Features » November 27, 2006

What We Learn When We Learn Economics

Is a little economics a dangerous thing?

By Christopher Hayes

In 2001, Argentinian protesters extracted their own revenge against the IMF's market reforms.

There’s a case to be made that the single most intellectually and politically influential neighborhood in the United States is Chicago’s Hyde Park. Integrated, affluent and quiet, the 1.6 square-mile enclave on the city’s south side is like a tiny company town, where the company happens to be the august, gothic, eminently serious University of Chicago. Students at the U. of C. sell T-shirts that read “Where Fun Goes To Die,” and the same could be said of the neighborhood, which until very recently had a bookstore-to-bar ratio of 5:2.

But the university is probably best known for the school of economic thought it has produced. When the Chicago School first emerged in the ’50s, its zealous support of free markets and critique of government intervention were considered reactionary and extreme. Among elites in economics and politics the consensus was, as John Maynard Keynes had argued, that capitalism could only function with regular and robust government management. Indeed, so total was this consensus that in 1971 Richard Nixon announced a plan to impose wage and price caps in order to curb inflation, declaring, “We are all Keynesians now.” Just 25 years later, however, Bill Clinton, the first Democratic president to be re-elected since FDR, announced that the “era of big government is over.” He might as well have said, “We are all Chicagoans now.”

Neoclassical economics, as the Chicago School of thought is now called, has become an international elite consensus, one that provides the foundation for the entire global political economy. In the United States, young members of the middle and upper-middle class first learn its precepts in the academy. Polls routinely show that economists and the general public have widely divergent views on the economy, but among the well-educated that gap is far narrower. A 2001 study published in the U. of C.’s Journal of Law and Economics showed that those with college degrees are more likely to subscribe to the views of neoclassical economists than the general public. This isn’t surprising. At elite colleges, economics is consistently one of the most popular majors (nearly a quarter of undergrads at the U. of C.), and across all schools, introductory economics, often a required course, has been one of the 10 most popular classes for the last 30 years. Graduate schools—from business to public policy to political science to, most notably, law—are now suffused with economic paradigms for understanding not only financial interactions but all human behavior.

Conservatives have long critiqued academia for the ways professors use their position to indoctrinate students with left-wing ideology, but the left has largely ignored the political impact of the way people learn economics, though its influence is likely far more profound. So in order to find out just what students learn when they learn economics, I headed down to Hyde Park, where the University generously let me enroll in “Principles of Macroeconomics” for a quarter.

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Allen Sanderson, 62, has been teaching the intro macro and micro courses at the university for the last 18 years and though he initially appears somewhat grave and understated, it is quickly apparent that he is a master of technique. His lectures skip along, propelled by a series of wry, contrarian quips, each punctuated with a visual rimshot: a slight pause and a thrust jaw. “When you hear, ‘The economics department at U. of C.,’ one’s free association is ‘pro-business, greedy bastards,’” says Sanderson (pause, jaw thrust) in the first lecture. “I tend to think that’s not the case. Greedy bastards we may be, but we’re not pro-business. Republicans tend to be very pro-business. It’s a genetic defect of Republicans. Democrats tend to be anti-business, another genetic defect. We are not anti-business; we are not pro-business. We are pro-choice in the ultimate sense of pro-market. Based on empirical work, macro and micro solutions are probably better worked out by private markets than government intervention.”

His second lecture begins with a thought experiment. Noting that there are only 26 spots left in the class for the 52 students who would still like to enroll, he asks, “How should we figure out who gets to go into the class?” The students—eager, studious and serious—shoot their hands up and offer a variety of ideas: Seniority? First-come, first-serve? Ask prospective students to write an essay? It takes about a minute for a confident young man to give the answer Sanderson’s looking for: “auction by price.”

