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A Bad Attack on Libertarian Economics

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Economism: Bad Economics and the Rise of Inequality by James Kwak (Pantheon Books, 2017; 237 pages)

There is a nasty genre of writing: books and articles that seek to build the case for socialism and interventionist government policies by smearing those of us who oppose them. That approach appeals greatly to Progressives who think that they are virtuous and their enemies must therefore be driven by base motives.

Such a book is Economism: Bad Economics and the Rise of Inequality, by University of Connecticut law professor James Kwak. He is extremely bothered by the fact that free-market arguments often succeed in derailing the kinds of socialistic policies he believes we need to combat inequality. And they succeed with what Kwak deems “simplistic” concepts.

Many years ago, I taught introductory college economics courses. Perhaps today one of my former students, if asked whether or not he supports increasing the minimum wage would reply, “No, because what I learned about economics makes me think that doing so will lead to more unemployment among workers with low-skill levels.”

That sensible response, according to Kwak, would exemplify the harmful phenomenon he calls “economism.” When people make decisions on what he deems complex policy questions on the basis of their having absorbed some of the “simple” concepts from Econ 101, that’s a bad thing. In his view, the United States is being held back from addressing the crucial issue of rising inequality because economism has indoctrinated so much of the population. If, for example, that former student opposes the minimum wage because he remembers that price increases mean decreases in demand, that shows the malign force of “economism” at work.

The “elegant model” of supply and demand, Kwak writes, “requires that all suppliers offer the same product — there are no differences in features, quality or anything else — and each competitor is so small that its behavior has no effect on overall supply.” Because the model of a perfectly competitive market is unrealistic, Kwak argues, it follows that the basic teachings derived from it are not reliable policy guides. We really can’t be sure about the impact of a mandated wage increase, for instance, and it’s therefore wrong to instruct impressionable students that there are any necessary implications from it or other interventionist policies. This artificial model, however, does not describe free-market economics and plays no role in comprehending human action.

Down with economics!

In short, learning the basic principles taught in Econ 101 is an instance of the old adage that a little learning is a dangerous thing. If it weren’t for the simplistic notions implanted in people’s minds about those principles, we would have adopted a host of regulatory and tax policies to relieve suffering and make America a more equal nation.

If that seems like an attack on economic theory, that’s exactly what Kwak is doing. He derides writers such as Henry Hazlitt for arguing that the world obeys economic laws. Theory, Kwak maintains, has been overthrown by data. We can discover the impact of different policies only by looking at studies after implementing them, and if any study finds an apparently beneficial result, that’s adequate justification for it. Naturally, he points to outlier academic studies finding little or no harm from minimum-wage increases and little or no benefit from tax cuts to make his case that the world is too complicated for mere theory.

Where does economism have its roots? They’re found in the ideas of economists who have argued that free markets lead to the most efficient use of resources to satisfy the desires of consumers and, equally important, that coercive interference with markets will have predictable and generally harmful consequences. Kwak displays a superficial familiarity with those economists. Throughout the book, he mentions Adam Smith, Ludwig von Mises, Friedrich Hayek, Milton Friedman, and others. All of them opposed the sorts of interventionist policies that he thinks are now necessary to restore fairness: trade restrictions, minimum-wage laws, strong labor unions, high taxes on the wealthy, and so on.

But Kwak never ventures a direct assault against their ideas. Rather, his contention is that their theoretical notions, while not necessarily wrong, have been pulled out of their books and impressed into the service of rich Americans who were unhappy that the New Deal had slightly reduced their share of national wealth, and wanted some means of fighting back. If, for example, Charles Koch cites Milton Friedman on the benefits of deregulation in an op-ed, that’s bad old economism at work — using simple, merely theoretical ideas to tear down our regulatory apparatus so his companies can gain.

In Kwak’s version of history, America had settled into a comfortable and relatively fair equilibrium under the enlightened policies of Franklin Roosevelt, which sensible Republicans continued under Dwight Eisenhower. But then a few people on the far Right decided that the New Deal’s big administrative state was an obstacle to their wealth maximization, so they created a movement to counter it, a movement centered around the anti-interventionist arguments of Smith, Mises, et al. Thus was economism born. It takes “simplistic” economic concepts and repackages them into op-eds and videos and radio commentaries designed to get Americans to believe that free markets are always good and government interference with them is always bad.

In making his argument, Kwak is relentlessly uncharitable toward his opponents. They’re depicted as mean-spirited people, all about money for themselves, never about principled economic and philosophical arguments against government coercion. William Graham Sumner is tarred with the false claim that he was indifferent to the poor, who just “deserved it.” Leonard Read, founder of the Foundation for Economic Education, was just a business executive looking for ways to put business back on top, not a man with a deep philosophic commitment to liberty. Americans who oppose the minimum wage merely want to keep down labor costs for business and those who argue for tax cuts do so only because their deep pockets could hold a few more dollars.

Kwak can’t even resist a dig at two Nobel laureates who provide ammunition for the practitioners of economism. Writing about Hayek and Friedman, he says, “Both were well versed in the complexities of various markets, even if their political sensibilities constantly colored their economic assessments.” I don’t think I have ever before seen the intellectual sincerity of Hayek or Friedman called into question, but Kwak feels the need to suggest that they were part of the right-wing cabal against the Golden Age of Progressivism.

