Two Faces of the Faith

BY JOHN KENNETH GALBRAITH

DANGEROUS CURRENTS

by Lester C. Thurow. Random House, $16.95.
ON ONE THING, if only one, professional economists are fully agreed: high worker productivity is good and a mark of general economic achievement. There is, I’ve often noted, one exception to that rule, and that concerns economic scholars themselves. An economist who works too hard and produces too much is regarded with some suspicion; he is carrying the idea of personal productivity to extremes. Some of the disapproval, needless to say, reflects the common academic belief that a mildly ostentatious commitment to leisure is an indication of a deeper intellectualism, and its protection an important aspect of academic freedom. Lester C. Thurow, professor of economics and management at the Massachusetts Institute of Technology, Newsweek columnist, author of the widely read Zero-Sum Society and of a reliable flow of articles and reviews and now this new book, and a man involved in numerous public activities, is a prodigiously productive worker. Obviously he is open to attack. This book is also hard on many of his fellow economists, although that is more readily forgiven.
Dangerous Currents is about the present state of economics. I have some criticism of the writing and rather more of the conclusions, but it is richly informed and informative, skillfully argued, and otherwise extremely good.
The central theme can be simply stated—more simply perhaps than Professor Thurow would concede. It is that economics has developed along two major lines—microeconomics and macroeconomics—each widely accepted and each in blunt contradiction of the other. Microeconomics is deeply inconsistent in its conclusions with the larger macroeconomic behavior of the economy, as everyday observation affirms and public policy requires.
Microeconomics has to do with the behavior of individual markets—those for products, for services, and, notably, for labor. It is the economics of the curves and the equations which, each year, is drilled into the heads of hundreds of thousands of the young. It affirms that prices rise to bring purchases into line with available supply and fall to bring available output and labor into use. The result is a reliable clearing of markets: if there is excess supply, prices and wages will fall to the level at which everything is sold and everyone is employed.
This is the reliable and relentless tendency, the miracle of the market. From this admirably autonomous process comes the geometry and the algebra, the years of instruction, and a fair proportion of the technical articles that are written on the subject.
The contradiction becomes evident when one turns to the overall behavior of the economy—to macroeconomics and the public policy associated with it. Idle plant capacity and unsold surpluses do exist; labor is massively not employed. Markets, and most painfully the labor market, do not clear. Nothing is so much a subject of everyday experience and discussion. Nothing more deeply influences political and social behavior and prospects.
AVERY LARGE PART of Thurow’s book is concerned with how economists— those whose faith is still bound up with the classical or, as he calls it, the priceauction market—resolve this conflict. The resolution calls, on the whole, more on the theocratic and necromantic resources of the profession than on its capacity for astute response to obvious, practical circumstance. For some economists, there is a natural rate of unemployment; this comes close to being whatever level of unemployment has come to exist for some time. Accordingly, when there is full employment, there is much unemployment, as anyone with sufficient sophistication can easily understand. Or, perhaps more important, belief in the market-clearing tendency of the market, in particular of the labor market, is simply made to prevail in the face of any and all evidence. One has faith. Those who live outside the true religion have not grasped its deeper meaning, are spiritually deprived, and should never be seen in Chicago.
From the true faith, in turn, comes policy—including, for the past two painful years, that of the present Administration. If markets work perfectly, so, without much pain, does an astringent monetary policy. The logic here is, on the whole, impeccable. If inflation threatens, you cut back on spending and respending from the proceeds of bank lending; this curtails the demand for goods and services; with this curtailment, prices cease to rise or begin to fall.
It is one of the few unquestioned propositions in economics that when prices do not rise, there is no inflation. And if markets, including the labor market, always clear, it is equally irrefutable that, some slight period of adjustment aside, there will be no unemployment. Here, in essence, was the basis for the early monetarist faith of the Reagan Administration.
The supply-side aberration, as it has come to be called, had a similar though less elegant foundation. In the classical market, economic achievement is priceelastic—the more you pay the individual, the more useful effort you get. Nothing is more damaging than government interference with this pricing. Thus came the supply-side commitment to stimulating the effort of the rich by giving them more incentives to work— lower taxes and more money—and the stimulation to the poor by giving them less government support, forcing them back to useful effort. Supply-side economics, in Thurow’s words, represents “the triumph of literal and unqualified equilibrium price-auction economics. Supply-siders are to that model what religious fundamentalists are to biblical interpretation. No deviations from the revealed truth are possible or allowed.”
