Bad Economics
Thinking Like an Economist: How Efficiency Replaced Equality in U.S. Public Policy
Elizabeth Popp Berman
Princeton University Press, $35 (cloth)
Cogs and Monsters: What Economics Is, and What It Should Be
Diane Coyle
Princeton University Press, $24.95 (cloth)
What’s Wrong with Economics? A Primer for the Perplexed
Robert Skidelsky
Yale University Press, $25 (cloth)
“Those who can, do science,” the economist Paul Samuelson once remarked. “Those who can’t, prattle on about methodology.” Until fairly recently this seemed to be the dominant attitude among mainstream economists, but a sea change came when the global financial system began to unravel in 2007. In the decade and a half since—painful years of sluggish recovery, stagnating real wages, yawning inequality, and populist upheaval—reflexive talk has exploded. Why was the crash not widely predicted? Was the “efficient market hypothesis” to blame? Have lessons from the Great Depression been forgotten? And why are core questions about finance, power, inequality, and capitalism still largely missing from Economics 101?
The most visible debates have centered on macroeconomics—the study of the gross features of the economy as a whole. At stake are some of the field’s bedrock concerns: the power of public spending and money creation, the role of banking and the risks of complex financial instruments, the relationship between employment, wages, inflation, and interest rates, and the nature and necessity of growth. Given the role macro models play in central banking and public spending, these are not merely academic questions but urgent matters of public policy—from pandemic response to Build Back Better and the new inflation wars.
Yet all this macroeconomic Sturm und Drang has obscured the basic unity of microeconomic methods employed by the vast majority of working economists today, whether in the academy, government, or industry. Crack open a bestselling introductory textbook like Harvard professor N. Gregory Mankiw’s Principles of Economics (now in its ninth edition), and the first “principles” one encounters are not the fundamentals of growth or employment but rather “opportunity cost, marginal decision making, the role of incentives, the gains from trade, and the efficiency of market allocations”—all microeconomic ideas. Far more than any core tenets of macroeconomic theory, it is this core bundle of microeconomic principles that defines and unites the modern economic profession. It is also what distinguishes mainstream methods, sometimes termed “neoclassical,” from the various heterodoxies—Marxist, Austrian, post-Keynesian, ecological—that most academic economists studiously ignore.
Although some of its roots stretch back centuries, microeconomics as we know it was born in the 1930s and ’40s, when a starkly formalist and deductive approach to modeling market behavior gradually but firmly displaced its historicist and institutionalist rivals in the Anglo-American profession. During World War II scores of economists were recruited to apply optimization models to wartime planning, and in the postwar era this shift was further entrenched by the global hegemony of intensely mathematized techniques (a trend pioneered by Samuelson himself). This revolution has proven exceptionally durable—far more, in fact, than the “Keynesian revolution” in macroeconomics that initially unfolded around the same time.
Given the outsize influence of economic thinking in modern life, it is odd that these microeconomic foundations have largely escaped public scrutiny. Three recent books help set the record straight. Each freely courts Samuelson’s scorn, showing how microeconomic methodology structures not only the theory and practice of economics, but the very institutions of American governance. In the face of the concatenating disasters of the present, economics will have to be remade, these authors suggest—from the inside and out.