To make his attack on the purveyors of “economism” as people who are all about greed and couldn’t care less about the poor hold up, Kwak has to ignore some inconvenient facts. Who opposes harmful labor-market restrictions such as occupational licensing that drive up prices for the poor, while at the same time preventing many from finding good work? They are almost always people who are imbued with “economism.” Who opposes crony capitalism that lines the pockets of the politically connected rich and who opposes the government schooling monopoly that so harms the chances for success of children from poor families? Again, those of us who have absorbed the basics of Econ 101. But Kwak is so adamant to portray economism as a wholly malign force that he can’t admit that it works for the poor and against the (unjustly) rich.

While Kwak claims that he isn’t trying to say who is right and who is wrong in policy debates and only wants deeper and more-enlightened debate, that’s hard to take seriously. He never indicts any of the equally simple arguments that come from Progressives. For every instance of economism — let’s say a Wall Street Journal editorial saying that raising the minimum wage will cause increased unemployment —it’s easy to find one of simple egalitarianism — say a New York Times op-ed declaring that raising taxes on the “1 percent” is a matter of basic fairness. Only the former appears to bother our author; simplistic appeals that help advance the policies he likes occasion no complaint from him.

Whatever impact the book has will be to encourage true-believing Progressives to say “Well, that’s just economism for you” any time they encounter an argument that’s premised on supply and demand, incentives, efficiency, or other concepts of basic economics. Instead of promoting deeper debate, the book encourages leftists to believe that free-market arguments are just a mask for greed.

Objections

Besides the book’s tactic of impugning the motives of those who argue for free markets and noninterventionist government, Kwak’s work is open to two obvious objections.

First, is it true that basic supply-and-demand analysis is so drummed into American students that they reflexively oppose government interventionism? Demonstrating that would seem to be crucial to Kwak’s case, but he never even bothers to try. Only a small percentage of Americans ever take an economics course (they are required at very few colleges) and as Daniel Klein has shown, many economics professors are not free-market enthusiasts. Among the minority of students who do take an Econ 101 course, many are taught in a way that gives more attention to alleged market failures and the need for intervention than to the adverse consequences of tampering with prices. In the rest of the college curriculum, students are far more likely to be imbued with egalitarian and statist ideas than to hear anything that reinforces supply-and-demand theory from Econ 101. If “economism” affects American thinking, its impact is far, far smaller than Kwak would have us believe.

The second obvious problem is that despite the supposedly gigantic barrier of economism, the United States has kept right on increasing the power of the state to interfere in markets. Economism did not prevent the Affordable Care Act from passing; it didn’t keep Congress from raising the minimum wage in 2007 or keep Seattle from raising it to $13 per hour last year; it didn’t prevent ethanol subsidies or steel tariffs; it didn’t keep states from enacting laws against price gouging. Nor has the government repealed any of the laws that people infected with economism have long railed against. The Davis-Bacon Act? Still on the books. The Department of Education? Ronald Reagan promised to abolish it, but it’s still here.

In short, Kwak vastly overstates the power of economism to dictate policy. He declares that it prevents Americans from even considering a single-payer national health policy, but many politicians and policy advocates have put forth that idea. It has been widely debated. Most Americans seem to have concluded that single-payer would be a big mistake. That isn’t because economism is so dominant; it’s because the case for a federal health-care monopoly is so poor.

What this book boils down to is the author’s complaint that the world of policy debate doesn’t operate to his satisfaction. “With economism,” he writes, “there are only implicit assumptions and asserted conclusions. When commentators and politicians say that a higher minimum wage will increase unemployment … they often do not realize that they are making contested claims about how the economy should be organized and how its output should be distributed.”

So what? Writers who rely on economism are just as apt to know they’re making “contested claims” as Progressive writers are to know that they’re doing the same thing when they advocate interventionist, redistributionist policies. People on any side who seek to shape public opinion couldn’t possibly include and respond to every objection that has been lodged against the positions they advocate. The realm of policy debate is (thankfully) still an even field of battle and Kwak’s lament that economism gives greedy right-wingers an unfair advantage is risible.

In the end, what does Kwak want? He wants his philosophical allies to develop “a new, compelling narrative about how the world works.” And what would that entail? To break the grip of economism, Kwak wants to fight the idea that “the overriding objective should be to have more and more stuff.” He praises Amartya Sen for saying that we should care about “the richness of human life” and not just “the richness of the economy.”

Fine. Let Kwak and anyone else make that case any way they can —even if those advocates don’t bother to acknowledge when they’re making “contested claims” and ignore the counterarguments about the trade-offs their preferences would require. They need not be fair and can make their arguments with simplistic notions. When they advocate coercion (as they almost inevitably will) we libertarians will oppose them as we think best.

In fact, writers have been trying to sell people around the world on a “less is more” philosophy for thousands of years. They haven’t gotten very far. Perhaps Kwak’s next book will argue that Americans should change to a sharing ethic, since we already have enough stuff. That would be a far greater challenge than writing a misguided hit piece like Economism.

This article was originally published in the October 2017 edition of Future of Freedom.

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    George C. Leef is the research director of the Martin Center for Academic Renewal in Raleigh, North Carolina. He was previously the president of Patrick Henry Associates, East Lansing, Michigan, an adjunct professor of law and economics, Northwood University, and a scholar with the Mackinac Center for Public Policy.