An economics degree is proof someone has no idea how an economy works

The point of the title – IT’S EASY TO BELIEVE AOC HAS AN ECONOMICS DEGREE – is not to point out how dumb Ocasio-Cortez is, but how shallow economic theory has become. It’s a quite nice article, which for me is only diminished because no mention is made of Keynesian theory. And this may be because by now almost no one even appreciates where the problem lies. He refers to central banks as the core of non-solutions to our economic problems but not to public spending. Still, I like what he writes. Here are some quotes from the article.

Why is it so hard to believe that she has a degree in economics? It seems far too many people have rather inaccurate ideas about what is taught in economics programs nowadays. The truth is there is little emphasis on understanding markets in economics programs, and little emphasis on the value of markets. The emphasis is now on using economics to justify state action in the economy. And any bias that may have once existed in favor of unhampered markets in these departments is vanishing.

There’s no reason to believe that a student with an economics degree is going to graduate with a deep understanding of how government intervention distorts markets or impoverishes consumers. The theoretical foundations behind such things are mentioned, of course, but at many institutions they are most certainly not emphasized. Far more likely, one learns in these programs that central banks can be relied upon to fix almost any economic problem faced in the course of a business cycle. And if a certain problem becomes especially difficult, the answer surely lies in giving the central bank even more power.

It’s entirely plausible AOC took any number of economics courses and came out with good grades after learning virtually nothing accurate about entrepreneurship, wages, money, or consumer choice. What she did learn on these topics was likely built on the premise that the state ought to be intervening and tinkering with all these things.

Economics is taught with the first priority being an ability to write some abstruse but highly mathematised paper of no relevance to anything other than it can be published in a high ranking journal. There is then some smattering of theory related to how government can fix things by hiring economic grads to work on devising policy since the market left to itself will only make things worse. An economics degree is merely proof that someone has next to no idea how an economy works. It’s sad but it’s true.


James Hacker:
Bernard. Humphrey should have seen this coming and warned me.

Bernard Woolley:
I don’t think Sir Humphrey understands economics, Prime Minister. He did read classics, you know?

James Hacker:
How about Sir Frank? He is head of the Treasury.

Bernard Woolley:
Well, I’m afraid he’s in even greater disadvantage in understanding economics. He’s an economist.

Many a truth is told in jest.

Using the failure of anti-market policies as evidence markets don’t work

Now here’s an article I find really gets the point. By Per Bylund on Mises Daily with the quite nice title, Economics Is Dead, and It Is Being Killed Again. It’s hard to pick a best bit since you really do need to read it all. But to find someone as on the money as this is a rare event and needs to be brought to the attention of others. Here he is pointing out that the stimulus – as anti-market a policy as there has ever been – made us worse off which the left now uses as evidence that markets don’t work.

You have to applaud the anti-economics left for this rhetorical masterpiece. They have struggled for decades to sink the ship of economics, the generally acclaimed science that has firmly stood in the way of their anti-market and egalitarian policies, hindered the growth of big government, and raised obstacles to enact everything else that is beautiful to the anti-economics left. The financial crisis is exactly the excuse the Left has been waiting for. It is a slam dunk: government grows, Keynesianism is revived, and economics is made the culprit for all our troubles.

We see this now in education, as students demand to be taught (and professors demand permission to teach) a more “relevant” economics. Relevance, apparently, is achieved by diluting economics with a lot of the worst kinds of sociology, post modernism, and carefully structured discourse aimed to liberate us from our neoliberal bias. And, it turns out, we must also teach Keynesian ideas about how government must save the market economy.

We see this same agenda at academic research conferences, where it is now rather common to hear voices (or, as is my own experience, keynote talks) claiming that “it is time” for another paradigm: post-economics. The reason is always that economics “has failed.”

If this weren’t so serious, it would be amusing that the failure of Keynesian macro-economics (whether it is formally Keynes’s theory or post-Keynesian, new Keynesian, neo-Keynesian, monetarist, etc.) is taken as an excuse to do away with sound micro-economic theory to be replaced with Keynesian and other anti-market ideas. But it is not amusing. If most of the discussions heard are to be believed, the failures of central planning is a reason for central planning, just like socialism is a reason for socialism. The success of the market, on the other hand, is not a reason for the market.

