Economism and Economics

By James Kwak

One point I try to be clear about in my new book is that economism—the assumption that simple Economics 101 models accurately describe the real world—is not the same as economics. There are people who think that all of economics, or at least all of modern, mathematically inclined, “neoclassical” economics, is at fault for the growth of neoliberal capitalism and the increase in inequality in rich countries. I am not one of them.

In my mind, the problem is knowing just a little bit of economics—the proverbial little bit of knowledge. (My favorite form of that proverb, despite its religious origins, is the following: “A little knowledge is apt to puff up, and make men giddy, but a greater share of it will set them right, and bring them to low and humble thoughts of themselves.”) When you learn more economics, you learn that the world has more than just supply, demand, price, and quantity.

Matt Yglesias has even tried to argue that “on a whole lot of issues the basic econ 101 view supports the liberal position.” I think he’s exaggerating his point—on a whole lot of issues, Economics 101 tells you that market failures are possible, but that doesn’t necessarily dictate a liberal policy outcome. But whatever is actually in an introductory textbook, the problem is that what people think they remember—or what people who never took economics think the subject teaches—is that competitive markets produce optimal outcomes. As Paul Samuelson wrote in the first edition of his textbook (and I never tire of quoting), the idea that “any interference with free competition by government was almost certain to be injurious … is all that some of our leading citizens remember, 30 years later, of their college course in economics.”

The historical development of economism, and its divergence from economics, is the subject of chapter 3 of my book, and also of my new article in the Chronicle Review. The article also includes some of my thoughts on how the teaching of economics might be modified to give students a richer and more balanced understanding of the discipline. For more, head on over there.

11 responses to “Economism and Economics

  1. I’m still waiting for my copy…

    I didn’t expect an immediate extended response to my comment, though it has plainly had been in the works for a while. I like your idea of a range of courses, but I also think there’s a specific need for a “Basic economics for non-economists” course, sort of like the infamous “Physics for poets,” one course that non-economists can take and be at least a bit informed about the subject, enough to know that there is a subject and that there are experts to refer to, and enough to let people know why Marx, Hayek, and Friedman are not reliable guides.

  2. Ray LaPan-Love

    I’ve been at this econ-blogging for about 10 years now; and so, I’ve witnessed many thousands of examples of ‘economism’ (I have committed some too). But I doubt if these fallacious arguments put forth by those who are so obviously misinformed, or under-informed, carry much weight. This is not meant to suggest that a democracy would not function more effectively if a larger percentage of the population better understood how the world actually works, it very probably would, but any hope of an educated populace is a long way off. Meanwhile, the typical examples of economism are just part of the relentless din of ignorance that ends up ignored by those who pull the strings, as the founders so wisely intended.

    But there is economism at a higher level that causes problems. For example, most economists fail to recognize, or to give enough weight to, how the US having reserve-currency status changes the dynamics of a fiat system. For instance, many economists believe that the number of dollars that exist in the global economy add up to the accumulative number of dollars as a result of trade deficits. But there are in fact many trillions of dollars more in the global economy than the accumulative total of the net deficit of trade imbalances. But presumably, there is some text-book driven fallacy which argues that currencies always repatriate, but of course dollars can be spent almost anywhere, and there is no solitary benefit to spending dollars on dollar-related assets. Plus, there is also the Triffin Dilemma which explains why an ever-increasing amount of dollars must be added to the global economy, and that the global supply of dollars must kept pace with global growth. It is surprising though, just how many economists don’t understand this, especially considering the fact that the Chinese cited the Triffin Dilemma as the cause of the 2008 downturn.

    Nearly all economists also ignore the influence of the global labor markets on the domestic labor markets. This being critical though to understand the potential for inflation, because… for inflation to be problematic there must be wage inflation. But, with our labor markets being in a state of over-supply, the potential for inflation becomes a matter which must be understood in a global context, and yet economists typically ignore the downward pressure on domestic labor values which is a result of global factors. In fact, broadly speaking, it seems that economists rely far too much on outdated concepts which were developed in an effort to better understand singular economies, and in an isolated sense, with trade issues being treated as a disconnected issue. But, of course, things have become much more complicated as the world has become more integrated.

