Economic Fundamentalism: Too Many False Prophets

Fred Argy provides a refreshingly different point of view on the debate about economics and science. Argy argues that maybe all of us – whether or not economists – ought to be aiming attacks primarily at economic fundamentalism:

[Beware of Economic Fundamentalism, Australian Review of Public Affairs, Mar. 31,2003] … There are too many false prophets in our profession—the kind who like to assert policy opinions in black-and-white terms, such as 'there is only one right way' and 'no other way will do'. This is what I like to call 'economic fundamentalism'. And I believe it is wrong on all counts.

For one thing, economics does not lend itself to doctrinaire policy assertions. The technical complexities are too great, the behavioural reaction of human beings too changeable and unpredictable, and the market subject to many imperfections. … [Many economic] questions do not lend themselves to definitive answers. The honest economist can make an 'on balance' judgment, but should also acknowledge the uncertainties and the merits of alternative positions.

Another reason why doctrinaire policy positions are unwarranted is that much of the day-to-day policy debate is not simply about economic choices. It is about normative values—the appropriate weight society should give to conflicting goals, such as freedom of choice, individual responsibility and self-reliance, equality of opportunity (what Australians call 'a fair go for all'), protection of the environment, and a sense of community.

Frankly, we economists have no special wisdom to offer on what should be the right balance between such goals. We can point to the economic costs and benefits of each option, but to go further and assert that one option is indisputably superior to all others is presumptuous. For example, will wage deregulation and welfare cuts have a big or small impact on employment, and how much pain will it inflict on low wage earners? Can the same employment outcomes be achieved through labour market programs such as wage and training subsidies, without the regressive effect on low wage earners? Again, will tax cuts have a more positive impact on community wellbeing than an increase in government spending? These are questions that are hard for economists to resolve because the alternatives being offered have very different distributional effects.

True professionalism requires economists to spell out the distributional as well as economic effects of each policy option, and then leave it to politicians to choose between them in the light of community preferences. …

One major risk of economic fundamentalism is that, like other forms of fundamentalism, it often breeds policy extremism. …

Another risk … is that it tends to widen the already large gulf between economists and the wider community. It encourages our critics to say that we are so obsessed with efficient markets that we have become insensitive to social and environmental concerns. …

When economists seek market-based solutions, they are discussing better means to given ends. Economic liberalism is consistent with a wide spectrum of ethical and philosophical values, and a wide range of distributional outcomes. So we need not be apologetic about our faith in competitive markets as instruments of allocation (where these are sustainable and do not involve disproportionate externalities). It is our critics who have got it wrong. Unfortunately, when some of our fellow economists seek to change society while masquerading as market economists, they give our profession a bad name.

To sum up, we have a proud and honourable profession. We need to defend it against external critics (on both the Left and Right) who attack our devotion to competitive markets without really understanding what we are on about. But equally, we should be vigilant in exposing the small but vocal band of extremists within our profession who take doctrinaire economic positions or, worse still, who push their own values under the false guise of economics. This is particularly evident in the current policy debate on labour market deregulation and welfare reform. The famous British economist Joan Robinson saw the danger clearly. She said that 'the purpose of studying economics is to learn how to avoid being deceived by other economists'.

So my advice to budding economic policy advisers is this: by all means be decisive in your day to day work, but when discussing policy don’t be afraid to be called a two-handed economist—'on the one hand this, and on the other hand that'. Wear it as a badge of honour.

Two questions: 1. How does one distinguish between "economic fundamentalists" and other practicing economists? We economists all tend to throw stones at others who are ideologically and methodologically different from us. Perhaps Argy is right is suggesting that we label as fundamentalists those "who like to assert policy opinions in black-and-white terms, such as 'there is only one right way' and 'no other way will do'."

2. How does one practice economics w/o being libeled as a fundamentalist? Here again Argy gives some useful clues when he says "[Many economic] questions do not lend themselves to definitive answers. The honest economist can make an 'on balance' judgment, but should also acknowledge the uncertainties and the merits of alternative positions."

One place where I tend to depart from Argy is his statement that "We can point to the economic costs and benefits of each option,". I agree in principle, but argue that we need to be very, very careful in our adding up costs and benefits of policy proposals. There are just too many things that prove too uncertain or too "contested" to be added up in any closed form way. Still I strongly agree with the rest of Argy's sentence, "but to go further and assert that one option is indisputably superior to all others is presumptuous."

Is the problem, in the main, that we have too many economic fundamentalists, "too many false prophets" in our profession? Do we need to get much better at self-policing?

As to "ecology fundamentalists," we will leave that topic for another day...

Comments

[John Konop]

Economists Are Destroying America

Economists, politicians, and executives from both parties have promised American families that “free” trade policies like NAFTA, CAFTA, and WTO/CHINA would accomplish three things:

• Increase wages
• Create trade surpluses (for the US)
• Reduce illegal immigration

Well, their trade policies have been in effect for about 15 years. Let’s review the results:

• Declining real wages for 80% of working Americans (while healthcare, education, and childcare costs skyrocket)
• A record-high 46 million Americans who don’t have health insurance (due in part to declining wages and benefits)
• Illegal immigration out of control
• Soaring trade deficits, much with countries that use slave and child labor
• Personal and national debt both out-of-control
• Global environments threatened by lax trade deal enforcement

Economists Keep Advocating Policies That Aren’t Working

Upon seeing incontrovertible evidence of these negative trade agreement results, economists continue with Pollyannish blather. Some say, “Cheer up! GDP is up and the stock market’s doing fine.” Others say, “Be patient. Stay the course. Free trade will raise all ships.”

Even those economists who acknowledge problems with trade agreements offer us only half-measures—adjusting exchange rates, improving safety nets, and providing better job retraining. None of these will close the wage gap in America—and economists know it.

Why Aren’t American Economists Shouting From Street Corners?

America needs trade deals that support American families and businesses in terms of wage, environmental, and intellectual property abuses. Why aren’t economists demanding renegotiation of our trade deals? There are three primary reasons:

• Economists are too beholden to corporations and special interests that provide them with research grants.
• Economists believe—but refuse to admit—that sacrificing the American middle class is necessary and appropriate to generate gains in third world economies.
• Economists refuse to admit they make mistakes.

Economic Ambulance Chasers

Now more than ever, Americans need their economists to speak truth and stand up to their big business clients. Instead, economists sound like lawyers caught chasing ambulances: they claim they’re “doing it for our benefit”.