Economics in Deserved Decline: The Comeuppance of a Profession That Took Itself Far Too Seriously

Posted in: Tax and Economics

“The rise of economics is a primary reason for the rise of inequality.” That sentence is the central lesson in Binyamin Appelbaum’s recently published essay, adapted from his new book, The Economists’ Hour: False Prophets, Free Markets and the Fracture of Society.

I have not yet had the chance to look at Appelbaum’s book, but his essay makes for powerful reading. Because his argument dovetails so nicely with much of my own writing, I will use this column to highlight his most important arguments and to put them into some perspective for those who know little or nothing about the inner workings of the economics profession.

I should add (perhaps as a warning, but at least as a matter of truth in advertising) that I will draw extensively from personal experiences in analyzing Appelbaum’s arguments. This is because the time frame that he discusses—the era of the “rise of economics”—happens to coincide not only with my lifetime but also with my career path into and then out of economics. My story is in a sense a data point within his story.

The larger point, however, is that we should welcome the decline of economics, because the history that Appelbaum describes (and that I lived) is a stunning indictment of what can go wrong when an academic field is given too much responsibility with too little accountability. And as I will discuss in the final section of this column, those lessons have great relevance to our present problems.

The Economists’ Hour Started a Half Century Ago, and Its Time Never Should Have Come

Appelbaum begins his essay by noting that, through the middle of the twentieth century, economists were some combination of pariahs and afterthoughts in the halls of power (in Washington and elsewhere). He quotes a former chairman of the Federal Reserve—the central bank of the United States, which is now fairly teeming with economists—saying in the 1950s that he had a small group of economists on staff because they were occasionally useful, but he kept them in the basement because “they don’t know their own limitations.”

As a particularly apt example of this, I recall talking in the 1990s to the non-economist head of Congress’s Joint Committee on Taxation, who told me that a young economist who had recently applied for a staff position had insisted that corporate taxation could not collect any revenue at all. When his interviewer (and potential boss) pulled out a table showing the hundreds of billions of dollars that the U.S. government collects from corporate income taxes, the young economist was undeterred: “The data in that table must have been falsified. Economic theory says that rational businesses will be able to avoid all business taxes, so the revenue from business taxes must be zero.” Talk about not knowing one’s limitations!

In any case, by the 1960s and into the 1970s, economists were beginning to make real noise in the public arena. The development of mainframe computers allowed technically competent economists to develop outsized reputations—and, in some cases to make a great deal of money—by building large-scale computer programs that churned out projections from economic models that included hundreds of equations. For the first time, it seemed possible to “solve” economics once and for all and to turn economic policy making into a self-driving vehicle.

I was in high school and college when these advances in computing power were causing the reputation of the economics profession to soar. Companies like Data Resources, Inc. and Chase Econometrics were being quoted uncritically in major news sources. Their forecasts were considered the keys to the kingdom in understanding the increasingly technocratic world bedeviled by “stagflation” (a combination of high unemployment and high inflation) and policy paralysis.

It was hardly a coincidence, then, that during college in the late 1970s I changed my intended career path from law school to a Ph.D. program in economics. I happened to be good at math, which was the coin of the realm in the new world of economics, and more importantly, I wanted to do something that mattered. I cringe now to remember a moment when, during my first year of graduate school in 1981, I tried to impress a young woman by telling her that “I’m determined to use mathematical rigor in solving the world’s problems.”

Amazingly, she did not laugh in my face; but what was I thinking? Actually, the answer is quite simple: I believed the hype about my chosen field, and I thought that economics was on the cusp of actually delivering on its outsized promises.

What I did not yet realize—and what Appelbaum fails to mention (at least in his excerpt)—is that economists had by that point stopped for the most part caring about policy, at least as a formal matter (although, as I will explain in a moment, this was largely a ruse). Almost none of the time in my graduate courses in a top Ph.D. program was spent on questions of policy, with everything being focused on developing technical expertise.

Indeed, in the hierarchy of subfields within economics, the highest position was held by “theory,” which actually meant applied mathematics. Even mentioning policy applications was considered declassee and evidence of shallowness or worse. The more “practical” the field—labor economics, development economics, and God forbid feminist economics—the lower the status. Anything that was not “rigorous economics” was dismissed as “mere sociology.”

Even so, and as I mentioned a moment ago, the high priests of economic theory were very much involved in a shell game by which they pretended not to care about mere applications of their oh-so-elegant theories but in practice aggressively policed the boundaries of which questions economists were even allowed to ask.

Indeed, by the time I was in graduate school, it had already become risky to talk in a theory seminar about even so fundamental an economic concept as unemployment. Why? The dominant theory of “market equilibrium” said that there was no possibility of unemployment—at least, not involuntary unemployment, because a person who was not working must logically have refused to work at the wage that was on offer.

The problem could not be a lack of jobs, because employers would always hire people if the wage was low enough. The problem, then, must be that people were unwilling to work for low wages—and if they thought themselves too good for such jobs, then they deserved their idleness!

The emerging right-wing consensus among economists was very much opposed to minimum wages for precisely this reason. That is, the theory held that the only time a worker can be involuntarily without a job is when the government foolishly prevents the wage from adjusting such that everyone can get a (low-paying) job.

And this logic was not limited to analyses of the worst-paying jobs. The conventional wisdom was that labor markets—like all markets—would do just fine if only the government left them alone, and therefore any discussion of involuntary unemployment at anything above the minimum wage was outright silly. Again, if a person was not working, the theory held that he must have decided not to work.

