A little knowledge is dangerous

Progressive blogger and professional economics student Kathy G [1] is involved in a tussle with libertarian blogger and professional economics know-nothing Megan McArdle [2] over the economic concept of "monopsony"—actually not much of a tussle, because Megan, as yet, won't cowboy up and join the battle, nor even link to Kathy G [3]. The term sounds technical, but Kathy pulls you through the concept with admirable clarity and bite. Basically, the monopsony model is one of the many ways economists, abiding by the most rigorous neoclassical principles, are able to demonstrate that laissez-faire markets, acting on their own, can deliver both unfair and inefficient outcomes. Which opens the door to the conclusion that, sometimes, government intervention makes markets work better and more fairly.

That's a fact that intimidates economic royalists to no end. Because they want to be able to claim that their policies of deregulation have the imprimateur of science. When in fact, if economics is indeed a science, its findings demand the conclusion that deregulation can often wrack ruin, and regulation can often work miracles.

They want to claim to "own" economics. Just like they want to claim to own religion. And national security. And we just can't let them get away with it. As Kathy G thunders [4]:

I write about economic theory because I believe it is Really. Fucking. Important. Bad economic models make for bad economic policies. Case in point: economic theory has often been used to argue against having a minimum wage, because the perfect competition model predicts that instituting a minimum wage will lower employment. But in fact, many studies of the minimum wage show that it doesn't lead to lower employment. Which tells you that something is definitely wrong with that model.

Elites set economic policy in this country, and many of their ideas about policy have been shaped -- and, I would argue, warped -- by economic theory.

For some people, economics can be a powerfully seductive discipline. The radically simplifying models you get in Econ 101 have an elegance that can be compelling, and that can cause you to see the world with new eyes. This can be thrilling; initiates into the economics priesthood can have the sense that they have seen through the Matrix, that they possess the Secret Decoder Ring of the Universe, that they've stumbled across the Key to All Mythologies. But if you do more reading around and more advanced study in economics, you quickly discover that the Econ 101 vision of the world is but a snare and a delusion.

To paraphrase something I wrote once, an intro econ course is necessarily going to be superficial. You deal with highly stylized models that are robbed of context, and that take place in a world unmediated by norms and institutions. Much of the most interesting work in economics right now calls into question the Econ 101 assumptions of rationality, hyper-individualism, complete information, etc. But, of course, if you don't go any further than Econ 101, you won't know that the textbook models are not the way the world really works, and that empirical studies regularly produce results at odds with standard economic theory.

Many of our policy-making elites are still working within that very narrow Econ 101 context. And there's a very good reason for that: right-wing economists, above all Milton Friedman (probably the most powerful intellectual of the last century), led a movement that revolutionized the discipline. They kicked out the Keynesians and heterodox types and instituted a doctrine of laissez-faire absolutism. So what students get taught in intro econ courses tends to be very much the version of economics that they created. A well-financed conservative infrastructure also relentlessly propagandizes in favor of Friedman-nomics. And the popularized version of economics presented by journalists in places like The Economist is very much in that "let the market work its magic" vein. Which, by some kuh-razy coincidence, just happens to be the version of economics that is most flattering, and useful, to our economic overlords.

This argument, I think, is unanswerable. So no surprise Megan McArdle has not answered it.