Sunday 25 Feb 2024
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A LOT OF PEOPLE see economics as a “conservative science” that makes up unrealistic theories in order to push a free-market agenda. I don’t know if that was ever true — maybe in the 1970s? — but if so, those days are long gone.

At the latest American Economic Association (AEA) meeting — the big annual economist convention, which ended on Monday — some people turned out to protest against what they claim is too much mathematical formalism in economics.

In an act of supreme irony, their main target was Carmen Reinhart, a Harvard economist whose most famous work was a book about the history of financial crises — a famous example of modern econ that isn’t mathematical.

Why did the protesters go after Reinhart? Because she’s in favour of cutting government debt. What the protesters want has nothing to do with methodology — they want economics to lean more to the left.

But if the protesters bothered to look around, they would see that their wish has been coming true for decades.

Over the past quarter century, economics has been shifting from singing the praises of free markets. Instead, it has moved toward a greater focus on inequality, human welfare and the ways that markets break down.

In academia, the shift has come partly through the introduction of new tools, and models that reveal the shortcomings of unfettered capitalism. Game theory shows how competition can lead to waste, and models of asymmetric information also show how markets can fail.

Decision theory, learning theory and behavioural economics have poked holes in the old assumptions of perfect rationality. Even in macroeconomics, all the focus is on incomplete and imperfectly functioning markets, as Karthik Athreya explains in his recent book, Big Ideas in Macroeconomics.

The move away from pure free-marketeerism has been helped by a flood of new data. Economics has become much more empirical, and that has made it much harder to wave away the possibility of market inefficiencies.

But academic economists themselves aren’t very ideological in the first place. Where the shift from right to left has really been more pronounced isn’t in the ivory tower, but in the public sphere.

Back in the 1970s, the public face of economics was Milton Friedman. A consummate public intellectual, Friedman would travel around the country giving lectures about the power of free markets and the virtues of capitalism. J

Just search YouTube and you can easily see highlight reels of Friedman smacking down socialists and idealistic leftist youths. He inspired a generation of bright young conservatives to go into economics. And before Friedman, there was Friedrich Hayek, whose tirade against Keynesian government intervention is still revered by many on the right.

Look around now. Where is the Milton Friedman of the 2010s? According to a recent post by George Mason University economist and blogger Tyler Cowen, the modern Milton Friedman is ... Paul Krugman. Friedman’s Free to Choose has been replaced by Krugman’s The Conscience of a Liberal.

Krugman isn’t alone. Cowen’s list of the five most influential economists also includes Thomas Piketty, Joseph Stiglitz, Jeffrey Sachs and Amartya Sen. Piketty, of course, exploded on the national scene last year with a book warning about inequality, and his ideas were apparently all the rage at this year’s AEA meeting. Stiglitz, who helped invent the theory of asymmetric information, travels the country talking about how markets are flawed. Sachs campaigns in favour of foreign aid to poor countries and Sen has spent his life trying to inject a human element into the cold equations of econ.

On the right side of the spectrum, what popular economists can match the appeal of Krugman, Piketty and the rest? The only candidate is Greg Mankiw of Harvard, who has become known as America’s economics teacher through his authorship of the most popular introductory college textbook. Mankiw is a rock-ribbed conservative, arguing tirelessly for lower taxes on the rich.

But in terms of popular influence, he can’t match the heavy hitters on the left. Other right-leaning economists such as Robert Barro, John Cochrane, Martin Feldstein and John Taylor pen occasional op-eds in the Wall Street Journal, but none of them has written a book or blog whose popularity or influence matches that of Krugman or Piketty.

It’s worth asking: Why has economics shifted to the left? Maybe it’s because the country itself, and its problems, have shifted. In the 1970s, when conservatism and Friedman became the face of economics, we faced high tax rates, heavy regulation, high inflation and powerful unions. But in 2015, we confront rising inequality, economic insecurity, and the aftermath of a financial crisis and a long, deep recession.

Maybe a country simply gets the economics it needs. In any case, if you think of economics as a bastion of conservatism and free-market dogma, it’s time to take another look. The winds have changed. — Bloomberg View

This article first appeared in The Edge Financial Daily, on January 9, 2015.

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