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Issue no. 8;  5 September 2001                                                   back issues at www.paecon.net

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                    In this issue:                    

                    - "The Kansas City Proposal",  An International Open Letter

                    - Geoffrey Hodgson,  How Did Economics Get Into Such a State?

                    - Ben Fine,  An Extraordinary Discipline

                    - Frank Ackerman,  What We Learned in the Twentieth Century

                    - Michael A. Bernstein,  Rethinking Economics in 20th-Century America 





An International Open Letter 

to all economics departments

“The Kansas City Proposal” To sign this and the "Cambridge Proposal" at the same time, see below.

Economics needs fundamental reform – and now is the time for change. 

This document comes out of a meeting of 75 students, researchers and professors from
twenty-two nations who gathered for a week of discussion on the state of economics and
the economy at the University of Missouri - Kansas City (UMKC) this June 2001.  The
discussion took place at the Second Biennial Summer School of the Association for
Evolutionary Economics (AFEE), jointly sponsored by UMKC, AFEE and the Center for
Full Employment and Price Stability.

The undersigned participants, all committed to the reform of our discipline, have developed
the following open letter.  This letter follows statements from other groups who have similar
concerns.  Both in agreement with and in support of the Post-Autistic Economics
Movement and the Cambridge Proposal, we believe that economic theory, inhibited by its

ahistorical approach and abstract formalist methodology, has provided only a limited

understanding of the challenging complexity of economic behavior. The narrow

methodological approach of economics hinders its ability to generate truly pragmatic and

realistic policy prescriptions or to engage in productive dialogue with other social sciences. 


All economics departments should reform economics education to include reflection on the
methodological assumptions that underpin our discipline.  A responsible and effective
economics is one that sees economic behavior in its wider contexts, and that encourages
philosophical challenge and debate. Most immediately, the field of economic analysis

must be expanded to encompass the following:

1. A broader conception of human behavior. The definition of economic man as an

autonomous rational optimizer is too narrow and does not allow for the roles of other

determinants such as instinct, habit formation and gender, class and other social factors

in shaping the economic psychology of social agents.

2. Recognition of culture. Economic activities, like all social phenomena, are
necessarily embedded in culture, which includes all kinds of social, political and moral
value-systems and institutions. These profoundly shape and guide human behavior by
imposing obligations, enabling and disabling particular choices, and creating social or
communal identities, all of which may impact on economic behavior.

3. Consideration of history. Economic reality is dynamic rather than static – and as
economists we must investigate how and why things change over time and space.
Realistic economic inquiry should focus on process rather than simply on ends. 

4. A new theory of knowledge. The positive-vs.-normative dichotomy which has
traditionally been used in the social sciences is problematic.  The fact-value distinction
can be transcended by the recognition that the investigator’s values are inescapably
involved in scientific inquiry and in making scientific statements, whether consciously or
not. This acknowledgement enables a more sophisticated assessment of knowledge claims.

5. Empirical grounding. More effort must be made to substantiate theoretical claims
with empirical evidence.  The tendency to privilege theoretical tenets in the teaching of
economics without reference to empirical observation cultivates doubt about the realism
of such explanations.

6. Expanded methods. Procedures such as participant observation, case studies and
discourse analysis should be recognized as legitimate means of acquiring and analyzing
data alongside econometrics and formal modelling.  Observation of phenomena from
different vantage points using various data-gathering techniques may offer new insights
into phenomena and enhance our understanding of them. 

7. Interdisciplinary dialogue. Economists should be aware of diverse schools of
thought within economics, and should be aware of developments in other disciplines,
particularly the social sciences.

Although strong in developing analytic thinking skills, the professional training of
economists has tended to discourage economists from even debating – let alone
accepting – the validity of these wider dimensions. Unlike other social sciences and
humanities, there is little space for philosophical and methodological debate in the
contemporary profession. Critically-minded students of economics seem to face an
unhappy choice between abandoning their speculative interests in order to make
professional progress, or abandoning economics altogether for disciplines more
hospitable to reflection and innovation. 

Ours is a world of global economic change, of inequality between and within societies, of
threats to environmental integrity, of new concepts of property and entitlement, of evolving
international legal frameworks and of risks of instability in international finance. In such a
world we need an economics that is open-minded, analytically effective and morally
responsible. It is only by engaging in sustained critical reflection, revising and expanding
our sense of what we do and what we believe as economists that such an economics can

To sign this proposal and the Cambridge Proposal, click here.

people have now signed the Cambridge Proposal:  http://www.btinternet.com/~pae_news/Camproposal.htm

Signatories of the "Kansas City Proposal" will be posted at  http://www.btinternet.com/~pae_news/KC.htm


The original 25 signatories of the International Open Letter:

