Eddie Adams/AP Photo
Proponents of the free market such as Nobel-winning economist Milton Friedman, pictured in 1977, continue to influence theory and policy.
The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society
By Binyamin Appelbaum
Little, Brown
The Great Reversal: How America Gave Up on Free Markets
By Thomas Philippon
Harvard University Press
Since the 2008 financial crisis, the once-stellar reputation of the economics profession has fallen into disgrace. Not only had the discipline’s heavy hitters mostly failed to foresee the crash—indeed, in 2002 Ben Bernanke famously said such things were no longer possible—many subsequently backed a policy of austerity (that is, spending cuts and tax increases to reduce the budget deficit), which dramatically slowed the post-crisis recovery in both Europe and the United States. It turns out that the hegemonic belief within economics that markets generally work best when “left to themselves” was catastrophically mistaken.
Since then, there has been a gradual reconsideration of attitudes within economics, with insurgents like Thomas Piketty contesting the pre-crisis hegemonic view. A pair of books—one by a critical outsider, one by a practicing insider—makes for a nice window into the profession’s brain, to see how far the process has gone. The former is The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society, by New York Times economics reporter Binyamin Appelbaum; the latter is The Great Reversal: How America Gave Up on Free Markets, by NYU professor Thomas Philippon.
They reveal that, while economics has come a great distance since 2008, the bankrupt pre-crisis ideology still holds too much sway.
Appelbaum’s excellent book covers much history of economic policy, but at bottom it is about politics and ideology. It’s a truism today to recognize that after the Great Depression and the shattering world war it spawned, classical liberalism and traditional laissez-faire economics were profoundly discredited. Political leaders the world over took it for granted that the economy could not be left to its own devices, lest it implode and bring another Hitler to power. The result, under the heavy domestic regulation of the New Deal state, the close international trade control of the Bretton Woods system, and the vast subsidies of the Marshall Plan, was the greatest economic boom in world history.
The Economists’ Hour is about what came next: how a new generation of free-market ideologues (often called neoliberals) wormed their way into power and influence, drove out the postwar belief in a controlled economy, and replaced it with an updated version of the old 1920s free-market dogma. Appelbaum takes readers through several case studies: the end of the military draft, the end of antitrust enforcement, the rollback of the regulatory state, the rise of so-called “cost-benefit analysis,” the end of controls on international trade, the dictatorship of Augusto Pinochet, and so on.
The key political strategy—as often as not carried out unconsciously—was controlling the terms of debate and the subjects of discussion. Rather than argue whether or not ordinary citizens should be forced to take part in America’s wars, or if a professional military was a threat to democracy, economist Walter Oi changed the subject to efficiency, arguing that a volunteer army “would be good for the economy.” The draft was subsequently abolished.
Similar political jujitsu brought down one pillar after another of the New Deal state. Predictions of faster, cheaper service from economist Alfred Kahn obliterated regulations on airlines and trucking, thereby evading discussions of whether all American communities should be connected to the same transport network. Preposterous revisionist history from Robert Bork recast antitrust law as solely about protecting the consumer, instead of protecting society as a whole from concentrated economic power. This allowed merging corporations to claim they would reduce prices through economies of scale, and all but ended antitrust enforcement. Predictions of skyrocketing growth from “comparative advantage” brought down restrictions on international trade. The absolutely crack-brained “efficient market hypothesis”—featured in loony theories like economist Eugene Fama’s 1965 paper arguing that stock prices “fully reflected all available information,” and thus ruling out financial bubbles by definition—led to repeated rounds of financial deregulation.
Nearly all of these moves led to disaster. Ending the draft was arguably morally defensible, but also enabled the succeeding generation of gruesome military adventurism by placing no broad sacrifice upon the public. Ending antitrust enforcement led to a quick roll-up of American markets into monopolies and oligopolies. Ending trade controls, especially with China, devastated America’s industrial base and threw millions out of work. And pretending that financial crises are impossible didn’t stop them from happening like clockwork—culminating in the global disaster of 2008.
Even airline deregulation has been heavily overrated. As Matt Stoller argues, data showing post-deregulation price declines fail to note that the trend line followed the pre-deregulation price decline almost exactly. Today, detailed regulation decisions are made by oligopolist executives instead of democratically accountable state authorities.
Federal Reserve
Alan Greenspan, Fed chair from 1987 to 2006
Appelbaum is rightly scornful about all this. As he points out, it is rather ironic that most of these free-market dogmatists lived through the Depression, and some of the most prominent ones—like Milton Friedman and Alan Greenspan—worked for the government. Only truly evidence-proof zealots (“a minority of ultra-liberal economic theologians,” as historian Eric Hobsbawm called them) could both live through the greatest imaginable failure of laissez-faire economics and spend time living off state employment, and still conclude that government can do almost nothing to help its citizens.
