Twitter Overflow on Economics 101ism, The leader Massimo, and two cities.

This is a twitter overflow. It is the landing page of a link I put in a tweet, because I didn't feel like making a long twitter thread.

In case anyone just surfs here, I will try to explain the context below.

The Tweet

I haven't read the book, just a column. I think the elite embrace of economics 101 occurred throughout the rich world. Certainly including Massimo D'Alema (Italian Prime Minister raised as a communist). In any case,I recognise the type over here in Rome (not just in my home town)

A bit of really necessary context

The tweet is a reply to this tweet by Scott Winship @swinshi

Any explanation for slower US growth has to explain slowed growth THROUGHOUT THE RICH WORLD. But sure, economists and elites are THAT powerful and influential and homogeneous. The merging of progressives & national conservatives continues apace.

The book is "The Economists' Hour: False Prophets, Free Markets, and the Fracture of Society" by Binyamin Appelbaum

OK the overflow.

I think Winship claims that Applebaum just assumed that the whole rich world is similar to his circle of aquaintances. It seems to be the common claim that members of the coastal liberal establishment elite are out of touch.

I defend Applebaum. The ideology, movement, policy shifts and consequences he discusses are certainly all strong in continental Europe. I think there is extremely strong evidence that an elite which includes economists but mostly consists of non economists who respect economists and have a particular opinion of what economists say is exceedingly powerful influential and homogenous. It is definitely not just a US phenomenon.

I realize my thoughts are definitely too long for a tweet, I think too long for a tweet thread, and almost certainly much better expressed in the actual book. But I will now get to this blog post.

Explaining the tweet. First I was born in Washington DC. The ideology is often called neoliberalism or The Washington Consensus. I like Noah Smith's term Economics 101. Smith's point is that many non-economists think economics consists of the very simplest economic models which are now mainly used to introduce the subject to undergraduates (and now high school students including 2 of my nieces). He has a lot to say. I just googled Noah Smith Economics 101

Massimo D'Alema was Prime minister of Italy 1998-2000. He is the first ex-Communist Italian Prime Minister. I am showing my age by still thinking of him. He is an example which comes to my mind of a powerful, influential, and homogeneous elite. In particular, he hosted a summit of center left politicians including Clinton, Blair, German Chancellor Gerhard Shroeder, Tony Blair, and (reluctantly attending) Lionel Jospin. This was a declaration of victory by the victors after the end of history (narrator: History didn't agree that it had ended). D'Alema is the son of a prominent Italian Communist. He was raised in the Communist Party as some of his contemporaries were raised in the Catholic Church. He remained loyal to the party when he was an undergraduate at the super elite Scuola Normale Superiore, where almost everyone else was way to the left of the party (think a Lyndon Johnson fan at Harvard in 1968 if you are even older than me).

A source tells me that, at another meeting this one of the post communist democratic party of the left, D'Alema said roughly (and in Italian -- he is very elite but not mutlilingual) that [Tony Blair is lucky, because Thatcher did what had to be done and then he could come in and take care of the wounded. We are going to have to do what has to be done ourselves.] (I use [] for paraphrases and in this case translations of vague memories).

So the first Italian Prime Minister coming from the Italian Communist Party explicitly presented Margaret Thatcher as a model to emulate. I wasn't there, I heard this second ha But I promise you, it wasn't surprising at the time. When a longtime loyal party member finally became prime minister, he was dedicated to privatization and deregulation.

"Neoliberalism" has two meanings on different sides of the Atlantic. In the USA it means "like Bill Clinton" or "typical of the Clinton administration and say the guys who wrote for "The New Republic" when Clinton was in office. In the rest of the world it refers to the extreme pro-market small government ideology. I am very very sad to say that the two meanings aren't all that different, because Clinton administration policies were far right by the standards of the rest of the world.

The Washington Consensus is a consensus of staffers (prominently including economists) at the IMF, the World Bank and the Clinton Treasury. A central figure is Larry Summers who went from chief economist at the world bank to first chairman of the National Economic Council under Bill Clinton.

I think the perfect expression of the ideology was found in "The Economist" He is one of many people who can confirm that there was an international elite which prominently included economists and which was convinced in the 1990s that it had found the answers, alll the answers. They were interested in, among other things, globalization, by which they meant economic globalization and especially the massive increase in trade in intermediate goods due to offshoring and the globalization of value added chains. I am pretty sure that they are willing to call themselves globalists (I sure am).

I'm sure Applebaum can defend himself, and does make a case in the book (which I haven't read).

I have a critique of the article which I have read. It is unfair to economists and to economics. Applebaum describes the economic theory which was extremely influential in the 1990s. It is economics 100, or rather really the first semester or so of economics 101. This tiny subset of economic theory (which has little to do with current academic research) the economy is described as a market where demand equals supply. Without regulation, markets in these models clear with demand equal to supply. This outcome is not so horrible that a policy maker can help everyone without one exception by intervening. The economics 101ism is an ideology which says that the answer to all policy questions can be found by assuming that these models describe the world and that an government intervention which helps all but one person and hurts that person a little is unacceptable.

So it has two components. First exceedingly strong positive assumptions about how the world works. These are testable (and overwhelmingly overwhelmingly rejected by the data). They include complete markets (if you want to bet that the temperature at a given address in Deluth will be between 73.2 and 73.3 degrees at 11:14 AM on March 14th 2023 you can) perfect competition (so if a store owner raised the unit price of a good by 1 cent then no one would buy it and if she cut it by one cent she would sell out instantly) and no externalities (so you don't care if I decide to end it all by releasing a ton of nerve gas) and symmetric information (so you know exactly how much I prefer chocolate ice cream to vanilla ice cream, that is exactly how much more I would be willing to pay for a pint of chocolate than for a pint of Vanilla).

With all these absurd assumptions, one can reach an absurdly weak conclusion -- there is no intervention which helps everyone. The full 100% 200 proof economics 101 ideology concludes that this means that laissez faire (no government intervention except for protecting people and their property rights from violence) is the best policy.

This is insane. The actual ideology is that the models are useful approximations, and we will separately consider equity and Pareto efficiency and hem and haw, so in this case moving towards laissez faire is an improvement.

This is also a very weak argument, but it was strong enough to change the world.

However, even introductory economics courses go on to teach about imperfect competition, externalities, something about welfare economics other than the Pareto principle and maybe asymmetric informtion. They sure don't discuss what can happen if markets are incomplete (as they are). That involves hard math. I will try to explain it in plain English in another post. Also economic research is now mostly based on assessing the effects of policy by finding natural experiments (or even conducting actual experiments). It no longer relies on assuming that hypotheses which have been rejected by the data must therefore be useful approximations. Also members of the American Economic Association tend to favor more rather than less government intervention. Also there are no anti-Keynesians in foxholes.

So Applebaum is wrong wrong wrong about everything except about the power of a homogeneous international elite and its recent (now weakening) pro-market ideology.