Should economists read Marx?

Yes, but not for the reasons Marxists think.

By Velvet, CC BY-SA 4.0, via Wikimedia Commons

The other day, Northwestern University economics professor Ben Golub tweeted the following:

Mount Holyoke English professor Alex Moskowitz responded to the revelation that most economists don’t read Smith and Marx by calling economics “fake”, declaring that it “hasn't properly historicized it's own methods of knowledge production”:

Is Moskowitz right? Should economists all be required to read, “work through”, and understand Adam Smith and Karl Marx? Is the discipline “fake” because most haven’t done this?

First of all, it’s important to point out that studying history of thought isn’t always useful. Just as doctors usually don’t study the works of Galen, and physicists usually don’t read Isaac Newton, economists don’t really have to read the original works of Alfred Marshall to understand supply and demand, or read John Nash’s original papers to understand game theory. The most useful concepts in science stand alone, divorced from the thought process of their originators. This is why they’re so powerful — anyone can just pick up Newton’s Laws or Nash Equilibrium and just use them to solve real-world problems, without knowing where those tools came from.

Imagine you’re an economist working for Amazon, using game theory to design online markets. Now imagine some English professor at a liberal arts college shouts at you that your whole field is “fake” because you haven’t read Marx. I imagine that experience would be a bit surreal.

But for now let’s set aside the question of whether and when economists should study the history of economic thought, and point out that in fact, they do study it — just not in the way that Alex Moskowitz might prefer.

When I was an economics PhD student, I was assigned a whole bunch of old foundational papers that were influential in framing modern economic thinking. I’ll just list four examples to illustrate what the economics canon is actually like:

1. “An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money”, by Paul Samuelson (1958)

In economics, there’s an important kind of model called the “overlapping generations” or OLG model, which is basically a model of how old people, young people, and middle-aged people interact in the economy. You can think about a lot of economic phenomena in terms of those generational interactions.

For example, young people generally have to borrow to get started in life — student loans, starter homes, cars, and such. People work and save when they’re young and middle-aged, and then have to spend down their wealth during retirement. This creates some interesting interactions, because the old people can only consume by selling their accumulated assets — houses, stocks, etc. — to the young and middle-aged people.

Paul Samuelson wasn’t the first to think about this, but he was the first to formulate it in a really simple mathematical model that a lot of people could work with — and which is still commonly used today. In this paper, he showed that if you had rapid population growth, you could run into problems — you could have so many young people that they needed to borrow more than the small older generation could lend them. In this case, the best thing to do would be to transfer money from each young generation to each old generation in turn, so they’d have enough money to lend each other.

You may recognize this as the basic idea behind Social Security.

2. “The Pure Theory of Public Expenditure”, by Paul Samuelson (1954)

One of the most important concepts in public economics is the idea of a public good — something that the private sector won’t provide enough of on its own, and so which the government ought to provide (if it can). Paul Samuelson was not the first to think about this general concept either, but like with the OLG model in the previous example, he was the first to show a mathematical example of how this might work.

In this paper, he shows that if something is nonrival (if one person using something doesn’t stop someone else from using it) and nonexcludable (if you can’t prevent people from using it) — then the private sector won’t build enough of it. The classic example is a lighthouse — one ship using a lighthouse doesn’t necessarily prevent others from using it, since everyone can see the light, and you can’t really stop any particular ship from using it. So building a lighthouse is a dicey investment for any private company — you’re basically encouraging a whole bunch of free riders.

Whether the solution is to have government step in and build the lighthouse, or if there’s some private arrangement that could work just as well, is the subject of perennial debate within the economics profession. And whether you actually need both nonrivalry and nonexcludability in order to get some of the key features of public goods is another open question. But it was this original paper by Samuelson that pretty much created the whole literature on public goods, so its influence is hard to overstate.

3. “The market for lemons”, by George Akerlof (1970)

Anyone who has bought a new car knows that when you drive it off the lot, the resale price instantly drops far below the purchase price. Why? It’s the same car that it was an hour ago! The most likely answer is that if you try to turn around and sell a car right after buying it, people will assume something is wrong with it.

