Is a little economics a dangerous thing?
by C h r I s T o p h e r h ay e s
T
here’s a case to be made ism could only function with regular and the U. of C.’s Journal of Law and Econom-
that the single most intellectu- robust government management. Indeed, ics showed that those with college degrees
ally and politically influential so total was this consensus that in 1971 are more likely to subscribe to the views
neighborhood in the United Richard Nixon announced a plan to im- of neoclassical economists than the gen-
States is Chicago’s Hyde Park. Integrat- pose wage and price caps in order to curb eral public. This isn’t surprising. At elite
ed, affluent and quiet, the 1.6 square- inflation, declaring, “We are all Keynes- colleges, economics is consistently one of
mile enclave on the city’s south side is ians now.” Just 25 years later, however, Bill the most popular majors (nearly a quarter
like a tiny company town, where the Clinton, the first Democratic president to of undergrads at the U. of C.), and across
company happens to be the august, be re-elected since FDR, announced that all schools, introductory economics, of-
gothic, eminently serious University the “era of big government is over.” He ten a required course, has been one of
of Chicago. Students at the U. of C. sell might as well have said, “We are all Chi- the 10 most popular classes for the last 30
T-shirts that read “Where Fun Goes To cagoans now.” years. Graduate schools—from business to
Die,” and the same could be said of the Neoclassical economics, as the Chicago public policy to political science to, most
neighborhood, which until very recent- School of thought is now called, has be- notably, law—are now suffused with eco-
ly had a bookstore-to-bar ratio of 5:2. come an international elite consensus, one nomic paradigms for understanding not
But the university is probably best known that provides the foundation for the entire only financial interactions but all human
for the school of economic thought it has global political economy. In the United behavior.
produced. When the Chicago School first States, young members of the middle and Conservatives have long critiqued aca-
emerged in the ’50s, its zealous support of upper-middle class first learn its precepts demia for the ways professors use their
free markets and critique of government in the academy. Polls routinely show that position to indoctrinate students with
intervention were considered reactionary economists and the general public have left-wing ideology, but the left has largely
and extreme. Among elites in economics widely divergent views on the economy, ignored the political impact of the way
and politics the consensus was, as John but among the well-educated that gap is people learn economics, though its in-
Maynard Keynes had argued, that capital- far narrower. A 2001 study published in fluence is likely far more profound. So in
26 november 2006 I n T h e s e T I m e s
order to find out just what students learn expression of interest, whereas if you pay most benefits on those who worked the
when they learn economics, I headed me, we both are benefiting.” hardest—and the inherent injustice of
down to Hyde Park, where the University This makes sense, but I’m uneasy. a coercive state forcibly redistributing
generously let me enroll in “Principles of Wouldn’t giving a place in class to the capital—into a technical argument about
Macroeconomics” for a quarter. highest bidder result in the rich students the inefficiencies associated with non-
getting in and the financial-aid kids be- free-market solutions and the perverse
A
llen Sanderson, 62, has been ing left out? And since people don’t have incentives that made any social pro-
teaching the intro macro and mi- equal amounts of money to spend, how grams destined to fail. Thus, arguments
cro courses at the university for good a measure of desire is price in this about the way the world should be were
the last 18 years and though he initially situation? converted into assertions about how the
appears somewhat grave and under- “Random and first-come have the ben- world actually was. Or, to put in terms
stated, it is quickly apparent that he is efit of being fair,” Sanderson says, antici- that economists favor, normative argu-
a master of technique. His lectures skip pating the objection. “There’s an interest- ments became positive ones.
along, propelled by a series of wry, con- ing dichotomy of fair vs. efficient.” But, In the textbook Sanderson uses, author
trarian quips, each punctuated with a vi- Sanderson asks, what, really, is fair? If we Michael Parkin defines the difference this
sual rimshot: a slight pause and a thrust think some kind of random lottery draw- way: positive statements are about “what
jaw. “When you hear, ‘The economics ing was a fair way of getting into the class, is” and they “might be right or wrong.”
