Customer Reviews

Zombie Economics: How Dead Ideas Still Walk among Us

5 star:		(13)
4 star:		(4)
3 star:		(2)
2 star:		(0)
1 star:		(7)

 

 

this book offers a very good critique of how the research program of macroeconomics for the last 40 or so years has been, largely, a failure. while it is true that the author is not always careful or complete with respect to some of his definitions (for instance, the efficient market hypothesis has different interpretations/statements in, say, finance versus freshwater economics --- finance folks, by the way, have dismissed the efficient market hypothesis decades ago), most of his points/explanations are clear enough to understand. HOWEVER, it is worth noting that economics can be extremely politicized; the one star reviewers are a cases in point; much of modern macro ends up having policy implications, and thus a lot of work, some of it very technical, was done with an ax to grind. and, if you have an ax to grind, well, evidence that throws a wrench in your machinery is dismissed, discarded, or, in some cases, claimed as stupid. this is a very embarrassing book for the economics profession, and is a very embarrassing book for folks who pedal a particular brand of right-wing economics, which is why it gets some of the negative reviews. but, that is one of the many compelling reasons to read it. moreover, this book is, with a few exceptions, honest, and correct and the author backs up his claims with a hell of a lot of references. in fact, for econ students looking for thesis problems, this book is a gold mine. in any event, to gain clear picture of why economics hasn't had much to say about the world since early 2008, and what is wrong with modern macro, read this book. really.

A zombie idea, per Quiggin, is one that keeps coming back, despite having already been killed. That seems like an apt description of where we're headed now - eg. resuscitating free market ideology after the 'Great Recession' caused by - free markets. The truly paranoid can be extra worried recalling Milton Friedman's statement that "our (true free-market enthusiasts) basic function is to develop alternatives to existing policies, and to keep them alive and available until the politically impossible becomes politically inevitable." Worst of all, some hold a suspicion that conservatives are committed to bringing about such crises if they don't naturally occur. Zombie economic ideas highlighted in the book include privatization, the 'Efficient Market Hypothesis,' the 'Laffer Curve,' and 'Trickle-Down Economics.'

I was particularly intrigued by the author's pointing out that restrictions on the dismissal of workers or requirements for sizable separation packages are the most vilified supposed obstacle to improved economic performance, yet those protesting the loudest ignore the one-sided bonuses, options, and pay without performance packages for the leaders who usually cause the worker layoffs. In case that isn't rich enough, there's also option repricing and backdating, golden parachutes, and gross overpayment vs. foreign firms, while offshoring millions of American jobs to save money. (In 2008, the world's largest bank - ICBC, market capitalization of $250 billion, paid its CEO $235,000, vs. J.P. Morgan with a capitalization of $158 billion, paying $19,651 million to its CEO. In 2009, all Toyota executives together received less than Ford's CEO.)

The 'Efficient Markets Hypothesis' implies that private enterprise will always outperform government. Contrary evidence includes the LTCM bailout, the dot-com collapse, and now the Great Recession.'

Neither the 'Trickle-Down' theory now the Laffer Curve offer limits on how far to take the theory. Thus, per the enthusiasts, we can never treat the rich too generously with tax avoidance (or most anyone else, for that matter), nor ever run out of increased tax revenues from lowering taxes. Both are obviously silly positions. Meanwhile, despite the benefits of trickle down, inequality in America has considerably increased in the last four decades - directly undermining the theory. Contending, eg. that supporting evidence is supplied by the poor in the 1990s being more likely than the average household in the 1970s to have a wash machine, dryer, dishwasher, refrigerator, color TV, PC, and/or phone ignores major price cuts for those products and ignores major increases for others - eg. university education and housing. It also ignores the role of increased debt. International data show the U.S. has the lowest social mobility on nearly all measures, while the often despised European social democracies the highest.

Quiggin is far from convinced of the innate benefits of privatization, conceding it works poorly in some instances (small and medium-sized businesses), and often much better for large enterprises - especially in transportation or public utilities. He identifies instances where privatized enterprises have been re-nationalized after economic failure or poor service provision (eg. railways, airlines, hospitals), but also too easily slides over problems with public employees (especially teachers, public-safety staff) leveraging excessive wage and benefit payments. Russia has suffered a major privatization failure, with extensive looting of public assets via those linked to the government. The same occurred in China, to a much more limited extent, and there are numerous complaints in South America about water, etc. privatization. Chile privatized Social Security, leading to much higher administrative charges and unsatisfactory benefit levels, despite government spending on pensions remaining at over over 25% of the total budget.

Quiggin points out that public entities have a financing advantage - funders look for much higher rates of return from private entities than they expect from public bonds. China may offer lessons in this area - it has kept large sectors of its economy in government hands or control, and manages to still be quite competitive.