Ricardo Aguado,  Universídad del País Vasco, Spain
Dr. Stephen Dunn
,  Staffordshire University, UK
Dr. Eric R. Hake
,  Eastern Illinois University, USA
Fadhel Kaboub
,  University of Missouri - Kansas City, Tunisia
Nitasha Kaul
,  University of Hull, UK, India
Peter Kimani
,  University of Nairobi, Kenya
Meelis Kitsing
,  London School of Economics, Estonia
Agim Kukeli
,  Colorado State University, Albania
Joelle Leclaire
,  University of Missouri - Kansas City, Canada
Áine Léime
,  National University of Ireland - Galway, Ireland
Hui Liu
,  University of Ottawa, China
Claudia Maya
,  National Autonomous University of Mexico, Mexico
Dr. Andrew Mearman
,  Wagner College, USA, UK
Jaime Augusto Torres Melo
,  London School of Economics, Colombia
Vassilis Monastiriotis
,  London School of Economics, Greece
Alfred Ng Yau Foo
,  University of Missouri - Kansas City, Malaysia
José Alfredo Pureco Ornelas
,  National Autonomous Uni. of Mexico, Mexico
Jairo J. Parada
,  Penn State University, Colombia
Franziska M. Pircher,  University of Missouri - Kansas City, USA
David Pringle
,  University of Ottawa, Canada
Dr. James F. Smith
,  University of Vermont, USA
Pavlina R. Tcherneva
,  Center for Full Employment and Price Stability, UMKC, USA
Ermanno Celeste Tortia
,  University of Ferrara, Italy
Eric Tymoigne
,  Université de Paris – Nord, France
Benton Wolverton,  University of Missouri - Kansas City, USA 

Questions, comments and critiques may be directed to David Pringle (pringle_djg@hotmail.com) or
Áine Léime (ainenileime@hotmail.com).







How Did Economics Get Into Such a State?
Geoffrey M. Hodgson   (University of Hertfordshire, UK)

I much applaud the recent initiatives of the movement for a post-autistic economics in
France and the petition for reform from economics graduate students at the University
of Cambridge. They are two great rays of hope in an otherwise largely disturbing
intellectual scene. It is to be hoped that these initiatives can help to reverse the
narrowing and over-formalisation of economics that proceeded apace in the second
half of the twentieth century.

In 1903, Alfred Marshall established one of the first economics degrees in Britain at the
University of Cambridge. It had a much broader curriculum than is typical in the year 2001.
If he were still alive, would Marshall get a job at the University of Cambridge or any other
leading Department of Economics in the world today? Probably not. First, there is very
little mathematics in Marshall’s writings and he saw mathematics as no more than an
auxiliary tool.

In his letters, Marshall explained that he had ‘little respect for pure theory’. He declared:
‘Much of “pure theory” seems to me to be elegant toying’. Along very similar lines,
Marshall wrote to Francis Edgeworth in 1902: ‘In my view ‘Theory’ is essential. … But
I conceive no more calamitous notion than that abstract, or general, or ‘theoretical’
economics was economics “proper.”’ (The Correspondence of Alfred Marshall, ed. John
K. Whitaker, Cambridge University Press, 1996, vol. 2, pp. 256, 280, 393).

Sentiments like these would not help Marshall get a job in a top economics department
today. Concerning pluralism and tolerance in economics, much has changed for the worst
in the last 100 years. Economics today is much less concerned with the history of
economics, the history of ideas, the study of real and relevant social institutions, and the
detailed practicalities of policy formulation and implementation.

How has economics got in its present state? The ideological polarisation of the Cold War
period cannot on its own explain why economics took a wrong turning. To some extent it
may explain why Western economics was increasingly dominated by pro-market ideology
from 1948 to 1991. But it cannot explain the degree of narrowing and impoverishment of
the standard economics curriculum in the last 50 years.

Several economists have suggested that the growing mathematicisation of economics has
been the key impetus behind the narrowing of economics since 1950. Formalisation feeds
on itself. It creates a peacock’s tail process of positive reinforcement, in which all that
matters is that which can be put in mathematics: all else is marginalised or rejected. The
curriculum is thus narrowed. In time, the selection criteria of enticing and innovative
formalisation come to dominate the leading journals and the professorial appointment
processes. In ratchet steps, the economics profession as a whole becomes progressively
dominated by the formalists. And so it goes on, in a narrowing, accelerating, inescapable

The positive feedbacks involved with formalisation do much to explain why economics got
into the state that it is. But I do not think that this is the whole story. Formalisation does
not provide a complete explanation of the travails of the social sciences, especially when
we glance outside economics.

Look at sociology. It is in deep trouble. Its central theoretical project of relating agency to
social structure is in virtual chaos. Its discourse is frequently confounded by fashionable but
deliberately obscure intellectual bandwagons that never should have been taken seriously.
In addition, having abandoned former theoretical presuppositions, many sociologists are now
embracing a version of utility maximising ‘economic man’ and proclaiming this as the ‘new
sociology’, whereas it has little to differentiate itself from Gary Becker-type neoclassical
economics. Sociology is in such a mess that it no longer has any apparent ability to define
its own identity.

