What is economics?

The Debate >> What is economics?

At the heart of discussions about the economics curriculum lies a seemingly superfluous question: what should be the purpose of an academic economic education? In our view, its core purpose should be to help students understand how the economy works.

To many readers, that may sound like a silly tautology, but there is in fact quite some disagreement about whether this actually should be the goal of economic education. We believe this disagreement partly originates in the fact that university education entails academic economists teaching (future) professional economists, and that these two groups have very different skill requirements. Another part of the answer can be found in the peculiar historical trajectory the economics discipline has taken over the past century. These two issues center on the foundational question: “what is economics?”

The setup of an academic education in economics is closely related with the activities of academic economists, who design the curriculum and teach the courses. A key question is therefore: how do academic economists define what they are doing? What is ‘economics’? Two main views on this have emerged from the debate. The first view is that economics is about a certain method of inquiry, a way of doing research and a way of looking at the world -- ‘thinking like an economist’. The second view is that economics is about a field of study, which could be defined as ‘the economy’, or ‘the economic system’. In order to better understand the two views, the history of the debate between them will be discussed below.

Historical pluralism in economics

In the two centuries following its inception as an academic discipline with Adam Smith’s publication of the Wealth of Nations, the discipline of economics was generally defined by its object of study: the economic system. Economists like Smith, Ricardo, Marx, Sombart, Veblen, Keynes and Schumpeter had very different theoretical perspectives; what they shared was the aim to understand this system. However, most of these economists did not only study the economic system. They nearly all embedded it into wider social scientific work, understanding the economy as a sub-system of society, as shown in figure 1.

The view of an economic science limited only in its object of study, without restraints on the methods used, remained the predominant modus operandi of economists throughout the 19th century. Since the modern economy is too big, diverse and changing a creature to be caught in any single ontological system, the field was characterized by a rich diversity of methodological and theoretical approaches.

“When economics became professionalized towards the end of the nineteenth century, there was still great variety within the discipline. It encompassed historical economics (especially in Germany), a wide variety of interpretations of marginalism (from the mathematical approach of Walras and Fisher to the less mathematical and very different approaches of J. B. Clark and the Austrians), Veblen’s evolutionary economics, and Commons’s law-based institutional economics.” (Backhouse, 2002)

This spirit of pluralism, enabled by a broad agreement on the subject matter of the field, largely remained in place during the first half of the 20th century, until the Second World War.

“During the interwar period, pluralism characterized economics on many levels. Whereas institutionalism and neoclassicism coexisted, they were individually also highly pluralistic. Institutionalism was a nonexclusive, broad movement and neoclassical economics was highly diverse as well. In addition, individual members of these groups adopted a variety of theoretical stances.” (Sent, 2006)

To get a more concrete taste of how economics was practiced as well as taught in the middle of the 20th century, Bowen (1953) provides an extensive review of graduate economics programs in the United States commissioned by the American Economic Association. Backhouse and Fontaine (2010a, pp. 49-50) summarize its findings as follows:

“The result of extensive consultation, the Bowen Report argued for a ‘common core’ for graduate work. It should consist ‘primarily of economic theory including value, distribution, money, employment. … No one, it was argued, had claim to an economics PhD without ‘rigorous initiation’ into these areas as well as economic history, history of economic thought, statistics, and research methods. … Mathematics was placed alongside Russian, German, and Chinese, in the sense that it was considered important to have some economists to have knowledge of it, but it was not necessary for all to do so.”

In short, in the period up to the Second World War, there was a great diversity of theoretical approaches in economics, a large variety of empirical methods, and a strong emphasis on both economic history and history of economic thought (Morgan & Rutherford, 1998). This diversity of approaches was thought necessary in order to capture all important aspects of the economic system.

The growing dominance of neoclassical economics

In the midst of this theoretical and methodological diversity, a new theoretical view had come up and was gaining prominence: neoclassical economics. This theoretical approach originated in the 1870s with Léon Walras, Carl Menger and William Stanley Jevons (Blaug, 1997; Samuels, Biddle, & Davis, 2008). It was further popularized by Alfred Marshall, who was very careful not to stretch its assumptions, applying the theory while paying a lot of attention to context.

