I really enjoyed Specialization and Trade: A Re-Introduction to Economics (2016), by Arnold Kling, and published by the Cato Institute. A long time ago, I decided, or you could say discovered, that most establishment, academic economics was bunk; or at least, not very useful, and plain wrong on a number of important points. Thus I began studying these topics on my own, and soon discovered that there were other, similar people, especially the Supply-Side group which I consider myself a part of. This has been quite productive, but the consequence has been that I am not really that familiar with conventional academic economic dogma, as would be a person who has gone through that whole process, perhaps getting a PhD from a major institution.
The problem of such people is that they are almost never capable of overcoming their mediocre and erroneous training, and thus never amount to much. But, there are a few exceptions. We looked at one such exceptional economist last year, Stephen Kates, and his book Classical Economic Theory and the Modern Economy (2020).
July 9, 2023: Classical Economic Theory and the Modern Economy (2020), by Steven Kates
September 3, 2023: Classical Economic Theory and the Modern Economy (2020) #2: Mostly Right
As Kates put it:
Writing this book was an odd experience, since the premise of everything found within the rest of this book is that just about the whole of modern economic theory is perniciously wrong, that other than here and there, such as in its opposition to rent controls, there is virtually nothing useful one can learn from a modern economics text in how to manage an economy. (p. 1)
This is a teeny little book, written in simple style. It elucidates some basic economic principles, rather nicely expressed, as one might do for an introduction to economics for lay people. This of courses includes “specialization and trade,” the title of the book. But, as Kling describes, he did not exactly write it for the introductory lay reader. He wrote it to re-establish some basic economic principles, and then illustrate how common PhD macroeconomics either is entirely contrary to these principles, or ignores them completely; and this is the basis of why much of academic macroeconomics is bunk.
Kling labels this the MIT view, and uses as an example of what he means, a book of essays by E. Roy Weintraub entitled MIT and the Transformation of American Economics (2014).
Yet I have come to believe in the wake of the MIT transformation, which began soon after World War II, that economists have lost the art of critical thinking. … I have set out to write an introduction to economics as I believe it ought to be studied. It is written primarily for other scholars of economics, to challenge the way that economists now approach their discipline. (pp. vii-viii)
Kling received a PhD in economics, from MIT, in 1980. He then had a rather nice early career among the economic elite. His first job, after getting his PhD, was at the Congressional Budget Office. He then moved to the Federal Reserve; and later, to the Federal Home Loan Mortgage Corporation. In 1994, he left Freddie Mac to create a new startup company at the early dawn of the Internet. He spent six years running homefair.com, which he eventually sold to homestore.com in 1999 (and probably made a boatload of money as a result). Thus, he had a whole spectrum of experience, from the citadels of academic dogma to the real world of finance and lending, and then to the cutting edge of entrepreneurial development, with an internet startup.
To summarize his critique of “MIT economics,” it would be the fallacy that the economy is a “machine.” This is the topic of Chapter 2, “Machine as Metaphor.” We also saw (in Stephen Kates’ book among other places) that this was the fundamental fallacy of the “Marginal Revolution”-era economists of the late 19th century, who wanted to use the tools of engineering in economic analysis. This resulted in what I’ve called the “Price, Interest, Money Box,” which the early Austrians got themselves into, and from which academic economics has never properly escaped.
July 10, 2016: The Tyranny of Prices, Interest, and Money
You can see this “machine metaphor” even in the simplest phrases. The economy is “overheating.” This is a machine metaphor. Maybe it is a useful metaphor. But think about a different metaphor, that of an ecosystem, which is much closer to what an economy actually is — a large number of people or firms engaging in Specialization and Trade. We could say that an ecosystem is healthy, or unhealthy, in some way. We might go looking for those causes of health or ill-health. But we would probably never say that an ecosystem is “overheating.” These economic metaphors lead directly to real-world stupid policy. In the 1960s and 1970s, it was very common, among academic economists, to argue that an “overheating” economy needed to be “cooled” by tax increases.
The MIT revolution was led by Paul Samuelson, who in 1970 became the first American to win the Nobel Prize in Economics, and whose textbook dominated the market in the 1950s and 1960s and serves as the template for popular current textbooks.
Samuelson and his successors taught that the economic machine had a gas pedal that could be used to avoid economic slowdowns. That device was “aggregate demand,” which could be increased by the government’s printing money, running a budget deficit, or both. (pp. 39-40)
I know most of you don’t believe me when I tell you that most academic economics really is that dumb, but maybe it will help if you hear it from the mouth of someone with a PhD from MIT that used to work for the Federal Reserve.
Recognizing the reality of Specialization and Trade, and perhaps tending more toward ecosystem metaphors, Kling concludes:
The main point here is that better economic outcomes arise when patterns of sustainable specialization and trade are formed. Those patterns do not come about as a result of tinkering undertaken by the Federal Reserve or by deficit spending authorized by Congress. It requires the creative, decentralized, trial-and-error efforts of thousands of entrepreneurs and millions of individuals seeking the best way to use their talents. (p. 175)
While there is hardly anything that I would disagree with in this book — all of his main points are good — nevertheless Kling has almost nothing useful to say about either Low Taxes or Stable Money, the supply-siders’ Magic Formula.
read The Magic Formula in free .pdf format
Thus, I would say that, although a book such as this does help correct errors in economics that arose during the Marginal Revolution era and continued through the 20th century, it shows little knowledge of all the new things that have been achieved since about 1970.
August 11, 2016: The Gigantic Importance of “Supply Side Economics”
I can’t believe I wrote that more than eight years ago!
But, it was not just me. Here is the “Supply Side Bookshelf”:
July 16, 2018: The Supply-Side Bookshelf
Of course the Supply Siders don’t think that only Taxes and Money are important. You could list 39 other important factors, such as varieties of regulation, or education, or morality, or a strong family, or religion, or even raw IQ, and I am sure I would agree on every point. But, in actual historical experience, we find that big successes are accompanied by Low Taxes and Stable Money; and big disasters often have High (or rising) Taxes, and Unstable Money. If you get those two things right, you can make a lot of other mistakes and still get a good result. Also, all the other things are easier to accomplish. If you get those two things wrong, then all the other advantages won’t help; and all the other things also tend to deteriorate.
