What is “Econ 101,” and why do economists always get things wrong? In this episode we dismantle orthodox economics, exploring where it comes from, why it’s wrong, and how “It’s Econ 101!” became a cynical rallying cry in defense of the status quo. Guests Eric Beinhocker (The Origin of Wealth) and James Kwak (Economism) explain that, far from a science, Econ 101 is really just a story we tell ourselves to justify who gets what and why. And it’s time to tell a different story.
Eric Beinhocker: Professor of Public Policy at the Blavatnik School of Government, University of Oxford. Executive Director of the Institute for New Economic Thinking at the Oxford Martin School. Author of The Origin of Wealth.
James Kwak: Professor of Law at the Connecticut School of Law. Co-founder of the economics blog “The Baseline Scenario”, a commentary on developments in the global economy, law, and public policy. Author of Economism: Bad Economics and the Rise of Inequality. Columnist for The Atlantic.
Talking Head: 00:00 In a sense, economics has become the legend of our time.
Nick Hanauer: 00:04 It’s not a law of nature, it’s an intimidation tactic, masquerading as an economic theory. It’s a way to negotiate wages at scale.
Speaker 3: 00:11 In the neo-liberal political movement, we argue that this imaginary world got confused with the real world.
Nick Hanauer: 00:18 We made rich people richer and occasionally threw a bone to the poor.
Talking Head: 00:21 At the end of the day, if all we stand for is leveling the playing field of the free market, that’s not enough.
Tina Nole: 00:32 From the offices of Civic Ventures in downtown Seattle, this is Pitchfork Economics, with Nick Hanauer. It’s like ECON 101 without all the BS.
Nick Hanauer: 00:54 I’m Nick Hanauer, founder of Civic Ventures.
David Goldstein: 00:57 I’m David Goldstein, Senior Fellow at Civic Ventures.
Stephanie Ervin: 01:02 I’m Stephanie Ervin, I run a lot of our advocacy and campaign work here at Civic Ventures.
David Goldstein: 01:06 So Nick, last week, you introduced us to Pitchfork economics. You told us that the pitchforks are coming for us.
Nick Hanauer: 01:13 Right.
David Goldstein: 01:14 This episode we will talk about why. And I’ll start by asking the question is ECON 101 a lie?
Stephanie Ervin: 01:27 Do you ever take an ECON 101 course?
Speaker 10: 01:29 No, I’ve never taken an economy class.
Speaker 11: 01:32 Yes. Micro economics and macro economics 101.
Speaker 12: 01:35 No, I haven’t.
Speaker 13: 01:36 Oh, I guess I did in college.
Speaker 14: 01:37 I have taken ECON 101, 201, 301, 401.
Speaker 15: 01:42 No.
Speaker 16: 01:42 Yeah, I did in college.
David Goldstein: 01:47 So really, there’s kind of two ways to talk about ECON 101. There’s ECON 101, the actual class you might have taken in college. And that taught you neoclassical economics, then there’s ECON 101 in the rhetorical political sense, where you make some argument for raising the minimum wage and somebody rolls their eyes at you and says, “It’ll kill jobs, come on, it’s ECON 101.”
Nick Hanauer: 02:13 Yes. Yeah. And that form of ECON 101, what the writer James Kwak calls economism is best understood really as a methodology for social control. It’s a way of enforcing status constructs. It’s a way of sort of bludgeoning people into believing that what they get is what they deserve, among other things.
Nick Hanauer: 02:36 But in this episode, we should really focus I think, more particularly on the weaknesses of the underlying academic-economic construct, which is neoclassical economics. The way in which the definitions, the assumptions about human behavior are wanting the assumptions about the dynamics of human social systems. In other words, how people interact is deficient. And the way in which we characterize prosperity and economic growth largely around statistics like GDP, why that’s also deficient, and why that’s just not working out.
Nick Hanauer: 03:16 But a fun thing to reflect on is the way in which the macro economic neoclassical construct is under attack.
Stephanie Ervin: 03:27 Can you guys just explain the difference between macro economics and micro economics?
