Why Economics Should Frighten You
I just finished reading Bruce Bartlett’s The New American Economy: The Failure of Reaganomics and a New Way Forward. As a non-economist casually reading Bartlett’s book, I can appreciate the criticism I sometimes receive from my non-lawyer readers. Bartlett’s is still an accessible book, but it does come right out of the gate assuming the reader understands certain macro-economic terms—i.e., supply-sider economics, monetarism, discount rates, etc.
One of the interesting points Bartlett makes concerns John Maynard Keynes. The most famous idea attributes to Keynes is, of course, that deficits are useful as a means of increasing the money supply and thus spurring growth. Nonetheless, Bartlett points out, Keynes was also eventually impressed with F. A. Hayek and advocated a return to classical economics. In this regard, Bartlett quotes Keynes as follows:
I find myself moved, not for the first time, to remind contemporary economists that the classical teaching embodied some permanent truths of great significance, which we are liable today to overlook because we associate them with other doctrines which we cannot now accept without much qualification. There are in these matters deep undercurrents at work, natural forces, one can call them, or even the invisible hand, which are operating toward equilibrium. If it were not, we could not have got on even so well as we have for many decades past.
Bartlett responds to this seeming contradiction accordingly:
Through the years, many economists have puzzled over the contradictions in Keynes’s work. But there is one thing that ties it all together: his intense desire to influence public policy. As Keynes biographer Robert Skidelsky put it, “He invented theory to justify what he wanted to do.” If one goes through the 30 volumes of his collected works, the vast bulk of the material is not technical economics, but articles for newspapers and popular magazines, as well as memoranda and policy papers for government officials. “He was an opportunist who reacted to events immediately and directly, and his reaction was to produce an answer, to write a memorandum, and to publish at once, economist Elizabeth Johnson explains.
Bartlett goes on:
It is clear that Keynes would often put forward proposals because he thought they would be helpful at a particular moment in time, knowing full well that it would be highly undesirable for them to be maintained for the long term. . . .
Keynes had enormous confidence in his ability to manipulate public opinion and this had a great deal of impact on the nature of his work. For one thing, it obviated any necessity for consistency; he would say what needed to be said one day and if it needed to be changed the next day, then he would simply make it happen.
Now, when this attitude is embodied in a Supreme Court justice, we call it “living constitutionalism.” However, we can probably cede it is more appropriate in the context of economic policy. On the other hand, to read the account of this political insider/economist, one gets the impression that economists view economic actors—i.e., us—as subjects in a science experiment. For example, Bartlett describes how a certain economic theory will work for a time, but will later cease to be effective because, among other things, people learn and adapt to the government’s policies. This causes the policies to lose the stimulative, artificial effect that the policy makers intended. As Bartlett puts it:
As builders and suppliers for public works become accustomed to the government enacting countercyclical programs, they tend to under-invest during upturns, thus adding to inflation and the cost of public works.
. . . .
Economists associated with the rational expectations school played a part as well in undermining the foundations of Keynesian economics. From the point of view of supply-siders, a key element of their critique related to econometric models. They argued that people learn from policy changes and thus change their behavior accordingly. People may react to a policy one way the first time and differently the second time.
There is something that sounds insidious about this insight—as if, though it may be true, it is unsavory that economists and politicians would bank on it. Are economists really like shepherds, and the rest of us like sheep, as Bartlett makes it sound? Are they out there somewhere poking and prodding the citizenry to modify behavior and thereby manipulate the economy? And is it really true their policies only work so long as we can’t quite get a read on what they’re up to?
I am skeptical that there can be no static formula on which our economy can operate. We require a “fluid” economic policy only because we insist on engaging the federal government to assist the economy in reaching such a magnitude that any fluctuations result in disaster—thus necessitating national legislative action with the help of economic policy advisers. That is, without the government as such a central component in our economy, we might not have as much growth, but we also might not have such disastrous bubbles and recessions, either.
Meanwhile, the economists run their experiments on us. They observe our behavior and devise theories to explain why we do the things we do. They then advise policy makers to get us to do more of some things and less of others. They then test those policies and see what works and what didn’t. Then when they overuse the policies that worked before such that we “see it coming” the next time and thus muck up their lab results, they have to try something new. Eventually, they overuse the corrected theory and self-correct, and so on and so forth. This process of macro-economic policy making, which already works at an incredibly high level, thus begins to give rise to yet another, higher level of observation, a “meta” macro-economics. That is, the development of a theory that explains why macro-economists do what they do.
It seems to me things can tend to spin out of control. We already talk about folks like Ben Bernanke and how lucky we were to have him at the Fed when the bottom was falling out, and what might have happened without him. Bartlett himself says this in his book. Is this what it’s come to? Is our economic system so impenetrable that there is just one fellow on God’s green earth who knows how to calm it down when it gets cranky? Economic policy making seems like just bunch of wet thumbs in the wind.