There is No Science of Economics 

(But There Could Be) 

In 2002, Daniel Kahneman and Vernon L. Smith won the Nobel Prize in Economics.  Except - no, they didn't.  The truth is, no one has ever won the Nobel Prize in economics, because there is no Nobel Prize in economics.  Alfred Nobel established prizes for physics, chemistry, physiology or medicine, literature, and peace, but not for economics.  The Sveriges Riksbank, the central bank of Sweden, a government agency, later established an economics prize and named it after Nobel, but it's not a real Nobel Prize.  

I find it oddly, ironically, appropriate that there is a "fake" Nobel Prize in economics, because, to my mind, economics isn't a real science.  It is the epitome of what physicist Richard Feynman called "cargo cult science" - people who desire the honor and prestige of science, and ritualistically go through the motions of science, without ever doing any actual science - that is, supporting their claims with scientifically rigorous evidence.

This issue came to a head in 2013, when the "Nobel" Prize for economics was awarded to two different economists, Robert Schiller and Eugene Fama, who had developed theories that seem to contradict each other.  Many wondered: how can this be?  What kind of science gives prizes to "prominent" scientists, even if one of whom says up and the other says down?

This prompted an Economic Professor at Harvard University, Raj Chetty, to write an article for the New York Times, "Yes, Economics is a Science."  But this was immediately prompted an economics student, Alan Wang, at Harvard, writing for the Harvard Crimson, to write, "No, Economics is Not a Science."  To be honest, I don't find either essay particularly persuasive.

But the question is not new.  People have been debating whether economics is truly scientific for centuries.  There are many possible positions to take in this debate.  One is: economics is a science, and everything is fine.  That is more or less the position taken by Raj Chetty, who also takes the moment to plug his own research.  Then there's another position, which would be something like, economics is sometimes, at its best, a science, but some economics falls short of this goal, (some studies are badly designed, and some research fails replication, or no replication is ever even attempted, etc.) and we should be more vigilant and make sure that economics is more scientifically valid.  You could consider this the moderate, common sense position, and it's probably how most people feel.  Then there's another position which is: economics is never scientific, and that's perfectly fine.  Alan Wang takes something like this position, but he moderates it somewhat - he seems to accept that most microeconomics is scientific, but rejects the idea that macroeconomics can ever be, but nonetheless insists that economics, though not a science, is still a wondrous world of inquiry, a fine career, and a useful tool.  But there are people, including economists, who have taken more radical stances in this direction, many of whom are influenced by the Austrian School of Economics - we will get to them shortly.  My own position is that economics has never been truly scientific, but it can be and it should be.  Finally, I suppose there may be another possible position, which, if I've understood them correctly, is taken by some radical leftists, especially of the postmodern variety, which seems to be something like: economics is indeed a science, but science itself is bad - or at least that science is always socially constructed and should be subjected to dialectical criticism - that empiricism always contains an element of imperialism - or something like that.  I'm not even going to bother addressing that position, but you can see my general attitude towards postmodernism elsewhere. 

So: is economics scientific?  It's a complicated question.  There are several different schools of economics.  Let's consider them one by one.  But before we do, we have to agree on what it means to be scientific.

When I was in high school, my teachers told me that the scientific method works like this: 

1. Let's say you're wondering about something (like, "Why is the sky blue?").  You might be wondering in a vague way about it, so the first step is to clarify and specify your question.  

2. Then you check the available, existing scientific literature about it, and see if there's an answer.  If so, then great - but it's also good to replicate the experiment to find out if your result matches the prediction given in the books.  

3. But let's say that the existing literature doesn't give you a satisfying answer in some way: either it doesn't directly answer your specific question, or it answers it in a way that seems incorrect or incomplete, or doesn't provide enough evidence for its claims, or you think that there's an alternate explanation for the results that previous scientists obtained - a hidden variable that "confounds" previous data - or you attempted to replicate the experiment and got a different result.  Okay, then the next step is to come up with a hypothetical explanation that explains the discrepancy or gap in the previous theory.  

4. Then, to try to formalize this hypothesis in a quantifiable way.  (If you're doing purely theoretical research, you could publish at this point - but it won't actually be a scientific theory unless and until someone completes the remaining steps.)  

5. Then, devise an experiment that tests your hypothesis against the null hypothesis.  Your experiment should be controlled - that is to say, it should have (at least) 1 control group and (at least) 1 test group.  If there are multiple variables to test for (and there probably are) then you should have an array of test groups so that you can separate the their effects as best you can, and measure the statistical correlations between them.  If you are testing people, the experiment should be double-blind (that is, neither the test subjects nor the people administering the test should know which group each test subject belongs to - control group, test group, etc.).  

6. Once you've performed the experiment, now it's time to do math - you should carefully determine whether your results are statistically significant, and not merely the product of statistical noise - typically, this means two standard deviations from the mean.  If not, you may need to go back and perform the experiment all over again - which may mean devising the experiment in a new way - until you get statistically significant results.  