Lionel Robbins was the first one to define neoclassical economics as ‘the economic approach’ (Backhouse & Medema, 2009; Fine & Milonakis, 2009a). He wrote: “Economics is the science which studies human behaviour as a relationship between ends and scarce means, which have alternative uses.” (Robbins, 1932, p. 15). Since then, there has been plenty of discussion over what exactly this neoclassical economic approach entails, but the core has remained largely centered on Robbins’ definition.

In the period following World War II, a certain form of the neoclassical approach became dominant in the research of economic faculties throughout the Western world. This tendency towards intellectual monopolization was and remains a unique development within the social sciences, as other disciplines such as psychology and political science have always been characterized by a pluralism of approaches (Backhouse & Fontaine, 2010b). Blaug (2003) calls this era the Formalist Revolution, as it is characterized by axiomatization and mathematization of economic theories.

It was from the 1970s that a real narrowing set in, as “field after field came to be based on rigorous rational-choice foundations” (Backhouse, 2002, p. 314). As G. Becker (1976, p. 5) put it: “The combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach as I see it.” The curriculum, with some delay, followed suit.

This increasingly homogenized approach, however, was still used by economists to study only the economic system. In terms of figure 2, only the green circle under the blue triangle was studied by academic economists.

The part of the economic system studied by neoclassical economists, can however also be studied from different perspectives. Figure 3 shows that parts of the economy can also be explained by other perspectives such as the Austrian School, Radical and Original Institutional Economics.

In sum, the dominance of a single theoretical approach to economics creates blind spots and one-sidedness. First, it creates ontological blind spots, as no single approach can give a good explanation of every aspect of the economic system. For example, power relations, the origins of preferences and global value chains (GVCs) are hardly captured in neoclassical economics. A branch of (non-neoclassical) literature has emerged around the role GVCs play as force behind globalisation (see e.g. Baldwin, 2016). The organisation of value chains and impact of these chains on different groups across societies can best be understood on the meso-economic level. As the consequence of regional integration of GVCs, international trade does not just affect which country gets what; it rather shapes which groups (meso-level) in society get what within and across countries. As the neoclassical approach is built around a thought-structure in which the behaviour of individual agents aggregates up to the macro-level of a society as a whole (Weintraub, 2007) and considers the existence of societal groups and civil society to be exogenous to economic processes, these meso-level dynamics can better be understood by approaches that actually integrate groups (as an ontological category) into the core of analysis, such as Original Institutional Economics and Radical Economics.

Second, in those parts of the economic system that it does explain, it creates epistemological one-sidedness, since a single approach gives only one of the possible explanations of certain parts of the economic system or economic phenomena it studies. For example, the neoclassical approach generally leads one to see the privatization of property as the most efficient solution to the allocation of resources. Other approaches such as the Austrian School (Boettke, 1998; Von Mises, 1949) and Original Institutional Economics  (Berle & Gardiner, 1932; Hodgson, 2015) however see institutions (tradition and law in particular), as important factors in explaining the existence and workings of private property, thus shedding a new light on the phenomenon.

On a technical note, to keep the subsequent figures clear and minimalistic, only the neoclassical approach on the economy will be shown; other approaches are left out of those figures.

But how does all this apply to the Netherlands? Historically, there used to be a quite distinct ‘Dutch’ approach to economics (Wilts, 1998).

