Economics is not a science; it's a story: what the wealth tax debate tells us about the bias of economists
- David Goldstein is a senior fellow at Civic Ventures and co-host of the Pitchfork Economics podcast.
- In this opinion piece, he argues that the "neoliberal narrative" has led to a gap between the economics we teach today and the actuality of the economic landscape. For instant, theory on minimum wage and regulations has been proven to be incorrect.
- Goldstein says "the economic story we've told ourselves these past 40 years is a neoliberal story deliberately crafted to serve the interests of a wealthy elite."
- For more on this topic, listen to the latest episode of Pitchfork Economics.
- Visit Business Insider's homepage for more stories.
One of the clearest illustrations of the economic notion of a "market failure" is the market for academic economists - a market so captured by the dominant neoliberal narrative, that it has proven nearly impervious to competition from empirical facts.
Take, for example, Senator Elizabeth Warren's recent call for a 2% annual tax on household wealth over $50 million. The proposal instantly drew derisive catcalls from economic experts arguing that taxing wealth would inevitably result in "slower growth ... fewer jobs and lower incomes." And why not raise this theoretical objection? The inverse relationship between taxes and growth is basic Econ 101. Raising taxes slows growth.Except, of course … it doesn't.
Multiple studies from the likes of the Brookings Institution, the Congressional Research Service, the Center on Budget and Policy Priorities, and many others have found absolutely no correlation between top marginal tax rates and GDP growth. And the same holds true for nearly every other economic metric, including job growth, wage growth, investment growth, productivity growth, and so on. When it comes to taxes, economic theory and economic reality simply don't match: "The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as gospel," the Brookings researchers noted. "However, theory, evidence, and simulation studies tell a different and more complicated story."
And tax policy is far from the only area where the economic theories we teach in college hold little resemblance to the world beyond.
On government regulations, the economic textbooks are equally clear: regulation may sometimes be a necessary evil, but it is almost always bad for business, depressing innovation, entrepreneurship, and productivity. This was the theory that economists at the libertarian Mercatus Center expected to support by analyzing a newly published trove of federal data. "I'm a free-market type of person, so it wouldn't have at all surprised me to find that government regulation is causing decline in dynamism," co-author Alex Tabarrok recently told Washington Monthly. But the data didn't support the theory at all. "We find that rising federal regulation cannot explain secular trends in economic dynamism," the authors concluded. Given how hostile mainstream economists can be to counterexamples, the biggest surprise might be that this study was published at all.
Which brings us to… the minimum wage.For decades, no economic principle was more axiomatic than the assertion that the minimum wage destroys jobs. Opponents on the right opined that in reducing low-wage employment, the minimum wage inevitably hurt the very people it intended to help. Supporters on the left insisted that the societal benefits far outweighed the costs. But, grounded in mainstream economic theory, both sides agreed that there is always a tradeoff between wages and jobs.
In fact, the minimum wage consensus was so strong that few economists even bothered to fact check it until David Card and Alan Krueger published a landmark 1992 paper that unexpectedly flipped conventional wisdom on its ear: "Contrary to the central prediction of the textbook model of the minimum wage," the authors concluded, " … we find that the increase in the minimum wage increased employment."
But if Card and Krueger thought they'd get a hero's welcome, they had another think coming. In an angry missive on the op-ed pages of the Wall Street Journal, Nobel laureate James Buchanan did his best to chill their research and destroy their reputations:
"The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the presupposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that 'water runs uphill,' no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores."
Buchanan's unselfconscious invective was infused with enough psychological projection to fill a thread of early morning Trump tweets. But no wonder he was so defensive: in fact, unlike physics, economics is not a hard science, and its practice was never more ideological than in the hands of Buchanan and his Koch-funded colleagues. A quarter century of research later, we now know that human behavior is not all that rational, that taxes do not slow growth, that regulation does not stifle entrepreneurialism, and that the minimum wage does not destroy jobs. Yet such is power of the neoliberal narrative, that the economics we teach today has hardly changed from that taught by Buchanan.
"We are fundamentally creatures of narrative," explains author George Monbiot on the latest episode of Pitchfork Economics. "When we try to interpret the world, we don't do so as scientists … we tell ourselves stories." And the economic story we've told ourselves these past 40 years is a neoliberal story deliberately crafted to serve the interests of a wealthy elite.
That is why economics is so resistant to change. It's just a story. And stories cannot be refuted by facts alone. So, if we want a more fair, more just, and more broadly prosperous economy, we need to replace the neoliberal narrative with a better story that correctly puts the American people back at the center of the American economy.
Listen to the Podcast: In 2014, venture capitalist Nick Hanauer warned his fellow plutocrats that our growing crisis of economic inequality would lead to an uprising or a dictatorship. Two years later, angry voters elected Donald Trump. In Pitchfork Economics, Nick explores why the pitchforks are coming, who they're coming for, and how the stories we tell about the economy can change the economy itself.