Orthodox Economics is Bunk - Inflation edition

(c) by Mark Dempsey

Americans tend to treat the pseudo-science called "economics" with the kind of reverence medieval peasants reserved for sacred relics. Yet that same orthodox economics gives intellectual cover to some of the worst public policies, including the sacred (unregulated) market's dog-eat-dog predatory competition that's supposed to turn out best for everyone if the state would just get out of the way. Despite the fact that in all of human history, economic markets have never existed without states to encourage and regulate them.

Orthodox economics failed to predict the largest economic event in 80 years--the subprime/derivatives meltdown, now called the "Global Financial Crisis" or GFC. Students of economics have even protested the "Don't Look Up," tunnel vision allegiance of orthodoxy has to its fundamental assumptions. Harvard economist Greg Mankiw's classes have been staging walkouts because of this bias.

Orthodox economics also informs the decisions of our central bank (The Federal Reserve, or "the Fed"). One example would be its response to the inflation that stems from shortages thanks to COVID and port logjams. That policy is...wait for it...raising interest rates. Yep. That'll cure COVID and unjam the ports. Not even the 19th-century belief that bleeding patients would cure them is as disconnected from the actual problem as the Fed's proposed inflation remedy.

Modern money theorists like Stephanie Kelton often hear criticism that the policies MMT recommends--like a job guarantee--would be inflationary, but MMT always includes resource availability in its spending prescriptions. Besides, government buys surplus soybeans, why not surplus labor? But then...it's not orthodox economics, so being kind to labor isn't "respectable."

Orthodox economics even informs recent inflation reporting, ignoring the asset-price inflation that has been going on for years without too many alarming headlines to announce it. Stock market and housing prices have been on a steady uptrend thanks to public policies orthodox economics blesses like Quantitative Easing, and the Wall Street bailout.

When Wall Street's subprime mortgages and derivatives proved toxic to the banksters who created them in 2007-8, the Fed provided $16 - $29 trillion in credit to make sure the big banks did not fail. Paying off everyone's mortgage would only have taken $9 trillion, but it was economic orthodoxy that made sure Wall Street got the gold mine while Main Street got the shaft.

Without that Fed intervention, the constant asset price inflation we've experienced in recent years would almost certainly have been interrupted by the bankruptcy of several large financial institutions. Sheila Bair, the Republican-appointed head of the FDIC said one recipient of Fed largesse, Citigroup, was insolvent, yet the Fed lent them the money they needed to weather the GFC. Some people believe that the Fed underwote those trillions in loans, but it's one of the first rules of underwriting not to lend to the insolvent. That bailout was a gift, made respectable by orthodox economics.

So the next time you read something claiming "economic studies say..." or "most economists agree," you need to take that policy recommendation with a lot more than a grain of salt, if not disregard it entirely. And remember: orthodox economics is bunk.

Meanwhile, here's the best article I've seen about inflation. Hint: it's not orthodox economics.

Recommended further reading Debunking Economics: The Naked Emperor Dethroned by Steve Keen (who correctly predicted the GFC)

[I'm  not the only one who thinks this way, either: “Leading active members of today’s economics profession… have formed themselves into a kind of Politburo for correct economic thinking. As a general rule—as one might generally expect from a gentleman’s club—this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen. … They oppose the most basic, decent and sensible reforms, while offering placebos instead. They are always surprised when something untoward (like a recession) actually occurs. And when finally they sense that some position cannot be sustained, they do not reexamine their ideas. They do not consider the possibility of a flaw in logic or theory. Rather, they simply change the subject. No one loses face, in this club, for having been wrong. No one is disinvited from presenting papers at later annual meetings. And still less is anyone from the outside invited in.” [emphasis added] - from James K. Galbraith’s Who are these economists anyway?] 

Update: Why would MSM emit so much propaganda about inflation?

