In the 1960s and 1970s, American universities trained economists as free market ideologues to preach the virtues of free trade and unrestricted privatization to poorer countries. For countries where these ideas were imposed domestically, the resulting policies were generally bad for economic prosperity, political stability, and social cohesion. But when applied to other countries, the ideas ensured robust investment returns. The Pinochet / Anaconda, Kennecott, Phelps Dodge story is perhaps the best-known example. In recent decades, however, economists have started to take their doctrine seriously, and they now use it to advise American policymakers. It raises the question: are economists a threat to national prosperity? The rest of this post is a semi-satirical thought experiment.
If you were plotting the economic decline of the world’s leading power, you might try to convince its leaders to unknowingly and persistently make small errors. To that end, you could install agents, who for the purposes of this article I will refer to interchangeably as “economists” or “experts”, with three assignments. First, convince the power’s lawmakers to pursue free trade blindly while other nations become more strategic in trade relations, leading to an erosion of industrial competitive advantage. Second, support scholarship that is sanguine about inequality increasing to democracy-threatening levels. Extra anger and instability never hurt a campaign of subversion. Third, when the “expert” arguments stop being convincing, revert to classic reactionary rhetoric to oppose bold attempts to reverse the obviously dangerous trends. Here's a short summary of each and three examples of success: Paul Krugman, Larry Summers, and Olivier Blanchard.
Free trade
Free trade is usually better for rich than poor countries. If the copper mined with the labor of 100 people in a poor country can be exported in exchange for currency to buy the cars and appliances produced by the labor of 5 people in a rich country, the rich and poor countries will remain rich and poor.
It’s no coincidence that Adam Smith, writing as a Scottish professor when Great Britain led the world in manufacturing technology, extolled the virtues of supposedly free trade. It’s also unsurprising that Alexander Hamilton, a statesman for a poor and ambitious young America, said we should absolutely not blindly open our markets to free trade.
Through its bicentennial the US followed a generally pragmatic national development strategy, eventually becoming the world’s leading economy. This strategy included protecting American workers and industry with tariffs and supporting development with subsidies (bounties) and investments in infrastructure (internal improvements). The pragmatic package became known as the American System. When the American System faced threats from economists advocating the British colonial system (“free trade”), early American lawmakers saw through the arguments, recognizing the benefits of protecting domestic industry. In 1832 Henry Clay almost went so far as to call people writing in favor of free trade agents of foreign powers.
More recently American economic thought seems to have lost some of its pragmatism. In the 1991 Report of the Commission on Graduate Education in Economics, a group of the economic profession's prominent figures stated that they feared "that graduate programs may be turning out a generation with too many
idiots savants, skilled in technique but innocent of real economic issues."
Around the same time, Paul Krugman and a group of economists were incorrectly concluding that trade with labor-abundant economies was not a problem for American workers. They had to work hard to overturn the prevailing common-sense wisdom, which held that when a rich country signs a free trade agreement with a poor country without labor protections, workers in the rich country lose out in a big way. After reaching this conclusion, “academic interest in the possible adverse effects of trade … waned.” In 2019 Krugman acknowledged that the analysis in the 1990s was incorrect, has resulted in extensive suffering in American communities, and was “a major mistake”.
Looking forward, however, Krugman maintains that, although his analysis was wrong for the past three decades, he does not recommend shifting course now. There is no mention of a return to the American System, including support for domestic industry, tougher labor regulation requirements on our trading partners in exchange for a smaller increase in tariffs, or other measures that would begin to correct the negative effects of these economists' trade models. [I realize that I might be giving economists too much blame/credit. There are of course many other forces at work.]
Inequality
High levels of inequality are so clearly bad for a democracy that it’s hard to know how to explain it. Machiavelli stated the obvious: "a Princedom is impossible where equality prevails, and a Republic where it does not." Chris Rock too: “If poor people knew how rich rich people are, there would be riots.” We’re at Roaring (19)20s / Great Depression levels of inequality, and people get angry when they face food insecurity while others have hundreds of billions of dollars. It was no surprise that the wealth tax proposals of Elizabeth Warren and Bernie Sanders were pretty popular among voters.
Now, keeping our prosperity-destroying mission in mind, let’s see Larry Summers argue against wealth taxes and other common sense measures for reducing wealth inequality (his work with Natasha Sarin on wealth taxes is classic reactionary rhetoric, but I’m just focusing on his work on inequality here):
“Wealth inequality reflects many things that happen in a society. Suppose we successfully in the United States adopted a more generous and complete progressive social security system… I would assume that the lower half of the population would have much less need to accumulate or hold liquid assets because they were being properly insured. And so measuring the ratio of the wealth of the wealthy to the wealth of the less wealthy may reflect something about accumulation at the top or it may reflect something about the adequacy or inadequacy of social insurance arrangements.”
Summers smoothly counteracts the obvious point that high levels of inequality are bad for political stability and civil society by getting viewers stuck on a technically correct yet almost entirely unimportant point.
Reaction
To be regarded as an expert for several decades while using an economic framework that is consistently proven wrong (whether on trade, interest rates, or fiscal policy) is impressive. But at some point, economists face the risk that people begin to see through their arguments. At least people will begin to view economists as unscientific. This is the time to remember Albert Hirschman’s framework for the rhetoric of reaction: perversity, futility, jeopardy.
Most weeks bring another example of an economist beseeching politicians to renege on political promises in the name of fiscal responsibility, yet these arguments are viewed as increasingly unscientific. Recently the standouts have been Larry Summers and Olivier Blanchard. With the US and the world facing an uncertain exit and recovery from the coronavirus pandemic crisis, these economists claim to be worried that the $1.9 trillion proposed relief package “could overheat the economy so badly as to be counterproductive.” They use numbers to maintain credibility while acknowledging that the numbers they select might not mean much. In the words of Patrick on Twitter, “[Blanchard's] argument is literally just that the vibes are off.”
Effectively, S & B, and economists generally, are stating their feelings that bold policies are likely to (a) have perverse effects (e.g., make inequality worse), (b) be futile (e.g., stimulus might not be effective if spending multipliers are too low), or (c) risk jeopardizing other accomplishments (e.g., stable prices might be at risk if multipliers are too high).
Which brings us back to the original question -- are (mathematical) economists (without sufficient knowledge of historical context or a framework for dealing with uncertainty) a threat to national prosperity?
