This first post is the intellectual history behind the crisis.
1. Social Science Paradigms
The economics profession has been, in part, thrown into disarray. The return of Keynesian fiscal policy, which was essentially killed by the Chicago school of Economics in the 1970’s has startled many hardliners. In turn, the financial crisis has evolved into an epistemological and methodological crisis, casting a long-shadow on some economic models.
In this way, this crisis partly begins in the 1970’s.
1. Public policy is, in one way or another, traceable to solid social science. Harry Truman famously declared that he wanted a one-handed economist, one that would give him direct and objective advice. Economics evolved into, or tried to be, a human nature physics. The Nobel Prize for “Economic Science” had a role in this: rewarding the technical aspects of the discipline, while neglecting human welfare.
Moreover, this same attitude is pervasive in the popular Freakonomics-styled “cute-o-nomics.” In each instance, a series of very clever econometric and statistical tricks are employed to uncover the “logic of life.” I am skeptical of these accounts, as they seem to rely on heavy assumptions or simply poor ontological categories. For example, there is a superb paper by the folks at Crooked Timber about Freakonomics and the use of “incentives”. “Incentives” are stretched to such a degree in the book, encompassing social structure obligations, personal desires and biological tendencies, that they cease to be analytically useful. In other words, if everything is an incentive then nothing is an incentive.
2. In the 1970’s, the dominant Keynesian orthodoxy was imperiled by stagflation—a phenomena that was not supposed to happen. According to Keynesians, governments faced a Phillips Curve, that is, a trade-off between unemployment and inflation. Monetarism rose to prominence by exposing the weakness in the dominant Keynesian orthodoxy.
What Chicago School economics offered, with its mathematical sophistication and axiomatic belief in individual rational agents, was an “economic science.” In some ways, it fit into a larger cultural form of American individualism–rugged man for himself. A new history of the great depression, written by Friedman and Anna Schwartz was a hefty intellectual achievement in reasserting the primacy of the free-market over the government in the context of the Great Depression–the economic event that provided the historical backdrop for Keynes’ work and presented a particular historical problem for the advocates of a free-market. Mathematical finance rose in lockstep. In short: the discipline underwent a Kuhnian paradigm shift.
The commitment to rigorous mathematics lead to a dismissive attitude towards other disciplines that were viewed as “less scientific.”
Related: from Greg Mankiw and on Greg Mankiw . On Larry Summers.
3. At the same time, sociology and anthropology were facing the hangover of the New Left. “Post-modernism” became, I think, a catch-all vocabulary for truly terrible social science. It rested on a far Leftist political prejudice and a flight from reality was made. Vocabulary like “social construction” spread rapidly, resulting in a cultural reductionism that drastically oversimplified the social world.
Not enough emphasis was placed on the explanation of social processes, instead, countless papers relied on the “shock value” of proving that such and such phenomena was actually an arbitrary social structure of some form or another. Countless books have been written on this, both inside and outside the discipline. One of particular interest is Robert Pippin’s Modernism as a Philosophical Problem. (Link is to an American Philosophical Association roundtable on the book.)
Obviously, like any blog post, this is an oversimplification of a difficult and complicated history. Some scholarly treatments here, here, here and here. Sub-disciplines like economic sociology and behavioral economics are making strides, but do not represent dominant opinions, although, perhaps this crisis will accelerate their trajectory.
What is important is the dual push in the social sciences: the rise of methodological individualism and a reductionism that failed to account for individual agency. The truth in human behavior is in the middle. We are bound by and constituted by social structure, but we are able to make our own decisions against a cost-benefit analysis. The opportune question is: when are we in the former camp and when are we in the latter?
Public policy, and certainly many of the economic policies that precipitated this crisis, placed human beings solidly in the former camp. The inability to understand this crisis is, in part, a failure to examine–or even consider–variables exogenous to economic models.
Zach
Jared