Nick Hanauer: 03:31 Yeah. There’s a difference between micro and macro economics. Micro economics is about economic behavior on the micro scale; how people behave and what their interactions are, and among other things. The impact of taxes on incentives and so on and so forth. And macro economics is about the big picture; how the whole economy behaves as a consequence of those micro interactions.
Nick Hanauer: 03:55 We have a problem with micro economics here at Civic Ventures, because all of the underlying assumptions that neoclassical micro economists make about human behavior turn out to be just objectively false. And the point of the podcast is to explain to people how and why those assumptions are wrong, and more particularly why they should care, why it matters.
Stephanie Ervin: 04:19 So, since I skipped taking economics 101, honestly, why should I care?
Nick Hanauer: 04:24 So the existing theory in all economics is built on the assumption that people are perfectly selfish, perfectly rational and perfectly calculating. And that assumption about human behavior undergirds everything that economists do. So, why is this matter so much? Because if your economics accepts the truth about human behavior, that people are reciprocal, moral, approximating, emotional rather than selfish, rational calculators of their self interest, then when you look around the world, all the prosperity in it, what you can see quite clearly is that it was reciprocity and cooperation and morality that created all this prosperity, not selfishness.
Nick Hanauer: 05:16 And once you see that connection in a more honest way about what it is that creates prosperity in human societies, then you can optimize for more of the good thing rather than optimizing for more of the bad things. So we live, Stephanie, in a culture as you know, where people celebrate selfishness where they literally believe that the more aggressively and narrowly they pursue their own self interest, the better will be for everyone. People literally believe that. And they believe it because this false assumption of neoclassical economics taught them that it was true.
Nick Hanauer: 05:55 In the first episode, we talked a little about the ideological layer of neoliberalism. And one of the cornerstone beliefs in the neoliberalism is this idea that the only purpose of the corporation is to enrich shareholders. Why? Because that’s how humans efficiently create prosperity for everyone. Relying in turn on that assumption about human behavior.
Nick Hanauer: 06:17 But once you kill that dumb idea about human behavior, now, the idea that the only purpose of the corporations, for shareholders and the executives is just obviously nonsense. It’s bullshit. And so that’s why getting this right is so important. It’s not just an academic question. By accurately settling the academic question you inform the ideology that people will accept about how to organize their lives and the policy agendas they will enact to make the world a better place.
David Goldstein: 06:51 So Nick, you just expanded on our fundamental theme that we stated in the first episode, which is bad theory leads to bad policy which leads to bad outcomes. We need to insert something in there. It’s actually bad theory leads to bad narrative, which leads to bad policy, which leads to bad outcome.
Nick Hanauer: 07:14 Correct.
Stephanie Ervin: 07:14 And the worst lies are the ones we tell ourselves.
Nick Hanauer: 07:17 Exactly.
David Goldstein: 07:17 They are the most convincing.
Stephanie Ervin: 07:17 Because I don’t think I have choice or urgency or can change anything about how to economic world is just inserting itself on me, then I am less likely to advance our collective interest in doing something differently.
Nick Hanauer: 07:29 That’s right. And so people over the last 40 years have been relentlessly told that selfishness is righteousness, and that your only responsibility is to advance your own narrow self interest, and if you do that the public interest is served. And that is just a complete lie, that human societies are built from reciprocity and cooperation. And cooperation in turn is built by trust. It’s only possible with high levels of trust. And trust is the product of justice. That that’s why justice is so important in human societies, is that it creates trust, which enables cooperation from which all human prosperity is built. It’s not competition that does it, its cooperation.
Nick Hanauer: 08:20 The reason you care about these academic issues is that these academic assumptions will end up framing everything in your life about how we organize a society and who gets what and why.
