Page 88 - Global Political Economy_Understanding The International Economic Order

NEO CLASS ICAL C ONCEP T OF AN ECONO MY
environment significantly influences the purpose of economic activi-
ties and determines the boundaries within which markets necessarily
must function. 48
Neoclassical economists andscholars of political economy also dis-
agree with one another regarding the limitations of economics as an
analytic tool useful for understanding the dynamics of social, politi-
cal, andeven economic affairs. While economic science provides a
useful framework for static analysis, it seldom can explain changes in
fundamental economic variables; for example, despite the central role
of technological developments in economic affairs, economists do not
have an explanation for technological change. In fact, the crucial de-
terminants of economic change lie outside the framework of eco-
nomic analysis. Reviewing the economics literature on the subject of
economic change, Joseph Stiglitz comes to the astonishing conclusion
that economists have not learnedmuch about the dynamics of the
economy. 49
Despite the attempts of economic imperialists andrational-choice
theorists to explain all forms of human behavior through application
of the techniques of microeconomics, these techniques have limited
utility for analyzing andexplaining human behavior. Most political
economists, I believe, wouldagree with the distinguishedeconomist
Joseph Schumpeter that economic analysis progresses until it inevita-
bly encounters social, political, andpsychological factors that eco-
50
nomics cannot explain. Although the research strategy of economic
science is to “endogenize” exogenous variables, economic analysis
andexplanation are unlikely ever to exceeda certain limit. 51 There
will always be exogenous variables such as culture, technology, and
institutions that affect economic outcomes but cannot themselves be
48
The concept of “embeddedness” is taken from the literature on economic sociol-
ogy. An excellent discussion of this fieldof scholarship is Neil J. Smelser andRichard
Swedberg, eds., The Handbook of Economic Sociology (Princeton: Princeton Univer-
sity Press, 1994). While this fieldof scholarship has producedclassic works by Max
Weber, Talcott Parsons, andothers, economic sociology, with the major exception of
radical sociology, has not devoted much attention to the international economy.
49
Joseph E. Stiglitz, “Another Century of Economic Science,” Economic Journal 101
(January 1991): 139.
50
Joseph A. Schumpeter, The Theory of Economic Development: An Inquiry into
Profits, Capital, Credit, Interest, and the Business Cycle (Cambridge: Harvard Univer-
sity Press, 1934), 4–5. I am indebted to Robert Keohane for bringing Schumpeter’s
comments to my attention.
51
To endogenize an exogenous variable, such as the behavior of a politician, means
that the exogenous variable can be explained by the logic of economics: individuals
rationally seek to increase their own interests. This assumption is of course the basis
of the public-choice school.
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