Symposium: Economics and Public Policy

Economic orthodoxy in theory and practice

Stephen L. Cheung, University of Sydney

“If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions.” With this remark, Sir Winston Churchill evokes one of the longest standing stereotypes of the economics profession. In it, economists are parodied for their fractious inability to agree among themselves on anything. Other political leaders of the last century seem to have shared Churchill’s frustration. US President Harry S. Truman makes a cognate observation in his famous plea for a one-handed economist—one who would not say “on the one hand … but on the other hand …” [1]

But on the other hand, there stands a new stereotype of economics. That of a monolithic rationalist cult, hell-bent on liberalisation and the sweeping aside of all impediments to the thoroughgoing penetration of market forces into all spheres of social activity, regardless of the costs. Rather than being crippled by its disunity, the profession is seen as dangerous for its unity. This view is characteristic of those further removed from the corridors of policy-making power, among whom it has taken deep root in Australia over the past twenty years.

Where then, between these popular yet seemingly contradictory views, does the truth lie? Or, if perceptions have shifted—across countries and different groups of participants, as well as over time—how can they be accounted for?

In what follows, I argue that the paradox can be traced to the existence of two distinct visions of economic orthodoxy—of what are the core beliefs and assumptions that are, or ought to be, shared by all economists. These are the shared understandings of economists working in the academy versus those of an influential minority active in the public service. I also suggest that the gap between these two worlds is particularly great in Australia, in comparison to other countries such as the United States.

Economic Orthodoxy in Theory

From the perspective of a scholarly insider, the most interesting and important issue is not that economists agree or disagree too much, but that they have agreed to disagree—and on how to disagree—on quite specifically defined terms. That is because from this perspective, orthodox economics is above all else a disciplinary framework. Like any such framework, its purpose is to provide structure and coherence to the work taking place within it. Differences of opinion are not only unsurprising but also healthy—it is through resolving or reconciling them that progress is made. The framework should not limit debate, but rather provide a language that demands clarity and precision of those engaging in it, so reducing the energy wasted on arguing at cross-purposes.

The framework should not limit debate, but rather demand clarity and precision, so reducing the energy wasted on arguing at cross-purposes.

So much then for the ideal. The ‘problem’ in economics has always been rather obvious. Embedded within the ‘neoclassical’ framework adopted by most economists is a proposition considered highly unpalatable by many outsiders. This is the statement that under certain highly idealised theoretical conditions, the unrestrained operation of market forces yields outcomes that are socially efficient. In the full formal statements, both the idealised conditions and the notion of ‘socially efficient’ are restrictively and precisely defined. But when such details are overlooked, the rhetorical force of the statement is quite striking.

It is at this point that the two camps part ways. Having come so far, one can either enlist in the crusade to spread the market gospel or—in the spirit of economics as a disciplinary framework—pause to reflect upon the origins and generality of the claims of the market. To choose the latter path is not necessarily to retreat from active participation in policy debates—rather it is to aspire to the possibility of a more nuanced role.

It would be too easy to glibly dismiss economics as being flawed by an inbuilt bias in favour of market forces. There are many in the profession who would make the opposite case: that what it has demonstrated is how unlikely and implausible are the circumstances that must obtain for free markets to be optimal. Moreover, and contrary to appearance, the latter observation does not necessarily invalidate or render redundant the disciplinary framework. Rather, it suggests that research should focus in detail on the consequences of, and policy responses to, the failure of the conditions for optimality. Indeed, this has been the ambition of much of the best work of the past twenty-five years. Some extremely stylised examples of the types of practical insight to have emerged from these processes are as follows:

  • If a single firm is the dominant employer of a certain type of labour, then imposing an appropriate minimum wage can increase the level of employment and bring about an outcome that is better for the community as a whole. This highlights that the usual presumption against a minimum wage is premised on the mutual lack of power of employers and workers alike.
  • If the tax system cannot reach all the goods that people consume, then—contrary to the popular notion of a uniform tax rate—this should be taken into account in the form of differential rates of tax on all the other goods.

This is not to claim that all economic researchers accept the above propositions—there are plenty to whom they are anathema. However the shared adoption of a common disciplinary framework enables participants on all sides of these debates to pinpoint the source of their disagreements in terms of contrasting views of what assumptions best fit a given situation. This then provides an impetus for empirical research, as well as efforts to synthesise the competing theories. [2]

The unqualified faith in unfettered markets is much less prevalent than is sometimes presumed.

