Page 62 - Global Political Economy_Understanding The International Economic Order

NEO CLASS ICAL C ONCEP T OF AN ECONO MY
what economists call an “opportunity cost.” In choosing to do one
thing, one must necessarily forgo the opportunity of doing something
else that might be of equal or even greater value. As economists fre-
quently quip, “There is no such thing as a free lunch” (TSTFL). Even
a free lunch involves an investment of time and, therefore, surrender
of an opportunity to do something else. In more stark terms, every-
thing incurs a cost as well as a benefit. The economist’s constant
awareness that every decision involves a necessary trade-off between
costs andbenefits casts a conservative mantle over the social and po-
litical outlook of the profession andmay explain why Thomas Carlyle
characterizedeconomics as “the dismal science.”
Although some economic theorists such as Adam Smith, Karl
Marx, andJoseph Schumpeter have attemptedto comprehendthe
economy as a complete, dynamic, and ever-changing system of hu-
man interaction, economics in the early twenty-first century is essen-
tially a toolbox of formal models and analytic techniques. In Keynes’s
words, “The Theory of Economics does not furnish a body of settled
conclusions immediately applicable to policy. It is a method rather
than a doctrine, an apparatus of the mind, a technique of thinking,
6
which helps its possessor to draw correct conclusions.” While its
methodology provides economics with its analytic rigor, it encourages
economic theorists to oversimplify economic reality andfrequently
has no social relevance. In the inevitable trade-off between rigor and
relevance, economists will choose the former over the latter almost
every time. One of the highest compliments that one economist can
give another is to describe his or her work as “robust,” regardless of
its utility in furthering understanding of the actual working of the
economic system.
A formal economic model is an intellectual device used to explain
a particular event or variable; such a model is an abstraction based
on an economic theory. Although a model may take a literary form,
the economics profession, ever since publication of Samuelson’s
Foundations, has preferredthat models be expressedin formal, math-
ematical, andabstract terms. Statedsimply, a formal model contains
a number of endogenous variables whose values (prices or quantities)
7
are determined logically within the model. Explanation of an event
6
Quotedin G. R. Hawke, Economics for Historians (New York: Cambridge Univer-
sity Press, 1980), 7–8.
7
Economists frequently state that a particular action is “endogenous,” meaning that
the action can be explained by an individual’s self-conscious effort to promote his or
her economic interests. For example, if a scientific discovery were motivated by a desire
for profits rather than being due to intellectual curiosity, one would say that the cause
of the discovery was endogenous.
49