Friday, March 17, 2017

Review of Economism: Bad Economics and the Rise of Inequality by James Kwak


There’s economics, a field that has been renewing itself, shaking off theoretical rigidities through more attention to behavior and institutions and shifting its center of gravity toward empirical observation and testing.  And then there’s economics as it exists in standard political discourse, seeing the whole world as refracted through supply and demand diagrams where markets are always efficient and outcomes always socially optimal.  This second, dumbed down, knee-jerk libertarian creed is the object of James Kwak’s new book, Economism.

If ever a book arrived to fill a need, this one has.  Neoliberalism, which is essentially simplified pseudo-economics in action, is finally beginning to break down, but rather than yielding to a more rational  politics it is giving us Brexit, Trump and similar delusionary movements.  Required to choose between the stale cant of economism and authoritarian fairytales of denial, the public is opting for the second door.  Unless economism is disposed of quickly, there won’t be an opening for a more enlightened third option.

In many ways, Kwak is an ideal person to take on the job.  He’s very, very smart.  He generally knows his economics, but he’s not in thrall to the profession.  (He’s actually a law professor.)  He writes clearly and explains economic concepts with a minimum of lecture-itis.  His book is short and to the point.

Most chapters follow the same general template.  Kwak begins by laying out an area of policy and briefly explaining why it’s important; topics include income distribution, taxes, health care, finance and trade.  He then goes into a thorough exposition of the standard economistic analysis, usually based on casual assumptions concerning rational choice, competition, and the market as a cost-benefit device.  His next step is to show this conceptual framework in action, as mouthed by politicians and journalists.  The critical deconstructive move follows, in which Kwak surveys the empirical literature, showing that, in real economics, the conventional assumptions are either flat out wrong or at least seriously qualified.  He then concludes by explaining the policy implications of a more informed approach.  It gets to be a bit formulaic, but it is effective and easy to follow.

I can imagine using a book like this in an introductory microeconomics class.  (Except for a bit of macro here and there, the book’s focus is micro.)  It’s exactly the right antidote for the tendency of introductory textbooks to oversell markets and undersupply critical thinking.  I hope lots of faculty teaching Econ 101 adopt it.

That said, I think it could have been even better than it is.  In a future second edition—and I expect there will be one—Kwak should consider these improvements:

1. His adoption of the voice of economism is very extended.  He will go on for several pages presenting the economistic worldview as if it were his.  Yes, I know, academics like Kwak, myself and perhaps you are trained to cope with this.  It’s nothing for us to read a book in which the author takes on the personna of someone with a differnt point of view for many pages at a time.  Most general readers are not familiar with this, however.  I can say from personal experience that something like half my students would come away thinking that Kwak himself espouses economism and is contradicting himself when he criticizes it.  What to do about this?  Of course, it’s important for Kwak to present economism in a neutral, even sympathetic voice, and to do so at the length it requires.  Perhaps he considered adding, every paragraph or so, a qualifier like “from this point of view”, but decided it was too clunky.  In that case, an altered typeface, like italics, could have been used to set off his temporarily assumed voice as expositor of economism.  One way or the other, markers are needed for readers unused to academic protocols.

2. He would do well to distinguish between the normative and positive aspects of economism.  In a policy context, both are usually entailed: the positive view that this is how the world works is given political salience by the normative view that demand curves represent “benefits” to society and the supply curve “costs”.  It’s important to recognize that economism can fail on either account: either empirical work can show that this is not how the world works, or the assumptions about how markets represent social interests can be challenged, or both.  In practice, Kwak relies more on the first critique, and the book usefully draws together key empirical findings on topics like minimum wages, health costs, etc.  But the market failure framework could have been given more of a workout than it received; in practice these arguments are effective.

3. The chapter on international trade is timid.  Kwak points out that the full-dress neoclassical trade model (Heckscher-Ohlin-Samuelson, although he doesn’t identify it as such) recognizes losers as well as winners from trade liberalization and makes this the conceptual linchpin of his critique of economism in this area.  In this he has a lot of company; H-O-S with lots of friction has become the standard progressive position.  However, the impacts of trade liberalization on employment may be worse than this, since the proposition that the trade balance is unaffected by changes in the degree of openness requires adjustments in exchange rates that, at the very least, are empirically unreliable.  (All exchange rate adjustments in response to anything are empirically unreliable.)  In practice it’s entirely possible, likely even, that a major liberalization event like the US opening to trade with China at the time of its WTO accession has an effect on the aggregate trade balance and not just the composition of industries on each side of the ledger.  I shouldn’t make a big deal of this, because Kwak is no doubt eager to avoid criticism that he is unknowledgeable about economics, and most economists would regard my criticism as falling under that shadow—but I don’t think I’m wrong about this.