department at U. of C.,’ one’s free associa- would that be a fair way of awarding Normative statements are about “what
tion is ‘pro-business, greedy bastards,’ ” grades? “Obviously not!,” I think. Why? ought to be” and because they depend
says Sanderson (pause, jaw thrust) in the Sanderson lets us mull that over, but the on values, they can’t be tested. “Be on
first lecture. “I tend to think that’s not answer floats up immediately: because I the lookout,” Parkin warns, “for norma-
the case. Greedy bastards we may be, but work hard for my grades and I deserve tive propositions dressed up as positive
we’re not pro-business. Republicans tend them. In other words, those who work propositions.”
to be very pro-business. It’s a genetic de- hard and get good grades are like those Parkin’s warning, however, turns out to
fect of Republicans. Democrats tend to who work hard and have a lot of money be surprisingly difficult to heed. Neoclas-
be anti-business, another genetic defect. to win spots that are auctioned by price. sical economics smuggles a great many
We are not anti-business; we are not pro- “We’re trying to balance these things normative wares underneath its positive
business. We are pro-choice in the ulti- out,” Sanderson continues. “What’s ef- trenchcoat, both in its assumptions about
mate sense of pro-market. Based on em- ficient? What’s fair? Often they are in how humans operate—as individuals ra-
pirical work, macro and micro solutions tension.” tionally maximizing their utility—and its
are probably better worked out by private implied preference for “markets in every-
E
markets than government intervention.” fficiency is the Chicago School’s thing.” Because neoclassical economics
His second lecture begins with a defining value. The free mar- always presents itself as a value-neutral
thought experiment. Noting that there ket economists who came be- description of the world, its ideological
are only 26 spots left in the class for the 52 fore—most notably Austrian Friedrich commitments can be adopted by those
students who would still like to enroll, he Hayek—offered a philosophical critique who learn it without any recognition that
asks, “How should we figure out who gets of the political consequences of state reg- they are ideological. This is the source
to go into the class?” The students—eager, ulation and control of the economy. But of some very spirited debate within the
studious and serious—shoot their hands Milton Friedman, his colleague George field itself. A growing global movement of
up and offer a variety of ideas: Seniority? Stigler and the entire Chicago School fo- “heterodox” economists has criticized the
First-come, first-serve? Ask prospective cused on the actual economic problems of ideological confines and blindspots of the
students to write an essay? It takes about state control, namely, inefficiency. They neoclassical approach. As Nobel Laureate
a minute for a confident young man to rejected Keynes’ contention that markets Joseph Stiglitz put it, the dominance of the
give the answer Sanderson’s looking for: function best with routine government neoclassical model is a “triumph of ideol-
“auction by price.” intervention and instead harkened back ogy over science.”
“As a reasonable indication of how to Adam Smith’s classical conceptions In the popular press, however, such
much you want something, how much of equilibrium. Chicago School theories dissent is almost entirely absent. When
you’re willing to pay is a pretty good gained popularity when global capitalism protesters disrupted the 1999 World
means of measuring,” Sanderson says. hit a major funk in the ’70s—a period of Trade Organization meeting in Seattle,
“A lot of things in economics will turn in slow growth and high inflation. Fried- WTO officials, mainstream economists
one way or another on price. Price has a man argued, plausibly, that it was too and the New York Times’ Thomas Fried-
lot going for it as a generalized expression much government that had caused the man ignored the fact that in much of the
of commitment. The thing we don’t like problems. world neoclassical reforms had failed to
about, say, first-come, first-serve, is that What may seem a subtle rhetorical shift produce the promised growth. Fried-
if someone really wants to get in, they had major consequences. It transformed man went so far as to dismiss the pro-
could start lining up now. But the prob- what had been conservatism’s moral ar- testers as “flat-earthers.” For Thomas
lem is that I don’t really benefit from your gument about capitalism bestowing the Friedman (and, indeed, Allen Sander-
In These TImes november 2006 27
son), people can’t “disagree” with neo- center of the political spectrum, and that percentage of their income in taxes is
classical economics. They can only fail can leave students with a strange percep- deeply embedded in American political
to understand it. tion of just where the center lies. During a culture, even during years of Republican
discussion of flat, progressive and regres- domination. The students sitting around
A
s a standard part of his first lec- sive tax structures, a student asked about me, I start to fear, are going to walk out of
ture in both his macro and micro- the argument against the flat tax. “What’s the lecture thinking that the flat tax is a
economics class, Sanderson reads wrong with the flat rate tax?” Sanderson sensible, centrist idea. And as thousands
a David Barry quote: “Democrats seem replies. “Well, the bad thing was that Steve of students pass through classes like
to be basically nicer people, but they have Forbes was the spokesman. It’s not obvi- Sanderson’s every year, I worry that it will
demonstrated the management skills of ous that there’s that much wrong with become a sensible, centrist idea.