I do not ignore the fact that some good work is being done within sociology and elsewhere.
But ironically, much of the best work in sociology in the last 20 years has addressed topics
and phenomena that used to be under the purview of the economist.

In the case of sociology, in contrast to economics, formalisation has not played a significant
role in causing its recent distress. Considering the social sciences as a whole, something
more than formalisation has been at work. I am now of the opinion that something even more
awesome and worrying is at work in modern academia. There are global forces in operation
that threaten the intellectual integrity of all the academic disciplines. The two leading social
sciences have been an early casualty.

My tentative explanation of these global developments would rely on a theme that is
central to the third part of my book Economics and Utopia (Routledge, 1999): the scenario
of growing complexity, knowledge intensity and specialisation under capitalism. In the
competitive process, capitalism creates ever-more products, technologies and wants.
Although deskilling exists in some sectors, modern capitalism also relies on an increasing
variety of skilled specialists. The global workforce divides between the skilled professionals
and the unskilled underclass. Under specific institutional conditions, the level of required
skill among the skilled population is pulled upwards by the expanding frontiers of science
and technology, and by the rising managerial burdens of growing social and organisational

Clearly, this scenario has several consequences for modern universities. First, the growing
corporate demands for highly skilled labour have brought the needs and concerns of the
corporate world into the centre of the academic arena. The knowledge economy has
expanded the hold of commercialisation inside the bastions of knowledge. While a good
dose of real worldliness in stuffy ivory towers can often do a power of good, it can also
corrupt and undermine. The risk is that the universities will loose their aura of detached
enquiry. The commercialisation of learning and enquiry can threaten the ancient
institutional function of universities as centres of relatively detached enquiry.

In the social sciences, a recent effect of this commercialisation has been the relative decline
of student recruitment into economics and sociology in favour of the business schools.
Economics has reacted in an attempt to maintain its position and prestige, by reaching for
its feathered head-dress of formalisation. This accelerated a process of mathematicisation
that has its own independent institutional logic, as described above. Meanwhile, sociology
as a whole has imploded in an orgy of self-doubt. Some have escaped the sociology
departments to pursue (sometimes excellent) case studies of business organisations in
business schools. But the theoretical core of sociology has become an abandoned battlefield.

This is only part of the story. The accelerating process of specialisation and the growing
volume of knowledge – as described in my Economics and Utopia – have just as serious
effects on academic life. The number of scientific journals and other publications has
exploded. At the same time, science itself is subdividing endlessly into a growing number
of subdisciplines. As a consequence, it is increasingly difficult to keep up-to-date in any
subdiscipline, let alone in a whole subject. The crucial result is that wide-ranging critical
reflection and interdisciplinary conversation are increasingly impaired. It is ever more difficult
to take a more general view, and make an impact across the disciplines. Generalists of the
orientation of Marx, Mill, Marshall, Durkheim, Pareto, Weber or Schumpeter would find it
difficult to obtain a foothold in the modern university. Today, as the grand view is more
difficult to obtain, the big questions fall out of favour. The disciplines narrow down on
relatively minute technicalities. Sadly, the grand vista is lost.

I believe that the causes of the ills of economics are not confined to economics alone.
Accordingly, its restoration to health will be all the more difficult. The modern university may
require a Humboldtian reform similar to that which made the nineteenth century German
universities the envy of the world. A key feature of this academic revolution was that
philosophy replaced religion at the apex of all enquiry. The pursuit of truth remained the
purpose of the university, and all students were required to understand the philosophical
problems of truth and explanation. The faculty of philosophy received full equality of status
with the other faculties. We now take it for granted that every scientist should have some
training in mathematics and statistics. But today an induction in philosophy is the
exception rather than the rule.

Philosophy should take a similarly general and prestigious position, in both the natural and
the social sciences. Philosophy is a skill that is transferable to multiple fields of inquiry.
Hence it can enable communication between disciplines. It encourages a critical frame of
mind and can help locate the big questions. Scientific development is facilitated by a common
philosophical awareness of problems of truth, meaning, testing, modelling, explanation,
prediction, unification and progress

In addition, I would suggest that every student scientist should have some training in the
history of at least his or her own subject. There should be a widespread awareness of
historical precedents for successful or failed innovation in science. The contemporary
development of science can be guided and inspired by knowledge of its own history.

In sum, just as the requirement of mathematics is now virtually universal, so too should
be some philosophy, and relevant parts of the history of ideas. All three should be part of
the compulsory core curriculum of every science. I do not know how this second
Humboldtian revolution can come about. Perhaps, at least in Paris and in Cambridge, it
has already begun.


