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The Transformation of Economics
Five big changes I’ve seen over the past half-century. One is economics as ideology in camouflage.
By Richard K. Vedder, Wall Street Journal
March 1, 2016 6:30 p.m. ET
Like most economics professors, I have spent my academic lifetime examining the economic and public-policy effects of issues involving the production, distribution and consumption of goods and services—what is known as political economy. There is, however, a “political economy” to the very act of producing and disseminating economic knowledge and examining public policies. And that political economy and my assessment of it has changed over a career spanning more than half a century. Here are five developments I would emphasize:
- Diminishing returns to research.A core economic principle is the Law of Diminishing Returns. If you add more resources, such as labor, to fixed quantities of another resource, such as land, output eventually rises by smaller and smaller amounts. That applies—with a vengeance—to academic research. Teaching loads have fallen dramatically (although the Education Department, which probably can tell you how many Hispanic female anthropologists there are teaching in Arkansas, does not publish regular teaching-load statistics), ostensibly to allow more research. But the 50th paper on a topic seldom adds as much understanding as the first or second. Emory University’s Mark Bauerlein once showed that scholarly papers on Shakespeare averaged about 1,000 a year—three a day. Who reads them? How much does a typical paper add at the margin to the insights that Shakespeare gave us 400 years ago?
- Economics as ideology in camouflage.Economists who achieve fame for genuine intellectual insights, like Paul Krugman (Links to an external site.), sometimes then morph into ideologues—predominantly although not exclusively on the left. The leftish domination of American academia is partly explained by economics. Federal student-loan programs, state appropriations, special tax preferences and federal research-overhead funds have underwritten academic prosperity, even at so-called private schools. The leftish agenda today is one of big government; academics are rent-seekers who generally don’t bite the hand that feeds them. The problem is even worse in other “social sciences.”
- A disconnect between economic reality and public policy.Three examples come to mind. First, the Keynesian orthodoxy of fiscal stimulus of the 1950s and 1960s, with its Phillips curves and the like, was shown to be spectacularly wrongheaded. The U.S. experience of the 1970s and the Japanese “lost decade” of the 1990s are two demonstrations. Second, centrally planned authoritarian states with no private property or free markets (e.g., the former Soviet Union or North Korea) have been shown to be monumentally inefficient and not permanently sustainable. Third, nations with some free-enterprise capitalism but with growing redistributionist welfare states start stagnating economically—Europe beginning after 1970, the U.S. after 2000. Yet many economists (including at the Federal Reserve) still champion Keynesian policies and welfare-state expansions such as ObamaCare.
- The rise of the nonuniversity research centers.A reaction to the liberal ideological orientation and inefficiencies of colleges has spawned this phenomenon. When I was attending college around 1960, the Brookings Institution, National Bureau of Economic Research and the Hoover Institution were among relatively few major independent think tanks. Today there are many, especially ones funded on the right to provide intellectual diversity, including nationally or regionally oriented centers such as the American Enterprise Institute, Cato Institute, Heritage Foundation, Heartland Institute and the Independent Institute, as well as dozens of state-policy think tanks. Universities have lost market share in social-science research.
- A major cause of America’s economic malaise:the government’s war on work. My own research with Lowell Gallaway has stressed the importance of labor costs in explaining output and employment fluctuations. If the price of something rises, people buy less of it—including labor. Thus governmental interferences such as minimum-wage laws lower the quantity of labor demanded, while high taxes on labor reduces labor supply, as do public payments to people for not working.
One reason living standards in the U.S. have stagnated: There were 12.7 million fewer Americans working in January than there would have been with the 2000 employment-population ratio. Disability insurance claims have roughly tripled in the past generation (despite greater inherent workplace safety because of the declining relative importance of manufacturing and mining); government-subsidized student loans and grants have lured younger Americans away from work; extended unemployment benefits prolonged unemployment; and food stamps now go to nearly 30 million more Americans than 15 years ago. The government has provided much more income that is only available if people do not work. So fewer do. As Charles Murray has noted, this phenomenon has contributed to declining social cohesion and arguably even largely explains Donald Trump (Links to an external site.)’s electoral success.
Modern computer technology and increased econometric sophistication sometimes yield useful information about the way the world works economically. But those gains are at least partially offset by the sharp decline in historical consciousness—today’s scholars sometimes think they know it all, having an arrogance arising from historical ignorance, often wasting time and energy relearning lessons that those with a good sense of economic history already know. It is still satisfying, after half a century, to try to counter that ignorance, and to teach young people the logic of the price system, the importance of private property and other institutions for freedom and prosperity.
Mr. Vedder teaches economics at Ohio University and is an adjunct scholar at the American Enterprise Institute. This op-ed is adapted from an article (Links to an external site.) in the Winter 2016 issue of the Cato Journal.