celery. Republicans would know how to it. There’s sort of a movement out there Sanderson’s politics aren’t one-dimen-
fix your tire, but they wouldn’t stop.”
In the wake of Katrina and Iraq, this ‘a little economics can be a dangerous thing,’
might seem quaint, but what Sanderson
is doing makes sense. Temperamentally, warned a friend. ‘an intro econ course is
it reflects his own, libertarian-inflected, necessarily going to be superficial. you deal with
“pox-on-both-their-houses” centrism, but
his insistence on political equanimity is highly stylized models that are robbed of context.’
also crucial to his pedagogical success. Stu-
dents are most likely to have been exposed for a flat rate tax. Because it strikes some sional, and he certainly isn’t a propagan-
to macroeconomic issues within the con- people: What could be fairer than that? It dist. But the fact remains that he has the
text of political debates about free trade, also doesn’t distort incentives. It has a lot predispositions of someone who “learned
the size of the budget deficit, tax rates, going for it.” economics from Milton Friedman.” First,
etc. In order to assure students that they It’s true that there’s “sort of a move- there’s a tendency to see trade-offs be-
aren’t just learning a set of political talking ment” for a flat tax, but those in favor of tween equity and efficiency even where
points, he must go out of his way to ham- what would be the single most regressive they might not exist. Dean Baker, an
mer home the fact that what he’s offering redistribution of wealth in American his- economist at the Center for Economic
is unbiased and nonpartisan: positive not tory are not located in the political center. and Policy Research and author of the
normative, facts not opinion. “I don’t have Far-right Republicans like former House book The Conservative Nanny State,
a dog in this fight,” Sanderson tells the stu- Majority Leader Dick Armey have long points out that policies can be both fairer
dents. So every joke about George Bush is pushed the idea, as have conservative and more efficient. For instance, Baker
followed by a joke about Hillary Clinton, think tanks like American Enterprise In- told me, “it is not clear that a flat tax is
every shot at a Democrat quickly balanced stitute and the Heritage Foundation. But more efficient than a progressive income
by a shot at Republicans. politically, it’s a non-starter. The basic no- tax. This is entirely an empirical question.
The effect, intentional or not, is that tion of fairness that those who get more It is entirely possible that taxing middle-
Sanderson appears to represent the exact out of our economy should pay a greater income workers and Bill Gates at a 25
percent rate will create more distortions
than taxing middle-income workers at
a 15 percent rate and Bill Gates at a 40
percent rate. … They want liberals to say
that we care about fairness and they care
about efficiency. This is crap. They find
ways to justify redistributing income up-
ward and proclaim it to be efficient. The
reality is it is not fair and generally not
efficient either.”
But when equity and efficiency trade-
offs do arise, economists like Sanderson
are systematically biased in favor of ef-
ficiency because that’s what they are
experts on. Efficiency they can measure
and analyze. Fairness? That’s the turf of
philosophers and politicians. This ten-
dency is most pronounced in discus-
sions of economic growth, and how the
benefits of that growth should be dis-
tributed. Sanderson paraphrases his No-
bel Laureate colleague Bob Lucas, who
says that “once you start to think about
the benefits of high growth, it’s hard
28 november 2006 I n T h e s e T I m e s
to think about anything else.” In other
words, first worry about how best to
grow the pie, then how to slice it up. Let
efficiency trump equity, create wealth,
and then you can use the extra wealth
you’ve created to alleviate inequality.
This makes a certain amount of sense.
But when this rhetoric comes to domi-
nate our politics, the problem of inequal-
ity is never addressed. Now is always the
time for growing, later is always the time
to address concerns about equity. The re-
sult is predictable: In countries that have
adopted the neoclassical policy prescrip-
tions (including the United States), there CourT esy of univ ersi T y of ChiC ago
has been an ever-widening gap between
rich and poor.
