Americans tend to treat the pseudo-science called “economics” with the kind of reverence that medieval peasants reserved for sacred relics. Yet this same orthodox economics gives intellectual cover to some of the worst public policies, including the predatory competition of the sacred (unregulated) market that is supposed to be best for everyone if the state simply gets out of the way. Despite the fact that throughout human history, economic markets have never existed without states to encourage and regulate them.
Orthodox economics failed to predict the biggest economic event in 80 years – the subprime mortgage and derivatives collapse, now called the “Global Financial Crisis” or GFC. Economics students have even protested against orthodoxy’s tunnel vision allegiance to its core assumptions. Harvard economist Greg Mankiw’s classes staged walkouts because of this bias.
Orthodox economics also informs the decisions of our central bank (the Federal Reserve, or “the Fed”). An example would be its response to inflation that stems from shortages thanks to COVID and port congestion. This policy is…wait for it…raising interest rates. Yeah. This will cure COVID and unblock ports. Even the 19th-century belief that bleeding patients would cure them is not as disconnected from the real problem as the inflation cure offered by the Fed.
Modern money theorists like Stephanie Kelton often hear criticism that MMT’s recommended policies—such as a job guarantee—are inflationary, but MMT still includes resource availability in its spending prescriptions. Also, the government buys the surplus soybeans, why not the surplus labor? But then… it’s not orthodox economics, so being kind to work isn’t “respectable.”
Orthodox economics even inform recent inflation reports, ignoring asset price inflation that has been going on for years without too many alarming headlines to announce it. The stock market and house prices have been on a steady upward trend thanks to government policies blessed by orthodox economics like quantitative easing and the Wall Street bailout.
When subprime mortgages and derivatives on Wall Street proved toxic to the bankers who created them in 2007-08, the Fed provided $16-29 trillion in credit to ensure that the big banks don’t go bankrupt. Paying off everyone’s mortgage would have only cost $9 trillion, but it was economic orthodoxy that ensured Wall Street got the goldmine while Main Street got the pit.
Without this Fed intervention, the steady asset price inflation we have seen in recent years would almost certainly have been interrupted by the failure of several major financial institutions. Republican-appointed FDIC chief Sheila Bair said a recipient of Fed largesse, Citigroup, was insolvent, but the Fed loaned them the money they needed to survive the GFC. Some people think the Fed guaranteed those trillions in loans, but that’s one of the first underwriting rules not to lend to insolvents. This bailout was a gift, made respectable by orthodox economics.
So the next time you read something claiming that “economic studies say…” or “most economists agree”, you should take that policy recommendation with a lot more than a grain of salt, even completely ignore it. And remember: orthodox economics is rubbish.
CrossPosted It’s easier than it looks.