Economics

Economists Get Too Much Credit -- and Blame

How influential is economic theory really? Even its practitioners disagree.

In the driver's seat.

Photographer: Gordon Anthon/Getty Images

Not so long ago economists appeared to rule the world. The globalization reaching into every home was christened the brainchild of neoliberal economics. But when things began to go wrong, starting in 2007, economists took a beating. Now, with the threat of deglobalization hanging over us, economists stand on the sidelines, feeling ignored.

This recent turn of events might leave us wondering: Do economists have the power and influence required to affect political and policy outcomes, or is it politics that determines which strains of economics are cherry-picked and ultimately championed?

It's not just an abstract question. The answer tells us the extent to which economists are to blame for the policy failures of the globalization era, and the extent to which they can help shape policy responses to come.

John Maynard Keynes and Milton Friedman, perhaps the two most influential economists of the 20th century, had different views on the matter. For Keynes, economists were in the driver's seat. “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist,” he scoffed. Were Keynes alive today, he would no doubt argue that the global financial crisis, Brexit and the election of Donald Trump are all a result of a failed free-market economic agenda, resulting in rising inequality and a slowdown in economic growth, leaving the general public reeling. Economists would be squarely in the dock.

As far as that great rival to Keynesian thinking, Milton Friedman, was concerned, it is the public's experiences and not the writings of economists that drive economic and policy revolutions. Friedman knew that economists are far from like-minded bunch: They hold contrasting views that span the political spectrum and politicians can always find an economic advocate to justify the political fashion of the day. For Friedman, those economists that rise are the ones who capture the zeitgeist. In Friedman’s words, public opinion is shaped "by experience, not by theory or philosophy." "Only a crisis -- actual or perceived -- produces real change," he felt.

While economists are not entirely powerless, as sociologists Daniel Hirschman and Elizabeth Popp Berman have shown, a short trek through the history of economic thought suggests that Friedman has the stronger point. Adam Smith and David Ricardo are seen as the fathers of free markets and free trade, but it was the British Industrial Revolution that breathed life into their theories. Factory workers and industrialists lobbied against the government protection, including the Corn Laws, which aided landowning aristocracy, but which increased the price of food for everyone else. Economists were able to ride this popular wave.

Keynes to the Rescue

Percentage of unemployed

Sources: Michael R. Darby, 1976 (pre-World War II data). U.S. Bureau of Labor; U.K. data from Bank of England and Office of National Statistics

By the 1920s and 1930s, popular opinion responded to rising unemployment and deep deflation; another economic revolution was about to erupt. Keynes’s "general theory" would have ended up in the dustbin of history had it not hit a nerve. By the 1950s and 1960s, and as seen below, the Keynesian managed economy seemed to be working: Unemployment had been tamed and inflation was low. It was a golden age for economists.

By the 1970s, however, both inflation and unemployment rose together, suggesting a problem on the supply, as opposed to demand, side of the economy. Keynesian solutions offered too little too late, and so the time was ripe for another revolution in economic thinking. Along came Friedman, whose work was ultimately harnessed by U.S. President Ronald Reagan and U.K. Prime Minister Margaret Thatcher and is commonly seen as setting the scene for the globalization that followed.

Friedman to the Rescue?

U.K. and U.S. inflation rates

Sources: U.S. data from Measuring Worth; U.K. data from the Office of National Statistics, Bank of England

Of course, Friedman had been pushing his free-market agenda for some time by then. Strikes, escalating inflation and growing public deficits created public dissatisfaction and a problem looking for a solution.  

Economic revolutions arise, then, when economists are able to swim with the current of public experience. This means that rather than being forward-looking, the dominant school of economic thought at any point in time is conditioned by the past and avoiding a repeat of past economic problems. The inevitable risk is that ideas that can potentially help guard against future economic problems – including, presently, deglobalization -- are not discovered until it is too late.

What can contrarian economists (and here I count myself as one) do to be heard? One answer is that we can get better at listening and observing how the public thinks and feels. By thinking more about the interactions between society and the economy, economists might be able to do a better job of anticipating -- and so be ready to challenge and shape -- public concerns.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Victoria Bateman at vb295@cam.ac.uk

    To contact the editor responsible for this story:
    Therese Raphael at traphael4@bloomberg.net

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