Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World
US: Sep 2014
How to solve America’s economic woes?
Big government may be the answer.
At least, that’s part of it, says Jeff Madrick in his fascinating and provocative new book, Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World. Former economics columnist for Harper’s Magazine and the New York Times, he doesn’t waste time or mince words, diving unapologetically into the heart of the matter in his introduction: “To call economists overconfident during the modern laissez-faire experiment understates their hubris. The susceptibility of economists to new fashions in thinking, their opportunistic catering to powerful interests, and their walking in lockstep with the rightward political drift of America are disturbing for a discipline that claims to be a science.”
While Madrick asserts that his book is not a wholesale condemnation of mainstream economics, it certainly offers a brutally direct and unforgiving assessment of the flawed thinking through which he says many mainstream economists have unwittingly, yet enthusiastically, contributed to the increasingly messy state of the world.
At the heart of the problem, says Madrick, is that economists have failed to act like the rational, empirical scientists they purport to be. Instead, they have failed to question many of the orthodox tenets of classical economics even in the face of mounting evidence that these core arguments are flawed, if not entirely inaccurate. And this lack of critical thinking has accelerated in recent years.
The path to the financial collapse of 2008 and the Great Recession that followed started with an ideological turn in the 1970s that sought to denigrate government rather than reform it. Economists centrally participated in that shift, emphasizing the laissez-faire philosophies of their discipline over more pragmatic and nonideological ones. Many of them are profoundly responsible for what has happened to America and the world. Value judgments overwhelmed objectivity, fashion overwhelmed serious thought, and opportunity overwhelmed honest methodology.
Where they went wrong, says Madrick, is that these economists conceived of economics as a sort of pure science, consisting of mathematical formulae that in fact reflect and retrench a set of core ideological beliefs. In doing so, they have ignored other disciplines whose contributions could have helped to offset the blind spots of mainstream economics: history, psychology, philosophy and sociology.
History offers concrete evidence of the truths and flaws of economic theories, as well as the fact that no single magic set of rules ever works in all contexts; psychology and sociology help us understand the truth that humans act neither rationally nor do they observe the rules that economists think should order a rational society. “Economics should move in the direction of a more inclusive discipline,” he writes. “The strong bias to make it a science – to presume it is a science – is self-defeating. The bias is in fact anti-intellectual.”
What pervades this book – and more broadly the entire political-economic discourse in America – is ultimately what one might call The Grand Feud: the ideological conflict between John Maynard Keynes and Milton Friedman. They represent the two dominant ideological forces in 20th century American economic thought and policy (and so far our century, too), and the differences in their thinking has been conflated to even more dramatic proportions by their respective followers and ideologues.
To generalize broadly: Keynes championed big government, strong public spending and social programs. Deficits weren’t necessarily bad, generous social benefits strengthen communities and improve society and economy alike, and full employment was possible. So long as governments followed his theories, this model in fact seemed to work quite well (there were economic hiccups, which his opponents exploited, but Madrick suggests these were too complex to blame simply on Keynesian economics).
Friedman, however, represents the ideologically conservative backlash, arguing for a world of small government that mostly stays out of trade and business; a world full of individuals and not communities, where people have the freedom and responsibility to look only after themselves in whatever way they choose. In his acolyte Margaret Thatcher’s words: “There is no such thing as society.” This neoliberal conservatism has held sway for the past 40 years, despite the fact that “during this period in which Friedman’s ideas gained ascendance, the economic record was mostly one of failure.” It has also been more rhetoric than reality: under the guise of of modern free trade agreements, politicians and economists have made trade more restrictive than ever. The difference is that contemporary rules and regulations benefit business, instead of society.
Why then does Friedman’s thinking still predominate among the majority of mainstream economists and the highest levels of government? This calls in the first of the seven bad ideas that Madrick critiques: ‘the beautiful idea of the Invisible Hand’. Ultimately mainstream economics clings to this notion for much the same reason ‘scientists’ (we may use the term loosely) clung to the idea that the earth was the centre of the universe for so many centuries, burning and jailing those who questioned this premise despite mounting – albeit complicated – evidence. The notion that the earth is the centre of the universe is a simple, beautiful idea: it appears self-evident, and it’s an easy-to-explain theory that seems to explain everything.
Deep down, it seems we yearn for easy all-embracing explanations. And the ‘invisible hand’ of the economy – the notion that left to its own devices and without anybody interfering, the economy will ultimately regulate itself to a position of equilibrium—is one such beautiful easy idea. But, like all such ideas, mounting evidence – and Madrick presents much of it here – indicates there is no such thing going on, and that the reality is far more complicated.
In this complicated reality, then, Madrick asserts it is more vital than ever for government to be poised, active and ready to act and intervene in the ways that will avoid the more chaotic and harmful excesses of the ‘free market’ and to protect those things we value as a society (most of which only benefit the economy anyway): “Government creates freedom when it enables people to get a good education and a good job, have good health, retain dignity… it is being sure people have the capabilities to live full lives.”
