History of economic thought: back from the brink?

Bright undergraduates tend to enjoy courses in the history of economic thought — I know I did — but the field is in an even more parlous state than economic history when it comes to the hiring decisions of economics departments. After all, why spend time studying the mistaken theories of the past, when you can study the superior theories that have replaced them?

(OK, perhaps that argument doesn’t seem quite so compelling now as it did a few years ago.)

So I was interested to see David Warsh’s report from the AEA meetings which quoted James Heckman, no less, as making the argument for history of thought courses in Economics PhD programmes. It follows the launching of a blog which promises to “engage current financial news and policy debates from the standpoint of the classics of monetary theory.”

And Brad makes the pitch in characteristically understated fashion here.

18 replies on “History of economic thought: back from the brink?”

From Mr. DeLong’s piece:
“Macroeconomics should be thought only through economic history and the history of economic thought”

I believe there are a couple of pieces missing from this. One is a philosophical underpinning, another a scientific (as in Popper, Weber etc.), and a final one a socio-political. PPE would seem to be the idea position to come to macroeconomics from…

Although, perhaps theology and a study of the decline and fall of the Catholic Church might be a more apt perspective.

Had Mr. DeLong though of this perhaps his inability to grasp Schumpeterian views would be easier? If you believe that the trend of NGDP has been corrupted by asset inflation such that what is happening now is a return to a sustainable trend rather than a loss of something good. The froth has been blown off – that there was a lot of froth is not the fault of those content to accept the blowing. The causes are historical and indeed, he identifies them in passing – the idea that the Fed and the banks can finesse recessions and crises, largely through the encouragement of financial assets to make up for declining real assets.

The FIRE economy, which had a strong theoretical underpinning, was a bust. There is still an unwillingness to accept this. The solution? Pump government money into its lifeless corpse…

I now think of economics as a debate rather than some of the other things it is passed off as, like a science for example. It seems just plain silly to have undergraduates latch onto the a debate at whatever point they turn up and absorb the current thinking of that debate, without understanding the thinking that shaped the prior course of the debate.

History of economic thought courses (honest ones anyway) would probably result in better economics, but would not do much for the standing or image of current members of the academic staff. The students wouldn’t be quite so willing to believe what they were told even if they still learned it for the exams!

it always struck me as surprising that economists didn’t have to take lots of courses in history, economic history, and basic philosophy. Not to mention the fact that it seems, from a quick looking at the syllabi and course requirements of UCD and TCD, a student can take a degree in economics without ever actually taking a course in financial statements analysis. There seems looking from the outside have been a manic obsession with mathematics and trying to become more scientific than physics or chemistry or something.

Economics to me seems to suffer from something akin to regulatory capture. The sheer size of the global financial market at > $200tn
and its significance as the marker of global power relations means that shoddy economic theories that justify the status quo will be propagated until the whole thing collapses . The permagrowth meme is part of the core thinking of every major corporate and it is no better than a belief in angels.

The financial crisis showed that no market traded asset has an inherent value which can be guaranteed at any time. There is no sense to markets other than greed.

@ Hoganmahew: “The FIRE economy, which had a strong theoretical underpinning, was a bust.”

Think you could please keep pressing this point? None of my current economics lecturers – nor my tutors had any idea that it exists. Best response was a shrug of shoulders.

@ Dr Bob “There seems looking from the outside have been a manic obsession with mathematics and trying to become more scientific than physics or chemistry or something.”

Bang on! Frederick Soddy came late to econ – after he had beeen awarded a full Nobel for some very sophisticated nuclear chemistry work.
Not sure about Georgescu-Roegen – but he went through his contemporary econs for a short-cut.

The current semester-based courses are too short and scrappy to come to grips (in any meaningful intellectual manner) with the many and varied constructs that underpin modern economics – like having some clue about actual, as opposed to assumed, human behaviour. Politics has a part as well!