Prof. Hodgson's latest book, How Economics Forgot History: The Problem of Historical Specificity in Social Science,
has just been published by Routledge. For details go to:





An Extraordinary Discipline
Ben Fine   (School of Oriental and African Studies, University of London) 


Whether in absolute terms or by comparison across the social sciences, economics is an
extraordinary discipline by a number of criteria. First, it is astonishingly ignorant of its own
history and traditions. As if to prove as well as to proclaim the point, long ago David Gordon
(1965, p. 123/6) argued that:

[Adam] Smith's postulate of the maximizing individual in a relatively free market and
the successful application of this postulate to a wide variety of specific questions is
our basic paradigm. It created a "coherent scientific tradition" (most notably including
Marx) and its persistence can be seen by skimming the most current periodicals … I
conclude that economic theory is much like a normal science and that, like a normal
science, it finds no necessity for including its history as a part of professional training.

Matters have since only got worse.

Second, in part a corollary, the discipline is systemically – in appointments, journals,
textbooks and teaching – intolerant of alternatives. They might just as well not exist.

Third, methodologically, ignorance and incoherence are endemic. Economics continues to
rely, at least in principle, on axiomatic models tested by externally given data. Such a
stance has long been abandoned by the natural sciences and sorely exposed by social
scientists and others working on methodology. In addition, the “let us assume”, “ceteris
paribus” forms of argument have long been notorious for their total lack of attachment to
material reality.

Fourth, economics relies upon the optimising individual, with the calculating mind of a
machine and the base motives of a beast. It is not simply that no humanity is displayed as
far as the individual is concerned but, on a deeper logical plane, the presumption is that the
social can be derived from the individual and not vice-versa.

Fifth, despite these glaring deficiencies, economics proclaims itself as the only true,
rigorous and scientific social science. It contemptuously dismisses anything without
formal models and/or statistical testing as unacceptable.

Sixth, whilst from outside, economics can be seen to be built on an intellectual pack of
cards – mainly jokers and no aces – its inner strength as a discipline has never been
greater. Heterodoxy and self-doubt have been eliminated and “Americanisation” of the
discipline reigns supreme.

Seventh, despite all these shortcomings, economics imperialism or the colonisation of the
other social sciences by economics, is stronger than ever before. On the basis of the new
information-theoretic economics, a whole new flush of fields have sprung up – the new
institutional economics, the new political economy, the new development economics, the
new economic geography, the new economic sociology, etc. Unlike the “old” economics
imperialism, most notably associated with Gary Becker for whom the world in all its
aspects should be treated as far as possible as if it were a perfect market of costs and
benefits even where a market is not in place to make valuations, the “new” economics
imperialism treats the world as if it is riddled with market imperfections. In this way, the
“social” is re-introduced into mainstream economics despite its dependence upon an
extraordinarily narrow version of methodological individualism. History, economic and
social structures, customs, culture and so on are all the rational path-dependent
responses to market, especially informational, imperfections.

Taken together, these features of mainstream economics paint a depressing picture, not
least as far as alternatives are concerned. But locating them in a wider intellectual setting
suggests otherwise. Currently, across the social sciences as a whole, there are two
discernible trends. One, in which economics has participated to some extent, is the retreat
from the extremes of neo-liberalism. Academics peddle originality and it is only so often
and in so many ways that it is possible to repeat the mantra – “leave everything to the
market”. So now there is much more interest in how the economic and the non-economic,
and the market and the non-market interact with one another. Hence, the success to some
degree of the new phase of the-world-as-if-market-imperfections economics imperialism. 

The other broad trend across the social sciences, also a retreat from excess and also
uneven and faltering, is from the influence of postmodernism. The latter has been concerned
with the meaning of objects, with identity and subjectivity. Necessarily economics has been
unable to participate in the retreat because these were no go areas for it in the first place as
both individuals and the material world were unproblematic as in the idea of given utility
functions and factor inputs or objects of consumption. The other social sciences, however,
are now increasingly concerned not only with how our world is understood but with how it is
created. Most notably this is revealed in the rapid rise to prominence of notions, however
problematic, such as globalisation and social capital (that have scarcely figured in economics).

The result is that the other social sciences are developing a strong interest in the economic.
They do so in part from a position of ignorance, in part intimidated by the formalism and
technical virtuosity – or the authority – of mainstream economics, and in part with a healthy
scepticism with, and contempt for, its methods and theory in light of their own intellectual
traditions. In short, there is a tension across the social sciences in its growing attention to
the economic – should it be seduced by the unsubtle charms of a colonising mainstream
economics or revitalise itself in the traditions of classical political economy.

The prospects are that there will be considerable debate over the economy in the coming
period. But it will not be within economics in the first instance although there will be
feedback effects. Rather debate over the economy will take place across the other social
sciences in which economics imperialism will be a participant. The outcome remains open
and is likely to be uneven from discipline to discipline and from topic to topic. Teachers,
students and researchers within and against the authority of mainstream economics must
not only welcome these developments but promote and participate in them.
Gordon, D. (1965) "The Role of the History of Economic Thought in the Understanding of
Modern Economic Theory", American Economic Review, vol 55, no 2, pp. 119-27.

