I’m in the process of reading Never Let a Serious Crisis Go to Waste, by Philip Mirowski, a
professor of economics at Notre Dame. He makes a number of excellent points
about economism in the wake of the Great Recession (though he prefers the
terminology favored by many historians and social scientists and calls the
ideology ‘neoliberalism’). I plan to say more about his central thesis in later
posts; but I could not resist addressing one issue now, because it nicely
reinforces some of the core themes of The
Golden Calf—specifically, why economism is riven with internal
contradictions, and how it logically acts like a religious ideology and yet
claims to be science.
In one section (Chapter 5) Mirowski notes the intellectual disarray
among orthodox neoclassical economists after the recession. The media naturally
wanted to know—why didn’t you brilliant people, to whom we have been turning
for wisdom about how the economy works, predict this train wreck? The
economists had two replies, and various among them offered each: 1) we did, you
just didn’t notice; or 2) it’s really not the job of academic economics as a
science to predict things like recessions.
While supposedly legitimate and credible economists offered
both statements, each was highly problematic. The first was in a small degree
true—various economists did, at various times, dare to say that the wonderful
world of the derivative bubble was going to come crashing down. The trouble was
that the guardians of orthodoxy, like Larry Summers most famously, hooted these
naysayers down in derision; and it was the hooting and not the warning that was
accepted at the time as “the word” from the economist community. After the
fact, theories were concocted about other predictions. Economist X was heard to
say something to two of his friends over several beers once. Economist Y once
developed a mathematical model which, if
you tweaked it six different ways, issued a prediction that somewhere, someplace
there might be a bubble. These were taken to indicate that see? Neoclassical
economics did predict what happened after all, so they were on the case from
the start. But these self-evidently silly proposals gained little traction.
Other supposedly credible economists intoned the second
theory, but that ran up against a classic paper written decades ago by one of
economism’s founders, Milton Friedman. Friedman was irked at the time because
of the persistence of critics of neoclassical economics (before the triumph of
economism purged all such heretics from most university econ departments).
These critics liked to point out that the assumptions that classical economists
depended upon to create their nice mathematical models generally were obviously
untrue and implausible (a point I addressed a bit in The Golden Calf and also previously in this blog). Friedman decided
to do away with these critics in one fell swoop. He argued that it did not
matter at all what assumptions they used. They could assume the earth was flat
and the moon is made of green cheese. All that mattered, rather, was the
accuracy of the predictions the models yielded about the real world. (Mirowski
seems to imply that maybe Friedman did not actually say that, but what matters
is not what Freidman said, but the lessons later generations of economists took
from him.) So you now have to explain the disconnect between the great god Friedman
saying that all that justifies economic models is their ability to predict, and
(some) economists insisting in 2009 that economics is incapable of predicting.
There was yet another problem with the “we can’t predict”
claim. It is not merely that Friedman made a theoretical point. In the past
several decades, economists put their mouths where their money was. They sold
their consulting services to big corporations, often raking in many multiples
of their academic salaries, in exchange for predictions—usually predictions
that happened to be precisely what their corporate paymasters wanted to hear. So
it seemed especially self-serving now for some of them to suddenly discover
that they could never have done what they obviously did.
So we now see that economism, in the form of the orthodox
neoclassical economics peddled by these academic gurus, was inconsistent at two
different levels. At the lower level, two different explanations were put forth
for what happened at the time of the recession, but each explanation clearly contradicted
facts about what economists had previously been saying.
At the higher level the two explanations were obviously in
contradiction. In logical terms, the economics community was asserting both A
and not-A. So the fact that some well-known economists preferred the first
explanation (we predicted it, all along) and others preferred the second
(economics can never predict anything) further illustrated that this field was
internally incoherent.
Perhaps sensing what image of economics was being conveyed
to the larger public through this time period, the Chicago economist Eugene
Fama gave an interview to John Cassidy
for the New Yorker that Mirowski
quotes:
Cassidy: “Back to the efficient
markets hypothesis [a mainstay of orthodox neoclassical theory]. You said
earlier that it comes out of this episode pretty well. Others say the market
may be good at pricing in a relative sense—one stock versus another—but it is
very bad at setting absolute prices, the level of the market as a whole. What
do you say to that?”
Fama: “People say that. I don’t
know what the basis of it is. If they know, they should be rich men. What
better way to make money than to know exactly about the absolute level of
prices.”
Cassidy: “So you still think that
the market is highly efficient at the overall level too?”
Fama: “Yes. And if it isn’t, it’s
going to be impossible to tell.”
Admittedly this exchange may simply show that Fama was
getting testy at the end of a long, contentious interview. And Fama, who knows
economics, may be able to explain in a way that I couldn’t some technical
meaning that he can give to what he has said that makes it immune from the
criticism that seems obvious. With those caveats in mind, let me proceed to
state the obvious. There seem to be two ways to understand the basic logic of
Fama’s defense of the efficient markets hypothesis. One is that it is a
tautology, true by definition. We define ‘efficiency’ as whatever the market
does; hence, if the market were inefficient, we’d never know, because there
exists no outside vantage point from which to judge the matter. The other is
that we have here what I alleged economism to be in The Golden Calf, a quasi-religious ideology. We simply have to have
faith in the market, because it was created by Divine will and represents a
Divine plan for humankind.
I trust it’s obvious that neither a tautological
truth nor a quasi-religious, faith-based truth meets any reasonable definition
for a science. So once again, economism is revealed as not what it
proclaims itself to be.
