No academic discipline has ever been so thoroughly discredited in such a short period of time as has economics over the past year. Virtually no business, government, or academic economists foresaw what may prove to be the greatest economic meltdown in history. Even though all of the evidence points to a major recession, many economists are still in denial as to the downside risk. Those employed by the Federal Reserve Bank, the U.S. Treasury, the White House, the World Bank, and the International Monetary Fund are among the most inept. They appear to be clueless as to how to deal with the crisis. Then there are the economists who are reporting for The Wall Street Journal, Business Week, Fox News, and CNBC who are little more than Wall Street prostitutes.
Ironically, enrollments in college economics courses have soared over the past two decades. An economics degree often provided a ticket to Wall Street. How was it possible for the economics profession to experience such a cataclysmic failure of insight? The answer is really quite simple. Economics is not a science but rather a pseudoscience pretending to be a science.
British economist Joan Robinson got right to the heart of the problem in her 1962 book Economic Philosophy when she said, “Any economic system requires a set of rules, an ideology to justify them, and a conscience in the individual which makes him strive to carry them out.” In other words, underlying every sophisticated economic theory and mathematical model lies a political ideology.
Since the 1980s the prevailing ideology in economics has been the free market, globalization ideology of University of Chicago economist Milton Friedman. Although Ronald Reagan popularized this ideology in the 80s, it was Bill Clinton and his Secretary of the Treasury Robert Rubin along with Fed Chairman Alan Greenspan who presided over its implementation in the 1990s. They created a regulatory environment which enabled globalization to thrive. George W. Bush was little more than a naïve cheerleader for globalization, who failed to notice when it started to unravel.
The problem of economics according to the high priests of the free market can be summarized as follows: Given the distribution of income and wealth, how do we achieve global economic growth in such a manner that we simultaneously allocate resources worldwide in a socially optimal fashion with a minimum of interference by government and organized labor? The underlying premise of this paradigm is that, if consumers, managers, employees, and stockholders do their own hedonistic thing, their interests will converge in the long run and society will evolve toward some form of socially optimal equilibrium. “This is an ideology to end ideologies,” said Joan Robinson. Tinkering with the distribution of income or wealth is strictly taboo. So too is questioning the sustainability of never ending economic growth.
The free market, global growth paradigm represents an ideology based on having ? owning, possessing, manipulating, and controlling money, people, things, places, and even nations.
There is absolutely nothing new about economists providing the economic underpinnings to support the prevailing ideology. Since the days of Adam Smith, economists have supplied the rich and powerful with the kinds of answers they wanted to hear. As John Maynard Keynes once said, “Practical men— are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
Today it is hardly surprising that few economists feel any discomfort whatsoever in justifying hedonism. Most of the funding for economic research comes from large corporations and the federal government, both of whom have a strong vested interest in promoting greed so that the economy does not collapse. While posing as objective social scientists, all too many economists are willing to sell their souls to the highest bidder.
During the 1990s Wall Street economists and financial analysts created the ultimate, free market, global, money-making machine. Designed to minimize public scrutiny, government regulation, and the possibility of prosecution, this Frankenstein-like monster consisted of a complex international network of hedge funds, derivative contracts, credit default swaps, and exchange-traded funds all based on sophisticated mathematical models. The greed driven maze was supported by a network of interconnected financial institutions linking every country to every other country and everyone to everyone else. It was so complex that literally no one understood how the separate components fit together. Now that the system is broken, neither Wall Street, the Fed, nor the Treasury knows how to fix it. It was simply too big, too unwieldy, too inflexible, and too conducive to mismanagement and fraud to survive.
Many believe that the meltdown of the U.S. economy was caused by too much credit and too much easy money. Yet the government’s strategy for dealing with the problem seems to be more of the same. Thus far none of the government’s bail-out strategies or stimulus packages seem to be working. Printing money like it was going out of style will not fix the U.S. economy. If China or Japan pulls the plug on their investments in U.S. Treasury bonds, the U.S. government could become insolvent.
Economics has long been known as the “dismal science.” We believe this is a complete misnomer. Economics as practiced in the United States today is no science at all, but rather a political ideology disguised as a science. Economics is the “abysmal science,” and that’s a problem for all of us.
Thomas H. Naylor
March 15, 2009