The Evolution of Economics: Where We Are and How We Got Here by Peter J

THE LONG TERM VIEW The Evolution of Economics: Where We Are and How We Got Here By Peter J. Boettke, Peter T. Leeson, and Daniel J. Smith This paper suggests that contemporary economics is characterized by three key features. First, it is focused on “big questions” in political economy and is willing to look out- side economics to search for these questions and their answers. Second, contemporary economics is empirically focused. “Grand theory” has taken a back seat to empirical explorations of institutions in particular. Third, modern economics has been dramatically influenced by “freakonomics”—the application of economic principles to unusual and unorthodox topics—and is increasingly directed at a popular lay audience. We argue that these particular areas of modern economics’ evolution are not unrelated. The devel- opment of each key feature is connected to the others. n the last decade or so, economics has been dramatically altered by the rise of undergone an impressive evolution. “freakonomics”—the application of economic IEconomic principles haven’t changed. But principles to unusual and unorthodox issues. economists’ applications of these principles Freakonomics is characterized not only by its have. There are three key features of contem- provocative applications of economic con- porary economics: cepts, but also by the fact that it is consumable First, economics has refocused its energies by a popular, lay audience, which is increas- on the “big questions” of political economy ingly exposed to the economic way of think- and, closely related, is increasingly turning to ing. insights from other social sciences to search These three trends are not separate and for these questions and their answers. independent evolutions within economics. Second, economics has largely abandoned Rather, they are interrelated in several “grand theorizing” for more empirically- respects. These changes are positive ones for minded projects. Although formalism is still economic science. prominent in economics, increasingly this formalism manifests itself via empirical tech- Economics and the Hourglass niques as opposed to novel theory. In particu- In his excellent paper on the state of econom- lar, the empirical focus of contemporary eco- ics in 1997, David Kreps draws on Paul nomics is driven by the renewed importance Romer’s hourglass analogy to explain the evo- attached to understanding institutions. lution of economics from Adam Smith to the Finally, the face of modern economics has Peter J. Boettke and Peter T. Leeson are professors in the department of economics at George Mason University. Daniel J. Smith is a graduate research assistant, also in the department of economics at George Mason University. Dr. Leeson can be contacted at [email protected]. 14 BOETTKE, LEESON, & SMITH present.1 See Figure 1. even “boundedly rational”) agents respond deterministically to relative price changes to Political Economy & Moral Philosophy, 1776-1900 optimize consumption or production deci- Economics as technical sions, had not yet taken form. Instead of “eco- science & tool of social nomics,” there was “political economy,” in control, 1930-1980 which history, morality, and psychology—in a Economics & political word, “humanity”—was at the center of economy, 1990- analysis. Unlike “economics,” “political economy” Figure 1: The Hourglass Shape of Economics cannot do without these essential, if often intractable, features of the world. To go along In Adam Smith’s day, “economics” was with imperfect and socially-embedded man, part of a much broader social science inquiry classical political economy emphasized the that included and drew heavily upon sister importance of institutions, coping mecha- disciplines such as history, politics, philoso- nisms that emerge to facilitate the ability of phy, and sociology. This is the top of the hour- imperfect actors to coordinate their activities. glass, which is wide, representing the interdis- In creating the “rules of the game” that govern ciplinary nature of economic study and the interaction, institutions were central for those “big picture”-type questions that this study studying political economy because they not asked, most famously, why are some nations only shaped social outcomes, but also because rich while others are poor? they reflected—i.e., were shaped by—social Nowhere is this broad approach more evi- outcomes. The classical political economists dent than in the work of Smith himself.2 Like were thus first and foremost concerned with his fellow Scottish moral philosophers, Smith these institutions and the features of man’s was fundamentally concerned with the con- reality that give rise to them. nections and relationships between morality F. A. Hayek provides perhaps the best sum- and the market. Even in his Wealth of Nations, mary of this tradition and its motivations. As which endeavored to answer a specifically he put it: “economic” question, Smith could not explore Smith’s chief concern was not so this question