Thursday, November 30, 2006

Potential pitfalls in misusing the dismal science

Chris Hayes has a fascinating article in this week's In These Times about the Chicago School of Economics and the dangers its ideology poses to American society.

He writes:
Neoclassical economics, as the Chicago School of thought is now called, has become an international elite consensus, one that provides the foundation for the entire global political economy. In the United States, young members of the middle and upper-middle class first learn its precepts in the academy. Polls routinely show that economists and the general public have widely divergent views on the economy, but among the well-educated that gap is far narrower. A 2001 study published in the U. of C.’s Journal of Law and Economics showed that those with college degrees are more likely to subscribe to the views of neoclassical economists than the general public. This isn’t surprising. At elite colleges, economics is consistently one of the most popular majors (nearly a quarter of undergrads at the U. of C.), and across all schools, introductory economics, often a required course, has been one of the 10 most popular classes for the last 30 years. Graduate schools—from business to public policy to political science to, most notably, law—are now suffused with economic paradigms for understanding not only financial interactions but all human behavior.

Conservatives have long critiqued academia for the ways professors use their position to indoctrinate students with left-wing ideology, but the left has largely ignored the political impact of the way people learn economics, though its influence is likely far more profound.


Go read the whole article. It provides one of the best takedowns of "Neoclassical" economics written by a non-economist (and thus intelligible to non-economist eggheads) as any I've ever read. By focusing on efficiency to the expense of equity and everything else, practitioners of this dark art present a warped view of how our society should order its economic affairs - with the unsurprising result that the rich always seem to come out on top. They find ways to justify redistributing income upward and proclaim it to be efficient. It's a winner-take-all zealotry that assumes those with money "deserve it", whereas the poor do not because they don't work as hard.

In short, it ignores luck, inheritance of wealth and assumes an efficiency between supply and demand, price and output and so on that simply does not exist in the real world. But worst of all, the Chicago School espouses what it claims to be positive theories (i.e. the way the world is) as opposed to a normative understanding of social/economic policy (i.e. the moral dimension of how things ought to be). But as Hayes proves, nothing could be further from the truth.

These Chicago School economists claim to be "pro-choice" in the sense of being pro-market, arguing that macro and micro solutions are better worked out by private markets than government intervention. This completely ignores the reality of market failures, like, say the 1929 Stock Market Crash and the subsuquent Great Depression - which was caused by a lack of government oversight and regulation and was ultimately resolved by a much more activist public sector.
Efficiency is the Chicago School’s defining value. The free market economists who came before—most notably Austrian Friedrich Hayek—offered a philosophical critique of the political consequences of state regulation and control of the economy. But Milton Friedman, his colleague George Stigler and the entire Chicago School focused on the actual economic problems of state control, namely, inefficiency. They rejected Keynes’ contention that markets function best with routine government intervention and instead harkened back to Adam Smith’s classical conceptions of equilibrium. Chicago School theories gained popularity when global capitalism hit a major funk in the ’70s—a period of slow growth and high inflation. Friedman argued, plausibly, that it was too much government that had caused the problems.

What may seem a subtle rhetorical shift had major consequences. It transformed what had been conservatism’s moral argument about capitalism bestowing the most benefits on those who worked the hardest—and the inherent injustice of a coercive state forcibly redistributing capital—into a technical argument about the inefficiencies associated with non-free-market solutions and the perverse incentives that made any social programs destined to fail. Thus, arguments about the way the world should be were converted into assertions about how the world actually was. Or, to put in terms that economists favor, normative arguments became positive ones.


As Hayes explains: "Neoclassical economics smuggles a great many normative wares underneath its positive trenchcoat, both in its assumptions about how humans operate—as individuals rationally maximizing their utility—and its implied preference for “markets in everything.” Because neoclassical economics always presents itself as a value-neutral description of the world, its ideological commitments can be adopted by those who learn it without any recognition that they are ideological. "

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