It is not just the American economy that is bankrupt, but the profession of economics as well. It is partly the interaction of these two that has led to the collapse of the American economy and the huge economic hole we find ourselves in.
Paul Krugman provides a devastating critique of his own profession in the Sept. 6 New York Times Magazine , in an essay entitled “How Did Economists Get it So Wrong?” Krugman, a Princeton economist, New York Times columnist and Nobel prize winner, believes that
American economics, as a field “got in trouble because economists were seduced by the vision of a perfect, frictionless market system.”The profession was blind to the possibility of catastrophic failures in a market economy, he asserts.
In a June lecture at the London School of Economics, Krugman argued that most
macroeconomics of the past 30 years was “spectacularly useless at best, and positively harmful at worst.”
Others besides Krugman are dissecting the economics field, and finding serious problems with it. Britain’s influential Economist magazine had a cover story (7/18) on “Modern Economic Theory: Where it Went wrong—and how the crisis is changing it.” They quote the LSE’s Willem Buiter saying that a training in modern macroeconomics was “a severe handicap” at the onset of the financial crisis. The main problem was that in many macroeconomic models, insolvencies simply cannot occur.
So much for those models.
The problem of economics is even worse, I think, because the discipline has been so intolerant of dissenting views. Modern economic theory is as much an ideology as anything else, with a faith in the market that ignores both reality and those who challenge the dominant paradigm. As the New York Times put it in a story last March:
“For years, economists who have challenged free market theory have been the Rodney Dangerfields of the profession. Often ignored or belittled because they questioned the orthodoxy, they say, they have been shut out of many economics departments and the most prestigious economics journals. They got no respect.”I saw this firsthand at my university a decade ago, when we were attempting to create a department of economics within the college of liberal arts and sciences. I was on the search committee to hire an economics professor to begin building that program. But it soon became clear that there was a basic inconsistency between the goals of the liberal arts curriculum—free inquiry, critical thinking, competing ideas—and that of the economics profession. The candidates we considered most interesting , with provocative ideas and wide-ranging interests, were largely outcasts in their own discipline, which favored narrow specialties, and strict adherence to the free market ideology. “They got no respect” from the economics discipline, so didn’t have the necessary credentials, and couldn’t be hired. Eventually, the university gave up on trying to create an economics department in the liberal arts college.
Not only is the narrow ideology of modern American economics inconsistent with the traditions of critical thinking, it has proved totally incompetent at predicting the crisis, or figuring out how to get out of it. There are a few exceptions, like Paul Krugman, Yale’s Robert Schiller, and Columbia’s Joseph Stiglitz—all Nobel laureates—and some economics writers like the New York Times’ David Leonhardt. But until now, most of them have been voices in the wilderness, trying unsuccessfully to point out the problems of mounting debt, growing inequality, and neglect of economic and social infrastructure.
President Obama , I believe, recognizes the problems and is trying to remedy them, but he is caught in a vise between huge accumulated needs of the U.S.—for example in health care and education—and the unprecedented level of government and consumer debt.
From an outsider’s perspective—that of a non-economist—it seems to me that the problem is pretty obvious and simple, and the solution is equally obvious and simple, but horribly painful. The problem is that for a generation, American government and citizens have both been living well beyond their means, borrowing to pay for the plethora of consumer goods most of us enjoy. But in the meantime, we have neglected the poor, the schools, the health care system, infrastructure, the environment, and most of the rest of the world. We have lots of goodies, but the society is ailing, and we have passed the buck to the next generation.
The painful solution is that Americans will have to spend and consume less, pay more in taxes, and be prepared for a long-term contraction in the economy. There is evidence of this already, with people finally beginning to save, and to practice “consumer thrift.” But more saving and less spending simply contributes to a contraction of the economy. Banks, retailers, the service and entertainment industry have all depended on people borrowing to spend. As this changes, all these industries will decline, and the economy will decline.
Most American economists, including those with the President, are predicting an imminent end to the recession, and a relatively quick economic recovery. So far, virtually all such predictions have proved overly optimistic and wrong. I think those predictions are based on flawed economic models, and do not account for the depths of the hole we have dug ourselves into. We are in for a very long slog.
While I agree with President Obama and Professor Krugman on most things, I disagree with them that the solution is more spending, by government and consumers, to prime the economy. What we need now is belt-tightening, and a return to a more modest standard of living—perhaps comparable to what we had in the 1970s. This will entail a continuing and severe contraction of the U.S. economy, to return to equilibrium. In the long run, though, it will be best for both the U.S. and the rest of the world.
But you won’t hear this from many economists