This insight was the basis for Akerlof’s paper. It’s about how markets can naturally break down due to asymmetric information — things that sellers know that buyers don’t. In the case of used cars, the process is called “adverse selection” — meaning that sellers want to sell low-quality stuff for more than it’s really worth, by concealing how crappy it is. Using some simple mathematical examples, Akerlof showed how adverse selection could cause trade to break down completely — buyers won’t pay full price for used cars because they might be getting sold a “lemon”, so used car dealers keep their high-quality cars off of the market entirely.

How do you solve the lemon problem? One way is to pay for mechanics to check whether a car is in good condition, but that costs money. Another way might be for the government to pass laws requiring used car dealers to tell prospective buyers important information about a car’s quality.

There’s an obvious application to health insurance, too. Adverse selection can also happen when a buyer conceals information from a seller; insurance customers will naturally try to hide how sick they are from an insurer, in order to get a lower premium. This means that healthy people have to pay premiums that are too high, which keeps them out of the market. Laws like the Affordable Care Act (Obamacare) that penalize people for not buying health insurance are aimed at preventing the exit of healthy people from the market, based on exactly the kind of principle Akerlof talks about in his paper.

4. “Uncertainty and the Welfare Economics of Medical Care”, by Kenneth Arrow (1963)

This one is interesting because although the author was famous for mathematical economics, this paper itself involves almost no math — it’s really just an essay making various logical arguments. Arrow is trying to explain why health care — including health insurance — isn’t like other markets. He basically just lists a bunch of reasons why health care is different. These reasons include:

• Health insurance is subject to a lot of information asymmetry — the aforementioned adverse selection, plus “moral hazard” (ie., people with more insurance might be more reckless).

• Health care involves extreme risks, including the risk of death. (Arrow implies, but doesn’t state, that both patients and providers may not be good at making rational decisions under that kind of extreme uncertainty.)

• Humans have strong moral norms around health care — we tend to believe that basic medical care is a universal a human right, that doctors shouldn’t act like profit-seeking businesspeople, a moral disgust at the idea of forcing people to pay for health care before they receive it, and so on.

• Things like communicable diseases cause externalities — if one person gets sick, it puts other people in danger.

• Increasing returns to scale and restrictions on the entry of new health care suppliers create barriers to entry inhibit competition.

• Medical providers regularly practice price discrimination, charging people different prices based on their ability to pay.

All of these factors make the market for health care an absolute mess compared to most markets, which is why the industry tends to be so heavily regulated, and is probably why so many rich countries just go ahead and nationalize their health insurance systems.

Anyway, there are four examples of the foundational economic thoughts that many (most?) PhD students in modern econ departments will be assigned. These papers produced both ideas and methods that are still central to economics research today — in Moskowitz’s terms, reading papers like these is how economists “historicize their methods of knowledge production”.

This is in contrast to the ideas of Karl Marx, which have mostly fallen by the wayside.

Is that because modern economists are neoliberal priests of the free market, who reject government intervention in favor of the power of markets? No, of course not. Every single one of the papers I just cited is about how markets fail, and about how government intervention is needed as a result of those failures. The papers don’t rely on Marxist concepts like the labor theory of value, alienation, exploitation, commodity fetishism, or the inevitable collapse of capitalism.¹ But the world of economic ideas is not defined by a one-dimensional axis between Marxism and neoliberalism — there are plenty of problems with markets that Marx never even thought about.

I don’t know how much economics Alex Moskowitz has studied, but my bet is that he doesn’t actually know a great deal about the foundational economic thought of Paul Samuelson, Kenneth Arrow, or George Akerlof — or about modern econ research in general. So why does he feel qualified to declare that Marx should be viewed as part of the discipline’s foundational canon?

Part of the reason, of course, is that Moskowitz personally likes and values Marx’s ideas. He has done research relating Marx’s ideas to those of other leftist philosophers, and he teaches classes on Marx as well. It’s natural that Moskowitz would want economists to study a thinker he likes.

