Economics will always be intensely political
by David Atkins
Paul Krugman makes a good and important point about the profession of economics, using the bizarre opposition to easy money policies in a poor economy. But I think he gets it only mostly right:
Complaints about low interest rates are usually framed in terms of the harm being done to retired Americans living on the interest from their CDs. But the interest receipts of older Americans go mainly to a small and relatively affluent minority. In 2012, the average older American with interest income received more than $3,000, but half the group received $255 or less. The really big losers from low interest rates are the truly wealthy — not even the 1 percent, but the 0.1 percent or even the 0.01 percent. Back in 2007, before the slump, the average member of the 0.01 percent received $3 million (in 2012 dollars) in interest. By 2011, that had fallen to $1.3 million — a loss equivalent to almost 9 percent of the group’s 2007 income.I'm not certain that this was ever not the case, though. Much of economics at a granular level is indeed a hard science that can make some verifiable predictions in closed systems given certain inputs. But at the macro level it depends on models of human behavior and as such is very much a social science.
That’s a lot, and it surely explains a lot of the hysteria over Fed policy. The rich are even more likely than most people to believe that what’s good for them is good for America — and their wealth and the influence it buys ensure that there are always plenty of supposed experts eager to find justifications for this attitude. Hence sadomonetarism.
Which brings me back to the politicization of economics.
Before the financial crisis, many central bankers and economists were, it’s now clear, living in a fantasy world, imagining themselves to be technocrats insulated from the political fray. After all, their job was to steer the economy between the shoals of inflation and depression, and who could object to that?
It turns out, however, that using monetary policy to fight depression, while in the interest of the vast majority of Americans, isn’t in the interest of a small, wealthy minority. And, as a result, monetary policy is as bound up in class and ideological conflict as tax policy.
The truth is that in a society as unequal and polarized as ours has become, almost everything is political. Get used to it.
And like all social sciences, the outcomes tend to vary quite greatly depending on the model of human behavior you use. As of the early 21st century, we actually have a remarkably limited understanding our own species, particularly as it relates to our behavior in groups and our reactions to various inputs.
It isn't just that it's convenient to the rich to, say, oppose easy money policies. It's also that it's convenient to the rich to assume that people are purely rational economic actors with foresight, intense attention to value, easy ability to fill gaps in the marketplace, and adequate access to market information. If you assume that, then there's nothing wrong with laissez-faire capitalism, and the only thing that can go wrong is government sticking its fingers where it shouldn't.
If, on the other hand, you assume that people often behave irrationally especially in groups, that greed and superstitions often overwhelm foresight, that most people would rather get a root canal than spend endless hours searching for the best product at the lowest cost or finding out which corporation in the food supply chain was responsible for poisoning their child, that monopolies form naturally often without the ability of competitors to naturally supplant them, and that large corporations hold insurmountable power over consumers due to a yawning information gap, then you're likely to favor a lot of Keynesian intervention.
Now, the balance of the evidence suggests that the latter view is correct. But you can't easily prove that with a formula. Which means that until we get a big enough aggregate of big data over time and powerful enough computers to answer some of these big social questions definitively, the science of economics (like so much else in the social sciences) is always going to be intensely political. It can't help be otherwise.