This fifty-eight-minute film will interest anyone who has taken a college-level course in economics, especially those who were baffled by the professor’s pronouncements but too insecure or embarrassed to ask an obvious question. Filmmaker Mary Filippo began in 2004 to audit economics classes in the hope that she could “learn something about globalization. Does it really help people in developing countries? What are its downsides?” She did not learn these things. She says, “What I found in these courses was instead a difficult to understand presentation of the economy through graphic models.”(1)
Throughout the film, she shows several purveyors of the wisdom of the dismal science making, with a straight face and with the discipline’s ubiquitous graphs, statements that seem ridiculous to any thinking person. These are offered without evidence, and when Ms. Filippo asks for some proof, they resort to either silence or subterfuge. They draw supply and demand graphs and assume that what they show is obvious. If prices are too high, competition in the market will miraculously force them down; if prices are too low, the same force will drive them up. In the end (whenever this might be, though the economists don’t know how long it will take), prices will always wind up at just the point at which the amount demanded equals the amount supplied. This is presented as an ideal situation, one that is, in effect, socially optimal. As some of the critics who participated in film note, the demand curve represents those who might desire a product and have the money to pay for it. When this is pointed out to Gregory Mankiw, author of an economics textbook that has made him millions of dollars, he said that the need for cash to make demand effective is taught in a subsequent course!
In another context, Mankiw, surely as callous and simple-minded a man as ever obtained a PhD, says that to ask questions about inequality, poverty, and so forth, reflects value judgments, which, by definition, are not scientific. They are beyond the purview of the economists, but rather are the stock and trade of journalists, for whom, his words and demeanor imply, he has a low opinion. He goes on to argue that the objectivity and value free nature of economics is due in part to its use of mathematics to buttress its theory, the idea being that since mathematics is itself value-free, any subject that uses it must be value-free as well.
The claim that economics is a science is one of the greatest frauds perpetrated by the adherents of any branch of learning. A professor who taught at the university I attended in graduate school said without irony that economists were really physicists of society. This would surely have generated howls of laughter had there been any physicists on hand when he uttered this nonsense. Real scientists know that, while the starting part of scientific investigation is a hypothesis, which itself is based upon certain assumptions, this is not the ending point. The logic of the assumptions is worked out, typically with the use of mathematics, to generate the hypothesis. But then, the predictions generated in the hypothesis must be tested. Scientists have devised many ingenious experiments to test their hypotheses, and when their results have been replicated by other researchers with the same results, then our confidence in these results is deepened. If at a future time, anomalies begin to appear, then scientists have to go back to the drawing board in an effort to explain these. Sometimes, entirely new theories come into being as a consequence, as when Einstein explained anomalies in Isaac Newton’s physics of the universe with a new theory, that of general relativity.
Economists cannot typically perform the kind of experiments scientists do. The social world isn’t a laboratory in which the variables being examined can be controlled while the scientist records what happens when a change is introduced. Occasionally, the social world throws up what we might call “natural experiments” in which, for example, two circumstances are pretty much alike except for one variable. Then differences in social outcomes might legitimately be thought the result of this one difference. When such natural experiments are not available, other, more indirect, methods can be used to test predictions. These must be used with great care, to avoid circular reasoning.
Unfortunately, mainstream economists, especially when teaching the classes that Mary Filippo audited, never discuss testing. They do mention the assumption that underlies their prediction-generating model. The key term used is the “market,” which is assumed to be the most important social institution that must be studied by economists. In the market, buyers and sellers of both outputs and inputs meet. Each buyer and seller is assumed to be motivated to take action in the market, that is, to buy or to sell, solely out of self-interest. Each is assumed to be autonomous, disconnected from every other market actor, and to base decisions about buying and selling only upon an internal selfish calculus. The sellers of outputs (for example, the owners of an automobile corporation), who are also the buyers of inputs (such as labor), make every business decision with the sole aim of maximizing profits. The buyers of outputs (for example, the purchasers of the automobiles), who are also the sellers of inputs (such as labor), want only to maximize their well-being, or “utility” as the economists put it. If we trace out the logic of the self-interest assumption, we get certain predictions, shown to beginning students through the use of demand and supply graphs, shown repeatedly in My Mis-Education in 3 Graphics.
Let’s look at some examples of the hypotheses we can derive from our assumption. First, the model predicts that an increase in the minimum wage will increase unemployment and reduce employment. The mainstream economists in the film takes this as an article of faith, with no proof needed. One of them interviewed by Filippo, the late George Borts, proclaims that unemployment is the result of wages being too high. But due to the nefarious actions of governments that set minimum wages and perfidious labor unions that force employers to pay decent wages, wages just don’t fall. This professor, along with most other diehard neoclassical economists, would abolish minimum wage laws and, no doubt unions as well. Then wages would fall, and unemployment would disappear. He says on camera that he doesn’t care how low wages would drop, even well below a dollar an hour. Borts has no answer to the question of how anyone could live on such an amount. Showing that he is just as callous and obtuse as Mankiw, he proclaims to Filippo that he finds it bizarre that she wants higher minimum wages and stronger unions. “Bizarre”! Think about that, coming from a person with a chaired professorship at Brown University. Pity his poor students, although some studies indicate the those who take an economics course become more selfish as a result.
