Economists, Economic History, and Theory

We can all come up with cringeworthy clichés for why history matters to society at large – as well as policy-makers and perhaps more infuriatingly, to hubris-prone economists:

And we could add the opposite position, where historical analysis is altogether irrelevant for our current ills, where This Time Is completely Different and where we naively disregard all that came before us.

My pushback to these positions is taken right out of Cameron & Neal’s A Concise Economic History of The World and is one of my most cherished intellectual guidelines. The warning appears early (p. 4) and mercilessly:

those who are ignorant of the past are not qualified to generalize about it.

We can also point to some more substantive reasons for why history matters to the present:

  • Discontinuities: by studying longer time period, in many different settings, we get more used to – and more comfortable with – the fact that institutions, routines, traditions and technologies that we take for granted may change. And do change. Sometimes slowly, sometimes frequently.
  • Selection: in combination with emphasizing history to understand the path dependence of development, delving down into economic history ought to strengthen our appreciation for chance and randomness. The history we observed was but one outcome of many that could have happened. The point is neatly captured in an obscure article of one of last year’s Nobel Prize laureates, Paul Romer: “the world as we know it is the result of a long string of chance outcomes.” Appropriately limiting this appreciation for randomness is Matt Ridley’s rejection of the Great Man Theory: a lot of historical innovations seems to have been inevitable (When Edison invented light bulbs, he had some two dozen rivals doing so independently).
  • Check On Hubris: history gives us ample examples of similar events to what we’re experiencing or contemplating in the present. As my Glasgow and Oxford professor Catherine Schenk once remarked in a conference I organized: “if this policy didn’t work in the past, what makes you think it’ll work this time?”

History isn’t only a check on policy-makers, but on ivory-tower economists as well. Browsing through Mattias Blum & Chris Colvin’s An Economist’s Guide to Economic Historypublished last year and has been making some waves since – I’m starting to see why this book is quickly becoming compulsory reading for economists. Describing the book, Colvin writes:

Economics is only as good as its ability to explain the economy. And the economy can only be understood by using economic theory to think about causal connections and underlying social processes. But theory that is untested is bunk. Economic history provides one way to test theory; it forms essential material to making good economic theory.

Fellow Notewriter Vincent Geloso, who has contributed a chapter to the book, described the task of the economic historian in similar terms:

Once the question is asked, the economic historian tries to answer which theory is relevant to the question asked; essentially, the economic historian is secular with respect to theory. The purpose of economic history is thus to find which theories matter the most to a question.

[and which theory] square[s] better with the observed facts.

Using history to debunk commonly held beliefs is a wonderful check on all kinds of hubris and one of my favorite pastimes. Its purpose is not merely to treat history as a laboratory for hypothesis testing, but to illustrate that multitudes of institutional settings may render moot certain relationships that we otherwise take for granted.

Delving down into the world of money and central banks, let me add two more observations supporting my Econ History case.

One chapter in Blum & Colvin’s book, ‘Money And Central Banking’ is written by Prof. John Turner at Queen’s in Belfast (whose writings – full disclosure – has had great influence on my own thinking). Focusing on past monetary disasters and the relationship between the sovereign and the banking system is crucial for economists, Turner writes:

We therefore have a responsibility to ensure that the next generation of economists has a “lest we forget” mentality towards the carnage that can be afflicted upon an economy as a result of monetary disorder.” (p. 69)

This squares off nicely with another brief article that I stumbled across today, by banking historian and LSE Emeritus Professor Charles Goodhart. Lamentably – or perhaps it ought to have been celebratory – Goodhart notes that no monetary regime lasts forever as central banks have for centuries, almost haphazardly, developed their various functions. The history of central banking, Goodhart notes,

can be divided into periods of consensus about the roles and functions of Central Banks, interspersed with periods of uncertainty, often following a crisis, during which Central Banks (CBs) are searching for a new consensus.”

He sketches the pendulum between consensus and uncertainty…goodhart monetary regime changes

…and suddenly the Great Monetary Experiment of today’s central banks seem much less novel!

Whatever happens to follow our current monetary regimes (and Inflation Targeting is due for an update), the student of economic history is superbly situated to make sense of it.

9 thoughts on “Economists, Economic History, and Theory

  1. In the 1914-1933 slice above, Wilson’s first use of the 16th Amendment and the Economic Results of Prohibition aren’t even a thing. That a government drawing $4B created and went to war with an underground economy based on corn sugar glucose and worth $5B is beneath the notice of soi disant economists says more about the latter. Wall Street and Washington, published in 1929, and The Economic Results of Prohibition, published in 1932 are unbooks in the sense that INGSOC regarded unpersons. Indeed, I’d wager few readers here can name the authors, one of whom coined the expression “Gross National Product.” Small wonder no economist produces a worthy explanation of the Great Depression.

  2. Truth to tell I married an economist. She doesn’t practice the profession except to untangle financial report translations. She is bored senseless by Herbert Hoover hunting Al Capone (plus Corn Products, Anheuser Busch, Hubinger Bros. and American Maize) and not interested in whether These States invading Colombia/Panama to hunt Pablo/Noriega the dealer caused economic collateral damage. Ya can’t win.

  3. Seems likely that parents who disdain history will raise successive children who will pick up the heating poler by its pretty, red end …

    But then, Murray Rothbard’s “America’s Great Depression” impresses me …

  4. […] Joakim had a banner year at NOL, and four of his posts made the top 10. He got love from the left, right, and everything in between this year. “Elite Anxiety: Paul Collier’s ‘Future of Capitalism’” (#9), “In Defense of Not Having a Clue” (#8), and “You’re Not Worth My Time” (#7) all caused havoc on the internet and in coffee shops around the world. Joakim’s piece on Mr Darcy from Pride and Prejudice (#2) broke – no shattered – NOL‘s records. Aside from shattering NOL‘s records, Joakim also had excellent stuff on financial history, Richard Davies, and Nassim Taleb. He is also beginning to bud as a cultural commentator, too, as you can probably tell from his sporadic notes on opinions. Joakim wants a more rational, more internationalist, and more skeptical world to live in. He’s doing everything he can to make that happen. And don’t forget this one: “Economists, Economic History, and Theory.” […]

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