One of the really exciting recent developments in economics is the on-line journal Econ Journal Watch ("EJW"). (Truth in Advertising: I’m an Editorial Advisor to the site.) It’s the brainchild of Professor Dan Klein, of Santa Clara University.
This article by Dan Johansson is an especially nice example of the service provided by EJW. In it, he reports the results of his survey of all graduate microeconomic, macroeconomic, and industrial-organization textbooks assigned in PhD-economics programs in Sweden. Because these are pretty much the same books that are used in U.S. programs – almost all authors are on the faculties of universities in the U.S. – his findings speak volumes not only about the state of modern Swedish training in economics but of modern economics training in the U.S. as well.
Johansson finds that these textbooks are devoted to equilibrium models in which genuine change (and, hence, genuine economic growth) is excluded by assumption. Not by conscious assumption, but excluded nevertheless. The reason is that models in which equilibria are determinate are models that, of course, inherently reject indeterminateness – true change, true uncertainty, true creativity. These models are analytically closed.
And any model that rejects change, uncertainty, and creativity also, necessarily, rejects entrepreneurship. That’s pretty obvious. But any such model rejects also property rights – or, rather, rejects the rich role that property rights play in reality. Here’s Johansson:
Analytically, all options are fully specified within a closed system, and the whole terminology of property rights is out of place. Entrepreneur-rich and institutional-rich traditions allow for actors to come up with creative action, interpretational breakthroughs. In this context, it is important to be able to speak of kinds of rules that constrain behavior (rules against stealing, for example) yet leave the door open for creative developments. Market entrepreneurship is transcendent action within a social framework of property rights.
Indeed so. But the analytically closed, formal, axiomatic equilibrium modeling that prevails in modern economics misses these vital insights. It misses the role of institutions – including that most important institution of all: property rights.
Johansson finds that, with rare (and questionable) exceptions, none of the textbooks mentions institutions, entrepreneurship, property rights, and other concepts that, in fact, are indispensable for a genuine understanding of economic growth and market processes.
If I may brag a bit in conclusion, we at George Mason Economics are unquestionably the only major PhD-granting Department that recognizes this problem with mainstream economics, and who work to do economics differently, more relevantly, more wisely – much more wisely.