Wednesday, March 13, 2024

Economics, Reconsidered - Vox Popoli

 In which the Professor of Economics and International Affairs, Emeritus, at Princeton and 2015 recipient of the Nobel Memorial Prize in Economic Sciences begins to wonder if perhaps everything about the mainstream Neo-Samuelsonian economics he has been utilizing as his basic conceptual model is wrong:

Economics has achieved much; there are large bodies of often nonobvious theoretical understandings and of careful and sometimes compelling empirical evidence. The profession knows and understands many things. Yet today we are in some disarray. We did not collectively predict the financial crisis and, worse still, we may have contributed to it through an overenthusiastic belief in the efficacy of markets, especially financial markets whose structure and implications we understood less well than we thought…

Like many others, I have recently found myself changing my mind, a discomfiting process for someone who has been a practicing economist for more than half a century…

I am much more skeptical of the benefits of free trade to American workers and am even skeptical of the claim, which I and others have made in the past, that globalization was responsible for the vast reduction in global poverty over the past 30 years. I also no longer defend the idea that the harm done to working Americans by globalization was a reasonable price to pay for global poverty reduction because workers in America are so much better off than the global poor. I believe that the reduction in poverty in India had little to do with world trade. And poverty reduction in China could have happened with less damage to workers in rich countries if Chinese policies caused it to save less of its national income, allowing more of its manufacturing growth to be absorbed at home. I had also seriously underthought my ethical judgments about trade-offs between domestic and foreign workers. We certainly have a duty to aid those in distress, but we have additional obligations to our fellow citizens that we do not have to others.

I used to subscribe to the near consensus among economists that immigration to the US was a good thing, with great benefits to the migrants and little or no cost to domestic low-skilled workers. I no longer think so. Economists’ beliefs are not unanimous on this but are shaped by econometric designs that may be credible but often rest on short-term outcomes. Longer-term analysis over the past century and a half tells a different story. Inequality was high when America was open, was much lower when the borders were closed, and rose again post Hart-Celler (the Immigration and Nationality Act of 1965) as the fraction of foreign-born people rose back to its levels in the Gilded Age. It has also been plausibly argued that the Great Migration of millions of African Americans from the rural South to the factories in the North would not have happened if factory owners had been able to hire the European migrants they preferred.

Economists could benefit by greater engagement with the ideas of philosophers, historians, and sociologists, just as Adam Smith once did. The philosophers, historians, and sociologists would likely benefit too.

I can’t cast too many stones in the eminent Prof. Deaton’s direction. I, too, once believed that free trade was economically beneficial to both nations involved in the trade. I, too, once believed that the free movement of peoples was a net benefit to the economy and the well-being of the peoples involved. And while I was always deeply skeptical of, and completely opposed to, globalization, it wasn’t until fairly recently that I recognized the satanic thread that runs through and inevitably connects liberty, democracy, the liberal Enlightenment values, and economic liberalism to obvious evils like globalism, imperialism, techno-authoritarianism, and Clown World.

But the lies, some of them centuries-old, are shattering. They are being broken apart by finally being tested against real-world consequences. And in the aftermath of their discrediting, an entirely new economics, one that is not based on a false model of a perfectly rational economic man, will be constructed.