7. Now you can publish the results that either confirm or eliminate your hypothesis (both are valuable results) - and there should be fairly strict standards for publication.  

8. Finally, the most important step in the process is peer review, and replication of your results.  Once your results have been sufficiently replicated, you have yourself a scientific theory.

You might ask yourself: why is all of this rigamarole necessary? Because, as the famous physicist Richard Feynman put it, "The first principle is that you must not fool yourself - and you are the easiest person to fool."  We all have cognitive biases - and we are all biased in favor of our own hypotheses.  Actually to call them "hypotheses" may be to give them too much credit.  We are biased in favor of our beliefs, our notions, our hunches, our prejudices, our dogmas, our goals, our desires, our wishes.  The scientific method doesn't exculpate anyone who calls themself a scientist from self-delusion - on the contrary, it assumes that we are self-deluded, or biased, and works to overcome some of these existing biases.  And these biases exist for every science - but biases are especially strong in the realm of economics, where people go into the field with already existing, very strong political convictions that they seek to confirm.  Therefore we should apply the rigor of the scientific method more scrupulously in the context of economics, where people have very, very strong reasons to fool themselves than we do in, for instance, chemistry, where people have far less incentive to convince themselves that, say, the structure of polycarbonates are something other than what they are. 

I can hear some criticisms out there: my high school teachers steered me wrong, you say, the scientific method I have laid out here is too rigid, too schematic, and actual science doesn't always follow this strict algorithm (as Karl Popper was fond of saying, "The scientific method does not exist.").  We could get into an extended discussion of the philosophy (and history) of science at this point - and that sounds like fun.  It's a topic that I enjoy thinking about.  But for the present argument, I'm going to cut it short, by saying: very well, what I outlined above as the scientific method could be thought of as the ideal (although I think it is realized all the time), and then there's a spectrum, or space, of methods and phenomena that resemble that ideal to varying degrees - and the more closely they resemble it, the more scientific they are.  So it's not a binary, yes or no issue, but a question of degree and kind.

For some examples: Quantum Electrodynamics and the Standard Model of particle physics are extremely scientific - they are some of the most scientific theories, with the best experimental replication, that humans have ever produced.  Does this mean that they are perfectly, or purely scientific?  Probably not.  There may indeed be errors in the methodology that we have yet to discover.  These two fields also have the virtue of being profoundly foundational to other scientific disciplines.  Less foundational, but equally or even more scientific, are the masses of data that have been experimentally determined in chemistry and which you can find in tables in the back of any chemistry textbook - which will tell you, for instance, that the molar mass of sodium chloride is 58.44277 g/mol.  These results have been replicated so many times that if I got a different result tomorrow, that would require explanation.  The double-helix structure of DNA is so robustly confirmed that it's about as scientific as a result can be.  A lot of biology is.  Many results in psychology and sociology and medicine are very scientific.  Others are less so.  In my opinion, the "big 5" personality factors do not have enough robust evidence for me to consider this scientific but it's on the border, and I could be persuaded that it is indeed scientific.  Psychoanalysis is not scientific.  But it is more scientific than astrology.  But astrology is more "scientific," I suppose, than say, one of Shakespeare's sonnets, which of course has no claim of being scientific - though I could imagine a pretentious literature professor claiming that Shakespeare's sonnets are scientific - such people are often wont to make baffling and meaningless pronouncements.  (I once had a conversation with a person who claimed that astrology is more scientific than psychoanalysis, because people have been gathering and recording astrological observations for astrology for thousands of years, whereas psychoanalysis just came from the minds of a couple guys.  Maybe she had a point there.  But I don't want to get bogged down on this.  Let's move on.)

*     *     * 

Obviously, Xenophon's dialogue Oeconomicus is not a scientific paper (nor is it about "economics," for that matter).  Few people would consider Aristotle, ancient Chinese sources, Aquinas, or Ibn Khaldun to be scientists in the modern sense of the term, though they all made their contributions.  Nor would most say that the Physiocrats were scientists, though the influence of Enlightenment philosophy and Quesnay's medical training at least provided a secular and materialistic set of metaphors to draw upon, rooted in circulation and anatomy, for the purposes of expressing their opinions.  But if, after this, there was a transition to a genuinely scientific discipline of economics, when exactly did it occur?  