Nick Hanauer: 08:37 Okay. So on today’s podcast, one of my very dear friends and longtime collaborators, Eric Beinhocker is going to be with us. Eric is currently the executive director of the Institute for New Economic thinking at Oxford University where he leads a team of 125 researchers at the bleeding edge of economic research and theory. Eric is regarded as the world’s leading heterodox economic thinker and runs around the world talking to people about new ways to think about economics. He lives in London with his family. And in the interest of full transparency, Eric and I are currently co writing a book on economics that will cover in greater depth a lot of the issues that we touch in this podcast, Pitchfork economics.
Nick Hanauer: 09:32 So, Eric today is going to talk to us a little bit more in detail about the weaknesses of neoclassical economics and point towards a new way of thinking about human behavior, human social systems, and how we might measure whether things are getting better or worse.
Nick Hanauer: 09:54 So, Eric, good morning.
Eric: 09:56 Good morning.
Nick Hanauer: 09:57 How is merry old England?
Eric: 10:00 Very rainy as usual.
Nick Hanauer: 10:02 So Eric, can we talk about the concept of equilibrium? And why assuming that the system is an equilibrium system, what that means and how it informs your intuitions about how it works?
Eric: 10:18 Yeah, this is, you know, it may sound like a bit academic point, but it’s actually a pretty fundamental one. So, if you look at the work of earlier classical economists, many of them actually what they were describing was a system that was in change, that was evolving, moving over time and they were often actually quite interested in the dynamics of the economy. A lot of the interesting questions are about how does it change over time and where might it go.
Eric: 10:52 But starting in the late 1800s as economist tried to make economic more mathematical. The tools that they had at the time, which were borrowed from physics, were tools that looked at systems at rest. Can we describe what happens when a pendulum stop swinging, or a rock rolls down a hill and comes to rest, or, a pencil falls down on the table?
Eric: 11:22 They had pretty good mathematics for these static systems going to a state of rester equilibrium, and they used those tools to apply to the economy. It seemed like a good fit particularly if think of something like the law of supply and demand, which describes how buyers and sellers meet in the market and then come to agree on a price and it kind of state of rest or equilibrium.
Eric: 11:46 That math was a real breakthrough and came to dominate the field. But what it missed was the fundamental issues in the economy. That the economy rarely is in a state of rest, it’s constantly in motion. There’s innovators innovating and consumers changing their tastes and preferences and firms changing their strategies and developing new products and services zone. The economy’s constantly emotion. It’s inherently a disequilibrium system.
Eric: 12:17 But it’s only very recently that we’ve had the tools in particular computer power to be able to describe the economy more realistically as a disequilibrium system. The problem with the equilibrium models is again, they cause you to miss many of the most important phenomenon in the economy like booms and busts, crashes and things like 2008. Or, on the positive side, questions of economic growth or how do we transition to a sustainable green economy or how do we deal with problems like inequality. A lot of the big issues that we’re wrestling with now are inherently disequilibrium phenomena.
Nick Hanauer: 13:00 And just I guess, to underscore your point, if you’re a baseline assumption is that the economy is an equilibrium system, a boom or a bust, a bubble sort of can’t happen. It’s not supposed to happen.
Eric: 13:14 Well, you kind of go through two stages. First is a sort of denial. It can’t happen. But then when it’s happening, then the answer is, do nothing, because this is the moment we’re trying to-
Nick Hanauer: 13:26 Because it will come back to equilibrium.
Eric: 13:27 It will come back equilibrium. And you can see how this kind of thinking and these theories then inform the political debate. There were many during the 2008 crisis that did argue the best thing we could do is do nothing. And I think the evidence is pretty strong that if we did nothing, we probably would have, instead of a great recession, we would have had a true Great Depression. Again, it’s a very abstract concept, but if you’re in a closed equilibrium system, like a bowl with a marble, if you throw the ball in the marble, eventually it will come to rest at the body, it will come to equilibrium.
Nick Hanauer: 14:05 Exactly.
Eric: 14:07 All you have to do is do nothing, in fact, you want it to come to rest, doing nothing is your best bet.