It is incredible that economists in general don’t get it, but there is at least one who does.

Even economists are beginning to notice there is something wrong with economic theory

The New York Review of Books ran a seminar series on “What’s Wrong with Economics” which may be found here, including the videos of the various sessions. It has taken more than half a decade for the penny to finally drop that the policies we have been applying do not work and that there may be something wrong with the economic theories we have been applying. This is the “preface” from the NYRB which is so wrong-headed in even setting out the issues that you can already see there is no possibility that they are going to get anywhere near the right answers. But at least the questions are finally being asked, because there is finally recognition that things have gone badly wrong.

This conference is taking place eight years after the onset of the Great Recession in December 2007, and nearly six years after the recession was declared to be officially over in the US in June 2009. Yet the events of six and eight years ago continue to haunt us. One of the great powers of the global economy, the Eurozone, has yet to put the recession behind it, while the uneven performance of the US economy—spurts of growth accompanied by stagnant real wages—has led economists such as Paul Krugman and Larry Summers to ask whether the US has succumbed to “secular stagnation”: Is the economy now burdened with structural impediments which will make strong and sustained growth difficult to achieve?

The Crash of 2007-2008 was an acute crisis of market disequilibrium which has imposed itself upon an economics discipline still giving pride of place to models where market forces nudge economies in the very opposite direction—towards equilibrium. Crises of disequilibrium have occurred with increasing frequency over the past thirty years: with the Latin American debt crises of the 1980s, the American Savings and Loans collapse of the late 1980s, the Scandinavian banking crisis of the early 1990s, the Asian and Russian financial crises of the late 1990s, the American “dot-com” bust of 2000, and the Crash of 2007-2008 itself which has been global in impact.

Yet treating these crises as a series of near-identical events susceptible to economic modelling does not, on the face of it, do justice to the complexity and singularity of the forces which combined to bring them about. Many of these influences seem to have had their origins well beyond the home territory of economics. Doing justice to these outside forces may require a knowledge of ethics, anthropology, contemporary history and politics, public policy, and an understanding of the beliefs, frequently delusional, which seized many of the economic actors before and during the crises.

Among these disciplines it is, unsurprisingly ethics which intrudes questions of value deepest within the territory of economics, and forces a reappraisal of where the discipline stands in the disciplinary continuum between the humanities and the natural sciences. The overwhelming preference of economists themselves is to be as closely aligned as possible with the natural sciences. But with the intrusion of such ethically charged issues as the human fallout from the Crash, and the unrelenting growth of economic inequality in the US and most European countries, the scientific and the normative in economics are becoming increasingly difficult to keep apart.

Disputes between economists which seem to derive from disagreements about data and methodologies may on closer examination be rooted in profound disagreements about values. So it can be argued, and often is, that all of us are responsible for making the best of the opportunities open to us. Those who have ended up on the wrong side of the inequality divide must have failed to make the best of these opportunities and must bear responsibility for their errors, with the state providing just enough support to save them from destitution.

Or, an opposing view, that those falling behind are very often the victims of circumstances beyond their control—globalization, technological change, corporate restructuring—and that the state has a strong obligation to support them generously through difficult times and to provide them with the knowledge and skills needed to cope with new technologies and work practices. But how are these conflicts of values embedded in conflicting views about policy to be resolved?

It may be that these are disagreements of a kind that arise frequently in political and moral philosophy and reflect conflicts of plural values which do not arise in the natural sciences and which cannot be resolved by the forms of reasoning employed by scientists. They may have to be resolved either by the choices and compromises achieved through the practice of liberal democracy, or by one set of values prevailing over another through intellectual and electoral force majeur—as for example the arguments for the legal equality of women prevailed over their opponents in the course of the twentieth century.

Once again a network of beliefs and judgments extending well beyond economics may be called into play, and once again these may be strung out along the ontological continuum between the humanities and the natural sciences. Does this mean that the economist as scientist is slowly but surely being displaced by that hybrid who seems better placed to bridge these divides—the political economist?

If you want to see things properly, you will, in my view, have to start if not exactly here, at least somewhere nearby. Paul Krugman can think we have fallen into some kind of secular stagnation which is not far from being the stupidest of all possible explanations. Having backed the stimulus and the fall of official interest rates to zero, he has no idea that there are others who think that is more than enough to account for the present dismal outcome. They are clueless in New York. I would leave them to their own devices except that they are likely to take the rest of us down along with them. With these people as the leaders of the profession, it is indeed a dismal science.

