The New Yorker
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The “drastic action” of abolishing the Nobel Prize in economics, which John Cassidy proposes as one way of encouraging Ph.D. economists to become more worldly and useful, less mathematical and useless, is an excellent one. ("The Decline of Economics,” Dec. 2.) In the last 30 years, as economists pile their prizes high, American living standards have steadily declined and the poorest countries of the world have gotten poorer still. If there had been as little progress in the medical profession, we would be dying like flies. As Cassidy crisply puts it: “The two most significant developments in the American economy over the past twenty years are the slowdown in productivity growth and the increase in wage inequality, and honest economists admit that they don’t have an adequate explanation for either.”
Unfortunately, Cassidy limits his survey of this dismal scene to the usual academic suspects. These are the practitioners of the economics which first went off the rails in the early 1950s, after the Keynesians at the London School of Economics decided to transform what had been a behavioral science into a mathematical science. Lord Keynes, who died in 1946, would not have approved. Discarded in the process was the idea central to classical political economy that risk-taking is the source of economic growth. That is, in order to reduce human behavior to algebraic equations and the calculus, an assumption had to be made that we are all the equivalent of identical hydrogen atoms.
The Canadian economist, Robert Mundell, now at Columbia University, began the revival of classical theory in the early 1970s, which we now broadly refer to as “supply-side economics.” On one point, Cassidy is incorrect. It was this model, not the “rational expectations” concept identified with Robert Lucas, that underpinned the policies of Ronald Reagan and Margaret Thatcher. It was the model Reagan was taught as an undergraduate at Eureka College, Ill., when it was still taught in American universities. It explains why productivity has declined and why income gaps appear to have widened. A branch survived at the University of Chicago in the teachings of the late Frank Knight and is carried forward today at McGill University in Montreal by a Knight student, Reuven Brenner. If there are to be any more Nobel Prizes handed out, one should first go to Professor Mundell.