Is There Nothing New Under the Sun in the Field of Economic Policy?

|Peter Boettke|

John Maynard Keynes famously argued in The General Theory that practical men who believe themselves to be devoid of the influence of academic scribblers are in fact "usually the slaves of some defunct economist."  This was good rhetoric on Keynes's part primarily to emphasize to his readers how they had to abandon the habits of thought and intellectual straightjackets that they had taken on-board often unwittingly.

But did you know that Milton Friedman argued similarly in Capitalism and Freedom?  Friedman states: "There is seldom anything truly new under the sun in economic policy, where the allegedly new generally turns out to be the discard of a prior century in flimsy disguise." (1962, 57)

Do you agree?  If so, what does that say about both Keynes and Friedman's respective positions (as they are juxtasposed with each other often in discussions of public policy)?  If both are claiming that the positions they are opposing are merely retreads of previously held positions, then what would public policy innovation really look like?

Also, if we consider the argument that Friedman (and Adam Smith before him) makes about the failure of government intervention but the continued progress that US citizens enjoyed during the period inspire of that failure, how can we in fact cleanly test which economic policies are good and which ones are bad.  We have in front of us novel/good; novel/bad; old/good; old/bad.  Keynes and Friedman both thought they were offering novel/good to be juxtaposed to old/bad mainly and fearing the possibility of novel/bad (Soviet style central planning or Nazi style corporatism as prime examples).  But if the empirical test is ambiguous at best, how can we sort out the correct story?

Here is Friedman: " ... there can be little doubt that the record is dismal. The greater part of the new ventures undertaken by government in the past few decades have failed to achieve their objectives.  The United States has continued to progress; its citizens have become better fed, better clothed, better housed and better transported; class and social distinctions have narrowed; minority groups have become less disadvantaged; popular culture has advanced by leaps and bounds.  All this has been the product of the initiative and drive of individuals co-operating through the free market.  Government measures have hampered not helped this development.  We have been able to afford and surmount these measures only because of the extraordinary fecundity of the market.  The invisible hand has been more potent for progress than the visible hand for retrogression." (1962, 199-200)

I make this argument myself all the time --- stressing the horse race between Smithian, Schumpeterian, Stupidity --- but I do recognize a problem. As I see it, the critics of the market (Keynes, Samuelson, Stiglitz, etc.) deny the very "fecundity of the market" that Smith and Friedman are upholding.  The market in their intellectual framework is not self-regulating, and thus the progress experienced must be due to government policy measures.

So the question remains -- how would you design an intellectual test (a broader concept than the more narrow idea of an empirical test) that would be able to sort out from the complex reality of economic policy history which stream of thought is correct?  Which academic scribblers have the logic and evidence on their side -- the Smith, Say, Mises, Hayek, Friedman crowd, or the Marx, Keynes, Samuelson, Stiglitz crowd? And if we cannot sort that out, are we in fact all merely "slaves of some defunct economist" when it comes to our public policy pronouncements?

I don't think so, I believe we can sort rationally.  But I am sure that those whose positions I consider counter-productive also believe that their positions emerge from rational analysis.  And there is the tension in public policy discussions.  The Robert Aumann discussion of agreement and disagreement among rational agents simply doesn't deal with humanly rational actors, who have priors, and who look at the world through multiple perspectives.  The puzzle isn't why rational actors would ever disagree, it is in fact the opposite how do humanly rational actors ever come to agree with one another about how the world works?  This can only be accomplished by institutions that incentive the different actors and provide them with quality information and critical feedback.  It is about the epistemic community they find themselves in.  So thinking along those lines, why would it be that the epistemic community of economic public policy would produce an endless intellectual cycle rather than a dovetailing toward a consensus?

Comments

[Daniel Kuehn]

They make good points although I wouldn't accept a strong version of Friedman's claim. Take Keynes. Sure we can see roots in Malthus, but he takes quite a different turn from Malthus too and criticizes him on many points. There is novelty to Keynes, although he is also reintroducing older ideas. So I suppose old/novel need not be a dichotomous choice.

I don't understand why you think that Keynes or any of the others denies the fecundity of the market. That seems wrong as a matter of history of thought on its face.

[Daniel Kuehn]

Smith, Hayek, Friedman, Keynes, Samuelson, and Stiglitz have logic and evidence on their side. Say and Marx make decent points now and a gain but have both done considerable harm. I am still abysmally unfamiliar with Mises (with no remedy in the near future, unfortunately), but I'd guess he'd be tagging along with Hayek in this assessment.

Not following the premise of the question, I know, but then I think there are problems with the premise.

[Nicolas Cachanosky]

"So the question remains -- how would you design an intellectual test (a broader concept than the more narrow idea of an empirical test) that would be able to sort out from the complex reality of economic policy history which stream of thought is correct?"

But isn't that what (right or wrong), Mises, Hayek, Buchanan, Adam Smith, etc., do offer in their work?

I'm afraid that either a narrow or broad empirical approach cannot avoid to rest on the need of persuasion.

[Damian Merciar]

uncertain - differences may well be more subtle now and the medium utilised can be at arms length....eg policy, when mechanised, with the excess of quants' driven reaction, can be both soulless and wrong headed (and become tram-lined as such) - hence arguable that the tools could actually have reduced in one sense...then, flipside there has been the whole emergence of "behaviourism" to try and manipulate response, through a "paternalistic" intervention - equally wrong headed...to try and allocate these ideas to various schools may take effort, but it's fairly obvious which way the institutional trend is going

[Twisemiller]

The first step is realizing that we never can cleanly test which economic policies are good and which are bad. Nor can we sort out a "correct story" in the sense that we can step back from hyper-complexity, comprehend how it all works, attribute progress to this or that policy or other factors and to what extents, and model it accordingly.