The themes of Prof. Fine's article are explored in depth in his recently published Social Capital versus Social Theory:
Political Economy and Social Science at the Turn of the Millennium
, London: Routledge, 2001, and in his
forthcoming The World of Consumption: The Cultural and Material Revisited, London: Routledge, 2002. For
more information: http://www.economicsarena.com/economicsarena/books/books.htm







What We Learned in the Twentieth Century
Frank Ackerman   (Global Development and Environment Institute, Tufts University, USA)

Is the traditional form of general equilibrium theory, and the neoclassical framework that
supports it, still worth talking about?  Or is the subject too old and outmoded to bother
with?  When confronted with criticisms of general equilibrium, many economists claim
that the discipline has moved on.  No one, it is said, still relies on the old Arrow-Debreu
framework.  Instead, avant-garde economists describe themselves as being involved in all
manner of new, sophisticated theoretical analysis.  The old, idealized, textbook model of
competitive markets is said to be uninteresting, yesterday’s news, no longer representative
of the leading edge of theory.

As intriguing as this sounds when announced in seminars, it is hard to find published
evidence that supports the hypothesis of brave new theorizing.  Scanning recent issues of
the top mainstream economics journals turns up very few examples of a new paradigm, or
of sharp departure from traditional models.  The great majority of articles still appear to be
applications or minor extensions of standard theories, sometimes experimenting with
relaxing one of the standard assumptions to see how much difference it makes.

Where, then, are these innovative new theoreticians hiding their work?  One of the few
high-profile statements of new theoretical approaches is a group of three articles in the
November 2000 issue of Quarterly Journal of Economics.  The QJE editors solicited
essays on what we have learned about economics since the days of Alfred Marshall,
paralleling Marshall's own retrospective essay on the economics of the nineteenth
century.  For the QJE, Olivier Blanchard reviewed the field of macroeconomics, while
microeconomics is covered in one essay by Sam Bowles and Herb Gintis, and another
by Joseph Stiglitz.

Blanchard's useful summary of trends in macro theory describes an eclectic field,
increasingly certain that market imperfections are among the causes of macroeconomic
fluctuations, but divided on the questions of which imperfections to focus on, and how
much they matter.  Fortunately, the profession has lost interest in the strong form of
rational expectations theories, a delusion of the 1980s in which business cycles result
only from random shocks to a perfectly competitive economy.  However, there is no
obvious new synthesis or alternative theoretical framework emerging from the work
surveyed by Blanchard.

Bowles and Gintis, and Stiglitz, present overlapping critiques of standard microeconomics
drawing heavily (though not exclusively) on their own work.  For Bowles and Gintis, there
are two crucial innovations in microeconomic theory: modelling of endogenous preferences,
and of the incompleteness of contracts, both undermine Walrasian general equilibrium.

Neoclassical economics, as embodied in general equilibrium theory, assumes that
individual preferences are formed outside the economic system (exogenously) and are not
influenced by economic interactions.  The unreality of this assumption is hardly news,
having been the subject of eloquent and sweeping critiques by Thorstein Veblen at the
beginning of the twentieth century, and by John Kenneth Galbraith at mid-century. 
What is new in the Bowles-Gintis account is a recent strand of literature in experimental
economics and social psychology, amply confirming that social norms and memories of
recent interactions influence individual choices even in the simplest, most contrived
laboratory settings.

Yet there is a trade-off; in exchange for "scientific rigor" the new literature has apparently
retreated from the broad political and social analysis of Veblen and Galbraith.  For Veblen,
conspicuous consumption was a cornerstone of an unequal, hierarchical, consumerist
society.  For Galbraith, the ability of advertisers to create consumer demand for their
products was a key mechanism creating the problems of the "affluent society" of American
capitalism.  The new, experimental research on endogenous preferences and social norms
has yet to achieve any such broader interpretation of its significance; it is at best a
provocative body of data on which interesting theories could be based.  To date, there is
little evidence that the new endogenous preference literature is influencing economic theory
as written by the majority of economists, let alone communicating with a wider audience.

The second point raised by Bowles and Gintis is that contracts are necessarily incomplete,
giving rise to strategic interaction or principal-agent problems surrounding market exchanges. 
For example, efficiency-wage theories argue that employers often pay more than the
market-clearing wage in order to create incentives for greater effort on the job.  On this point,
Bowles and Gintis overlap with the more comprehensive treatment of similar issues by Stiglitz.

Among the three QJE articles, the one by Stiglitz comes the closest to presenting an
alternative new theory.  For Stiglitz, the fatal flaw of the Arrow-Debreu model is its assumption
of perfect information, costlessly and symmetrically available to all.  In fact, perfect information
is impossible;  a reasonable economic theory needs to assume that information is limited,
costly, and frequently asymmetrically distributed.   Neither the characteristics of goods and
services, nor the behavior of market participants, can be fully known or specified in advance. 
Among other things, this implies that contracts are necessarily incomplete, the point made
by Bowles and Gintis.  Even small imperfections of information can lead to large deviations
from the Pareto-optimal outcomes of general equilibrium theory; in an imperfect-information
economy there is no reason to expect markets to reach or even approach Pareto optimality. 
Indeed, the very existence of a market equilibrium is in doubt in an economy of limited

Prices cannot, according to Stiglitz, simply convey information about scarcity.  In the context
of limited information, prices must also address the selection problem, communicating about
unobserved characteristics of goods and services (as when the price of an unfamiliar bottle
of wine, say, is interpreted as a sign of its quality), and the incentive problem, influencing
the unobserved or unmonitored behavior of market participants (as in the efficiency wage
story).  These multiple, often conflicting, roles for prices imply that the standard theories
of producer and consumer behavior are inadequate, and that the standard solution to the
problem of scarcity will not always be achieved, even in a competitive market.

