Deirdre Nansen McCloskey, Beyond Positivism: Behaviorism, and Neoinstitutionalism in Economics

After Bettering Humanomics: a New, and Old, Approach to Economic Science (2021), in which Deirdre McCloskey explained what should and can actually be done “to get an adequate economic science” (p. 1), is now published Beyond Positivism: Behaviorism, and Neoinstitutionalism in Economics (2022), in which she details why economics is not adequate, where it failed, and why it remains stuck in a dead end street. Two books that complement each other, they “are a pair” McCloskey notes (p. 1). Two books which are a must read, not only because of the importance of the message she delivers, but also because of her rich, metaphoric, acidly funny – when you are not of those she criticizes, that is – prose. Reading McCloskey’s books is always extremely enlightening. But, if one had to choose, reading Beyond Positivism first would not be a bad start. Partly because it also gives (more than) a flavor of what one finds in Bettering Humanomics, that is what would be “a new and more sensible way of doing economic science—quantitatively serious, philosophically serious, historically serious, and ethically serious too” (p. 3). Some details are given in the third part of the book and also spread all over its 200 pages. But mainly because it explains what economists should not do, something most economists may not have realized or understood yet, it might lead economists to understand why indeed economists should become humanomics.

Beyond Positivism is divided into three parts. The third part, as said above, explains how “humanomics,” a more human economics, “can save the science.” (pp. 133–176) The first two parts detail why economics has gone wrong, proposing a severe criticism against Samuelsonian economics (Chaps. 1 to 5) and then (Chaps. 6 through 10) a no less severe attack against one of the most important attempts to renew economics, what McCloskey dubs “neoinstitutionalism.” It is Samuelsonian economics, rather than neo-classical to McCloskey, because it is the “tolerant, moderate, amiable”, the “admirable”, the “crushingly intelligent Paul Anthony Samuelson (1915–2009)” – and also his “brother-in-law Kenneth Arrow”, she adds – who is to blame for the despairing state of the discipline. And the neoinstitutionalists – “smart” scholars such as Douglas North, John Wallis, Barry Weingast, Oliver Williamson, Avner Greif, Daron Acemoglu or Douglas Allen – are also to blame for having assuming the legacy of Samuelson. Let us look at McCloskey’s reasons for criticizing these economists.

Samuelson? His fault, tells McCloskey, does not so much lie in his fascination for mathematics, as it is more than frequently said, than in his “obsession” (p. 154) with the wrong kind of mathematics, the kind of mathematics that no science preoccupied with understanding the functioning of the actual world – be it engineering, physics, meteorology or economics – cares to use. Engineers, not troubled by the irrationality of the proof of the square root of 2, content themselves to know that a good approximation of this value is 1.41421. Physicists use Schrödinger’s equation without being worried by the absence of axioms proving it (p. 29). Engineers and physicists use mathematics to make propositions that are “useable approximations.” (p. 28) This is also what economists should do. This is not what they do, because of Samuelson who himself did not. Samuelson used the mathematics that comes from “the Departments of Mathematics”, the kind of mathematics that cares about making propositions that can have “rigorous”, “Greek-style proof[s] of existence” (p. 28).

Thus equipped, Samuelson built internally consistent mathematical models, giving the necessary conditions to satisfy to have a perfectly functioning market economy. And most economists have followed suit. They also agreed with him that one of the problems encountered – obviously, a problem they had created – was that these models were populated with utility maximizing individuals, individuals granted with one virtue only: prudence. It is a problem because such “Max U beings” do not always behave in a way that guarantees the necessary conditions to be satisfied. One would remember that Samuelson (1954, p. 388; italics in original) assumed that individuals “give false signals” about their preferences about public goods – when they know what their preferences are. Individuals, to put it differently, were supposed to behave as children who need to be put back on the right track. And this is precisely the role of economists – because “Economic Daddy [who] Knows Best” (p. 4) – to design the proper necessary incentives. Samuelsonian economics is all about incentives. Incentives that should be implemented and enforced by the government.

Samuelson, no more than Samuelsonian economists after him, cared not whether markets fail in the real world, as long as they theoretically fail. Samuelsonian economics is “just modeling” (p. 68; emphasis in original) – modeling without looking at the actual world and, more specifically, without analyzing quantitatively the problems evidenced in their models. McCloskey notes:

[N]ever does the economic thinker feel it necessary to offer evidence that this or that proposed intervention by the state will work as it is supposed to. And never does he feel it necessary to offer evidence that the imperfectly attained necessary or sufficient condition for perfection is large enough in the actual world that its imperfect fulfillment reduces by much the performance of the economy in aggregate. (p. 41)

If Samuelsonian economists cared to look at the real world, they would realize that the imperfections they theoretically identify, which supposedly hinder the functioning of markets and require government intervention, do not actually exist or do not have a magnitude that warrants collective action. If Samuelsonian economists cared to look at the real world, and listen to the humanities, then they would understand why: the necessary conditions of their models are not sufficient. More precisely, incentives might be necessary, but they are not sufficient to explain how the actual economy works. Why? Because the actual human beings are not as Samuelsonian economists represent them. No “Max U beings”, no children. They are grown-up adults (p. 4), who “have identities (faith) and projects (hope) for which they need courage and temperance, those self-disciplining virtues. And they all have some version of transcendent love” (p. 172) and who “exhibit meaning” (pp. 83–84) when they exercise these virtues. They are creative beings, who invent stories and use metaphors in their narratives, and talk to each other. They follow ethical rules too. All this explains why human beings are able to deal with the problems they face that “Max U beings” cannot, to achieve efficiency more rapidly than “Max U beings”, to cooperate when “Max U beings” do not. The real-world human beings cooperate, coordinate with others, innovate, create wealth by themselves. Samuelsonian economists cannot see it because they have trapped themselves in models that they have populated with Max U beings.

