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James K. Galbraith, "How the Economists Got It Wrong", The American Prospect, V.II, Issue 7, 2-14-00

Source: R. Carson, W. Thomas, and J. Hecht, "Economic Issues Today: Alternative Approaches", p.4-10, 6th ed., 1999.

Note To The Beginning Student

At the time of this writing, the American economy is humming along just a few months shy of attaining a new record: the longest continuous expansion in the nation's history. By virtually any known standard of economic measurement, the national economy is doing very, very well. Unemployment is at a twenty-five-year low. Prices are stable. Economic growth, though not at a record-setting pace, is respectable. And the stock market continues to push upward, regularly setting new record highs.

Given such prevailing economic conditions, the authors, when they occasionally forget the capriciousness of history, sometimes ponder whether this book's title will be entirely understood by its readers. Indeed, some readers uninitiated into the mysteries of the discipline of economics may find the title perplexing. After all, what "economic issues" actually exist today? But, alas, such questioners will quickly learn that, even in the best of times, economists are quite adept at putting together long agendas of ongoing economic problems. These are often matters that have not yet been addressed even if we are in the middle of a long prosperity, while some of them are problems that will certainly emerge after prosperity fades a bit, as it always does.

A discerning would-be initiate to economics may also wonder about the subtitle to Economic Issues Today. Even if there are unresolved economic issues, how is it possible that economists are of differing opinions as to how to address these problems? How can a respected field of social scientific inquiry be divided by matters of outlook that produce "alternative approaches" to the agenda of economic issues? These latter questions on differing approaches to economic reasoning, unlike the earlier one on economic issues themselves, are not easily or quickly answered. And, as the reader will learn, these are the real questions this book attempts to explain.

When Economists Disagree

Early in 1997, George Soros, financial capitalist extraordinaire, raised a mild firestorm among professional American economists and American political and economic commentators by publishing a piece in the Atlantic Monthly magazine. Soros was a multibillionaire who had made his fortune specializing in international currency speculation. By all outward appearances, he was the quintessential model of the success that free-market economic conditions can accord its more diligent practitioners. Yet, in his essay, Soros chose to question whether the rock-bottom assumptions of market theory were properly founded. In so doing, he was attacking the prevailing opinion of the economics profession and its many supporters, namely the view that conventional economic theory is a reasonably "scientific" explanation of how an ideal economy ought to operate.

George Soros was not yet to the point of attacking all aspects of market economics. However, in defending his larger view on the limits of free-market theory, he observed, "Markets are the best machines for correcting individual errors, but government intervention and collective action are needed to protect common interests and correct inequities in the capitalist system."

In the wake of the Soviet Union's collapse in 1992, at a time when market theory was enjoying growing support everywhere in the world, and precisely as a Democratic American president was agreeing with his Republican foes that "the era of big government" was over, Soros's statements briefly made big waves. The shock was all the greater because Soros was also striking at the underlying belief system of conventional economic theory. As he put it, "Laissez-faire ideology-which holds that the common interest is best served when each individual pursues his particular interest- is inadequate for holding our open society together." Accordingly, Soros was not just disagreeing with mainstream economists on a matter of policy emphasis, he was questioning the philosophical foundations of mainstream thinking. It was a provocative challenge, and a lot of "nonmainstream economists" found themselves in the awkward position of agreeing with the observations of a wealthy capitalist.

True, the Soros affair was one of those increasingly frequent "mininews" events that bubble up suddenly and quickly recede from journalistic and public notice. Yet, the issues it raised are not likely to go away, regardless of the extent, or lack, of continued public interest in George Soros's particular economic views. The fact remains, despite the apparent singlemindedness of most economic thinkers, that real differences of opinion and ideological perspective persist on how an "ideal" economy should operate. The old economic debates of the 1960s, 1970s, and 1980s between Conservative, Liberal, and Radical advocates perhaps have subsided as matters of prominent public and professional concern, but they have not passed out of existence.

