Book Review - Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World by Jeff Madrick
For the past 40 years, mainstream economics has prescribed bitter medicine for economies suffering from recession, inflation, negative trade balances or deficits. Their advice has been to cut government spending on social programs, reduce regulations on big corporations and reduce business taxes. It seems that there’s been one nostrum for every economic illness: trust the free market to take care of things.
Of course, there’s been plenty of pushback. The citizenry of the various countries subject to austerity decry the heartlessness of cutting a social safety net while increasing corporate welfare. But it’s been less common for someone to explain how the one-size-fits-all prescription of mainstream economics bears about as much relationship to economic health as the medieval prescription of leeches did to medical health.
“Seven Bad Ideas” does just that. Although author Jeff Madrick lists seven bad ideas, it’s clear that they’re all related to the principal bad idea: That the “invisible hand” of the market, unfettered, will solve all economic woes. The “invisible hand” postulates that, freed of interference, the supply and demand for goods — and for labor — will reach an equilibrium that is the optimum for prosperity and progress. First formulated by 18th century economist Adam Smith (although with numerous caveats), the theory has been extended to create another “bad idea:” That supply creates its own demand, and therefore there’s no need for government to pick up the slack in a recession.
Madrick points out that mainstream economics, which considers itself to be a “science” (a third “bad idea”), is in love with simple explanations. The invisible hand has become the economic equivalent of the relatively simple equations underlying traditional physics. The difference is that physicists had proven, in multiple and differing situations, that the equations they were using predicted what happened in the real world. They were prepared, when physical phenomena proved them wrong, to adopt a new theory.
According to Madrick, mainstream economists are so in love with the idea of the invisible hand that they’re willing to ignore all matter of historical data that contradict its prescriptions. Many of the predictions that follow from the theory do not actually hold up. For example, a number of mainstream economists predict that government deficits in excess of a certain percentage of Gross Domestic Product will cause runaway inflation. However, historical data provides plenty of examples where that didn’t happen.
Similarly, the bad idea that poor countries can best develop by opening their economies to “free trade” is contradicted by history. As Madrick puts it, “The central policies of today’s globalization advocates are to eliminate tariffs, minimize government intrusion … and allow the value of currencies to be determined … in the financial markets.” He continues that the “economic development of today’s rich world [i.e., the United States and Western Europe] ... was mostly accompanied by just the opposite: high tariffs, government investment in industry, financial regulations, and fixed values for currencies.”
In another bad idea, economists from Milton Friedman to Alan Greenspan and Ben Bernanke asserted that there can be no such thing as a “speculative bubble,” since any overpricing of housing or stocks would be corrected by the market. As a consequence, in the face of skyrocketing housing speculation in the 2000s, the Federal Reserve did nothing to regulate the various derivatives that banks were investing in. The Great Recession of 2008 was the result. At this point, you’d think policymakers would have learned — but economists are still reluctant to support more regulation of the finance sector, even as it sucks more and more money out of the regular economy.
If there’s one weakness of the book’s argument, it’s that Madrick gives too much weight to the power of bad ideas by themselves. It’s certainly true that economists have set themselves up as the “medical professionals” of the economy, deriding alternative voices that question their basic assumptions. And there is an unfortunate tendency, in the echo chamber of the mainstream media, for “experts” to be believed again and again, no matter how wrong they turn out to be.
But the fact is that these bad ideas wouldn’t get so much traction if they didn’t fit the interests and the preconceptions of the people who benefit. The rich don’t like being taxed; they don’t like policies that empower the people they employ, sell or rent to. They want people who borrow money to face the strictest sanctions, even as they, the rich folk, get bailouts for irresponsibly lending money to people at terms that are almost certain not to be met.
Another weakness of the book is that, although it’s not particularly academic, it assumes a lot of insider’s knowledge of economics and recent economic history; Madrick often makes references to people and ideas without adequately defining them or putting them in context. “Seven Bad Ideas” will thus be most useful to people who have some familiarity with economics theory — or who want to be inoculated against simplistic theories before taking their own introductory course in macroeconomics.