In a similar vein, I might urge English professors to view Ursula K. LeGuin as one of their foundational intellectuals, because I like Ursula K. LeGuin. In fact, my suggestion might be justified, and some English profs do teach LeGuin. But because I haven’t done an English PhD or existed inside of humanities academia, my suggestion would be that of an amateur outsider. (And I would probably make the suggestion with a little more playfulness and a little less aggression than Moskowitz uses in his comments about economics.)

Another reason Moskowitz might demand that economists include Marx in their canon is that Marx wrote in a literary, discursive, non-mathematical style that Moskowitz, being a humanities scholar, is able to understand (or at least, to more easily convince himself that he understands). Samuelson, Arrow, and Akerlof expressed many of their ideas in the language of mathematics, which Moskowitz, given his educational background, probably doesn’t understand very well. Prioritizing research you’re equipped to understand over that which is opaque to you is a natural human reaction, but it’s a form of the streetlight problem.

So I think the salient question here isn’t “Should Marx be part of the foundational economics canon?”, but rather, “Why should an English professor feel qualified to decide who should be part of the foundational economics canon?”.

And of course the answer here is probably going to be “politics”. I don’t want to put words in Moskowitz’s mouth, of course, but he does seem like a sort of a leftist fellow:

In my experience, many leftist academics in the humanities and social sciences see non-STEM academia as a single unified enterprise — not a collection of knowledge-seeking efforts in different domains, but a single activist political struggle against capitalism, settler colonialism, white supremacy, and so on. In this cosmology, economists are acceptable if and only if they revere the econ-adjacent thinkers whose ideas most closely dovetail with the leftist activist struggle — e.g., Karl Marx.

And in fact, I think this is the most important reason economists should read Marx. His vision of history as a grand revolutionary struggle is a cautionary tale of what can happen when pseudo-economic thought is applied too cavalierly to political and historical questions.

One economist who has read Marx, and who has thought deeply about what he wrote, is Brad DeLong. In a 2013 post, DeLong tried to explain what he thought Marx got right and what he got wrong in terms of his economic thought:

Marx the economist had six big things to say, some of which are very valuable even today across more than a century and a half, and some of which are not…

Marx…was among the very first to recognize that the fever-fits of financial crisis and depression that afflict modern market economies were not a passing phase or something that could be easily cured, but rather a deep disability of the system…

Karl Marx was among the very first to see that the industrial revolution…opens the possibility of a society in which we people can be lovers of wisdom without being supported by the labor of a mass of illiterate, brutalized, half-starved, and overworked slaves…

Marx the economist got a lot about the economic history of the development of modern capitalism in England right--not everything, but he is still very much worth grappling with as an economic historian of 1500-1850. Most important, I think, are his observations that the benefits of industrialization do take a long time--generations--to kick in…

[But] Marx believed that capital is not a complement to but a substitute for labor…Hence the market system simply could not deliver a good or half-good society but only a combination of obscene luxury and mass poverty. This is an empirical question. Marx's belief seems to me to be simply wrong…

Marx…thought [that] people should view their jobs as…ways to gain honor or professions that they were born or designed to do or as ways to serve their fellow- human…The demand for a world in which people do things for each other purely out of beneficence rather than out of interest and incentives leads you down a very dangerous road, for societies that try to abolish the cash nexus in favor of public- spirited benevolence do not wind up in their happy place.

Marx believed that the capitalist market economy was incapable of delivering an acceptable distribution of income for anything but the briefest of historical intervals. …But "incapable" is surely too strong…[S]ocial democracy, progressive income taxes, a very large and well-established safety net, public education to a high standard, channels for upward mobility, and all the panoply of the twentieth-century social- democratic mixed-economy democratic state can banish all Marx’s fears that capitalist prosperity must be accompanied by great inequality and great misery.

