evident in the title of the Introduction to
his book. Blaug indicates that he uses modern economic theory as the standard
of judgment. He warns the reader of two kinds of common mistakes: being too
critical of the older writers, and ancestor worship. He further raises the
distinction of absolutism and relativism. Blaug himself is an absolutist, and
thinks that “relativists are always likely to ignore considerations of internal
coherence and explanatory scope and to fix attention solely on congruence with
the historical and political environment.[2]”
By implication, Blaug gives more weight to the “internal coherence and explanatory
scope” as he evaluates economic theories.
A few paragraphs later, Blaug rhetorically asks, “would
anyone seriously deny that in the matter of techniques and analytical construct
there has been progress in economics?[3]”
In essence, Blaug is suggesting another criterion to “progress”, namely the
analytical methods. Indeed, the absence of graphs in Marx and Keynes has
created more difficulties in understanding their theories.
Blaug notices that there have been dramatic shifts of
the focus of economics. For example, neoclassical deals mostly with
microeconomics until Keynes brought macro back into the picture. Blaug suggests
that the reasons for such shifts are changes in dominant political attitudes
and modes of reasoning, value judgments and biases, and even psychological
factors. Blaug draws a line between a theory’s political bias and its logical
validity. He claims that the validity of a theory is independent of its initial
bias. In other word, biases only influence the questions we ask, but would not
distort the validity of the answers we give. This is what Schumpeter called the
“vision”.[4]
Such prejudices might even assist the scientific analysis in some cases, just
as Marx was more aware of the ills of capitalism, like business cycles.
Toward the end of his Introduction, Blaug gives a definitive
“Yes” to the question of progress in economic thought. His evidences of
progress include: improved analytical tools, increasing volume of empirical
data, exposition of past biases, and better understanding of the workings of
the economic system.[5]
However, the rest of Blaug’s book sounds less confident about progress in
economic theory.
Blaug also raises the question of whether or not
economics is a “science”. “After 1870, economics came to be regarded as a
science that analyzed human behavior as a relationship between given ends and
scarce means which have alternative uses.[6]”
If economics is a science, then falsifiability should be its key feature.
However, economists find it hard to agree on the criteria for falsifying a
hypothesis. Nor do they find it easy to agree on the “fundamental character of
a theory.[7]”
In the last chapter, “A Methodological Postscript”,
Blaug deals extensively with the falsifiability and “science-ness” of
economics. Blaug points out that economists have always tried to “produce
accurate and interesting predictions that were, in principle at least, capable
of being empirically falsified.[8]”
With regard to the classical economics, Blaug argues that “no real effort was
made to test classical doctrines against the body of statistical material[9]”,
and that most contradictions to the theory were attributed to the strength of “counteracting
tendencies[10]”. Some
key variables, like the rate of technological change, were treated as exogenous
factors. Blaug concludes that classical economists, including Marx,
acknowledged the importance of falsifiability, but just could not bring
themselves “to face up to the requirements of his canon.[11]”
When it comes to the neo-classical economists, Blaug
says that their greater rigor in model construction was achieved by limiting
the scope of the analysis. Another key flaw of neoclassical economics is its “timelessness”.
The model treats the economy as a static system, but attempts to predict events
in real world. One of the most obvious assumptions of such kind is the
constancy of the relative weight of labor and capital in the aggregate production
function. Blaug calls neoclassical economics “empty models” and wonder why
economists haven’t yet abandon them[12].
However, says Blaug, the falsifiability criterion has
its limitations in economics. It might be too strict of a criterion for
economics. Friedman famously argued that predictive accuracy should be the sole
criterion of validity --- no matter what unrealistic assumptions people make. (This
position, if carried to the extreme, sounds to me like an endorsement of witchcraft:
witchcraft often has quite strong predictive power, but is based on the
assumption that there are witches.) Blaug contends that Friedman’s edict (Test
Implications, Not Assumption) is not very helpful due to various level of
interpretation of falsifiability. Also, if a theory is refuted by evidence,
economics usually falls short to provide an alternative. So, at best, Friedman’s
position proves that economic theories have failed both the assumption test and
the prediction test. Furthermore, economics events are influenced by so many
non-economic factors, making it hard to test the theory itself.
Turning his attention to value judgment, Blaug
explains that the significance or relevance of a theory remains to be discussed
even if its validity has been proved. Blaug brings back the distinction between
normative and positive economics, which he has touched upon in the
Introduction. He agrees that economics is value-loaded, and that “a
disinterested social science has never existed, and for logical reason, cannot
exist.[13]”
For example, the discussion of efficient allocation of resources is based on
the value judgment of what is “efficient”.
