“It just isn’t the case that university economics departments are heavily stacked with libertarians and free market advocates. By roughly two to one, economics profs are of the interventionist persuasion, ranging from Keynesians to Marxists.” – George Leef.
Conservative critics of academia will tell you that socialism and Marxism are pervasive in such fields as history, English, and sociology. The charges are frequent and pervasive, and not news. But the conservative critique of leftist homogeneity in academe now extends to economics. Not so. Economics is a generally conservative field that many observers would say is far less inclined toward radical ideology than other humanities and social sciences.
The allegation that the economics profession is dominated by big-government interventionists is perplexing, especially in light of the history of economic thought during the past several decades.
Libertarian Dominance
The Marxism allegation strikes me as completely off the wall. When I completed graduate school in economics in the late 1970s, the so-called Chicago School had already revolutionized economic thought in the United States, and it was not uncommon at most economics graduate departments to jump on the Chicago bandwagon.
That was especially true of the so-called Freshwater schools in the interior of the country. My department was, in fact, dominated by libertarian-minded economists who believed that free markets and limited government were keys to building and sustaining private wealth and public welfare. We had one closeted Marxist economist, a fish completely out of (fresh) water, and as one might expect, he was denied tenure after two years.
That was then. Nowadays, consider what Brian Underwood said about Marxist economists in The Mendenhall in 2012:
“While the university system itself has not yet cycled out its old Marxist influences, Marxism has become so disreputable in several fields that it largely no longer exists within them…. Marxism has become so discredited within the economic field that it is an extremely rare occurrence.”
I put this question to Joshua Dunn, co-author with fellow conservative John Shields of Passing on the Right: Conservative Professors in the Progressive University: what did his research show about the influence of Marxist economists at American colleges and universities?
His answer: “Almost none.”
No Keynesian Control
The claim that modern economics departments are populated with old-school Keynesian interventionists requires a more complicated answer, but the answer is essentially the same: almost none.
Invisible Hand Beats Hidden
Lawrence Summers was once asked to name the “the single most important thing to learn from an economics course today.” Summers replied, “What I leave my students with is the view that the invisible hand is more powerful than the hidden hand. Things will happen in well-organized efforts without direction, control, plans. That’s the consensus among economists.” (emphasis added.)
Prior to the Great Depression, the so-called “classical” economists held strongly to the conviction that free markets — including profit-maximizing firms and utility-maximizing individuals — yielded prices and quantities that always cleared markets to an equilibrium state. Supply created its own demand, according one of the favorite postulates of classical economics
The Great Depression
Then, of course, came the Great Depression and the “Keynesian Revolution.” Macroeconomics was born as a separate field of study from classical microeconomics. Keynes attacked classical theory, however elegant its solutions to microeconomic problems, as being dangerously out of touch with the economic realities of the economy in aggregate. That was especially so when tepid aggregate demand led inexorably to price deflation and then, depression.
Only governments, as the third leg of the macroeconomic triad that included consumption and private investment, had the power to circumvent the slow process of market adjustments in prices and interest rates. As Keynes famously said, “In the long run, we’re all dead.”
The Counter-Revolutions
But to claim that academic economists nowadays are cut from the same cloth as Keynes is contradicted by the subsequent counter-revolutions in economic theory since Keynes.
In fact, classical and neo-classical economists who seized center stage from the Keynesian drama argued that Keynes’ General Theory was, in fact, a solution to a special case, and not a theory that would hold at all times in all cases.
Alfred S. Eichnerand and J. A. Kregel wrote in the Journal of Economic Literature in 1975: “Yet, to those who were most closely associated with Keynes at Cambridge during that period, the revolution proved largely abortive.” In the thirty years after Keynes, there was “little fundamental change in the way economists see the world.” In other words, Keynesianism proved to be but a minor interruption in the classical theory’s continued march to dominance of the economics profession.
The Neo-Classicals
Paul Samuelson coined the term neoclassical economics to mark the separation between Keynesianism and the new generation of neoclassical economists. He wrote in 1955: “In recent years 90 percent of American economists have stopped being ‘Keynesian economists’ or ‘anti-Keynesian economists’. Instead they have worked toward a synthesis of whatever is valuable in older economics and in modern theories of income determination. The result might be called neo-classical economics and is accepted in its broad outlines by all but about 5 per cent of extreme left-wing and right-wing writers.”