AND AN ADDED BONUS: There is also Jeff Madrick on Why the Experts Missed the Recession. And why was that? Whatever the reason, here’s why I know he doesn’t know:

By lowering the target rate of interest, known as the federal funds rate, the members of the FOMC can stimulate economic growth, and by raising it, they can dampen growth and inflation.

Steven Kates’s Free Market Economics 2nd ed

I was particularly pleased by Old woman of the north, blogstrop and danger mouse who saw Mill’s genius in my previous post on Mill’s Principles of Political Economy. I could not agree more with OWOTN where she wrote “What beautiful, clear English! The thought processes flow.” And so they do. And Mr Bear, Ted if I may, I just mention the book because I do think it would be an aid to governments who are sinking our economic ship. I merely translate Mill into language that is easier to read in the twenty-first century. This is my attempt to say what Mill said in that same passage. Nowhere as poetic, nowhere as deep, but hopefully getting to the same point. These are the opening paras of Chapter 3.

Value added

Possibly the most difficult area to understand about economics is one that you would think would be amongst the easiest and most commonly understood. This is the area of value and value added.

If economics were going to provide an understanding of anything, it would have to be, you would think, an understanding of what value is and where it comes from. And while economists do have such theories, they are relatively obscure and are almost never discussed at the introductory level. Value in economics is a very difficult idea.

Yet for all that, it is not possible to have a clear understanding of either economics or economic policy unless one has a reasonably clear idea about what value is and how it is created. And unless one has this reasonably clear idea about the nature of value, it is almost impossible to make judgements about almost anything done in an economy, from its very organization to the finer details of individual decisions.

That the aim of economic activity is to create value is obvious and straightforward, for all the difficulty in knowing just what value actually is. Something has value to the extent that a person is better off with it than without it. In economics we frequently say that a good or service has value if it is able to provide utility. Economic activity is aimed at providing individuals with increased levels of personal utility.

But it is also true that in almost all cases to produce something of value it is first necessary to use up some of our resources that also have value. Nothing comes from nothing. And this is where the notion of value needs to be further refined. A tonne of steel also has value, but not as a final good providing utility. It has value only as a productive input that can be used to produce the goods and services that do provide that utility. The value of such inputs is derived from the value of the final goods and services they can be used to produce. Which brings us to the crucial issue of value added.

To create value in the form of the final goods and services that provide utility is the central purpose of economic activity. In the process of creating such value, some part of the resources that exist must be used up in the process. Value added underscores what is too often forgotten, that to add value one must also at the same time destroy value. The word ‘added’ is there to remind us that we have also had to subtract the resources used up in producing whatever has now been brought into existence. Value added is thus the net result of using up various resources which already have value, to create other products that have even more value.

It is only if the value of the products newly produced is greater than the value of the resources used up that value adding has occurred. Economic growth is the way we normally discuss value adding activities. They are one and the same. The value of output must exceed the value of the inputs used up if economic growth across an economy is to occur.

My advice is to read Mill if you can. But if you would like a modern version, then you will need to read this.

A farrago of vacuous ideas and empty nonsense

I came across a book in one of the still remaining second hand book shops I frequent by two Nobel Prize winners, George Akerlof and Robert Shiller. It’s title was Animal Spirits with the basic premise stated on the cover, that “human psychology drives the economy and why it matters for global capitalism”. So far, so ordinary but since this is all part of the new direction in economics, I thought I would give it a go.

Well, what a farrago of vacuous ideas and empty nonsense. I had always thought it was ridiculous that Keynes had made such a fetish about “animal spirits” himself, seeing as how every classical economist was perfectly aware of how crucial business confidence is to economic outcomes. If nothing else, Frank Knight had published his Risk, Uncertainty and Profit in 1921, a book I am pretty certain Keynes raided in writing the General Theory published in 1936. That Akerlof and Shiller write as if they have introduced some new conceptions into economics was astonishing, but given the low level of historical knowledge within the profession, you can just about get away with anything.