Nick Hanauer: 14:12 Doing nothing is your best bet. Exactly. And also, quite importantly, a brilliant but rather strange Italian economist named Vilfredo Pareto, who is known not just for his mathematics but also the fact that he kept something like 20 cats in his house. He came up with this idea that this equilibrium point was also the optimal point for the economy. It was the economy when resources are being used in their most efficient and best way for society as a whole. So, a further point is that by doing nothing, letting the economy come to equilibrium that you’ll come to the best outcome for society. So this leads to then views that like the economy on economic inequality, there’s nothing we can do about it, and that’s actually … The level of inequality we have is the best and most efficient outcome for society. Well, this all makes sense now, because anybody who’s had a cat knows that they reach equilibrium 17 hours a day.
Eric: 15:17 Excellent.
Nick Hanauer: 15:18 So to be clear, Eric, you are outside of the economic consensus. So when you talk to your fellow economists who still subscribe to the neoclassical equilibrium models, how do they explain things like the minimum wage that it never seems to work the way their models predict it will work?
Eric: 15:40 Well, it’s funny economics is in a real state of flux right now, which actually makes it a very exciting time to be an economist. So, many of my colleagues will actually push back to me and say, “Eric, you’re fighting against a straw man, the neoclassical model is dead, nobody takes it seriously anymore. Don’t flog a dead horse.”
Eric: 16:06 To many degrees that’s true. Again, as I mentioned, lots of economists are doing work on behavioral models and realistic institutional models and more dynamic views of the economy and so on. But there’s a big disconnect between this work and work in the more applied and policy area.
Eric: 16:28 Again, if you look at a lot of the academic work on an issue, like the minimum wage in this kind of fairly narrow neoclassical framework, if you look at a lot of macro economic modeling on things like monetary policy or fiscal policy, comes from this neoclassical view. And part of this is just economics. It takes time to change. Part of it is that it’s hard to do these things in a new and better way, and it takes more work.
Eric: 17:06 But some of it is also just habits of mind. People have been used to thinking this way for a long time, and it’s hard to change.
Nick Hanauer: 17:13 So the the policy makers are lagging the discipline.
Eric: 17:19 Well, no, actually the other … It’s kind of a bit of a sandwich. So, I’d say at the more level of basic research, there’s a lot of exciting stuff going on. And in the policy community itself, there’s a big appetite for new approaches model. So actually, the central banks are some of the leading advocates for these new approaches and are very disillusioned with the standard models. And we have conversations in treasuries and finance ministries or environmental ministries, lots of places in governments and in the policy community, where we get a lot of interest in support for these ideas. It’s more of the applied part of economics in academia that actually seems to be lagging.
Nick Hanauer: 18:13 Our next guest is James Kwak who is a law professor at the University of Connecticut. And James has written this amazing book called Economism; Bad Economics and the Rise of Inequality.
James Kwak: 18:29 Nick, pleasure to hear from you.
Nick Hanauer: 18:31 How are you?
James Kwak: 18:32 I’m well. How are you?
Nick Hanauer: 18:34 Good. How goes the battle?
James Kwak: 18:38 Poorly.
Nick Hanauer: 18:40 Haha, that’s honestly accurate.
Stephanie Ervin: 18:46 Hi, Professor Kwak. Thanks for joining us. This is Stephanie.
James Kwak: 18:49 Yeah. My pleasure.
Nick Hanauer: 18:50 Why don’t we start by just telling us what economism is? Because we should start with our listeners with that. So, just apply your book in the concept.
James Kwak: 18:57 Yeah. So economism is the misuse of very simplistic models from first economics to try to make claims about the world, claims that are politically convenient to some people. So for those of you who have taken economics or haven’t taken it, the first thing you learn is you learn about supply and demand competitive markets. And you learn that the forces of supply and demand essentially create a perfect world because everyone gets paid exactly what they deserve, and all products cost exactly what they should make. And all the sources get allocated to their best uses.
James Kwak: 19:30 And I say this is first year economics because when people study more economics and go to graduate school, and so on, they learn that this model really applies to a very small segment of the economy. But what’s happened is that beginning especially in the 1950s, 1960s, conservative ideologues, started using arguments based on this very simple supply and demand model to say things like very famously, the minimum wage hurts poor people because the minimum wage is essentially a price floor in the markets of labor, and it creates a shortage and that shortage is unemployment.
