The term “neoclassical economics” was born in 1900; in this paper I am proposing economist-assisted terminasia; by the powers vested in me as president of the History of Economics Society, I hereby declare the term neoclassical economics dead. Let me be clear about what I am sentencing to death—it is not the content of neoclassical economics. As I will discuss below, it is difficult to determine what that content is, and even if I wanted to kill the content, I have no role in determining content. The role of historians of thought is to record, not determine, content. What I am declaring dead is the term.

The thesis that economics is “performative” (Callon 1998) has provoked much interest but also some puzzlement and not a little confusion. The purpose of this article is to examine from the viewpoint of performativity one of the most successful areas of modern economics, the theory of options, and in so doing hopefully to clarify some of the issues at stake. To claim that economics is performative is to argue that it does things, rather than simply describing (with greater or lesser degrees of accuracy) an external reality that is not affected by economics. But what does economics do, and what are the effects of it doing what it does?

That the theory of options is an appropriate place around which to look for performativity is suggested by two roughly concurrent developments. Since the 1950s, the academic study of finance has been transformed from a low-status, primarily descriptive activity to a high-status, analytical, mathematical, Nobel-prize-winning enterprise. At the core of that enterprise is a theoretical account of options dating from the start of the 1970s. Around option theory there has developed a large array of sophisticated mathematical analyses of financial derivatives. (A “derivative” is a contract or security, such as an option, the value of which depends upon the price of another asset or upon the level of an index or interest rate.)

A few years after the publication of The General Theory, a number of economists began to present John Maynard Keynes’s model, identified with IS-LM, as a particular case of the Walrasian model. This view of IS-LM has often been rationalized by a basic syllogism: IS-LM was invented by John Hicks, Hicks was a Walrasian, hence IS-LM was Walrasian. But as some historians of macroeconomics have shown, this syllogism is false. Considering this confusion as an established fact, this article studies how and why IS-LM came to be considered as Walrasian. It shows that the standard view took its roots in “The Rate of Interest and the Optimum Propensity to Consume,” a paper published by Oskar Lange in 1938, and resulted from a need to clarify the foundations of Keynes’s theory.

Something happened to economics in the decade of the 1950s that is little appreciated by most economists and even by professional historians of economic thought. The subject went through an intellectual revolution as profound in its impact as the so-called Keynesian Revolution of pre-war years. I call it the Formalist Revolution after Ward (1972, pp. 40–41), who was the first to recognize the profound intellectual transformation of economics in the years after World War II.

Economics revolves around a central character: “economic man.” As historians, we are all familiar with various episodes in the history of this character, and we appreciate his ever-changing aspect even while many of our colleagues in economics think the rational economic agent of neoclassical economics is the same kind of person as Adam Smith's economic man. The fact that this is a familiar history means that I can focus on a few salient examples—a “short” history, rather than a complete history— to provide the raw material for my account which has a more specific agenda than simply a history of economic man. My aim is to re-consider the history of economic man as a model man. This leads to two further questions: What kind of a role has this model man played in relation to the science he inhabits? And, how can we characterize the processes by which economists have arrived at their model characters?

To illuminate this history of economic man, I adopt ideas from philosophy about how scientists arrive at models and use them in science. Of course, economists have always had their own ideas about such matters. So in effect, there are two intersecting strands in this account: one is how economists have discussed their strategies in creating these characters, and the other is how philosophers of science have—at the time and since—labeled and thought about such strategies. These discussions, from the economists and from philosophers, will enable us to explore the usefulness of the concept of idealization, a standard way of thinking about model construction in philosophy of science. They will also allow us to consider model man as an ideal type (using Weber's concept) or as a caricature (to follow Gibbard and Varian's label). These analytical labels—ideal types, idealization, and so forth—relate to questions about the status of models and their construction that are sometimes evident, and sometimes lie below the surface, but always remain important in the historical discussions about economics as a science. My account is concerned then with constructions of the persona of economic man, how he has changed over the last 250 years, how far we can regard that character as a model, and with reflections on his role in the changing science of economics.

Scholars have long been interested in the apparent dichotomy between sympathy and self-interest in Smith. The question of the consistency between The Theory of Moral Sentiments (TMS) and An Inquiry into the Nature and Causes of the Wealth of Nations (WN)—the famous Das Adam Smith Problem—is definitely still relevant for anyone attracted to Smith scholarship. Although there is some agreement that the two works are consistent and, furthermore, parts of an incomplete system, it seems that the Problem continues to attract interest, not only for its historical and philosophical appeal, but also perhaps for its implications for the current economics-and-ethics debate.