A
s taught by Sanderson, econom-
ics is a satisfyingly neat machine:
complicated enough to warrant University of Chicago
professor allen sanderson
curiosity and discovery, but not so compli-
teaches it like he thinks it is.
cated as to bewilder. Like a bicycle, input
matches output (wind the crank and the
wheel moves), and once you’ve got the ba-
sics of the model down, everything seems sumptions of rationality, individualism, reads to the class from an article in the
to make sense. As the weeks go by, and I maximizing behavior, etc. But, of course, Chicago Tribune with the headline, “Cor-
trek down to Hyde Park, fight for a park- if you don’t go any further than Econ 101, porate Giants Dwarf Many Nations.” The
ing space and slip in between the hundred- you won’t know that the textbook models piece compares the annual sales of large
plus students into the lecture hall, I come are not the way the world really works, corporations like Wal-Mart with that of
to love the class. The more reading I do, the and that there are tons of empirical stud- small countries, like Israel, showing that
more sense the op-eds in the Wall Street ies out there that demonstrate this.” many of the world’s 200 largest corpora-
Journal make. The NPR program “Market- Take, for instance, the minimum wage. tions are as large as entire national econ-
place” becomes interesting. I even know In Sanderson’s intro micro class, he uses a omies, and therefore have a great deal of
what exactly the Fed rate is. A part of the simple supply and demand model of a la- political and economic clout. After quot-
world that was blurry and obscure begins bor market to show why a minimum wage ing at length, Sanderson points out how
to come into focus. My classmates seem to will cause unemployment, and therefore implausible it is that 200 companies, with
feel the same way. “I never thought I’d be be self-defeating. “Most economists, my- one third of one percent of the world’s
interested in economics,” one sophomore self included, are opposed to living wage workforce, could produce 28 percent of
told me. “Sanderson convinced me I was.” ordinances and minimum wage laws pe- the world’s economic activity. “There’s a
The simple models have an explana- riod,” he says. But a series of empirical word for it,” Sanderson says. “Two words,
tory power that is thrilling. Once you’ve studies has established that the most re- actually. The first is ‘Horse.’ ”
grasped the aggregate supply/aggre- cent increase of minimum wage in 1997 The problem, Sanderson notes, is that
gate demand model, you understand had essentially no impact on unemploy- “sales” is a terrible measurement for
why stimulating demand may lead, in ment. In fact, in October, 650 economists, the economic output of a company like
the short run, to growth, but will also including five Nobel Laureates, signed a Wal-Mart, because it only produces a
produce inflation. But the content of letter advocating an increase in the U.S. very small percentage of the value of any
that understanding turns out to be a bit minimum wage to $8 an hour. product is sells. When you buy pistachios
thin. Inflation happens because, well, Of course, some elision and simplifi- at Wal-Mart, it’s not like those nuts were
that’s where the lines intersect. “A little cation is unavoidable. Sanderson’s not grown on a Wal-Mart farm. Wal-Mart
economics can be a dangerous thing,” trying to create future economists, but bought them from someone and then re-
a friend working on her Ph.D in public rather give students “some sort of cul- sold them for a profit. “If we were count-
policy at the U. of C. told me. “An intro tural literacy” about how the economy ing GDP, we just want to count what’s the
econ course is necessarily going to be works. He often starts class by leading us net contribution, what’s the value added?”
superficial. You deal with highly styl- through a kind of Socratic deconstruc- he explains. “Last year, worldwide Wal-
ized models that are robbed of context, tion of a newspaper article that commits Mart sold $285 billion worth of goods and
that take place in a world unmediated some egregious economic sin. About services, but paid manufacturers $220.”
by norms and institutions. Much of the midway through the semester, during the Sanderson’s point is pretty obvious, if you
most interesting work in economics right unit we spend learning about how the think about it. And yet the article gets it
now calls into question the Econ 101 as- gross domestic product is computed, he wrong over and over, which nearly sends
In These TImes november 2006 29
your car, you’re deciding to specialize
in what you do best, and trade for the
other things you need. Specialize and
trade: That was Adam Smith’s central
insight into the nature of the “wealth of
nations,” and, Sanderson says, it remains
as true today as it was then.
