Bad economists

Nothing more dangerous than someone who either understands just a little bit of econ 101.... except maybe the people who make their money ensuring that that's all most people understand.

This is from Paul Krugman's review of a new book by Jeff Madrick.

Adam Smith used the phrase “invisible hand” only once in “The Wealth of Nations,” and he probably didn’t mean to say what most people now think he said. But never mind: Today the phrase is almost always used to mean the proposition that market economies can be trusted to get everything, or almost everything, right without more than marginal government intervention.

Is this belief well grounded in theory and evidence? No. As Madrick makes clear, many economists have, consciously or unconsciously, engaged in a game of bait and switch.

On one side, we have elegant mathematical models showing that under certain conditions an unregulated free-­market economy will produce an efficient “general equilibrium,” in the sense that nobody could be made better off without making anyone worse off. Yet as Madrick says, these assumed conditions — including the assumption that people “are rational decision makers, and that they have all the price and product information they need” — are manifestly not met in practice. What, then, do the elegant models tell us about the real world?

Well, in a different chapter Madrick recalls Milton Friedman’s dictum that economic models should be judged not by the realism of their assumptions but by the accuracy of their predictions. This lets general equilibrium off the hook, sort of. But has the proposition that free markets get it right ever been vetted for predictive accuracy? Of course not. Friedman’s own polemics on behalf of free markets consist mainly of “assertions based on how free markets may work according to the Invisible Hand,” Madrick writes, with hardly any evidence presented that they actually work that way.

In other words, economists arguing for free markets and limited government try to have it both ways: They claim that their doctrine is a deep insight derived from first principles, but dismiss as irrelevant the overwhelming evidence that these assumed principles don’t hold in practice.

And, of course, there's no shortage of demand for economists willing to make these distortions in punditland.  Economics may be the most corrupt discipline in all academia.