BioScience • January 2011 / Vol. 61 No. 1

“We are by no means the first to write about the limits to
economic growth and the fundamental energetic constraints
that stem directly from the laws of thermodynamics and
the principles of ecology. Beginning with Malthus (1798),
both ecologists and economists have called attention to the
essential dependence of economies on natural resources
and have pointed out that near-exponential growth of
the human population and economy cannot be sustained
indefinitely in a world of finite resources (e.g., Soddy 1922,
Odum 1971, Daly 1977, Georgescu-Roegen 1977, Cleveland
et al. 1984, Costanza and Daly 1992, Hall et al. 2001, Arrow
et al. 2004, Stern 2004, Nel and van Zyl 2010). Some
ecological economists and systems ecologists have made
similar theoretical arguments for energetic constraints
on economic systems (e.g., Odum 1971, Hall et al. 1986).
However, these perspectives have not been incorporated
into mainstream economic theory, practice, or pedagogy
(e.g., Barro and Sala-i-Martin 2003, Mankiw 2006), and
they have been downplayed in consensus statements by
influential ecologists (e.g., Lubchenco et al. 1991, Palmer et
al. 2004, ESA 2009) and sustainability scientists (e.g., NRC
1999, Kates et al. 2001, ICS 2002, Kates and Parris 2003,
Parris and Kates 2003, Clark 2007).”

Is this the same David Warsh that wrote a gushing hagiography about Roemer’s endogenous growth theory?


“There is no sense to markets other than greed.”

JK Galbraith succinctly explained why ‘markets’ get it in the neck from many – with the so-called ‘progressive-left’ in the fore.

“Let’s begin with capitalism, a word that has gone largely out of fashion. The approved reference now is to the market system. This shift minimizes-indeed, deletes-the role of wealth in the economic and social system. And it sheds the adverse connotation going back to Marx. Instead of the owners of capital or their attendants in control, we have the admirably impersonal role of market forces. It would be hard to think of a change in terminology more in the interest of those to whom money accords power. They have now a functional anonymity.”

And, of course, as a result the perceived failings of capitalism are wrongly attributed to ‘markets’. Any capitalist worth his or her salt loathes, hates and detests liquid, efficient, competitive markets – even more probably than government regulations. (Capitalism is confident it can subvert the state and capture regulators.) Markets are the most effective tools we have to assemble and process huge volumes of economic information and to frame and execute choices. And when they work properly they constrain capitalism to generate economically and socially useful outcomes. Which, of course, is why capitalists hate them so much and they will strain every sinew to subvert and rig markets, exercise and abuse market power, squeeze competition and ensure sustained capture of monopoly profits.

It is sad and stupid that the so-called ‘progressive-left’ direct their fire at ‘markets’, when the object of their ire should be capitalism. But acknowledging the benefits of markets doesn’t fit their narrative which is focused on increasing the role of the state. It is even more sad and stupid when the terms ‘capitalism’ and ‘capitalist’ are not considered appropriate in polite academic circles. Why not ‘name the beast’ and get on with applying the numerous economic tools that may be used to house-train it. But perhaps, academics, being forced to rely less on the state and more on the private sector for finance, are reluctant to risk biting the hand that might feed them – while they slaver over the hand that already does.

@ Dr Bob

Financial theory is more firmly routed in “hard” science – like adapting fast fourier transforms in option pricing models etc.

I’ve always gotten the impression that the powers that be like to think of economics as a “hard sciences”, rather than a social science (something more dynamic and case sensitive – something to look at critically). It’s surely a credibility thing and linked to the “air of certainty” worn world of high finance. So we see rules and more rules – prognosis, and prescription in a heartbeat. Maybe finance is obsessed with economics or vice versa, maybe that arrangement pays off. I was once told that finace is a system within macroeconomics.

Unfortunately, much of the ecomomic debate and decision-making now lies in the hands of finance professionals and this polarised expectation system feeds the reckless/speculative in high finance.