But when lecturing on trade, Sand-
erson’s tone is noticeably different. His
agenda and ideology are more up front,
such that the classes felt for the first
time almost—almost—like propaganda.
And during these lectures, something
incredible happens. The class rebels.
Whereas for the duration of the quarter
Sanderson had made the students feel as
aLi Bur afi/afp/ge T T y images
if he was their guide in seeing through
the Matrix, suddenly Sanderson morphs
from being Laurence Fishburne to the
In 2001, argentinian protesters FBI agent in a suit. The class prods and
extracted their own revenge against pushes back as if they are being fed spin.
the ImF’s market reforms. As Sanderson talks about the impor-
tance of nations specializing in what-
ever they have a comparative advantage
Sanderson around the bend. “This hap- revenue was still larger than the GDP in, a student raises his hand: “Isn’t there
pens to be the political rhetoric: ‘These of 132 countries, including Bangladesh, a problem if you put all your eggs into
200 corporations dominate the world.’ which has a population of 144 million one basket, and then if there’s a problem
They don’t. They’re a very small percent- people. I wrote an e-mail to Sanderson, with that sector you’re in trouble?”
age of GDP,” Sanderson says. “Those who who promptly wrote back, saying the That ends that day’s class, but it con-
are criticizing very large multinational bigger point was to drive home the prob- tinues in the next. Sanderson argues that
corporations are doing a disservice if lem with inappropriate comparisons liberalized trade creates more jobs than
they don’t get the math right.” and double counting. “I tried to point it destroys. “Free trade creates winners
This contrarian approach is central to out that these apples v. oranges com- and it also creates losers. It turns out
Sanderson’s worldview: It’s the counter- parisons are all over the place,” he wrote, that winners are quantitatively larger
intuitive, “everyone-says-x-but-really- and added that the double-counting er- than the losers.” A student asks, flat out,
what-matters-is-y” formulation that has ror could be found everywhere from the “Why are we to believe that?” Sanderson
become the staple of magazines like the Wall Street Journal to some introductory restates his point, but the student holds
New Republic and Slate. (A headline from textbooks. “Thanks,” he wrote, “for con- his ground, saying he’s read that there
Slate’s October 14 “Underground Econo- tinuing the out-of-class dialogue.” simply doesn’t exist an accurate mea-
mist” column: “Charity is Selfish.”) But as sure to figure out how many jobs are
S
with any counterintuitive rhetoric, what anderson is so likeable and mas- being created and destroyed. Sanderson
matters is how you define the conven- terful that the entire semester goes concedes that this is true, but insists it
tional “intuition” that you’re skewering. by with the class eating out of his “must” be a net positive.
And with Sanderson, the target is almost hand: They take careful notes, class at- You can hear papers rustling and side
always statist, regulatory and liberal: tendance is almost perfect every day and conversations breaking out. Hands be-
The idea that you can, indeed, get a free each pre-exam study session is packed. gin to shoot up and Sanderson began to
lunch, by, for instance, mandating better But the final unit of the class is devoted to sweat noticeably as the mutiny spreads.
incomes for workers by raising the mini- free trade, and suddenly things change. One student asks about attaching labor or
mum wage. Thinking of economic policy Sanderson begins the class by telling environmental protections to trade deals.
as a series of trade-offs and opportunity us that “in trade, there’s an enormous Sanderson replies that such stipulations
costs and, most importantly, unintended amount of agreement between econo- (like requiring workers be paid $14 an
consequences is a hallmark of the Chi- mists about what constitutes the truth. hour) simply operate like tariffs, raising
cago School, and it was a constant theme The disagreements are between econo- the price of goods and “saving jobs in the
throughout the course: Whenever you mists and everybody else.” His central U.S., union jobs that are relatively high
try to alter the market, the market ex- contention is that allowing any two given paid, and taking people in developing
tracts its revenge. countries to trade their goods freely will countries who are not well off and mak-
In Sanderson’s zeal to play ‘gotcha’ necessarily make both countries better ing them poorer. I tend to be against laws
with the press, he too can slant the pure off. It’s the same logic, he says, that we that make poor people poorer.”
