TCS Daily

How Economists Lost Hayek, and Then Found Him

By Josh Hendrickson - May 23, 2007 12:00 AM

"It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences - an attempt which in our field may lead to outright error. It is an approach which has come to be described as the 'scientistic' attitude - an attitude which, as I defined it some thirty years ago, 'is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed.'"

-- Friedrich von Hayek, Nobel Lecture 1974

In the 33 years since Hayek gave his Nobel lecture, economists have taken the opposite path. Economists have become increasingly reliant on empirical models. In other words, they have become more mathematician than philosopher. This would normally be cause for concern amongst Hayekian economists, however, over the last few years, a new medium has allowed economists to have the best of both worlds.

As a whole, empirical work in economics has not been a failure (far from it). However, at times, these tools have been used poorly. For example, one can easily find published empirical work by economists that ignore the wage in labor supply equations and price in demand equations. In addition, models with a great deal of explanatory power (statistically speaking) are heralded. Yet the most frequent way to measure such power (what economists call an R-squared) is only useful when looking at linear data. Unfortunately, this phenomenon has only caused those with little explanatory power to blame the data, thus rendering the statistic virtually useless.

Critics of these mathematical methods are often criticized as not being mathematically inclined or convinced that the alternative to such methods would be to "do nothing" (which, in some cases, may not be a bad idea). In reality, however, most of these complaints come from Hayekian economists who yearn for the days when economists were more philosophical. Perhaps over time, this shift in thinking has come as a result of recent technology that now allows econometric models to be estimated in mere seconds. Some have argued that this has made economists sloppy because the opportunity cost of estimating a flawed model has declined (I am not, by the way, immune to such sloppiness).

While technology is the romantic explanation, it is not completely to blame for this shift. Quite appropriately, it seems economists are simply responding to incentives. Many young faculty members are under pressure to accumulate publications in order to earn tenure. This incentive to produce as much research as possible will inevitably have effects on quality. The quality of the work of tenured economists has caused "freakonomist" Steven Levitt to endorse the idea of eliminating tenure. Levitt argues that removing tenure is unlikely to remove entirely the incentive for young faculty to produce research. In addition, it is easy to conceive the possibility that the number of publications may decline, so the average quality of each publication would likely rise.

While Levitt's arguments certainly have merit, his thesis is not what struck me as important. Levitt's musings were not published in a leading economic journal, but rather on his blog. Further, the comments were not accompanied by an econometric model that attempted to explain quality. In fact, especially poignant was that his writing was purely philosophical and based on simple economic principles.

Ironically, while some have blamed technology for the shift away from Hayekian economics, in reality, technology has created a medium for philosophy to return to the discipline. Each day, economists such as Greg Mankiw, Brad DeLong, Tyler Cowen, Mark Thoma, Arnold Kling, and many others offer their opinions on current economic issues. These thoughts are, for the most part, free from "scientistic" thinking so derided by Hayek. Not only have blogs bolstered a new generation of philosopher-economists that includes those who have been successful in the empirical arena, but it seems to have attracted those who favor this type of thinking. Economists Russ Roberts and Don Boudreaux have a blog named after Hayek himself. Blogger Perry Eidelbus prominently features 19th-century French philosopher-economist Frederic Bastiat at the top of his homepage. Additionally, economist Don Luskin highlights quotes from Ayn Rand.

Some economists may continue to deride the empiricism that is prevalent in the economic journals. In reality, however, technology has facilitated a new medium for economists to express their views in a more philosophical manner. What was once lost from the mainstream has now been found again. I would like to believe that somewhere Hayek is reading a blog and smiling.

Josh Hendrickson teaches economics at Wayne State University. He also maintains the blog entitled, "The Everyday Economist".


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