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Ideas
on Liberty
Economics on Trial
January 2001
The
Imperial Science
by Mark Skousen
"I
think it is quite likely that we are entering an era of much
more interaction among the sciences." Kenneth E. Boulding
1
During
the 20th century it was popular to label economics the "dismal
science," a term of derision coined by the English critic
Thomas Carlyle in the 1850s. Carlyle lashed out against laissez-faire
capitalism, which be defined as "anarchy plus the constable,"
for, among other things, being inconsistent with slavery.2
But
attitudes are rapidly changing as we enter the 21st century.
Economics, no longer dismal, has come a long way toward reinventing
itself and expanding into new territories so rapidly that
another descriptive phrase is needed. Like an invading army,
the science of Adam Smith is overrunning the whole of social
science--law, finance, politics, history, sociology, environmentalism,
religion, and even sports. Therefore, I have dubbed 21st-century
economics the "imperial science."
Boulding's
Dream Comes True
The
father of economics as an interdisciplinary movement is Kenneth
E. Boulding, longtime professor at the University of Colorado
in Boulder, who died in 1993. He published over 1,000 articles
on more than two dozen eclectic subjects, ranging from capital
theory to Quakerism. But Boulding's vision of every discipline
borrowing ideas from other disciplines isn't exactly what
has happened. Instead, economics has started to dominate the
other professions.
The
first breakthrough came in finance theory. Harry Markowitz,
a graduate economics student at the University of Chicago,
wrote an article on portfolio theory in the March 1952 issue
of The Journal of Finance. It was the first attempt
to quantify the economic concept of risk in stock and portfolio
selection. Out of this work came modern portfolio theory and
the "efficient market theory," which argues that short-term
changes in stock prices are virtually unpredictable and that
it is extremely difficult if not impossible to beat the market
averages over the long run.
These
ivory-tower theories were greeted with scorn by Wall Street
professional managers, but eventually confirmed by numerous
studies. Index funds, the economists' favorite investment
vehicles, are now the largest type of mutual fund sold on
Wall Street?
James
Buchman and Gordon Tullock, both at the University of Virginia,
published The Calculus of Consent in 1962 and forever
changed how political scientists view public finance and democracy.
Today public-choice theory has been added to every economics
classroom's curriculum.
Buchanan
and other public-choice theorists contend that politicians,
like businessmen, are motivated by self-interest. They seek
to maximize their influence and set policies in order to be
re-elected. Unfortunately, the incentives and discipline of
the marketplace are often missing in government. Voters have
little incentive to control the excesses of legislators, who
in turn are more responsive to powerful interest groups. As
a result, government subsidizes vested interests of commerce
while it imposes costly, wasteful regulations and taxes on
the general public.
The
public-choice school has changed the debate from "market failure"
to "government failure." Buchanan and others have recommended
a series of constitutional rules to require the misguided
public sector to act more responsibly, including requiring
supermajorities to raise taxes, protecting minority rights,
returning power to local governments, and imposing term limits?
Economics
Enters the Courtroom
In
1972 Richard A. Posner, an economist who teaches at the University
of Chicago Law School and serves as chief judge of the U.S.
Seventh Circuit of Appeals, wrote Economic Analysts of
Law, which synthesized the ideas of Ronald Coase, Gary
Becker, F. A. Hayek, and other great economists at the University
of Chicago. Today centers of "law and economics" are found
on many campuses. Judge Posner states, "Every field of law,
every legal institution, every practice or custom of lawyers,
judges, and legislators, present or past-even ancient-is grist
for the economic analyst's mill" 5. Economists apply the principles
of cost-benefit and welfare analysis to all kinds of legal
issues antitrust, labor, discrimination, environment, commercial
regulations, punishments and awards. In my October 1999 column,
I reported on Chicago law professor John R. Lott, Jr.'s new
work on the relationship between gun ownership and crime.
He applied the incentive principle to demonstrate that well-armed
citizens deter crime.
Chicago's
Gary Becker has been in the forefront of applying price theory
to contemporary social problems, such as education, marriage
and divorce, race discrimination, charity, and drug abuse.
Not surprisingly, he called his book for the general public
The Economics of Life. But Becker warned, "This work
was not well received by most economists," and the attacks
from his critics were "sometimes very nasty."6
There
are many other cases where economists have made significant
improvements in other disciplines-in accounting (see July
1999 column on "Economic Value Added," or EVA), history (see
the work of Robert Fogel and Douglass North), religion (Lawrence
Iannaccone and Edwin West have shown that increased competition
in religions increases attendance at churches), management
(the Center for Market Processes at George Mason University),
and sociology (see the writings of Richard Swedberg). They've
even changed the way Treasury bills are auctioned.
As
we enter the 21st century, false theories still prevail in
politics, law, history, sociology, and other disciplines.
As Lord Acton once stated, "There is no error so monstrous
that it fails to find defenders among the ablest men." The
sooner the principles of market economics enter the fray and
attack false doctrines, the better off we'll all be.
1.
Kenneth E. Boulding, The Skills of the Economist (Cleveland:
Howard Allen, Inc., 1958). p 134.
2. For the complete background of Carlyle's racism and vile
attack on market capitalism, see David M. Levy, "150 Years
and Still Dismal!" in Ideas on Liberty, Marsh 2000,
and chapter 3 of my book, The Making of Modern Economics
(Armonk, N.Y.: M. E. Sharpe, 2001).
3. Two excellent books on modern portfolio theory are Burton
Mankiel, A Random Walk Down Wall Street, 6th
ed. (New York: W. W. Norton, 1996) and Peter L. Bernstein,
Capital Ideas (New York: Simon & Schuster, 1992).
4. Buchanan and Tullock's The Calculus of Consent (Ann
Arbor: University of Michigan Press 1962) is still worth reading.
For an excellent summary, see chapter XI, "The Public Choice
School: Politics as a Business," in Todd G. Buchholz, New
Ideas From Dead Economists (New York: Penguin Book, 1989).
5. Richard A. Posner, Law and Literature, 2nd ed. (Cambridge,
Mass.: Harvard University Press, 1998). p. 182. A comprehensive
summary of the "law and economics" movement can be found in
Nicholas Mercuro and Steven G. Medema, Economics and the
Law: From Posner to Post-Modernism (Princeton, N.J.: Princeton
University Press, 1997).
6. Gary S. Becker and Guity Nashat Becerk, The Economics
of Life (New York: McGraw-Hill, 1997), p.3.
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