Finally, Blaug asks why we should bother with the
history of economic theory. He asserts that “bad theory is still better than no
theory at all and, for the most part, critics of orthodoxy had no alternative
construction to offer.[14]”
That is, except for Marxist critics. Blaug acknowledges that much of the
received doctrine is merely metaphysics and should not be mistaken for science,
and that economists are prone to claim possession of the truth while what they’ve
really got is value judgment. He even says that “modern economics provides an
abundance of empty theories parading as scientific predictions or policy recommendations
carrying concealed value premises.” (Remember Blaug’s confidence in modern
economics and in the progress of economics in his Introduction?) Blaug believes
that studying the history of economics is the best antidote and would introduce
more methodological humility.
Moseley
Moseley is much more consistent than Blaug on the
criteria of progress in economic thought. Moseley’s two criteria are logical
consistency and empirical explanatory power. Moseley’s answer to the “progress”
question would probably be “yes and no”: some thinkers have certainly made
progress over their predecessors, but there has been serious retrogression and
stagnation, especially in the mainstream modern economics.
Marx is the most prominent example of real progress in
economic theory. Marx has the most rigorous logical structure among the
economists we’ve studied. The scope of his analysis is unparalleled. He is the
only one who has developed a full theory of profit, and has explained and
successfully predicted the falling rate of profit. He has explained the
exploitive nature of capitalist mode of production and has demonstrated
surplus-value, which is at the heart of profit creation. He has deduced
capitalism’s endogenous drive for technological advancement, and has highlighted
the struggle over the length of the working day. What’s more, the predictive
and explanatory power of Marx’s theory has been confirmed by reality.
Compared with Marx, the neoclassical and modern
theories would often look like miserable retrogression in the history of
economic thought. The most obvious and serious defect of modern economics is
the absence of a theory of profit --- the soul of capitalism. For another
example, in one of his article, Moseley points out the glaring flaws of
marginal productivity theory and the mainstream economists’ unwillingness to
give it up. “Little or no ‘further development’ of marginal productivity theory
has taken place in 45 years,
and marginal productivity remains in a ‘state of limbo’ and continues to ‘await
further development’.[15]”
It would indeed be a progress if the mainstream economists give up their
unjustified beliefs, go back in time and revisit Marx.
Such intellectual progress is usually made impossible
by non-economic forces, as Moseley explains. Most economists today are ignorant
or misinformed about Marx because of the political prejudice and professional
bias --- some truths are too subversive to be accepted in an academic circle in
a capitalist society.
My Thoughts
To answer the question of “progress”, I will first ask
“why progress”. To a modern person, “progress worship” is just too natural to
be noticed. “Progress” has become an equivalent of “living a better life”.
However, this belief is questionable because in human history, many groups have
enjoyed happy and static way of life. Some would even say that it is shameful
that modern society requires constant expansion to achieve balance --- a
treadmill to hell. But, for the purpose of this paper, if progress in economic
theory could lead to a better-run society and a happier life, then I agree that
progress is indeed desirable.
I will also make a distinction between “progress in
economics” and “economic progress”. The former deals with economic theory and
the study of economics; the latter refers to the material improvement in human
society. There could be economic progress without progress in economics, and
vice versa.
Under the above conditions, I will further define my
criteria for progress. On this point, I fully agree with Moseley’s suggestion
that the criteria should be logical validity (both assumptions and inferences)
and empirical validity (both explanatory and predictive power). Logical
consistency is the minimum requirement of any theory. The fact that “logical
validity” is still a stated goal of economics reflects the dismal state of this
discipline. Empirical validity is the reason why anyone should pay any attention
to the economists. If the economists don’t deliver any helpful results (either explaining
or predicting), then as a costumer, I want my money back. Why should the
society pay a high consulting fee to those economists who don’t deliver any financial
or intellectual benefits?
With my two criteria in mind, I think the prize of
progress should go to Marx. I largely agree with Moseley’s defense of Marx’s
economic theory, as stated in the section above. Reading Marx’s Capital, I enter into his magnificent
logical construction, marvel at his perceptive assumptions and solid
inferences, and shiver at the subversive implications of his theory of
surplus-value and of profit. The empirical validity of Marx’s theory finds its
proof in the current worldwide economic crisis and Occupy movements. The high
unemployment in the developed world reminds me of Marx’s demonstration of
technological unemployment; the squeezed middle class echoes Marx’s theory of
the relative impoverishment of workers.
It is sobering that the prize of progress in economic
theory would require travel back in time for more than a century. It seems that
the intellectual development of economics is by no means linear or progressive.
I would also like to note that the validity
of a theory does not directly correlates with its acceptance by the society or its ruling class. As Marx has pointed
out, “the ruling ideas are the ideas of the ruling class.” Validity doesn’t
rule; the rule class does.
I would also like to look at some items on Blaug’s
list of “progress”. Blaug insists that improvements in analytical tools should
qualify as progress in economic theory. However, tools are not theory, just as
a can-opener is not food. A good can-opener might as well open a can of worms.
