History of Economic Thought as an Analytic Tool: why Past Intellectual Ideas Must Be Acknowledged as Lighthouses for the Future
In this review, which is more extended than usual, we are going to discuss the paper “History of Economic Thought as an Analytic Tool: why Past Intellectual Ideas Must Be Acknowledged as Lighthouses for the Future” by Dr.D.Bögenhold (2020). It is a quite dense review of a crucial matter, so feel free to highlight points and segments where you might need clarification!
Economics within Social Sciences: Specialization and Differentiation
Bogenhold tries to show how economic thought is never stable and in line with the Heraclitus notion that “everything flows”. This affirmation, which is also valid for social sciences, can be clearly showed with Keynes observation that:
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.
To understand this we need to employ a process that can be facilitated by the history of economic thought (HET) which is an important, although neglected, domain of economic inquiry.
Studying of the HET appears to be nearly forgotten and the domain is held in low esteem by “mainstream economists’’ that sometimes openly disregard it as a type of antiquarianism. The latest methods in econometrics and mathematical procedures are being put into the course materials in highgher education, while courses in the history of economics are taught less and less, and in many institutions, they are no longer part of the curriculum.
The economic crisis and downturn in 2008, teaches us that our academic understanding of economic processes may be incomplete, that our analysis of economic relationships must be more comprehensive, integrating further perspectives of thought, and that contemporaries cannot afford to have a good command of economics without a working knowledge of the changes in and the tradition of their own subject.
This paper is about the question of why it is not only useful but also necessary to invest into the history of economic thought — not for romantic worship but for practical reasons. Modern economics usually operates with simplifications, depicting a general theory and aspiration to depict economics as a body of “cohesive ideas set within a structure that seems internally consistent”.
As J. Viner put it in 1917:
There is a tendency among economists to fear over much for the integrity of their science and to try to maintain its borders intact by carefully avoiding encroachment on the fields of other science
By engaging in such a tendency, we end up not acknowledging contradictions, empirical failures, a plurality of competing paradigms and, especially, ignore change. Over time, topics have multiplied in many directions and whole new areas of discourse have emerged that lead to the shift of disciplinary boundaries inside and outside economics. During the second part of the twentieth century, an organizational segmentation began, which provided proof of Max Weber’s statement given in his famous article “Science as Vocation”. The notion that the individual can achieve something really substantial on academic grounds only in a situation of increased specialization.
In accordance to this idea of specialization, we have seen the rise of domains such as economics, labor economics, small business economics, household economics, the economics of aging, but most notably game theory and diverse applications in combination with econometrics. The use of advanced statistics and econometrics have expanded substantially, which can be summarized broadly as diverse sorts of “mathiness”. Taken together, one may conclude that we have entered “The Age of the Applied Economist”. According to the author, this has led to the loss of elegant theoretical reasoning and historical foundation.
In order to combat this, the author revisits the work of Joseph A. Schumpeter, who dealt in detail with the questions of how to deal with historiography as a tool for appropriate economics in his substantial introduction to the History of Economic Analysis (1954). Schumpeter already pointed out very clearly that the history of economic thought must be acknowledged because it provides a manual to gain systematic knowledge in order to be better equipped for research on future developments.
Loss of History of Economic Thought
The loss of HET, coincides with:
- the increased specialization, abstractness and mathiness, which led to an empiricism that differentiated economics from other social sciences
- ongoing tendencies toward processes of an increased pluralization of economics, which tried to address the criticism that economics has forgotten its social foundations.
Those factors have resulted in the economic complexity paradox:
The more complex economics has become, the smaller the real terrain of neoclassical theory remains; although the general image of economics, especially when looking from the outside, still shows a dominance of neoclassical orthodoxy.
While economics changes, it also means that the types of economists are changing. A former link, which was maintained by economics and further social science domains, especially philosophy, was exchanged for the link of econometrics and mathematics. Mainstream economics became increasingly associated with abstractness and formalism, which went along with an ongoing trend that the history of economic theory was disregarded.
