Finally, Somebody Says It

Economist, author and Audit pal Jeff Madrick has a piece on the Daily Beast that I’ve been hoping someone would write:

How the Entire Economics Profession Failed

Not a bad topic, right?

Here’s a partial list of misguided and dangerous notions to which mainstream economics and economists have lent their considerable academic and intellectual heft:

Wall Streeters paid themselves enormous bonuses based on rising market values of investments, not on revenues actually made. The bonus system has been based on the preposterous assumption that the value of an investment set by traders in financial markets rationally reflects the true future value of that asset almost all the time.

Investment banks took on $25 to $40 of debt for every dollar of capital in order to maximize their returns. It was assumed that these smart people wouldn’t do this if they didn’t know how to manage their risk.

Average Americans took on record amounts of debt compared to incomes, which was said to be just fine because it was supported by high stock prices and, when that bubble burst, by high house prices.

Financial deregulation freed MBAs to make the brilliant technical innovations. I could find no single mainstream academic economist who criticized financial deregulation in a systematic way since the 1990s until only very recently. Two veteran Wall Street economists, Henry Kaufman and Al Wojnilower, were partial exceptions.

Low rates of unemployment were proof the American economic model was working. In light of this, stagnant or falling wages in the 2000s was not an indication of economic failure—just a reflection of American competitiveness.

The Federal Reserve can always save the day, as Milton Friedman taught us. Just add more reserves and believe in Ben Bernanke, whose mentor was Friedman. So now Bernanke is adding reserves far beyond anyone’s imagination, just like Friedman said he should do, and the economy is in ever-deeper trouble.

And check out this figure. Unbelievable:

The earnings of financial institutions rose to more than one-third of all American profits. This only proved how valuable finance was to the economy and that manufacturing was simply old hat.

Madrick then skewers the profession’s pretensions to scientific objectivity:

What most economists can’t seem to acknowledge is that they have been overcome by free market ideology over the past thirty years. Such ideology is especially beneficial to wealthy vested interests. But economists are purportedly dedicated to objective empirical and statistical analysis. Ideology has little part in the work of these serious empiricists, but surely there was no buttering up of the rich and powerful that provide jobs and grants.

Only with the near collapse of the economy are economists changing their tunes slightly, accepting the need for regulation and Keynesian stimulus. But they will probably not change their deepest assumptions about how markets work, or about when they should and should not be given free reign. They will make no bigger place for government than to adjust a little more for “market failures.” They will go back to tinkering with those models, not transforming them, and even make them fit the current crisis without blinking an eye.

Economics is probably unique among academic disciplines in the extent to which its academic debates end up affecting the lives of everyday people. Put it this way, art historians, comp-lit scholars, and anthropologists may be susceptible to the same academic pitfalls as economists—group-think, a focus on minutia, the lack of interaction with humanoid life forms, poor hygiene, etc.—but it doesn’t matter because policymakers don’t actually rely on them to make policy.

That’s not true with economics. This is a profession that could stand for some soul-searching, and some scrutiny. Come to think of it, that’s not a bad story idea for a business-news outlet. There you go, an Audit Freebie.

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.