Alfred Nobel, who hated economics "from the bottom of my heart"
What is economics? Is it a science? Haven't all its failures of prediction and political guidance proved its lack of respectability? The current financial crisis also reveals a deep crisis of economics. We seem to be witnessing the dismantling of an approach that, at least in its shallow mainstream version, has to make a series of absurd assumptions in order to reach any conclusion — with both the assumptions and the conclusions being astonishingly out of touch with reality. Its scholars have come to use mathematical logic as some sort of l'art pour l'art, falling into the trap of technicality rather than aiming at the wider horizon of an all-encompassing social science.
"Competent economists are the rarest of birds...The master-economist must possess a rare combination of gifts...He must be mathematician, historian, statesman, philosopher — in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man's nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician."
We owe this job description to John Maynard Keynes and the situation hasn't changed since he wrote it nearly a century ago. The scarcity of good economists has indeed been a constant plague of humankind.
This is not to say that all economists are by nature technocrats who fail to recognise the relevant questions. This would just not be true. The verdict of narrowness and non-scientific shallowness cannot be directed against those economists who have made their career outside the mainstream, the so-called "orthodoxy" — in institutional economics, for example, or in public choice, in law and economics, game theory and behavioural finance. In these relatively new and innovative fields, scholars have been endeavouring to fill the gaps in mainstream theory, hoping to contribute to what should one day be a better and more fruitful mainstream. The goal is a body of theory that would be able to answer more relevant questions about how mankind can peacefully live together in society, granting personal autonomy and economic progress for all, building on the institutional achievements of Western civilisation, such as individual liberty, the free market and the rule of law.
It therefore seemed worthwhile to interview as many as possible of the living recipients of the Nobel Prize for Economics, as I have done in my new book Roads to Wisdom (Elgar, 2009). Nobel laureates are terrific subjects of analysis if one seeks to grasp the backgrounds and inspiration that create true excellence, especially in a field such as economics, where fruitless and shallow technical brilliance can turn out to be so harmful. The Nobel Prize in Economics does not really deserve its name. It was instituted as late as 1968, by the Swedish Riksbank and its full name is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The man who invented dynamite, made a fortune and dedicated it to the ongoing promotion of scientific excellence, clearly seeking not to leave the world with a merely destructive legacy, had not included the field of economics in his will. Actually, he hated economics, as he said, "from the bottom of my heart". For a physical scientist, to whom hard data and precision were vital, this is quite understandable. Economics, as a social science, cannot discover eternal laws. It has to deal with ever-changing and inherently complex phenomena.
The fake genealogy of the Nobel Prize in Economics doesn't however impair its importance. The prize is, of course, no guarantee of quality. But it is better than many other indicators, because the phenomenon of self-perpetuating elites plays itself out less negatively here than elsewhere in academia. In order not to misjudge whether some areas of research or some pieces of work have really had a measurable impact on economics, the prize tends to be handed out very late in an individual scholar's career. A welcome side effect of this is that career choices are not being corrupted. On average, Nobel laureates in economics are 67 when they receive the prize. The oldest to receive it was Leonid Hurwicz, at the age of 90, in 2007.
This does make the Nobel Prize a relatively good indicator of excellence. For this reason, it is useful and inspiring to turn to the Nobel laureates and ask them about their personal journeys — leaving behind the more pedestrian issues of publication indexes, citation cartels and networks. It is much more interesting to have outstanding scholars describe their individual roads to research, originality and excellence, and to ask them about their own character traits, family backgrounds and worldviews. How have they come to be what they are? What is it that triggered curiosity about economics? What does it take to have a promising career? Where do path-breaking ideas come from? What were their sources of inspiration?
Actually, most Nobel laureates in economics have come to that field because they were attracted by its questions, which they felt an imperative urge to answer in order to improve the world. Those are the missionaries. People with this trait usually have a "vision", as Joseph Schumpeter once said. Among my subjects, Douglass North says that he is "still trying to save the world" today. Gary Becker talks about his youth referring to his emerging "desire to do something for society". On the other hand, there are some born technicians, who easily possess themselves of the proper (mathematical) "technique", as Schumpeter puts it, and who take a while to discover their more profound interest in "people and policies": those laureates have come to economics via their mathematical talent. To some extent, this is the case with Vernon Smith. Blessed with a talent for mathematics, he started out studying physics and electrical engineering at the California Institute of Technology, where he was confronted with the social sciences more or less by accident. He stumbled over Paul Samuelson's new textbook, which was revolutionary in presenting the subject matter in mathematical terms. "Samuelson's book indicated that economics was just physics," he said. He has since found that economics is not like physics — but the newly discovered field stuck nevertheless.
There may be a humility bias in how much one ascribes to chance, looking back on one's life — but it is probably also true that the dice are not yet fully thrown at the age of 16 or 17. Decisions made at such a young age are made with a great deal of uncertainty. Hence, we may take it seriously when most laureates claim that they have more or less stumbled into economics.