All attempts to define American institutionalism, whether in terms of a set of key methodological or theoretical principles or in terms of the contributions of the three generally accepted “founding” figures of Thorstein Veblen, Wesley Mitchell, and John R. Commons, have run into a problem with the apparent disparities within the movement. In terms of the three “founders” there are obvious and quite dramatic differences between the methodologies and theoretical directions of the three men. Veblen is associated with an evolutionary approach, a key distinction between pecuniary institutions and technological or industrial requirements, and a biting critique of orthodox theory and business practices; Mitchell with quantitative methods and detailed research on business cycles, an approach he established at the National Bureau of Economic Research (NBER); Commons with documentary histories, work on labor issues and public utility regulation, and an analytical scheme emphasizing the evolution of legal institutions and processes of dispute resolution. The same problem shows up with more explicit types of definition that often seem to capture only some parts or aspects of the movement and not others, or are so broad as to lack much specific content. Institutionalism easily appears as incoherent, as little more than a set of individual research programs with nothing in common other than a questioning of more orthodox theory and method. Thus, Mark Blaug has stated that institutionalism “was never more than a tenuous inclination to dissent from orthodox economics” (Blaug 1978, p. 712), and George Stigler has claimed that institutionalism had “no positive agenda of research,” “no set of problems or new methods,” nothing but “a stance of hostility to the standard theoretical tradition” (quoted in Kitch 1983, p. 170). This view still finds wide currency— for example Oliver Williamson has recently argued that “unable or unwilling to offer a rival research agenda, the older institutional economics was given over to methodological objections to orthodoxy” (Williamson 1998b, p. 24; see also 1998a).

Economists suffer badly from what we might call “Cliophobia.” Why bother with the history of economic thought?, they ask. Why not just do economics? What is the point of constantly recalling the inadequate economics of yesterday instead of improving the economics of today and tomorrow?

In the course of coediting the Handbook of Experimental Economics (forthcoming) it became clear to me that contemporary experimental economists tend to carry around with them different and very partial accounts of the history of this still emerging field. This project began as an attempt to merge these “folk histories” of the origins of what I am confident will eventually be seen as an important chapter in the history and sociology of economics.

According to the folk history of transaction costs, the concept is due to a seminal article by Ronald H. Coase, written in the 1930s. Failing to provide an operational framework, Coase's article was neglected for a long time, or so the story continues. In the 1970s, after the limits of the Arrow-Debreu paradigm had become obvious, several authors, including Oliver E. Williamson, Kenneth J. Arrow, Armen A. Alchian, and Harold Demsetz, took up the notion of transaction costs and turned it into a useful analytical tool. Partly responsible for this sudden upsurge of interest was an article by Coase in which he allegedly proposed the now famous “Coase Theorem.”

Econophysics presents itself as a new paradigm and a new specialty (or even a discipline) using various models and concepts imported from condensed matter and statistical physics to analyze economic and financial phenomena. Given that econophysics is based on different fundamental assumptions from those of mainstream economics, the disciplinary position of econophysics is not so clear. In this perspective, this paper will analyze the progressive institutionalization of econophysics using bibliometric methods to identify core authors as well as the structure of the disciplines with which econophysics is closely related.

Recent articles have explored from different perspectives the psychological foundations of American institutionalism from its beginning to the interwar years (Hodgson 1999; Lewin 1996; Rutherford 2000a, 2000b; Asso and Fiorito 2003). Other authors had previously dwelled upon the same topic in their writings on the originsand development of the social sciences in the United States (Curti 1980; Degler 1991; Ross 1991). All have a common starting point: the emergence during the second half of the nineteenth century of instinct-based theories of human agency. Although various thinkers had already acknowledged the role of impulses and proclivities, it was not until Darwin's introduction of biological explanations into behavioral analysis that instincts entered the rhetoric of the social sciences in a systematic way (Hodgson 1999; Degler 1991). William James, William McDougall, and C. Lloyd Morgan gave instinct theory its greatest refinement, soon stimulating its adoption by those economists who were looking for a viable alternative to hedonism. At the beginning of the century, early institutionalists like Thorstein Veblen, Robert F. Hoxie, Wesley C. Mitchell, and Carleton Parker employed instinct theory in their analysis of economic behavior. Their attention wasdrawn by the multiple layers of interaction between instinctive motivation and intentional economic behavior. Debates on the role of instinctsin economicswere not confined to the different souls of American Institutionalism, and many more “orthodox” figures, like Irving Fisher or Frank Taussig, actively participated.