James Kwak: 20:05 And I think this kind of argument has been very powerful for a couple of reasons. One is that it invokes the power of economics, which many people are just intimidated by. And then secondly, it allows this particular kind of rhetorical argument that you heard first among conservatives, which is that I really like poor people and I really want to help poor people, and that’s why I’m against the minimum wage and that’s why I’m against welfare. You hear that one too. Welfare hurts poor people because it undermines the incentive to work.
Nick Hanauer: 20:37 Yeah, that we would pay you more except that would be bad for you.
James Kwak: 20:42 For you. Exactly. And that is a godsend for the elites because they’ve been accused for centuries, since Dickensian England. They’ve been accused of not caring about poor people. What Milton Friedman, the economist gave them was this tool to say, “No, we are actually champions of the poor.
Stephanie Ervin: 21:02 What was your goal in writing economism? What were you hoping to achieve?
James Kwak: 21:05 I guess two audiences. Neither one was kind of conservative Republicans. One was; I wanted to equip progressives to be able to understand what people were saying when they said, “It’s just economics 101. Because I think a lot of people find that intimidating and I think a lot of progressives would not know how to argue with someone who says, who gets a cocktail napkin and draws a picture and shows that the minimum wage creates unemployment.
James Kwak: 21:32 So I wanted to give them a little bit of economics and to show that this is not the whole story. In a few cases to teach them the other side of the story, but more generally, just to make people more suspicious of that whole line of reasoning, ‘It’s just economics.’
James Kwak: 21:48 And then I guess my second audience was, I guess moderate democrats because I think many people have been won over to the idea that as Bill Clinton said, Government’s not the solution. Al Gore said customer should be smaller. A lot of Democrats have been won over to the idea that really we want the free market to generate prosperity and all we need to do is kind of tweak it on the margins. I think that’s just wrong.
James Kwak: 22:14 So, I was hoping to convince a few people of that.
Stephanie Ervin: 22:16 So, Professor Kwak, are you arguing that folks are applying the lessons of econ 101 incorrectly, or that the lessons in econ 101 are themselves wrong or both?
James Kwak: 22:28 I think they’re being applied incorrectly. But it’s probably the way people learn economics 101. Because in a first year class with a good teacher, with most economics teachers, they have no reason to think of that, they will explain the model, then they will say this is an analytical model, we use it as a starting point. And then we look at ways in which the world is different in the model and how that changes the outcome.
James Kwak: 22:49 But I think that first of all, it’s much easier to remember the model than the caveats and secondly, a lot of public policy debate is essentially kind of like it’s a debating club in which people try to score points by clarity and simplicity. And this provides a handbook of clear and simple arguments against many kinds of government intervention. Because, again, the starting point is essentially that private markets generally produce optimal outcomes.
James Kwak: 23:21 So I think it’s largely, it’s a case of miss application. Often it’s a common trope among commentators. They will say, ‘Sorry, the world is this way, but it’s just economics 101, there’s nothing I can do about it.” It’s a way of disclaiming all urgency, pretending politics doesn’t exist and saying, this is just a force of nature. It’s like gravity.
James Kwak: 23:42 But again, if you talked to an economist who … A professor, maybe one with Nobel Prize in that very subject, most of the time, they will tell you things are more complicated.
Nick Hanauer: 23:52 Yeah. So, can you deconstruct the claims of economism a little bit more. How do they resolve in public discourse.
James Kwak: 24:01 Yeah so um. I mean I think the minimum wage is perhaps the simplest example to talk about. As I said the diagram you can draw on a cocktail napkin says that if you had a minimum wage it will cause an employment. And then I would say that at the high level this is, if you look at op ed written against increasing the minimum wage that is usually the core of the argument. That, as Milton Friedman said, “It harms the very people it was meant to help.”