It is well for the reader to remember that throughout the long history of human efforts to understand and explain economic matters, disagreement rather than consensus has been the rule. In a nation that puts great stock in consensus building as the ultimate tool of governance and the principal device for sustaining social order, this may be a disconcerting fact. In any event, it is one we should understand. At this writing, at a time of considerable national economic prosperity, real differences of political and economic opinion still circulate. And, as we should know from the historical record, "economic prosperity" itself has always been a transitory condition; when it fades, debate over alternative economic policies often becomes heated.

When that debate takes place, squabbling among economists over policy alternatives can scarcely be hidden from the public, and such disagreement can be downright unsettling. It often comes as a rude surprise to the person on the street, who, although paying due professional respect to economists, still sees the economist as a kind of mechanic. When one's car does not start, the car owner expects (at least hopes) that the diagnosis of mechanical trouble given at one garage is exactly the same as what will be heard at any other. If there is one mechanical problem, there should be one mechanical solution. The moral of this comparison is that the study of economics is more than studying a repair manual, and economists are not mechanics.

The Role of Ideology

How is such disagreement possible? Isn't economics a science? Economists' answers to that question vary. A common and reasonable enough response is simply that scientists disagree too. While there is much truth to such an answer, it really begs the question. Plainly, the "dismal science" of economics is not a science like physics. Whereas economists may sometimes talk about the laws of supply and demand as if they were eternal verities like the law of gravity, there is abundant anthropological and historical evidence that many societies have behaved quite contrary to the laws of supply and demand.

To be sure, economists employ (or at least should employ) the rigor of scientific method and quantitative techniques in collecting data, testing hypotheses, and offering reasonable conclusions and predictions. However, economists deal with different "stuff' from that of their colleagues in the exact sciences. Their data involve human beings and their laboratory is a world of behavior and perception that varies with time and place. On top of this, economists, like all social scientists, are called on to answer a question not asked of those in the "pure" sciences: "What ought to be?" Astronomers, for instance, are not asked what ought to be the gravitational relationships of our universe. That would be a nonsense question. Economists, however, cannot evade making some determinations about optimal prices, optimal income distribution, and so forth. Their decisions, while perhaps based on a genuine effort at neutrality, detachment, and honest evaluation of the available evidence, finally must be a matter of interpretation, a value based on their own particular world views. To put the point directly: Economics, as a study of human behavior, cannot avoid value judgements. Struggle as it may, economics as a discipline is never free from ideology.

The early economists of the eighteenth and nineteenth centuries- Adam Smith, David Ricardo, John Stuart Mill, and especially the heretic Karl Marx- perceived economics as merely part of a broader political-economy context, but this view had largely been abandoned by the end of the nineteenth century. By the middle of the twentieth century, the economics profession generally approached "ideology" as if it were a dirty word, unprofessional, or, at the very best, too troublesome to deal with. The emphasis was on theoretical tools, considered both universal and neutral. All this changed in the 1960s and 1970s when well-known American economists thrust themselves into the powerful debates then sweeping American society. Their views on the war in Vietnam, poverty, civil rights, the extent of government power, the environmental crisis, the oil embargo, the causes of "stagflation," high technology versus smokestack industries, and much more could be heard regularly on television talk shows and miniseries or read in the columns of weekly newsmagazines. Often there was the pretension that this "talking out of church' had little impact on the body of "professional" theory and judgment, but the pretension was unconvincing. For good or ill, the genie was out of the bottle, and the economics profession had again become involved in politics and in recommending political courses of action to pursue economic objectives.

Initially, through the 1960s and into the early 1970s, prevailing opinion among economic reasoners upheld a Liberal perspective on political economy, advocating an active interventionism by government to "correct and improve" the workings of the economy. However, during the late 1970s, this consensus began to break down as the national economy slipped into a long period of sagging growth, rising unemployment, and escalating inflation. In its place, a new consensus began to build on behalf of a Conservative, minimum-government approach to political and economic matters. As the Liberals' star fell and the Conservatives' rose, the intensity and bitterness of economic and political argument sharpened. Although the shrillness of the ideological debate calmed a bit during the Reagan years- no doubt a by-product of the long economic expansion that began in late 1982- the past four decades of shifting ideological perspectives have left their mark on the economics profession. To a considerable extent, the ordinary economics textbook illustrates this point. While economics texts continue to do what such books have always done, namely, to introduce the reader to a generally agreed-on body of theoretical and analytical techniques and tools that constitute the study of economics, most have also found it necessary to identify and discuss the alternatives of Liberals, Conservatives, and, sometimes, even Radicals in the practical extension of economic analysis to actual policy-making situations.

