Pluralistic: 27 Oct 2022 Substituting economics for politics is a failure

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Economist Arthur Laffer standing at a podium. A thought-bubble is coming out of his head. In it is a horse.

Substituting economics for politics is a failure (permalink)

Most of us believe that we do stuff because we want to be good people, and that other people act the same. But the dominant political philosophy for the last half-century, "economism," views us as slaves to "incentives" and nothing more.

Economism is the philosophy of the neoclassical economists, whose ideology has consumed both the Democrats and Republicans. They dismiss all "non-market" solutions (that is, projects of democratically accountable governments) as failed before they're begun, due to the "incentives" of the individuals in the government.

Economism's major project has been to dismantle the achievements of the New Deal (Social Security, unions, public housing, limits on corporate power) and to discredit the very idea that we can or should attempt those sorts of bold initiatives.

In economicist doctrine, it's actually impossible to make national parks or social security or public healthcare, and people are naive to even think we should try. To the extent that these things actually exist and thrive and please people in the real world, they are mirages – they don't work in theory, so they must not work in practice, either.

It's not that progressives ignored economists. Some 5,000 economists worked with FDR to craft the New Deal. But while FDR employed a lot of economists, his successors set out to create full employment in the profession – by the 1980s, there were 16,000 federal economists.

In "May God Save Us From Economists," in the New Republic, Timothy Noah takes us on a whirlwind tour of the disastrous rise of economism and the changing currents that are finally deprecating its ideology and methodology – and not a minute too soon.

In 1944, Paul Samuelson called World War II "the economist's war." JK Galbraith did research for the United States Strategic Bombing Survey that concluded that military doctrine overestimated the usefulness of aerial bombing. Milton Friedman tried and failed to use economics to develop high-temperature alloys. The Rand Institute developed the post-war nuclear "Mutually Assured Destruction" plan using economists, not military experts.

After the war, economics became the language of Washington. By 1967, the DOT's safety agencies took up economic models to determine when and how to deploy safety regulations. These regulations were weighed against a model that assigned a cash value to the human lives they'd save, and as that value changed from year to year, so did the regulations that were politically possible.

Today, the use of cost-benefit analyses that relied on arbitrary prices assigned to human lives is mandatory for all major regulations:

That means that federal economists aren't just in charge of economic policies – at the Fed, say, or the Congressional Budget Office – but rather, they have the final word on all policy matters – every question has become an economic question. That's the core of economism.

From the middle of the 20th century on, economism gave rise to a near-endless supply of annoyances, miseries and horribles.

For example, economists convinced Carter to deregulate the airlines and turn legroom into a commodity that you pay extra for. That was the brainchild of then-chair of the Civil Aeronautics Board Alfred E Kahn, an economist, who cheerfully declared "I don't know one plane from another – to me, they are all marginal costs with wings."

Most consequentially, economists gutted antitrust, declaring monopolies to be efficient and ruling any questions of corporate power out of bounds on the grounds that it couldn't be measured or modeled in equations. This, in turn, made all other regulation a battle between concentrated sectors dominated by a handful of giant corporations and their would-be regulators. From here, it's a direct line to both "too big to fail" and "too big to jail."

Economism has had an enormous – and awful – impact on public health. It's no coincidence that when Johns Hopkins sent out a call for survey data early in the covid pandemic, two of its signatories were economists and only one was an epidemiologist:

As Noah writes: "Think about that. Hopkins medical school is consistently rated one of the top five in the country. Yet even there, an epidemiologist dared not make an uncontroversial public health pronouncement in the midst of a pandemic without invoking the unimpeachable authority of two economists."

Even Trump, who professed a hatred of "experts," bowed before economism: it was his trade advisor Peter Navarro who got Trump to take covid seriously, not his public health team (Navarro's PhD is in economics). And it was Navarro who got Trump to recommend useless – and potentially dangerous – hydroxychloroquine therapy for covid.

In 1992, the Nobel Prize in Economics went to Gary Becker, who used economics to explain "criminal justice, marriage, and racial discrimination."

Related to this is the fact that the Economics Nobel isn't actually a Nobel at all – rather, it is part of economism's drive to subordinate evidence-based science to economicist ideology. The prize was created 73 years after the Nobel by Sweden's finance sector, who backed it with a perpetual grant, in a bid to establish that economics was a science:

Economism began to lose its shine after the Great Financial Crisis of 2008, which saw renewed interest in Karl Polanyi's 1944 anti-economism "Ur-text," "The Great Transformation," which argued that "economics was created by society and must be made to serve its needs."

Polanyi railed against the notion that the individual should respect economic law even if it happened to destroy him…. Nothing obscures our social vision as effectively as the economistic prejudice."

In the years after the GFC, Polanyi's anti-economism critique was updated and formalized into five major areas:

I. Excessive reliance on models. Famously, Queen Elizabeth visited the London School of Economics and demanded to know why they hadn't predicted the Great Financial Crisis. Economic forecasting basically sucks, and even though it now consumes vastly more computing power and has vastly more data to crunch, it's only made the most marginal and tenuous improvements.

Noah rejects the comparison of economic forecasting to weather forecasting: since 1984, economic forecasting has incorporated 20,000 times more variables with few improvements; over the same period, the time horizon for weather forecasts has grown from a few days to a few weeks ("Hurricanes no longer surprise us. Financial crises still do").

Despite this, economicists continue to claim that models can solve our problems. In 1991, Larry Summers (ugh) said, "the laws of economics, it’s often forgotten, are like the laws of engineering. There’s only one set of laws and they work everywhere."