Answer: Corporate profits have contributed disproportionately to inflation. The article includes recommendations for policy makers' responses--things like "stop blaming labor costs." Excerpt:

"Since the trough of the COVID-19 recession in the second quarter of 2020, overall prices in the NFC sector have risen at an annualized rate of 6.1%—a pronounced acceleration over the 1.8% price growth that characterized the pre-pandemic business cycle of 2007–2019. Strikingly, over half of this increase (53.9%) can be attributed to fatter profit margins, with labor costs contributing less than 8% of this increase. This is not normal. From 1979 to 2019, profits only contributed about 11% to price growth and labor costs over 60%"

A little graphic clarity from the same source:

 

Update #2: (from Ian Welsh)

What Economics Gets Wrong (Almost Everything)

Economics as a discipline is nearly worthless. What it teaches mostly isn’t true.

• Decreasing price does not always increase demand and increasing price sometimes increases demand.
• People do not optimize utility (by any definition that is not circular).
• People are not rational.
• The market is not rational.
• The market does not discount the future well at all.
• Competitive markets are created by government, and destroyed by private actors.
• Markets do not and never have properly priced externalities and never will do so while humans remain human. The only way to price externalities properly is thru government or custom (government in drag.)
• Profit or loss in any enterprise in a modern economy is a social choice, entirely based on government and social decisions and mostly unrelated to fundamentals like energy in and energy out.
• Railroads are far more efficient, energy wise than roads, but govt. subsidizes roads.
• The vast majority of profit is based on market position and sustained profit is almost always based on having an unfair advantage that makes the market less competitive and therefore not have the virtues of competitive markets.
• Genuine competitive markets don’t exist, and no businessman wants them to because they drive profits to almost zero.
• The best economies the world ever saw went out of their way to keep wages and prices high, not to reduce them.
• Any concentration of market power that is not regulated or broken up will engage in practices intended to buy/undermine government and destroy wages.
• Higher CEO pay is correlated with lower company performance.
• You cannot have a good economy for long without keeping the rich poor, weak and under your thumb. It is impossible.
• Monetary efficiency between countries is bad. It should be hard to move large amounts money in and out of another currency or country.
• Financial market efficiency is generally bad, and effectiveness and shock pads should be optimized for rather than financial efficiency.
• Countries should, if it is possible, make or grow everything important inside their own borders and not trade for it.
• People perform better when happy, healthy and at least moderately autonomous. The literature on this is so abundant it is silly. Bosses are authoritarian assholes because they like being authoritarian assholes who micro-manage employees. It’s what Bezos gets out of being Bezos.
• Private money creation concentrated in a few hands is destructive to the economy, democracy and freedom (authority: Thomas Jefferson). It is also anti-competitive market, since you can’t compete with people who create money out of thin air.
• Moderate levels of inflation are good, not bad, if they include assets, because they take away the control of people who won the past so they don’t control the present and the future.
• Taxes should be low on ordinary people and high on anyone rich, including wealth and estate taxes. No one should be rich because their parents were.
• People who lend money should lose that money if the person who they loaned it to can’t afford to repay it. The function of lending is “I know how to pick people who will use the money well.” If you can’t do that you deserve to lose the money, and govt shouldn’t collect it for you
• bankruptcy should be easy, fast and leave people whole. Economically crippled people are not in the interest of society as a whole.
• A UBI’s main function is allowing people to do what they want to do, and forcing bosses to make jobs good, not shitty.
• Pensions should simply be handled by government or a general UBI.
• Comparative advantage is a terrible strategy for improving your economy.
• Free trade is garbage for most countries.
• Raising the minimum wage is not correlated with increased unemployment
• The unemployment rate measures supply driven wage push inflation pressure, not how many peole can’t get a job.
• Initial capital for capitalism was primarily acquired by theft, first of European commons, then of non-European land, people and resources.

Essentially everything Economics teaches is wrong. If and when their prescriptions for action are followed, disaster ensues. With almost no exceptions every country which ever developed did so by not doing what economists say to do.

Economics also has a morally corrosive affect on those who study it. People mostly don’t free rude or otherwise act according to the maxims of economics: but people who have studied economics do.

Because economics is wrong and harmful about almost everything, and because economists do not say “please don’t follow our advice”, Economics should probably be banned and all Economics faculties shut down.