This is a revised version of the keynote address to the joint conference of the New Zealand Association of Economists and Law and Economics Association of New Zealand held in Auckland on 30 June 2010.
The neoclassical ‘economist king’ has tumbled from his pedestal. Enrolments in mainstream economics courses have declined the world over. Faculties of law, commerce, sociology, psychology, anthropology, history and engineering have removed conventional introductions to economics from their curricula. Moreover, the great policy reforms since the 1980s owed little to the neoclassical mainstream, which has been found wanting. The poverty of neoclassical economics becomes evident when one realises that key concepts – such as competition, enterprise, profit, the costs of transacting business, the need for law and other rules of coordination (institutions) – have simply been ‘assumed away for simplicity’s sake’. It is also imbued with a wrong-headed pessimism, derived from nineteenth-century agricultural reality (law of diminishing returns).
Nonetheless, many economics faculties and major journals still cling to the neoclassical paradigm, because it makes teaching and research easy, facilitates publication and builds on established professional networks. Neoclassical assumptions allow economists to build elegant models, to adopt a utopian posture, allege frequent market failures and urge policy makers to engineer specific outcomes (constructivism), thus helping to increase the sway of the visible hand.
Despite recent lapses into Keynesian (neoclassical) economics and re-regulation, an intellectual sea change is manifest. Jurists, business analysts, engineers and historians, as well as top-level policy advisors, now increasingly embrace the Austrian (evolutionary or institutional) approach to economics. And the wider public has long jettisoned the assumption of a benevolent, all-knowing state. Instead, electorates embrace a deepening ‘public-choice scepticism’.
To understand these changes, we are well advised to revisit the Methodenstreit (dispute over the correct method to analyse economic phenomena), which excited Continental European economists one hundred years ago and has been maintained on and off ever since. At its core lie fundamental disagreements over the very subject matter of human action, and specifically the admissibility of assumptions of ‘perfect knowledge’ and ‘ceteris paribus’. Methodenstreit also deals with aspirations to make economics ‘scientific’, similar to the traditional laboratory sciences (scientism), and with assertions that it can be conducted satisfactorily without reference to fundamental social values (normative economics).
If economics is again to become more realistic and relevant, economists must acknowledge the absurdity of basic assumptions that underpin the neoclassical paradigm. Economics – a child of moral philosophy – must again, in essence, be about the search for and use of knowledge for socially valued purposes. A focus on creativity, progress and enterprise also recommends itself, because that will turn the dismal science of rationing scarcity into a more cheerful and encouraging discipline.
