Three Books for 2017: Economics for the Common Good, Janesville, Economism

Ken Murphy asked me for three books for 2017. Mine are: Amy Goldstein: Janesville: An American Story, Jean Tirole: Economics for the Common Good, and James Kwak: Economism: Bad Economics and the Rise of Inequality:

• Amy Goldstein: Janesville: An American Story (9781501102233): The best of the very large and very uneven crop of ground-level books attempting to explain why those parts of America that are treading water or losing ground have been unable to adapt to changing technology and organization in the global economy…

• Jean Tirole: Economics for the Common Good (9780691175164): A very wise book on what high-quality economics is and is not, from the guy who was truly the smartest guy in the room back when I spent a year as a young lecturer in the MIT economics department…

• James Kwak: Economism: Bad Economics and the Rise of Inequality (9781101871195): How a very large part of the economics profession has failed to get the true message of economics through its own biases and the political and ideological filters…

Amy Goldstein: Janesville: An American Story (9781501102233): This is the best of the very large and very uneven crop of ground-level books attempting to explain why those parts of America that are treading water or losing ground have been unable to adapt to changing technology and organization in the global economy. General Motors closed its Janesville plant in 2008 as it teetered on the edge of bankruptcy. Students began showing up at the local high school hungry and dirty. Teachers and others started social service organizations to supply them with supplies and food. Contributions to local charities fell off just when the need spiked. The closing of the GM plant triggered the closing of its nearby supplier plants as well.

The GM assembly-line workers had earned \$30 an hour at the plant. Some—a few—maintain their paychecks by becoming “birds of passage” working at still-open GM plants in other states. Others see their paychecks collapse: settle at jobs paying half as much, and with minimal benefits. For nobody was willing to pay anywhere near \$30 an hour for the skills and the energy of ex-GM workers. And the ex-workers could not use their skills and energy themselves to find a retraining path to anywhere near the pay levels that GM had offered them.

The big flaw, of course, is Amy Goldstein’s ignorance of and unwillingness to learn about the macro picture that makes the closing of the GM plant so devastating for Janesville. Plants, after all, close all the time because the money being spent on the products they had made is diverted to purchase other commodities made more efficiently that promote greater prosperity. Why weren’t the Janesville ex-workers able to benefit from spillovers from that greater efficiency and greater prosperity? Goldstein has no clue.

Jean Tirole: Economics for the Common Good (9780691175164): This is a very wise book on what high-quality economics is and is not, from the guy who was truly the smartest guy in the room back when I spent a year as a young lecturer in the MIT economics department. “The distinctive characteristic of academics”, Tirole writes, “their DNA, is doubt”. This creates a substantial tension: economists need to teach what they know not just to their peers and their students but to the public sphere; but the public sphere today—did it ever?—does not want nuanced arguments from two-handed economists. Cable TV and Twitter do not like to be told: “It is difficult to tell”. Yet, often, that is what Tirole has to say. Nevertheless, Tirole thinks—and I agree—that we have no alternative but to try: we must imagine Sisyphus happy.

In its thoughtful discussions of market-state interactions, boundaries, and synergies; in its focus on the government’s role not in prescribing actions but remedying information and other externalities; in its pleas for a diversified portfolio of institutional forms; in its speculations about the long-run impact of information and communications technology revolutions; in its use of the economics of information as an organizing principle; in its rich institutional detail; in its application of theory to real-world examples; and in its (much appreciated) boosterism for behavioral economics—this is the best book I read in 2017.

James Kwak: Economism: Bad Economics and the Rise of Inequality (9781101871195): This is a very good book about how a very large part of the economics profession has failed to get the true message of economics through its own biases and the political and ideological filters.

First of all, I think the book is mistitled. It is not economics that becomes a misleading and destructive ideological “-ism”. Rather, it is, as my friend Noah Smith puts it, it is Econ 101—supply and demand, and where the curves cross is always the bet place to be—that became a misleading and destructive ideological “-ism”.

Second, as James Kwak writes, Econ 101 became a misleading and destructive ideological “-ism” because it suited the interest of powerful groups with megaphones that it become so: neoclassical economics badly done via those who learned little economics simplistically applying the most basic supply-and-demand models. Our large upward leap in inequality, the financial crash, and the large holes in our safety net are some of the current flaws in America that Kwak traces to 101-ism. And he is in large part correct do so. 101-ism makes people think that whatever inequality there is in the current market is natural and just, and that government policies will always reduce wealth by generating Harberger triangles. And these are very convenient beliefs for plutocrats—not for plutocrats to hold them, but for those who pay rents to plutocrats to hold in order to make plutocrats richer.

Noah Smith hopes that empirical evidence will disrupt and dismantle 101-ism:

The economics discipline itself has been shifting from theory to data for years now, and the world is taking notice. Every time studies show that tax cuts don’t do much to encourage investment, or that the impact of minimum wage hikes is modest, the public loses a little faith in the power of traditional Econ 101. The cure… is more and better economics…. Americans are now starting to question economism because of declining median income, spiraling inequality and a huge financial and economic crisis…

I think Noah is wrong here: 101-ism provides a simple and powerful intellectual framework easily grasped that makes sense of a complicated world and also works to the advantage of people with a great deal of money who benefit from its spread. Thought is vulnerable to simplistic theories which then gain an unshakeable hold. Simplistic theories are easily propagated because they are, well, simplistic. When it is in the interest of someone with resources that others believe a doctrine, they will devote their resources to spreading it. And it is very difficult to convince somebody of anything when their pocketbook or their sense of self-worth depends on their thinking otherwise. 101-ism thus has powerful material and cognitive advantages over alternatives. And the only thing that the alternatives have going for them is that they are the truth.

I think that James Kwak is showing us here both how much and how little arguments based on the truth can do in the modern public sphere.

But, as I said in talking about Jean Tirole’s Economics for the Common Good: we must imagine Sisyphus happy…