BOOK REVIEW | ECONOMISM: Bad Economics and the Rise of Inequality
Someone needed to write a book about how economic theory has been abused in American politics. And, someone finally did.
James Kwak’s Economism is a very important and timely book, and anyone who is interested in public affairs should read it.
Kwak, a law professor at the University of Connecticut, spins a tale of how simple supply-and-demand theory fed a free-market ideology that led to a financial crash, a dysfunctional healthcare system, spiralling inequality and a threadbare social-safety net.
The basic idea is that by getting everyone to think in Econ 101 terms — perfectly competitive, well-functioning markets, rational, well-informed consumers and so on — free marketers were able to redefine the terms of the national debate to favour their own interests.
With Econ 101 as the default lens through which everyone views the world, Kwak argues, government programmes and regulations start to seem dangerous and inefficient, while inequality begins to feel like the natural and just order of things.
ECONOMISM: Bad Economics and the Rise of Inequality
There is much truth here. When competitive free markets and rational well-informed actors are the baseline assumption, the burden of proof shifts unfairly onto anyone proposing a government policy.
For far too many years, free marketers have got away with winning debates by just sitting back and saying "Oh yeah? Show me the market failure!"
That deck stacking has long forced public intellectuals on the left to have to work twice as hard as those safely ensconced in think-tanks on the freemarket right, and given the latter a louder voice in public life than their ideas warrant.
It is also true that simple
theories, especially those people learn in their formative years, can maintain an almost unshakeable grip on their thinking. For example, the basic Econ101 theory of supply and demand is fine for some products, but it does not work very well for labour markets.
It is incapable of simultaneously explaining both the small effect of minimum wage increases and the small effect of low-skilled immigration.
Some more complicated, advanced theory is called for. But no matter how much evidence piles up, people keep talking about "the labour supply curve" and "the labour demand curve" as if these are real objects, and to analyse policies — for example, overtime rules — using the same old framework.
An idea people believe in despite all evidence to the contrary is not a scientific theory — it is an infectious meme.
Academic economists are unsure about how to respond to the abuse of simplistic economic theories for political ends. On one hand, it gives them enormous prestige. The popularity of simplistic economic ideas has made economists the toast of
America’s intellectual classes. It has sustained enormous demand for the undergraduate economics major, which serves, in the words of writer Michael Lewis, as a "standardised test of general intelligence" for future business people. However, as Kwak points out, the simple theories promulgated by politicians and on the Wall Street Journal editorial page often bear little resemblance to the sophisticated theories that are utilised by real economists.
And when things go wrong — when the financial system crashes, or millions of workers displaced by Chinese imports fail to find new careers — it is academic economists who are often blamed, not the blasé and misleading popularisers.
The solution that Kwak discusses, and which I endorse is empirical evidence. The economics discipline itself has been shifting from theory to data for years now and the world is taking notice.
The economics discipline has been shifting from theory to data and the world is taking notice
Every time studies show that tax cuts don’t do much to encourage investment, or that the effect of minimum wage hikes is modest, the public loses a little faith in the power of traditional Econ 101.
The cure for economism is not less economics — it is more and better economics. So you should read Kwak’s book. But there is one big question it does not answer to my satisfaction.
Why was economism — or as I’ve called it, 101-ism — really so successful at capturing hearts and minds? Kwak chalks it all up to the purposeful influence of business leaders, the wealthy and their enablers.
He writes: "A way of seeing the world, such as economism, does not become widespread and influential because it is more accurate or correct than the alternatives. Instead, world-views become powerful because they reflect the beliefs and serve the purposes of an important interest group." I don’t really believe this. The real-world usefulness of a world-view or ideology really does have an effect. Russia and China have given up communism not because they stopped having working classes, but because it became obvious that their communist systems were keeping them in poverty. And Americans are now starting to question economism because of declining median income, spiralling inequality and a huge financial and economic crisis.
So, I wonder if economism was really as unrealistic and useless as Kwak seems to imply. Did countries that resisted economism — Japan, for example, or France — do better for their poor and middle classes than the US?
Wages have stagnated in those countries, and inequality has increased, even as those countries remain poorer than the US. Did the US’s problems really all come from economism, or did forces such as globalisation and technological change play a part?
Cross-country comparisons suggest that the deregulation and tax cuts of the 1980s and 1990s, although ultimately excessive, probably increased economic output somewhat.
Economism has obviously gone too far.
The world-view it promulgates is too simplistic and, it sometimes ends up hurting the many to benefit the few. But in the search for new ideologies and world views, economism should not be forgotten. It should be just one tool in the mental toolbox.