To have some idea of where we are going in this world, it is useful to have some sense of where we have been. It is one thing to assert that most prominent economists of the 20th century can be divided into three groups: the Generation of the Great Depression (and World War II); the Generation of the Cold War; and the Generation of Perestroika. That is certainly true, and probably useful, as far as it goes. But it doesn’t tell us much about economics
It is quite another thing to identify the discipline’s galvanizing events from the perspective of those inside the field.
Such a chronicle of internal developments is, after all, the way economists report their news to us. Until about 1960, the big news (it reached the public well after the fact) had to do with the appearance of various books: Keynes’ The General Theory of Employment, Interest and Money in 1936, Hicks’ Value and Capital in 1939, Von Neumann and Morgenstern’s The Theory of Games and Economic Behavior in 1944, Samuelson’s Foundations of Economic Analysis in 1948, Debreu’s The Theory of Value in 1959, Friedman and Schwartz’ Monetary History of the United States 1867-1960 in 1963.
After that (and in many cases before), the most significant contributions to economics are short, technical papers published in journals: Ronald Coase’s “The Problem of Social Cost” in 1960; George Akerlof’s “The Market for ‘Lemons’” in 1970, Robert Lucas’ “Expectations and the Neutrality of Money” in 1972, Fisher Black and Myron Scholes and Robert Merton’s papers on options pricing in 1973 and so on. An almost-serviceable definition of a good economist is someone who reads the journals instead of the newspapers.
A proper history of 20th-century economics would interweave these narratives, internal and external, in order to produce a coherent account of how those three unmistakable generations came to coalesce, forming unities of experience and analysis both inside the discipline and in countless countries round the world.
It is a daunting task — a task at once complicated and somewhat simplified by the fact that, during the middle third of the century, the economists developed a language of their own. The spread of that language throughout economics has made it harder to understand developments in any particular sub-discipline.
“There is no question that economics underwent a revolutionary change around a half century ago,” wrote Stanford University economist David Kreps in an under-noticed article in Daedalus in 1997. “Mathematical modeling, a small piece of the subject until the 1940s and 1950s, became the all-encompassing (some would say suffocating) language of the discipline.” Formal reasoning had been a part of the discipline for much longer than that, Kreps noted, “but their embrace by the mainstream of the profession came in this period.”
What accounts for the triumph of formal methods? Kreps continued, “The allure of mathematical modeling and reasoning in economics come first and perhaps foremost from the power it gives us to define our terms (say, ‘efficiency’) precisely and unambiguously and to show that certain precise assumptions lead to other precise conclusions. It also allows us to stretch our analyses and to unify them…”
Logical consistency might not be a satisfying substitute for controlled data, he continued, but it was better than nothing as a goad to sharpness and discipline in theorizing. The rise of powerful statistical methods was another factor. There was, of course, still another advantage: “The use of a powerful and somewhat obscure tool confers power in the user.”
In any event, the triumph of formal methods had resulted in a kind of globalization of the core ideas of the field, according to Kreps — to a unification, that is, if you are among the winners. There have always been many different topical concerns within economics, he noted. They include international trade, development, economic history, labor markets, public finance (and, more recently, the interplay of economic and political institutions), industrial organization and so on. Before mathematicization, he noted, each of these fields enjoyed “significant intellectual autonomy.”
“The things a student would learn in, say, development economics, would not resemble all that closely what was taught in public finance. Emphasis was placed on typologies and on the institutions that pertained to the subject in question. There were, if you will, a number of regional dialects of ‘Economese,’ dialects that were close to being distinct languages.”
As economics became more mathematical, as the power of formal deductive methods became more apparent, these formally semi-autonomous provinces succumbed gradually to mainstream language, wrote Kreps. “This was not a matter of applied fields recognizing the power of these new techniques and, thus persuaded, welcoming them with open arms.”
On the contrary, he wrote, acceptance was often grudging. The process more often than not involved outright imperialism, with an economist trained in mathematical technique invading the topical domain of one of the applied fields and mathematicizing it. There was a lot of resentment along the way.
But unification triumphed, and today the dialect of international trade is very similar to the dialect of industrial organization, of development and labor economics. Goodbye to the funny accents, then. “Nowadays the languages used by different branches of economics sound a lot more like branches of a single methodological (rather than topical) tongue.”
So here’s the point: the process of unification usually has entailed paying a price in relevance, meaning a temporary reduction in what was studied. In Development, Geography and Economic Theory, economist Paul Krugman offered a parable about mapping Africa. He described how various improvements in map-making techniques in the mid-18th century resulted in an emptying — out of the interior of the subcontinent in newly-published maps, until explorers equipped with chronographs and sextants could deliver reliable information about the remote features of “the Dark Continent.”
Details previously based on folklore — some of it accurate, some of it not — gave way to blank space on the maps. In a way, Europeans had become more ignorant about Africa than they had been before,” wrote Krugman — but only for a time. Then the details were filled it.
In a similar way, Kreps cites economist Paul Romer’s use of the figure of an hourglass to describe what happens when formalization comes to a previously descriptive field. “The vertical axis represents time, and the horizontal axis the scope or breadth of economics. As time passes, we see first a narrowing of topical concerns as the language is unified and then a widening of concerns as the language develops.”
The “narrowing” doesn’t mean those topical concerns disappear, during the interval when economists are ill-equipped to deal with them, any more than travelers to Africa stopped caring about what lay in the interior during the decades when mapmakers had no answers to their questions.
Sometimes these concerns were preserved as literary economics, in pockets of resistance such as development economics and institutional economics. Sometimes they were ignored. “Rather than speak in an unfashionable dialect, some things were just not discussed,” wrote Kreps.
In every case, however, there is a conservation of curiosity. Economists address the questions they can answer. The rest of us go on asking questions whose answers we want to know, whether it is technically feasible to answer them or not. It is precisely at this point that often economics can be seen to evolve in response to outside influences, according to Kreps.
During the Depression it was persistent unemployment of 25 percent; more recently, curiosity about Japanese production techniques, the German system of workplace co-determination, the impact of venture capital on newly-created American firms.
This is not an easy matter to disentangle and convey, much less nail down. Implicit in the image of the hourglass, or the parable of mapping Africa, is the view that ideas expressed in literary language in one generation are rendered crudely in mathematical terms in the next, then refined in the third and subsequent generations to a subtlety and precision that can be achieved in no other way. That seems to be the way that economists experience progress in their field.
Can this highly internal view of economics going forward be related to the external story — to the sequence of successive generations whose concerns were dominated by the Great Depression and World War II, by the Cold War, by Perestroika? I don’t know. It should be possible. And starting in two weeks, and thereafter at about monthly intervals, I am going to try — beginning the story of the man who succeeded John Maynard Keynes as the dominating figure in the public eye among economists of the next generation.