Over the past half century, economic ideas have become influential in a wide range of fields, from obvious ones like finance and international trade to less obvious ones like education and sports. At the same time, the field of economics has become increasingly diverse, spanning everything from the psychology of self-control to the health impact of air pollution. However, among the media and politicians, “economics” too often stands for a single idea: that rational people and companies, interacting in so-called free markets, will produce the optimal outcome for everyone involved — a modern version of the “best of all possible worlds” that Voltaire ridiculed in Candide more than 250 years ago.
This blinkered way of seeing the world is the subject of Economism: Bad Economics and the Rise of Inequality. The book traces the transformation of a single Economics 101 model into a comprehensive theory of social reality and analyzes how that theory has warped discussions of crucial issues such as labor markets, health care, and government regulation. Here, however, I discuss how readers can gain a richer understanding of the questions that real economists ask and the tools that they use, using five books as examples.
A good starting point for learning about the subject is Economics: A Very Short Introduction, by Partha Dasgupta. Most introductory textbooks begin with the highly stylized world of rational individuals and profit-seeking firms trading goods and labor in abstract markets. Instead, Dasgupta starts with two families—one in the upper middle class in the American Midwest, the other in a rural village in Ethiopia—describing how the members of each family live their lives and support themselves. The central concern of economics, he writes, is “to uncover the processes that influence how people’s lives come to be what they are.” Economists use models to answer that question, but the models only come later—after understanding the material conditions that people face and the choices they make under those conditions.
The Origins of Power, Prosperity, and Poverty
Daron Acemoglu and James A. Robinson
Few scholars have done more to illuminate the importance of institutions on people’s lives than Daron Acemoglu and James Robinson. Their book, Why Nations Fail: The Origins of Power, Prosperity, and Poverty, describes in abundant anthropological and historical detail the role of economic and political institutions in shaping the development of societies around the world. They show how open, pluralist systems—think of capitalism and democracy—can create a virtuous cycle of innovation, growth, and political participation, while hierarchical, elite-dominated institutions can produce economic stagnation. Their analysis is particularly important in our current age of rising inequality and at a moment when an unprecedented collection of billionaires and multi-millionaires takes power in Washington.
From the grand sweep of history to the workings of the human mind: The latter is the province of Daniel Kahneman, the psychologist who, along with Amos Tversky, launched the behavioral economics revolution. In Thinking, Fast and Slow, Kahneman describes many of their key insights into how people make choices. Inside our brains, we actually have two decision-making systems: System 1, which thinks intuitively and generates quick reactions using approximative guesses; and System 2, which thinks reflectively and tries to assess evidence and apply logic. Once you get a sense for how real human beings make choices in the real world, you will know the limits of any economic model that assumes perfectly rational actors.
Armed with an appreciation of both the institutions that surround us and the way our brains function, it’s safe to learn more about economic models. The best guide to modeling you can find is Dani Rodrik and his book, Economics Rules: The Rights and Wrongs of the Dismal Science. Rodrik shows how theoretical models can be used to illuminate complex issues, identify important relationships, and raise questions that can be tested empirically—and also how they are sometimes misused, elevated to the status of “universal laws” that hold everywhere and under all conditions. This little book goes a long way toward explaining the difference between the rich field of economics and the caricature that I call economism.
Finally, for a frightening and fascinating look at how the economy really operates, read The Big Short: Inside the Doomsday Machine, by master storyteller Michael Lewis. This book recounts the most significant economic event in several decades—the 2008 financial crisis—through the eyes of a handful of traders who realized (slightly before everyone else) that the housing bubble was collapsing and figured out how to place bets worth millions or billions of dollars. After reading it, you’ll never believe that the economy is a finely tuned machine that mechanically determines what things are worth and efficiently allocates resources to their most valuable uses. Instead, it’s made of people like bond trader Greg Lippmann, saying, “You have three choices. You can sell them back to me at seventy. You can buy some more at seventy-seven. Or you can give me my f****** one point two billions dollars.” Which, let’s face it, is both more interesting and more accurate than a model.
James Kwak is a professor at the University of Connecticut School of Law and the co-author, with Simon Johnson, of 13 Bankers and White House Burning. Economism: Bad Economics and the Rise of Inequality is his latest book. He has a Ph.D. in intellectual history from UC Berkeley and a J.D. from the Yale Law School. Before going to law school, he worked in the business world as a management consultant and a software entrepreneur.
Bad Economics and the Rise of Inequality