It is possible—indeed, plausible— that there was a deeper purpose to supply-side economics than Thurow suggests. In a democratic society, it is customary for politicians to reward their supporters. Ronald Reagan, no one doubts, came to office with the support of the more affluent sectors of the voting population. But no American politician can be overtly for the rich. That is politically unacceptable, mildly obscene. So, as David Stockman has suggested, supply-side economics was a way by which the Administration, through tax reduction, could reward its own.
One comes next to what does exist— what keeps markets from clearing, as in these past years of the monetary squeeze. Why the persistent huge unemployment? Here Thurow is not wholly specific; but generally he has in mind that corporations in present-day markets—markets shared by a few firms known to economists as oligopolies—respond to the reduced demand through which monetary policy works with reduced output (and employment) rather than with lower prices. And wage-earners (including, without much choice, those with the least seniority or no job experience at all) accept unemployment rather than a reduced wage. “Economics,” Thurow notes, “has a supply-anddemand theory of price determination for competitive markets and complete monopolies, but it has no theory of price determination for oligopolies—the most prevalent form of industrial organization. . . . Economics needs a theory of oligopolistic behavior and especially a theory of oligopolistic price determination. Some economists deny the meaningful existence of oligopolies; some glorify their usefulness; some blame them for almost everything. But no economist understands their pricing behavior.” Obviously, if true, this is a serious failure.
IN EXTRACTING THE core of Thurow’s argument, with which I largely agree, I do him something of an injustice and also slightly more than justice. He goes well beyond these matters to a range of related economic ideas—to a complex form of intellectual escapism known to economists as rational expectations, which holds, with some slight simplification, that although economic performance is imperfect, it cannot be improved, because all improving action will be anticipated and rendered nugatory by informed anticipatory action. “Whereas the supply-siders’ beliefs are so strong that they are blind to all contrary evidence, the rational expectationists define the world tautologically, permitting no contrary evidence to exist because it can’t exist.” And he discusses the strengths and weaknesses of the massive econometric models of the economic system which have become so central to economic analysis and forecasting, and current economic thinking on the labor market, and much more.
On occasion, Thurow’s detail conceals his main point; a stronger, clearer statement of his central proposition would have kept it from being lost in the mass of associated information. As in his earlier work, he is much better on what is wrong with economics than on what would put it right. His ideas, for example, lead inexorably to the need for a way of resisting inflation that does not depend on unemployment and idle capacity, as does either effective monetary or fiscal restraint. There is, unfortunately, nothing other than a prices-and-incomes policy that will fill this need. This Thurow implies but does not quite address. “If the profession were to admit that institutions are important to the economy, it would require a substantial change in the dominant intellectual theory of economics. Techniques other than monetary or fiscal policies would then be admitted to the pantheon of possible policy prescriptions to fight inflation.” Thurow shares with more circumspect scholars the reluctance to embrace all that such a policy implies, for it is a drastic, open, irreversible admission that for much of the economy the established economics and its wondrous technical elaborations are extensively irrelevant. One feels that he appended his final, affirmative chapter to avoid the charge that he is more concerned with telling what is wrong than with telling what is right.
I do not think this is a matter for apology. There has always been a certain respect in economics for the concept of the division of labor. As Thurow’s book appears, the Reagan Administration is—or seems to be—in a major retreat from astringent classical monetarism just as it retreated earlier from the even more improbable supply-side vision with which it came to office. Professor Milton Friedman has now disavowed his Washington disciples; the supply-siders have largely disappeared from view, although doubtless they will re-emerge should the economy improve. With the retreat from past policy comes the chance that there might be some improvement in economic performance. Thurow, if he hasn’t told what is right, at least has made clear—not alone, one trusts, for liberals—what was so wrong,