  3. Please address lax anti-trust enforcement and how big money monopolies impede free markets and create barriers to entry.

  4. Bruce E. Woych

    Perhaps a course in non-economics might deconstruct the artificial models that articulate the language of economizing into new realms of real time survival economics. DEconomizing of rationing politics through markets is possibly the start a away from the teleology of circular modeling that now represents analytical tracking of business constructs and reconstructs these into entire social economies (by default). Unfortunately it never covers stakeholders as anything more than consumers, and shareholders as anything less than producers and it all meshes nicely into a false scenario of supply side control fraud where scarcity dictates price and ownership captures scarcity through either the market prices or monetary wages. E-con game is built on what intrinsically is equivalent to domestic forms of inverted mercantilism that sees concentration in the hands of a few as the ultimate goal of capital utility.
    I did have Economics 101 back in the early 70s, by the way, the Professor was Greek and he was already very upset about the state of the art. Obviously ahead of his time.

  5. And they are telling me over here that a big debt due from gambling is their only alternative to finding a human solution, and I am the financial mechanism they are committed to paying of ft his debt, and there is a hard timer included. Ohh no, now what could go wrong here?

    When I said/say, a failed human experiment, I meant it.

  6. Bruce E. Woych

    @skunk: The explanations are often perverted-inversions. Look here where “asset seizing” opportunism comes after crashing the economy and it is covered as if it was just “bargain basement” shopping by Blackstone
    http://www.nakedcapitalism.com/2017/01/the-obama-administration-bails-out-private-equity-landlords-at-the-expense-of-the-middle-class-government-guarantees-for-rental-securitization.html. But one step further, this is supposed to be supply and demand in a fair economy?
    Evictions by Wall-Street Mega-Landlords Soar, Financialization of Rents Cause “Housing Instability”: Atlanta Fed
    by Wolf Richter • Jan 7, 2017
    http://wolfstreet.com/2017/01/07/evictions-by-wall-street-mega-landlords-soar-financialization-of-rents-cause-housing-instability-atlanta-fed/
    …….
    They’re not “experimenting” with capitalistic economics…this is outright capital punishment to the general domestic population.

  7. I guess we already know/knew how bad it can/could get with financialization of the economy and higher interest rates, life has already proved to not be fair, the right people not getting the fair shake for many reasons over the long term.
    Personally I’ve already half left this world behind, its the next one where he wants to cement his same legacy in advance …..(and a sped up version of competing with insanity for money. Think of a well educated generation going from 30 years to 20 years and expecting the speedy pain free educated results, guess what, that aint gonna happen),…. with a financial momentium (or lack thereof with the correct persons), and he says just don’t be late twice or you’ll lose 1/2 your beautiful stinkin recruits, (and only supplied with two too begin with). It’s just rather depressing to see desperation first hand and now promised twice, (just so there is no mistake about the mutual desperation on all levels) and only promises of it getting worse.
    Can there be anything for anyone to pick up after the outright capital punishment to the general domestic population is complete. i’m searching regrettably alone knowing a team is the logical path here, yet the clock is a tickin and the desperation growing everyday.

    The never ending list of offenders –vs– at most a few sole survivors. Calculate the odds and arrive at the conclusions. It just seems too much to ask of mankind in the first place, and then to have no other alternatives, just proves the desperation he is capable of mass producing.
    This is all based on a time tested momentium theory practiced since the discovery of the amusing big bang theory,(and that is 4.5 billion years ago) before that they just matted the pedal and hoped for the best, that war was not even close and newer one created, even though some still live and pray, in the past, today.

  8. Bruce E. Woych

    https://en.wikipedia.org/wiki/Iron_law_of_oligarchy… The Iron law of Oligarchy
    or/ Deja Vu…all over again!

  9. Well the good news is the cost of living is about to lower in the future. It finally rained in California, that’s years of stored liquid gold just waiting to be economically monetized. Hum, is there a take the money and fox on the run scenario in the future.

  10. Sophisticated economists seem entranced by “economism.” They never anticipated the income distribution effects of globalization, only the shining phantasm of Ricardo.

    Nick de Peyster
    http://undervaluedstocks.info/