Sunday, May 29, 2011

John Quiggin's "Zombie Economics"

I had high hopes for this book. It did cover the problems with economic theory over the last 40 years, but it wasn't as readable or as memorable as I would like. The book was aimed a little high for a general reader and the style was a slog. Too bad academics don't realize that style and wit are important in keeping their reader alert and interested. I found myself dozing off in too many places. This should have been a very important book. It is, but not for the general reader. That is a tragedy.

Chapter 1 covers the deceptive economic performance from 1985 until the bank panic of 2008 and how this "Great Moderation" seemed to verify the right wing (fresh water) economists which he calls "market liberals".

Chapter 2 talks about the absurd simplifying assumptions of right wing economics with absurdities like the "efficient market hypothesis".

Chapter 3 covers the DSGE models used by right wing economists to create a completely unrealistic theory for macroeconomic "policies" which basically come down to "the market knows best" so "hands off" and let it do its magic.

Chapter 4 reviews the elites constant claim that if you let them prosper, then everybody else will prosper, i.e. the "trickle-down economics" touted so popularly by Ronald Reagan.

Chapter 5 explores the deceptive claim the "privatization" would have magical benefits of downsizing government, while returning loads of booty to the government treasury, and unleashing the dynamism of private ownership to cause the economy to soar. As Quiggins points out, almost all of the big privatizations over the last 30 years have failed miserably. He says that in a mixed economy there is a place for some privatization, but right wing economists sold politicians a pig-in-a-poke.

These are all great topics to educate the broad public on. And I admit that if you are diligent you will get the necessary information. But sadly the presentation and style just aren't conducive to educating somebody outside the magic circle of economists.

Here is an example of him skewering DSGE models:
People are not, and cannot be, the infinitely foresightful, unbounded rational utility maximizers assumed in DSGE models. On the contrary, economic behavior, even that of highly sophisticated actors like the "rocket scientists" who design financial instruments for investment banks, is inevitably driven by a partial view of the world. Heuristics and unconsidered assumptions inevitably play a crucial role. For finite beings in a world of boundless possibilities, nothing else is possible.
That is a proper dressing down of DSGE models, but the general reader won't understand all the technical terms and the inside jokes about "rocket scientists with partial views" unless they have been doing a lot of reading. The text simply demands too much from an average reader.

There is a lot of material in this book which the broad public should know. Until this information is widely disseminated, the right wing economists (and politicians) can fool people into thinking that the disaster of 2008 didn't really happen and that it really wasn't because of their failed economic theories. That is dangerous. The world needs to steer away from the crazy radicalism of the freshwater theorists.

The chapter on "trickle-down economics" ends with three paragraphs that raise good questions but don't provide an answer:
All of this analysis is merely a preliminary to the big question: how can the growth in inequality be reversed and the more egalitarian society of the Great Compression be restored? Some steps, such as restoring progressivity to the tax system, seem obvious.

Even these obvious steps must confront the political realities of a system in which political power has shifted overwhelmingly to the wealthy. A study by the Center for Responsive Politics showed that about two-thirds of U.S. senators were millionaires in 2008. There are similar trends in other countries.

Improving the taxation system is a comparatively easy response. The decline in union membership has almost certainly played a substantial role in promoting inequality in market incomes, not to mention the removal of checks to the power and prerogatives of managers. But,how, if at all, can this decline be reversed? This is one of many questions we need to look at with fresh eyes.
The book is well worth reading, but be warned. It is a hard slog. And you won't feel as satisfied as you should that you understand how economic theory went off the rails and what needs to be done to get it back on track.

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