There’s a widespread feeling among the public that economics somehow has failed to make enough sense of the world. Markets as a social system have triumphed almost everywhere in the last few years, but informed laymen make jokes, disparage Adam Smith, invoke forgotten prophets, mock the mathematical formalization of modern, university-based economics. Even many of its prominent defenders say economics needs to be more practical, empirical, policy-oriented if it is to be persuasive.
It wasn’t always thus. There was a time when economics rode far higher in our esteem-mostly during the quarter-century between 1945 and 1970.
After all, no great depression followed the war. Instead, wealth and income grew faster in the West during that quarter-century than they ever had in human history. Inflation and, more important, unemployment were low. Economists were quick to take credit for this achievement. It was something that John Maynard Keynes was said to have engineered.
The high-water mark for economics of this sort was 1968. It was then that a Nobel Memorial Prize in Economic Sciences was established by the central bank of Sweden.
And then the bottom dropped out. At least in the West, the steady growth stopped. A series of crises, stops and starts set in instead. The breakdown of the international monetary system that had been established at Bretton Woods, the advent of the Organization of Petroleum Exporting Countries, the unexpected rise of the Asian economic tigers, the productivity slowdown, double-digit inflation, the tax revolt in Western industrial economies, the failure to foresee the collapse of the socialist economies: All contributed to the sense that economists had lost their way.
Bitter quarrels divided economists in the 1970s. In the 1980s the “supply-side” insurrection was led by marginal players and laymen. Economists who 25 years before had been hailed as geniuses were dismissed by Congress in favor of activists, lobbyists and journalists.
What happened? Well, some of it had to do with luck, surely, and some with hubris. The generation of economists for whom the Nobel Prize was created was born at a most propitious time. Most of the early laureates cut their teeth during the Great Depression. Their Keynesian Revolution was grounded in the conviction that they could cure forever the cycle of boom and bust, and who knows even today whether it was the discovery of pump priming or World War II that ended the slump?
During the war, economists made important discoveries of planning techniques; suddenly they had something highly useful to sell. They felt the exhilaration of wartime victory, the grim excitement of the Cold War peace, the satisfaction of the long postwar boom, the confidence of John F. Kennedy’s “New Frontier,” which dawned just as they were reaching the height of their powers. Politically speaking, they may have overreached, promising more “fine-tuning” than they could deliver.
Scientifically, too, the founders of the New Economics may have set their sights too high-but on this thesis hangs a different tale-a story of progress amid a cycle of boom and bust.
There are plenty of theories around of cycles of alternating optimism and pessimism; usually they apply to politics, as in Arthur Schlesinger Sr.’s famous theory about alternating waves of liberal expansion and conservative reaction in U.S. politics. Joel Moses, a student of science who is dean of engineering at Massachusetts Institute of Technology, has stated that there is evidence of a similar cycle of alternating waves of optimism and pessimism among intellectuals in the history of even relatively hard sciences.
Moses says the pattern goes like this: Great discoveries are made. A mood of buoyant excitement sets in, in which all things seem to practitioners to be possible and within reach. In due course there is a demonstration that matters are considerably more complicated than had been thought. Younger members of the profession are then plunged into doubt and despair. A period follows in which both moods vie for attention-and finally give way to optimism and a new cycle, with the process taking about 30 years.
Moses mentions two notable cases. One was the history of mathematics, when the community’s mood swung from the buoyant optimism that attended David Hilbert’s search during the 1920s for an algorithm that would prove the correctness of all true statements about mathematics to Kurt Goedel’s profoundly pessimistic “undecidability” theorem of the early 1930s that such an algorithm cannot exist. The other case is the history of artificial intelligence. The field went from Herbert Simon’s confident 1957 prediction that a computer soon would prove a novel theorem in mathematics, compose an interesting new piece of music cnd become chess champion of the world to a powerful reaction in the 1960s that forestalled research on the concept of neural nets for 15 years. Only now are intellectuals delivering on the dreams of the ’50s, of computer translators and chess-playing machines.
If a 30-year cycle of collective exhilaration and despair can run through the computer sciences, why not the same in economics? Surely this is an intriguing possibility. The high hopes of the 1950s and 1960s all had to do with combining theory and measurement to generate concrete predictions about the way economies would behave under various conditions. The pessimistic reaction of the 1970s mainly had to do with expectations and the fact that predictions of what people will do often influence in surprising ways what in fact they do. The possibility was forcefully raised that they might quickly learn to outwit their policymakers. More deeply, dissatisfaction centered on technical conceptions about the factors that influence economic growth-the “supply side” of things.
In the last 10 years this has begun to change. New theories have appeared with new tools to give them rigor, not unsusceptible to empirical testing, but not crucially dependent on it for rhetorical effect either. Mostly these developments have to do with new ways of thinking about institutions and technical change.
This column inaugurates a series about the fall and rise of technical economics during the last 25 years. I say “fall” because I think economics’ tumble in public esteem occurred for important reasons that should be more widely understood. I say “rise” because I think there is good reason to believe that at the deepest levels economics has learned from its mistakes and moved on.
In any event, many readers will recognize the value of thinking countercyclically. When all the press is kicking the economics profession, it’s probably time to go long on textbook knowledge.
