According to New York Times journalist Binyamin Appelbaum’s recent book The Economists’ Hour, economics is not the unbiased science that it pretends to be, but a useful tool that politicians have used in class warfare for the last forty years on behalf of the elite. However, his entertaining narrative raises some questions. The Stigler Center will host an event with Appelbaum on January 28. 

“What is called sound economics is very often what mirrors the needs of the respectably affluent.” This is only one of the many quotes from John Kenneth Galbraith that New York Times journalist Binyamin Appelbaum included in his successful book The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society. It is also the one that best explains the book’s title: Economics is not the unbiased, data-driven science that it pretends to be, but a useful tool that politicians have used in class warfare for the last forty years on behalf of the elite.

Every reviewer with an economics background will object that in Appelbaum’s account of economists’ influence on policymaking, the causality relationship is far from clear: Were the economists the proverbial useful idiots, or were they the nefarious masterminds who used unskilled politicians to pursue their ideological preferences? Appelbaum’s book apparently tells both stories but does not try to reconcile them in a single narrative. Moreover, it does not consider a third option: that economics is simply a technical tool that can produce wonderful results or terrible disasters, the outcome depending not only on the intrinsic quality of individual economists and politicians but also on the incentives that shape their behavior.

The “economist’s hour” is actually much longer than sixty minutes. It began in 1969 and ended—or at least paused—in 2008 because of the financial crisis. After the Second World War, economists were not particularly respected, but they proved useful to Franklin Delano Roosevelt’s New Deal: They helped with the calculations necessary to build roads and bridges and to manage complex redistributive policies and regulations. According to Appelbaum, that was the beginning of the end of politicians’ supremacy: “Gradually, economists also began to exert an influence over the goals of public policy.”

The Counter-Revolution

According to Appelbaum’s classification, in the first minutes of “the economists’ hour,” the economists involved in policymaking were all under the influence of John Maynard Keynes and provided the tools for US politicians to develop sophisticated redistributive policies. In the seventies, a counter-revolution began at the University of Chicago and changed everything: Pro-market economists, led by Milton Friedman, convinced politicians and their fellow scholars that free competition was the solution to almost any policy problem.

After a few years, an almost complete ideological homogeneity prevailed: Economists and policymakers joined their forces to curb the power of the government, reduce taxes, to maximize efficiency at the expense of equality. The final result proved so beneficial for the elite that dissenting ideas disappeared until the 2008 financial crisis threatened the status quo: Only in that dramatic moment did economists and politicians go back to the old Keynesian approach—both because the market had failed to provide the desired outcome and because the elite is always in favor of socializing losses. Profits, obviously, should always stay private.

Milton Friedman and US President Richard Nixon, Photo by Volteurismo via Wikipedia [CC BY-SA 4.0]
Appelbaum’s book is highly entertaining, full of juicy anecdotes and brilliant quotes, but some of his choices bewilder. The first example he offers of the rise of economists’ intellectual hegemony is President Nixon’s 1973 decision to abolish the military draft. Milton Friedman, Walter Oi, Sol Tax, and other Chicago-trained scholars campaigned against the draft, defending the alternative of a professional army.

Freedom of choice, optimal resource allocation, and efficiency were certainly persuasive arguments, but it is hard to give more credit for Nixon’s choice to neoliberal economists than to the 58,000 US casualties of the Vietnam War. However, in the seventies and eighties, pro-business economists proved to offer precious intellectual fuel to politicians looking for sound arguments in favor of their policies.

As a lead writer on business and economics for the editorial board of the New York Times, Appelbaum knows how to offer readers an uncompromising point of view without hiding evidence that might also support counterarguments. In the chapter dedicated to the triumph of corporate efficiency over employment, for example, he writes that Paul Volcker’s Federal Reserve policies in the eighties favored the financial industry. But he also recognizes that those same policies fixed a problem that seemed unfixable: the mix of inflation and stagnation known as “stagflation.”

On the other hand, Appelbaum does not acknowledge any positive effect of the Chicago revolution in antitrust theory in the fifties: Friedrich Hayek, Aaron Director, George Stigler, John McGee, and the “law and economics” movement persuaded courts, politicians, and scholars that corporations’ bigness was a consequence of their superior efficiency, not a problem that regulators had to address, at least until there was no impact on retail prices.