 

I have the greatest respect for Adam Smith.  But he wasn't a scientist.  He was a moral philosopher (who inspired revolutionaries!).  His great work, which more people should read, is his Theory of Moral Sentiments, which makes the principle of "Sympathy" the foundation of all of his later philosophy.  Today, Smith is wildly misinterpreted even by some of his most ardent defenders, who often forget that he was a persuasive exponent of the labor theory of value, which continued to be developed by many others - Bentham, Say, Ricardo, Mill, Sismondi, Rodbertus, Hodgskin, Malthus, Ravenstone, Bray, and Cherbulliez, to name a few.  Then came Karl Marx and the other leftist critics of his generation, who are often falsely credited (or blamed) for having come up with the labor theory of value, when in reality they were simply confronting and in some ways critiquing the existing value theory, which had in effect become the consensus of nearly all economic thinkers at the time (in some ways, perhaps Marx was anticipated by Richard Jones in this respect - and Richard Jones was closer to being scientific than most).  

 

If I were to name the person that I consider the most important of the early economists, it would not be Adam Smith, David Ricardo, or any of the above named figures, but rather Antoine Augustin Cournot.  Cournot was primarily a mathematician, but he (not Smith, contrary to popular belief) was also the first, in 1838, to draw what we would now call a demand curve.  But this already demonstrates both the strength and the problem with economic theory: yes, it is undeniably mathematical.  But it is not scientific.  Economists since Cournot have devised brilliant mathematical models to describe economic processes.  But they have never bothered to perform, or even devise, the necessary kinds of experiments to either confirm or eliminate these models, and so all of these economic models cannot be considered to have risen above the level of hypotheses - and often, they have not even attained that distinction.

To some extent, Karl Marx may have thought of himself as a scientist, though if you look for specific texts in which he makes this claim, they will be few and far between.  (He did, however, refer to Théodore Dézamy as "scientific," though.)  The term "scientific socialism" was coined by P. J. Proudhon, and later used by the followers of Eugen Dühring, who was extremely critical of Marx (though other similar terms had been used since the rise of the Positivists, the quasi-religious and sociological movement started by August Comte).  In response to Dühring's followers, Marx's friend and partner Friedrich Engels wrote the bitterly sarcastic "Herr Eugen Dühring's Revolution in Science," (to which Marx contributed a single chapter, just before his death) which has been published as "Contra Dühring" and "Anti-Dühring" and one section was excerpted from it and published separately as "Socialism, Utopian and Scientific" and became a surprise runaway bestseller right after Marx's passing, introducing millions to Marxism for the first time.  We can perhaps say that Engels aspired to create a genuinely scientific movement - a movement not only of revolutionaries, but of scientists.  Did he - and they - succeed?  For reasons that I will not get into here - I will pursue it elsewhere - I have to conclude that it was a failure.  But I have to acknowledge that, at the very least, this was their aspiration.

But as Marx and Engels were publishing their major works, an intense backlash against their attempt at a science had already begun.  The "marginalist revolution" was fought by William Stanley Jevons, Carl Menger, and Leon Walras.  Carl Menger is usually considered the founder of the "Austrian school of economics."  Eugen Böhm Von Bawerk deserves a mention, for writing a point-by-point rebuttal to Karl Marx.  Also, even before this, in the 1870s, though not a marginalist per se, or even really an economist, we should acknowledge the bizarre eccentric romantic poet and engineer, Fleeming Jenkin, who had substantially developed Cournot's demand curves, adding supply curves and using these graphs to calculate equilibrium prices.  These supply and demand curves would later be popularized by Alfred Marshall, who wrote Principles of Economics, which was published in 1890 and became a standard textbook for economics and established a kind of new mainstream academic consensus.   

 

In contrast to these economists, there were people like the aforementioned Eugen Dühring, who, along with Ferdinand Lassalle, another rival with Marx for leadership of the socialist movement, but one with whom Marx had a more complex relationship, were more influenced by what came to be known as the German Historical School of economics.  Before them, Georg Friedrich List had pioneered this area with his "national system" that may have been in part influenced by Alexander Hamilton; List was offered editorship of the Rheinische Zeitung, and when he had to turn the position down due to ill health the position effectively went to Karl Marx.  This movement can perhaps also be traced back to people like Friedrich Christoph Dahlmann, who was not an economist at all, but a nationalist politician, historian and Romantic poet.  Dahlmann's follower, Wilhelm Georg Friedrich Roscher is generally regarded as the first real economist of this school, and Bruno Hildebrand became an important politician representing the movement; Karl Knies wrote its manifesto, "Political Economy from the Standpoint of the Historical Method."  In the revolutions of 1848, Hildebrand was regarded as treasonous for his participation in what was seen as insurrection, but already by the 1850s the movement had settled down and become respectable, indeed soon came to dominate academia, and became known as Kathedersozialismus - "socialism of the academic chair".  Indeed, although they may not be as familiar names today, representatives of the German Historical School like Gustav von Schmoller were regarded as the mainstream of economics of their time, whereas the Marxists and the Austrian School were regarded as heterodox extremists.  Adolph Wagner pushed these ideas further and became the most well-known advocate of what was sometimes called "state socialism," along with Lujo Brentano and Karl Rodbertus.  All of these people can be generally regarded as nationalists of one type or another, most of them in favor of some type of tariffs.  (A similar trend can be seen in the often-forgotten so-called "American School," most prominently the American economist, Henry Charles Carey, and movements such as the Whig Party.)

