In this profoundly stimulating and well-crafted work, Arnold Kling expertly pursues a bold and timely undertaking: to encourage a complete sea change and re-conception of the nature and character of the modern economy, and to articulate the case that the reliability of the contemporary theory and practice of mainstream Macroeconomics is much more inescapably limited than what is usually accepted.
Kling's prose is particularly clear and concise. It is accessible at the novice level while informed by his deep experience and familiarity with the profession. This allows him to pack a large number of ideas and insights into a slim volume that can be read in an afternoon and pondered for years. Once one learns to observe the economy in this realistic light instead of through the lens of academic idealizations, one cannot help seeing the complex mechanisms of specialization and trade at play everywhere one looks. And just as importantly, Kling manages to accomplish this without using the field's tribal jargon which usually triggers the kind of my-team-right-or-wrong solidarity that is the true enemy of any hope of progress. It gives the book a feel that is both fresh and fair.
But let me back up a little and try to explain the nature of this work by way of an admittedly extreme and exaggerated metaphor.
Let's say that the medical profession was still mired in the rampant quackery that prevailed over a century ago, while still proclaimed by its own credentialed and high-status professional expert authorities to be a 'Science' as legitimate as say, Physics. And all this prior to any understanding of genetics, Microbiology, or the germ theory of infectious disease. Presented with symptoms of diseases that, even today, are notoriously hard to predict, diagnose, and treat - due to the almost hopeless complexity of the underlying mechanisms that give rise to these conditions - the medical doctors nevertheless argued for the validity of their longstanding theories and practices while going about their business in completely misguided ways. Two warring schools of thought based their theories respectively on intricate and elegant models of astrology on the one hand, and palmistry on the other. Meanwhile the typical practice of treatment mostly relied on starvation diets and administration of large doses of nicotine and powdered organs of endangered animals.
Now, let's also imagine that this crazy approach to "medicine" had come under vigorous and legitimate criticism over the past hundred years or so, but that for all their merits, these critiques were brushed aside by the profession's mainstream and politically influential experts, who tended to respond to these arguments by stating - in a perfectly justified and accurate way - that their theories were rigorously validated and internally consistent and thus, so long as their assumptions were reasonable, their conclusions were bound to be reliable.
A reasonable and independently-minded person trying to rationally assess the validity of these claims for himself would reasonably conclude that (1) the assumptions are probably too wrong and incomplete to be relied upon, (2) those past critiques deserve to be revisited and elevated in status and respect, (3) never-ending and irresolvable arguments about the relative merits of palmistry or astrology are worse than wastes of time, and (4) it's time to start over and take a completely different approach to trying to understand the phenomena of health, illness, and disease.
Now let us return from this metaphorical detour to Arnold Kling's extended essay. Kling demonstrates that it is not going too far to say that contemporary academic Macroeconomics, obsessed with complicated mathematical analyses of aggregate demand and gross domestic product, has been going off on the wrong track (and in this metaphorical direction) of unjustified self-confidence since at least World War II. The author, who received his Ph.D. in economics from the Massachusetts Institute of Technology, dubs this, with justice, "the MIT tradition".
The surprise of the depth, severity, and duration of the global financial crisis of 2008, and its many repercussions since, ought to have been the wake up call to shake mainstream academic and other elite economists out of their complacent paradigms and routines. It should have been an occasion for branch-to-root reassessment and an emergence from stale, entrenched positions and towards an efflorescence of new, alternative approaches.
Instead, the field is (mostly) still marching to the same old drummers. This state of affairs has inspired more than a few critics of the mainstream orthodoxy to more vigorously express the case that something is fundamentally rotten in the state of Denmark. Many of these critics, however, are engaging in argumentative strategies that have proven unproductive. It seems that the current worldview of mainstream Macroeconomics is somehow impervious to these sorts of critical assaults no matter how rigorously devastating these arguments are, or how often the typical models fail to predict or correspond to observations of the real world. No matter what happens, no matter how much the forecasts of the models deviate from the real state of affairs, advocates of various mainstream views all seem perennially unperturbed as there always seems to be some way for proponents of any particular view to salvage and maintain their former outlook.
The key insight of Kling's book is that the reason for all this is that mainstream Macroeconomics is not a real science, regardless of how adamantly its champions insist it to be. To be blunt, that claim of the mantle of science is an unwarranted, even conceited, pretense. In the absence of any ability to perform controlled experiments or falsify any claims because of an overabundance of causes and degrees of freedom, the best one can do is form a framework of interpretation through which one tries to make sense of ones observations. However, there are many possible and rival frameworks of interpretation, and there is not necessarily any good way to choose between them when, at root, the effort to understand any irreducibly complex phenomena by means of a extending a few simple propositions is always fated to inadequacy.
But the current framework based on crude conceptions of aggregate demand and GDP - and overconfidence in the utility of government interventions - could surely use some serious competition.
Kling rises to the task, presenting his alternative framework of interpreting the economy and its fluctuations through the lens of patterns of sustainable specialization and trade. The economy is more like an unfathomably intricate ecosystem or the incomprehensibly variegated Internet than some kind of simple machine which it might be possible for government action to "repair". Kling's is an evolutionary framework in which the price system works to coordinate activity throughout the economy in a dynamic and decentralized fashion.
It is one in which competitive pressures, social norms, the legal system, and the disciplining and encouraging incentives provided by considerations of profit and loss, lead to ever more efficient patterns of investment and activity. His framework is one in which genuine market failures that justify state-imposed solutions which one can actually expect to work do indeed exist, but are few and far between. And it is a view that is properly modest regarding the possibility of providing much specific advice to policymakers, a principled and humble stand which is appropriate to the insurmountable limits of human understanding.
Perhaps the best summary of the book's main thesis comes from the author himself and provides a good example of his lucid writing style:
"Mainstream economists in the MIT tradition can be very interventionist with regard to policy. They look at markets as machines that generate predictable outcomes. Policymakers can tinker with those machines to improve the outcomes. The economist’s task is to advise the policymaker. That approach makes two troubling assumptions. One assumption is that the economist’s model is sufficiently powerful to justify overriding market prices. The other assumption is that the political process is sufficiently clean to implement the policy correctly. Instead, I would argue that, as Peter Boettke would have it, the economist’s task is to explain to the public how one might compare the institutional processes of the market and of government. Those of us who emphasize specialization see markets as trading networks that are constantly undergoing evolution. Rather than look for particular interventions, we raise the question of which institutional mechanisms serve to support the process of specialization and enable it to continue to evolve in a favorable direction."
If I were to make one criticism it is that Kling could have spent more time explaining in more depth why specialization is essential for, and how it translates into, the much higher labor productivity that makes the wealthy civilization we enjoy possible. But this is hardly enough to take away from its well-deserved five star rating. Highly recommended and a must-buy.
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Economics as an interpretive framework
Reviewed in the United Kingdom on June 15, 2016