Monday, October 13, 2008

Broad Quackery in the Economics Profession

The last few weeks have seen a series of political decisions that concern economic issues but whose pros and cons are not directly germane to the study of economics other than economic history. Economic history teaches us that aggressive inflation is harmful to a nation's economic future and has led to the decline and fall of Rome in the 4th and 5th centuries, to Nazi Germany and, in general, to economic stagnation and failure. In contrast, in the late nineteenth century in the United States, there were deflation and "depressed" profits but real wages were secularly rising, there was increasing standard of living and an explosion of innovation such as never has been seen in the world before or since. It is a testimony to the poor historical training of many in the economics field that economists have made public statements to the effect that the late nineteenth century was characterized by high unemployment and increasing income inequality. I recall seeing a remark along those lines by Paul Krugman, for instance. However, a careful reading of contemporary sources such as David Ames Wells's "Recent Economic Changes", published in 1889, reveals that economists and historians have often been confused by a simple fact. The word "depression" in the late nineteenth century referred to profit weakness, not to unemployment. Indeed, economists and historians who refer to this period as one of income inequality and poverty have probably not read Wells and other contemporary authors and literally misconstrue the widespread complaints about "depression". This is unfortunate, because any policy justification for the existence of the Federal Reserve Bank depends on the claim that management of the economy since 1913 was superior to what happened between 1860 and 1913, and in order to make this claim, a misreading of the word "depression" is essential. In fact, the economy performed far better between 1860 and 1913 than since 1913. The Great Depression, the stagflation of the 1970s and now the massive redistribution of wealth from the general public to Wall Street and banking interests, interests that do not produce value and have repeatedly misallocated resources, are examples of the inability of economists to manage the money supply or the economy competently.

The education of economists does not prepare them to assess business or entrepreneurial risk or the judiciousness of investment or allocation of resources. Economic theory provides an abstract framework for allocation under free market conditions. The allocation of government money to support corporations or banks or the claim that a given state of affairs results in excessive risk is not something that economists are equipped to conclude.

In recent weeks I have heard repeated claims (in the few instances when I consume the mass media, and they are very few) by economists who argue that intervention by the US government to subsidize banks is "necessary". I have not heard any empirical or historical evidence to support this claim, nor does any exist. These are ideological arguments meant to justify a political, interventionist position. They do not reflect a line of reasoning in which economists are competent or have any training, but rather reflect an interest in providing political support to investment and commercial banking and the Fed, from which the economics field receives financial support.

The economics profession has claimed for the past 95 years and especially since the 1930s that the Fed is necessary to manage the money supply and prevent "deflation". But the deflation of the late nineteenth century benefited almost all Americans. It only created pressure on owners and stockholders, who were subsidized by tariffs that facilitated excessive business start-ups. The deflation of the late nineteenth century was helpful to consumers, whose standard of living shot up 100% from 1840 to 1890. In contrast, under the regime of the economics profession that has existed since 1933, when the gold standard was abolished and the Fed given free reign to create money, standards of living have hardly increased. Moreover, innovation has been at best tepid compared with the late nineteenth century. All of those resources misallocated to incompetent banks and stupid real estate investments deprived innovators of financial support. Since 1971, the American average real hourly wage has been reduced by almost 20%, while income inequality has skyrocketed.

Economists like Paul Krugman claim that they oppose income inequality, but income inequality has been enhanced by the subsidization to the stock market that easy money due to the Fed provides. The easy money depresses interest rates which in turn increases stock prices. When inflation creates pressure to reduce the flow of money, economists like Krugman oppose such a move, and instead push for direct subsidies to the Wall Street firms whose employees are the chief beneficiaries of the income inequality. Obviously, Krugman's and other "progressives'" claims that they oppose income inequality and do anything other than support Wall Street and the Fed are lies. The cloaking of theft in benevolent-sounding phrases has long been part of a Progressive strategy that has bamboozled and increasingly impoverished America.

At this juncture, the performance of the economics profession amounts to overt quackery. The term quack is defined by the as:

"a person who pretends, professionally or publicly, to skill, knowledge, or qualifications he or she does not possess; a charlatan."

In claiming to have some kind of special expertise that enables them to assess whether a trillion dollar subsidy to banks and a massive injection of monetary reserves is well advised, the economics profession has exhibited widespread quackery. The public would be well advised to ignore the opinions of this failed profession.


Phil Orenstein said...

Speaking about quackery, did you know that Paul Krugman is the winner of the 2008 Nobel Prize in economics?

Mitchell Langbert said...

Oy vey!