“As a reasonable indication of how much you want something, how much you’re willing to pay is a pretty good means of measuring,” Sanderson says. “A lot of things in economics will turn in one way or another on price. Price has a lot going for it as a generalized expression of commitment. The thing we don’t like about, say, first-come, first-serve, is that if someone really wants to get in, they could start lining up now. But the problem is that I don’t really benefit from your expression of interest, whereas if you pay me, we both are benefiting.”

This makes sense, but I’m uneasy. Wouldn’t giving a place in class to the highest bidder result in the rich students getting in and the financial-aid kids being left out? And since people don’t have equal amounts of money to spend, how good a measure of desire is price in this situation?

“Random and first-come have the benefit of being fair,” Sanderson says, anticipating the objection. “There’s an interesting dichotomy of fair vs. efficient.” But, Sanderson asks, what, really, is fair? If we think some kind of random lottery drawing was a fair way of getting into the class, would that be a fair way of awarding grades? “Obviously not!,” I think. Why? Sanderson lets us mull that over, but the answer floats up immediately: because I work hard for my grades and I deserve them. In other words, those who work hard and get good grades are like those who work hard and have a lot of money to win spots that are auctioned by price.

“We’re trying to balance these things out,” Sanderson continues. “What’s efficient? What’s fair? Often they are in tension.”

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Efficiency is the Chicago School’s defining value. The free market economists who came before—most notably Austrian Friedrich Hayek—offered a philosophical critique of the political consequences of state regulation and control of the economy. But Milton Friedman, his colleague George Stigler and the entire Chicago School focused on the actual economic problems of state control, namely, inefficiency. They rejected Keynes’ contention that markets function best with routine government intervention and instead harkened back to Adam Smith’s classical conceptions of equilibrium. Chicago School theories gained popularity when global capitalism hit a major funk in the ’70s—a period of slow growth and high inflation. Friedman argued, plausibly, that it was too much government that had caused the problems.

What may seem a subtle rhetorical shift had major consequences. It transformed what had been conservatism’s moral argument about capitalism bestowing the most benefits on those who worked the hardest—and the inherent injustice of a coercive state forcibly redistributing capital—into a technical argument about the inefficiencies associated with non-free-market solutions and the perverse incentives that made any social programs destined to fail. Thus, arguments about the way the world should be were converted into assertions about how the world actually was. Or, to put in terms that economists favor, normative arguments became positive ones.

In the textbook Sanderson uses, author Michael Parkin defines the difference this way: positive statements are about “what is” and they “might be right or wrong.” Normative statements are about “what ought to be” and because they depend on values, they can’t be tested. “Be on the lookout,” Parkin warns, “for normative propositions dressed up as positive propositions.”

Parkin’s warning, however, turns out to be surprisingly difficult to heed. Neoclassical economics smuggles a great many normative wares underneath its positive trenchcoat, both in its assumptions about how humans operate—as individuals rationally maximizing their utility—and its implied preference for “markets in everything.” Because neoclassical economics always presents itself as a value-neutral description of the world, its ideological commitments can be adopted by those who learn it without any recognition that they are ideological. This is the source of some very spirited debate within the field itself. A growing global movement of “heterodox” economists has criticized the ideological confines and blindspots of the neoclassical approach. As Nobel Laureate Joseph Stiglitz put it, the dominance of the neoclassical model is a “triumph of ideology over science.”

In the popular press, however, such dissent is almost entirely absent. When protesters disrupted the 1999 World Trade Organization meeting in Seattle, WTO officials, mainstream economists and the New York Times’ Thomas Friedman ignored the fact that in much of the world neoclassical reforms had failed to produce the promised growth. Friedman went so far as to dismiss the protesters as “flat-earthers.” For Thomas Friedman (and, indeed, Allen Sanderson), people can’t “disagree” with neo-classical economics. They can only fail to understand it.

———————————-

As a standard part of his first lecture in both his macro and microeconomics class, Sanderson reads a David Barry quote: “Democrats seem to be basically nicer people, but they have demonstrated the management skills of celery. Republicans would know how to fix your tire, but they wouldn’t stop.”