data. That evening, I went online and use everyday. When you decide to have “OK,” responds the student, who with
found that Wal-Mart’s $65 billion of net someone do your dry cleaning or fix a beard and long hair looks a bit like the
30 november 2006 I n T h e s e T I m e s
student radical who’s been missing all magazine subscriptions or wrapping a long mop of brown hair. I remember a
quarter. “Let’s say the standards are not Hershey’s Kisses—becomes automated. conversation we’d had at the beginning
ridiculous. The workers have a right to Trade works the same way as technolog- of the semester: “I hope it doesn’t all
organize, or we can’t pollute the only ical progress: While it might put some end up to be wrong,” he’d said, referring
source of the village’s water supply.” people out of work, in the end, it makes to the Chicago School theories he was
“How do we define what’s ridicu- everyone better off. The class is nod- about to learn. “Like in Latin America.
lous?,” Sanderson shoots back. “Once ding, attentive and silent. That worries me a bit.”
you start, it’s very difficult to draw the Furthermore, free trade is a moral im- Six months after the class ended, I e-
line, in terms of what workers have. perative because it makes poorer coun- mailed him to ask whether he was still
Should other countries not trade with tries better off. “I don’t want to sound worried. “I got this e-mail right after
the U.S. because we have capital pun-
ishment? Should we not trade with The contrarian approach is central to sanderson’s
countries that don’t allow abortion?
My problem with sweatshops is, quite worldview: It’s the counterintuitive, ‘everyone-
frankly, the only potential definition
is people who work long hours for low
says-x-but-really-what-matters-is-y’ formulation
wages, and that’s what the U.S. was 120 that has become the staple of magazines like Slate.
years ago. A lot of what economics is
about is how to increase the world’s in-
come, and not for Bill Gates and Oprah, like Miss America,” Sanderson says as my Econ 201 class, the intermediate se-
but for the world’s poor. Unions don’t he wraps up the final class of the quar- quence for the major requirement,” he
like trade agreements. They’ve never ter. “I think world poverty is where it’s wrote back. “So it looks like I’m no longer
seen one they like, and they want to find at in terms of where you try to place worried that what I’m learning is ‘wrong.’
a reason in environmental standards or resources. My sense is that significant Actually, the conversation we had doesn’t
things like that.” redistribution of wealth is probably not really make sense to me anymore. I now
“We do draw the line every day,” the the answer. Part of it is that there is not understand that any one school of eco-
student responds, not bothering to raise enough wealth to redistribute. There’s nomics can’t explain and predict all the
his hand this time. There are hands up not a lot of rich people and too many intricacies of human economies.”
all over and the class has now devolved poor people. And the gap between rich What he’d come to realize, he wrote,
into a free-for-all. “We don’t trade with and poor is too vast. It comes down to was that “it isn’t a question of correct
Burma. We didn’t trade with Iraq. We economic growth, how fast we can make theory or incorrect theory, but whether
do trade with Saudi Arabia. It’s not im- economies grow. Economic growth does or not the results of the implementation
possible to re-imagine how to draw the tend to raise all boats.” of that theory are right or wrong in a
line.” Sanderson is not winning this As the class files out, I see a student I’d moral sense.”
argument. “These are tough issues,” he talked with a few times over the course In other words, it’s a question that eco-
says, and the class ends. of the semester, an unassuming kid with nomics alone can’t answer. n
It occurs to me that Sanderson’s prob-
lem is that he’s been too honest about
his biases. It’s far more effective to com-
municate a worldview through subtext
than to argue for it explicitly. For eight
weeks, Sanderson had been the model
of equanimity, the centrist arbiter of
competing factions, and because of this
students seemed to accept his word
without question. But on the very first
day of class he’d tipped his hand that he
was an “ardent free-trader,” and his clear
desire to have students come away be-
lieving, as he does, in the benefits of free
trade, was backfiring.
By the next class, Sanderson has re-
grouped, and calmly and methodically
leads the class through a Socratic dia-
logue. Tobacco farmers have lost their
jobs because we smoke less: Does that
mean we should have the government
do something about it? People lose their
jobs all the time because the work they
do—whether opening envelopes for
In These TImes november 2006 31