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Politics and Markets: Does Mainstream Economics Have a Handle on the Subject?

By Bill Schweke on 10/04/2010 @ 04:46 PM

Tags: Ideas in Development, Recommended Reading

By William Schweke

How quickly things change.  A few years ago (and continuing to this day), there were an avalanche of books about the wily economist who could cut through the bull and overturn common sense, regarding the workings of the economy and the reflections and choices of “Economic Man.” Titles included: Freakonomics, The Logic of Life, Why Economics Explains Almost Everything, The Soulful Science, to name just a few.

These books described confidently an “imperial” field, in which almost any topic could receive an economic analysis.  It constitutes a real social science, ready to show sociologists, political scientists, geographers, and others how it is done.  Economists were feeling fat and sassy, boasting successful predictions, lots of sophisticated mathematical models, an almost uncanny ability to spot unanticipated consequences of seemingly rational government action, and a readiness to be on-call and play “market doctor.”  And they did.

But, how the world changed in the past ten years.  The so-called Great Recession has hit the United States hard, generating double digit unemployment in many states.  The profession has been chastised.  Many respected economists have even opined that economics itself is partially to blame.

How were events not foreseen?  How did the market create so many “toxic” assets?  How could government better address the financial woes of the citizenry and curb the predatory practices of pay-day lenders and credit card companies, the spread of sub-prime mortgages, and the “casino” product line, marketed tirelessly by investment bankers?

Two new books help you to wrestle with these questions and the enigma of the discipline of economics: Dean Baker’s Taking Economics Seriously and Roger Backhouse’s The Puzzle of Modern Economics: Science or Ideology. 

The Baker book meets one’s expectations for a book by this author: its prose is lucid, but aggressive, to the point, but subtle.  He is a superb popularizer, treating issues like health costs creatively and clearly in this short tract.

Economist Dean Baker hammers home many of the same points he makes in his book on The Conservative Nanny State:

• The ideological side of modern economics is a reality and there is a need for progressives to reframe the policy debate.
• He stresses the importance of the choice of words and labels – free market, death tax, tax relief and other “Republican” terms, for instance.
• Both conservatives and liberals support public intervention in the economy.  But they have different beneficiaries in mind.
• Do not play into Republican “rope-a-dope” tactics and get labeled as pro-regulation, anti-market, and so forth.

His book should be read along side of Bernie Horne’s Reframing the Future and George Lakoff’s numerous publications on the subject of political communication and persuasion.

Backhouse’s book is much more scholarly than Baker’s and attempts to itemize the strengths and weaknesses of contemporary economics.  He is the   ideal author of such a study, being the writer of an excellent recent history of economics – The Business of Ordinary Life. 

He tries very hard to make this work accessible to the non-economist, as well as inviting and interesting to orthodox economists and economic heretics.  And I think he succeeds ably.

Backhouse tackles fundamental questions such as: Is economics the key to everything or has it already failed?

His answers flow from a series of case studies – the Russian transition to capitalism, the creation of new markets, the impacts of globalization, and   research on finance and money.  Also included are intellectual histories of the role of ideology, the adoption of complex mathematics, and the changing nature of macroeconomics since Keynes.

He concludes by noting that economics has excelled in cases where the problem is well defined and not too big.  It has often failed where the challenge was too big and involved too many other institutions (e.g., Russia). 

Furthermore, since there are genuine methodological issues at play and mythological elements in left and right wing theory and applications, the critical reader should not be silenced by the scientific pretentions of economics and its customary stances.

But economics is more pluralist today.  The new institutional economics, Marxian economics, information studies, principal-agent analysis, behavioral economics, the public choice school, post-Keynesian economics, Austrian economics, and game theory, to name just a few, all clamor for attention.

For this reason and on the basis of economics real contribution to knowledge, Backhouse argues in a compelling and fair fashion that economics still has a future in combating popular illusions about the economy.

And Backhouse does his part by making the discipline more transparent to the lay reader.  Warts and all.
William Schweke is a senior fellow at CFED in Durham, NC