It was primarily against this German Historical School - and especially against "state socialism" - that the Austrian School contended.  In 1883, the year Karl Marx died, a war of words known as the Methodenstreit - the "struggle over method" - erupted, with Carl Menger representing the Austrian School and Schmoller representing the Historical School.  This conflict, in essence, gave birth to the modern study of economics, and it was over the question of how precisely this study should be done.  In short, the Historical School believed that economic theory had to be grounded in established historical facts, whereas the new Austrian School instead began with timeless axioms plucked from the ether - or rather from their own imaginations - and derived theorems from these dogmatic assumptions.  But neither side of the argument strikes me as advocating a method that can be considered scientific.  It's questionable to me whether history can be a science in the strict sense of the word.  But at least the German Historical School can be regarded as trying to be inductive in some sense, whereas the Austrian School was purely deductive.  So this was a conflict between one group that had, at best, an extremely dubious claim to science, and another that was not scientific at all.

Then John Maynard Keynes transformed the discipline of economics, but not in a direction that can be considered more scientific.  His father, John Neville Keynes, professor of "moral science" at Cambridge, had attempted to solve the Methodenstreit in 1890.  Meanwhile, his mother, who had been one of Cambridge University's first female students, was a charity worker who became a politician and eventually the mayor of Cambridge.  Keynes himself was more inclined to philosophy than economics, and particularly became deeply passionate about the ethical philosophy of G. E. Moore.  But Alfred Marshall begged him to become an economist, and so he did.  But his moral commitments never left him - nor did the group of academics, philosophers, literary figures, poets, artists, and wits known as the Bloomsbury Group, who were his close-knit inner circle of friends, and later, promoters.  Essentially a colonialist, representative of British imperialism, Keynes began as a clerk in the India Office and quite quickly rose up to be a member of the Royal Commission on Indian Currency and Finance, where he - largely successfully - pushed for a rapid conversion rate between the Indian rupee and gold.  The rupee had, until then, been backed by silver, so this effectively put India on the gold standard.  (Keynes also, in these early years, wrote about the mathematical philosophy of probability, and what he had to say was very interesting.  But that is a subject for another time.)

 

Meanwhile, a Welsh nationalist Liberal politician named David Lloyd George rose to the position of Chancellor to the Exchequer.  In the UK, "Liberals" are generally conservative, so it is somewhat ironic that it was Lloyd George who, in 1909, through a series of fiery speeches, passionately implored England to impose a welfare state, a series of reforms known as the "People's Budget," somewhat influenced by the political theories of Henry George (no relation).  You may have heard of the Georgist movement, also known as Geoism, the Single-Tax Movement, or the Land-Tax movement, mostly because the idea for the board game Monopoly was famously stolen from The Landlord's Game, which Lizzie Magie had invented in 1903 as a kind of propaganda to promote the ideas of Georgism.  (Incidentally, one of the early marginalist economists had been Philip Wicksteed, who was also a Georgist.)  But Lloyd George was scarcely able to implement his program, because to his (and everyone's) surprise, World War I broke out.  

 

Keynes saw himself as a conscientious objector to the war, and managed to avoid the draft, on the condition that he work for the government in another capacity.  Even before the UK officially entered the war, Keynes became a kind of unofficial advisor to Lloyd George, and the next year he was appointed a position in the Treasury.  It appears that Keynes at first had a somewhat moderating effect on Lloyd George's wilder ideas, such as the suspension of specie.  Keynes, in his role at the Treasury, was also known to take actions, such as a famous sale of Spanish pasetas, that were seen as "bold" and "decisive" - if not downright illegal - but which resulted in him being seen as having saved the UK from insolvency.  In the meantime, Lloyd George became the Minister of Munitions, the Secretary of State for War, and finally Prime Minister in 1916.  When the war ended in 1918, Lloyd George as Prime Minister asked Keynes to accompany him to the Paris Peace Conference to negotiate the Treaty of Versailles.  But though Lloyd George was one of the key crafters of the Versailles Treaty, most of Keynes's suggestions were ignored.  Keynes felt that the treaty was punished Germany too severely and would have a devastating effect on Germany's economy, with enormous economic and political consequences for all of Europe.  He wrote a book, "The Economic Consequences of the Peace," which made dire predictions in 1919, and as the years went on, with runaway inflation and the gradual rise of fascism, his predictions seemed to be coming true.  The book became an international bestseller and made him a global celebrity.  Leonard Woolf, a Labour party organizer, member of the Bloomsbury Group, and husband of the novelist Virginia Woolf, gave him the nickname "Keynesandra," after the Cassandra, the figure from Greek myths, who could see the horrible future, including her own murder, but could do nothing to avoid it. 

