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A History Of Economists Getting It Wrong

A History Of Economists Getting It Wrong

The Exchange Exchange is Todd Van Luling’s new conversation series with authors of recent economics books.

For the first edition of this economics interview series, I decided to highlight a book about how economists often make mistakes.

I’m a novice to the field of economics and have long seen the economy as a sort of mystery machine. A fascinating mystery machine –– but inscrutable nevertheless. Binyamin Appelbaum’s The Economists’ Hour helped lessen my confusion and heighten my curiosity. As such, The Exchange Exchange is lucky to start with Appelbaum’s book.

The Economists’ Hour covers decades of economic history, mostly centered around the 20th century. The public policy ebb of John Maynard Keynes and the rise of The Chicago school of economics’ Milton Friedman provides the central tension in the book. The repeated use of Friedman’s free-market ideas leading to repeated economic failure provides the central comedy.

As a journalist and the lead writer on business and economics for the editorial board of The New York Times, Appelbaum knows how to tell complicated tales in an accessible, accurate way.

In The Economists’ Hour, he focuses on the people of the past to put “flesh on the bones” for the conventional wisdom we take for granted today. If you still have an unwavering trust of economists –– the contemporary alchemists of sorts –– Appelbaum has a few stories for you.

My conversation with Appelbaum:

Todd Van Luling

The Economists’ Hour gives a historical background to many of the popular economic assumptions in American politics today, such as the inherent value of free markets and lower taxes for economic growth. What interested you in poking holes in these theories through telling their historical stories?

Binyamin Appelbaum

Some years ago, I read a book called Prophets of Regulation, which narrates the evolution of the government’s approach to regulation. Great book. The part that really stuck with me was that the modern approach, rooted in economic theory, is relatively new. I grew up in a world dominated by economic thinking about public policy problems and until that moment, I’d just never thought about how that came to be, or really even considered that some other approach might previously have held sway.

Over time, as I explored different areas of economic policy in my work as a journalist, I started going back and looking for a similar paradigm shift in other areas. The pattern was always the same and I became increasingly fascinated by this shift. I wanted to understand why it had happened, and what the consequences had been. I became increasingly convinced that this revolution in policymaking had contributed to many of the problems that are now tearing at our society. This book is my best effort to share that story. 

I think that studying history is empowering, because it puts flesh on the bones of the idea that our present reality is the product of human choices –– and therefore that we have the power to make different choices, and to construct a different future.

Todd Van Luling

A common theme in the book is that politicians routinely use economic ideas without the ideas first having tests –– essentially attempting the theories in real-time on the citizens en masse. This repeatedly has created unintended consequences of winners and losers. Why do you think politicians of the last century have trusted economists when, as your book highlights, the theories have often been based on unproven predictions?

Binyamin Appelbaum

I think the government can and should conduct real-world policy trials more often, but in many situations that’s simply not feasible. Policymakers must constantly make decisions in the face of uncertainty; the real question is why they have become increasingly reliant on economics –– both its theories and its methodologies –– in making those decisions.

In part, the rise of economics in policymaking was both inevitable and necessary. The cataclysms and inequalities of the first half of the 20th century fostered a consensus that government should play a larger role in managing economic conditions. As politicians struggled to manage the growth of government, they turned to economists to rationalize the administration of public policy. And the influence of economists grew with the availability of data –– like bean vines wrapped around cornstalks.

But policymakers become overly reliant on economists. I think a lot about something Stephen Breyer –– now a Supreme Court justice –– said in the early 1980s. He was explaining why he and other judges had accepted the arguments of economists and adopted a new standard for antitrust enforcement. He said that the standard “offers objectivity –– terra firma –– upon which we can base decisions.” This sense that economics was objective played a big role in its popularity. Even the smartest people in America sometimes lose track of the difference between a mathematical formula and the truth. 

Todd Van Luling

The 2019 winners of the Nobel Prize in Economics won in part for introducing a scientific method to economic theory and doing smaller tests on economies. As many already see economics as a science, do you think this could be a positive step forward in the field, allowing it to earn the trust we’ve already given it?