Neoinstitutionalists are caught in the same trap for one reason, that McCloskey repeats time and again: neoinstitutionalism “is Samuelsonian economics in drag” (p. 111; p. 137); it is “deeply unoriginal” (p. 135) precisely for being “conventionally Samuelsonian” (p. 123); it is, “as I just suggested and show at length in the Bourgeois Era trilogy, deeply Samuelsonian” (p. 135). Indeed, despite its claim to be “new, new, new” (p. 135), it is not. It can thus not be “the way forward in the science or in its policy recommendations” (p. 3). It cannot be “the way out of the dead end that economics has wandered into” (p. 67) because of Samuelson.

Neoinstitutionalists reason with the same Max U beings as standard Samuelsonian economists. The difference is that individuals are now supposed to maximize their utility within a (given) institutional framework – “human interactions [are] reduce[d] to maximization within rules of the game” (p. 79). Introducing institutions has not changed the frame of analysis. It all remains a matter of incentives, except that it is now the institutions that provide the incentives individuals need to behave efficiently. They are the cause that explains why economic and social phenomena happen. Take for instance what McCloskey calls the “Great Enrichment,” the massive, unprecedented increase in wealth of the last two centuries that “economists have been trying ever since 1776 to explain” (p. 71) and to which she herself has devoted much work. She insists again on what is a major point of contention with the neoinstitutionalists. To them, the Great Enrichment started with the Industrial Revolution and was caused by legal changes – property rights in particular – that took place in 1689. Before that date, before England’s Glorious Revolution, property rights and legal rules were inadequate or non-existent, individuals had no incentive to innovate, which explains the lack of growth. The institutional changes that (supposedly) took place in England in the 17th and 18th centuries changed everything. Thus, without good institutions, no growth was and is possible, but introduce good institutions and growth would ensue. The neoinstitutionalists indeed “want the story of the Great Enrichment… to be a story of institutions” (p. 100).

The thesis is as seducing as it is empirically wrong. To start with, the Great Enrichment did not begin after the Industrial Revolution but later; so the neoinstitutionalists do not explain the right phenomenon. In fact, the changes in property rights and institutions that the neoinstitutionalists identify were not sufficient to explain something as big as the Great Enrichment – again, as with Samuelsonian economics, it is a problem of measurement. Then, the “bad old days of bad law” never existed (p. 72). In England, “contract and property law were well developed and enforced ‘before the reign of Edward the First,’ which is to say 1272, as Pollock and Maitland established as long ago as 1895” (p. 72). And yet, no Great Enrichment took place before the 19th century. No more than it took place in other countries, in which nonetheless existed a similar system of institutions and property rights, that is, the proper incentives to innovate according to neoinstitutionalism. And there were places in which legal rules were (Chicago) or are (Italy) not perfectly enforced (to say the least) and that nonetheless do extremely well economically. Thus, the conclusion seems clear: institutions may be (actually are) necessary to explain why something as big and as positive as the Great Enrichment took place, they are not sufficient. And neoinstitutionalists do not understand that. They have the same fetichism for necessary conditions that leads some individuals to christen their children “winner” because it will allow them to win, necessarily (see Levitt & Dubner, 2005, p. 191). They confuse, as these parents and as Samuelsonian economists did, necessary and sufficient conditions. Now,

[e]levating a necessary condition such as property rights to the cause of modern growth would be like elevating the existence of the tomato in Europe after the Columbian Exchange to the cause of sauce tomate. It was necessary, obviously, but not sufficient, equally obviously. The British and the Dutch and the Germans had the necessary tomatoes, too, but did not have the sufficiencies that made for their glorious Italian and then French use (p. 14).

The difference between Italy and France, on the one hand, and Great-Britain, Germany and the Netherlands is human creativity. The same thing can be said of the Great Enrichment: “It is human creativity unleashed that makes for great enrichment” (p. 21). But then, “the tsunami of human creativity called the Great Enrichment was caused by technological change.” (p. 122; italics in original). And technological change was caused by “[i]ngenuity encouraged by liberalism” (p. 122). This was sufficient to give birth to such a dramatic event as the Great Enrichment: “Around 1800 in northwestern Europe the liberal idea… did suffice… to inspirit ordinary people to extraordinary creativity. Innovism” (p. 130). The Great Enrichment was a matter of ideas and of ideology. It took place because individuals wanted to live better lives, wanted to improve themselves, and had the liberty and freedom to do so.

In this book, Deirdre McCloskey delivers an important, indeed crucial, message that economists should listen carefully. Human beings, not the Max U beings of Samuelsonion economics in whatever form it takes, are the “ultimate resource” to paraphrase Julian Simon (1981). And economists would be well advised to remember this, rather than continuing to assume that individuals are liars and cheats. This means that, instead of trying to devise and to suggest the implementation of mechanisms aimed at controlling individuals, economists should focus on the solutions human beings develop to cooperate with others. This also means that individuals should be left free to live as they wish, because only then will they try to better themselves and better the society in which they live. This is a message of hope that explains the importance of Beyond Positivism: Behaviorism, and Neoinstitutionalism in Economics.

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