Quiggin is a good writer and by all accounts a very good economist. His problem is that he doesn't understand how you fight zombies, and he seems confused about what zombies are.

Zombies, you see, are ex-people, not ideas. Ideas, both true and false, are the life's blood of a field. Often more is gained from showing that an idea is false than by showing an idea is true. The Zombies (in the sciences at least) are ex-scientists who have had their brains lost, sold or eaten. You can recognize them by the way they promote obvious garbage without a hint of shame. Often while they are speaking at a conference, the audience members will have a contest to see who can find the most egregious blunder. They are generally pitied, but not to the extent that we publish their nonsense (ok sometimes their nonsense does get published, but then there is a big scandal and the offending member of the editorial board of the journal resigns in disgrace) or allow them to propagate.

The economics profession is an example of what happens when the zombies propagate unchecked. The entire fresh water school and many of the top journals have been taken over by zombies. Quiggin does an excellent job of eviscerating most of the false ideas propagated by the zombies, he shows how wrong these ideas were and even shows how most of them where known to be false long before now.

One minor quibble with his treatment of the EMH. While it has always been clear that the strong form was false, he seems to give the weak form a pass. The problem is that the weak form is every bit as false as the strong form. In the presence of massive leverage, a sharp downward drop will cause massive margin calls and this will cause a massive drop in the price. We observed this in action in the fall of 2008, and short sellers made a mint on this observation. Quiggin says that you cannot make money consistently in this way. Yes, that is true because such an event is followed by a depression, and then you have to wait for the start of the next depression before you can do it again. If the liberals are in power, that should be 70+ years (1929-08), so you would have to be a vampire to manage this more than once. If the conservatives are in power, you should only have to wait about 15 years, so the living can do this multiple times. However the weak form of the EMH is still false. In the real sciences, it only takes one counterexample to show that a theory is false.

One interesting point in the book is where he talks about how the Keynesians altered their theories in light of problems with inflation expectations. (Altered them too much as it turns out.) This is what non-zombies do. If you believe the same thing on Wednesday as you did on Monday no matter what happened on Tuesday, then you might be a zombie.

The book that Quiggin should have written is the one describing how the zombies took over economics. This is the more interesting story I think. The zombies in Economics are different than the zombies in other fields, where they are mostly insane or senile. In Economics, the zombies have made a conscious choice to be zombies. They have, in effect, sold their own brains. I think this subject is ripe for economic analysis. The wealthy have benefited enormously from the ideas put forth by the zombies (the rich should always pay less taxes for example) and they have showered money on the fresh water zombies and their schools. It would be interesting to examine how much return they have achieved on their investment.

It would also be interesting to document how the fresh water schools go about destroying the brains of their students. The most egregious example that I am aware of is the intro course at UC where the students are told that the best way to decide who should get an education is by who can pay the most. None of the recent presidents, except the Bushes, would have been educated, and I guess that is the point. I would imagine that a student in that class would either leave, eat his own brain, or willingly sell his brain when the price was right.

Also Quiggin doesn't seem to understand how one should deal with zombies. He seems to think that by politely pointing out that the zombies are promoting false ideas, he will convert the zombies back into people. Unfortunately that isn't how zombies work. He needs to watch "army of the dead" or "Zombieland" to get an idea of the proper method of polite discourse with a zombie. Here`s hoping that Quiggin and the other living economists can mange to purge the zombies and rescue the field of economics. The economy of the world is depending on them.

The zombies Dr. Quiggin describes and discusses are five economic theories that have proven to be false, but which keep being trotted out as if they were accepted fact by the intellectual courtesans of Laissez-Faire.yland.*

Quiggin devotes a chapter to each of five zombie ideas:

. . Chapter 1: The Great Moderation: the lie that business (mainly big business) can now be relied on to govern the economy optimally, or nearly enough so. It can't.

By law, corporations MUST seek to maximize the wealth of their shareholders, generally regardless of all other considerations, including the public good.

. . Chapter 2: The Efficient Markets Hypothesis: the lie that "the market" will always correctly determine and implement the optimum prices and quantities produced. It won't.

As early a writer as Adam Smith recognized that where there were spillover costs, the market price would be lower and the quantity produced greater than optimal, and when there were spillover benefits the reverse would be true.

. . Chapter 3: Dynamic Stochastic General Equilibrium: The mistaken belief that DSGE models can overcome the Kornbluth objection. They can't.

To quote Kornbluth (The Syndic, 1978) as best I can from memory: "No accurate history of the future has yet been written, a fact which I think disposes of History's claim to rank as a science. Astronomers quail at the three-body problem, and throw up their hands in despair at the four-body problem. And yet, every moment in history is a problem in at least three billion bodies. [in 1978; now seven billion] I can juggle mean rainfalls, car-loading curves, birth rates, and patent applications, but I cannot for the life of me fit the recurring facial carbuncles of Karl Marx into my equations, even though we know, well after the fact, that the agonizing staphylococcus infections under that famous beard helped shape the course of twentieth-century totalitarianism . . . ." And DSGE models actually reduce the number of variables taken into account by aggregating them under assumptions which are, to say the least, questionable. Thus, their version of future economic history is inaccurate, sometimes disastrously so.

