Previously, the model of a perfectly competitive market was primarily used in thought experiments designed to be contrasted with real-world market institutions. Such counterfactual thought experiments illuminated the positive function of those institutions. In a world of complete information, for example, neither firms nor profits would logically exist. Therefore, the contrast of this imaginary world against the real world of firms and profits showed that such institutions may have some functional significance in coping with imperfect and incomplete information.
This counterfactual use of the theory of perfect competition was reversed by the formalist revolution in economics. The departures of reality from the model of perfect competition were now thought to highlight interventions in the market ecnomoy that would be necessary to approximate equilibrium. Competitive equilibrium and the maximizing behavior that would ideally produce it represented the hard core of the research program f economists from 1950 on. As this happened, economics as a discipline was transformed.
From Chapter 1 of Peter Boettke’s Living Economics. I received the book as a gift on Monday and just started reading it.
This is the economists’ age-old plight: what is fleeting in economics is politically popular, whereas what is enduring in economics is politically unpopular. Hayek describes the economists’ conundrum as consisting of being called upon to consult with politicians on matters of public policy more often than any other social scientists, only to have their advice based on the principles of the science dismissed as soon as it is uttered. Not only are the teachings of the discipline dismissed, but public opinion on the matters at hand seems to run in precisely the opposite direction of that of the economist.
Boettke doesn’t mention what I think is an obvious third layer to this “conundrum.” That is, that as opportunistic young economists grow into their shoes, they themselves are often swayed by political theater and enticed to promote ideas and theories that are “fleeting” and bad for the discipline, yet quite marketable among the reading public. Therefore, the problem threatens not only economists’ image and effectiveness, but the very heart of their discipline.