James Kwak: 24:28 But then I think there’s a level below this as well because what’s happened I think as amply documented, is over the past 50 years, the conservatives have funded and developed a network of think tanks that dwarfs anything [comfortable 00:24:42], on the left. In fact because most democratic funded institutions end up being centrist for reasons that I don’t fully understand.
James Kwak: 24:50 And so, this basic claim becomes then the starting point for these think tanks to put out industry funded studies that then purport to backup the claims of economism. Because I’d say that, on questions like this and public policy questions, the attacks kind of takes two forms. One is the sound bites that politicians use and the people use in articles saying, “Look, it’s just economics 101.”
James Kwak: 25:25 And then on the second level there is an industry of organizations who will turn out white papers and empirical studies to kind of just muddy the waters. It’s the industry of … Well, if we have a study and they have a study, then Fox News will say, “Well, we can’t decide which one it is.”
Nick Hanauer: 25:42 Yeah. So, what’s fascinating to me is that the Chamber of Commerce and their allies churn out a lot of papers on why raising wages will be terrible for workers. But what they never do is churn out papers and send them to the press showing why raising wages will be bad for executive bonuses and bad for shareholders. Why is it that they only seem to release papers about why it will be bad for workers and never release papers or why it will be bad for owners and shareholders? And this is of course because they’re trying to advance a moral argument that they think will win the day, and we’re rich, you’re poor and we want to keep it that way, doesn’t sell.
Nick Hanauer: 26:27 And the other thing that I think it’s worth mentioning is that the marvelous historian [Baudelaire 00:26:34] has said in his books, and I really do think this is true, is that the iron law of history, and the one that undergirds all of the narratives that hold human societies together comes in one of two forms, either God says, or it’s a law of nature. That is why economism is so powerful and that is why it takes that form is. Because what folks are saying is that raising wages kills jobs is just like force equals mass times acceleration, that these are laws of nature, they’re in violet. And that if you contradict them, well, you just don’t understand physics or you just don’t understand economics, that they are asserted, as if there are laws of nature.
Nick Hanauer: 27:26 The thing about force times mass equals acceleration is that is true in every circumstance where it has ever been tested. It is always true. It’s never not true. That’s why it’s a physical law. But raising wages kills jobs is never true. It’s not a law of nature. It’s an intimidation tactic masquerading as an economic theory. It’s a way to negotiate wages at scale.
James Kwak: 27:52 Yeah, that sentiment is very familiar to me. The epigraph to the book is a quote from [Baudelaire 00:27:57]. It’s the one that’s been cited many times. So he said, “The devil’s greatest trick was convincing people that he didn’t exist.” I started off the book talking about [inaudible 00:28:06] Bible teller which is most you know, well known characters, the philosopher Pen glos is a caricature of [light 00:28:12], he says, “This is the best of all possible worlds.”
James Kwak: 28:15 And I think that part of the … I don’t know if I quite make the analogy in the book. But in a sense economics has become the religion of our time. At least a religion of the kind of policy and political elite. And I think that this is one reason when you talk about this convincing people that it’s a law of nature, obviously we’ve talked a little bit about how this is very convenient for Republicans but I think this is also, this idea that it’s a natural law is part of what has helped move the Democratic party so far to the center, to the central white on many economic issues.
Nick Hanauer: 28:48 Yeah.
Stephanie Ervin: 28:49 But some of the policies that Democrats support actually do are better for the economy, right? Are better for growth.
Nick Hanauer: 28:56 Unambiguously.
Stephanie Ervin: 28:56 So, why don’t we make that argument? Why are we instead making argument about fairness and helping poor people, or to your point, Professor Kwak, leveling the playing field?
James Kwak: 29:06 So, let’s just take Obamacare. I think Obamacare is the best example. Obamacare is a very kind of over-engineered … Well, it’s the long way to try to use market forces to approximate the outcome you would get with single payer, when single payer is obviously the short way to get there. And Obamacare was designed that way.