 

Then, in 1929, came the Great Depression.  Until then, Keynes had been, at least in his official work, more or less, with some modifications, a traditional economist in the line of his mentor, Alfred Marshall.  But in 1930, Keynes published his Treatise on Money, which rethought many of his earlier assumptions.  That year, he proposed a 10% tariff on all imports and subsidies for all exports.  

 

In fact, the turning point probably came some time before this.  With the outbreak of Russian Revolution, Keynes joined a group called "The 1917 Club," led by his Bloomsbury friends, notably the aforementioned Leonard Woolf.  In a private letter to his mother, Keynes described himself as "buoyantly bolshevik."  But internal squabbles caused the 1917 Club to collapse fairly quickly, and it's unclear how deep Keynes's commitment had ever been.  In 1921 he met the Russian ballerina, Lydia Lopokova, and they fell in love.  After they married, in 1925, the two of them visited the U.S.S.R., where he met Trotsky and was given a diamond-studded medal, but he was utterly unimpressed and disappointed with the Bolshevik experiment.  In 1926, he wrote a brief essay entitled "The End of Laissez-Faire," in which he distanced himself from what he now called laissez-faire economics, but also from Marxism - as he put it, "Marxian socialism must always remain a portent to the historians of opinion—how a doctrine so illogical and so dull can have exercised so powerful and enduring an influence over the minds of men and, through them, the events of history."  Nonetheless, he visited the U.S.S.R. again in 1928, writing that the country was "more normal than anyone thinks."

 

Throughout the 1930s, he developed his own theories, culminating in his magnum opus, "The General Theory of Employment, Interest, and Money," in 1936.  Weirdly, he wrote a preface to the German edition, published that same year, in which he states that his theories have more applicability in a system like theirs than in a laissez-faire system.  This is sometimes taken to mean that Keynes had some nazi sympathies.  But a 2009 article by Mark Pernecki and Thomas Richter suggests a different reading: that Keynes meant that, unlike, for instance, the Austrian school of economics, which deduces theorems from eternal, a priori principles, Keynes's theories were more in line with the German historical school, which had an empirical basis.  In other words, this was the Methodenstreit all over again.  In any case, in a 1939 interview with The New Statesman and Nation, a newspaper that Keynes himself had helped found, but which had moved sharply to the left and published fairly sympathetic articles about the U.S.S.R., Keynes said:

 

    "The question is whether we are prepared to move out of the nineteenth century laissez-
    faire state, into an era of liberal socialism, by which I mean a system where we can act
    as an organised community for common purposes and to promote economic and social
    justice, whilst respecting and protecting the individual – his freedom of choice, his
    faith, his mind and its expression, his enterprise and his property."

 

Incidentally, Keynesian economics is often associated with Franklin D. Roosevelt's New Deal, but this connection is tenuous at best. Roosevelt ran and won, giving his famous acceptance speech in which he announced his "new deal" in 1932; he was sworn in in 1933.  Keynes did not publish his famous theory until 1936.  As it happens, the two did actually meet in 1934 - Keynes visited the White House and tried to explain his economic theories to the President.  But the meeting did not go well.  FDR found Keynes's lecture abstract, confusing, overly mathematical, and impractical, and left the meeting making somewhat mocking remarks about Keynes to his advisors.  Roosevelt's economic policy was more influenced by his Assistant Secretary of Agriculture, Rexford Guy Tugwell, an interesting economist who is worthy of further study.

 

Can anyone really claim that Keynes's theories were more scientific than the economic theories that came before them?  For people living in the 1930s, between the standard economic model that had been set by Alfred Marshall's textbook, on the one hand, and Marxian socialism/communism on the other hand, Keynes's theories (as well as FDR's programs and other welfare states of the era) may have seemed like a compromise position, a kind of reasonable happy medium.  But a compromise between two unscientific theories does not make a scientific theory.  Once again, Keynes's theories were mathematical, but not scientific.  And they were more motivated by politics and moral philosophy than by the evidence.  If anything, Keynes's work seems less scientific than much of the work that came before it.  Not only did Keynes not use the scientific method summarized above, but Keynesian economics is not even a dispassionate survey of all the evidence gathered hitherto - a kind of grand survey of history.  Instead, it is a moral response to a specific crisis.

 

Alfred Marshall had passed away in 1924, but many economists, especially at Cambridge, continued in his footsteps rather than choosing to follow the innovations of Keynes.  These came to be known as "Neoclassical economists."  The first problem with so-called Neoclassical economics is right in the name - its adherents aspire not to be careful and open-minded scientists, who will go wherever the evidence takes them, but as valiant protectors of a tradition they deem "classical," appealing to the authority of the great men who founded that tradition as unassailably esteemed and revered.  They hold to the old assumptions of previous economists that produce supply and demand curves, etc., etc., etc..  Their attitude is "We have never questioned these assumptions so far - so why should we question them now?"

