No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Seventeen: A Short History of Macroeconomics 422 INTRODUCTION As with any scientific discipline, the field of economic inquiry often has competing claims with orthodoxy. One idea becomes orthodoxy through consensus, where it remains until challenged by another. Then it either survives the challenge by repudiating the contending ideas, or it is supplanted. A prime example is the classical economists’ failure to satisfactorily answer the question of value. When the triumvirate of W.S. Jevons, Carl Menger, and Leon Walras introduced the concept of subjectively assessed marginal utility to explain the nature of demand in the early 1870s, economics decidedly changed into what we now call neoclassical economics. So steadily and inexorably, knowledge advances—or so it would seem. The social science of economics is different from the natural sciences in that it is more difficult to isolate the question under study. Further, the unit under study—the human—is capable of learning and changing behavior, such that any conclusion drawn from one period of time may not be applicable in the future. This latter difficulty formed the basis of Nobel Laureate Robert Lucas’s path-breaking critique of econometric (statistical) modeling of human behavior. These difficulties notwithstanding, economists nevertheless must continually challenge received doctrine to more fully understand the science. As the proverb above states, the first to speak can usually provide a pretty compelling case, as people generally make arguments that are consistent within their own logic and assumptions. Yet when another presses from a different view, the limitations of the first come to light. This problem is magnified when one perspective not only pleads their case effectively, but also distorts (deliberately or not) the position of the other side. Unfortunately, both sides of some of our most important debates have failed to fully and accurately consider the position of the other side. To introduce you to the science of macroeconomics, it is necessary to take an abbreviated walk through economic history to learn how problems have been grappled with in the past. We will see that many of our current economic controversies are in respects very old, and in some ways, we are still talking past one another. Economics properly is the study of individual choice—how individuals behave in a world of scarcity. Chapter 1’s great economist Ludwig Von Mises thus thought of economics as the study of human action. Studying human action leads us to understand how individuals behave, which also leads to the prediction of general social outcomes. As we’ve learned earlier in this text, individuals acting in accord with their own self-interest are led to cooperate socially such that mutually beneficial trade leads to a higher level of social welfare. We find it in our interest to specialize, and overall social productivity rises since each of us generally can produce more than we consume, enabling us to trade the rest of our production. This social phenomenon leads to the emergence of markets, with associated prices of goods and services. Yet the social result is never severed from its foundation in individual behavior, and we properly label this as microeconomics . Yet early economics, at the time called Political Economy, was also interested in public policies that had economy-wide implications. Adam Smith combatted the false ideas of mercantilism and its associated support of monopoly privilege and managed foreign