Can Economics Get Better, Even Though It Can’t Get Better?

Posted in: Tax and Economics

It is increasingly rare that I am able to write about current affairs with any sense of optimism or happiness. A quick review of my columns here on Verdict over the course of the last year reveals what must honestly be called a depressing body of work.

This is mostly, of course, because our political system has been completely distorted over the last generation—and especially over the last three or four years—putting us truly in danger of experiencing a break with more than two centuries of constitutional democracy. Pretending that this is not happening is not an option for any author who wants to be able to look at himself in the mirror every morning.

Even when I am not writing about Donald Trump’s serial assaults on the rule of law, the news about the Democrats’ presidential contest continues to disappoint. A party that had every reason simply to find the most popular policies and the most optimistic messenger instead continues to be controlled by elites who are, among other notably harmful strategies, working overtime to defeat Elizabeth Warren and to cast her positive vision of egalitarian capitalism as a “pipe dream” or somehow an assault on economic prosperity.

Therefore, rather than being able to look at the Democrats and say, “Well, we don’t know whether Trump and the Republicans will accept defeat, but at least we know that the Democrats are coalescing around a positive vision of shared prosperity and justice,” we instead see Democrats saying, “Oh, we dare not be ambitious, because that might scare some people off. Better to be as minimal and inoffensive as possible.” We should all be offended.

Today, however, I come with good news. Befitting the times, the good news comes with some serious caveats, but at least it is good news. It relates to my October 3 Verdict column: “Economics in Deserved Decline: The Comeuppance of a Profession That Took Itself Far Too Seriously.”

This good news is that the economics profession is beginning to show some growth in terms of what constitutes “thinkable thought,” specifically to move beyond the narrow notion of “Pareto efficiency” that economists have used for decades to support trickle-down economics.

The caveat is that this good news is almost certainly not going to make much difference in actual economic policies. That it is even possible for something good to happen, however, is very much worth discussing.

The Neoliberal Nightmare of the Late Twentieth Century

In my October 3 column, I used my professional path into and out of economics as a vehicle to explore the hard right turn that academic economics as a whole took starting in the 1970s. I discussed at length an important new book by Binyamin Appelbaum, previewed in an essay in The New York Times, where he serves on the editorial board.

Appelbaum tracks and amplifies a critique of mainstream economics that people like me have been advocating for quite some time, although the efforts of our band of dissenters have had almost no effect. Indeed, in some ways I owe orthodox economists a debt of gratitude because the rigidity of thought within nearly all economics departments was so extreme that it drove me to find my bliss as a legal scholar instead. So maybe I can reserve one cheer for the narrowness of modern economists.

But although I was able to find a way into an academic field in which I could explore the issues that motivate me (and to do so without arbitrary restrictions on intellectual or methodological choices), economics writ large continues to have a profoundly negative effect on everyone else (and on me, as a human being).

From the big-name economics departments to the lesser renowned ones, the basic lesson of mainstream economics was that questions of distribution—of rich and poor, and of the growing inequality between them—were not only uninteresting but illegitimate.

The only thing that mattered was the peculiarly narrow definition of efficiency emphasized by orthodox economic theory, which is actually incoherent as a theory and can thus be used by the powerful to defend their power. And if you are a billionaire who can support a bunch of economists who will tell the world that your wealth and power are the inevitable result of your awesome and unique talent—and that anything that we might do to address the people left behind by the economy will only make things worse—then your billions will be much more secure.

The surprising reality is that mainstream economists’ supposedly objective defenses of the efficiency criterion are utterly opportunistic, taking as unchallengeable the arbitrary “property rights” that right-wing libertarians hold sacrosanct.

To put it bluntly (and, I hope, memorably), a world in which slavery is legal is a world in which ending slavery is inefficient (by the standard economic definition). By contrast, if slavery is already illegal, it is the enslavement of people that is inefficient. The larger point is that we can describe anything as efficient or inefficient, depending on what we take to be the core property rights in society.

Why does this matter? Because the standard move in economics for the past half-century has involved acting as if some rights (such as businesses’ “freedom of contract”) are inviolable, whereas others (such as people’s right to unionize, the right to clean air, or the right to medical care) are either ruled out entirely or are provided to people only at the whim of the much-mythologized “free market.”

As one dissenting Ph.D. student noted recently about her chosen field: “Economists, and the free-market doctrine they cling to, are partly to blame for decades of stagnant wages and soaring inequality. Powerful people beget policies that help the powerful.” She referenced in particular a hoary example, saying that “discrimination in hiring and pay [is] not … an unfortunate failure of the marketplace, but … a persevering reality that requires action.”

That latter point is worth emphasizing, because even fifty years after conservative icon Milton Friedman claimed without evidence that profit-motivated businesses would “naturally” compete for top talent and thus ignore irrelevant things like race and gender, we still see mainstreams economists wedded to the idea that discrimination is somehow inconsistent with profit-seeking businesses. Theory without evidence tells them that the government can only make things worse if it tries to end discrimination.

That is but one example—a powerful one, to be sure—of many demonstrating how the narrow ideological lens within economics departments has caused the profession to reinforce inequality and injustice. How can we do better than free markets, they ask, when we simply know that free markets will make everything right?

The Good News: Some Economists Are Showing Signs of Change

One of the challenges of writing about an entire academic field is that there will be counterexamples to challenge any general statement. But just as we know that “Ireland and Israel begin with ‘I’” does not disprove the statement that “Most countries’ names do not begin with ‘I,’” knowing that there are some economists who have managed to do some interesting work that is not completely orthodox does not prove that there is no orthodoxy.

Even in top-level economics departments, there have been scholars who have managed to turn out some good work that does not merely reinforce excuses for national and global inequality. And that is all to the good. It takes more than an unrelated set of examples, however, to constitute genuine good news.

