Review of Economism: Bad Economics and the Rise of Inequality by James Kwak

There’s economics, a field that has been renewing itself, shaking off theoretical rigidities through more attention to behavior and institutions and shifting its center of gravity toward empirical observation and testing.  And then there’s economics as it exists in standard political discourse, seeing the whole world as refracted through supply and demand diagrams where markets are always efficient and outcomes always socially optimal.  This second, dumbed down, knee-jerk libertarian creed is the object of James Kwak’s new book, Economism.

If ever a book arrived to fill a need, this one has.  Neoliberalism, which is essentially simplified pseudo-economics in action, is finally beginning to break down, but rather than yielding to a more rational  politics it is giving us Brexit, Trump and similar delusionary movements.  Required to choose between the stale cant of economism and authoritarian fairytales of denial, the public is opting for the second door.  Unless economism is disposed of quickly, there won’t be an opening for a more enlightened third option.

In many ways, Kwak is an ideal person to take on the job.  He’s very, very smart.  He generally knows his economics, but he’s not in thrall to the profession.  (He’s actually a law professor.)  He writes clearly and explains economic concepts with a minimum of lecture-itis.  His book is short and to the point.

Most chapters follow the same general template.  Kwak begins by laying out an area of policy and briefly explaining why it’s important; topics include income distribution, taxes, health care, finance and trade.  He then goes into a thorough exposition of the standard economistic analysis, usually based on casual assumptions concerning rational choice, competition, and the market as a cost-benefit device.  His next step is to show this conceptual framework in action, as mouthed by politicians and journalists.  The critical deconstructive move follows, in which Kwak surveys the empirical literature, showing that, in real economics, the conventional assumptions are either flat out wrong or at least seriously qualified.  He then concludes by explaining the policy implications of a more informed approach.  It gets to be a bit formulaic, but it is effective and easy to follow.

I can imagine using a book like this in an introductory microeconomics class.  (Except for a bit of macro here and there, the book’s focus is micro.)  It’s exactly the right antidote for the tendency of introductory textbooks to oversell markets and undersupply critical thinking.  I hope lots of faculty teaching Econ 101 adopt it.

That said, I think it could have been even better than it is.  In a future second edition—and I expect there will be one—Kwak should consider these improvements:

1. His adoption of the voice of economism is very extended.  He will go on for several pages presenting the economistic worldview as if it were his.  Yes, I know, academics like Kwak, myself and perhaps you are trained to cope with this.  It’s nothing for us to read a book in which the author takes on the personna of someone with a differnt point of view for many pages at a time.  Most general readers are not familiar with this, however.  I can say from personal experience that something like half my students would come away thinking that Kwak himself espouses economism and is contradicting himself when he criticizes it.  What to do about this?  Of course, it’s important for Kwak to present economism in a neutral, even sympathetic voice, and to do so at the length it requires.  Perhaps he considered adding, every paragraph or so, a qualifier like “from this point of view”, but decided it was too clunky.  In that case, an altered typeface, like italics, could have been used to set off his temporarily assumed voice as expositor of economism.  One way or the other, markers are needed for readers unused to academic protocols.

2. He would do well to distinguish between the normative and positive aspects of economism.  In a policy context, both are usually entailed: the positive view that this is how the world works is given political salience by the normative view that demand curves represent “benefits” to society and the supply curve “costs”.  It’s important to recognize that economism can fail on either account: either empirical work can show that this is not how the world works, or the assumptions about how markets represent social interests can be challenged, or both.  In practice, Kwak relies more on the first critique, and the book usefully draws together key empirical findings on topics like minimum wages, health costs, etc.  But the market failure framework could have been given more of a workout than it received; in practice these arguments are effective.

3. The chapter on international trade is timid.  Kwak points out that the full-dress neoclassical trade model (Heckscher-Ohlin-Samuelson, although he doesn’t identify it as such) recognizes losers as well as winners from trade liberalization and makes this the conceptual linchpin of his critique of economism in this area.  In this he has a lot of company; H-O-S with lots of friction has become the standard progressive position.  However, the impacts of trade liberalization on employment may be worse than this, since the proposition that the trade balance is unaffected by changes in the degree of openness requires adjustments in exchange rates that, at the very least, are empirically unreliable.  (All exchange rate adjustments in response to anything are empirically unreliable.)  In practice it’s entirely possible, likely even, that a major liberalization event like the US opening to trade with China at the time of its WTO accession has an effect on the aggregate trade balance and not just the composition of industries on each side of the ledger.  I shouldn’t make a big deal of this, because Kwak is no doubt eager to avoid criticism that he is unknowledgeable about economics, and most economists would regard my criticism as falling under that shadow—but I don’t think I’m wrong about this.

4. The very end of the book—the final four pages—are simply weak.  To wrap up, Kwak points out that, whatever its faults, economism delivers by having a simple, all-purpose, easy-to-grasp message and then asks, “What’s our message?”  His answer is that wealthy economies don’t need economic growth or even economic efficiency as they used to, and we should all turn away from economic concerns and embrace happiness instead.  Huh?  Now, before I launch into a critique of this view, I should make it clear that I agree with a lot of it on matters of substance: economic values, like income, are not the same as human values.  One can live well on less money, and the pursuit of wealth should not be the primary goal either for individuals or societies.  Yes, of course.  But that doesn’t mean that “downplay money” is the logical message to set against economism.

One obvious reason is that the difference between wealth and happiness played no role whatsoever in the chapters that led up to his conclusion.  Economism is wrong about how labor markets work, how health care works, how international trade works and so on, not because money doesn’t buy you love, but because its analysis is wrong.  If we’re looking for a common message that applies to all these topics and pokes a hole in the economistic world view, wouldn’t we look for common elements in the arguments we’ve already made?  It’s always a mistake in a piece of writing to go off in a new direction at the point where we should be summing up; this should have occurred to Kwak or been pointed out to him by his reviewers.

The other reason is that downplaying economics—saying that income and other economic measures don’t mean so much—violates the spirit of the book.  At its best, Economism is feisty.  It challenges sloppy thinking about how the economic system works and makes the case for progressive policies that would result in greater income equality and access to economic goods.  Excellent!  Why at the end turn around and say, in effect, OK, we’ll give the conservatives economics, and we’ll take happiness instead?  No!  Don’t give them that!  They don’t deserve it!  The unifying progressive message is not that economics doesn’t matter so much; it’s that the economics of knee-jerk libertarianism is doctrinaire, false and self-serving.  Our message is that we reject the ideology of universal unlimited acquisitiveness as a reasonable way of organizing human affairs, and that the evidence is on our side.  I’d love to see a hard-hitting conclusion replace the flabby one that’s currently there.

It’s in the nature of a review like this to dwell on the negative, but I don’t want you to be dissuaded from buying and reading this book.  Economism is an important work of popular education that needed to be written.  Kwak has the skills to do it well—even better than he has this time out.