“In the Netherlands, economics used to be a subject for lawyers and ‘men of practical affairs’. What mattered for these groups was a general understanding of both human economic behaviour and economic processes and a capability to read statistics. (…) In the period directly preceding and following World War II, economics in the Netherlands was rapidly remodelled according to an ideal of ‘scientific knowledge’, which resembles the ideal in the natural sciences.” (Plasmeijer & Schoorl, 2000)

That meant that also throughout Dutch economics faculties, neoclassical economics became more and more central after WW2. Due to the increasing orientation to the Anglo-Saxon way of practicing economics, this has put an increasing strain on the typical ‘Dutch’ type of academic economics: practical, policy-oriented and knowledgeable about the Dutch economy (Van Dalen & Klamer, 1996). This socially relevant manner of practicing economics has been increasingly marginalized (Van Dalen et al., 2015).

Recent trends in economics

Recently, two major trends are visible in the work of economists: a widening of the range of topics studied, and an expansion in terms of approaches used. The following section will briefly discuss these trends, before drawing conclusions regarding their societal impact.

A widening range of topics

In a response to Robbins’s definition of the economic approach, the term economic imperialism was coined in 1933 (Fine & Milonakis, 2009a, p. 5).  However, up to the 1980s most economists remained sceptical towards the idea, as they thought its theoretical concepts were only of use in market contexts, where a certain form of rationality was dominant. This changed in the last decades of 20th century, when the neoclassical approach gained almost complete dominance over economic faculties and the economic discipline acquired a high status compared to other social sciences (Backhouse & Fontaine, 2010b; Fourcade, Ollion, & Algan, 2015).

As result, economists started expanding their scope of inquiry, applying their approach increasingly to other topics than the economic system. The most famous proponent of this project was G. Becker (1976), with his landmark publication The economic approach to human behavior. Other social scientists still view this approach as out of place and sometimes even bizarre, with perhaps the exception of rational choice theorists.

A well-known contemporary of Becker, Jack Hirschleifer, also strongly favoured such ‘economic imperialism’, as he called it. He wrote that “economics really does constitute the universal grammar of social science”.  So what exactly does ‘economics’ mean in such a context? The definitions often differ slightly, but are never far removed from Becker’s: “[the economic approach] is a method of analysis. (...) The analysis assumes that individuals maximize welfare as they conceive it. (...) Their behavior is forward-looking, and it is also assumed to be consistent over time.” (1975)

How does such ‘economic imperialism’ work in practice? As Posner (1987) explains:

“There is an open-ended set of concepts (such concepts as perfect competition, utility maximization, equilibrium, marginal cost, consumers’ surplus, elasticity of demand, and opportunity cost), most of which are derived from a common set of assumptions about individual behavior and can be used to make predictions about social behavior; and that when used in sufficient density these concepts make a work of scholarship ‘economic’ regardless of its subject matter or its author’s degree. When economics is ‘defined’ in this way, there is nothing that makes the study of marriage and diverce less suitable a priori for economics than the study of the automobile industry or the inflation rate”.
(quoted out of Fine & Milonakis, 2009a, p. 6)

This revolution is rarely discussed very publicly, although it is signalled by projects like Freakonomics (Levitt & Dubner, 2010). Its authors define economics as ‘the study of incentives’, which is slightly different from Robbins’ and Becker’s definitions, but retains their basic assumptions as well as the idea of ‘economics as an approach’. In the book, they bring together fascinating research by economists on a variety of topics, ranging from parenting strategies to the Ku Klux Klan to schoolteachers’ propensity to cheat on standardized tests. Increasingly, economists are now using their method of inquiry to study things other than the economic system, such as marriages (Grossbard-Shechtman, 1993), suicide (Kimenyi & Shughart, 1986), the game of tennis (Klaassen & Magnus, 2014), discrimination (G. S. Becker, 2010) and even the cultural socialization of young children (Angrist, Lavy, & Schlosser, 2010).

Since the 1980s new theories originated, which explained political and social structures on the basis of neoclassical economics in combination with new concepts such as imperfect information and transaction costs. Examples of these new theories are new institutional economics, imperfect information economics and public choice economics.

