Do Economists Really Know What They’re Talking About?

The disconnect between economic theory and reality seems ominous.

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. . . . Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. —English economist John Maynard Keynes (1883-1946)

Almost everyone wants the world’s governments to do more to revive ailing economies. No one wants a “double dip” recession. The Group of 20 Summit in Toronto was determined to avoid one. In major advanced countries—the 31 members of the Organization for Economic Cooperation and Development—unemployment stands at 46.5 million people, up about 50 percent since 2007. It’s not just that people lack work. Lengthy unemployment may erode skills, leading to downward mobility or permanent joblessness. But what more can governments do? It’s unclear. We may be reaching the limits of economics. As Keynes noted, political leaders are hostage to the ideas of economists—living and dead—and economists increasingly disagree about what to do. Granted, the initial response to the crisis (sharp cuts in interest rates, bank bailouts, stimulus spending) probably averted a depression. But the crisis has also battered the logic of all major theories: Keynesianism, monetarism and “rational expectations.” Economics has become the shaky science; its intellectual chaos provides context for today’s policy disputes at home and abroad.

Consider the matter of budgets. Would bigger deficits stimulate the economy and create jobs, as standard Keynesianism suggests? Or do exploding government debts threaten another financial crisis?

Read on

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