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A review of James Kwak’s Economism

A review of James Kwak’s Economism

Economism: Bad Economics and the Rise of Inequality, James Kwak, Pantheon, 2017

I just finished reading James Kwak’s Economism: Bad Economics and the Rise of Inequality. Here is a quick review of the book.[1]

Imagine a first-year economics student. After attending six lectures in introductory economics, and carefully studying the first six chapters of his economics textbook, he gets comfortable with the basic supply-demand model. Bedazzled by the potential uses of this simple model and explanatory power of economics in general (looking at the covers of economics made fun books convinces him about this), he starts thinking that the supply-demand model is the only thing that he needs to know. As a firm believer of market solutions to everything, he quits school in order to give it back to you, the people. He becomes a politician (or advisor, author, columnist, the president…) and starts applying what he learned from an introduction to introductory economics to real world problems. Because he skipped all other courses, he does not have any idea about how to conduct research on these important societal problems. So he bases all of his policy decisions (or suggestions) on the basic supply-demand model and a little bit of armchair reasoning. James Kwak’s book, Economism, is a critique of this student’s abuse of basic economics.

More properly, Economism is a book on the dangers of applying simplistic economic models to complex real-world problems. According to Kwak, economism is the act of trying to explain all social phenomena and to solve all societal problems with basic economics.

“[Economism] rests on the premise that people, companies, and markets behave according to the abstract, two-dimensional illustrations of an Economics 101 textbook, even though assumptions behind these diagrams virtually never hold in the real world.” (Chp.1)

You might ask: But who does that? Is there really anyone out there who acts like a university dropout president (politician, advisor, author, columnist…)? Kwak’s book provides enough evidence to show that economism is a real problem. And if you think about it, you might find your own examples of economism. Think about those politicians, columnists, experts, and journalists who talk about taxes, minimum wages, regulation, inflation, healthcare etc. Think about how TV and radio programs, podcasts, blogposts, tweets, etc. help an oversimplified supply-demand logic to reproduce and invade people’s brains. And think about how easy it is for anyone to have an illusion of understanding economics. If you can Google it, you can think that you know it! Search for tax policy, drug policy, minimum wage policy, or any other thing you like. You’ll get a quick answer and a fix for your problem. Anyone who is willing to learn some economics but does not have the time to do it properly can be infected with economism quite quickly. So Kwak’s attempt to warn us concerning the dangers of economism is a valuable endeavor.

Of course, Kwak is not the first person to warn us against the abuse of basic economics. Noah Smith, for example, wrote about economism in 2016. He called it 101ism. See for example, Most of What You Learned in Econ 101 Is Wrong, and 101ism. And here is something from Paul Krugman:  101 Boosterism. Last year, Dani Rodrik also warned us against misuses of economic models in his Economics Rules. Also note that there is a huge literature in philosophy of economics that discusses the limits of idealized and abstract models in economics. Given this background one expects a lot from a book length treatment of economism, or 101ism.

My expectations were very high. This is probably why I am disappointed. I knew in advance that in the book Kwak would be discussing how economism misleads us concerning issues such as the minimum wage, tax policy, and financial regulation. So I expected a detailed and careful discussion of these topics. Something that would go beyond the blog posts and columns cited above. Moreover, I really wanted to learn about the origins of economism. I wanted to learn who to blame, and why. On top of this, there was a lot of buzz on my twitter feed which also raised my expectations. I did not expect Kwak to dive into philosophy of science, but I was expecting that he would have some serious discussion of the limits and merits of simple, abstract, idealized models. At least I was expecting Kwak to go beyond just reminding us that economic models are unrealistic, and that they employ simplifying assumptions.

Even though Kwak uses considerable amount of space and several supply and demand graphs to demonstrate the possible ways in which that Econ 101 models may mislead us, he does not show the reader how one should really think about the issues discussed in the book. His argument basically boils down to the following claim: Econ 101 thinking is erroneous because the world is more complex than the basic model, and the empirical evidence concerning the matter is mixed. For example, Kwak (in Chp. 9) summarizes economism’s claim concerning labor markets as follows: “The minimum wage causes unemployment and harms poor people”. And here is how he summarizes how things are in reality: “The minimum wage (around current levels) has little impact on unemployment and reduces poverty”.[2] Or, he summarizes economism’s claim concerning financial markets as follows: “People only buy financial products that are good for them”. And he argues that the more likely reality is “many people make poor choices about complex products such as Option ARMs”. Fair enough. But how should one avoid economism and think about these issues? Does Kwak have an answer to this question?

First note that Kwak does not argue that economics is useless or that economists should abandon their beloved simple models. He argues that

“The answer to economism is not to reject economics altogether. Rather, the immediate antidote to economism’s simplistic model of reality is more and better economic analysis, which can help identify the fundamental drivers of social phenomena or select the most effective solutions to difficulty problems” (Chp.9)

“Recognizing that economics does not provide a single simple answer to all questions is a crucial step in throwing off the blinders of economism” (Chp.9).

