Any Profit in the History of Economic Thought?

The study of history is a powerful antidote to contemporary arrogance. It is humbling to discover how many of our glib assumptions, which seem to us novel and plausible, have been tested before, not once but many times and in innumerable guises; and discovered to be, at great human cost, wholly false.

UK historian Paul Johnson

At first glance, the question of whether the history of economic thought has profit – a positive “net” of benefits versus costs – seems odd. Of course it does. Besides, as Ludwig von Mises once said about the question of who’s right – “logical economists” or “mathematical economists” – Mises suggested we let the market for ideas decide. However, after reading academic papers by George Stigler, Ken Boulding, Pete Boettke et al., the question has been transformed by the changes in my perspective.   In this paper, I will explain why my perspective changed, why I believe the history of economic thought is critical to future knowledge and I’ll provide one contemporary example that speaks to this issue.

Most of us are taught that history has much to teach us, but we’re also taught that all of us, even the great ones, stand on the shoulders of previous giants. Ken Boulding says Robert Merton gave this idea an acronym (OTSOG). Yes, Einstein was amazing, but even he stood on shoulders of Newton, Descartes, et al.  A major theme of The Prince is how much new princes should learn from great princes like Romulus, Cyrus, Theseus, and others. Machiavelli believed a great prince might surpass the ancients, but “man must always follow in the footsteps of great men and imitate those who have been outstanding” (19). Lord Keynes believed the “world is ruled by little else” than the ideas of economists and political philosophers and that these ideas are more powerful than the “power of vested interests”.   Yet, as Stigler and Boulding make clear, modern economics seems dominated by the “anti-historical school” that are not “interested in the wrong opinions of dead men”.   Boettke tells us “the mainstream of economic analysis has become occupied with excessively …unrealistic models…rather than a deeper historical and institutional knowledge”.  Stigler ends his article with a challenge, which Boettke echoed 45 years later, to inspire those who properly value the role of the history of economic thought to make a strong case, change minds and, in Boettke’s bold words, “reverse the degenerative path of the discipline”.

One of the implications of Whig arguments is that there’s something inherently superior – built in – about modern economics. Let me provide one counterfactual. My textbook for Intermediate Macroeconomics, written by Charles Jones (Stanford Graduate School of Business), was an older version (2006). On page 308, in a section called, “Case Study: Oil Prices and Inflation Shocks”, that included a graph of oil prices from 1978 – 2006, Jones said: “Most economists don’t believe the high inflation of the late 1970s and the large recession that followed are likely to occur.” As we know, no high inflation but the 2008 financial crisis, one of the worst recessions in U.S. history, followed shortly thereafter. This is not Jones fault – he’s simply passing along the consensus of modern “mainstream” economists in 2006. But they had it wrong – very wrong.

The point is that for 30 years, after rejecting Bolding’s argument that we have much to learn from past thinkers, mainstream economists ignored the great thinkers and got the 2008 recession wrong. Moreover, given Lord Keynes’ claim that the economic ideas of “academic scribblers” are hugely influential, is it possible that 2008 was caused by flawed “Whig” or mainstream thinking and research? I contend it’s not just possible, it’s probable. At the very least, it’s worthy of honest, objective research – research informed by the principles of great thinkers and pioneers like Adam Smith who showed us how to break through hundreds of years of mercantilism and establish a new paradigm, what Boettke called “the theory of markets” that laid the foundation for a system of “the 3 p’s of property, prices and profit/loss” (122) that has helped transformed the world and raised millions out of poverty. If Adam Smith was right about that, perhaps he’s right about a few other things?

Works Cited

  • Boettke, Coyne, and Leeson (2010), “Earw(h)ig: I Can’t Hear You Because Your Ideas are Old.
  • Boettke, Peter J. “What Should Classical Liberal Political Economists Do?” SSRN Journal SSRN Electronic Journal 25.1 (2014): 111-22. Constitutional Political Economy. Springer Science Business Media. Web. 17 May 2015.
  • Boulding, Kenneth E. (1971), “After Samuelson, Who Needs Adam Smith?”  History of Political Economy 3(2): 225-237.
  • Jones, Charles. Macroeconomics: Economic Crisis Update. 2E ed. New York: W. W. Norton, 2010. Print.
  • Mises, Ludwig. Human Action: The Scholar’s Edition. Hillsdale, MI: Hillsdale College, 2000. Print
  • Stigler George J. (1969), “Does Economics Have a Useful Past?” History of Political Economy 1(2): 217-230
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