James Kwak: 29:25 The whole question of whether we had the votes, let’s leave that aside for a second, it was designed that way so that people would not accuse Democrats of being socialists. Well, guess what they call us socialist anyway. And it is a less good outcome, because I think it’s unsustainable because it doesn’t do enough to do produce, health care is just getting too expensive. And it does doesn’t do enough to solve that problem at the end of the day.
James Kwak: 29:49 But I think that we propose policies that are certainly better than the Republicans alternatives, but they are perceived as technocratic. And they do not give people what they really want. What people really want is security and a few basic areas such as health care. And what we’ve had Obamacare, again, I will say it’s better than Republican alternative. What we’ve done is we shifted healthcare costs from up from premiums to back end cost sharing. Because, basically in order to create a policy that people can afford, it often has to be a high deductible plan.
James Kwak: 30:25 So we have this kind of technocratic half measures and we say that we’re harnessing market forces. And that’s part of why I think people think Democrats don’t stand for anything. Because Republican pitch is one sentence long. ‘We’re gonna get government out of the way and we’re going to let innovation and entrepreneurship in the American way, we’ll make everyone rich.’ It’s completely false but then it’s one sentence.
Nick Hanauer: 30:50 It is persuasive.
James Kwak: 30:51 And we don’t have a sentence. A lot of the Democrats position on policy debates ends up being … Well, my complicated policies is better for more people than your simple policy. And they’re liked. But it’s politics. It doesn’t give you any vote. It doesn’t stand for anything, it doesn’t get you any votes.
James Kwak: 31:14 In the long term our policies tend to be better for economic growth but the problem that increasing number of people in this country is safe is not a lack of both, it’s not a lack of jobs, it’s just inequality.
Nick Hanauer: 31:25 We have plenty of jobs. The problem is the jobs don’t pay enough. That’s the principal problem with the economy. and people aren’t paid enough because they don’t have good jobs. They are not paid enough because their employers don’t pay them enough. And that has nothing to do with the job, has to do with power.
Nick Hanauer: 31:45 And that I think is the underlying lie of economism, which is, the most pernicious part about it, is that what economism and tells you is if you are paid 725 an hour, you only deserved 725 an hour. And if the government intervenes and requires your employer to pay you more than 725 an hour, then a law of nature has been violated. Cats and Dogs are going to start to live together. Earth is going to crack open, we’re all going to slide into hell and the economy will collapse. And that is simply a lie. That people are not paid what they’re worth, they’re paid what they negotiate, and how much power you have to negotiate, frankly, is orthogonal to what you may.
Nick Hanauer: 32:35 In some cases, you have a lot of negotiating power, most cases people don’t, and that’s the role of government. In any democratic society is to try to balance the power of elites versus not non-elites.
James Kwak: 32:50 Yeah, that’s a good way to put it. I mean in economics, there’s obviously a whole field devoted to market power. But again, going back to what is economism and the way it goes on a very small part of first economics, the supply and demand competitive market model does not have any market power in it. So, when you say the minimum wage is necessarily paying people more over necessarily cause unemployment, you’re drawing on a picture of the world in which power just doesn’t exist, and you’re able to pretend it doesn’t exist.
Nick Hanauer: 33:18 Yeah. And in a world where mostly that’s the only thing that’s important.
James Kwak: 33:24 Yeah.
Stephanie Ervin: 33:25 So, professor, I know you’ve offered to have your book economism included in the syllabus as a real econ 101 courses.
Nick Hanauer: 33:32 Good luck with that.
Stephanie Ervin: 33:33 Can you elaborate your take on that?
James Kwak: 33:33 To be honest, I’m not actually sure I get requests to review copies, I send them out, I haven’t followed up to find out. I’m probably a little scared to ask.
Stephanie Ervin: 33:42 I think we share a lot of the same goals in our efforts to put out this podcast. So thanks for being a part of it this morning. We really appreciate it.
Nick Hanauer: 33:51 Thank you so much for joining us.
James Kwak: 33:52 Thanks for having me. I really appreciate it.