The significance of all this should not be lost on the beginning student of economics. Though many economists may stress the valuefree nature of their studies, and of economics in general, common sense and observation suggest that this is at best a vastly exaggerated claim. The content and application of economic reasoning are determined ultimately by the force of what economists believe, not by an independent and neutral logic. But to say that economics is a matter of opinion is not to say that it is just a study of relatively different ideas: Here's this view and here's that one and each is of equal value. In fact, opinions are not of equal value. There are good opinions and there are bad ones. Different economic ideas have different consequences when adopted as policy. They have different effects- now and in the future. As we confront the various policy solutions proposed to deal with the many crises now gnawing deep into our economy and society, we must make choices. This one seems likely to produce desired outcomes. That one does not. No other situation is consistent with a free and reasoning society. Granted it is a painful situation, since choice always raises doubts and uncertainty and runs the risk of wrong judgement, but it cannot be evaded.

This book is intended to focus on a limited number of the hard choices that we must make. Its basic premise is that economic judgement is fundamentally a matter of learning to choose the best policy solution among all possible solutions. The book further assumes that failure to make this choice is to underestimate the richness and importance of the economic ideas we learn and to be blind to the fact that ideas and analysis do indeed apply to the real world of our own lives.

On Sorting Out Ideologies

Assuming that we have been at least partially convincing in our argument that economic analysis is permeated by ideological judgment, we now turn to examine the varieties of ideology common to American economic thought.

In general, we may characterize the ideological position of contemporary economics and economists as Conservative, Liberal, or Radical. These, the same handy categories that evening newscasters use to describe political positions, presumably have some meaning to people. The trouble with labels, though, is that they can mean a great deal and, at the same time, nothing at all. At a distance the various political colors of Conservative, Liberal, and Radical banners are vividly different. Close up, however, the distinctiveness blurs, and what seemed obvious differences are not so clear. For instance, there is probably not a strictly Liberal position on every economic issue, nor are all the economists who might be generally termed "Liberal" consistently in agreement. The same is true in the case of many Radical or Conservative positions as well. Unless we maintain a certain open-endedness in our categorizing of positions, the discussion of ideological differences will be overly simple and much too rigid. Therefore, the following generalizations and applications of ideological typologies will attempt to isolate and identify only "representative" positions. By doing this we can at least focus on the differences at the center rather than on the fuzziness at the fringes of these schools of thought.

We are still left with a problem. How do you specify an ideological position? Can you define a Radical or a Liberal or a Conservative position? The answer here is simple. As the British economist Joan Robinson once observed, an ideology is like an elephant-you can't define an elephant, but you should know one when you see it. Moreover, you should know the difference between an elephant and a horse or a cow without having to resort to definitions. There is a general framework of thought within each of the three ideological schools by which we can recognize them. Thus we will not "define" the schools but merely describe the salient characteristics of each. In all the following, the reader is urged to remember that there are many varieties of elephants. Our specification of a particular ideological view on any issue is a representative model- kind of average- looking elephant (or horse or cow). Therefore, the Conservative view offered on the problem of federal deficits, for instance, will probably not encompass all Conservative thought on this question. However, it should be sufficiently representative so that the basic Conservative paradigm, or world view, can be distinguished from the Radical or Liberal argument. Where truly important divisions within an ideological paradigm exist, the divisions will be appropriately noted and discussed.

~ Talking It Over & Thinking It Through ~

Answer the following question and support your answer with an explanation:

* According to the reading, a student of economics should think of an economist as a "mechanic" and the study of economics as the study of a "repair manual".   T/F, Explain.

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