Mamas, Don’t Let Your Babies Turn Out to Be Mainstream Economists
The credibility of mainstream economics took a punishing punch from the Great Recession that hit in 2008. It should have been a fatal blow, but the profession had made itself nearly impervious to the effects of empirical data. The field took so much criticism that Harvard economist Dani Rodrik decided to write a book to defend it – Economic Rules: the rights and wrongs of the dismal science.
This is the book readers should give to any poor soul considering a degree in mainstream economics. Hopefully it will discourage them. It’s easy to read. Rodrik is a much better writer than most economists. And it’s not too long, about 200 pages.
Rodrik’s book is about the models that mainstream economists use. They don’t have just one model of the economy, but many. Economics is a toolbox of models and good economists choose the appropriate tool for the job. Different time periods also requirement their own models.
However, Rodrik has only one sentence for the New Keynesian models that the Fed uses to actually model the entire economy and upon which monetary policy and most fiscal policy is based:
Those who thought active government policy retained a role in stabilizing the economy were ultimately forced to develop variants of microfounded models, called new Keynesian models, to retain credibility within the discipline. (134)
He admits that the models in the toolbox have major flaws: they’re all based on unrealistic assumptions. But he pleads with the uninitiated not to reject them because of their pock marks; just ask the economist using the model how the results would change if he used more realistic assumptions. What he doesn’t say is that we never get the chance to ask that question and if we did the economist would ignore us. The truth is that models require unrealistic assumptions in order to work because the models fail to reach a solution with realistic assumptions.
Rodrik defends math models on the grounds that 1) they make economics a science and 2) they clarify thinking. I couldn’t care less whether economics is considered a science or not. If you think that truth exists only in science then you need to repent of your irrational scientism. And if you think only math can make economics a science then you have a ridiculously narrow definition of science. For a complete description of the math problems in mainstream economics read page 347-354 in Mises’ Human Action.
Mises wrote that equations are nothing but logic converted into math symbols; they add nothing in the way of knowledge. A lot of people have trouble following long lines of reasoning and need it to be simplified for them in the form of math symbols. The clarity achieved by math is through simplification. By doing so in mainstream economics, the field favors those who are good at math over those good at logical reasoning and why the logic in mainstream is so bad.
Some people are good at both, such as Mises and Hayek.
The most damaging part of the book for mainstream economics is the section in which Rodrik demonstrates the consensus among economists which he took from Harvard economist Greg Mankiw. Keep in mind that consensus is the new definition of truth. In the old world, science used evidence and logic to arrive at truth. Now they have been reduced to relying on consensus. I’m not exaggerating much when I say this summarizes what you will learn from mainstream economics. Here is his list from page 149:
1. A ceiling on rents reduces the quantity and quality of housing available. (93%)
2. Tariffs and import quotas usually reduce general economic welfare. (93%)
4. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
5. The United States should not restrict employers from outsourcing work to foreign countries. (90%)
6. The United State should eliminate agricultural subsidies. (85%)
7. A large federal budget deficit has an adverse effect on the economy. (83%)
8. A minimum wage increases unemployment among young and unskilled workers. (79%)
The list contains all that a student can expect to learn from a PhD in economics. The rest is all conjecture. For those who find that to be too little reward for the effort, try learning some real economics by starting with Mises’ Human Action.
Originally published on ABCT Investing.
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