without thoroughly understand- much with what man might occasion- ing the foundational animating forces of ally achieve when he was at his best human beings, historically and in his own but that he should have as little oppor- time. Those who built in the Smithean tradi- tunity as possible to do harm when he tion, such as J.S. Mill, David Hume, and oth- was at his worst. It would scarcely be ers, also applied this fundamentally interdisci- too much to claim that the main merit plinary approach to economic inquiry. of the individualism which he and his Indeed, it is safe to say that “economics” in contemporaries advocated is that it is a the narrow sense that is used to describe eco- system under which bad men can do nomic study in the mid-20th century did not least harm. It is a social system which exist for these thinkers. Moreover, when does not depend for its functioning on Smith, Hume, or even Mill was writing, the our finding good men for running it, or “marginal revolution” had not yet taken place on all men becoming better than they in economics. A discipline of sterile rational now are, but which makes use of men choice, in which ends and constraints are in all their given variety and complex- taken as given, and perfectly informed (or 15 THE LONG TERM VIEW ity, sometimes good and sometimes of doing so, the neoclassical presentation of bad, sometimes intelligent and more the logic of choice and the logic of the market often stupid. Their aim was a system also established the use of formal methods— under which it should be possible to mathematics in particular—as the only way of grant freedom to all, instead of analyzing economic problems scientifically. restricting it, as their French contem- Questions of man’s foibles, fears, and stum- poraries wished, to “the good and the bling in his quest to better his condition and wise.” The chief concern of the great exchange with his brethren, let alone the vari- individualist writers was indeed to ety of informal and formal institutions that find a set of institutions by which men defined his environment of choice and inter- could be induced, by their own choice action, simply had to be put aside for reasons and from motives which determined of mathematical tractability. his ordinary conduct, to contribute as At the same time, the marginal revolution much as possible to the need of all oth- operated to sever “economics” from “political ers; and their discovery was that the economy” to a certain extent, or, perhaps system of private property did provide more accurately, to carve out of this social sci- such inducements to a much greater ence mish-mash the peculiarly “economic” extent than had yet been understood.3 elements, allowing them to be distinguished from the historical, philosophical, or psycho- logical elements that were not readily dis- Hayek’s interpretation of classical political posed to analysis using marginal utility theo- economy shows a concern with choosing ry. In this way economics began to pull away man, but one with foibles and fears, who, pre- from other social sciences, something that cisely because of his imperfections, requires was reinforced by the growing methodologi- institutional restraints and filters to steer his cal difference between “scientific econom- activity in a direction to achieve economic ics,” which required formal testable proposi- cooperation and realize the gains from trade tions, and increasingly actually testing these with his fellow man. propositions, in contrast to the historical or Following WWII, the narrowing of economics greatly accelerated, fueled in no small part by mathematical advances that soon defined what it meant to do “economics” versus other social sciences, which economists increasingly viewed with disdain. philosophical dimensions of political econo- This picture of the intellectual project of my that were not readily amenable to the classical political economy was transformed application of such methods. Thus, from the into the science of “economics” only as we marginal revolution onward, while ostensibly entered into the 20th century. The marginal more “scientific,” economics also became revolution solved the “diamond/water para- narrower, analogous to the narrowing of the dox” that had so troubled the classical politi- hourglass. cal economists, and later, equilibrium models Following WWII, the narrowing of eco- presented the logic of competitive economic nomics greatly accelerated, fueled in no small forces in a rigorous manner. But in the process part by mathematical advances that soon 16 BOETTKE, LEESON, & SMITH defined what it meant to do “economics” ver- back at the center of economic study. The suc- sus other social sciences, which economists cess of these authors is at least partly respon- increasingly viewed with disdain. The substi- sible for making it fashionable again to tution for Smith’s method of inquiry in 1776, engage in more broad-ranging work, closer to and indeed of the big questions he posed, by classical political economy.

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