The Chronicle Review

When Economics Was Radical

Katherine Streeter for The Chronicle Review

December 04, 2016

On May 1, 1886 — the same day the Knights of Labor called the general strike that led to the Haymarket Riot in Chicago, one of the most notorious instances of labor violence in American history — a young professor of political economy at Yale named Arthur Hadley sent a letter to his colleague Henry Carter Adams at the University of Michigan to express his reluctance to join the newly formed American Economic Association (AEA), on whose executive committee Adams sat.

The AEA had been conceived as an upstart challenge to classical economic orthodoxy. Its founding platform stated, "We regard the state as an educational and ethical agency whose positive aid is an indispensable condition of human progress" — a polemical sentiment that worried Hadley. He wrote to Adams:

The fact that the principles are true, only makes the danger of misinterpretation more serious. … My sympathies are in many respects strongly with the movement. My inclinations would have led me to join it from the first. But I was afraid, and still am afraid, of getting into a position which would do practical harm both to me and to others, where I should seem to be made an advocate of measures and maxims which I cannot but regard as dangerous in the extreme.

In other words, it didn’t matter if a proposition was accurate. What had to be considered was the unsavory radical implications it might have — and how that radicalism might taint the rest of the economic profession by association.

Hadley eventually got over his concerns and joined the AEA. He even rose to become its president in 1898 (as well as president of Yale). But by then, the AEA had veered from its radical beginnings, in order to become a less controversial home for professional economists.

Mainstream economists gained elite approval by sacrificing the disinterested search for answers to the most controversial questions.
Few people, even among its current membership, know that the AEA was founded on radical premises. But soon after its founding, it retreated to the safer ground of nonpartisan neutrality as the hallmark of professionalism. That move away from radicalism ensured that some of the most controversial questions in the field would never be answered convincingly, at least not by economists. Indeed, the pose of scholarly objectivity acted to impair rather than promote insight — a fact that has now become apparent as criticism of the way economics has been practiced for decades has become more prominent.

Established in 1885, the AEA was founded both to conduct scientific research and to agitate for reform, both inside academe and in the public sphere. At its start, the two missions were inextricably linked.

The old economics claimed to have discovered immutable laws governing the distribution of wealth, derived from a theoretical construction of an abstract, idealized economy. The founders of the AEA, on the other hand, looked first to study economic outcomes as they found them. Treating wealth, work, wages, depressions, trade, and so on as contingent realities, as opposed to abstract truths, naturally led to the conclusion that they could be altered by policy. That implication clashed with the reigning mood against so-called class legislation, namely any attempt to alter the social hierarchy through collective action or public policy. At all levels, therefore, the AEA’s early approach defied the intellectual foundations of classical economics.

The original draft of the organization’s founding platform stated that the group’s objectives were the encouragement of economic research and of "perfect freedom in all economic discussion." It went on:

While we recognize the necessity of individual initiative in industrial life, we hold that the doctrine of laissez-faire is unsafe in politics and unsound in morals; and that it suggests an inadequate explanation of the relations between the state and the citizens. …

We do not accept the final statements which characterized the political economy of a past generation. … We hold that the conflict of labor and capital has brought to the front a vast number of social problems whose solution is impossible without the united efforts of Church, state, and science.

This manifesto of rebellion against the economic orthodoxy of the Gilded Age raised eyebrows among the established preachers of "political economy." The state as an "ethical agency" whose aid was "indispensable"? The "conflict of labor and capital"? Even after the denunciation of laissez-faire as "unsafe in politics and unsound in morals" was removed from the final document, lest it appear that the new association had any motives beyond scientific advancement, the AEA was still understood as a challenge to the status quo.

But the AEA’s radicalism would be smothered soon after its birth. In December 1887, the executive council, including Henry Carter Adams, agreed to drop entirely the platform approved two years earlier, on the grounds that any platform impaired free inquiry. In 1890 a committee was appointed to judge articles for the association’s publications, superseding Richard Ely, its crusading founder and guiding light. In 1892, Ely tried to reassert control over the organization he had helped to found, but he failed; he then agreed to step down. Harvard’s Charles Dunbar, an economist from the traditionalist school, acceded to the presidency. Thenceforward, the AEA would not be what Ely had hoped at its formation: It was neither a unified ideological force against laissez-faire nor a de facto economists’ guild mandating that university or government employers respect its members’ intellectual freedom. Instead it became a professional academic association in the modern mode: sponsoring conferences and publications, assembling data, imposing standards on its membership, and fostering professional development.

When the AEA began, its founders considered inequality a subject worthy of serious study and a policy problem, even a crisis, that required a solution. But as the profession moderated, that view faded over time. By the middle of the 20th century, the pose of objectivity that had come to dominate economics told a particular story about inequality — that it wasn’t much of a problem, since it would dissipate over time. And even if it was a problem, there wasn’t much that could be done without risking the economy’s broader health.