4. The very end of the book—the final four pages—are simply weak.  To wrap up, Kwak points out that, whatever its faults, economism delivers by having a simple, all-purpose, easy-to-grasp message and then asks, “What’s our message?”  His answer is that wealthy economies don’t need economic growth or even economic efficiency as they used to, and we should all turn away from economic concerns and embrace happiness instead.  Huh?  Now, before I launch into a critique of this view, I should make it clear that I agree with a lot of it on matters of substance: economic values, like income, are not the same as human values.  One can live well on less money, and the pursuit of wealth should not be the primary goal either for individuals or societies.  Yes, of course.  But that doesn’t mean that “downplay money” is the logical message to set against economism.

One obvious reason is that the difference between wealth and happiness played no role whatsoever in the chapters that led up to his conclusion.  Economism is wrong about how labor markets work, how health care works, how international trade works and so on, not because money doesn’t buy you love, but because its analysis is wrong.  If we’re looking for a common message that applies to all these topics and pokes a hole in the economistic world view, wouldn’t we look for common elements in the arguments we’ve already made?  It’s always a mistake in a piece of writing to go off in a new direction at the point where we should be summing up; this should have occurred to Kwak or been pointed out to him by his reviewers.

The other reason is that downplaying economics—saying that income and other economic measures don’t mean so much—violates the spirit of the book.  At its best, Economism is feisty.  It challenges sloppy thinking about how the economic system works and makes the case for progressive policies that would result in greater income equality and access to economic goods.  Excellent!  Why at the end turn around and say, in effect, OK, we’ll give the conservatives economics, and we’ll take happiness instead?  No!  Don’t give them that!  They don’t deserve it!  The unifying progressive message is not that economics doesn’t matter so much; it’s that the economics of knee-jerk libertarianism is doctrinaire, false and self-serving.  Our message is that we reject the ideology of universal unlimited acquisitiveness as a reasonable way of organizing human affairs, and that the evidence is on our side.  I’d love to see a hard-hitting conclusion replace the flabby one that’s currently there.

It’s in the nature of a review like this to dwell on the negative, but I don’t want you to be dissuaded from buying and reading this book.  Economism is an important work of popular education that needed to be written.  Kwak has the skills to do it well—even better than he has this time out.

5 comments:

Bruce Wilder said...

I have not read Kwak's book, though I have read the chapter on minimum wage policy republished in the Atlantic in January. My comment reflects on your review and that Atlantic article.

Kwak is trying to do a very difficult thing in attacking "economism", the glib libertarian ideology derived from neoclassical economics, and he does not seem to grasp just how difficult or why it is so difficult. The Amazon page explains, "Economism: an ideology that distorts the valid principles and tools of introductory college economics, propagated by self-styled experts, zealous lobbyists, clueless politicians, and ignorant pundits." This is the basic rhetorical stance of the book: that the economics of Econ 101 has validity and economism is some distorted, illegitimate simplification. This rhetorical template will get reiterated as the notion that the actual economy is messy and complicated and economism is wrong because it is oversimplified (to serve interests).

On the minimum wage, Kwak concedes "The supply-and-demand diagram is a good conceptual starting point for thinking about the minimum wage. But on its own, it has limited predictive value in the much more complex real world." and then presents sophisticated economics as "it's complicated". "In short, whether the minimum wage should be increased (or eliminated) is a complicated question. The economic research is difficult to parse, and arguments often turn on sophisticated econometric details. Any change in the minimum wage would have different effects on different groups of people, and should also be compared with other policies . . . "

This is a hopelessly weak rhetorical position, because it depends on conceding -- indeed, confirming -- the validity of neoclassical economics, which still outlines introductory college economics textbooks. Economism is a fair distillation of neoclassical economics and, like it or not, mainstream economics nurtures neoclassical economics and demands commitment to the neoclassical framework. Even if the mainstream permits many other ideas to float around academia, neoclassical economics is the framework of indoctrination.

I do not think it is possible to win the argument against economism, if you are not willing to reject neoclassical economics wholesale. Neoclassical economics is the father and mother of economism, and neoclassical economics is wrong, fundamentally wrong, in a scientific (aka epistemological) sense. The world is not essentially or fundamentally as neoclassical economics says, which is provable logically and empirically; you can only sustain neoclassical economics as an academic doctrine by suppressing critical thinking (which economics pedagogy insists upon). We do not live in an economic system organized primarily by markets tending toward general equilibrium; the actual economy is organized primarily by bureaucracy and driven by disequilibrium dynamics. Most prices are not formed by competitive bidding; prices are administratively determined and managed. And so on.

Bruce Wilder said...

The supply-and-demand diagram is NOT a good conceptual starting point for thinking about the minimum wage, and Kwak should never have conceded as much. There's no labor market. Most employers offer low-wage workers take-it-leave-it terms, constrained only by the rules and bureaucracy of state and Federal labor regulations, one of which, of course, is the statutory minimum wage. (Millions work for less than the minimum wage by the way -- as the Bureau of Labor Statistics regularly attests.) And, when people go to work, they are managed and supervised in systems that determine how productive they are; if they are paid their "marginal product" in some abstract sense, it is because their managers make it so. They work in bureaucracies controlling production and distribution processes by administrative and technological means, and the terms of their employment reflects this role as controller and controlled: they are paid a more or less fixed wage, subject to being fired. The threat of being fired is key to the willingness of employees to follow managerial direction.