Likewise, sometimes it's not so much novel/good v. old/bad as it is right/bad v. wrong/good. Keynes et al were right that the market is not especially self-regulating, however because there is no discernible correct story, their regulations cause more harm than good.

In contrast, Friedman was wrong to attribute progress cleanly to this theoretical construct called the "free market" (which cannot be approximated in reality), but for the right reasons. The government definitely plays a central role in fostering conditions of progress, as we know. It's just that we have little confidence that the government did much fostering via policies premised on socioeconomic engineering (especially in its more ambitious phases), welfare state policies, regulations, etc. As a general, but unproven, "rule" the government does better with straightforward discrete projects involving only a few variables, while the market is better at helping us imperfectly navigate complexity.

In that sense, Friedman was on the "right" (correct) side for the wrong reasons.

[Peter Lewin]

http://plewin.blogspot.com/2013/05/why-dont-we-learn-from-history.html

[Roger Koppl]

I'm not sure what type of answer you're looking for, Pete. The world is a big complicated (and complex I would say!) place that is hard to understand. Evidence tends to under-determine theory. Scientists are no more truth seekers than bus drivers. (Analytical egalitarianism) They do a lot of signaling, especially signaling goodness. It is probably better to signal intelligence by pretending to master the social world than saying what a blooming buzzing confusion it is. OTOH maybe we liberal types are wrong, seeing as how the world is a big complicated place . . . I guess I'm just not sure what level of discourse we are on here. I do think "we" need to emphasize the broad facts of history. This is what Don Boudreaux does when he cracks open the 1975 Sears & Roebuck catalog. It is what Deirdre McCloskey does when she points to the economic-growth hockey stick. And it is what Andrei Shleifer did in "The Age of Milton Friedman." It is what Ayn Rand and co. did in, if I recall correctly, in "Capitalism the unknown ideal." You gotta work out all sorts of other stuff, too, but let us continue to relentlessly repeat the basic facts of economic growth. If it is true that the idea of anthropogenic global warming is in trouble as some have claimed, then "they" won't have much of a counter claim to "our" facts on growth. I should have mentioned Hans Rosling's washing machine. And Steve Pinker's book on declining violence. The persuasive empirics are mostly simple things that do not depend on fancy statistical techniques.

[Jim Rose]

This an example of Stigler’s law of scientific epiphany about how the inventor of an idea is not the first to discover it, but the first to make sure it stayed discovered and was not forgotten again and reinvented and recycled as new.

Stigler’s Nobel lecture was on how and when new ideas were fully adopted into the body of knowledge of the profession.

Stigler said that Smith founded economics because

A considerable number of economists, and a few considerable economists, have emphasized the fact that Smith had many gifted predecessors and almost all or perhaps exactly all of his ideas are to be found expressed, and sometimes well expressed, by these predecessors.

Some economists therefore wish to give the title of founder of economics to earlier writers such as Cantillon. This line of argument, in my view, misses the point.

It was Smith who provided so broad and authoritative an account of the known economic doctrine that henceforth it was no longer permissible for any subsequent writer on economics to advance his own ideas while ignoring the state of general knowledge.

Knight’s review of the general theory was:

Many of Mr. Keynes’s own doctrines are, as he would proudly admit, among the notorious fallacies to combat which has been considered a main function of the teaching of economics.

under Stigler’s rule of scientific epiphany, Keynes deserves credit because he made sure that the old scattered ideas and fallacies stayed discovered.

[plus.google.com/109940749078801852015]

"why would it be that the epistemic community of economic public policy would produce an endless intellectual cycle rather than a dovetailing toward a consensus?"

I think Hayek was trying to address this question in his "Fatal Conceit." He argued for submission to traditional Western morality because of its respect for property and the bourgeois values that had appeared in the West. That morality provided the institutional setting and assumptions on which solid economic investigation could be done. In fact, it was the institutional setting in which modern economics developed. It probably could not have developed in another.

The current mess in economics comes from the changing of the institutional setting in the Enlightenment. As Hayek wrote, the pseudo-rationalism of the enlightenment insisted that man could invent new morals from scratch and new institutions. It resulted in the triumph of socialism.

Agreement in economics will require agreement on the morality of property, the limits of reason and intelligence, and especially the limits of mankind's ability to change human nature.

[Jim Rose]

Another reason for the lack of new ideas in economics is George Stigler argued that if the problems of economic life changed frequently and radically, and lacked a large measure of continuity in their essential nature, there could not be a science of economics.

Stigler said that an essential element of a science is the cumulative growth of knowledge, and that cumulative character could not arise if each generation of economists faced fundamentally new problems calling for entirely new methods of analysis. A science requires for its very existence a set of fundamental and durable problems.

Stigler proposed that a viable and healthy science requires both the persistent and almost timeless theories that naturally ignore the changing conditions of their society and the unsettled theories that encounter much difficulty in attempting to explain current events.

Stigler concluded that without the base of persistent theory, there would be no body of slowly evolving knowledge to constitute the science. Without the challenges of unsolved, important problems, the science would become sterile.