Mark Skousen (http://www.mskousen.com; [email protected]) is an economist at Rollins College, Department of Economics, Winter Park, FL 32789, a Forbes columnist, and editor of Forecasts & Strategies. His new book, The Making of Modern Economics, will be published in February by M. E. Sharpe.
“I think it is quite likely that we are entering an era of much more interaction among the sciences.”
—Kenneth E. Boulding
During the 20th century it was popular to label economics the “dismal science,” a term of derision coined by the English critic Thomas Carlyle in the 1850s. Carlyle lashed out against laissez-faire capitalism, which he defined as “anarchy plus the constable,” for, among other things, being inconsistent with slavery.
But attitudes are rapidly changing as we enter the 21st century. Economics, no longer dismal, has come a long way toward reinventing itself and expanding into new territories so rapidly that another descriptive phrase is needed. Like an invading army, the science of Adam Smith is overrunning the whole of social science—law, finance, politics, history, sociology, environmentalism, religion, and even sports. Therefore, I have dubbed 21st-century economics the “imperial science.”
Boulding’s Dream Comes True
The father of economics as an interdisciplinary movement is Kenneth E. Boulding, long-time professor at the University of Colorado in Boulder, who died in 1993. He published over 1,000 articles on more than two dozen eclectic subjects, ranging from capital theory to Quakerism. But Boulding’s vision of every discipline borrowing ideas from other disciplines isn’t exactly what has happened. Instead, economics has started to dominate the other professions.
The first breakthrough came in finance theory. Harry Markowitz, a graduate economics student at the University of Chicago, wrote an article on portfolio theory in the March 1952 issue of The Journal of Finance. It was the first attempt to quantify the economic concept of risk in stock and portfolio selection. Out of this work came modern portfolio theory and the “efficient market theory,” which argues that short-term changes in stock prices are virtually unpredictable and that it is extremely difficult if not impossible to beat the market averages over the long run.
These ivory-tower theories were greeted with scorn by Wall Street professional managers, but eventually confirmed by numerous studies. Index funds, the economists’ favorite investment vehicles, are now the largest type of mutual fund sold on Wall Street.
James Buchanan and Gordon Tullock, both at the University of Virginia, published The Calculus of Consent in 1962 and forever changed how political scientists view public finance and democracy. Today public-choice theory has been added to every economics classroom’s curriculum.
Buchanan and other public-choice theorists contend that politicians, like businessmen, are motivated by self-interest. They seek to maximize their influence and set policies in order to be re-elected. Unfortunately, the incentives and discipline of the marketplace are often missing in government. Voters have little incentive to control the excesses of legislators, who in turn are more responsive to powerful interest groups. As a result, government subsidizes vested interests of commerce while it imposes costly, wasteful regulations and taxes on the general public.
The public-choice school has changed the debate from “market failure” to “government failure.” Buchanan and others have recommended a series of constitutional rules to require the misguided public sector to act more responsibly, including requiring supermajorities to raise taxes, protecting minority rights, returning power to local governments, and imposing term limits.
Economics Enters the Courtroom
In 1972 Richard A. Posner, an economist who teaches at the University of Chicago Law School and serves as chief judge of the U.S. Seventh Circuit of Appeals, wrote Economic Analysis of Law, which synthesized the ideas of Ronald Coase, Gary Becker, F. A. Hayek, and other great economists at the University of Chicago. Today centers of “law and economics” are found on many campuses. Judge Posner states, “Every field of law, every legal institution, every practice or custom of lawyers, judges, and legislators, present or past—even ancient—is grist for the economic analyst’s mill.” Economists apply the principles of cost-benefit and welfare analysis to all kinds of legal issues—antitrust, labor, discrimination, environment, commercial regulations, punishments and awards. In my October 1999 column, I reported on Chicago law professor John R. Lott, Jr.’s new work on the relationship between gun ownership and crime. He applied the incentive principle to demonstrate that well-armed citizens deter crime.
Chicago’s Gary Becker has been in the forefront of applying price theory to contemporary social problems, such as education, marriage and divorce, race discrimination, charity, and drug abuse. Not surprisingly, he called his book for the general public The Economics of Life. But Becker warned, “This work was not well received by most economists,” and the attacks from his critics were “sometimes very nasty.”
There are many other cases where economists have made significant improvements in other disciplines—in accounting (see July 1999 column on “Economic Value Added,” or EVA), history (see the work of Robert Fogel and Douglass North), religion (Lawrence Iannaccone and Edwin West have shown that increased competition in religions increases attendance at churches), management (the Center for Market Processes at George Mason University), and sociology (see the writings of Richard Swedberg). They’ve even changed the way Treasury bills are auctioned.
As we enter the 21st century, false theories still prevail in politics, law, history, sociology, and other disciplines. As Lord Acton once stated, “There is no error so monstrous that it fails to find defenders among the ablest men.” The sooner the principles of market economics enter the fray and attack false doctrines, the better off we’ll all be.
- Kenneth E. Boulding, The Skills of the Economist (Cleveland: Howard Allen, Inc., 1958), p. 134.
- For the complete background of Carlyle’s racism and vile attack on market capitalism, see David M. Levy, “150 Years and Still Dismal!,” in Ideas on Liberty, March 2000, and chapter 3 of my new book, The Making of Modern Economics (Armonk, N.Y.: M.E. Sharpe, 2001).
- Two excellent books on modern portfolio theory are Burton Mankiel, A Random Walk Down Wall Street, 6th ed. (New York: W. W. Norton, 1996) and Peter L. Bernstein, Capital Ideas (New York: Simon & Schuster, 1992).
- Buchanan and Tullock’s The Calculus of Consent (Ann Arbor: University of Michigan Press, 1962) is still worth reading. For an excellent summary, see chapter XI, “The Public Choice School: Politics as a Business,” in Todd G. Buchholz, New Ideas from Dead Economists (New York: Penguin Books, 1989).
- Richard A. Posner, Law and Literature, 2nd ed. (Cambridge, Mass.: Harvard University Press, 1998), p. 182. A comprehensive summary of the “law and economics” movement can be found in Nicholas Mercuro and Steven G. Medema, Economics and the Law: From Posner to Post-Modernism (Princeton, N.J.: Princeton University Press, 1997).
- Gary S. Becker and Guity Nashat Becker, The Economics of Life (New York: McGraw-Hill, 1997), p. 3.