Economists are held responsible by some for the increase in income inequality that has taken place in recent decades. Milton Friedman in particular has been singled out for advocating the removal of the government from almost all sectors of the economy, which led to an increase in inequality. But this charge is flawed for two reasons. First, Friedman’s views were always contested by other equally well-known and respected economists who advocate government policies to deal with markets where there are distortions, such as health care. Second, policy decisions are undertaken by public officials in response to many factors, including the advancement of personal and ideological agendas as well as the influence of donors and interest groups. The study of the causes and effects of inequality has become a central topic of economic research, and economists have a role to play in developing policies to address it.
Economists and Inequality
by Joseph Joyce
Economists and Inequality
Binyamin Applebaum of the New York Times has written a book, The Economists’ Hour: False Prophets, Free Markets and the Fracture of Society, in which he claims that economists are responsible for the increase in income inequality in the U.S. I thought this charge was off the mark and wrote a reply. My piece, “Are Economists Responsible for Income Inequality?“, has been published in the June issue of Society. Here is the abstract:
https://www.nytimes.com/2019/10/04/books/review/the-economists-hour-binyamin-appelbaum.html
October 4, 2020
Can We Trust Economists?
By Justin Fox
THE ECONOMISTS’ HOUR
False Prophets, Free Markets, and the Fracture of Society
By Binyamin Appelbaum
THE MARGINAL REVOLUTIONARIES
How Austrian Economists Fought the War of Ideas
By Janek Wasserman
In 1970s Washington, politicians started putting economists in charge of stuff. The Federal Reserve and the Treasury got their first economist-bosses, Arthur F. Burns and George Shultz. Many others with economics Ph.D.s rose to key positions.
This “economist’s hour,” as the historian Thomas McCraw termed it in his Pulitzer Prize-winning “Prophets of Regulation” in 1984, was in many ways a reasonable match of training and task. The government had become too big and complex for the lawyers who had dominated it for decades to comprehend, let alone successfully steer. Economists had the tools and the inclination to provide systematic answers to questions facing policymakers and regulators.
Were they the right answers? From the 1970s through the early 2000s, Binyamin Appelbaum recounts in “The Economists’ Hour,” economists played major roles in ending military conscription, deregulating airlines, cutting taxes, transforming monetary policy, dismantling the Bretton Woods system of managed currencies, reconfiguring and ultimately weakening antitrust enforcement, subjecting environmental and safety rules to cost-benefit analysis and unleashing the financial system.
Some of these changes still look pretty smart. Others, not so much. Today’s America is wealthier than the one the economists set to work on in the 1970s, but it is also less equal, more prone to financial crisis and slower growing. Large corporations are getting more entrenched, innovation seems to be waning and politics are dysfunctional.
One response to all this is to “Blame Economists for the Mess We’re In” — the headline The New York Times put on a recent essay adapted from the book by Appelbaum, who is a member of the paper’s editorial board. This unleashed a predictable wave of online outrage from economists, but the book itself conveys a more nuanced message.
The status quo that the economists set about reshaping was not sustainable, Appelbaum argues. Something had to give. The economists’ recommendations didn’t all point in the same direction, either. “I am cognizant that some economists vigorously opposed each of the changes described in this book,” Appelbaum writes. And of course economists weren’t responsible for everything; there were big cultural and political changes afoot as well.
Still, Appelbaum is undeniably correct that economists gained unprecedented power and influence starting in the 1970s, and that those with the most power and influence “occupied a narrow portion of the ideological spectrum.” At one end were crusading ideologues, foremost among them Milton Friedman, who saw an opportunity to shift the tide of popular and political opinion against government power over the economy, and took brilliant advantage of it. But Appelbaum’s account is also full of economists who considered themselves liberal Democrats but found themselves coming down on the same side as Friedman. The analytical tools employed by mainstream economists steered them toward prioritizing efficiency over equality, market mechanisms over nonmarket ones and consumers over producers. Their methodology was itself a sort of ideology.
