Is Economics a Discipline?
Pieces of economics are certainly a science.
But if you look at the current state of the Chicago School, it seems to me that, among that group of economists at least, it is definitely not a science.
Moreover, it is not even a discipline. There were a lot of things that economists like Frederic Bastiat, Jean-Baptiste Say, and John Stuart Mill knew in 1830 about the origins of aggregate demand shortfalls and the usefulness of expansionary fiscal policy in a downturn that modern Chicago never bothered to read, never bothered to learn, or have long forgotten.
For example, consider Luigi Zingales of the University of Chicago--smart guy.
In my debate with him over at the Economist I found myself flummoxed when he would say things like:
Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behaviour. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good. And they tell consumers, who are affected by severe spending problems, that consuming is good, while saving is bad. In medicine, such behaviour would get you expelled from the medical profession; in economics, it gives you a job in Washington...
Among the 37 Economics Nobel prize winners in the last 20 years, four received the prize for their contributions to macroeconomics. None of these could be considered Keynesian. In fact, it is hard to find academic papers supporting the idea of a fiscal stimulus...
The current crisis is not a demand crisis, it is a trust crisis. Bad corporate governance coupled with bad government policies has destroyed the financial sector, scaring investors and freezing lending. It is as if a nuclear bomb had destroyed all roads in America and we claimed that to alleviate the economic impact of such an event we should invest in banks. It is possible that eventually the effect will trickle down. But if the problem is the roads, you want to rebuild roads, not subsidise the financial sector. And if the problem is the financial sector, you want to fix this and not build roads...
Let me pick on Zingales.
Bad corporate governance coupled with bad government policies certainly produced a trust crisis--a collapse in the perceived supply of safe, liquid, high-quality assets for investors to hold. As a consequence, all across the economy agents cut back on their expenditures on currently-produced goods and services in order to try to build up their stocks of safe, liquid, high-quality assets to desired levels. But they could not do so: the stocks simply were not there. So the consequence of the cutback in planned spending was a fall in demand, production, employment, and income.
When people cannot get high-quality assets by lending to banks, that is a problem. One way to fix it is to fix the banks so that people are once again confident that their loans to banks are high-quality assets. But that is not all you can do. The government is a supplier of high-quality assets. As an alternative to lending to banks which then lend to businesses which then spends by investing in physical capital and so boost demand back to normal levels, we can lend to the government which then spends and so boosts demand back to normal levels.
That is expansionary fiscal policy.
Zingales's claim--that because the current crisis is a trust crisis that has left the economy short of safe high-quality liquid assets we cannot restore employment by having the government build roads and finance road construction by issuing trusted safe high-quality liquid assets--that claim is so incoherent as to reveal nothing more than a failure on Zingales's part to think any of the issues through for more than a weekend. Zingales is a smart guy. But he is also pig-ignorant about what economists have thought and said in the past. And because he is pig-ignorant, he has mentally disarmed himself.
The hallmark of a discipline--let alone a science--is that you are working in an intellectual tradition and know and build on the work of your predecessors.
Had Zingales a clue as to what economists were writing even as early as the first half of the nineteenth-century, he would be familiar with cogent and true arguments like:
Frederic Bastiat, "What Is Seen and Not Seen," on the benefits of fiscal expansion and government employment of the unemployed in a recession:
There is an article in the Constitution which states: "Society assists and encourages the development of labor.... through the establishment by the state, the departments, and the municipalities, of appropriate public works to employ idle hands." As a temporary measure in a time of crisis, during a severe winter, this intervention on the part of the taxpayer could have good effects... as insurance. It... takes labor and wages from ordinary times and doles them out, at a loss it is true, in difficult times...
Jean-Baptiste Say, "Treatise on Political Economy," on the benefits of fiscal expansion and government employment of the unemployed in a recession::
[A] benevolent administration can appropriately make provision for the employment of supplanted or inactive labor in the construction of works of public utility at public expense, as in construction of canals, roads, churches, or the like...
Jean-Baptiste Say, "Complete Course of Political Economy," on how the key problem created by a trust crisis is not the harm it does to aggregate supply--not the disruption of the division of labor--but rather the lack of aggregate demand:
The Bank [of England]... forced the return of its banknotes... cease[d] to discount commercial bills. Provincial banks were... obliged to follow... commerce found itself deprived at a stroke of the advances on which it had counted, be it to create new businesses, or to give a lease of life to the old. As the bills that businessmen had discounted came to maturity, they were obliged to meet them, and finding no more advances from the bankers, each was forced to use up all the resources at his disposal. They sold goods for half what they had cost. Business assets could not be sold at any price. As every type of merchandise had sunk below its costs of production, a multitude of workers were without work. Many bankruptcies were declared among merchants and among bankers...