History can be hurtful, but should be weighed in. I’ve also read that there has been some unease toward “economic history” modules being thought at third level institutions.

@ Seafoid: Note the ref. Thanks.


1. ‘A History of Economic Theory and Method’ 5th ed. Ekelund + Hebert [1997 + 2007]. Covers ancient times to present.

2. ‘A History of Economic Theory’ Niehans [1990]. Starts with Cantillon, 1725.

Both are advanced scholarly texts. You need to get a balance though – oriental economic development was several centuries more advanced than Europe during middle-ages. Slipped a bit then.



Since it’s been a while since I took one of these courses, I asked Antoin Murphy what he would recommend. His three suggestions, for general readers, were:



(written by a TCD graduate)



When we were in College Antoin made us read Leijonhufvud and other such people on Keynesian economics, and I have been idly wondering whether I shouldn’t have another look at them one of these days. And then there is of course


Here is where lunacy meets economics. Take the past 40 years and extrapolate to death. Never mind resource constraints, population growth, broken politics, peak oil, war. Would Lex ever devote a column to the appearance of the Virgin Mary at Knock?


Emerging markets
Published: January 7 2011 10:36 | Last updated: January 7 2011 15:51

At some point, perhaps when China becomes the world’s largest economy, the term “emerging market” may become redundant, gone the way of the Asian Tigers. Investors need to position themselves for this economic tsunami, or be overwhelmed by it.

By 2050, HSBC predicts, 19 of the world’s 30 largest economies will be emerging markets. Their collective economic output, of about $55,000bn, will be greater than that of their developed-world peers. The world leaders will include not just China, India and Brazil but Mexico, Egypt and Iran. If all goes to plan, these will displace small, rich, ageing European economies such as Sweden and Denmark.

There is much guesswork involved in futurology, and studies like HSBC’s are invariably rosier the further out they look. The real worth of predictions is not whether they are accurate – who knows? – but whether they are interesting. The conclusions seem at least plausible. Economic governance and monetary stability are improving across emerging markets, while demographics and trends in education and health are working in their favour. These are the key drivers of economic growth.

With only 9.5 per cent of global funds in emerging market assets, according to HSBC, a massive realignment of investible cash may be in store. For that to happen, however, two changes are required. First, investors have to develop a longer time horizon. Then they need to be convinced that the rise of emerging markets is both irreversible and seismic in nature. Lots of things can go wrong. Soaring commodity prices and inadequate access to energy and food could mess up the transition. Protectionism and capital controls remain a constant and probably rising threat. And one lesson of the last financial crisis is that the authorities are having trouble keeping up with globalisation. Developing markets emerged stronger this time, but the next crisis could end quite differently.

E-mail the Lex team in confidence

I have the privilege of participating in Professor Murphy’s class on the the history of monetary thought & policy, which should be a mandatory undergraduate course. While many theories of the past were ‘mistaken,’ so to, I believe, is much of the prevailing conventional economic wisdom.

One example is that in EC1010 we are taught that rational individuals are narrowly self-interested utility maximizers whose only goal is to accumulate material goods. In defence of this bizarre assumption, we are directed to our textbooks which, in an almost biblical fashion, shows a picture of Adam Smith and his book ‘Wealth of Nations’ referencing his famous remarks on the ‘self-love’ of the butcher and baker.

As if God himself deemed it so, the homo sapien becomes homo economicus.

Three things are ‘mistaken’ about this.

Firstly, Adam Smith is grossly misquoted. In fact, he begins ‘The Theory of Moral Sentiments’ (a book in which 6 editions were released during his lifetime, both before and after the Wealth of Nations) as such:

‘How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it’.

Secondly, as everybody knows, rational human beings are not narrowly self-interested. Rather, as Smith noted, they act upon a variety of sentiments. They are guided by what they perceive as valuable – which will be dependent upon the culture they exist in – and often they do not value hoarding wealth particularly highly.