Neoclassical economics does not admit economic hierarchy as central to the organization of the economy. But, when you reject neoclassical economics, you do not exclude all that might be relevant from mainstream economics. Indeed, economists have had many useful insights into "efficiency wages" and the relation of principals to their agents.

Useful and sophisticated ideas are still available after rejecting neoclassical economics, but I am not sure reputable economists are. I do not think Kwak would find his book jacket blurbed by quite such luminary figures, if he had rejected neoclassical economics as one big lie (which it is). He would have been in a stronger logical and rhetorical position to reject economism, but he might have lacked reputable allies. That's what makes the rejection of economism so difficult.

Economism is the ideology of right neoliberalism, but the neoliberal right is locked into a symbiotic relationship with left neoliberalism. Paul Krugman, Brad DeLong, John Quiggin, Noah Smith, Jared Bernstein -- these people seem to be opposed to economism, but they depend upon the legitimacy of neoclassical economics and the mainstream economics establishment too much to allow a winning argument premised on a rejection of the mother lode of economism, neoclassical economics.

It is an old story of "with friends like these who needs enemies". Economics is a thoroughly corrupt profession and all neoclassical economists are some mix of fraud and fool. We might like the fools better, but they are not that much help against the frauds. As Peter Dorman says, “Kwak is no doubt eager to avoid criticism that he is unknowledgeable about economics”, but I suspect his eagerness to avoid such criticism is focused more on the sociological factor that mainstream economics nurtures neoclassical economics than on actual knowledge of economics qua knowledge of the economy. And, that’s the core problem.

Sandwichman said...

"the neoliberal right is locked into a symbiotic relationship with left neoliberalism"

I would have phrased it the other way round. It seems to me the neoliberal right would be content without the left but the neoliberal left desperately needs the neoliberal right for legitimization in its relentless crusade against the heterodox infidels -- the right is what makes Krugman, DeLong et al. "the lefter of two neoliberalisms."

George H. Blackford said...

With regard to:

"In practice it’s entirely possible, likely even, that a major liberalization event like the US opening to trade with China at the time of its WTO accession has an effect on the aggregate trade balance and not just the composition of industries on each side of the ledger. I shouldn’t make a big deal of this, because Kwak is no doubt eager to avoid criticism that he is unknowledgeable about economics, and most economists would regard my criticism as falling under that shadow—but I don’t think I’m wrong about this."

Hobson made a very big deal about this when it comes to China more than 100 years ago:

"It is here enough to repeat that Free Trade can nowise guarantee the maintenance of industry, or of an industrial population upon any particular country, and there is no consideration, theoretic or practical, to prevent British capital from transferring itself to China, provided it can find there a cheaper or more efficient supply of labour, or even to prevent Chinese capital with Chinese labour from ousting British produce in neutral markets of the world. What applies to Great Britain applies equally to the other industrial nations which have driven their economic suckers into China. It is at least conceivable that China might so turn the tables upon the Western industrial nations, and, either by adopting their capital and organisers or, as is more probable, by substituting her own, might flood their markets with her cheaper manufactures, and refusing their imports in exchange might TAKE HER PAYMENTS IN LIENS UPON THEIR CAPITAL, REVERSING THE EARLIER PROCESS OF INVESTMENT UNTIL SHE GRADUALLY OBTAINED FINANCIAL CONTROL OVER HER QUONDAM PATRONS AND CIVILISERS. This is no idle speculation. If China in very truth possesses those industrial and business capacities with which she is commonly accredited, and the Western Powers are able to have their will in developing her upon Western lines, it seems extremely likely that this reaction will result." John Atkinson Hobson, Imperialism, A Study, 1902."

AXEC / E.K-H said...

Bad economics, futile critique, and illusive new thinking
Comment on Peter Dorman on ‘Review of Economism: Bad Economics and the Rise of Inequality by James Kwak’

Economics claims since Adam Smith/Karl Marx to be a science. Yet, everybody who looks closer into the matter comes to the conclusion that economics is a failed science. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the pivotal concept of the subject matter, i.e. profit, wrong.

In this hopeless situation, critique is futile: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1990)

James Kwak, too, has not the slightest idea what a paradigm shift means: “To wrap up, Kwak points out that, whatever its faults, economism delivers by having a simple, all-purpose, easy-to-grasp message and then asks, ‘What’s our message?’ His answer is that wealthy economies don’t need economic growth or even economic efficiency as they used to, and we should all turn away from economic concerns and embrace happiness instead.”*

Instead of coming up with a ‘completely new research program and conceptual approach’ as replacement for the standard approach, which is known to be false on all methodological counts, Kwak dishes out cheap advice from the self-help workshop: don’t worry, be happy. To top it all, this abortive pseudo-critical exercise is advertised as new economic thinking.

Egmont Kakarot-Handtke

* See also ‘The economist’s pick: liar, moron or what?’
http://axecorg.blogspot.de/2016/12/the-economists-pick-liar-moron-or-what.html