Binyamin Appelbaum

I love the idea of testing policies on a small scale. Some of that is actually built into our system of government: A local or state government adopts a policy, others can watch and then decide to follow, or to improve upon the idea.

Minimum wage laws are a great example. For years economists told policymakers that raising the minimum wage would increase unemployment, and so the minimum wage was allowed to languish at a low level. But in the early 1990s, New Jersey raised its state minimum and two economists, David Card and Alan Krueger, wrote a groundbreaking paper comparing the impact on fast-food restaurants in New Jersey with restaurants across the state line in Pennsylvania. They found no impact on employment, and other studies have backed that up. So now we’re seeing a surge in minimum wage increases at the state level.

Todd Van Luling

The concept of economics remains a bit of a “black box” for many people, politicians or otherwise. What would you recommend to people who are trying to better understand the field?

Binyamin Appelbaum

Economics begins from the premise that resources are limited, and therefore choices must be made. The discipline is basically devoted to analyzing and making those choices.

But as I write in my book, “The real message of economics, and the reason for its popularity, is the tantalizing promise that it can help humankind to loosen those surly bonds of scarcity. Alchemists promised to make gold from lead; economists said they could do it ex nihilo, through better policymaking.” 

For those seeking an introduction to economic ideas, my favorites include Reinventing the Bazaar: A Natural History of Markets, by John McMillan and Economics: A Very Short Introduction by Partha Dasgupta.

For the history of economics, and its place in our society, I’d recommend The Wordly Philosophers by Robert Heilbroner, which ends roughly where my book begins. And then, of course, read The Economists’ Hour.

Todd Van Luling

There seems to be a renewed interest in John Maynard Keynes in recent years, particularly with progressive politicians arguing for the role government can play in growing the economy. The Economists’ Hour also covers his ideas –– why do you think Keynes has been growing as a contemporary fascination?

Binyamin Appelbaum

It may help to begin with a little context. When the Great Depression began in the United States, the government didn’t even know how large the economy was. An economist named Simon Kuznets was hired to figure that out, and he returned a couple years later with the basic framework of what is now the standard methodology for measuring the size of a national economy: its “gross domestic product,” or GDP. That was a transformative moment.

Once the economy could be measured, it was only natural –– and necessary, in the midst of the Great Depression –– to start thinking about how to make the economy grow faster, and how to prevent future downturns. It was a moment much like the way that the first images of Earth from space catalyzed the modern environmental movement.

And the first great thinker in this new field of “macroeconomics” was the British polymath John Maynard Keynes. His basic argument was that governments had the power to end the Great Depression by spending a lot more money. More broadly, he and his disciples argued that the economy required careful management both in good times, to prevent the unequal distribution of prosperity, and in bad times, to limit the pain. 

“The Economists’ Hour” that I describe in my book was, in large part, a backlash against Keynesian ideas. It was a period, beginning in the late 1960s and early 1970s, in which economists argued that the government should not try to regulate markets or to redistribute output –– or even to intervene during recessions. And the global financial crisis that began in 2007 was, among other things, a disaster for these apostles of faith in markets. Policymakers saw that government needed to take a more active role in the economy, and people began dusting off their old copies of Keynes. 

Todd Van Luling

Much of the book focuses on contrasting Keynes’ ideas with Milton Friedman and the Chicago School’s free-market ideas. What appealed to you about focusing on this central tension?

Binyamin Appelbaum

Keynes and Friedman never met. Their only interaction came when a young Friedman submitted a paper to a journal edited by Keynes, who was then generally acclaimed as the world’s greatest living economist, and Keynes summarily rejected it.

But most great economic policy debates of modern times can be described as an argument between Keynes and Friedman. They embody two antithetical perspectives on the government’s role in the economy. Keynes thought that the government needed to play an active role in managing economic conditions; Friedman favored minimalism. 

A different way of framing their disagreement is that Keynes had great confidence in the ability of smart people to improve the human condition, and Friedman did not. He proposed, for example, that the Federal Reserve should be replaced by a computer program that increased the supply of money at a regular rate. 