This analysis leads to the well-known problems of adverse selection (e.g., if insurance is
available to all,  accident-prone people are the most likely to buy it) and moral hazard
(insurance reduces the cost of accidents and thus may make people more accident-prone). 
Stiglitz sees these problems as pervasive, and shows how the limited-information paradigm
explains many practical puzzles and policy debates.  Intervention in the market often leads
to welfare improvements, particularly when public policy is crafted to increase access to
information or remove asymmetries.  In some cases, new institutions are needed to
overcome information problems.

Does this constitute a new theory, replacing neoclassical models, general equilibrium, and
the Arrow-Debreu results?  Yes, in a narrow sense; but no, in a larger and more important
sense.  The good news is that Stiglitz provides a richer, more complex picture of market
interactions and explains a way in which the traditional neoclassical view is inadequate. 
His emphasis on the multiple meanings of prices creates space for the systematic
exercise of unequal power in market transactions, a point that is developed more fully by
Bowles and Gintis.  Politically, Stiglitz recognizes the importance of the traditional general
equilibrium results, particularly the presumed optimality of laissez-faire outcomes; he
repeatedly demonstrates that his analysis overturns the traditional theory and justifies

Yet the bigger picture of economic theory is surprisingly little changed by this handful of
innovative brush strokes.  The normative and evaluative apparatus of neoclassical
economics, including the utilitarian standard of individual welfare maximization and the
focus on Pareto optimality, survives unchanged.  That is, the market no longer gets an
A+ on every exam, but the exam questions are the same.  The presentation of results in
contrast to traditional general equilibrium theory is both a strength and a weakness:
Stiglitz does well in highlighting where the traditional theory goes wrong, but by the same
token is less successful in developing and presenting a coherent alternative.

The political agenda that flows from the economics of limited information mirrors the
strengths and weaknesses of the theory: it fails to present a frontal challenge to
contemporary capitalism, but justifies frequent government interventions in the market
on specific issues.  It is the agenda of Clinton-style "New Democrats" in the U.S. (and
in fact, Stiglitz served in the Clinton administration), or Blair's "New Labor" in Britain. 
Both in politics and in economic theory, we have done much worse in recent memory, 
but we should aspire to do much better.

The economics of limited information, as presented by Stiglitz, offers intriguing and
valuable insights  into the meaning and functioning of markets, as does the story of
endogenous preferences and the analysis of incomplete contracts offered by Bowles and
Gintis.  However, these do not yet add up to a complete new perspective; at most they
are building blocks that should be used in a new theory.  They are hardly new enough,
and hardly accepted enough, to support the claims of a bold  departure beyond
neoclassical traditions, on the part of the economics profession as a whole.  Anyone who
finds out where the innovative new economic theorists are hiding should be sure to tell
the rest of us.
[1][1] Olivier Blanchard, "What Do We Know About Macroeconomics That Fisher and Wicksell Did Not?", 1375-1409; Samuel Bowles and Herbert Gintis, "Walrasian Economics in Retrospect", 1411-1439; Joseph Stiglitz, "The Contributions of the Economics of Information to Twentieth Century Economics", 1441-1478.  All are in Quarterly Journal of Economics, November 2000







Rethinking Economics in Twentieth-Century America:
A Political-Economic Approach to the History of Thought
Michael A. Bernstein   (University of California, San Diego)


What came to be known as the "new economics" of the post-World War II era and the
interventionist fiscal and monetary policies pursued by the American government after
1945 did not simply arrive in the published text of Keynes' General Theory, nor did they
emerge de novo from college and university seminar rooms, faculty offices, and typewriters. 
They came with military mobilization and war in particular, with power and global authority
in general.  This "new economics" could not, in fact, subsist without national power.  On
the one side, American hegemony in the American century was crucially linked with the
expansion of the scope and size of government activity, and with a significant commitment
by the government to wielding the means (diplomatic, political, military, and economic) of
that power.  It was, as well, dependent upon an apparent political consensus tied to a
constellation of social and cultural forces that made anti-communism, global intervention,
and militarization policies appeal across dimensions of class, ethnicity, and gender.  For
all these reasons, a political-economic approach to the history of economic thought,
especially in its American contexts, offers a great deal of enlightenment for our
understanding of the emergence of the neoclassical "consensus" in our field.