Nick Hanauer: 33:54 Wonderful to talk to you. Talk to you soon.
James Kwak: 33:58 Okay, bye.
Nick Hanauer: 33:59 Bye.
Stephanie Ervin: 33:59 Bye.
Speaker 19: 34:03 There was a lot of … and I can’t remember any of it, because it’s been well over 10 years, but there were a lot of supply side stuff, a lot of supply and demand talk, different ways to figure out what was going to be, you know like what indicators or whatever. Like insert this into our supply and demand algorithm, I guess. And then, you can hopefully see what is going to come out on the other end.
Stephanie Ervin: 34:37 Do you think neoclassical economics was a lie from the beginning or was it some guys really just trying to simplify how they understood the economic world? Explain it.
Nick Hanauer: 34:47 Yes. So it’s unfair to call neoclassical economics a lie. It’s fair to call trickle down economics a lie because that’s a very deliberate effort to manipulate power and economic arrangements. The people who built neoclassical economics did so for the best, mostly, I mean, I don’t know all of them, but certainly most of them for the best reasons. They were just trying to understand the world using the best tools that they had available.
Nick Hanauer: 35:20 And many of them at the time that they offered these theoretical constructs were explicit about saying, “Look, this is just a model. This is just a way of modeling some things, don’t take it too seriously.” I mean, for instance, GDP, which is our current measure of growth and economic prosperity was developed by this guy named Kuznets who was absolutely explicit that this should never be used as a way of measuring welfare for all the really obvious reasons in which it is deficient. And yet we grabbed onto it.
Nick Hanauer: 36:00 And we grabbed onto it for a couple of reasons. First, it was simple. And second, because if you measure things in a particular way that benefits a particular group of people, if you measure output and define output as good, the people in charge of the output are highly rewarded. And if-
Stephanie Ervin: 36:22 But at the time, I’m sure it was really easy to believe these things, because those people in the econ 101 classes or whatever, 60 years ago, 80 years ago were elites.
Nick Hanauer: 36:32 Yes, that’s right. Another theme of the podcast here is that economics is presented as if it’s this sort of set of revealed laws of nature. And indeed there’s some very fine academic work that is done on how economies work by legit objective fine people. But the way that most people experience economists is as a construct, or a rationalization of who gets what and why. Economics is how modern societies instantiate our social and moral preferences about status, privileges and power. And whether economists want to acknowledge that or not, or whether they want to admit it or not, their work is often harnessed to or in service of enforcing the status contracts that benefit some people and don’t benefit others. And there’s a very fine line between objective economic research and a very deliberate effort almost certainly of elites to enrich themselves at the expense of others using that research or those arguments or that data.
Speaker 20: 38:03 Do you remember wishing [inaudible 00:38:04]?
Nick Hanauer: 38:06 No, not a thing. It’s been a long time.
Speaker 21: 38:08 I don’t remember anything.
Speaker 22: 38:08 I don’t remember.
Speaker 23: 38:11 Whether or not it was true I guess I don’t know because I didn’t pay close enough attention.
Stephanie Ervin: 38:20 So, on the next episode we’re going to talk about the trick in trickle down and here’s a preview, it’s a scam too.
Nick Hanauer: 38:28 What people have to recognize is that these stories that are told often are not told because they’re true, they’re told because they’re the most effective way ever devised for elites to continue to gain advantage and keep other folks down.
Stephanie Ervin: 38:53 Pitchfork Economics is produced by Civic Ventures. The magic happens in Seattle in partnership with LARG Media, that’s L-A-R-G media and the Young Turks Network. Find us on Twitter and Facebook @CivicAction and follow our writing on medium @civicskunkworks. And you should also follow Nick Hanauer on Twitter, @NickHanauer.
Stephanie Ervin: 39:11 As always, a big thank you to our guests and thank you to our team at Civic Ventures, Nick Hanauer, Zach Silk, Jasmine Weaver, Jessyn Farrell, Stephanie Ervin, David Goldstein, Paul Constant, Nick Casella and Annie Fadely. Thanks for listening.