Central to the ascendance of these ideas was Simon Kuznets’s groundbreaking 1953 work, "Shares of Upper Income Groups in Income and Savings," which studied the reduction of inequality over the first half of the 20th century. Kuznets used tax data similar to that recently employed by Thomas Piketty and Emmanuel Saez, and interpreted those findings in his 1954 presidential address to the AEA to imply that inequality first rises, then falls as an economy develops. This traced out the so-called Kuznets curve, which he suggested was driven by "natural" sectoral transformation from agriculture to manufacturing, and by the accompanying urbanization. The transformation, he argued, can be replicated across countries as they develop. His theory offered an optimistic projection in particular for colonial and postcolonial economies still mired in extreme poverty. Sure, they might be the losers in the global economy now, he seemed to suggest, but eventually they would get richer, so long as they continued to plug away at capitalism.

Kuznets’s optimistic interpretation of the relationship he observed between inequality and economic development was at odds with his own lived experience — two world wars and a Great Depression were responsible for the destruction of hereditary fortunes in the first half of the 20th century, not intersectoral transformation. In Capital in the Twenty-First Century (Harvard University Press, 2014), Piketty himself has harsh words for Kuznets, his motivations, and the attitude toward inequality he spawned in the economics profession:

By presenting such an optimistic theory in the context of a "presidential address" to the main professional association of U.S. economists, an audience that was inclined to believe and disseminate the good news delivered by their prestigious leader, [Kuznets] knew that he would wield considerable influence. … In order to make sure that everyone understood what was at stake, he took care to remind his listeners that the intent of his optimistic predictions was quite simply to maintain the underdeveloped countries "within the orbit of the free world." In large part, then, the theory of the Kuznets curve was a product of the Cold War.

Kuznets’s conclusions seemed to justify leaving inequality off the economics-research agenda as a problem that would solve itself — and so it increasingly was. No serious challenge developed to the Kuznets curve’s prediction that overall inequality had reached a permanent minimum. Even worse, if such a theory did emerge and imply feasible action to reverse inequality, its advocates would likely have been feared and shunned just as the prudent Hadley had realized when he held back from initially joining the AEA.

More than 125 years since the AEA’s founding, its radical premises seem to be enjoying a resurgence. A re-evaluation of classical economics has been proceeding in recent years, highlighted by the publication of Piketty’s Capital in the Twenty-First Century, which had many harsh things to say about the field’s methodological narrow-mindedness and self-absorption and their cost: the absence of a convincing theory of rising inequality, downward social mobility, and resulting pathologies — and, in the absence of such a theory, a foot-stomping insistence that these phenomena either don’t exist or don’t matter.

Piketty’s book is only the most controversial publication of the recent movement in economics away from the confining strictures and received wisdom of theory. The more general intellectual trend in the field is toward empirics, with convincing causal inference the sine qua non of good original research. This so-called data revolution (or, as two of its best-known adherents, Joshua D. Angrist and Jörn-Steffen Pischke, refer to it, "credibility revolution") is made possible by sophisticated computation and the availability of data. But it is also motivated by increasing distrust in the old way of doing things — starting from competitive equilibrium, the mathematical formulation of Adam Smith’s invisible hand that aggregates individual selfishness into societal well-being and searches reality to find just-so stories to serve as evidence of that theory’s benign operation. The new turn in economics finds researchers seeking out natural experiments (or conducting their own) as tests of one theory against another.

Notable instances of this new way include the new minimum-wage research, casting doubt on the old consensus that wage floors reduce employment; investigations of the effect of trade liberalization, with an emphasis on their labor-market impact; and careful considerations of changes in tax policy to estimate their effect on economic output, labor supply, or capital formation and investment. In many ways, the data revolution repeats the intellectual challenge that the AEA’s generation brought to deductive economics as it had been practiced: New data-based tools and approaches cast doubt on old ways. The very fact that a similar epistemological revolution is underway is itself evidence that the interregnum was a retrogression; furthermore, it challenges most economists’ self-conception that the field has been one forward march of progress.

The marginalization of the radicalism of Richard Ely came at the hands of his peers, and it is only by economists themselves that such a marginalization of views that challenge incumbent wealth might be reversed. In contrast with other social sciences, which could be said to lean left, economists have a reputation for ideological diversity, if not conservatism, which is exactly how it comes to be that their research is lavishly funded in prestigious business schools and marquee departments. It’s hard to escape the conclusion that in exiling radicalism from the AEA and from mainstream economics, its practitioners attained enormous intellectual prestige and elite approval by sacrificing the disinterested search for answers to the most controversial questions in economics.

That they abandoned "advocacy" under the banner of "objectivity" only raises the question of what that distinction really means in practice. Perhaps actual objectivity does not require that the scholar noisily disclaim advocacy. It may, in fact, require the opposite.

Marshall Steinbaum is a senior economist and fellow at the Roosevelt Institute. He is co-editor of the forthcoming After Piketty: The Agenda for Economics and Inequality (Harvard University Press). Bernard Weisberger is a historian who has taught at the University of Rochester and the University of Chicago. His many published works include The La Follettes of Wisconsin: Love and Politics in Progressive America (University of Wisconsin Press, 1994). Portions of this essay were previously published in Democracy: A Journal of Ideas.