John Stuart Mill, "Essays on Some Unsettled Questions in Political Economy," on how at the root of high unemployment after a financial crisis is an excess demand for financial assets:
There can never, it is said, be a want of buyers for all commodities; because whoever offers a commodity for sale, desires to obtain a commodity in exchange for it, and is therefore a buyer by the mere fact of his being a seller. The sellers and the buyers, for all commodities taken together, must, by the metaphysical necessity of the case, be an exact equipoise to each other; and if there be more sellers than buyers of one thing, there must be more buyers than sellers for another.... If... we suppose that money is used, these propositions cease to be exactly true.... Although he who sells, really sells only to buy, he needs not buy at the same moment when he sells; and he does not therefore necessarily add to the immediate demand for one commodity when he adds to the supply of another....
In order to render the argument for the impossibility of an excess of all commodities applicable to the case in which a circulating medium is employed, money must itself be considered as a commodity.... [T]hose who have... affirmed that there was an excess of all commodities, never pretended that money was one of these commodities; they held that there was not an excess, but a deficiency of the circulating medium.... [P]ersons... from a general expectation of being called upon to meet sudden demands, liked better to possess money than any other commodity. Money, consequently, was in request, and all other commodities were in comparative disrepute.... [T]he result is that all [other] commodities fall in price or become unsaleable...
Had Zingales known all of this, he would have recognized that expansionary fiscal policy was a perfectly respectable policy response to the shortage of safe, liquid assets created by the trust crisis.
But he didn't. So he didn't.
And he is not alone. Consider how much more Bastiat, Say, Mill, and company knew back in 1830 than all of these Chicago School "thought leaders" whom I wrote about a year and a half ago:
David K. Levine of Washington University in St. Louis:
It is a daunting task to bring you [Paul Krugman] up to date on the developments in economics in the last quarter century. I know that John Cochrane has tried to educate you about what we've learned about fiscal stimulae [sic][1] in that period...
But the stimulus plan? How can you be arguing for more? Since we are recovering before most of the stimulus money has entered the economy--isn't that evidence it isn't needed? How can you write as if you are proven right in supporting it?...
John Cochrane of the University of Chicago:
[That spending can spur the economy] is not part of what anybody has taught graduate students since the 1960s. They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false...
Paul [Krugman's]’s Keynesian economics requires that people make logically inconsistent plans to consume more, invest more, and pay more taxes with the same income...
Robert Lucas of the University of Chicago:
Christina Romer--here's what I think happened. It's her first day on the job and somebody says, you've got to come up with a solution to this--in defense of this fiscal stimulus, which no one told her what it was going to be, and have it by Monday morning.... [I]t's a very naked rationalization for policies that were already, you know, decided on for other reasons...
If we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder--the guys who work on the bridge -- then it's just a wash... there's nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you've got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn't going to help, we know that...
Edward Prescott of Arizona State University:
I don't know why Obama said all economists agree on [the need for a stimulus bill]. They don't. If you go down to the third-tier schools, yes, but they're not the people advancing the science...
[T]he period of the '20s was one of healthy growth, until Hoover's anti-market, anti-globalization, anti-immigration, pro- cartelization policies were instituted, brought this expansion to an end, and created a great depression...
Eugene Fama of the University of Chicago:
Sorry, but I’m not familiar with [Hyman] Minsky’s work
Haven't seen it [Paul Krugman's article]. I pay no attention to him...
Government bailouts and stimulus plans seem attractive when there are idle resources - unemployment. Unfortunately, bailouts and stimulus plans are not a cure. The problem is simple: bailouts and stimulus plans are funded by issuing more government debt. (The money must come from somewhere!) The added debt absorbs savings that would otherwise go to private investment. In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another...
Michele Boldrin of Washington University in St. Louis:
It is a fantasy that the economic profession at large finds the "stimulus" and the "bank bailout" plans sensible and adequate. Most economists we know oppose them.... Outside the administration, the convinced supporters of the plans are a small minority among academic economists working in those fields. Both plans contradict four decades of research and are designed to please special interest groups...
Is there a case for borrowing now to finance a stimulus package? People are worried about the future and are sensibly reducing their spending. Does this imply the government should step in and do the spending for them? Put that way, the idea seems like a non-starter...
And I haven't even mentioned Richard Posner's bizarre and false claims that:
No one has the faintest idea what effect the stimulus has had.... Disentangling the various factors... has not, to my knowledge, been attempted.... This raises the question of the ethical responsibility of academic economists, such as Romer (and Krugman, and Lawrence Summers, and many others), who write for the media or join the government, either to adhere to academic standards in their nonacademic work or to make clear to the public that they are on holiday from those standards...
As I say, before you ask whether economics as an intellectual discipline rises to the standards of a science, you first have to ask whether it rises to the standards of an intellectual discipline at all.