Today, economists are no longer systematically educated in economic history, the philosophy of science, or the history of their own discipline. The general theory of economics, is mainly constructed:
in a single semester in which the student dashes through Physiocracy to Smith and Ricardo, stops for a moment to regard from afar the mysterious figure of Karl Marx, learns about the Marginalist Revolution, and is finally delivered safely to the arms of Modern Economics when he reaches the 1930s and the General Theory is born.
Additionally, the number of publications in the history of economics has declined compared to the total of publications in economics while a large body of those publications are concentrated in just five highly specialized journals.
Finally, recruitment and professional advancement are almost on the basis of technical competence, rather than on knowledge of the real economy or of the evolution of economics as a discipline. Recent graduates and economists are often lacking the generalist background that enables communication and synthetic advance.
History of Economic Thought and Historiography
The term “historiography,” literally “the writing of history,” carries two distinct meanings:
- it refers to historical accounts of the past, in contrast to the past itself
- the term is used in a meta-theoretical sense as the reflection on how historians account for the past.
In this sense, historiography is to the practice of the history of economics what the methodology of economics is to the practice of economics: a meta-discourse.
Rather than seeking the link between ideas and historical events, historical reconstructions seek to reconstruct the sense (meaning) that someone gave a particular text at some historical point. The most obvious form of historical reconstruction is the effort to understand the original author’s meaning.
In order to become successful at historical reconstructions, we have to avoid the generational bias:
Each generation writes its own history, new knowledge is always created and each generation is “keen not only on being original but on being perceived as such. But each generation also searches for meaningful progenitors so it can share in their renown and brilliance (Kurz,2016).
Based on the above-mentioned element, we may distinguish the history of economic thought, as a kind of intellectual history, while other concepts focus more on the history of economic theory or economic history. Mainly:
- HET aims to understand the ideas of past thinkers and how and why those ideas have developed and changed through time.
- Historians of economic theory are much more concerned with very concrete authors, meaning, and theories.
Both versions are at the intersection with philosophy and methodology of economics.
- Economic history deals with different empirical facts in a series of social arrangements and physical processes by which human societies have produced the material conditions of human life since the emergence of the human species, mostly devoted to the development of modern economic growth.
Methodenstreit
The author revisits the Battle of methods (Methodenstreit), which can be seen as a confrontation between inductive (developing a theory) and deductive (testing a theory) ways to generate scientific statements. This is closely related to the question of the relationship between theory and empiricism in social studies and economics, and poses dilemmas such as:
- empiricism versus theory,
- presentation of data versus generalization,
- and historical reconstruction versus formal theorizing.
The author focuses on the battle of methods between the Austrian Economic School and the German Historical School (GHS). He differentiates the following representatives of GHS:
The old GHS, wrote about the evolutionary character of economic civilization where historical progress was thought of as a ladder starting from the barter economy evolving through monetary economy up to the banking industry. Wealth was not considered an end-in-itself of economy and society but one of the major questions closely related to issues of life standards and their measurement.
The new GHS, undertook profound studies in many economic sectors and set up research programs that studied economic sectors, geographic regions, or individual branches or occupations in detail in a historical view in order to investigate their related dynamics. They endeavored to find a political-academic perspective and alternative for the social question of working classes, poverty, housing, and living conditions in general. This notion was derogatorily understood as “Katheder-Sozialismus” (socialism provided by professors).
The newer German Historical School is of central concern for the current
discussion on interdisciplinarity, since convergences between economics, historical scholarship, religious studies, and sociology were practiced at that time (1880–1930) as a matter of course. Economies were not taken in abstracto but always in concreto, which is not too far from the credo of new institutional thought.