One example of this is marginal utility, a basic building block of modern economics that assumes all value derives from the wants of consumers. The concept was worked out independently in Austria, England and Switzerland in the early 1870s. For its Austrian progenitor, the journalist-turned-economist Carl Menger, it soon led to a petty but legendary Methodenstreit (battle over methods) with a top German economist. The Germans emphasized history, statistics and the interests of the nation, Janek Wasserman writes in “The Marginal Revolutionaries,” while for Menger and those who followed him in what became known as the Austrian school, individual choice was central.
This made Vienna a leading Continental outpost of the market-oriented “neoclassical” economics that also became dominant in Britain and eventually the United States. But the Austrian school also had some unique properties. One was a fascination with entrepreneurs, expressed most famously in Joseph Schumpeter’s 1942 account of the “creative destruction” of business failure and creation. Another was a skepticism of the mathematical tools used by neoclassical economists elsewhere. Most pronounced of all was a disdain for government management of the economy.
Early on, this disdain was reserved for full-on socialist seizure of the means of production. The Austrian economists of the late 19th and early 20th centuries endorsed progressive taxation and the welfare state, and Schumpeter even served briefly as finance minister in his country’s first socialist-led government, in 1919. In subsequent years his contemporary Ludwig von Mises and Mises’ protégé Friedrich Hayek took a less compromising line, eventually arguing that virtually any government economic intervention was, as Hayek put it in 1944, a step down “the road to serfdom.”
By then Hayek and the rest of the Austrian school had fled Austria. Schumpeter and several others settled down to distinguished academic careers in the United States, with Schumpeter also enjoying a posthumous renaissance as patron saint of Silicon Valley. But it was Hayek and Mises who came to define the new Austrian school, attracting wealthy patrons in the United States who had despaired of finding credentialed economists willing to offer such a full-throated defense of free markets. Before long they were joined by younger Americans like Friedman (although even he found Mises a tad extreme).
There the stories of these two books intertwine, at least a little. Wasserman is a history professor at the University of Alabama and he doesn’t really have an ax to grind; his book is a fair-minded, deeply researched account of how a school of thought developed and wielded influence. It is a narrative with many protagonists, and keeping track of all of them can be a bit much, but it’s still quite well done, and full of fascinating stories.
Appelbaum does have an ax to grind, but unsheathes it only occasionally, usually to offer cutting one-sentence dismissals of particularly dubious claims by economists. His book is a marvel of popular historical writing, propelled by anecdotes and just the right amount of explanation but also impressively well grounded in the latest academic research by historians, sociologists and others. Much of the territory it covers was familiar to me, but I was constantly learning new twists and nuances.
What are we to think of economists after all this? Wasserman tells the story of the Socialist Austrian chancellor Bruno Kreisky, who when asked to account for his country’s spectacular post-World War II economic success said: “I explain it by our attention to export. We exported all of our economists.” It was a joke, but one that hints at the truth that economists don’t have a monopoly on good economic policy.
Appelbaum makes this explicit by comparing the development experiences of Chile and Taiwan. University of Chicago-trained economists devised a market-dominated approach for Chile that has left the country wealthier than its South American neighbors but beset by high inequality and civic malaise. Taiwan’s far more spectacular rise to affluence was steered by electrical engineers who consulted economists and enlisted market forces but were never ruled by them. “They regarded the economy as a machine,” Appelbaum writes, “and they were not afraid to tinker.”
The United States is currently led by a man who regards the economy as an extension of himself and pays no heed to economists. This approach worked remarkably well for his first two years in office, but now seems to be unraveling. The economists will be back. When they return, one hopes that they and the rest of us will have learned a few things since the 1970s.
Friedman’s views were always contested by other equally well-known and respected economists who advocate government policies to deal with markets where there are distortions, such as health care….