But what really did get to me was this book, published in 2009 at the height of the GFC and as the stimulus programs were getting into full swing, were not just advocating such public spending but made it clear how much economists had learned from Keynes and how fortunate we lot were that economists such as themselves were now on the watch and in control of policy.

A repeat of the Great Depression is now a possibility because economists, the government and the general public have in recent years grown complacent. They have forgotten the lessons of the 1930s. In those hard times we learned how the economy really works. . . .

In the middle of the Great Depression John Maynard Keynes published The General Theory of Employment, Interest and Money. In this 1936 masterwork, Keynes described how creditworthy governments like those of the United States and Great Britain could borrow and spend, and thus put the unemployed back to work. [My bolding]

I have an article on this book at Quadrant Online, Phlogiston with a Keynsian Twist. I think of it as a contender for the worst book on economics ever written. Lots of bad books on the subject, of course, but you don’t normally find two people at the highest level of the profession conspiring to write such stuff. Read the review, but spare yourself the trouble of reading the book, unless you would like to see just how empty economics can be in this day and age.

Why economics needs the history of economic thought

My reason for being on the road and in Montreal is to attend the American History of Economic Society meetings. I wrote my Defending the History of Economic Thought in response to attempts to remove HET from within the economics classification and place it in some remote category as far from economics itself as they could arrange. In Australia (2007) it was to be, “History, Archaeology, Religion and Philosophy” while it Europe (2011) it would have been, “The Study of the Human Past: Archaeology, History of Memory”. If you had therefore been studying HET, you would not have been studying economics. Your papers also would not have been HET. As near death as HET already is, over the precipice it would have gone.

For HET has enemies everywhere. For the makers of the Classification Codes at the OECD, because the history of economic thought was “history”, neatness demanded HET be included as part of the humanities with other types of history, not with economics in the social sciences. But the more I became involved, the more it turned out that the mainstream of the profession wants HET out of economics because, so far as they are concerned, it gives legitimacy to alternative approaches to economic theory, approaches such as my own, which is seen as part of the “heterodox” tradition rather than the orthodox, orthodox like Y=C+I+G. For the mainstream, this is one way to get rid of the competition. Competition may be fine in theory, but not so much in practice.

But the odd part turned out to be that the elite of the HET establishment were also actively seeking this change. Because so much of HET is made up of people who think the mainstream is useless – uninteresting questions, badly answered – there is a push at the very top of the HET executive (its current president, for one) to turn HET into the history and philosophy of science. No more of these Austrians, or post-Keynesians, or Institutionalists, or Sraffians, or John Stuart Mill classicals. Out with the lot and HET can be a study of the sociology of knowledge. The American Society is at the centre of this attempted shift, and my efforts to preserve HET within economics and then write a book about it is resented in a way you would not believe, or at least I would not have. Just think of them as the equivalent of global warmists and you will get some sense of what they think about what I wrote. If you think my sweet little book on defending HET has had a series of lovely reviews within HET journals, you would not be right. Astonishing for me. I suppose I should not have been surprised but I have been.

So today I will present in defence of my book. Will let you know how it went later.

Note to “The Economist” – your solution is the very problem itself

economics whats wrong

I’ve just been reminded of an article from The Economist published 16 July 2009 titled, What went wrong with economics. Note that it is not a question but a statement. The Economist naturally has no clue being an ultra-Keynesian rag but this, at least, can be dredged from its commentary:

And if economics as a broad discipline deserves a robust defence, so does the free-market paradigm. Too many people, especially in Europe, equate mistakes made by economists with a failure of economic liberalism. Their logic seems to be that if economists got things wrong, then politicians will do better. That is a false—and dangerous—conclusion.

What’s missing apparently is a more sophisticated financial model to graft onto the Keynesian core of what The Economist thinks of as good economics:

Central banks are busy bolting crude analyses of financial markets onto their workhorse models. Financial economists are studying the way that incentives can skew market efficiency. And today’s dilemmas are prompting new research: which form of fiscal stimulus is most effective? How do you best loosen monetary policy when interest rates are at zero? And so on.

As early as July 2009 they could see that the fiscal stimulus had been a disaster. They just do not see that trying to drive an economy along using either monetary or fiscal policies is the problem. Public spending and near-zero interest rates leave an economy dead in the water but they cannot see that their solution is the very problem itself.