Magazine article Ideas on Liberty

The Imperial Science

Magazine article Ideas on Liberty

The Imperial Science

Article excerpt

"I think it is quite likely that we are entering an era of much more interaction among the sciences."

-KENNETH E. BOULDING1 During the 20th century it was popular to label economics the "dismal science," a term of derision coined by the English critic Thomas Carlyle in the 1850s. Carlyle lashed out against laissez-faire capitalism, which he defined as "anarchy plus the constable," for, among other things, being inconsistent with slavery.2

But attitudes are rapidly changing as we enter the 21 st century. Economics, no longer dismal, has come a long way toward reinventing itself and expanding into new territories so rapidly that another descriptive phrase is needed. Like an invading army, the science of Adam Smith is overrunning the whole of social science-law, finance, politics, history, sociology, environmentalism, religion, and even sports. Therefore, I have dubbed 21st-- century economics the "imperial science."

Boulding's Dream Comes True

The father of economics as an interdisciplinary movement is Kenneth E. Boulding, long-- time professor at the University of Colorado in Boulder, who died in 1993. He published over 1,000 articles on more than two dozen eclectic subjects, ranging from capital theory to Quakerism. But Boulding's vision of every discipline borrowing ideas from other disciplines isn't exactly what has happened. Instead, economics has started to dominate the other professions.

The first breakthrough came in finance theory. Harry Markowitz, a graduate economics student at the University of Chicago, wrote an article on portfolio theory in the March 1952 issue of The Journal of Finance. It was the first attempt to quantify the economic concept of risk in stock and portfolio selection. Out of this work came modern portfolio theory and the "efficient market theory," which argues that short-term changes in stock prices are virtually unpredictable and that it is extremely difficult if not impossible to beat the market averages over the long run.

These ivory-tower theories were greeted with scorn by Wall Street professional managers, but eventually confirmed by numerous studies. Index finds, the economists' favorite investment vehicles, are now the largest type of mutual fund sold on Wall Street.3

James Buchanan and Gordon Tullock, both at the University of Virginia, published The Calculus of Consent in 1962 and forever changed how political scientists view public finance and democracy. Today public-choice theory has been added to every economics classroom's curriculum.

Buchanan and other public-choice theorists contend that politicians, like businessmen, are motivated by self-interest. They seek to maximize their influence and set policies in order to be re-elected. Unfortunately, the incentives and discipline of the marketplace are often missing in government. Voters have little incentive to control the excesses of legislators, who in turn are more responsive to powerful interest groups. As a result, government subsidizes vested interests of commerce while it imposes costly, wasteful regulations and taxes on the general public.

The public-choice school has changed the debate from "market failure" to "government failure." Buchanan and others have recommended a series of constitutional rules to require the misguided public sector to act more responsibly, including requiring super-- majorities to raise taxes, protecting minority rights, returning power to local governments, and imposing term limits.4

Economics Enters the Courtroom

In 1972 Richard A. Posner, an economist who teaches at the University of Chicago Law School and serves as chief judge of the U.S. Seventh Circuit of Appeals, wrote Economic Analysis of Law, which synthesized the ideas of Ronald Coase, Gary Becker, F. …

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