‘Economics as an approach’ also appears to be the currently dominant view in the Netherlands, in research as well as in teaching. Arnold Heertje called economics “the science of the wisdom of the eternal shortage” (2006, p. 35). Gautier (2016) defines contemporary economics as “a bundle of methods, mainly useful to study human behavior in situations of scarcity”. In the same piece, he suggests that students who wish to study the economic system go to other faculties to do so. At the secondary school level, the current economics curriculum is based on a similar view (Commissie-Teulings, 2002, 2005). The view on what an economics education is about is also reflected in what economics programs themselves argue the curriculum is about. For instance, the front page of the economics program of the University of Amsterdam reads:

“Economists are specialised in analyzing trade-offs. At the heart of this field is the notion of scarcity of means (commodities, time) in relation to unlimited needs. This forces subjects to make choices as to how to use their means”  

An expansion in terms of approach

Even more recent than the expansion in terms of topics is the second trend: an expansion in terms of approach. Back in the 1950s and 1960s, game theory was posed as a solution to the problems with neoclassical general equilibrium theory, as it focuses upon disequilibrium analyses. It was thus not an approach challenging neoclassical economics, but more an additional tool that was incorporated into neoclassical thought as much as possible. However, this expansion of approach did not change the axiomatic foundations of the mainstream economic theory.

Recently, the initial assumptions of this “economics as an approach” are being loosened, notably those of rationality, equilibrium and non-complexity (Colander, Holt, & Rosser, 2004a; Davis, 2007). This is visualized in figure 4, below. As Van Damme (2016) puts it, the limiting assumption of a homo rationalist “…prevents economists from using the full strength of the economic method”. As the empirical section will show, a limited amount of this expansion of approach has made it into mainstream textbooks.

Future directions

Since the ´economics as an approach’ has come to dominate (Dutch) economics faculties, scholars studying ‘the economy’ have become more and more dispersed. There are many who use approaches that fall outside the neoclassical mainstream to study the economy. However, these academics have increasingly had to base themselves in other social science departments, such as human geography, anthropology, sociology and political science, or business departments. At the same time, more and more academics in economics departments study other phenomena than the economic system.

If this trend continues at the present pace, it might become necessary to redefine economics departments as ‘scarcity-focused quantitative social science departments’ or something similar. Given the fundamental character of this trend, it is surprising how little public scrutiny these multiple revolutions in the definition of ‘economics’ have received. We were therefore very glad that the KVS (the Dutch Association of Economists) decided to dedicate its yearbook of 2016 to these discussions. That has been a great help in clarifying recent developments and debates. As for the degree to which this recent broadening of ‘the economic approach’ is reflected in the teaching of economics, that is the subject of this research and will be treated later in more detail.

Current debate

To sum up, today these two camps can be clearly distinguished: economics as a topic and economics as an approach. Both choices of course carry complications: it is hotly debated what exactly ‘the economic approach’ looks like, and it is equally unclear where the boundaries should be drawn around the object of study we call the economy, or the economic system. To clarify this, their current positions will briefly be reviewed.

The first camp consists of those who define economics as an object of study, the economy, which should be studied by a variety of methods ranging from ethnographic work to mathematical complexity theory, and by a variety of theories ranging from Marxism to the Austrian School. This camp often defines its object of study using some version of Karl Polanyi’s substantivism. Polanyi (1957) writes: “The substantive concept is based on the empirical economy, defined as an instituted process of interaction between man and his environment, with results in a continuous supply of want-satisfying material means.” Other definitions are also in use, but most of them focus on the structure of the material (re)production of society.

The second camp contains those who define economics as a specific scientific method of inquiry, the economic approach, which can be applied to any topic within the social sciences. As explained above, this camp does not agree 100% on its definition, but common elements are rationality, equilibrium, methodological individualism, formalistic methodology and a focus on market and price mechanisms.

To be clear, these two conceptions of economics do not argue totally different things. They rather put the main focus on different things, as their primary goals differ. For the first camp the primary goal is understanding the economy and in order to achieve this, they use any scientific means necessary, neoclassical economics included. For the second camp, thinking like an economist is the principle goal and being able to explain parts of the economy is an (intended) consequence of this.

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