In the wake of Katrina and Iraq, this might seem quaint, but what Sanderson is doing makes sense. Temperamentally, it reflects his own, libertarian-inflected, “pox-on-both-their-houses” centrism, but his insistence on political equanimity is also crucial to his pedagogical success. Students are most likely to have been exposed to macroeconomic issues within the context of political debates about free trade, the size of the budget deficit, tax rates, etc. In order to assure students that they aren’t just learning a set of political talking points, he must go out of his way to hammer home the fact that what he’s offering is unbiased and nonpartisan: positive not normative, facts not opinion. “I don’t have a dog in this fight,” Sanderson tells the students. So every joke about George Bush is followed by a joke about Hillary Clinton, every shot at a Democrat quickly balanced by a shot at Republicans.

The effect, intentional or not, is that Sanderson appears to represent the exact center of the political spectrum, and that can leave students with a strange perception of just where the center lies. During a discussion of flat, progressive and regressive tax structures, a student asked about the argument against the flat tax. “What’s wrong with the flat rate tax?” Sanderson replies. “Well, the bad thing was that Steve Forbes was the spokesman. It’s not obvious that there’s that much wrong with it. There’s sort of a movement out there for a flat rate tax. Because it strikes some people: What could be fairer than that? It also doesn’t distort incentives. It has a lot going for it.”

It’s true that there’s “sort of a movement” for a flat tax, but those in favor of what would be the single most regressive redistribution of wealth in American history are not located in the political center. Far-right Republicans like former House Majority Leader Dick Armey have long pushed the idea, as have conservative think tanks like American Enterprise Institute and the Heritage Foundation. But politically, it’s a non-starter. The basic notion of fairness that those who get more out of our economy should pay a greater percentage of their income in taxes is deeply embedded in American political culture, even during years of Republican domination. The students sitting around me, I start to fear, are going to walk out of the lecture thinking that the flat tax is a sensible, centrist idea. And as thousands of students pass through classes like Sanderson’s every year, I worry that it will become a sensible, centrist idea.

Sanderson’s politics aren’t one-dimensional, and he certainly isn’t a propagandist. But the fact remains that he has the predispositions of someone who “learned economics from Milton Friedman.” First, there’s a tendency to see trade-offs between equity and efficiency even where they might not exist. Dean Baker, an economist at the Center for Economic and Policy Research and author of the book The Conservative Nanny State, points out that policies can be both fairer and more efficient. For instance, Baker told me, “it is not clear that a flat tax is more efficient than a progressive income tax. This is entirely an empirical question. It is entirely possible that taxing middle-income workers and Bill Gates at a 25 percent rate will create more distortions than taxing middle-income workers at a 15 percent rate and Bill Gates at a 40 percent rate. … They want liberals to say that we care about fairness and they care about efficiency. This is crap. They find ways to justify redistributing income upward and proclaim it to be efficient. The reality is it is not fair and generally not efficient either.”

But when equity and efficiency trade-offs do arise, economists like Sanderson are systematically biased in favor of efficiency because that’s what they are experts on. Efficiency they can measure and analyze. Fairness? That’s the turf of philosophers and politicians. This tendency is most pronounced in discussions of economic growth, and how the benefits of that growth should be distributed. Sanderson paraphrases his Nobel Laureate colleague Bob Lucas, who says that “once you start to think about the benefits of high growth, it’s hard to think about anything else.” In other words, first worry about how best to grow the pie, then how to slice it up. Let efficiency trump equity, create wealth, and then you can use the extra wealth you’ve created to alleviate inequality.

This makes a certain amount of sense. But when this rhetoric comes to dominate our politics, the problem of inequality is never addressed. Now is always the time for growing, later is always the time to address concerns about equity. The result is predictable: In countries that have adopted the neoclassical policy prescriptions (including the United States), there has been an ever-widening gap between rich and poor.