Todd Van Luling

The book often finds humorous or otherwise satisfying narrative arcs in the economic histories. For example, the book details the rise of economist Arthur Laffer in which he ultimately uses his questionable, but popular theory that lower taxes can spur economic growth to personally lower his own taxes in Tennessee (President Trump awarded him the Presidential Medal of Freedom in 2019). How did you develop your storytelling style of mixing historical facts with narrative payoff?

Binyamin Appelbaum

I wanted to write a book in the style of the books that I love to read. I love great narrators, not in the sense of characters in the book, but of authors who write with intelligence and assurance and wit about their chosen subjects, who take you by the hand and tell you a story without talking down to you or oversimplifying. So that was my goal.

I’ve been a journalist for about two decades, and most of the writing I do professionally is for a daily newspaper. That style of writing is very focused on efficiency. You maybe get one good anecdote, and a few telling quotes, and then you get to the point. 

Writing a book was a chance to stretch out a little –– to hang a few more ornaments on the tree. But I think my roots in journalism helped me to maintain a sense of discipline and purpose in my writing: to tell stories, but to make sure the destination remains in sight.

Todd Van Luling

With all the competing ideas in economics, it can be hard to understand which presidential candidate has the best plans. I’ve personally had a hard time finding journalism that has helped tackle this problem. In particular, Senator Elizabeth Warren responded to a Wharton study that her policies would hurt growth by saying in a debate that those economists were simply wrong. As your book highlights, there are still many competing theories in economics, and yet journalism outlets focusing on this issue tended to portray the argument as black and white –– that the Wharton model should be trusted. How do you think journalism can contribute to presenting economics as a field of competing theories versus a hard science?

Binyamin Appelbaum

I think there are two related problems confronting both economics and journalism about economics, and we really need to get better at both of them.

The first is quality control, by which I mean being clear about what we do know. Take the example of tax cuts. The Trump administration is the third Republican administration in my lifetime to assert that it was going to cut taxes, and that the tax cuts would generate so much economic growth that the government wouldn’t even see a reduction in revenue. This was a pretty wild claim when it was made by the Reagan administration, but it’s fair to note that it hadn’t been disproved. So fine. They tried it, and it failed.

Two decades later, the George W. Bush administration makes the same claim, and at least has the grace to argue that its tax cuts are different than the last batch. So they tried it, and it failed.

Fast forward to 2017 and the Trump administration makes this claim for the third time. I would like to report to you that no credentialed economists were willing to lend their names to this nonsense, but alas, that’s not true. And that’s a big problem for the discipline. There’s little sense of quality control.

The media didn’t do a great job of making clear that this was nonsense, either. But I have some sympathy for reporters. It’s not so easy to decide which tenured professors of economics are credible economists and which ones are cranks.

On the other hand, to get back to your original point, there are a lot of areas of uncertainty in economics –– both areas in which we have two groups of credible economists insisting that they’re certainly right, and areas in which economists are willing to concede uncertainty.

And here I agree with you that economists and economic journalists need to do a better job of communicating uncertainty. There are professional incentives in both disciplines –– economics and journalism –– for reaching clear conclusions. But we’re not serving our readers when we pretend, for example, that the impact of minimum wage increases on employment is settled law.

It is more helpful, if also more difficult, to give readers a sense of what we know and what remains uncertain.

Todd Van Luling

You’re a member of The New York Times editorial board and were recently featured in “The Weekly” episode that focused on the Times‘ endorsement of a presidential candidate. Do you feel a particular candidate or candidates has a particularly strong grasp of economics?

Binyamin Appelbaum

Good politicians –– good leaders in any area –– know how to draw on expertise. Most politicians are not deeply versed in the public health literature, but if they need to make decisions about public health, they tend to be aware that they should consult experts.

It’s the same with economics: I’m not particularly concerned about whether candidates are well-versed in the literature; I’m more interested in how they would make decisions.

This interview has been edited and condensed for clarity.

The Economists’ Hour
By Binyamin Appelbaum
Little, Brown and Company
Sept. 3, 2019

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