Representing the Austrian School, Carl Menger (author of The Errors of Historicism in German Economics) and a pioneer of marginal utility theory (which later served to be the consolidation of neoclassic theory in economics) argued against the methodological principles of the German Historical School.
Menger’s message was that the GHS was far from being a theoretical science:
The historical-analytic and in some ways reconstructive-narrative method of the historical school would not be sufficient to meet the requirements of theoretical science. The methodological implications of the controversy are concerned with questions about the status of theory and principal different methods to practical science.
At the end, one can conclude that the controversy was about inductive versus deductive. Let us explain:
Induction “is the process of reasoning from a part to the whole, from particulars to generals or from the individual to the universal.” Bacon described it as “an ascending process” in which facts are collected, arranged and then general conclusions are drawn.
The inductive method was employed in economics by the German Historical School which sought to develop economics from historical research. The historical or inductive method expects the economist to be primarily an economic historian who should first collect material, draw generalisations, and verify the conclusions by applying them to subsequent events. For this, it uses statistical methods.
On the other hand, the deductive method derives new conclusions from fundamental assumptions or from truth established by other methods. It involves the process of reasoning from certain laws or principles, which are assumed to be true, to the analysis of facts.
Deduction involves four steps:
- Selecting the problem.
- The formulation of assumptions on the basis of which the problem is to be explored.
- The formulation of a hypothesis through the process of logical reasoning whereby inferences are drawn.
- Verifying the hypothesis.
Contemporary discussion is far removed from those debates, which ran a hundred years ago under the slogan of historical schools. Recent economics has become “cleaner” and more theory-driven, but even mainstream authors now write about parallels between old and new institutional economics. Recent scholars, and especially students, should be trained to have some idea of the underlying trends and tendencies of the own academic field.
History of economic thought belongs to those tools, which are important to keep the engine of changes visible and to learn to understand directions of
change.
Why Study History of Economic Thought?
The best mathematical and econometric modeling techniques did not manage to forecast the ’08 global crisis. This begs the question if economics is a science and more than an ex-post reporting branch one must expect that economics is better equipped and also more self-reflexive?
Schumpeter argued not only in favor of economic history as an answer to failures (such as repeating same old mistakes or neglecting social dynamics) but also as rendering a service to economic theory, in favor of “a sort of generalized or typified or stylized economic history” that offers pedagogical advantages, new ideas and new insights into the workings of the human mind.
He argued that it is very difficult to approach a field without knowing how it relates to a specific historical time. As such, present methods and results are meaningful only with reference to their historical background.
“Scientific analysis is not simply a logically consistent process that starts with some primitive notions and then adds to the stock in a straight-line fashion. It is not simply progressive discovery of an objective reality”
Additionally, by revisiting old theories someone might find new ideas. Schumpeter wrote that
“our minds are apt to derive new inspirations from the study of the history of science”
A third reasoning is that history can give us insights into the manner in which the human mind works:
“Scientific habits or rules of procedure are not merely to be judged by logical standards that exist independently of them; they contribute something to, and react back upon, the logical standards themselves”
Finally, each field has its own historical process that should be studied uniquely according to Schumpeter:
“Much more than in, say, physics, is it true in economics that modern problems, methods, and results cannot be fully understood without some knowledge of how economists have come to reason as they do. In addition, much more than in physics have results been lost on the way or remained in abeyance for centuries”
The author concludes that if modern crises have any benefits, one may be to trigger a careful revision of the systematics of sciences, tools and common bodies of knowledge
History of economic thought despite being a neglected academic topic, is necessary for contextualizing knowledge, which provides a more sufficient working compass for further study (Kates 2013).
If we are really serious that economics is a part of social sciences (Marchionatti and Cedrini 2017) we have to look for links to neighboring fields of economics in the social sciences. Anthropology, sociology, (social-)psychology, and, of course, history are to those neighbors (Bögenhold 2018), which always provide fruitful ideas and links to prevent economics from becoming sterile and too insulated.