History shows that it was World War II that most decisively laid the groundwork for the
participation of the American economics profession in the Cold War of the 1950s and later
years. That involvement in the affairs of state insured the triumph of neoclassical
perceptions over alternative points of view and furthered the emergence of a "mainstream"
economics as the dominant discipline of the social sciences.  Indeed, future Nobel
Laureate Paul Samuelson commented in 1945 that "the last war [i.e., World War I] was
the chemist's war . . . this one [had been] the physicist's.  It might equally be said that
this [had been] the economist's war." 

The usefulness of economics to the American war effort in the 1940s was demonstrated
in two broad areas of endeavor -- mobilization and resource allocation, and strategic
decision-making.  It was on matters of allocation that economists made some of their
most significant contributions, and with which they (collectively as a profession) had their
most important wartime experience.  Conversion to defense production had created
virtually intractable problems of materials scarcity for government officials.  How to choose
efficiently the timing and distribution of various productive activities necessary for the war
effort became a major concern.  With American entry into the war, allocation problems
became only more intense.  Not surprisingly, the American armed services and allied
government agencies were quite eager to develop allocative techniques for wartime
production, transportation, and distribution that would minimize costs and extravagance
and that would have as their corollary the maximization of some objective such as output,
frequency, or endurance.  The investigation of such "linear programming problems" had a
tremendous impact on the future course of research in mathematical economics in
particular and economic theory in general -- as demonstrated, for example, by the
invention of algorithms to maximize particular functions subject to sets of "linear
inequalities".  In other words, scholars sought to establish techniques by which specific
goals, such as output-maximization or cost-minimization could be met with reference to
specific constraints such as fuel supply, labor availability, raw material bottlenecks, and
national (indeed, international) transportation capacities. 

It was with the development of game theory, however, where the intellectual evolution of
American economics and the concerns of a burgeoning national security state truly melded. 
On a strictly mathematical level, the development of both linear programming and game
theory depended on advances in the understanding of linear inequalities in constrained
maximization or minimization problems.  In this sense, the mathematical techniques used
in both areas were the same.  But game theory had a powerful appeal for strategic analysis
because of its focus on conflict and decision-making.  Not surprisingly, the theory of games
was also a field greatly stimulated by the World War II years -- but in certain ways it did not
achieve its full stature until the coming of the Cold War.

The 1940s work of John von Neumann and Oskar Morgenstern signalled the entrance of
game theory as a major part of economic analysis.  Their demonstration that it was
possible to derive definite results from mathematical simulations of complicated scenarios
of conflict and uncertainty was revolutionary.  They showed that under certain conditions
and assumptions, game participants (that is to say, those involved in competitive
situations that approximated a contest of some sort) could implement strategies that
would secure at least certain minimum gains (or their parallel, incur at most certain
predictable losses).  While it was immediately clear that their findings would be useful in
conventional microeconomic theory  -- especially with regard to estimating pricing
outcomes in contested markets -- over time it also became obvious that they would be
applicable to strategic choice problems and national defense planning. 

Game-theoretic approximations and simulations of two-person conflicts seemed appropriate
scenarios in which to investigate the implications of the nuclear duopoly, between the
United States and the Soviet Union, of the early Cold War era.  The dramatic intellectual
impact of the work of von Neumann and Morgenstern among academic economists was
thus, not coincidentally, paralleled by the willingness of the federal government to support
the continued evolution of this line of inquiry.  Research funding, distributed by the U.S.
Department of Defense and affiliated agencies -- most notably the U.S. Office of Naval
Research -- was rapidly made available to those economic theorists, in particular
mathematical economists, whose work in game theory and linear programming seemed to
have potential value for the missions of the national defense and security establishment --
all this at a time when the mission of the American defense agencies expanded in novel
and indeed global ways. 

The United States Navy and Air Force proved most eager to lend support to the work of
game theorists and linear programming specialists.  The Navy, in particular, supported
much of the work in mathematical economics -- in large part done by Kenneth Arrow and
Gerard Debreu (both future Nobel Memorial Prize Laureates) -- that, during the 1950s and
early 1960s, propelled the field into great visibility and prominence.  Official publications of
both the Office of Naval Research and the Air Force Office of Aerospace Research
claimed, in the late 1960s, that the Arrow-Debreu project was exceptional for its "modelling
of conflict and cooperation whether it be [for] combat or procurement contracts or exchange
of information among dispersed decision nodes."