Even for the "missionaries", economics wasn't a fully unequivocal choice before they saw it in class. In Vernon Smith's case, for example, it was chance exposure to economics at Caltech that proved decisive. Paul Samuelson says that he "came to Chicago only because of location" and that it "was an accident that I liked the subject". Kenneth Arrow and James Buchanan were simply lured by a scholarship.
This brings me to the influence of family backgrounds. Edmund Phelps certainly hit the nail on the head when he remarked that it is not straightforward — not impossible, but more difficult — to become an economist if one doesn't grow up in a somewhat bourgeois setting. Absent major crises that affect virtually everybody, economic issues do tend to subside into the fuzzy background of social life unless one lives in a context that brings with it some regular intellectual exposure to questions of this kind.
Phelps grew up in precisely what he calls a "somewhat bourgeois setting", both parents being oriented towards business and coming from relatively wealthy backgrounds. Gary Becker's case is similar, his father having been a pretty well-to-do businessman. The same is true for Douglass North, whose father was a successful insurance manager, and even for Paul Samuelson, whose father had his own pharmacy and whose family had accumulated a relative degree of affluence but had to watch it gradually dissipate when the Florida land bubble burst in the 1920s.
The situation was, however, altogether different for Vernon Smith, whose parents left school at 14. His father provided the work ethic and can-do knowledge, while his mother was active in political and social affairs in the community. Financial problems forced the family to practise self-sufficiency on a farm for a couple of years. The situation of James Buchanan was similar to Smith's. His family lived on a farm throughout his youth. His father had gone through two years of university training ("and played football"). His mother, however, had been a schoolteacher. She was endowed with an exemplary work ethic and a voracious intellectual appetite. Both character traits, as it seems, have left an important and lasting impact on the son.
Even without much schooling, therefore, parents can provide their children with intellectual appetite and a motivation for achievement. Discussions at the dinner table, or other regular family gatherings, are extremely important — and it doesn't matter much how high-powered the arguments are. What is crucial is that the awareness is raised-awareness about the importance of certain topics relating to economics and economic policy, to anything that touches social questions and of course the appetite to learn more about them.
This is an experience that most laureates share. Smith was fascinated to discover at college that the topics that had been debated at the dinner table were actually "things you could study, that it needn't be only a matter of opinion. You could actually base your opinions on analysis, on investigation, on some kind of understanding about how society and how the economy work". In the Buchanan household, discussions were more about politics.
Worldviews also play a role in instigating academic research. As Schumpeter put it, worldviews enter the "pre-analytic cognitive act" or "vision" that "supplies the raw material for the analytic effort". To some extent, a person's worldview is usually shaped at home, in the family, actively and passively, perhaps also during dinner table conversations. This "initial endowment" may however fade away as new influences come in later in life. Interestingly, in the case of the ten Nobel laureates I interviewed, the initial ideological endowments were mostly socialist. There is a saying that a person who, as a youngster, is not a socialist, has no heart — and a person who still remains a socialist in later years has no brain. There may be something to it. Smith comes from a socialist background. Becker was a socialist, just like his father, who "although he was a pretty successful businessman, strongly supported interventionist-type candidates". North was an outright Marxist. Arrow regarded himself as a socialist ("not a communist"). Buchanan doesn't make such a fine distinction. He came from a populist background, but when he turned to economics, his peer group lured him over to socialism. "I would have signed up immediately to the Communist Party had a recruiter come along," he says. As predicted by the popular saying, however, those initial ideological endowments indeed didn't last. In Buchanan's case, it was the University of Chicago that turned him around, "and in a hurry".
The same happened to Becker, who remembers that two things pulled him away from socialism: Milton Friedman and economics. When North got his first job at Seattle, he relearned theory — and, as he says, this "was the last step in my getting rid of Marxism. As I relearned theory, I became a very rigid neoclassical, Chicago-type economist". As the Nobel laureates moved on with their schooling and academic training, they came across teachers and mentors who, in most cases, played a decisive role. These mentors managed to entice their intellectual appetite even more, opened up interesting new fields for them, gave them good advice and urged them ultimately to stay in academia. The role of teachers is as important as it is psychologically interesting. Teachers provide the intellectual socialisation, and they are role models. This is clear from Becker's experience with Milton Friedman at Chicago. "He was by far the greatest living teacher I have ever had," Becker says. But Becker ultimately had to defend his intellectual autonomy some years later, deciding to move on to Columbia University. Buchanan was in Frank Knight's wake, while in Smith's case, Wassily Leontief and Gottfried Haberler and especially Edward Chamberlin, left their mark.
Events also leave their marks on people and on their theories. Scholars pick up on catastrophes and cataclysms, trying to understand and explain them, and theory changes correspondingly. All economic theory is thus historically bound, both in terms of the real-life events behind it and the trajectory of theory itself, as Schumpeter points out. Looking back at the past century, there are only a couple of events from an economic point of view that qualify as having had this kind of importance. The first, and foremost, was the Great Depression. Samuelson, Phelps, Solow, Arrow and Smith all cited it as the most serious economic catastrophe so far. It will be interesting to see whether the current crisis will have a comparable motivational impact on academia.