The chapter “In Corporations We Trust” ends by mentioning the 2017 Stigler Center conference on antitrust. Appelbaum summarizes the event with a quote from Richard Posner: “Antitrust is dead, isn’t it?” What the New York Times journalist fails to inform his readers about is the actual content of that conference and of the many Stigler-organized events that followed it.

As ProMarket readers know, for years the Stigler Center has been leading the intellectual challenge to adapt antitrust to a digital-oriented economy in which traditional assumptions are not valid anymore: Because companies offer their services almost for free, market concentration has no impact on prices, yet it still has worrying consequences on the nature of the market. Appelbaum’s readers would probably be surprised to know that the recent Stigler Center report on digital platforms offered arguments in favor of more, not less, regulation.

Economists’ Preferences Are Different

Applebaum’s approach leads, in the final pages of the book, to two opposite conclusions: Economists are always wrong; or, economists are sometimes right, but bad things happen when they pretend to ignore the people’s preferences for the sake of a textbook definition of efficiency. The first conclusion leads to, well, supporting President Donald Trump’s approach to international trade. Check page 324 of The Economists’ Hour:  In the summer of 2017, Trump delivered a speech reacting to the almost unanimous consensus among economists that protectionism is harmful to all the countries involved. “Trade is bad,” the president wrote in the margin of the text of his upcoming speech.

The second conclusion is less disturbing, at least for a New York Times reader. “Communities can decide what they want from markets. The market that matches medical students with training programs is structured to let married couples end up in the same place. That is not efficient, yet it was deemed important,” Appelbaum writes. However, such a conclusion opens a new line of questions: Why would economists have different preferences than other people? How could they convince elected officials who look for popular consensus to adopt unpopular policies? Is intellectual homogeneity a problem of ideology or of intellectual corruption? In other words, did economists corrupt politics to favor corporations, or did corporations corrupt economists in order to influence politicians?

In a recent working paper on “The Political Limits of Economics,” University of Chicago professor Luigi Zingales [The Stigler Center’s faculty director and one of the editors of this blog] acknowledges that economists tend to use their tools and expertise to impose their view, rather than playing a mere advisory role. “When we do so, however, we generally do not question the principles of democracy, but we identify a reason why the political system fails to represent the will of the majority. Thus, the substitution of our preferences in place of those of the majority’s becomes not only legitimate but also necessary to fix the political failure,” Zingales argues. This attitude might be not only questionable but also dangerous.

After a long experience as an economic advisor to two Democratic presidents and presidential candidates, Princeton professor Alan Blinder coined the Murphy’s Law of Economic Policy:

“Economists have the least influence on policy where they know the most and are most agreed: They have the most influence on policy where they know the least and disagree most vehemently.”

The relationship between academics and elected officials is much more complex than in Appelbaum’s account, but not less problematic. According to Appelbaum, economists pursued a neoliberal agenda offering useful technical tools to the ruling elite. But economists are just as human as politicians and voters. Despite all their econometric and data-driven approaches, they respond to incentives and they have biases they do not often admit.

As UC Berkeley professor Emmanuel Saez recently told ProMarket, “Economists belong to the happy class of the winners of these modern times. We are very well paid. We are part of the intellectual elite. For us, the world as it is works pretty well, and I think it influences the way we think about the system. Our economic models make sense for people like us.”

There is much more than that. Career incentives in academia are often designed to reward marginal innovation rather than radical and out-of-the-box approaches; journals’ publication criteria expose their readers to the risk of “group thinking.” Paper results pretend to be scientific and robust, but they are also dependent on assumptions that policymakers, journalists, and Twitter commentators tend to forget when they generalize results that are both context and time-specific.

Economists do have an influence on politicians’ and regulators’ decisions concerning corporations, but corporations also have an often underestimated influence on economic research. Data-driven economics needs data, and corporations can share their data with scholars who have research interests whose outcome is likely to support corporate PR and lobbying strategy. Uber proved very effective in this particular form of soft power, as Hubert Horan’s ProMarket articles have documented.

The most consequential effect of free-market quasi-religious beliefs was probably that economists happened to consider a theoretical framework—perfect competition increases social welfare—as a description of real-world economics. As Luigi Zingales argues in his working paper, “By not studying the rest of the social sciences, we economists end up being unconscious victims of forces those sciences study.”

Many economists who will read Appelbaum’s book will find it outrageous and one-sided. However, they have no way to respond to the author’s allegations without admitting that their profession’s problems are deep and structural and that The Economists’ Hour has only scratched the surface.

The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.