International Herald Tribune Business

Subscribe to the newspaper
Find out more >>
Clippings
Remove all clippings Remove all read clippings

Economists question dominance of free-market ideas

NEW YORK:

For many economists, questioning free-market orthodoxy is akin to expressing a belief in intelligent design at a Darwin convention: Those who doubt the naturally beneficial workings of the market are considered either deluded or crazy.

But in recent months, economists have engaged in an impassioned debate over the way their specialty is taught in universities around the United States, and practiced in Washington. They are questioning the profession's most cherished ideas about not interfering in the economy.

"There is much too much ideology," said Alan Blinder, a professor at Princeton and a former vice chairman of the Federal Reserve Board. Economics, he added, is "often a triumph of theory over fact."

Blinder helped kindle the discussion by publicly warning in speeches and articles this year that as many as 30 million to 40 million Americans could lose their jobs to lower-paid workers abroad.

Just by raising doubts about the unmitigated benefits of free trade, he made headlines and had colleagues rubbing their eyes in astonishment.

"What I've learned is anyone who says anything even obliquely that sounds hostile to free trade is treated as an apostate," Blinder said.

And free trade is not the only sacred subject, Blinder and other like-minded economists say. Most efforts to intervene in the markets - like setting a minimum wage, instituting industrial policy or regulating prices - are viewed askance by mainstream economists, as are analyses that do not rely on mathematical modeling.

That attitude, the critics argue, has seriously harmed the discipline, suppressing original, creative thinking and distorting policy debates.

"You lose your ticket as a certified economist if you don't say any kind of price regulation is bad and free trade is good," said David Card, an economist at the University of California, Berkeley, who has done groundbreaking research on the effect of the minimum wage.

Most economists are still devoted to what is known as the neoclassical model. Philip Reny, chairman of the economics department at the University of Chicago - the temple of free-market economics - said the theory and methods were "taught to avoid personal biases and conclusions that aren't found in the data."

Like any science, he said, the field changes course slowly: "It requires evidence, and if evidence is there, it will accumulate and positions will move." He added, "I personally have a lot of faith in the discipline."

But as issues like income inequality, free trade and protectionism have become part of the presidential candidates' stump speeches, more thinkers have joined the debate.

In addition to Blinder, other eminent economists like Lawrence Summers and the Nobel Prize winner George Akerlof have pointed out what they see as the failings of laissez-faire economics.

"Economists can't pretend that the consensus for free markets and free trade that existed 30 years ago is still here," said Robert Reich, a public policy professor at Berkeley who served in President Bill Clinton's cabinet.

Part of the reason is the growing income inequality and dislocation that global markets and a revolution in communications have helped create. Economists who question the free-market theories "want to speak to the reality of our time," Reich said.

Meanwhile, critics have also pointed out the limits of standard cost-benefit accounting to measure items like the cost of inequality or damage to the ecosystem.

The degree to which economists wander from the mainstream varies widely.

Dani Rodrik, an economist at the Kennedy School of Government at Harvard, for instance, said, "I fall into the methods of the mainstream, but not the faith," which he defines as the belief that more markets and free trade are always good and government regulation is always bad.

Thinkers like these may come up with controversial ideas but are hardly marginalized. Other economists, however, go much further, and try to chip away at the field's underlying theoretical foundations. So while Blinder, Card and Rodrik might be considered mere heretics, this second group has earned the label "heterodox."

Although the meaning of the term is slippery, Frederic Lee, an economist at the University of Missouri-Kansas City who edits the Heterodox Economics Newsletter, says it refers to those who reject the neoclassical model, which Milton Friedman helped create, and which Ronald Reagan championed when he took over the White House.

Reny and others point out that the increasing popularity in the mainstream of behavioral economics, which looks at people's complex psychological reactions to events, has offered a fuller picture of how consumers operate in the marketplace. Still, Lee criticizes neoclassical economics for maintaining that the market, if left alone, would ultimately find a happy balance.

Back to top
Home  >  Business

Most E-Mailed Articles

Last 24 Hours
Last 7 Days
Last 30 Days
Formula One

Blogs: Managing Globalization

Join the IHT's Daniel Altman in a lively discussion of the day's economic news with an eye on globalization.

IHT Subscriptions
Sign Up  |  Manage
More Features
Blogs
Top Ten Articles

  Site Feedback | Terms of Use | Contributor Policy | Site Map
About the IHT | Privacy & Cookies | Contact the IHT   
Copyright © 2008 the International Herald Tribune All rights reserved   IHT