Can you survive as a lone wolf in academia — or do you have to be a group animal faithful to the tribe? How much co-operation and interaction is needed in order to be successful? My interviews show that "anything goes", as Paul Feyerabend put it. Samuelson, for example, certainly isn't a lone wolf. He has co-authored a lot, and much of his work — if not most — has been triggered by other people's papers. Buchanan co-authored extensively, too, and derived from it as much inspiration as despair, usually having to bring the discipline to bear. Smith clearly isn't a lone wolf: he has always worked out his experiments within groups. Reinhard Selten, however, the one German laureate in the group, denies that kind of disposition. "I'm not so dependent on external inspiration," he says. And North is "sure I have learnt a lot from other people...but in terms of where my ideas come from, I have been very much a loner". In an age of globalisation when co-authoring has become the rule rather than the exception in academia, the lone wolf may be on the verge of extinction.
The muse also kisses whomever and whenever she chooses. Crucial ideas are a gift. They tend to be inspired by the most unlikeliest things, at the most unlikely moments. Buchanan traces back his approach mainly to a dusty old book he stumbled on by chance in the library: Knut Wicksell's Finanztheoretische Untersuchungen. Smith owes his inspiration to a course taught by Edward Chamberlin, but the ensuing illuminating idea came later: "In the middle of the night, in 1956 at Purdue, I wake up and I have this idea." Becker remembers puzzling about the "economics of marriage" while sitting on his own in a hotel room. North tells the story of how some serious criticism by a student prompted him to stay up all night drinking brandy and reflecting on the topic. Arrow remembers how painfully long it was before he left the starting blocks, yet in the end, his dissertation came "just like that". And Samuelson acknowledges that many of his topics came up because somebody else had written something that he felt an irresistible urge to straighten out.
And finally, the area of research seems to be to a large extent predetermined by individual character. From the point of view of self-marketing, it is more promising to place oneself in a new field or even to create one from scratch: who would not prefer to be a big fish in a small pond rather than to be a small fish in a big pond? In order to prevail in academia, one should try to come up with a truly pioneering idea, a fruitful approach that one can expand. But breaking free from the mainstream is a risky investment, and few scholars have the guts to undertake it — although becoming the mainstream should be a big reward. To differing degrees, most Nobel laureates have indeed been rebels against the established mainstream at some point. Becker rose against the narrow scope of economics. Smith rebelled against the black or empty holes in general equilibrium theory. Buchanan spoke against the missing regard for the public sector and collective decision-making. In Selten's case as well, his rebellious character predisposed him to swim against and beyond the mainstream wherever he went. As he admits, "I have always mistrusted majority opinion."
The decisive truth in this observation, which also helps to answer the initial question about economics as a science, is that it is always outside a given "orthodoxy" that human reason finds the most difficult — and therefore also the most promising — challenges. All such "heterodoxy" in fact requires mental freedom, an independent mind, self-confidence and perhaps a rebellious character. It takes courage to be a dissident. Enlightenment does indeed wait at the end of the road for those intellectual entrepreneurs who are not only equipped with intelligence, curiosity and patience, knowing how to ask relevant questions and how to use their insights in a well-balanced way, but who also follow a more universal scholarly impulse, leading to a broader perspective.
As Friedrich August von Hayek said, "An economist who is only an economist is likely to become not only a nuisance but a positive danger." With the current crisis, both of the economy and economics, we have just experienced the enormity of this positive danger. It comes with an unhealthy combination of mainstream conformity and conceit. In order to circumvent it, economists must relearn humility. They need to shield themselves not only against the illusion that humankind can fix all things, but also against romantic illusions about the possible scope of human knowledge in the first place. A role model is James M. Buchanan. In spite of his high scientific ambitions, which he follows wholeheartedly, he remains humble and always keeps his feet on the ground. All scientific knowledge can be but transitory, he insists, and progress is necessarily relative. "There are whole realms of discourse out there that we cannot reach, by definition. There are always going to be limits beyond which we cannot go. Knowing that they are there, you can always hope to move a little closer — but that's all."
Economics must also again be understood as an encompassing social science, deeply ploughing the rich common ground with philosophy, sociology, politics and history. The use of formal mathematical methods should certainly be part of this approach — but not their long practised senseless misuse, with many mainstream scholars indulging in an obsession with mathematical virtuosity for its own sake, forgetting to ask the relevant questions. It is only such a cure of technical sobriety and wider perspective that will make economics a truly worthwhile avenue of research again, interesting for the individual scholar and useful for society as a whole. It is only this that may re-establish confidence that economics is not dismal, but indeed a science — a science that does have valuable contributions to make that will permit us better to understand human interaction, devise appropriate institutions, and to more wisely assess and advise public policy.
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