The second problem has already been indicated: that they interpret Adam Smith so badly that they utterly falsify him, and their doctrine is so mangled that it really bares not even the slightest resemblance to what Adam Smith actually wrote.  Unlike Smith, they were, to a man, marginalists, and most were essentially proponents of the subjective theory of value in one form or another.  In truth, the ideas of Neoclassical economics have almost nothing to do with Smith, and everything to do with the Austrian school, whose ideas they steal - often without giving credit.  In fact, the term "Neoclassical economics" was coined by Thorstein Veblen all the way back in 1900, in his article "Preconceptions of Economic Science," where he noted that "The so-called Austrian school is scarcely distinguishable from the neo-classical, unless it be in the different distribution of emphasis."

 

The third problem with Neoclassical economics is that the term has been overused, used so much by so many different people that it has lost all meaning.  It was never tethered to Smith or the other classical economists of the 18th century in any determinative sense, and through linguistic drift it has long since lost whatever denotation it may have had.  So what does it really mean?  In essence, it has become a euphemism.  Austrian economics has become considered "heterodox," and thus beyond the pale of academic respectability, but academics can vaguely embrace the positions of the Austrians while still being considered "mainstream" by calling them "Neoclassical".  In other words, Neoclassical economics is watered-down Austrian economics, Austrian economics with plausible deniability.  Doing Austrian economics is the same as doing "Neoclassical" economics, but with a meaner tone of voice.  But since Neoclassical economists need that plausible deniability to remain respectable, there can be no clear demarcation that distinguishes Neoclassical economics as a category, and so the meaning of "Neoclassical" is constantly shifting with academic fashion, itself determined by external political pressures - like whom one has to please in order to secure grants for one's research.  So as prevailing political winds shift, the research shifts.  For instance, Keynesian economics had been, to some large degree, discredited in economics departments across the country until 2007 - until another crisis made Keynesianism suddenly fashionable again.  So it goes.

 

So, in order to understand Neoclassical economics, it is necessary to investigate its dirty little secret, Austrian economics.  As previously mentioned, Austrian economics had been inaugurated by Carl Menger.  His students included Henryk Grossman, and most importantly Ludwig Von Mises.  Mises fought in the artillery on the side of Austria in World War I and then became economic advisor to the War Department.  After the war, he became economic advisor to Engelbert Dollfuss, the Austro-fascist dictator of Austria, and, after Dollfuss's assassination, advisor to Otto von Habsburg, who was the claimant to be Emperor of the Austrian Empire.  He also secured a position at the University of Vienna, where he became mentor to a young Friedrich Hayek.  In 1934, he moved to Switzerland, where he was briefly a professor of International Studies, and during this time, in 1938, he was asked to participate in the Colloque Walter Lippmann, organized in Paris by the French philosopher Louis Rougier.  Rougier worked for the nazi-occupied Vichy government during World War II, and claimed after the war that he had met with Winston Churchill to form a secret alliance between Churchill and the Vichy leader, Marshall Petain - a claim that was officially denied by the French government.  Also after the war, Rougier became well-known for his articles strenuously opposing the épuration, the French equivalent of denazification.  In 1951, he petitioned the United Nations that the Allies had committed human rights abuses during the liberation of Paris.  Much later in life, Rougier allied himself with far-right "Nouvelle Droite" theorist Alan de Benoist.

 

The Colloque Walter Lippmann, as the name implies, met to study the work of Walter Lippmann, the American "Father of Modern Journalism" who in 1922 had written "Public Opinion" which famously claims that democracy requires a an elite who will guide them through the "manufacture of consent."  At this meeting they resolved to form a new organization, the CEIRL, Comité international d'étude pour le renouveau du libéralisme - the international study committee for the renewal of liberalism.  One of the members, Alexander Rüstow, proposed the term "neoliberalism" to describe the new movement.  After the war, Friedrich Hayek formed many of these same people back together in a new organization, the Mont Pelerin Society, which had its first meeting in 1947 next to Mt. Pélerin at the other end of Lake Geneva from where the International Trade Organization was meeting at the same time.  During that first meeting, there was a split: there are differing reports on what happened, but it's safe to say that Ludwig von Mises split from the other participants, representing a somewhat more laissez-faire point of view (according to some, he angrily denounced the rest of them as socialists).  In any case, Mises became the primary representative of the most dogmatic strain within the Austrian School of economics.