Crucial support, both financial and logistic, was also given to these activities by the RAND
Corporation.  During the 1950s, what had been the U.S. Air Force's Project RAND (an
acronym for Research and Development), and what later became the non-profit RAND
Corporation known today, underwrote much of the work on linear programming that had
been stimulated by the 1940s work of people like George Dantzig (now emeritus professor
of economics and operations research at Stanford University) and Tjalling Koopmans (the
late professor of and Nobel Laureate in economics at Yale).  It was at RAND that Dantzig
refined his simplex techniques (with the enormously important contributions of mathematician
Richard Bellman), and where RAND employees began the systematic application of
game-theoretic principles to war planning and simulation.  Government officials were often
participants in RAND conferences and workshops geared towards helping them prepare for
crisis management.  Indeed, the presidential administration of John F. Kennedy, according
to available RAND records, was evidently most engaged by and committed to this sort of
experience for its officials.  [It was, by the way, no idle exercise, as Herbert Scarf -- a
former RAND investigator and now Sterling Professor Emeritus of Economics at Yale --
noted in an oral history interview, for colleagues at RAND to relax over games of
"Kriegspiel" and "Liar's Poker" while taking a break from their investigations of strategic
choice and conflictive outcomes.]    

Under the auspices of RAND, continued research in game theory and operations research
flourished throughout the 1960s and 1970s.  The Corporation funded what it called
"Defense Policy Seminars" at U.C.L.A., Columbia University, Dartmouth College, Johns
Hopkins University, M.I.T., Ohio State University, Princeton University, the University of
Wisconsin, and the University of Chicago.  In 1965, RAND created a graduate fellowship
program to support relevant training in economics and international relations.  In that year,
such fellowships were distributed among the University of California, Harvard University,
Stanford University, Yale University, Chicago, Columbia, and Princeton.  Not infrequently,
talented graduate students and postdoctoral investigators received major support from
RAND (and through RAND from the federal government) for their work in economics that
touched upon matters of strategic decision-making.  [One such individual for whom this
was true, whose career as a "cold warrior" would take many twists and turns, was a
Harvard University graduate student in economics, specializing in game theory, who later
became a most prominent figure in the 1971 "Pentagon Papers" scandal surrounding the
Vietnam War -- Daniel Ellsberg.]  The authority and legitimacy of the new work in
economic theory that had been, in large measure, an outgrowth of the war years, carried
over to the post-war era and the years of the Cold War.  In a wide array of activities related
to the defense establishment and the new global power of the United States, economic
analysis came to play a significant role.  From defense cost minimization, to budgeting
techniques and strategies, to transportation and logistical-support scheduling, to
shadow-price estimation of the burdens of military-industrial procurement, the research of
the World War II years paid off.  Even in the private corporate economy, not to mention in
the civilian activities of government, what came to be known as the operationally-useful
methods of economists came of age.  And with these successes, the prestige of those
engaged in such research, along with the governmental and private-foundation support for
their scholarly activity, were powerfully enhanced.  

More than all this, what the war-inspired development of such things as linear programming
and game theory served to do was to legitimize a transformation in the object of economics
research that had been in the making for some seventy years.  Ever since the so-called
marginalist revolution in the latter part of the nineteenth century, American economists had
been very much part of this redefinition of the science.  No longer the study of "the nature
and causes of the wealth of nations" (as Adam Smith and other classical theorists had
claimed), nor "a critical analysis of capitalist production" (as Karl Marx had suggested), the
discipline became, in the twentieth century, the formal study of what Lionel Robbins had so
deftly called in his 1932 Essay on the Nature and Significance of Economic Science "the
adaptation of scarce means to given ends." While the work of marginalist theorists had
gained increasing respectability since the 1870s, earlier (and quite famous) works in this
tradition had had a distinctly polemical, usually anti-Marxist quality.  [I have in mind here
the work of Eugen von Bohm-Bawerk, for example, in the European case, and that of John
Bates Clark in the American.]  That tone was sharply distinguished from, and ultimately
displaced by the ostensibly objective, apolitical, and elegant formulations of mid- and later-
twentieth-century mathematical economic theorists.  The fundamental ingredients of the
hegemony of neoclassical thinking in the economics discipline were thus secured.  

The ascendancy of particular points of view is not, of course, simply a matter of scholarly
debate or pedagogy.  A real environment of wealth distribution, corporate control, diplomatic
pressure, and military force also plays a crucial role in distinguishing between, and
differentially empowering, dominant and oppositional ideologies.  It is appropriate, therefore,
that we turn our attention to the role of both political-economic processes and of ideas in
structuring the history of economic theory itself.  One very promising way to do this, as I
hope I have conveyed to you, is by rethinking economics in twentieth century America.  

Prof. Bernstein's new book, on which this article has been based, A Perilous Progress: Economists and Public
Purpose in Twentieth Century America
, is now being published by Princeton University Press.  For more
information about this book go to tp://www.pupress.princeton.edu/titles/7181.html




EDITOR: Edward Fullbrook
CORRESPONDENTS: Argentina: Iserino;  Australia: Joseph Halevi, Steve Keen:  Brazil: Wagner Leal Arienti;
France: Gilles Raveaud, Olivier Vaury; J. Walter Plinge;  Germany; Helge Peukert;  Japan: Susumu Takenaga;
Spain: Jorge Fabra;  United Kingdom: Nitasha Kaul; Michael Murphy;  United States: Benjamin Balak,
Daniel Lien, Paul Surlis:  At large: Paddy Quick

Proposals and suggestions for articles
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