So Kwak seems to think that economic models help us understand the world. But he does not tell the reader how. The world is complex. All economic models are similar to the basic supply-demand model in that they simplify and employ unrealistic assumptions. Kwak does not help us in finding our way from simple models to more complex reality. If we would like to avoid economism, how should we approach the subject matter? What is the appropriate way to use economic models? Not clear. Kwak does not really attempt to answer these questions. We learn that we should be careful about the dangers of economism, and that is about it.

What about the origin and sources of economism? Kwak has a whole chapter on that. He makes some strong claims, such as the following:

“For a worldview like economism to take root and grow, it must serve a significant social group.” (Chp.3)

“[Economism] matters because it is one important vehicle that interests groups have used to pursue their objectives during the past half century.” (Chp.3)

“Economism exists because people organizations saw how they could use economic principles to their advantage.” (Chp.3)

“Today, economism reflects the preferences and interests of the very rich more than those of ordinary citizens” (Chp.9)

“The great achievement of economism has been to repackage a political ideology [market fundamentalism or neoliberalism] as a lightweight, easy-to-use, seemingly neutral framework for seeing the world.” (Chp.9)

Basic argument here is that economism benefits the wealthy, thus it must have been intentionally promoted by them. Unfortunately, Kwak does not provide enough evidence that these and other related claims concerning the origins of economism are right. The evidence he provides is basically about some connections between economists, institutions and people with money who funded some of these people and institutions. This lays down some of the connections, but it is not enough. Maybe it is impossible to provide a convincing account of the origin of economism in one chapter, but I was supposing that this was one of this book’s promises. So I was disappointed. To be fair, Kwak cites his resources. In order to get a better sense of the development of economism (especially in USA) one could read: The Idea Brokers (James Smith), The Power of Ideas (Lea Edwards), Building Chicago Economics (eds. Robert Van Horn, Philip Mirowski, and Thomas A. Stapleford), The Road from Mont Pèlerin: The Making of the Neoliberal Thought Collective (eds. Philip Mirowski and Dieter Plehwe), and other works cited by James Kwak.

After reading the book, we learn that economism is bad. Also, we are provided with a list of names and institutions[3] that we could blame. I’ll only mention the names of the economists that pop up: Ludwig von Mises, Friedrich von Hayek (Nobel Prize 1974), Milton Friedman (Nobel Prize 1976), Gary Becker (Nobel Prize 1992), George Stigler (Nobel Prize 1982), and Richard Posner. Unfortunately, Kwak does not discuss the actual contributions of these economists to research. I cannot help thinking that maybe Kwak also got trapped by the simplistic thinking that he criticizes. Remember, he wished to argue that real economics is not like simplistic Econ 101, and that actual research in economics is superior to simplistic Econ 101 thinking. Could it be that the actual contributions of these economists are much more sophisticated and important than they appear in Kwak’s book? Let me just remind you that the list contains four Nobel laureates.

So what is my verdict? I enjoyed reading the book. It introduces the reader to the debates about minimum wages, tax policy, health policy, and financial regulation. Also, the chapter on the origins of economism could be considered as a good first reading on the topic. Nevertheless, I was disappointed because I was expecting much more from the book. So I’ll recommend the book with just one warning: If you would like to have a better understanding of how economists think and how to avoid economism and all that, this book will not help you much. If you are going to read this book, also read Dani Rodrik’s Economics Rules (see my review here). Dani Rodrik provides a much more sophisticated (and accessible) account of economic models and guidelines for using them appropriately. You could also supplement this book with other popular books. For example, you could read Ha-Joon Chang’s Economics: The User’s Guide, which champions a pluralistic approach to economic issues.

If you are wondering about the remedy for economism, remember the economics student who got infected because he quit learning economics too early. The first and most important remedy for economism is to keep on studying economics. A good economics education will teach you that if you try to apply a model without taking into account the specifics of the particular real-world problem you are dealing with, you are very likely to misunderstand the problem and its solution. After all, a good Econ 101 is the best cure for 101ism. [4] Naturally, I would also add some philosophy of economics to the recipe.

Thank you for reading.

Notes:

[1] All references are to the e-book edition of the book (sold by Google Play Books)

[2] Also see: The Curse of Motivated Reasoning against Econ 101 by Ryan Bourne, James Kwak on Minimum Wage  by David Henderson, and James Kwak Sure Doesn’t Understand The Economics Of The Minimum Wage by Tim Wortstall.

[3] Kwak also list the following institutions: Volker Foundation, Mont Pelerin Society, Foundation for Economic Education (FEE), The American Enterprise Institute, The Heritage Foundation, The Cato Institute, and The Manhattan Institute. Moreover, Kwak points out that authors like Henry Hazlitt and Jude Wanniski helped the spread of economism.

[4] Kwak argues:

“Paying more attention to topics such as economic history, institutions, behavioral economics, common market failures such as asymmetric information, and empirical methods could help dilute the intellectual hegemony of the competitive market model.” (Chp.9)

But, students of economics learn about most of these topics. Also one of the first things that one learns in economics courses is that assumptions matter. True, there could be more emphasis on institutions, economic history, history of economics thought, and economic methodology. There is much room for improvement in economics education. But this does not justify the now widespread belief that economics education is harmful. I am almost sure that James Kwak would not agree with such a statement, but his book might contribute to this belief.


Some other reviews of Economism