What’s the Economist’s Point of View? Adam Martin

By Adam Martin

https://www.econlib.org/library/Columns/y2020/Martinpointofview.html

A Liberty Classic Book Review of The Economic Point of View: An Essay on the History of Economic Thought, by Israel Kirzner.

Excerpts:

The narrative arc of Kirzner’s biography of economic science is the gradual shift from the study of wealth to the logic of human action. Understanding economics as the science of wealth is of course a venerable position. Before anyone held a chair in political economy, mercantilists, physiocrats, and others had investigated the source and nature of riches. But it was Adam Smith’s work that spun off a new discipline (Chapter 2).

What counts as wealth? The range of answers to this question has provoked centuries of fierce debate among economists. If everything useful counts as wealth, then economics cannot be distinguished from the study of law, culture, or any other field, for the distribution of material goods is affected by all these factors. This was precisely August Comte’s argument for why economics was not a distinct discipline and should just be a part of sociology (Kirzner 41). Try telling the typical economist that he or she should be part of the sociology department.

If wealth is what is useful, maybe what economics really studies is utility or some other conception of welfare. This is the more typical modern spin on studying wealth, and it is still popular in development economics and public policy economics. But it has the same amorphous boundaries as the study of wealth. …

Wealth and welfare also both raise normative questions. … If economics studies welfare, it makes value judgments no matter how one answers this question. For economists who see their enterprise as primarily studying rather than trying to improve the world, admitting that economics has a moral dimension is a tough pill to swallow.

Critics of economics such as Thomas Carlyle clearly recognized and seized upon these unavoidable normative judgments, disparaging economics as a “pig-science” that celebrates the lower side of human nature (Kirzner 52). Such damning criticisms as these did not cease as a new definition of economics gradually emerged: the science of avarice (Chapter 3). John Stuart Mill most famously defended this view. Economics studies social phenomena as if they arise from the choices of a human stripped of every motive except self-interest (alongside “aversion to labor” and time preference). This definition remained influential for decades. Jacob Viner describes the economic impulse as trying to “get the most for the least” (Kirzner 55). The science of avarice marks a clear step in the direction of Type B definitions of economics. Economics studies society in general from the point of view of wealth-seeking in particular.

In addition to providing fuel for criticisms of economics, this definition invited important challenges from within economics. One was to question whether economic motives exist at all. 

Can economics divorce itself from the thorny problem of assuming or explaining certain motives for behavior? At this point, Kirzner sacrifices chronology in order to position three other traditions in economics as dialectic responses to the science of avarice. Chapter 4 deals with economics as (a) the study of exchange and (b) the study of the system of exchanges. Chapter 5 treats economics as the science of money.

Instead of fretting over motives, “catallactics” (a name given by Bishop Whately) focuses on the act of exchange itself. … But exchange relationships are not isolated atoms any more than individuals are. …

An alternative to pure catallactics, then, is for economics to take as its object the economic system as a whole. Kirzner cites Frédéric Bastiat’s view that economics studies “harmonies” and F. A. Hayek’s early thoughts on what he would later call “spontaneous order” as exemplars of this sort of view (Kirzner 89-90). The economy is a system with distinct (emergent) properties that can be analyzed … (but) Kirzner worries that this definition robs economics of its distinct standing and makes it a branch of sociology.

Another attempt to escape from the motives of economic behavior is to focus on money, an approach popularized by Alfred Marshall. Money prices have two key characteristics. Prices respond to all sorts of motives, from avarice to altruism to a sense of duty. And prices are measurable. An economics focused on prices allows for a science that predicts movements in measurable quantities. But while these are both properties of money, they are not unique to money. The quantity of apples bartered for oranges is no less measurable than the quantity of dollars that would buy those same oranges. And barter prices also respond to all sorts of motives. This is not to say money does not deserve special attention, but only that it cannot draw a useful boundary around economics. Economics as the science of money introduces a veneer of scientific credibility by focusing on measurable quantities. But this approach arbitrarily limits economies to the study of particular institutional environments (those that use money) or is indistinguishable from catallactics.”

GM comment: though economics as a science of money makes a lot of sense the analytical reduction of money to prices would seem to justify Kirzner’s critical conlcusion, albeit based on a limited reading of Marshal. A science of money ghas the production prices only as one aspect. Arguably more important is the production, accumulation and distribution of money. But this requires emancipation from the “neutral” money dogma and the myth of barter as the midwife of money.

So what is economics, really? Enter Lionel RobbinsThe Nature and Significance of Economic Science is by far the most influential text answering this question, right down to today. Because of scarcity, we must allocate our limited means among competing ends. Economics studies all aspects of human life from this point of view. It is a science of means, not ends. …

Kirzner treats Robbins’s contribution as a watershed moment that his narrative has been building to. But he doesn’t stop there. The final chapter explores praxeology, the approach of his mentor (and dissertation chair) Ludwig von Mises. Praxeology means, literally, the logic of action. It is the master science of action of which economics is just one example. Building on sociologist Max Weber’s work, Mises places purpose and reason at the center of economic analysis. Individuals pursue goals and use reason to select courses of action that they expect (perhaps mistakenly) to help them realize those goals. Action is constrained by the logic of means and ends. Whatever ends individuals pursue, they desire to be more effective rather than less effective in pursuing them. The internal logic of action shapes our behavior and can serve as a hook for understanding real world phenomena. …

Which brings us back to Chapter 4. For each definition of economics except praxeology, Kirzner highlights certain tensions and shortcomings. But he never gets around to it when discussing economics as catallactics, the science of exchange. (He critiques Joseph Schumpeter’s reductive version of the view, but not the view in general.) Perhaps he would treat catallactics as nothing more than an application of praxeology. But this approach would ignore the possibility that there might be something distinct about exchange. Exchange is not reducible to action. Since it takes two (or more), it involves problems of communication and coordination that a lone Robinson Crusoe does not confront. Perhaps it is more helpful to see praxeology and catallactics as complements, rather than substitutes. They are two different but necessary pieces of a still distinct machinery of economic science.

There are many ways to survey the history of economics. The Economic Point of View … offers its own useful vantage point: how did economists understand their own scholarly enterprise? Kirzner acknowledges that books like his may be “doomed to be wordy disquisitions fertile in nothing but the stimulation of sterile controversies” (p. 6). He largely evades this pitfall, providing a helpful (though definitely wordy) perspective on economists’ constantly evolving self-identity.