Americans tend to treat the pseudo-science called "economics" with the kind of reverence medieval peasants reserved for sacred relics. Yet that same orthodox economics gives intellectual cover to some of the worst public policies, including the sacred (unregulated) market's dog-eat-dog predatory competition that's supposed to turn out best for everyone if the state would just get out of the way. Despite the fact that in all of human history, economic markets have never existed without states to encourage and regulate them.
Orthodox economics failed to predict the largest economic event in 80 years--the subprime/derivatives meltdown, now called the "Global Financial Crisis" or GFC. Students of economics have even protested the "Don't Look Up," tunnel vision allegiance of orthodoxy has to its fundamental assumptions. Harvard economist Greg Mankiw's classes have been staging walkouts because of this bias.
Orthodox economics also informs the decisions of our central bank (The Federal Reserve, or "the Fed"). One example would be its response to the inflation that stems from shortages thanks to COVID and port logjams. That policy is...wait for it...raising interest rates. Yep. That'll cure COVID and unjam the ports. Not even the 19th-century belief that bleeding patients would cure them is as disconnected from the actual problem as the Fed's proposed inflation remedy.
Modern money theorists like Stephanie Kelton often hear criticism that the policies MMT recommends--like a job guarantee--would be inflationary, but MMT always includes resource availability in its spending prescriptions. Besides, government buys surplus soybeans, why not surplus labor? But then...it's not orthodox economics, so being kind to labor isn't "respectable."
Orthodox economics even informs recent inflation reporting, ignoring the asset-price inflation that has been going on for years without too many alarming headlines to announce it. Stock market and housing prices have been on a steady uptrend thanks to public policies orthodox economics blesses like Quantitative Easing, and the Wall Street bailout.
When Wall Street's subprime mortgages and derivatives proved toxic to the banksters who created them in 2007-8, the Fed provided $16 - $29 trillion in credit to make sure the big banks did not fail. Paying off everyone's mortgage would only have taken $9 trillion, but it was economic orthodoxy that made sure Wall Street got the gold mine while Main Street got the shaft.
Without that Fed intervention, the constant asset price inflation we've experienced in recent years would almost certainly have been interrupted by the bankruptcy of several large financial institutions. Sheila Bair, the Republican-appointed head of the FDIC said one recipient of Fed largesse, Citigroup, was insolvent, yet the Fed lent them the money they needed to weather the GFC. Some people believe that the Fed underwote those trillions in loans, but it's one of the first rules of underwriting not to lend to the insolvent. That bailout was a gift, made respectable by orthodox economics.
So the next time you read something claiming "economic studies say..." or "most economists agree," you need to take that policy recommendation with a lot more than a grain of salt, if not disregard it entirely. And remember: orthodox economics is bunk.
CrossPosted from It's Simpler Than It Looks.