Historically, Madrick notes, it was doing precisely this, not chaotic unfettered deregulation, that helped build America’s greatness. Bringing public sanitation to the cities (to render them liveable), building canals and railways and highways, introducing mandatory and free public education for adolescents and, later, accessible college education for a broad swath of the public: much of America’s greatness was founded on the very ‘big government’-type things that economists and policymakers today decry. Even their free market ‘success stories’ can inevitably be traced back to a big government root. Silicon Valley grew out of government defense contracts. Many of Apple’s innovative breakthroughs came not from industry competition but from government research labs.
Indeed, government R&D funding and public research facilities have been vital for most technological breakthroughs, and the clawing back of such public funding and resources today raises serious questions about America’s capacity to contribute, or even hold its own, in global innovation in the future. While America stoically upholds Friedman-ite virtues and allows its tech companies to fail rather than receive government aid, the Chinese government (among others) merrily supports its own corporate tech companies and expands in America’s wake.
Madrick hammers home his points with unapologetic clarity and unrelenting waves of evidence. His book presents more analysis than alternatives; more proscription than prescription, but when he does render judgment it is pointed and direct: “A nation that operates as if free markets are adequate governance is a nation headed toward decline and tragedy.”
Having debunked the ‘invisible hand’, Madrick explores other core ideas it has led to – ‘bad ideas’ that, in their modern iterations and ideologically partisan contours, often do more damage than good. He looks at austerity economics, at the criticism leveled against big government, at the obsession, to the point of irrationality, with low inflation. He looks at “the destructive set of ideas known as the efficient markets theory”; and also looks at how these ‘bad ideas’ have taken to the global stage and shaped international trade and free trade negotiations.
It’s hard to call these purely ‘economic debates’, as Madrick points out, because ultimately these debates are not just economic: they’re moral and philosophical. The liberal Keynes recognized this, too, commenting already in the ‘20s that “The fiercest contests and the most deeply felt divisions of opinion are likely to be waged in the coming years not round technical questions, where the arguments on either side are mainly economic, but round those which, for want of better words, may be called psychological or, perhaps, moral.” And while the conservative Friedman argued that his theories were based on facts (despite what Madrick and others have revealed to be a very narrow, selective and often unrepresentative cherry-picking of facts), he, too, felt he was serving a moral good: “safeguarding freedom”.
This is part of the problem: people often lose sight of the fact that to debate the economy is to debate more than just numbers: it is to debate what social values we want our economy to reflect. At least, that’s how it should be. Yet people often tune out when ‘experts’ start talking about inflation and interest rates and other such technobabble of the economics field. Such language is precisely how economists have reinforced the myth of their field being a science.
In reality, these debates – and the challenges for Americans and other countries to grapple with in the future – are not economic ones, and they are not narrow, technically ‘scientific’ ones. They are moral and philosophical ones, and thus the preserve of everyone to weigh in on.
How can we fix this? Economics must be more open to honest, rational debate says Madrick; it must become more interdisciplinary; it must become less ideological and opportunistic in reinforcing the values of the rich and powerful. Madrick is blunt: “Economics should allow for ambiguities, uncertainties, unknowns, and multiple explanations. On-the-ground surveys, empirical research, and experiments should trump reliance on pure theory and massive macro-oriented research.”
The problem, Madrick’s work suggests, is that politicians and policy-makers try to reduce the insights economics offers into a set of iron-clad rules: simple principles to be followed and pursued under all circumstances. Privatization is good, big government and protectionism is bad, unions drive up wages. While sometimes these might be true, often they are not. Protectionism has been the source of much vital economic growth, and often unions provide a vital counterbalance to the unnatural political influence and interference of big business.
By reducing economic insights to a set of rules that are applied under all conditions, many of these erstwhile astute insights have wound up wreaking horrific damage to economies and societies alike, through their imposition under inappropriate circumstances. While policy-makers bear the blame for such simplistic thinking, Madrick says economists share that blame for simply following along and failing to offer the sort of dispassionate critique that could stem the damage of an overly simplistic policy regime. Whether this is due to a lack of intellectual rigour, or a susceptibility to opportunism, the result is the same: a discrediting of the discipline coupled with considerable social and economic damage to the countries that fall under sway of such policies.
Seven Bad Ideas is a provocative and absorbing read, albeit one that’s understandably heavy on the economics: some basic understandings of the economy and finance are useful. Ideal for university courses, it’s still quite accessible, and will particularly appeal to students of politics as well as finance (in fact, it should be required reading for students of business, economics and public policy). Madrick makes a strong, persuasively argued case, offering a refreshing take on the political and fiscal policies that have defined our era, and the questionable foundations on which they uncomfortably rest.