The Existential Crisis of Mainstream Economics

Had I not read Angus Deaton’s Economics in America: An Immigrant Economist Explores the Land of Inequality, I would not have learned that one of the most devastating blows to the economics profession was delivered by the film Inside Job, which won the Oscar for Best Documentary in 2011. The movie directed by Charles Ferguson tried to explain the 2008 global financial crisis in popular terms, and it succeeded, garnering $7 million in revenues against a budget of $2 million.

Not bad for a documentary, but very bad for economics, some of whose leading lights were caught on camera denying their role in framing policies that triggered the crisis, continuing to espouse the deregulation that brought on the crisis, thinking there was nothing wrong in accepting six-figure consulting fees from Wall Street and promoting policies it favored, engaging in selective amnesia, or lying through their teeth.

In one scene, Glenn Hubbard, former chair of George W. Bush’s Council of Economic Advisers, then dean of Columbia University’s School of Business, gets upset and threatens to end the interview when asked whether as a researcher or policymaker he has disclosed his multiple links to the financial industry. This display of tantrums was, however, not as bad as the response of John Campbell, head of Harvard University’s Economics Department, when asked the same question; he was simply tongue-tied.

Unlike the meteor that killed the dinosaurs, Inside Job did not destroy economics, though in Angus Deaton’s account, “the movie did great harm to the public image of economists who were seen as benefiting mightily from an economy that they were claiming to research in a neutral, scientific way.”

There is probably no one better qualified to discuss the crisis of mainstream economics than Deaton, one of the leading experts on the economics of health and inequality, a former president of American Economic Association, and a Nobel Prize winner. He is about as mainstream as one can get, though of the center-left variety, probably owing to his training at Cambridge, which apparently not only produced spies for the Soviet Union but also economic iconoclasts like John Maynard Keynes.

A Discipline Captured by Special Interests

Deaton does not beat around the bush. The profession brought the calamity on itself because a great many of its members have been bought by powerful interests to produce the research and policy proposals that would benefit them. Though Deaton would be more measured and courteous in the way he would put it, that is essentially the theme that runs through this book. There may be some who really believe that the untrammeled market is the best way to allocate resources, but for most that belief is sweetened by the financial support, in the form of grants and consultancies, of powerful special interests.

Take the case of the minimum wage. Rigorous experiments by a number of well-regarded researchers have produced results that by now should have yielded no opposition to the fact that raising the minimum wage does not create unemployment. But half the profession still believes it does, and there’s no shaking them from this belief, whose main bankroller is the fast-food industry that sees the false doctrine as useful to keep the wages of its hamburger flippers low.

Health care has probably been the key battlefield over social policy over the last two decades in the United States, and no one knows more about the health industry than Deaton, whose Nobel Prize was earned largely by his studies of the relationship among health, poverty, and inequality. The Affordable Care Act, aka Obamacare, was, overall, positive in that it brought insurance coverage to around 20 million formerly uninsured people. But it was a Pyrrhic victory since the best solution to escalating medical costs, the single-payer or public option, was not even allowed to be discussed, and insurance companies were allowed to continue to hawk deceptive policies to an unwary public.

Research and the experience of European countries demonstrate clearly that a single payer national health system would radically reduce costs and would also keep inequality down because all share the risks of ill health and “prevent unequal burdens of sickness to turn into inequalities of earnings.” So, what keeps this seemingly rational solution from being adopted? An unholy alliance among the insurance companies, the medical establishment, Big Pharma, politicians in the pocket of business, and, of course, the legions of economists employed directly by them or paid as academic consultants.

In the United States today, life expectancy is falling as suicides, drug addiction, alcoholism, and heart disease are inexorably on the rise, contrary to the trends in other First World countries. One thing is clear. The terribly expensive and massively inefficient system of politically protected private health system is not equipped to deal with the “deaths of despair” and other manifestations of the health crisis in the richest country in the world.

Meritocracy and Inequality

The crisis of the health system is but one of the trends that have made the United States no longer the land or promise but of inequality. The gaps in earnings, health, and welfare have come to be increasingly caused by unequal opportunities available to those with a college education and those without one. Like Michael Sandel, Deaton argues that meritocracy, which used to be seen as an antidote to inherited income, wealth, and privilege, has instead been turned into a major cause of rising inequality. Those who have benefited from “passing the exam” believe they deserve their privileges because they earned them while seeing those who “failed the exam” as having only themselves to blame.

This sharply rising inequality owing to meritocracy has had destabilizing political consequences, with those without college degrees, who Hilary Clinton famously called the “deplorables,” becoming the angry base for Donald Trump’s “Make America Great Again” movement.

Despite its anti-democratic consequences, there has been no lack of economists who, either out of belief in the market, antipathy to any sort of government intervention, or being bankrolled by wealthy capitalists, can be found to argue that inequality is not a problem, such as Martin Feldstein, chair of Ronald Reagan’s Council of Economic Advisers, and Harvard’s Greg Mankiw.

Likewise, there are still many big-name economists who either deny or downplay the impact of climate change, such as Bjorn Lomborg, Thomas Schelling, Robert Fogel, Douglass North, Jagdish Bhagwati, or Vernon Smith.

A Profession Divided Against Itself

In sum, economics is a profession that is split almost in half along political beliefs, but with one side propped up by the power structure, which makes its views influential but very questionable. One half of economists “are concerned with efficiency and believe in the power of markets to promote it, and are concerned that attempts to interfere with the market will compromise current or future prosperity.” The other half, to which Deaton belongs, are also concerned about efficiency and believe in the power of the market to promote it, but are also concerned about inequality “and are willing to use redistribution to correct the failures of the market, even at the expense of some loss of efficiency.”

But beyond these differences, the whole profession is to be blamed for the central problem of mainstream economics, which is that the discipline has become “unmoored from its proper basis, which is the study of human welfare.” Both conservative and liberal economists, in other words, continue to frame economics the way Lionel Robbins defined it, as the allocation of scarce resources among competing ends, which has rightfully earned the discipline the description of being the dismal science. For both schools, efficiency remains the prime consideration. Rather, the economic problematique should be, according to Deaton, the way his fellow Cambridge economist Keynes defined it: “how to combine three things: economic efficiency, social justice, and individual liberty.”

But there is one other, major problem, which, surprisingly, Deaton fails to see as a problem. Both conservative and liberal economists are fundamentally attached to the value of economic growth because “it makes it possible for everyone to be materially better off.” With economic growth having become a central cause of the climate crisis, it is hard to believe that a sensitive mind like Deaton’s would miss its relevance to the crisis of the profession that he otherwise deals with so brilliantly in this book. But I guess everyone has their blind-spot.

Needed: A Bigger Meteor

It has been some 16 years since Inside Job appeared during the depths of Great Recession, and things have gotten worse for the profession. Deaton concludes that the narrative of mainstream economics is “broken and has been broken for several decades,” and “neither conservative nor progressive economists have a solution.” Saving economics is not going to be simply a matter of theoretical or policy adjustments but a total overhaul, including learning to think like sociologists (something that I, as a sociologist heartily endorse) and “recapturing the philosophical territory that used to be central to economics.”

Deaton is right about the scale of the task needed to make economics relevant to contemporary society, but he is being optimistic or naïve since he is still in a minority of economists who can admit that their discipline is in crisis. Looking back at the last century, I think that the Global Financial Crisis was not strong enough to bring the discipline to its senses and that no less than a much bigger meteor, like  the Great Depression of the 1930s, is needed to cut economics from its servitude to capital.

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