‘Sticky’ Prices and Wages
The essence of neoclassical economics was to relax some classical assumptions in order to capture the realities of “sticky” prices and wages in the aggregate economy. The neoclassical revision produced a happy crew of modestly active economic stabilizers (fine-tuners) but who were still attached to classical roots.
That period of relative calm – not only in the economy but also in the economics profession – lasted until the 1970s when the economy got caught in the rather unhappy situation of high inflation and a stagnant economy. This, of course, defied the common belief that low unemployment came at the cost of high inflation and visa versa.
Stagflation became the premise for a full-on classical attack against any government intervention in the macro economy. That effort produced the New Classical Macroeconomics, otherwise known as the new Neoclassical Synthesis. Economists from the University of Chicago, including Milton Friedman and Robert Lucas, led anti-interventionist attack, arguing that government intervention was useless when economic agents were guided by “rational expectations.”
Drawing on History
In other words, firms and individuals not only understood how the economy worked, but they drew upon knowledge of past economic history as a gauge of future economic activity. Rational actors factored in the results of anticipated policy interventions, which might lead to nominal changes in economic activity, but not real changes (after inflation adjustments.)
Thus, only unanticipated intervention would produce any real economic change. Based upon this theory, any government countercyclical policy in the macro economy would be thwarted by the actions of the private economy anticipating the government interventions.
Economist Oliver Landmann praised the intellectual breakthrough of the New Classical Macroeconomics, which he says has dominated all “serious” discussion about macroeconomics since the 1980s.
Whispers and Giggles
“If the government was to intervene in any way, it must first have identified the particular market failure it wished to correct. But since the New Classical models consisted of perfectly rational agents interacting on perfectly competitive markets, the role for active stabilization policy was virtually ruled out by assumption.”
Lucas himself has been quite blunt about this. A political libertarian himself, Lucas was once asked in 1982 if there was such a thing as social injustice. Lucas replied, “Well, sure. Government intervention vs. laissez-faire and free markets.”
In a 1980 article, The Death of Keynesian Economics, Lucas wrote: “One cannot find good, under-forty economists who identify themselves or their work as ‘Keynesian’. Indeed, people even take offense if referred to as ‘Keynesians’. At research seminars, people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another.”
Depression Prevention
Lucas and the Chicago School had become supremely confident. In 2003, Lucas stated that that the new classical macroeconomics had finally solved the “central problem of depression prevention.”
Not only was the period a convergence in the widespread belief in limited intervention, but, at last, the new classical synthesis included the rejoining of macroeconomics with its classical “micro-foundations.” The classical project of renormalization was, at last, complete.
As Harvard’s N. Gregory Mankiw has observed, the economic theoreticians, the “scientists,” with their elegant mathematical models, largely proved victorious. Not exactly so for the economic “engineers,” who were more inclined to trade mathematical elegance for “realism” in basic assumptions.
Still, there remained an underlying tension between the scientists and the engineers. Minor cracks in the new classical edifice surfaced. Robert Solow, a Keynesian, who won the Nobel Prize in 1987 for his earlier work on economic growth, cautioned that the (anti-Keynesian) new classical synthesis was “foolishly restrictive” by assuming markets always clear and ruling out short-term price rigidities.
The Minor Players
Even as the new classical macroeconomics was gaining dominance in the economics profession, a small minority of economists was raising doubts. These minor players were dubbed the neo-Keynesians, and guardians of the new classical synthesis were quick to dismiss the upstarts.
In a 1989 article titled, “New Classicals and Keynesians, or the Good Guys and the Bad Guys,” Robert J. Barro of Harvard and Stanford’s Hoover Institution opined, “Although some of these ideas may prove helpful as elements in real business cycle models, my main conclusion is that the new Keynesian economics has not been successful in rehabilitating the Keynesian approach.”
Failures Demand a Retreat
Willem H. Buiter, wrote in a 1980 article, The Role of Economic Policy After the New Classical Macroeconomics, that he agreed that policy failures demanded a retreat from the neoclassical (or sometimes called the neo-Keynesian) paradigm that had ruled mainstream economics since the 1940’s, but he questioned the new classical movement’s return to pre-1930’s economic theory.
“What is harder to understand is how, for so many, this retreat from the neo-Keynesian mainstream and from policy optimism has taken the form of a return to the neoclassical dogmas and modes of analysis that received such a battering in the thirties.”
And, presciently, it turns out, Buiter, cautioned that the new neoclassical models of Lucas and others remained oblivious to potential “departures from ideal economic behavior in good, factor and financial markets during cyclical upswings or downturns.” (emphasis added)
History Repeats Itself
I mention Buiter’s prescient reservations about the new classical synthesis, especially its failure to include financial instability, only because history would again repeat itself in 2008.
