Many of us have long known in our guts that something about mainstream economics doesn't add up. As a new, must-read book proves, we were right. For decades, dubious, false and nonsensical ideas have dominated public discourse and decision-making, from the irrational belief in the efficiency of markets to a willful blindness about the inequalities of wealth and economic opportunity in a system that has been rigged for the benefit of the few. Author Jeff Madrick has just come out with his latest challenge to the pernicious ideas that have captured the minds and clouded the judgment of huge numbers of orthodox economists and the legions who follow their advice: Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World. In this brisk and accessible volume, which should be on Econ 101 syllabi, Madrick outlines the wrong-headed propositions, fictitious models, shoddy research, and partisan agendas that have made a reexamination of the entire field long overdue, especially in the wake of the financial crisis of 2008. Madrick’s book is part of a healthy movement to set the record straight and chart a new direction for an economics that can serve the whole of society and lead to sustainable growth.
Lynn Parramore: Why does the invisible hand (the metaphor used by 18th-century economist Adam Smith to explain what he saw as the benefits of individuals in pursuit of their own interests) get top billing in your list of bad economic ideas? What value judgments come with this model of how the economy works?
Jeff Madrick: Adam Smith’s invisible hand is really the hub of the wheel: the other ideas are all spokes. It argues that if we all follow our self-interest and the government stays out of the market—for instance, it should not regulate prices—then the interaction of buyers and sellers will result in the greatest prosperity for all.
The invisible hand suggests that all wages will be established at fair levels and that regulation of financial markets can be minimized because free markets will lead to the "right" price for securities or commodities or currencies. On and on. But this is only an idea, if a beautiful one. It tells us how a market may work, not how it actually does work. Long after Adam Smith wrote about the invisible hand, as the economics profession became increasingly ideologically conservative, economists came to accept it as a rule, not a hypothesis.
LP: What do bad economic ideas cost the ordinary person?
JM: Bad economic ideas result in less income for most of us over time, unfair rewards for work, and the exclusion of many groups. For example, bad economic ideas do not deal with racism. They create a justification for high pay for bankers and CEOs when such pay is not justified. Bad economic ideas channel our precious savings into self-serving areas rather into productive investments. They lead to financial crises when many of us lose homes or a chunk of our pensions. On it goes.
LP: People with 401(k)s watching the stock market’s recent dip may have heard experts cite the weakened European economy as a factor. How does austerity economics in other parts of the world affect us at home?
JM: Austerity economics, which argues that we should cut budget deficits through tax hikes and reduced social spending even in times of economic weakness, have led to slow growth and outright recession in Europe. Recessions result in very high unemployment rates—25 percent in Spain, for example, and 50 percent for youth. European governments led by Germany should be spending to stimulate growth, but they are caught in the grips of bad economic ideas and so they are not doing this.
Americans pay a price because those countries export their slow growth in the sense that they don’t buy what we make. They also jeopardize financial markets because their debt levels rise as their incomes fall, possibly sending up rates or leading to defaults. The U.S. has also practiced austerity, if less so. The sequester took a lot of strength out of the U.S. economy. Pro-austerity people argue that deficits reduce a nation’s savings, but that is exactly what you want to do in weak economies. Businesses will invest if they sell goods and services. Savings will lie fallow, but conservative economists claim it is an automatic adjustment, that savings will be invested. It is a tragically wrong idea.
LP: You note that many conservative economists would like to see government’s role in society and the economy drastically reduced. How does this position impact our ability to respond to emergencies like Ebola?
JM: I think we have denigrated government in America since the 1970s and clearly since Ronald Reagan. We react to Hurricane Katrina as if it is an afterthought. As a result, our government is not ahead in all kinds of fields — clean energy, for example. Or how about the technology needed to restrain methane emission due to methane release, which could be disastrous?
Ebola is yet another example. We wait for a crisis rather than trying to get ahead of it. I fear Ebola most, but people should know this reflects an anti-government attitude that started 40 years ago and has not truly abated. It permeates economics today.
LP: You mention several forces that keep economists committed to bad ideas, like the conformity required for professional success, the pretense that economics is a science akin to physics, and the addiction to simplistic models that do not account for the messiness of the real world. Given these forces, how can we move toward a better economics?
Crisis should have moved us to a better economics, and to some small extent it has. Economists have gone back to the drawing board. They are trying to write finance into their forecasting models, something they completely neglected before. They are a little more humble. But I would say not much. They still think they have a special knowledge that others don’t. Thus, they turned the seven bad ideas of my book into rules of thumb rather than hypotheses that have to be adjusted to every new problem.
But it is easier to have a one-size-fits-all solution than to get down and dirty and recognize the limitations of universalist ideas. The notion of economics being akin to physics confers a certain kind of prestige, but it is also easier to measure contributions, even if they are wrong. These ideas are part of the sociology of academia, which badly needs reforming.