11 Big Myths About the Economy That Are Destroying America
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In the Middle Ages, people looked to the Church for certainty. In today’s complex, market-based economies, they look to the field of economics, at least for answers to questions concerning the economy. And unlike some disciplines, which acknowledge that there’s a huge gap between the scholarly knowledge and policy advice, economists have been anything but shy about asserting their authority.
As we can see from the current dismal state of economic affairs, economies are incredibly complex systems, and policymakers who are forced to act in the face of this uncertainty and complexity want guidance. And over the last half century, neoclassical economists have not only been more than happy to offer it, but largely been able to marginalize any other disciplines or approaches, giving them a virtual monopoly on economic policy advice.
But there are two big problems with this. First, despite economists’ calming assurances, we still know little about how economies actually work and the effect of policies. If we did, then economists should have sounded the alarm bells to head off the financial collapse and Great Recession. But even more problematic, even though most economists know better, they present to the public, the media and politicians a simplified, vulgar version of neoclassical economics — what can be called Econ 101 — that leads policymakers astray. Economists fear that if they really expose policymakers to all the contradictions, uncertainties and complications of “Advanced Econ,” the latter will go off track — embracing protectionism, heavy-handed “industrial policy” or even socialism. In fact, the myths of Econ 101 already lead policymakers dangerously off track, with tragic results for the economy and everyday Americans.
Myth 1: Economics is a science.
The way economists maintain stature in public policy circles is to present their discipline as a science, akin to physics. In Econ 101, there is no uncertainty, only the obvious truths embedded in supply and demand curves. As noted economist Lionel Robbins wrote, “Economics is the science which studies human behavior as a relationship between given ends and scarce means, which have alternative uses.” If economics is actually a science, then policymakers can feel more comfortable following the advice of economists. But if economics is really a science – which implies only one answer to a particular question — why do 40 percent of surveyed economists agree that raising the minimum wage would make it harder for people to get jobs while 40 percent disagree? It’s because as Larry Lindsey, former head of President Bush’s National Economic Council, admitted, “the continuing argument [among economists] is a product of philosophical disagreements about human nature and the role of government and cannot be fully resolved by economists no matter how sound their data.”
Myth 2: The goal of economic policy is maximizing efficiency.
Economists have one overarching principle that shapes their advice: maximize “efficiency.” As economist and venture investor William Janeway notes, “Efficiency is the virtue of economics.” But the goal of economic policy should not be to maximize static efficiency (the “right” allocation of widgets), but to create inefficiency — in the sense of disruptive innovation that makes widgets worthless. For it is the development of new widgets and better ways to make them (e.g., innovation), rather than efficiently allocating existing widgets, that drives prosperity. As noted “innovation” economist Joseph Schumpeter pointed out: “A system which is efficient in the static sense at every point in time can be inferior to a system which is never efficient in this sense, because the reason for its static inefficiency can be the driver for its long-term performance.”
Myth 3: The economy is a market.