Mainstream Economics: A Catalogue of Failures

A critique of mainstream economics’ failures and its resistance to change.

In a remarkable catalogue of horrors for The New York Times, journalist Ben Casselman details the “central tenets” of mainstream economics that have fallen out of political favour: free trade, open borders, a carbon tax, fiscal austerity. Covering the American Economic Association’s recent annual meeting in San Francisco, Casselman notes the problems that economists have not solved: deindustrialization, the 2008 crash and ensuing recession, the long-term growth slowdown. And he highlights their biggest forecasting failures: the 2007-09 financial crisis, the 2021-22 price shock, and the transitory nature of the resulting inflation, which has so far receded without triggering a recession. 

With admirable restraint, Casselman reports Jason Furman’s view that economists need to “do a better job … understanding the problems people care about,” and Glenn Hubbard’s observation that too many in the field have been “dismissive and insensitive” regarding such concerns. No kidding. 

It is not surprising that a reporter encountered such a congeries of failures – and almost no one with a dissenting opinion – at this meeting of “top” economists. Of course, there are economists who have embraced contrarian ideas about tariffs and development, financial fraud and crises, the roots of deindustrialization in the 1980s, industrial and environmental policy, and money, deficits, and debt. But when these experts attend the meetings – firmly controlled by the mainstream – they are sidelined to small rooms at satellite hotels. No amount of error can embarrass the “top” economists into giving up the prime slots. 

The grip of the conventional is deeply rooted in institutional norms. To be a “top” economist requires tenure at a “top” economics department, which in turn requires publication in a “top” journal – a needle’s eye tightly controlled by the orthodox. The only other route to professional prestige is an appointment to a high-level position at the White House, the Federal Reserve, the US Treasury, or perhaps the International Monetary Fund. Heterodox scholars are dispersed, their departments underfunded and poorly ranked. Holding a coherent dissenting view – particularly one that was right on the merits – bars them from the type of meeting that Casselman observed. 

Yet none of this explains why the track record of mainstream economics is so poor, and why it yields lousy, and often politically impossible, policies. On the topic of inflation, former chair of the Council of Economic Advisers Christina Romer remarked, “We’re all sitting up here trying to diagnose what went wrong.” Her comment could have been applied to every issue in Casselman’s catalogue. 

Oren Cass, a talented conservative polemicist who served as a foil to the largely moderate and liberal mainstream economists gathered in San Francisco, is on to something when he suggests that “it’s all been wrong.” Cass rightly names the theory of comparative advantage as one of the discipline’s major errors, although it is far from being “the most basic mistake,” and it doesn’t work “great in the classroom,” as he claims. 

A paper exercise with no real-world application, comparative advantage was invented by the early-nineteenth-century British stockbroker David Ricardo to advance and justify a free-trade policy that he already supported. Ricardo’s theory served national interest – free trade benefited the dominant economic power, which was Britain – and the rising commercial-industrial class. In America at that time, free trade was the policy of planters and farmers. It took firm hold only in the mid-twentieth century, when the US supplanted Britain as the world’s foremost industrial economy. Before that, trade protection was “the American System” – paralleled in Germany and widely emulated in Asia. 

A deeper explanation may disturb even Cass. Economists derive their theories from the parable of exchange and the assumption that markets are the key economic institution. This enables them to treat production as an afterthought – organized in pseudo-markets for labour, capital, technology, and so forth – and cling to an illusion of equilibrium. The comforting idea that underpins economists’ models is that – apart from all the problems, like monopoly – markets in some ideal setting will sort things out. 

In every other field of human knowledge, theories of equilibrium faded after the mid-nineteenth century, when evolution and thermodynamics came to dominate scientific thinking. Mainstream economists are the lone holdouts, preferring the trivial verities of self-contained mathematical models to engagement with the real world. 

A thermodynamic view understands that production, not exchange, is primary. Without production, there is nothing to exchange. Acquiring and mobilizing the resources needed for production requires fixed investment, made by organizations in the hope of profit. All such investments are uncertain. And all activity must be regulated – just like your blood pressure or the temperature in your car engine. 

There is no sophisticated market – actually, no market – without government, and there is no government without borders and boundaries to determine its jurisdiction. That alone is why globalization was destined to end in chaos. 

It is not hard to adjust one’s thinking to this well-established paradigm, with which every other branch of the natural and social sciences came to grips long ago. Many policy issues – trade, inequality, energy, interest and discount rates, deficits and debt, monopoly power – come into focus. But one cannot expect progress so long as an antiquated school of thought monopolizes the resources underpinning universities, journals, promotions, research funds – and the top slots at the annual economics meetings.

Copyright Project Syndicate