Summers' economicist doctrine was at work in post-Soviet Russia, where the models confidently predicted that an "open economy" would be unleash massive growth. Instead, it delivered "a semi-fascist and not terribly prosperous kleptocracy."

II. Underreliance on data. As Ely Devons famously quipped, "If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, ‘What would I do if I were a horse?’"

As Robert Skidelsky wrote, an economics that can't validate its hypotheses empirically "has a strong tendency to slide into ideology."

In the pre-economicist age, economists focused on "history and the dynamics of change." These were the New Deal "institutional economists" of the 1930s, who were supplanted by the more math-heavy Keynesians and then the purely theoretical neo-classicals. These economists were seduced by "beauty, clad in impressive-looking mathematics," which they "mistook for truth," in the words of Paul Krugman.

The difficulty of finding data and the seductive power of models produced an establishment that dismissed the evidence before them, and common sense, as inconsistent with the theory and thus wrong. This is how the "virtual consensus" that minimum wage hikes increase unemployment was born, and it's why the minimum wage stagnated at $7.25, lower in real terms that the minimum wage MLK marched against in 1963.

III. A rejection of society. At the core of economism is a rejection of the very idea of society ("There is no such thing as society" – M. Thatcher). The only way to understand our lives is to model us as individuals, making individual choices and expressing individual preferences. Economism gives short shrift to how individuals affect one another.

Nowhere is this more visible than in Garrett Hardin's 1968 hoax "The Tragedy of the Commons," which purported to be a factual account of how people in communities persistently and reliably failed to manage common resources (Hardin, a eugenicist, was later revealed to have made the whole thing up):

The actual nature of how people manage commons is far more interesting. Elinor Ostrom – one of the few women to have been given an economics "Nobel" – has devoted her career to analyzing and explaining the long, factual history of well-managed commons, some of which have been run successfully for centuries:

IV. A failure to understand "irrationality." In the neoclassical model humans are present as "rational utility-maximizing agents" whose actions can be predicted by asking "What would this person rationally do to get the most out of their situation" (e.g. "What would I do if I was a horse?").

In the early 2000s, the "behavioral economists" turned the profession upside-down by taking the radical step of observing how people actually behaved, which turned out to bear little relation to the homo economicus of the models.

This "irrationality" could also often be called "ethics" – for example, the decision in various "ultimatum games" to punish selfish people, even if it means getting less for yourself. You can view this as "irrationality" if your sole conception of human motivation is "how do I get more for myself?" But you can equally say, "I don't like people who betray the social contract and I am prepared to go with less if it means punishing them."

But by insisting that ethics are irrational, economism can actually do away with them. Michael Sandel's 2012 book "What Money Can’t Buy," offers examples of things that shouldn't be subject to market forces, like concierge medical services. A decade later, these have gone from examples of the unthinkable to actual products.

V. The prejudices of economism. Economists themselves are more likely to behave like "economic man," "pursuing self-interest at the expense of cooperation":

Economists also give less to charity than other sorts of people:!

It is one of the least racially and gender-diverse of all disciplines:

It's one thing for a profession to be so different from the majority – but when that profession has elevated itself to the final arbiter of all regulation and government, its narrow composition and ideological blinkers start to tell.

Thus far, the response to this critique has been to reform the economics profession – the Hewlett, Omidyar, Ford and Open Society Foundations are all pursuing programs to make economics better. But Noah argues that it's not enough to fix economics, we also have to restore politics as a project separate from economics.

Economics should be a tool in politics, but not a replacement for it. As a start, Noah proposes three political domains where economics does not belong:

I. Criminal justice. Get rid of private pretrial supervision, where people charged with a crime have to pay a corporation "user fees" for their ankle-bracelet and other monitoring, or rot in jail. Get rid of private prisons. Get rid of private immigration detention.

To the extent that these "save taxpayers money," they do so by "running their facilities on the cheap." Private prisons have "more assaults, more inmate grievances, more lockdowns, and nearly twice as many guns and other weapons confiscated from prisoners."

II. Health care. After a century of "ever-more ambitious experiments to see whether medical services can be made broadly available on a for-profit basis" the verdict is in: "Every experiment failed." Every private healthcare scheme fails for the same reason: "The market doesn’t want society to share equally in paying the cost of health care. It wants the biggest consumers (i.e., the sickest people) to pay more. A lot more. That’s how markets work."

Private insurance failed when companies started "charging riskier customers higher premiums and avoiding very risky customers altogether." That led to HMOs, which failed when "rising health care costs eventually made even premiums for HMOs too expensive."

Then we let doctors buy interest in labs and drugs and machinery, charge unlimited fees, and become "entrepreneurs." We shut public hospitals and let for-profits consolidate hospitals into massive chains. Prices went up. Care got worse. Failure.

Obamacare – which tries to have a private system paid for out of the public purse – has also failed, as costs have gone up, premiums have risen, and outcomes have worsened. We're on track to outspend the budget for Medicare for All on a private system that delivers worse outcomes to fewer patients.

Many, many studies have concluded that private insurers can't deliver better care at lower prices. Private insurers pay nearly double the rate that Medicare gets from hospitals.

III. The climate emergency. We are barreling towards a planet incapable of sustaining human life. There is no longer a "credible pathway to a 1.5C rise."

The economics trade has an answer. In 2019, 28 "Nobel" laureates in economics called a carbon tax "the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary." Three years later, emissions are up, not down.

Thankfully, the economicist answer to the greatest existential risk facing human civilization today is no longer the only answer we're willing to try. The Inflation Reduction Act puts $369b worth of public money into directly subsidizing green energy and green tech.

It doesn't include a carbon tax.

(Image: Gage Skidmore, CC BY-SA 2.0, modified)

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Colophon (permalink)

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