 

To their credit, Mises's Austrian School usually does not even claim to be scientific - indeed, they are occasionally downright anti-scientific.  Mises formalized the Austrian school into a system he called "Praxeology."  According to the rules of praxeology, rather than following the evidence, Austrian economists start with a set of axioms which he saw as absolute, self-evident, and undeniably true, and derive unshakable principles that apply to every aspect of the economy.  Frequently, they exhibit the most egregious kind of motivated reasoning, serving propagandistic interests, because the results of all of their supposedly logical derivations always lead to the same ideological, political conclusions: everything government does is always wrong, and the "free market" is always right.  Some of their foremost representatives today, such as Hans-Hermann Hoppe, do not even disguise this now, and openly oppose science.  As far as they are concerned, if the principles of Austrian economics contradict the evidence, then the evidence is wrong.  As the saying goes, my mind is made up; don't confuse me with the facts.

 

As far as the rest of the neoliberal movement is concerned, what began as a (very well-positioned and well-connected) small, marginal, unorthodox ideological and economic current gradually began to put down roots.  In 1932, multimillionaire William Volker had founded the William Volker Fund.  When he died in 1947, it was administered by his nephew Harold Luhnow, who decided to pivot the foundation to promoting free market ideology.  In 1953, the Olin Foundation was founded by John Olin of Olin Industries, a chemical corporation that specialized in ammunition, and in 1958 it began to be used to launder money for the CIA.  Together, the Volker Fund and the Olin Foundation began financing a massive establishment of hundreds of neoliberal think-tanks, staffed by laissez-faire economists and ideologues, with Friedrich Hayek as their foremost theorist.  Hayek knew how to speak the language of Keynesian economics fluently, but he used it to express ideas that were more inkeeping with his mentor, Mises.  More and more corporate foundations (sometimes with more CIA and other government connections) soon joined, such as the Scaife Foundation, the Bradley Foundation, and the Koch Networks, funneling more and more money into what became a larger movement.  Gradually, the people trained at these think-tanks infiltrated academia, starting with the University of Chicago, where Hayek taught a young Milton Friedman.  Eventually these folks wormed their way into the halls of power in the 70s and 80s, both serving as advisors to successful politicians and dominating the economics departments.

 

The Hayek-branch of this family tree had by now become the mainstream of economic thought - in the United States, and eventually throughout much of the world.  On the other hand, there were other, more hardcore, dogmatic adherents of Ludwig von Mises's vision that were not ready for prime time.  Murray Rothbard, in particular, became the most well-known representative of what became known as "anarcho-capitalism".  In so doing, he thought he was merely taking Mises's ideas to their only logical conclusion - and I think, in a way, this is true.

 

"Mainstream economics," today, is contrasted with the strict, "heterodox" tradition of Ludwig von Mises and Murray Rothbard.  Undoubtedly, in the dusty corners of the minutiae of abstract theory, there are some kinds of significant details that make them distinct.  But in practice, when they are applied to real life, there is not that much difference between them.  The main visible difference, to the extent that there is one, is not a difference of substance but rather of style.  The hardcore Ludwig von Mises types tend to be vituperative, strident, intransigent, occasionally angry, often gleefully transgressive, and full of fanciful utopian daydreams and longings.  Their writing also tends to be fairly clear.  The Hayekian branch, by contrast, tends to be written in a style that is more cautious, technocratic, ameliorative, consensus-building, confident, assured, smug, superior, and vague.  In short, they form a good-cop, bad-cop team.

Meanwhile, in the 1940s, John von Neumann and Oskar Morgenstern founded game theory.  They were soon joined by John Nash and others in this innovative branch of mathematics, itself an offshoot of previously existing decision theory.  Now, I'm an enormous fan of game theory, and I think these people were extraordinary geniuses.  Indeed, I consider game theory to be far superior to Austrian economics in every way.  But it is not economics.  It is math (and perhaps also a bit of philosophy).  To the extent that it applies to economics, it explicitly formalizes, in a mathematically rigorous way, the assumptions that had already been made by previous economists.  That, in itself, is no small accomplishment.  But it is still lacking something, namely evidence provided by controlled experiments.  In a word, what it lacks is science.

To refer back to the steps of the scientific method that I outlined at the beginning of this essay, no economic theory that I have mentioned so far got any further than step 4 - and to say that they completed step 4 is, in some cases, being very generous.  Since none of them have performed steps 5 through 8, there really are no scientific economic theories.

By now, presumably many economists realized that their discipline lacked a certain recognition - namely, that they had failed to be convincing to anyone.   And, so they reasoned, who was to blame for this impasse?  Everyone!  Everyone, that is, except for the economists themselves.  The field collectively decided: "It's not my fault that my argument is unconvincing - it's your fault, for failing to be convinced."  Thus, in their own minds at least they transformed an epistemological problem into a problem of public relations.   The intervening decades saw rather few innovative scientific theories in economics, but instead an attempt at a mass-market popularization - and gradual dumbing-down - of the old theories.  Thus the aforementioned network of think tanks became little more than corporate-financed political rhetoric factories and from there gradually turned into superficial media spectacles.

