Chris Trotter misunderstands economics

By Paul Walker 20/08/2015

Over at the Offsetting Behaviour blog Eric Crampton notes that Chris Trotter has been writing In praise of Bryce Wilkinson. And justly so.

But at one point Trotter writes,

Economics II was staffed by young economists who had studied at universities in the United States where the monetarist theories of Milton Friedman, and the ideas of neo-classical economics generally, were already well-entrenched.

“[T]he ideas of neo-classical economics generally, were already well-entrenched”. Is this in anyway surprising? This comment seems to show a rather large misunderstanding of the development of economics.

I mean neo-classical economics developed in the 1870s with the work of Carl Menger, William Stanley Jevons and Léon Walras. So by the 1970s and 1980s it had been around for 100 years. It had been the standard in economics textbooks since, at least, Alfred Marshall’s Principles of Economics in 1890s. So I am confused as to why Trotter thinks its worth noting that Treasury economists were trained in it. Every economics student, then as now, is trained in it. Its the standard, there is nothing unusual or noteworthy about it.

What would be worthy of note is if they were using non neo-classical ideas. And it is, because they were. Many of the ideas introduced by treasury economists of this time where ideas which moved thinking outside of the purely neo-classical box. They were thinking Coaseian thoughts by applying ideas from the law and economics literature and the new institutional economics to the New Zealand policy scene. They also utilised ideas from contract theory, in the main principal-agent theory, and the transaction cost economies of Oliver Williamson,

This kind of thinking is non neo-classical thinking. It moves away from the ideas of perfect markets, perfect information, zero transaction costs and institution free worlds. So one of the most important things we should be grateful to Wilkinson et al for is the introduction of non neo-classical thinking into New Zealand policy making. It is a great and lasting contribution, a contribution for which they can be justly praised.