The Tyranny of Zombie Economics in America

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The Tyranny of Zombie Economics in America - Jared Bernstein - Business - The Atlantic


How a stubborn misreading of classical economists -- combined with a hyper-partisan Republican Party -- haunts the U.S. economy

The story of where we are is a story of the destructive ideas that guided us here. Bad ideas about how capitalism works--ideas that fail to describe how economies actually function--have combined with conservative politics to promote policies that stifle growth, redistribute what growth there is upward, skew our fiscal outlook, and handcuff our policy process.

We are like travelers who have followed a road map to a destination that promised bliss but instead delivered stagnation and joblessness to many and political dysfunction to all. The economic geography behind that roadmap is a misreading of the original mapmakers--the founders of free markets--which eventually morphed into the deeply damaging belief that markets never fail and always self-correct; and therefore, government actions can only distort otherwise self-correcting markets.

Adam Smith and J.S. Mill never held this view. Of course it's true that Smith's brilliant insight was that unfettered price signals coordinate individuals' actions in markets in ways that deliver optimal outcomes. But he and later thinkers never let that distract them from the fact that, left to their own devices, markets would underinvest in public goods, pollute the environment, and generate unacceptably high levels of inequality and poverty. While there are contemporary macroeconomists that still teach their students that market bubbles are impossible, these early thinkers were intimately familiar with credit bubbles and did not for a second believe financial markets could self-regulate. (John Cassidy's book, When Markets Fail, is essential reading on these points.)
 
The Tyranny of Zombie Economics in America - Jared Bernstein - Business - The Atlantic


How a stubborn misreading of classical economists -- combined with a hyper-partisan Republican Party -- haunts the U.S. economy

The story of where we are is a story of the destructive ideas that guided us here. Bad ideas about how capitalism works--ideas that fail to describe how economies actually function--have combined with conservative politics to promote policies that stifle growth, redistribute what growth there is upward, skew our fiscal outlook, and handcuff our policy process.

We are like travelers who have followed a road map to a destination that promised bliss but instead delivered stagnation and joblessness to many and political dysfunction to all. The economic geography behind that roadmap is a misreading of the original mapmakers--the founders of free markets--which eventually morphed into the deeply damaging belief that markets never fail and always self-correct; and therefore, government actions can only distort otherwise self-correcting markets.

Adam Smith and J.S. Mill never held this view. Of course it's true that Smith's brilliant insight was that unfettered price signals coordinate individuals' actions in markets in ways that deliver optimal outcomes. But he and later thinkers never let that distract them from the fact that, left to their own devices, markets would underinvest in public goods, pollute the environment, and generate unacceptably high levels of inequality and poverty. While there are contemporary macroeconomists that still teach their students that market bubbles are impossible, these early thinkers were intimately familiar with credit bubbles and did not for a second believe financial markets could self-regulate. (John Cassidy's book, When Markets Fail, is essential reading on these points.)

First, J.S. Mill wasn't an economist, although he commented on economic issues.

Second, Adam Smith is not the final word on economics. He never commented on the issue of externalities or pollution because it simply wasn't a significant issue in the late 18h century. The claim that markets "underinvest in public goods" is nothing more than the opinion of a hack on the government payroll. It's not a fact of any kind.

Capitalism eliminates poverty and reduces inequality. It's easy to see that the worst poverty and inequality exist in countries where capitalism has never been in operation.

I doubt there is any employed economist who teaches that market bubbles are impossible. However, they are almost always the result of govenrment interference in the market. The recent sub-prime mortgage debacle is a classic example. This disaster was obviously the result of government tinkering in the mortgage market. The Great Depression was also caused by government artificially inflating the supply of credit. if you look at all past recessions and depression, the finger of blame points squarely at politicians and the government.
 

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