This paper examines James Buchanan’s earliest writings within the context of post-WWII public finance theory and his education at Chicago. Public choice scholars have long recognized their ties to Chicago, but few have examined Chicago’s role in serving as the primordial soup for Buchanan’s later work in public choice. Thus, we know very little about the subdiscipline of public finance at Chicago and its institutional and intellectual traditions in the immediate post-war period. As the influence of Frank Knight, price theory, and catallactics on Buchanan have been well explored, the focus here is on Buchanan’s graduate training in public finance, the departmental emphasis on product differentiation of ideas, and the general acceptance in ‘Old Chicago School’ economics of the importance of institutions and institutional design. I find that while he maintained a high degree of intellectual affinity with Chicago economics generally, Buchanan broke decisively with orthodox public finance (including that taught at Chicago) on several substantive issues early in his career, including the importance of expenditure theory and the relevance of the benefit principle and voluntary exchange.

Often papers begin with an idea. Once the paper is written, sometimes little sometimes much effort goes into finding a title. This lecture worked the other way round. It started with the title, which I passed on to Roy Weintraub, my successor as President of the Society, when I still had but the vaguest idea ol what I would write. When Roy heardmy title he pointed me to a passage from C. Vann Woodward, that he hadhimself quotedin Stablizing Dynamics:

Lost causes, especially those that foster loyalties and nostalgic memories are among the most prolific breeders of historiography. If survivors deem the cause not wholly lost andperhaps in some measure retrievable, the search of the past becomes more frantic and the books about it more numerous. Blame must be fixed, villains found, heroes celebrated, old quarrels settled, old dreams restored, and motives vindicated. Amid the ruins controversy thrives and books proliferate (quoted by Weintraub 1991, p. 125, from Vann Woodward 1986).

Despite its recent re-emergence to analytical importance, the phenomenon of increasing returns remains outside the central core of neoclassical economics. The history of this idea (or set of ideas) might have been quite different if Adam Smith's explanation of the origins of trade had not been replaced by that of David Ricardo. To Adam Smith, mutually beneficial exchange emerges because of specialization, which, in its turn, implies the presence of increasing returns to the size of the exchange nexus. Even in a world of equals, trade offers mutuality of gain. There is no need for participants in the economic nexus to differ one from another. In the Ricardian logic, by contrast, trade presumably emerges because productive resources differ in their capacities to create economic value, at least among separate “goods.” Specialization is a “natural” feature of resource endowments—a feature that is exploited by trade. Comparative advantage ensures the mutuality of gain. But, in this explanation, there is no direct linkage between the size of the exchange network and the degree of specialization that is viable. There is no need to introduce increasing returns. Comparative advantage may be present even if there are constant returns to scale, both for the economy and for its separate productive sectors.

What are the prospects for progress in heterodox economics? The question posed for this roundtable discussion raises a wide range of important issues, for heterodox economics and for economics as a whole. In order to clarify some of these issues, this contribution approaches the question from a practical point of view: what strategy would promote the progress of heterodox economics?

Popular texts typically assert that guilds of craftsmen “monopolized” markets in medieval England. Norman Cantor's Medieval Reader declares “craft guilds' … main purpose and activity was narrow regulation of industrial productivity in order to restrain competition” (Cantor 1994, p. 278). Douglass North's Structure and Change in Economic History asserts “… guilds organized to protect local artisans … [and their strength] in preserving local monopolies against encroachment from outside competition was frequently reinforced by the coercive power of kings and great lords” (North 1981, p. 134). Henry Pirenne's Economic and Social History of Medieval Europe proclaims:

craft guilds, under a diversity of names, officium or ministerium in Latin, metier or jurande in French, arte in Italian, ambacht or neering in the Netherlands, amt, innung, aunft, or handwerk, in German, craft-gild or mistery in English, … fulfilled the need of economic protection. The pressing necessity to stand by one another, so as to resist competition from newcomers (Pirenne 1937, pp. 177–79).

In his autobiographical piece, “A Jevonian Seditionist,” Sidney Weintraub ([1983]1989, p. 50) recalled that in 1957 he sent an offprint of his paper on the micro-foundations of aggregate supply to D. H. Robertson. He remembered that “Robertson generously wrote me that it was ‘lucid and definitive,’ and that thenceforth he would not return to the subject again. I confess that I have lost or misplaced his letter, along with the one by [Alan] Sproul, in my move to Canada, though they were prized possessions.” And I have my own memory of a conversation with Sidney in which he told me that Robertson had written in that letter “If this is not what Keynes meant, it is what he should have meant.”