———————————-

As taught by Sanderson, economics is a satisfyingly neat machine: complicated enough to warrant curiosity and discovery, but not so complicated as to bewilder. Like a bicycle, input matches output (wind the crank and the wheel moves), and once you’ve got the basics of the model down, everything seems to make sense. As the weeks go by, and I trek down to Hyde Park, fight for a parking space and slip in between the hundred-plus students into the lecture hall, I come to love the class. The more reading I do, the more sense the op-eds in the Wall Street Journal make. The NPR program “Marketplace” becomes interesting. I even know what exactly the Fed rate is. A part of the world that was blurry and obscure begins to come into focus. My classmates seem to feel the same way. “I never thought I’d be interested in economics,” one sophomore told me. “Sanderson convinced me I was.”

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• Reader Comments

  I appreciate Mr. Hayes’s intellectually stimulating article here. There are
  other schools besides Chicago across the political spectrum.
  On the social democratic side you have Paul Samuelson, John Kenneth
  Galbraith, Robert Heilbronner and Robert Kuttner. Kuttner’s 1998
  book, Everything For Sale, is excellent in debunking the markets cure
  all ideology outlined in the above article.
  On the Right you have Murray N. Rothbard’s anarcho-capitalism, promoted by the Ludwig Von Mises Institute, they are total libertarians
  and advocate the privatization of everything including police, defense,
  jails, courts, lighthouses, roads, schools, etc.  They are nothing if not
  consistent ! And they are a refreshing contrast to the hypocritical Know
  Nothing Big Gov Neocons who frequently post here and on restroom walls.
  There are the Ayn Randians who believe in army, courts, jails, police
  and nuking all Arabs, so-called limited gov types. No thanks !
  Actually everything including government and the market is limited.
  Then we the collectivist but anti-central planning folks at Z-----Michael
  Albert’s PARECON, totally nonmarket. Murray Bookchin’s eco-anarchism, leftist anarchism, municipal ownership of the means of
  production, I’m very sympatico here. Except I don’t want the city of Oakland running anything, here I’m a Rothbardite.

  Posted by blondemike on Nov 27, 2006 at 1:02 PM

  Though my MA was in Political Science from the UW-Madison, I took many economics courses. Non-were tradtional macro-economics which I learned “on the fly” by development economics, labor economics, and agricultural economics all of which is based on the principles of macro-economic principles. There is an excellent book which I’ve yet to finish call Debunking Economics by Steven Keene. He takes the basic rationality utilitarian ideas behind neoclassical economics and debunks them. There is no real connection between wage levels and labor productivity. This is true especially now during the ongoing jobless recovery. Supply doesn’t create its own demand. Says law is thus out the window. Of course as JM Keynes proved, lowered interest rates don’t lead to increased investment. For over half a century the government has had to step in to stimulate the economy and of course business cycles are not self-balancing. A deep slump can go on for years. The recovery from the 1979-1982 slump wasn’t stimulated by the Reagan tax cuts, which Paul Krugman proved experienced a rate of growth similar to that from 1969 to the 1979 recession, but was stimulated by (a) massive military spending and (b) massive foreign capital inflows attracted by high interest rates. This was indeed a Keynesian form of pump priming which has been the strategy ever since FDR’s New Deal back in the 1930s. Finally, employment threasholds change so that more and more growth can be achieved with similar levels of employment due to new and dynamic technological inputs. However, this in conjunction with globalization of manufacturing production has lead to great increases in worker productivity in the US without any corresponding growth in income levels of the median and below strata. Again this is also because job growth in an age of lean production keeps unemployment high enough to suppress wage levels that would normally rise. One also notices low levels of investment with increasing levels of liquidity and very low savings due to imports and deficits. Global capitalism is to complex for formulaic trascendental theories and is shown over and over again to be an Historic System whose “laws” change with time over many different epochs of history. In the 1970s, economists were confounded by the debunking of the Phillips Curve and the existence of stagflation. Economics keeps getting more complex and confusing.

