Econ 101, Reconsidered

“Economics rose to its eminence in this century precisely because it promised to be able to control the weather,” Peter Drucker wrote in The New Realities. “The results have hardly met the tests of efficacy and safety we apply to a new drug before it is approved for medical practice.”

Writing in Salon, think-tankers Robert Atkinson and Michael Lind agree, comparing economists today to the supposedly all-knowing Church of the Middle Ages. “First, despite economists’ calming assurances, we still know little about how economies actually work and the effect of policies,” they assert. “But even more problematic, even though most economists know better, they present to the public, the media and politicians a simplified, vulgar version of neoclassical economics— what can be called Econ 101—that leads policymakers astray.”

Atkinson and Lind then proceed to list 10 “myths” propagated by economic advisors, including the notions that economics is a science, that prices reflect value and that low wages are good for the economy. All of these myths, they feel, “lead policymakers dangerously off track, with tragic results for the economy and everyday Americans.”

Drucker, who considered “economist-kings” to be dangerous, would have appreciated this argument. “Economics used to be an enjoyable discipline because it was so humble,” Drucker wryly recalled in Managing for the Future. “When someone asked an economist of 1925 a question, his answer was, ‘I don’t know,’ which in many ways is a respectable answer. (At least it’s a modest one.)” But in subsequent years economists became so unshakably certain so as to become “arrogant” (a trait that we’ve discussed before).

Drucker could not have been blunter about his disapproval of this trend. “Economics hasn’t worked,” he wrote. “Whatever we tried, it failed. What’s more, the basic assumptions of modern economic theories are unreasonable and invalid.”

This makes life hard for politicians. “Macroeconomic theory is no longer a basis for economic policy because no one knows what is going to happen,” Drucker noted. “Political leaders have no economic theory they can trust, a fact which escapes many businessmen.”

What Drucker felt optimistic about were the discoveries being made about how knowledge and prosperity are related. The 20th Century, he wrote, revealed “knowledge applied to human work as the source of wealth.” Therefore, Drucker predicted, “We are on the threshold of post-economic theory, grounded in what we now know and understand about the generation of wealth.”

What’s your take? Do you think conventional economic theory is leading us astray?