 

This began with Hayek himself, who at least paid lip-service to science, and indeed castigated his fellow students of Ludwig von Mises that they were not doing science but merely proceeding from axioms that amounted to little more than assumptions.  But in reality, he never did any science either, preferring instead to write impassioned political polemics like "The Road to Serfdom."  These, essentially propagandistic books are more appeals to emotion than they are scientific papers that could be submitted to meaningful peer review.

The process continues to this day, in ever-more embarrassing and ham-fisted ways, from the works of Thomas Sowell, to Steven Levitt and Stephen Dubner, of "Freakanomics" fame.  Another example would be Bryan Caplan, who routinely takes to Twitter and Substack, openly blaming the public for failing to swallow the ideas that the economists are spoonfeeding them.

It's hard for me not to be especially galled by the "left" side of these contemporary economists - people like Robert Reich and Joseph Stiglitz.  There has come to be quite a career path for aspiring economists: first, ingratiate yourself to free-market fanatics (Reich began his career as an assistant to Robert Bork), so that you can establish yourself as an "economist".  Then, pivot to become a mouthpiece of the Democratic Party.  Politicians can then point to your work and use it as an argument from authority.  And their lack of economic sophistication means that they will accept whatever slop you offer them.  Everyone wins (except for the public, who is cheated of the opportunity for real economic science).  Fame and fortune are not assured, but they dangle seemingly within grasp.  You can always tack back to the right, like Larry Summers, and if you play your cards right, you might wind up on the board of megacorporations like OpenAI, the way he did.  A limo ad astra.  On the other hand, there are just as many - actually, many more - who use the same technique, but for the Republican Party.  It is just as easy and just as venal - either way, economists work as the servants of political power, high priests of its legitimation, rather than as scientists.  The field of economics may not gain any scientific credibility by serving the interests of political parties, but it does draw a steady paycheck and a phony kind of prestige.

 

Meanwhile, the more hardcore economists in the Austrian tradition just went further and further into extreme dogmatism.  Characteristic of this school is Hans-Hermann Hoppe, who stridently and openly denies science in favor of his "praxeological" doctrine.  Following him is an army of online warriors, who are hardening into far right political groups, many of which, despite their libertarian rhetoric, have quickly become fascist-adjacent.

Perhaps the apogee of the contemporary epistemological decadence of economics is the book "Nudge" by Cass Sunstein and Richard Thaler, one of the most anti-scientific screeds ever written, whose message is, essentially, "These people aren't behaving the way our economic model says they should, so let's create 'choice architectures' to 'nudge' them into behaving more like we think they should."  Here they have reached a kind of reverse-Lysenkoism.  That is the opposite of what a scientist does.  If a scientist is studying a subject, and comes up with a theory, a model, to explain it, but the subject doesn't do what the model predicts, then the scientist's response shouldn't be to try to manipulate the subject to fit the model better, but rather to change the theory to fit the facts better.  Anything else is a recipe for insanity.

 

Paul Krugman is fond of saying that "Economics is not a morality play."  But he's wrong.  So far, economics has been nothing but a morality play: a debate over moral philosophy, dressed up in math.  The left wing bourgeois economists have their morality, based on the principle of equality.  The right wing bourgeois economists have their own morality, based on the principle of property, that no one should get something that doesn't belong to them - which usually means punishing the idle and rewarding the industrious.  Both are ultimately based on some concept of "fairness".  (In the 19^th century, both "economy" and "industry" were considered virtues.)  Both the left and right like to throw around terms like "freedom," "liberty," and "emancipation," as well.  And both have their formulae and equations, which they recite like magic spells.  But neither have scientifically valid evidence to back up their claims.

 

This leads some people to conclude, not only that economics is not a science, but that it can never be a science.  I can understand this kind of pessimism. 

 

But there is a ray of hope.  As I mentioned at the very beginning of this essay, in 2002, Daniel Kahneman and Vernon Smith won the "Nobel" Prize in economics.  And in 2017, Richard Thaler also received this honor.  And they represented a new direction in economic thought.  A new branch of economics had been born - namely, what is now known as "Behavioral Economics".  Another economist, Dan Ariely, summed up the gist of this new work in the title of his 2008 book, "Predictably Irrational."  

 

Against the grain of the sordid history of economic thought up until this time, the behavioral economists did something truly novel: they conducted actual experiments.  Apparently, it had never occurred to anyone to try that before.   And the results of these experiments surprised almost everyone in the economic community.  Whereas earlier economists (even including Marx!) assumed that human being are rational decision makers and then mathematically determined what followed from this fundamental axiom, the behavioral economists showed experimentally that in many situations, humans do not behave "rationally" - that is, rationally according to the rather narrow, shallow, inhuman definition of "rationality" that earlier economists employed.

I will admit that I know nothing about economics - but that proves I know one more thing than all economists.  I know that I know nothing.  They don't even know that they know nothing.