William Allen, Professor Emeritus of Economics at the University of California, Los Angeles, died January 15 at 96. Get it noticed, but Allen's death was important. It represented a generational change in economics, one that bodes ill for economists and the public. Allen really believed in economics – something that is hard to say about most economists these days.
Allen was among the last of a generation of economists to master their craft. He wrote with his friend and colleague
an excellent economics textbook that conveys the power and potential of economic thinking: Despite the complexity of the market, economists can get to the heart of how they work by focusing on prices. This insight is so important that it gives economists' core toolkit a name: price theory. No one can be an economist who is unfamiliar with or uncomfortable using this tool.
Nevertheless, there are not many economists left by this standard. Professional economists are abandoning price theory in droves. The new status quo has increased the field. Economics is becoming less and less scientific and more exposed to political influence.
The absence of price theory in today's economic research would have affected the great economists of the past. Unlike the field's nayayers, the golden age of 20th century price theory was never about "neoliberalism" or "market fundamentalism." Instead, it was a simple yet brilliant framework for the markets that revealed the hidden ways in which market prices ̵
For many years, economics has become less theoretical and more empirical. Economists spend less time building and thinking through simple models, and more time collecting and analyzing data. The "identification revolution" in economics increased the yield, in the form of elite publications, to find good data from quasi-experimental settings and conduct advanced statistical analyzes. Better empirical work should certainly be applauded. But it cost: a whole group of economists with serious theoretical blind spots.
Data does not interpret itself. Unlike the rally of this new breed of economists, we can not "just let the data speak for itself." What and how to measure rely on theoretical assessments of how markets work. The way you understand concepts such as competition, barriers to entry and market power can change how you interpret identical data. Is an industry with a small number of high-income companies oligopolistic because of its concentration? Or is it competitive due to continued customer satisfaction? Price theory helps us understand these questions. Going to the data without strong theoretical justification is an invitation to confusion.
The heights of economics are increasingly inhabited by people who despise price theory. Dependence on the economic mindset to solve problems is seen as outdated and unscientific. The computer jockeys think they are groundbreaking, but they only repeat old mistakes. At the end of the 19th century and the beginning of the 20th century, economists from the German historical and old institutionalist schools believed that they could manage with history and statistics alone, unlimited by theory. In the end, they got so caught up in the details that they came up with very little that lasted.
A common anti-price theory trope is that its practitioners are political ideologues who disguise themselves as scientists. The opposite is closer to the truth. Old school economics recognized that trade-offs and limitations are everywhere. There are no free lunches. Armed with price theory, economists opposed the politically appealing but economically unhealthy proposals from both the right and the left. Today's economists, innocent in price theory, have no such armor.
The theoretical approach to contemporary economists makes them particularly vulnerable to the technocratic pretension of the center-left. If, contrary to the claims of price theory, there are no lasting economic laws, there is no reason to stop technocrats from tinkering. Many of these economists do not realize that they have been politically compromised. They see it as "just facts, madam" pragmatism. In reality, it is ideology that sneaks in behind the back door.
As an example, you can consider the corporate tax debate in 2017. It was a question of whether labor or capital would benefit from the cut. Price-theoretic economists like
predicted great benefits for workers. Empirical pragmatists like
thought this prediction was not only unscientific, but borders dishonest.
As it turns out, Team Price Theory was right: Workers saw large wage increases after corporation tax. Because capital adapts over time in response to tax increases, labor is left with the weight of the reduction in productivity. But the opposite is also true: Cut the tax on capital, and labor will be large. The long-term adjustment of capital is a classic price-theoretical result. Score one for the old school.
While the discrepancy between price theory and pragmatism is obvious in political debates, politics is not the biggest problem here. What the government should or should not do is a valuation. An economist could agree with Messrs. Mankiw, Mulligan and Landsburg on the growth effects of corporate tax cuts, but for example oppose them due to deficits. Nevertheless, it shows that the supposedly ideological and unpleasant economists came to the fore in this kerfuffle that price theory still means something according to scientific standards – comprehensibility and predictability.
In order to fix economics, economists must once again insist on the primacy of price theory. Economic thinking is not optional. Nor is it an obstacle to the social sciences. Price theory is in fact the only thing that enables social science. William Allen has left us, but what is dead can never die: We still have his articles and books, as well as those of his friends and colleagues. No matter what kind of fashion among economists, economics' lasting contribution to human knowledge is and will always be price theory.
Mr. Salter is an associate professor of economics at Rawls College of Business at Texas Tech University and a fellow at TTU's Free Market Institute.
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