Thirdly, and most importantly, if a society existed in which people behaved only in their narrow self interest, economics would indeed be a very dismal science. Economic transactions would inevitably lead to sub-optimal outcomes.

Economic theory, presumably for the sake of simplicity, works on the understanding that the rule of law is established through sanctions. The state however, unlike god, is not omnipresent. In actual fact, the rule of law requires society to abide by norms of behaviour that are often not in the individual’s interest. Consider a situation in which every time an individual saw that the material benefit of stealing something outweighed the disutility and likelihood of being caught and punished – they acted upon that impulse. That society would not only be a tragic place, it would be a remarkably unproductive one.

As these crises demonstrate – the most immediate challenge that the discipline of economics faces is how to effectively overcome the problem of moral hazard in an era in which financial institutions are too big to fail. Telling students, many of whom will go into banking, that greed is good is not the way to go about doing this. The reckless greed of the those who have destroyed the lives of so many people is unnatural, it is base. Economics students need to be taught that.

One of the greatest achievements of economics as a discipline is its focus on continuity (for example, graphically depicting the continuity of indifference in the preference between two goods). Market economies require a plurality of sentiments to function effectively. Conventional economic thought should recognize this fact.



“We are now learning things about ourselves that are in complete contrast to what we have been taught to be true for hundreds of years. The model of human agency and the assumptions that underlie it frame our entire political, legal, and economic system. That model is now being shown to be false: “These assumptions culminate in the widespread and persistent belief that regardless of physiological processes, developmental history, or current circumstances, the person is ‘free’ to choose any course of action among the alternatives that present themselves. This view of human behavior is simply untenable from a scientific perspective.”12

This belief is the basis of selfhood in the form of the rational agent. It is the foundation of both progressive and conservative dogmas and what allows the structures of power to perpetuate themselves. The narratives and legitimization rituals of our society are designed to enforce this conception of the human animal, but they ultimately depend on the acceptance of these assumptions of the self as true:

•Actions are freely chosen
•Choices imply preferences
•Preferences are stable over time
•Preferences implicate identity of the self
•Outcomes are mostly controllable
•People are responsible for the choices they make and the resultant outcomes.

The ecological and social catastrophe devastating the planet clearly shows that capitalism’s hero, “the selfish individual,” has no idea what he is doing, and now we know why: the hero’s life is based on a lie.

@TCD SS Econ,

Many thanks for highlighting the importance of Smith’s ‘Theory of Moral Sentiments’ (ToMS). I sometimes think that those who cite a passage in ‘The Wealth of Nations’ to advance a specific policy or interest should be required to declare that they have read and understood the propositions in ToMS on which the passage draws.

Similarly to Smith the breadth and depth of Keynes’s insights have been filtered and distilled to fit within the neo-classical canon. His key objectives of saving capitalism from itself to generate economically and socially useful outcomes, of maintaining and enhancing civilisation and of securing a sustainable trade-off between the imperatives of the state and the liberty of the individual have been shrunk into the Hicks-Hansen ISLM curves.

The valuable insights of both on the crooked timber of human nature have been shrink or cast aside to focus on dessicated calculating machines whose behaviour may be captured in mathematical models. Economics as a discipline is the poorer and verges on being irrelevant in the context of institutions and policy.

Perhaps the greatest appeal of economists like Smith was that they were philosophers.

Books/ articles worth reading:

On Smith and self interested choice:
Economic Sentiments by Emma Rothschild
2009 edition of Theory of Moral Sentiments (with excellent introduction by Amartya Sen)

On the state of economics today:
‘The Discipline of Economics’ by Amartya Sen

On the rule of law:
‘The Concept of Law’ HLA Hart

On ridiculous assumptions for the methodological purposes:
‘Essays in Positive Economics’ Milton Friedman
Response by Paul Samuelson – see “f-twist”

Comments are closed.