Am I exaggerating? Hardly. Stories at the time abounded about the extremes to which the aggressive adherents of the newly dominant markets-always-solve-everything school of thought would go. One story had such a true believer asking the presenter of a paper during a graduate seminar: “Is your paper based on the idea that there can be involuntary unemployment?” When the answer was in the affirmative, the questioner stood up and left the room. I once said to another graduate student that it was important to look at reality rather than theory, and he literally laughed in my face.

More generally, the principal movers and shakers in this hegemonic group openly exulted at having so changed the environment in economics departments that discussions of “old ideas” like involuntary unemployment were being met with “titters and giggles.” They took over the top journals, and well before the end of the century they had made it impossible to get a job in even a low-ranked economics department unless one based all analyses on the dominant economists’ idiomatic assumptions.

Interestingly, this increasing professional dominance by the market idolaters continued even though there were plenty of economists who were neither blind to reality nor politically reactionary. For example, one highly regarded economist responded to the claim that there can be no involuntary unemployment by archly commenting that the Great Depression could not possibly have been “an extended national vacation.”

Yet even the doubting economists acceded over time to the theoretical requirements of the “market clearing” model of economics. They gamely tried to work within that theory to try to reach non-reactionary results—often successfully—but the underlying imperatives of the new model nonetheless drove the profession into an intellectual cul-de-sac.

Why It Mattered—and Matters

This perversion of the original promise of modern economics—from “Economic models loaded onto computers can help policy makers solve real problems” to “There is only one right way to think about economics, and it is that markets are always better than policy makers’ decisions”—was accelerating during my early years in graduate school. I decided to move to the periphery of the profession rather than to knuckle under to the absurd requirements of the dominant model, but eventually even that was not a plausible strategy. I continued to care about economic policy questions, but I found—as many other economists had also concluded—that the unshakable expectations within economics departments prevented interesting work from being done there. In the end, I found myself returning to my first instincts and thus enrolled in law school.

One of the main reasons that I chose not to engage with the dominant approach in economics is that that school of thought, as Appelbaum points out, categorically rejected discussions of inequality. Indeed, he quotes one of the leading stars of the dominant school: “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.”

More colorfully, as Appelbaum notes: “In the words of a British acolyte of this new economics, the world needed ‘more millionaires and more bankrupts.’” What could that possibly mean? The idea was that having the government allow the players who dominate markets to fight it out amongst themselves might (indeed, almost certainly would) result in a concentration of wealth, but that was very much to be desired.

It was thus unacceptable to talk about inequality (much less unemployment) in economics seminars. Even so, this would not have been such a problem if it had been limited to the ivory tower. Unfortunately, the denizens of the top economics departments are the natural candidates for top jobs in the government and in presidential campaigns. Once in those positions, they bring their habits of mind to policy discussions, which pushes out pesky pedestrian concerns about maldistribution of economic rewards.

This is how even Democratic presidents ended up playing the market idolatry game. The top economist in Bill Clinton’s administration was Harvard superstar Lawrence Summers, who enthusiastically helped to dismantle regulations that supposedly prevented financial markets from reaching their ideal, efficient states of nature. The world paid a huge price for that particular bit of ideological rigidity, in the form of the Great Recession of 2008-09.

As the economy became more and more unequal over the last forty years or so, Democrats decided that they had to rely on billionaires to fund their campaigns, which had predictable results. In particular, kowtowing to the wealthy removes anti-inequality policies from the realm of thinkable thoughts. (Rich people, even rich liberals, frequently have a problem with labor unions, because paying workers as little as possible is a big part of what makes billionaires billionaires.) Attacks on public schools (which also have a distinctly anti-union aspect) were thus embraced by Barack Obama, not just by Republican extremists.

The Democrats’ embrace of a market-worshiping approach to economics is known as neoliberalism, which has in one way or another been the target of much of my writing over the years. The bipartisan belief that we need only minimize government actions and allow markets to magically produce “efficient” outcomes never made any sense, especially as markets produced more and more inequality—and, as Appelbaum points out, worsened the inevitable human costs such as falling life expectancy for poorer Americans.

Thankfully, not everyone who fell under the spell of neoliberalism lost sight of the bigger picture. Earlier this year, Berkeley economist Bradford DeLong (who, although a few years older, overlapped with me in graduate school) reflected on what his generation of neoliberal economists had wrought. It was a brutal self-examination, for which he deserves credit.

As I noted in a Dorf on Law column earlier this year, a Vox interview of DeLong included his conclusion that “that neoliberals’ time in the sun has come to an end,” which the Vox article explained this way:

The core reason, DeLong argues, is political. The policies he supports depend on a responsible center-right partner to succeed. They’re premised on the understanding that at least a faction of the Republican Party would be willing to support market-friendly ideas like Obamacare or a cap-and-trade system for climate change. This is no longer the case, if it ever were.

In other words, when DeLong and others were deferring to the market idolaters in the seminar room, he and the more thoughtful economists in his group understood that the market-clearing model was at best a limited heuristic device. Most importantly, when they moved from their departmental offices into policy positions, they expected that the economists on the other side of the political divide would be more realistic and set aside their market absolutism. This expectation went unrealized, to say the least.

I am one of the people who opted out of the world of academic economics while that revolution was going on, but I am nonetheless resisting the urge to take a victory lap now. Any sense of vindication, after all, is not only childish but also does nothing to help the hundreds of millions of people whose lives were made worse (and sometimes prematurely ended) by neoliberal policies. So even though I might be justified in saying, “I told you so,” any sense of satisfaction is truly hollow.

But it is at least a hopeful sign that a high-profile person like Binyamin Appelbaum, who serves on the editorial board of The New York Times, is now calling out the economists in both parties who did so much damage in the Age of Economics. That age cannot end too soon.

Posted in: Tax and Economics

Tags: Economics, policy