This summary, which seems eminently fair to me, establishes Marx as a peripheral, mildly interesting economic thinker — a political philosopher who dabbled in economic ideas, perceiving some big trends but getting others badly wrong, and ultimately leaving little mark on the field’s overall methodology or basic concepts. (Also see Brad’s slides, video, and other commentary.)

But it’s not actually for his economic ideas that we remember Marx — it’s for his political philosophy of class warfare and revolution. And here, I think DeLong has appropriately scathing things to say:

Large-scale prophecy of a glorious utopian future is bound to be false…The New Jerusalem does not descend from the clouds…But Marx clearly thought at some level that it would…

[Marx thought that] social democracy would inevitably collapse before an ideologically-based right-wing assault, income inequality would rise, and the system would collapse or be overthrown…But I think this, too, is wrong…

Add to these the fact that Marx's idea of the "dictatorship of the proletariat" was clearly not the brightest light on humanity's tree of ideas, and I see very little in Marx the political activist that is worthwhile today.

Everywhere any variant of Marx’s vision of proletarian revolution has been tried, it has been not just a failure, but an epic human tragedy. Here’s what I wrote for Bloomberg back in 2018:

[I]t’s hard to forget the tens of millions of people who starved to death under Mao Zedong, the tens of millions purged, starved or sent to gulags by Joseph Stalin, or the millions slaughtered in Cambodia’s killing fields. Even if Marx himself never advocated genocide, these stupendous atrocities and catastrophic economic blunders were all done in the name of Marxism…20th-century communism always seem to result in either crimes against humanity, grinding poverty or both. Meanwhile, Venezuela, the most dramatic socialist experiment of the 21st century…is in full economic collapse.

This dramatic record of failure should make us wonder whether there was something inherently and terribly wrong with the German thinker’s core ideas. Defenders of Marx will say that Stalin, Mao and Pol Pot exemplified only a perverted caricature of Marxism, and that the real thing hasn’t yet been tried. Others will cite Western interference or oil price fluctuations…Some will even cite China’s recent growth as a communist success story, conveniently ignoring the fact that the country only recovered from Mao after substantial economic reforms and a huge burst of private-sector activity.

All of these excuses ring hollow. There must be inherent flaws in the ideas that continue to lead countries like Venezuela over economic cliffs…The brutality and insanity of communist leaders might have been a historical fluke, but it also could have been rooted in [Marx’s] preference for revolution over evolution…[O]verthrowing the system has usually been a disaster. Successful revolutions tend to be those like the American Revolution, which [keep] local institutions largely intact. Violent social upheavals like the Russian Revolution or the Chinese Civil War have, more often than not, led both to ongoing social divisions and bitterness, and to the rise of opportunistic, megalomaniac leaders like Stalin and Mao.

As I note in that post, the successful examples of “socialism” that people cite — the Scandinavian societies of today — are actually social democracies. They achieved their mixed economies through a slow evolutionary process that was absolutely nothing like the revolutionary upheavals predicted and advocated by Marx.

Economists should read Marx, and they should read him with all of this history in mind. It’s a vivid reminder of how social science ideas, applied sweepingly and with maximal hubris to real-world politics and institutions, have the potential to do incredible harm. Marxism is perhaps the single greatest example of social-science malpractice that the human race has ever seen.

This should serve as a warning to economists — a reminder of why although narrow theories about auctions or randomized controlled trials of anti-poverty policies might seem like small potatoes, they’re not going to end with the skulls of thousands of children smashed against trees. Modern economics, with all of its mathematical formulae and statistical regressions, represents academia appropriately tamed — intelligence yoked to the quotidian search for truth, hemmed in by guardrails of methodological humility. The kind of academia that Alex Moskowitz represents, where the study of Great Books flowers almost instantly into sweeping historical theories and calls for revolution and war, embodies the true legacy of Marx — something still fanged and wild.

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1. As it happens, I have read Marx’s Das Kapital. However, it was when I was an undergrad physics major, so I wasn’t really thinking about it in terms of its relation to modern economic theory. Also, like most German philosophy of the time, I found it both pointlessly dense and frustratingly vague.