Appelbaum gets considerable wry amusement from Friedman’s extraordinarily arrogant, brittle mind in particular. At one point during the Second World War, he worked at a state-funded think tank “testing alloys for the blades of jet engine turbines.” Despite the fact that he had no special training in metallurgy, Friedman came up with his own alloy, which, by his calculations, should have lasted 200 hours. In testing, it lasted two. “Friedman later said the experience shaped his lifelong skepticism of complicated formulas and forecasting,” Appelbaum notes. I’ll bet it did.
Philippon’s book, meanwhile, has a jarringly twofold character. In the Dr. Jekyll half of the book, he has several technical and rigorous explorations of empirical economic questions that are masterpieces of careful reasoning. For instance, he examines money in politics, and carefully knocks down tendentious arguments that such behavior does not simply reflect the rich purchasing policy outcomes that benefit themselves.
Europe, by contrast, has maintained some reasonable controls on the amount of money the rich are allowed to dump into the political system, and thus avoided a lot of awful policy. Some of Philippon’s findings are eye-popping: For example, in America, “[t]he top 0.01 percent of donors contribute an astounding 40 percent of all contributions,” he writes, while after adjusting for the economic size, total “contributions in the US are fifty times larger than those in most European countries.”
Philippon also provides conclusive proof that American business has become more concentrated, and its markets more dominated by a few enormous firms. He digs deep into data revealing declining American business investment and slow productivity growth, and provides a strong argument that declining competition—leading to stagnant monopolists who rake in easy profits without having to invest further—is at least partly to blame.
On the other hand, Philippon shows that Europe has maintained a semblance of effective antitrust regulation, preventing the same level of market domination as in the U.S. The result is much cheaper prices for things like airlines, internet, and cellphone service. Americans are being radically overcharged for those and many other things because our markets are significantly more monopolized. Thus, he comes to the surprising conclusion that Europe is more free-markety than the United States.
Only truly evidence-proof zealots could both live through the greatest imaginable failure of laissez-faire (the Depression) and spend time living off state employment, and still conclude that government can do almost nothing to help its citizens.
But that leads me to the Mr. Hyde half of the book, in which Philippon displays an unthinking, knee-jerk faith in the exhausted free-market nostrums Appelbaum destroys—a faith that is sharply inconsistent with many of the results Philippon derives. One rather contrarian point of the book is that many of the problems afflicting America are the result of abandoning free-market policies. But to start with, antitrust regulation is just that—regulation, where meddling government bureaucrats decide whether firms have amassed too much power, whether or not two companies can merge, or if so what compensatory steps they should take. While the goal is to allow free-market competition, it is not exactly a free-market policy by the traditional meaning of the term.
In his discussion of the financial sector, Philippon is comically trusting toward traditional market-based explanations of what banks do. “Financial intermediation arises from the need for expertise in channeling capital from savers to borrows,” he asserts—a definition straight out of a Milton Friedman–style Econ 101 textbook. He then spends the rest of the chapter mystified at the gigantic profits in the financial sector. Intermediation “costs around 200 basis points [0.2 percent]—about the same as a century ago. The more you think about it, the more puzzling it becomes.”
This is only confusing if you accept the ideological presupposition about what finance is for. It very obviously has other functions than intermediation—most notably controlling non-financial businesses so as to extract money from them. Indeed, earlier in the book Philippon notes that the corporate profit rate has soared in the United States, and firms are spending that money on payments to shareholders. “The payout rate has increased substantially, primarily driven by share buybacks.”
That, in turn, is mostly the result of pressure from finance—most clearly in the form of shareholder tyranny, where big investors demand companies “disgorge the cash.” As Barry Lynn writes in his book Cornered, market concentration has often been directly orchestrated by Wall Street buccaneers, who use vast sums of borrowed money to conduct roll-up operations on whole sectors, reducing competition and raking in easy profits.
Just as notable are the absences from Philippon’s book. He barely discusses the crash of 2008 or the ensuing binge of austerity across the developed world, which led directly to a lost decade of weak growth. This would seem to be important when talking about finance! In line with neoliberal arguments from Larry Summers, he celebrates the political independence of the European Central Bank—but does not mention how it deliberately caused a bank run in Greece when its government tried to escape the economically backward austerity straitjacket. And in his discussions of how Europe has maintained a reasonable labor share of national income (a metric which has fallen sharply in the United States), he does not mention the continent’s heavy unionization. Labor unions, of course, are directly anti-market, with one of their primary objectives being to set wages higher than they would be in a “free” market.
So while there is a lot of good work in The Great Reversal, the economics profession as a whole has a great deal to learn from outsiders like Appelbaum. “My generation of economists is less interested in ideology,” Philippon writes. This book shows that such a position is not only impossible, but dangerous. Answering any question about economics or politics worth asking will inherently require some kind of normative moral framework. Data alone cannot tell you whether it is good or bad for the labor share of income to go down, for instance. But moreover, if you try to avoid ideology, you end up making assumptions based on status quo thinking, and then grow confused about stone obvious things like why Jamie Dimon is so rich. A mind requires structure to operate clearly, or it will get lost in space.