. . Chapter 4: Trickle-Down Economics: The lie that the best way to help the poor is to reduce the taxes paid by the rich. It isn't. If you believe the trickle-down theory, and you want to help your son or daughter in college or your aging parents, try making me rich by sending the money to me and see how much of what I spend trickles down to those you want to help!

. . Chapter 5: Privatization: the lie that governments never do anything right, and private enterprise will always do it better. It doesn't. The Government put a man on the Moon and back, but just look at the sorry results of privately-run prisons.

What Dr. Quiggin does not, in my opinion, adequately address is WHY these false ideas keep being resurrected. The answer is simple: they are ideas the super-rich want us to believe, because, if accepted, they facilitate the transfer of wealth from those who need it most to those who need it least (because they already have more than enough). So they have their tame economists trumpet these lies, cherry-picking or inventing data to support them. (Whoever said "Show me a supply-side economist and I'll show you an intellectual courtesan." sure hit the nail on the head!)

But despite that omission, the book is well worth reading. Thank you, Dr. Quiggin!

* Thanks to Jim Hightower's "Lowdown" for suggesting the term Laissez-Faire.yland

watziznayme@gmail.com

I am not an economist myself, however, I sometimes read economic books and articles just out of personal interest. When I first saw this book, the cover threw me off but after I started reading it, I found quite fascinating. Quiggin analyzes five "failed" economic hypotheses / ideas which have prevailed in the economic and political scene since the recession in the 70's. These are:

1. The great moderation theory - indefinite economic stability, proved wrong with several recessions around the world including the latest global financial recession.

2. The efficient market hypothesis - the belief that market prices reflect true values, which should have been killed with bubbles and busts that happened in recent years.

3. Dynamic Stochastic General Equilibrium (DSGE) models - proved unrealistic and only concerned with "theoretical consequences of optimizing behavior by rational consumers"

4. The trickle down hypothesis - which argues that the poor and middle class will benefit from the tax breaks given to the rich. This idea has resulted in significant wealth transfer to the rich and huge economic disparity.

5. Privatization - Private sector is always more efficient that the government. Proven wrong by several real life examples contradicting this zombie idea, which has been the global prescription for all governments in the last 30 years.

Theses hypotheses have been dominant in the last 30-40 years but they have not been able to resolve the global and regional economic problems. On the contrary, a widening economic gap between different income groups, and a shrinking middle class are the outcomes of the policies adopted based on these theories. Excellent read!

Whether you agree with the author's conclusions or not, Quiggin presents all the economic ideas discussed in a clear and comprehensive manner. I find his analysis convincing and imagine most other readers will also.

Well written and extremely descriptive. I found this book to get a bit wordy at times with economic jargon, but better that than it being dumbed down and oozing with political agenda. It's nice to see an international focus on economics as opposed to a singular view of America and some kind of belief that American economics, the policies that rule it, and the people making it up are different than the rest of the world, along with a focus on the psychological/historical in addition to the mathematical. Overall something I'd definitely recommend.

A very clear and very sane exposition of the dominant economic nonsense of the last 35 years, that in the end nearly killed off the world financial system, but will not die itself.

This isn't a perfect book; the first 3 chapters are somewhat monotonous. Don't stop reading-- Chapter 4 is terrific, unless you're diehard Laffer Curve fanatic. Quiggin does an excellent job of showing the flaws of free market absolutism, supply-side economics, and privatization. If you're constantly arguing with a loyal reader of the Wall Street Journal editorial page, give them a copy. They might end up realizing, to their horror, that markets are not perfect.

Like the villain in a horror movie, discredited economic theories can return to haunt you. Australian economist John Quiggin claims that some of these ideas - like total privatization, perfectly rational markets and trickle-down policies - nearly destroyed the world's economy, and that they are trying to make one more comeback. In an attempt to drive the final stake through the brain-eating, dead soul of "zombie economics," he knifes through the five most dangerous principles of "market liberalism." With no apparent fear of being controversial, he presents a compelling case as to why each of those "zombie ideas" failed and describes a new, alternative approach, melding the best of free-market capitalism with judicious use of government involvement to address crucial social needs. Quiggin heavily annotates his work and provides a thoughtfully researched bibliography. Though the economic jargon can, at times, slow your progress, Quiggin's book rewards your persistence. getAbstract recommends this eerie tour through defunct yet durable economics to anyone who enjoys a good scare. Find your silver bullets, construct your booby traps and carry your axes for good measure: Quiggin says it is high time to kill those zombies once and for all.