ANOTHER SLAP DOWN OF "INVISIBLE-HAND' THEORIES
Kevin G. Hall, McClatchy Washington Bureau (October 29), reviews a new book on economics that is causig a stir HERE
“New book slams economists, their theories and their forecasts”
Jeff Madrick has a bone to pick with the economics profession, and that’s putting it nicely. Consider the title of his new book: “Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World.”
The book amounts to a broadside on modern economics and recently was critiqued by 2008 Nobel Prize-winning economist Paul Krugman, whose review appeared in The New York Times.
“Hardly any economists predicted the 2008 crisis – and the handful who did tended to be people who also predicted crises that didn’t happen,” Krugman noted, underscoring a central theme of the book – that the profession has a poor forecasting track record. “More significant, many and arguably most economists were claiming right up to the moment of collapse that nothing like this could even happen.”
Madrick is a longtime writer on economic matters for Harper’s magazine and a former New York Times columnist. He dropped by McClatchy’s Washington Bureau recently to discuss his book. Here are some of his thoughts, edited into a question and answer format.
Q: You question economists’ devotion to the famous “invisible hand,” the notion that in a free market absent of government intervention buyers and sellers find an agreeable price and self-regulate the economy. Why?
A: This book is about how economics has been oversimplified and increasingly they take good ideas, the invisible hand, and oversimplify them, and make them rules of thumb.
Q: You cite raising the minimum wage as an example of that. Economists doggedly insist that because of the invisible hand, raising wages will reduce the demand for workers. Research raises doubts on this. What’s your view?
A: That’s an example of the abuse of a good idea turned into a rule of thumb. My argument is that since the 1970s and certainly since the 1980s, economists have increasingly moved in this direction of making many good ideas and some not-good ideas into rules of thumb as a shortcut for thinking.
Q: You disagree with those who say the invisible hand got the U.S. economy back on track after the financial crisis. You think the stimulus program, while too small, helped reverse the steep economic decline of late 2008 and 2009. Why?
A: (The idea that) economies adjust with no help from the government, that wages, prices go down and people invest, that’s what drove economic thinking in the Great Depression – it’s just not true. The economy does not adjust itself. The economy is not one big invisible hand.”
So far so good. Nothing like evidential criticism to expose the emptyness of the prevailing concensus on the so-called invisible-hand (though Krugman is quite defensive - he still believes in the myth of the “invsisible hand” being more than a metaphor for something other than what he thinks it is for.
Forecasting the future is hubris. Economists have enough problems with understanding the past; economics is not like physics which can predict the next lunar eclipse with impressive accuracy and the eclipses that will occur in the next hundred years or more. What they can’t do is predict what will happen to you next Friday; they can predict, with wide margins of error, what might happen to you. Human behaviour is full of surprises; the predictable laws of physics are dull in comparison. Yet some economists think human behaviour is predictable and have theories of human behaviour that assume humans behave like the physics of atoms.
So hats off to Jeff Madrick! He’s not fooled by the Emperor’s new clothes cheer-leaders that dominate economics and award each other Nobel Prizes and hang on to the myths of the “invisible hand” that they falsely arttribute to Adam Smith.
Moreover this is the second incident of better sense this week undermining the prevailing ‘certainties’ of “an invisible-hand” ‘miraculously’ and ‘beningly’ running the economy.
I have no comments on the rest of Madrick's ideas.