As I noted at the top of this column, however, there actually is reason for some optimism. Shortly after I published my October 3 column, the annual ritual of the awarding of the “Economics Nobel” was carried out in Stockholm. I use scare-quotes to identify that award because there is no such thing as the Nobel Prize in Economics. The award that goes by that misnomer was created decades later by an entirely different process from the real Nobel Prizes. The Economics award was the result of a successful self-marketing campaign by top economists who wanted to add luster to their field and rounded up the funding to get it done.

Be that as it may, the annual award does tell us who is the ultimate insider’s insider in the top reaches of academic economics, which is useful information (even though the Nobel aura provides undeserved prestige to the winners). And this year, the co-winners were cited for their very non-orthodox efforts to try to help the world’s poor (rather than arguing that the poor are poor because the market says they should be).

Even better, two of the winners (Esther Duflo and Abhijit Banerjee) then co-authored an op-ed in The New York Times in which they directly challenged the orthodoxy of efficiency in their field. They began by saying that economics from its very beginning has been based on an erroneous “fundamental premise,” which is

that financial incentives are the primary driver of human behavior. Over the last few decades, this faith in the power of economic incentives led policymakers in the United States and elsewhere to focus, often with the best of intentions, on a narrow range of ‘incentive-compatible’ policies.

This is unfortunate, because economists have somehow managed to hide in plain sight an enormously consequential finding from their research: Financial incentives are nowhere near as powerful as they are usually assumed to be.

The authors then offered this heretical assertion: “But in the real world, it is unreasonable to expect markets to always deliver outcomes that are just, acceptable—or even efficient.”

Or even efficient! That allows them to point out that conservatives are wrong to rely on “dependency theory” to argue against anti-poverty programs, that we should have a very well-funded “Marshall Plan” to help displaced workers, and that “we should not be unduly scared of raising taxes to pay for these projects.”

Not to be too technical about this, but … holy cow! This is almost revolutionary stuff, and it is coming from the most recently minted sages of economics (who work at one of the top departments in the field).

Certainly related to this sudden opening up of the bounds of thinkable thought is a Washington Post op-ed by Jared Bernstein, “Economics used to be all about what we can’t do. That’s finally changing.” Bernstein himself is one of the unicorns of economics, a dissenter from the orthodoxy who has managed to put together a long and successful career in Washington advising liberal Democrats.

Bernstein describes the standard trickle-down, efficiency-obsessed approach as “can’t-do economics.” Even liberal Democrats have been cowed for decades by economists insisting, “You can’t do that!” You can’t fight poverty (because it will make people lazy). You can’t run deficits (because it will shrink the economy). You can’t tax rich people (because they are the geese laying the golden eggs). You can’t regulate financial markets (because the markets are hyper-efficient). You can’t nurture emerging or ailing-but-salvageable industries (because the government should not pick winners and losers). You can’t. You just can’t.

But it turns out that we can, and we always could. Duflo and Banerjee are, it turns out, merely part of the emerging dissent against the deformed ideology that always hid beneath the impressive veneer of economics. Personally, I am still glad that I headed for the exit, but for the first time, I might not try to talk a student out of entering an economics Ph.D. program.

The Not-So-Great News

The title of this column is deliberately paradoxical: “Can Economics Get Better, Even Though It Can’t Get Better?” Thus far, I have argued that economics has for decades needed to get better (but did not do so because it served the rich and powerful) and that now there is evidence that it actually is getting better. Why do I say, then, that actually “it can’t get better”?

The short answer is that the rich and powerful have only become more rich and powerful, and they are going to fight fiercely against anything that challenges their wealth. Even if the field of economics opens up to new and challenging ideas, we are already seeing how the wealthy will respond to even the most mild and unthreatening efforts to address inequality.

Bill Gates, the multi-billionaire who has bought himself quite a bit of good press with some genuinely impressive humanitarian efforts over the past few decades, recently embarrassed himself (without realizing that he was doing so, of course) by responding to Senator Warren’s proposed wealth tax in a spectacularly uninformed fashion. He somehow imagined that she was going to tax $100 billion of his $107 billion, and he “joked” that he might have to rethink his liberalism if it came to that. (As if being stuck with a mere $7 billion—the dregs of a fortune largely built on anti-competitive behavior and shoddy software—would somehow be terrible.)

And it is not merely Gates (who, in addition, refused to confirm that he would oppose Trump no matter what, saying only that he would support the candidate who “has the more professional approach,” whatever that means). Multi-billionaire Michael Bloomberg has been fuming about Warren’s wealth tax proposals for what seems like forever, and he has finally decided to vie for the Democratic nomination himself rather than risk having someone like Warren lead the ticket.

The point is that the policies that were justified by orthodox economics have had their inevitable effect of making the rich richer, and the result is that we live in a world where even supposedly left-leaning superrich people have convinced themselves that they deserve their wealth—rather than accepting the reality that they were the beneficiaries of policies that were entirely optional choices and were in no way “natural” or inevitable. Amazon’s Jeff Bezos abused his workers so badly that they were afraid to take bathroom breaks. Is that the “invisible hand of the free market” or a particularly disgusting example of how political choices shifted money from workers to Bezos?

I am not entirely dismissing the possibility that ideas matter. If I were to do that, after all, I would very much be in the wrong line of work. I do hope that even a slight opening up of the economics profession will allow some good ideas to become mainstream and that policy-oriented economists become emboldened by those ideas.

The evidence thus far, however, tells us that even the Democrats have little-to-no chance to resist the power of the billionaire class. And with Republicans in a full-on plutocratic rage, where will the political power to create more just policies come from?

Comments are closed.