At best, progress in analytical tools is progress in math. Indeed, most of what
we call progress in economics in the past few decades is merely more and more complicated
math and computer modeling.
Blaug also put “accumulation of empirical data” and “exposition
of past biases” in the category of progress. I would say that the accumulation
of empirical data is merely a result of passing time, or of statistics and
accounting, not of economic theory. Regarding the exposition of past biases, I
hope soon enough the bias against Marx would be “past”.
Blaug claims that “bad theory is better than no theory
at all”, a point questioned by many of my classmates. I think there is a
difference between “weak theory” and “false theory”, both of which are “bad
theory”. Weak theory is not harmful, while false theory can be very
destructive. Many authors and articles have spoken eloquently to the damaging
effects of modern economic theory and its wide indoctrination (embodied in
Mankiw’s textbooks). I think mainstream economics should adopt more scientific
skepticism and modesty if they want to qualify their discipline as a real
science.
Moving Forward
Still, I believe we live in a time of exciting new
economic thinking. I would make two suggestions regarding moving forward.
The first suggestion has to do with the Earth’s
biosphere. In the time of Adam Smith, or even of Marx and Keynes, the natural
environment is taken as an infinite given. Mankind can take as much resources
as we want from the nature, and dump as much trash back as we please. Air
(atmosphere, ozone, etc.), water (rivers, oceans, glaciers, etc.) and many
other public goods are both free and boundless. “Sustainability” wasn’t even in
the vocabulary.
However, as we enter the 21st century, for
the first time in human history, we as an entire species have hit the limit of
our biosphere. The era “Anthropocene” has arrived. Human activities have become
the dominant force in shaping the nature. Economic activities today are
overdrafting our future. The biosphere is not longer an externality to be
brushed off. It has become an integral part of our economic calculation and wellbeing.
The new economic theory must account for the human interaction with nature, and
demonstrate how we can live within our ecological means.
One key component of such new economic thinking should
include the accounting of what I call “GDD” --- Gross Domestic Damage. We
should calculate the environmental and institutional cost of our economic activities.
For example, the cost of a coal-fired power plant is not just its construction
and operational cost; it should include the rising health care cost due to
pollution, the cost of policing protests from local residents, the cost of
restoring destroyed landscape due to coal mining, the cost of carbon, and the
hidden cost of crowding out investment in new energy industry. In today’s GDP
accounting, however, these costs would in fact increase GDP through higher
health care bill, insurance bill, police expenditure, etc. This needs to be
remedied.
My second suggestion on moving forward has to do with
the notion of reflexivity. Simply stated, I believe that economic theory is both the cause and the effect of economic reality, therefore the theory
could never catch up with the reality. A more elaborate explanation of
reflexivity in economics would go like this: a theory comes from studying the
reality. Once the theory is produced and popularized, it has an impact on the
real world and changes how the world functions, to a greater or lesser degree.
So as soon as a theory is adopted, it is out of date because the world has
changed thanks to the adoption of exactly that theory.
The reflexive phenomenon is especially relevant to
economics because our economy has evolved so much over the past three hundred
years, often due to the arrival of new ideas and theories. It would help illustrate
this point if we compare economics to physics. The discovery of gravity doesn’t
change the gravity; no matter how we transform our physical world, it still
follows the same physical laws. However, in economics, the invention and
acceptance of a theory have a deep and unpredictable impact on how the economy
works, through policy making and even personal choices. So, even the best
theory would still be one step behind the reality because it couldn’t account
for the impact of itself. Marx is, again, probably the best case in point. His
economic theory has had profound impact on the trajectory of historical events,
which he himself couldn’t possibly take into account as a part of his theory.
Much disproof of Marx’s theory is actually a result of taking Marx seriously
and modifying how capitalism works. In a sense, the success of Marx’s theory
has defeated itself: thanks to Marx, the capitalists saw the crises coming, so
they scrambled to change their behavior and saves themselves, thus disproved
Marx.
What a dilemma for the economists! But such a dilemma
has only been the exclusive privilege of a handful of great thinkers, who have
truly contributed to the progress in economic thought. Let’s hope more future
economists would join this troubled club.
[1] James K. Galbraith, Professor of Economics, University of Texas Austin,
at 2011 INET Bretton Woods Conference, http://ineteconomics.org/blog/playground/bretton-woods-past-and-present-2-progress-economics
[2] Blaug, 2
[3] Ibid., 3
[4] Ibid., 5
[5] Ibid., 7
[6] Ibid., 4
[7] Ibid., 6
[8] Ibid., 689
[9] Ibid., 690
[10] Ibid., 691
[11] Ibid.
[12] Ibid., 694
[13] Ibid., 699
[14] Ibid., 700
[15] Moseley, “A Critique of the Marginal Productivity Theory of the
Price of Capital”, 2010
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