I’m in the process of reading Never Let a Serious Crisis Go to Waste, by Philip Mirowski, a professor of economics at Notre Dame. He makes a number of excellent points about economism in the wake of the Great Recession (though he prefers the terminology favored by many historians and social scientists and calls the ideology ‘neoliberalism’). I plan to say more about his central thesis in later posts; but I could not resist addressing one issue now, because it nicely reinforces some of the core themes of The Golden Calf—specifically, why economism is riven with internal contradictions, and how it logically acts like a religious ideology and yet claims to be science.
In one section (Chapter 5) Mirowski notes the intellectual disarray among orthodox neoclassical economists after the recession. The media naturally wanted to know—why didn’t you brilliant people, to whom we have been turning for wisdom about how the economy works, predict this train wreck? The economists had two replies, and various among them offered each: 1) we did, you just didn’t notice; or 2) it’s really not the job of academic economics as a science to predict things like recessions.
While supposedly legitimate and credible economists offered both statements, each was highly problematic. The first was in a small degree true—various economists did, at various times, dare to say that the wonderful world of the derivative bubble was going to come crashing down. The trouble was that the guardians of orthodoxy, like Larry Summers most famously, hooted these naysayers down in derision; and it was the hooting and not the warning that was accepted at the time as “the word” from the economist community. After the fact, theories were concocted about other predictions. Economist X was heard to say something to two of his friends over several beers once. Economist Y once developed a mathematical model which, if you tweaked it six different ways, issued a prediction that somewhere, someplace there might be a bubble. These were taken to indicate that see? Neoclassical economics did predict what happened after all, so they were on the case from the start. But these self-evidently silly proposals gained little traction.
Other supposedly credible economists intoned the second theory, but that ran up against a classic paper written decades ago by one of economism’s founders, Milton Friedman. Friedman was irked at the time because of the persistence of critics of neoclassical economics (before the triumph of economism purged all such heretics from most university econ departments). These critics liked to point out that the assumptions that classical economists depended upon to create their nice mathematical models generally were obviously untrue and implausible (a point I addressed a bit in The Golden Calf and also previously in this blog). Friedman decided to do away with these critics in one fell swoop. He argued that it did not matter at all what assumptions they used. They could assume the earth was flat and the moon is made of green cheese. All that mattered, rather, was the accuracy of the predictions the models yielded about the real world. (Mirowski seems to imply that maybe Friedman did not actually say that, but what matters is not what Freidman said, but the lessons later generations of economists took from him.) So you now have to explain the disconnect between the great god Friedman saying that all that justifies economic models is their ability to predict, and (some) economists insisting in 2009 that economics is incapable of predicting.
There was yet another problem with the “we can’t predict” claim. It is not merely that Friedman made a theoretical point. In the past several decades, economists put their mouths where their money was. They sold their consulting services to big corporations, often raking in many multiples of their academic salaries, in exchange for predictions—usually predictions that happened to be precisely what their corporate paymasters wanted to hear. So it seemed especially self-serving now for some of them to suddenly discover that they could never have done what they obviously did.
So we now see that economism, in the form of the orthodox neoclassical economics peddled by these academic gurus, was inconsistent at two different levels. At the lower level, two different explanations were put forth for what happened at the time of the recession, but each explanation clearly contradicted facts about what economists had previously been saying.
At the higher level the two explanations were obviously in contradiction. In logical terms, the economics community was asserting both A and not-A. So the fact that some well-known economists preferred the first explanation (we predicted it, all along) and others preferred the second (economics can never predict anything) further illustrated that this field was internally incoherent.
Perhaps sensing what image of economics was being conveyed to the larger public through this time period, the Chicago economist Eugene Fama gave an interview to John Cassidy for the New Yorker that Mirowski quotes:
Cassidy: “Back to the efficient markets hypothesis [a mainstay of orthodox neoclassical theory]. You said earlier that it comes out of this episode pretty well. Others say the market may be good at pricing in a relative sense—one stock versus another—but it is very bad at setting absolute prices, the level of the market as a whole. What do you say to that?”
Fama: “People say that. I don’t know what the basis of it is. If they know, they should be rich men. What better way to make money than to know exactly about the absolute level of prices.”
Cassidy: “So you still think that the market is highly efficient at the overall level too?”
Fama: “Yes. And if it isn’t, it’s going to be impossible to tell.”
Admittedly this exchange may simply show that Fama was getting testy at the end of a long, contentious interview. And Fama, who knows economics, may be able to explain in a way that I couldn’t some technical meaning that he can give to what he has said that makes it immune from the criticism that seems obvious. With those caveats in mind, let me proceed to state the obvious. There seem to be two ways to understand the basic logic of Fama’s defense of the efficient markets hypothesis. One is that it is a tautology, true by definition. We define ‘efficiency’ as whatever the market does; hence, if the market were inefficient, we’d never know, because there exists no outside vantage point from which to judge the matter. The other is that we have here what I alleged economism to be in The Golden Calf, a quasi-religious ideology. We simply have to have faith in the market, because it was created by Divine will and represents a Divine plan for humankind.
I trust it’s obvious that neither a tautological truth nor a quasi-religious, faith-based truth meets any reasonable definition for a science. So once again, economism is revealed as not what it proclaims itself to be.