[ Beginning college on a well-regarded campus, with an older economist on faculty who I had thought was among the most prominent in the field, I quickly learned that this was an economist to avoid studying if the point was to advance in the field. The need, as Paul Krugman has written, was to be a rough sort of Chicago School or at least a neoliberal affirming economist to be successful.
Economics struck me as meaning a conformity of thought, and needing to be indeed careful in arguing over the conformity. ]
J. Bradford DeLong @delong
@Noahpinion @profwolff and Stephen Resnick do have a UMass Amherst reputation as mendacious creepazoids…
6:44 AM – 13 Oct 2015
[ Keeping to the tradition of “hippie punching,” an attack on 2 locally distinguished professors.
Richard D. Wolff, the first professor attacked, had become emeritus at the University of Massachusetts and was continuing a university teaching career in New York. The second professor had actually died years before this attack. ]
About time. (I leave the explanation of such as Friedman to others.)
Economics is, without a doubt, a most important aspect of government. So much is known, the study avails governments many essential measures and tools. Economics per se is not the problem.
Heard C. Romer speak on the difference between empirical evidence of consequences to an economic measure and the willingness of about half of the economists to accept the evidence because it contradicted their ideology. Ideology has come to dominate economics to the extent that economic ideology amounts to a religion. There needs to be vigorous challenges to the mantras of Free Markets, Capitalism, and Free Enterprise. From the broader view of people, the environment; we’re headed toward disaster. Another mantras/buzzword begging scrutiny that comes to mind is entrepreneurship.
Give me that old time religion
The half-witted congress-critter proudly proclaimed that he worshipped capitalism. Didn’t say what it was about capitalism, wouldn’t have done any good to ask; believers got to believe. For believers, Capitalism along with Entrepreneurship and Free Markets form their trinity.
There may have been lots of dissident economists, but it is hard to think of more than a handful who actually spoke out against neo-liberalism. Where were their textbooks? Who were their graduate students? Where were their petitions? Physicists spoke out against the atomic bomb. All sorts of scientists argued against genetic engineering, against climate change, against high fructose corn syrup and so on, but economists seemed to be, at best, silent against the new economic program and the dismantling the New Deal. Was there some kind of cancel culture, an omerta, or just a dearth of opposition?
Silence is never an answer
The problem with economics is that it is hard to argue with money. Then there is that old saw “Economists know the price of everything and the value of nothing.”
BTW, Anne, you go girl. You are rocking it.
Anne,
[I particularly loved the following excerpted below from the article by Justin Fox that you post up thread -]
“…At one end were crusading ideologues, foremost among them Milton Friedman, who saw an opportunity to shift the tide of popular and political opinion against government power over the economy, and took brilliant advantage of it. But Appelbaum’s account is also full of economists who considered themselves liberal Democrats but found themselves coming down on the same side as Friedman. The analytical tools employed by mainstream economists steered them toward prioritizing efficiency over equality, market mechanisms over nonmarket ones and consumers over producers. Their methodology was itself a sort of ideology…”
[That was poignant and beautiful and noticeably reminiscent of the old saw “To a man whose only tool is a hammer then every problem looks like a nail.” This type of endemic bias native to methodology is the anti-science (as analogous to the anti-Christ) as well as antithetical to the fundamental purpose of economics.]
I will blame economists for one thing though. They do not point out often enough, that if we want to maximise welfare, the easiest way at any point od time to do it, is to take money from the rich and give to the poor. That is because a dollar is worth much more to a poor man than to a rich man.. The onus of proof lies in the hands of people who want to argue against that.
By the way I remember Friedman. He always argued for positive economics and against normative evonomics, and the grounds that devisions about social allocatoon were political decisions and economists shouldn’t be making them. He did argue that policies should however consider how best to acchieve their objectives. For instance by using negative income tax (sort of like UBI) rather than means tested welfare. So though he was mostly wrong (thanks Robert Waldmann) particularly with his theoretical speculations, sometimes he might have been right.