That, of course, is when the mortgage-backed securities bubble led to big trouble. The financial crisis had been scoffed at by most economists as indicative of pending macroeconomic trouble. But, in fact, the collapse of the financial sector did lead to the Great Recession, now regarded as worst economic downturn since the Great Depression.
Thus, the “New Convergence,” as Woodford called it, when academic economists were largely as peace with the anti-Keynesian view that government intervention in the macro-economy would always prove futile due to rational expectations, suddenly faced crisis of its own that corresponded to crisis in larger economy.
Posner Weighs In
Indeed, writing in the Atlantic in 2009, Richard Posner of the University of Chicago law school, stated that Lucas and most mainstream new classical economists “contributed to the economics profession’s, and the government’s, complacency about the vulnerability of the economy to severe crashes, and contributed also to deflecting economists from improving their understanding of the risks of economic instability.”
No, We’re Not All Keynesians
Richard Nixon once said something to the effect that the whole world had become Keynesian. That was, perhaps, true at that moment of time. But the post-Depression history of macroeconomics has been nothing if not an inexorable retreat from Keynesian ideas. Time after time, the classical view fended off challenges to its historic dominance of economic theory, either despite economic shocks or, in the case of stagflation, because of them.
Predictably, calm waters are followed by the next great exogenous “shock” –whether technical, financial or something else that no rational expectations theory is equipped to handle. The neoclassical model and the larger philosophical assumptions that undergird the model are rarely abandoned and not forgotten.
The pull of intervention is always opposed by a push toward non-intervention and the belief that markets will clear in the long run, and that all disequilibria (such as labor surplus) is simply the result of rational actors making rational decisions based on the best available evidence. It remains to be seen how academic economists will ultimately respond to the lessons of the Great Recession.
‘Regular’ Economics
Even in the wake of the Great Recession, the new classical economists have already begun to dig in their heels. Writing in the Wall Street Journal in 2011, Robert Barro contended there existed two types of economics: Keynesian economics and “Regular” economics. Barro continued to insist “that there is no meaningful theoretical or empirical support for the Keynesian position.”
But what about the recent work on wealth inequality by the French economist Thomas Piketty? Hasn’t his work moved economics departments even farther to the left? In his 2014 book, “Capital in the Twenty-First Century,” Piketty concluded that the long-run rate of return on capital exceeded long-run growth rates in GDP, which created and sustained a sort of permanent income inequality in capitalist economies. Only state intervention and a permanent tax on capital could alleviate this tendency generation after generation.
In some circles, Piketty’s book was widely praised as a monumental breakthrough in the understanding of advanced capitalist economies. But it’s not clear what real impact his ideas will have on mainstream economic thinking at American universities. I suspect Piketty’s influence in that respect will be far smaller than what anti-interventionists might fear. First, neoclassical critics have already challenged the core concepts of Piketty’s assumptions, specifically relatively fixed rates of substitution between capital and labor in his model, contradicting decades of evidence that the capital/labor substitution rates are substantial.
Second, there’s little evidence that Piketty’s work has influenced the professional practices and standards of mainstream economists. Consider, for example, citation rankings of articles and papers in the economics literature. According to one such ranking maintained by the St. Louis Fed, just one 1995 paper by Piketty was cited 299 times, which ranked 1550 on the list — near the bottom.
The most frequently cited paper was Manuel Arellano’s and Stephen Bond’s 1991 paper, “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,” which was cited 4,846 times.
Nixon Got It Wrong
Even if a new push for Keynesianesque interventionism comes, it will not last. Despite “exogenous” critiques from outside the profession, as we economists might call it, as a whole we’ve never abandoned our classical roots.
When I was in graduate school, the belief in the free market struck me as more of an ideology, a quasi-religious belief, than a science. Generations of economics graduate students have experienced something similar. The study of economic history or exposure to non-orthodox thinking is non-existent compared to the larger mission of reproducing economists with similar beliefs in the classical foundations, generation after generation.
Nixon got it wrong. We’re not all Keynesians now, not in 1971 and not in 2016. The profession’s classical identity has, on occasion, merely been stored in the closet, temporarily, only to rise again, attack the unbelievers and restore its seemingly timeless foundations.
Why that happens is another story altogether. But, meanwhile, almost every economist knows in his or her heart of hearts what he or she is supposed to know. We’re all Smithians. Always were, always will be.
