What are we doing here? (Long version)

Remember high school economics? All that Adam Smith, supply and demand curves, and TINSTAAFL? I'm sure we could all go on and on about all the crazy things that we learned in that class.

For example, I remember our teacher telling us about how when a nation has a negative trade deficit, the value of its currency decreases. That decrease makes exports from that nation cheaper, and other countries buy them up, helping its economy and increasing the value of its money, thus repeating the cycle. So poor countries have the means to become rich, and rich countries will inevitably lose wealth as they cannot produce exports as cheaply as the poor countries.

Makes sense in theory, right? And I uncritically filed it away in the back of my mind, as I'm sure most of my classmates did. Well, at least the ones who were paying attention.

How wrong could such a theory be? The answer, of course, is very, very wrong. And one only has to look at the perpetual poverty of some nations and compare it to the perpetual wealth of others to see that the theory has almost no predictive value. And a theory without predictive value isn't really worth much at all. This particular one doesn't take into account global racism, protectionist trade policies like farm subsidies, and other wholly irrational ways in which people work in contradiction to neoclassical economics.

This is just one example of the many ways in which economic theory has a big disconnect from reality. I could provide more examples, but that's the whole point of this blog.

Neoclassical economics is based on the following assumptions (this list is not complete):

1. People act rationally to maximize utility.
2. People have all knowledge necessary to act rationally.
3. Competition increases efficiency and quality of life.
4. Economic growth is without limit.
5. All problems caused by growth can be solved with more growth.

This leads to predictions that are ridiculous on face, like that people will buy from green companies if global warming is happening thus stopping it and that people will always seek and find the highest paying job for themselves and that the social welfare that people want for themselves or others can be handled entirely by charity. We can laugh all we want, but they're justified in theory.

The problem with them being wrong is not that they just slip into legislative and media policy-making debates. They dominate those debates. The neoclassicists and their dogma is at the center of the debates, often completely unquestioned.

Of course, neoclassical economists have resisted actually testing their theories but still want and very frequently get the same respect that other fields that do their homework get. Consider this from economist Robert Hanson:

Consider how differently the public treats physics and economics. Physicists can say that this week they think the universe has eleven dimensions, three of which are purple, and two of which are twisted clockwise, and reporters will quote them unskeptically, saying "Isn't that cool!" But if economists say, as they have for centuries, that a minimum wage raises unemployment, reporters treat them skeptically and feel they need to find a contrary quote to "balance" their story.

They can get pretty smarmy, too, like in a statement from several Republican members of Congress:

For many years it has been a matter of conventional wisdom among economists that the minimum wage causes fewer jobs to exist than would be the case without it. This is simply a matter of price theory, taught in every economics textbook, requiring no elaborate analysis to justify.

I'm not going to get into the ins and outs of the minimum wage right here, but what's important to note from these two quotations is that they pull their power from the dogmatic nature of neoclassical economics. The first points to how they have degrees and how there is a consensus amongst economists on the minimum wage (which is far from the truth), the second basically says that anyone who didn't uncritically learn neoclassical economics is an idiot for not believing it (it's everywhere so it's gotta be true!).

The irony, of course, is that both justifications for why neoclassical justifications of public policy should be considered true is that they've already been considered true by many others. It's a cyclical appeal to authority - it's true because we say it is, and by saying it is we're making it true. In that way the dogma is advanced not by truth or study alone, but by power. As Christopher Hayes put it:

As Nobel Laureate Joseph Stiglitz put it, the dominance of the neoclassical model is a “triumph of ideology over science.” In the popular press, however, such dissent is almost entirely absent. [...] For Thomas Friedman, people can’t “disagree” with neoclassical economics. They can only fail to understand it.

There are a lot of ideas about where that power might come from, but again, that's an issue I'll address later.

So that brings me to the main point: What are we doing here? Well, since a group of theories known as neoclassical economics have such power as theories even though they resist experimentation like other social scientific fields, someone's got to point out the news stories that contradict the numbered assumptions cited above. Theoretically, as someone once said, everything can be theoretically justified. So when the rich want some sort of law passed that would chiefly benefit them, they often rely on neoclassicism. That's why power instead of study is used often to advance it - economics can seem complicated and daunting, so the people who would be hurt by such policies are told to go home and not worry about it. If they do question some of the more laughable theories, they're labeled "flat-earthers" by the likes of Thomas Friedman.

That's why I'm starting up Street Economics. Economics related to basic public policy shouldn't be daunting. If you open your eyes and pay attention, you'll get lessons in economics every day. Here I intend to post about real instances where academic neoclassical economics falls flat on its face in the real world. This isn't to say that it can't ever be right, but just to say that it isn't right all the time and its dogmatic authority can and should be questioned frequently.

Most of all, this should be fun and painless. At least more painless than letting someone else control the economics debate.