  Posted by cabdriverinchicago on Nov 28, 2006 at 12:47 AM

  One of the most honest comments I have read by an economist was that the market is not moral.
  
  “The fact is, a free-market system is blind.  All the market was designed to do was to provide the most output at the least cost. It will distribute goods and services in an economically efficient manner. It is important to emphasize that this does not necessarily mean it will distribute these goods and services in a socially desirable way.” (Robert Goodman, “Independently Wealthy” pg. 4)

  A key word here is necessarily. Becoming rich is largely a matter of intellect, while moral behavior is a function of character.

  Those who believe in a managed economy deal in theory but treat it like science. Science sets specific parameters — at standard temperature and pressure — control groups, etc.

  However, economics only works in theory due to the infinite number of uncontrolable variables involved. A policy may seem reasonable between two trading partners if playing only with numbers, but this is never the case for long.

  Factors such as individual preferences, language barriers, religious differences, social customs and traditions, unscrupulously selfish people, national political agendas introduce too many uncontrolled conditions. It is like playing poker with more than half the deck as wild cards.

  Nearly all the popular “experts” we hear from do have a dog in the fight — he is hiding behind clichés like, “A rising tide lifts all boats.”
  ---------------------
  Cabdriver and BlondeMike,
  Some interesting comments and references here to look into.
  Thanks

  Posted by whattheheck on Nov 28, 2006 at 7:24 AM

  “WTO officials, mainstream economists and the New York Times Thomas Friedman ignored the fact that in much of the world neoclassical reforms had failed to produce the promised growth.”

  This is one of those un-refutable statements that tarnishes people for no reason.

  What was the “promised growth?” What was the actual growth?  What were these “neoclassical reforms” which were actually implemented?

  Last time I looked, the only Latin America country rated as “Economically Free” by the Economic Freedom of the World Index was Chile, the country with the highest GDP per capita in Latin America, and had 6.1% GDP growth in 2004-2005.

  Recent research (Dollar and Kraay, 2001) studied the experiences of a group of developing countries that have significantly opened up to international trade during the past two decades.  Per capita GDP growth in the post-1980 globalizers accelerated from 2.9% a year in the 1970s to 3.5% in the 1980s and 5.0% in the 1990s. 

  The nonglobalizing developing countries did much worse than the globalizers, with the former’s annual growth rates falling from highs of 3.3% during the 1970s to only 1.4% during the 1990s.

  [David Dollar and Aart Kraay, 2001, “Trade, Growth, and Poverty,” World Bank Policy Research Department Working Paper No. 2615]

  In China and India, neoclassical market reforms have lead to growth rates of near 10% and bringing over 100 million people out of absolute poverty.

  Posted by mreconotarian on Nov 28, 2006 at 10:22 AM

  One economist who may be getting more attention in Europe than in the U.S.—not that there’s anything necessarily wrong with that—is Friedrich List.  Generally in this country (based on having just skimmed some on-line bios) he seems to be branded as a “nationalist” economist, implying perhaps that he a proto-Communist, or even a proto-fascist.  I hjave not taken the time to read a copy of his two majhor works _The_Natural_System_of_Political_Economy_ and _The_National_System_of_Political_Economy_, so I can’t really comment directly.

  James Fallows had an article published in the _Atlantic_Monthly in 1993, in which he “discovers” Friedrich List (I remember the title as “How the World Works"), so this might be a good intro also.

  Ironically, List seems to have taken much of his inspiration from how the American economy was being “run” in the early 1800s—a time that many modern economists (or perhaps only neocons posing as economists) consider the free-market Golden Age.

  Posted by tallen387 on Nov 28, 2006 at 10:52 AM

• extended discussion >>>Continued...

  Discussions with more than 5 comments are continued on our special discussion page to encourage continuity and ease of use. There are currently 63 posts.

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