What I do claim is that even in the mainstream of academic economics, the unqualified faith in unfettered markets is much less prevalent than is sometimes presumed. Further, the neoclassical disciplinary framework not only accommodates a broader range of policy positions than is commonly recognised; by clarifying the points of divergence between them it also, importantly, gives power and coherence to economics as a tool of policy analysis. This can be marshalled in support of both ‘liberal’ and ‘conservative’ political causes alike. [3] [4]

In the remaining space, I address a slightly different question. Taken on its own terms, why has this more sophisticated understanding of neoclassical economics not been as influential in Australian policy circles as its adherents might hope? To judge from recent reforms to labour markets and the tax system, as well as mooted changes to higher education, the unqualified belief in market forces remains highly influential in Canberra.

What, then, went wrong?

Economic Orthodoxy in Practice

During the 1992 US Presidential election, the Clinton-Gore campaign sought to bolster its economic credentials by distributing a list of over five-hundred economists—drawn largely from elite universities, colleges and think-tanks—who were endorsing Bill Clinton for the Presidency. Following its election, the Clinton Administration appointed a large number of well-known economists to positions both within the Administration itself and in major international organisations. These included Stanley Fischer, Carl Shapiro, Joseph Stiglitz and Lawrence Summers. [5]

While these may not be household names, they were all intellectual giants of the academic economics profession. Both Stiglitz and Summers were past recipients of the John Bates Clark Medal, awarded every second year by the American Economic Association to “that American economist under the age of forty who is adjudged to have made a significant contribution to economic thought and knowledge.” These economists brought a state of the art understanding of economic analysis to the work of the Administration.

At the same time, other economists rose to prominence as media commentators, most notably Paul Krugman, another Clark medallist and now an op-ed columnist for the New York Times. Nor is this level of public prominence for economists unprecedented in the US—other well-known economists who have served as Presidential advisers in the past have included Milton Friedman, John Kenneth Galbraith and Herbert Stein, to name but a few.

The market crusaders have become entrenched in Canberra but at the same time cut off from their intellectual roots in the universities.

In Australia, this entire set of events would essentially be unthinkable. The worlds of academic economists and the public service have remained largely disjoint. The market crusaders have become entrenched in Canberra but at the same time cut off from their intellectual roots in the universities. The tentative and contested nature of the policy prescriptions arising from economic analysis has largely been forgotten. This has occurred at a cost to both the quality of policy making and the public esteem of the economics profession. [6]

A number of institutional factors have contributed to this outcome. The Australian public service has tended to recruit directly from undergraduate honours students where in the US it is typical for policy analysts to have graduate (not uncommonly doctoral) qualifications. As if to compound this, an Australian undergraduate major in economics has typically gone through a much narrower degree program than her elite US counterpart. The result can be a graduate with both insufficient exposure to economics to appreciate the full subtlety of the discipline, and little exposure to the conflicting demands and priorities thrown up by other disciplines.

Moreover, not only is there virtually no direct recruiting of academic economists (in sharp contrast to the US), there is also little by way of a policy think-tank sector, to serve as a halfway house between the universities and public service. The limited interchange of personnel that does occur has been with the private forecasting and consulting houses. Those academics wishing to weigh in on policy matters have largely been left to do so from the outside. [7]

If the gap is to be bridged, there will need to be movement on both sides. A useful first step would be the creation of a body similar to the US Council of Economic Advisors. For their part, academic economists will need to communicate their work to a broader public through the ‘serious’ media, accord greater professional status to policy research and provide their graduates with the broad education they will need to perpetuate these same values.

It is to be hoped that with some movement in these directions, future Australian political leaders may one day benefit from the high calibre of economic advice that so infuriated Churchill and Truman.


1. The third great aphorism in this family, that “if all economists were laid end to end, they would not reach a conclusion” has been attributed to George Bernard Shaw. [Back]

2. Two celebrated examples of such ‘synthesis’ in economics are the IS-LM model in macroeconomics, and Atkinson’s formulation of the social welfare function. [Back]

3. I use these terms in their contemporary North American sense. [Back]

4. Of course the adoption of this framework does not come without costs. Firstly, the above lengthy exposition would suggest a problem of transparency to the outside world. Secondly, the seductions of refining the technical minutiae of the framework can be more rewarding than the equally challenging task of its practical application. Thirdly, there remain a range of more radical views that are not so readily accommodated within it. [Back]

5. Fischer is First Deputy Managing Director of the International Monetary Fund, Shapiro served in the Antitrust Division of the Justice Department, Stiglitz was Chairman of the President’s Council of Economic Advisors and later Chief Economist of the Word Bank, Summers is Treasury Secretary. [Back]

6. The economics profession is not alone in Australia in having been criticised for being too remote from public affairs. See, for instance, McKenzie Wark (2000) “Confessions of a public idiot” The Australian 30 August, p 40. [Back]

7. In this regard, the ANU has been notable for producing many distinguished economists, with sympathies on both sides of politics. It has also been customary for one academic to serve on the Board of the Reserve Bank of Australia. [Back]

Stephen Cheung is Coordinating Editor of The Drawing Board.

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