The faith in the model of Mankiw and Borts notwithstanding, there is extremely good evidence, gathered by many empirically-minded economists (those who eschew orthodox theory for sophisticated analyses of the data), that raising the minimum wages either has no effect on employment or, in fact, increases it. Ever since David Card and Alan Krueger eviscerated the mainstream view in their book Myth and Measurement: The New Economics of the Minimum Wage, it has become apparent that there is good reason to raise the minimum wage, even though businesses and their shills in the economics profession think this is a bad idea.(2)
We know that inequality in income and wealth has grown to record levels in the United States over the past forty years.(3) Once again, Professor Mankiw, who served as an economics advisor to that great progressive, George W. Bush—how anyone can claim to do value-free science and work for any president is beyond me—either appears oblivious to the fact that this is a grave social problem or explains it away in a simplistic manner. According to the theory, different incomes simply reflect the different “productivities” of the recipients of the income. There are so many things wrong with this notion that we don’t have space to enumerate them all here. The mainstream model says that when markets are in equilibrium, with prices and quantities at the point where demand and supply curves intersect, the wage income that a worker earns is just equal to the money value the worker adds to the employer’s revenue from the sale of its product. Therefore, for employees to deserve higher wages, they simply must become more productive. Otherwise, an employer will suffer losses if a higher wage is paid, with the consequence that workers will have to be discharged and less product will be produced, to the detriment of society. You might ask: how do we measure productivity? What I produce hinges on many factors: what kind of equipment will I have at my disposal? What workers will I be laboring with, given that in any modern workplace, what is produced is invariably a collective effort? How might I become more productive?
I remember thinking about my grandmother. She once worked for rich people in New York City. She labored day and night cleaning, cooking, taking care of children, ironing, and so forth. I think she was extremely productive. Her employers, on the other hand, seemed not to do much at all. But they had lots of money, and she had almost none. How might Mankiw explain this? They had wealth: stocks, bonds, real estate, all of which generate income in the form of dividends, capital gains, interest, and rent. Was it the ownership of these, and the income gotten from it, that made them productive? It would seem so according to the theory. Now if grandma became still more productive, by, say learning how to cook a complicated meal (these folks didn’t eat hotdogs and potato chips for supper) while simultaneously rocking the baby to sleep and ironing dresses, would she have been given a big raise? I doubt it. I imagine that Mankiw would argue that her employers were taking risks by purchasing risky, venture forms of wealth or that they were simply being rewarded for saving money now so that they would have greater income and wealth in the future. Yet, if today, Jeff Bezos, the world’s richest person went into a coma, meaning that his productivity surely would be zero, wouldn’t he keep right on collecting vast amounts of income, which his hired managers would then convert into still more wealth? Maybe, them that’s got is them that gets, and productivity has nothing to do with it.
What is more, should workers become more productive, the theory tells us that employers must either pay a higher wage or hire more workers or profits will suffer. A look at U.S. overall productivity data (basically total output divided by something like total hours worked) indicate that for decades, productivity in the economy has risen considerably, but wages have not, as Filippo shows in her film. This flies in the face of the neoclassical predictions, though economists seem not to have noticed.
Let’s give the economists the benefit of the doubt and agree that wages are productivity dependent. Most economists would admit that productivity cannot be measured directly. So, they use proxies for it, the most common being education and experience. Workers with more schooling are presumed to be more productive, although I know of no direct evidence proving this. Once radical economists, Samuel Bowles and Herbert Gintis, showed in their book, Schooling in Capitalist America, that students are more likely to be rewarded with good grades and workers are more likely to get good ratings from supervisors, not because they are creative and knowledgeable but because they are perseverant and identify strongly with their school and bosses.(4) However, the economists reason that, because those with more schooling have higher wages, they must be more productive. That this is circular reasoning seems not to matter. There are other explanations of why more schooling leads to higher incomes, but these are dismissed because they have nothing to do with productivity.(5) I used to tell my students that it might well be that they will make more money someday simply because they were willing to sit in truly uncomfortable chairs and give back to the teacher exactly what the teacher said for four years. It wouldn’t be because they had all become magically more productive, though an employer, fed the same propaganda as the students, might assume they are.
We can combine product and input (factor) markets in another example of the model’s predictions. Suppose that all markets are in equilibrium, that is, demand and supply are equal in all product and factor markets. Now, imagine that consumers would like to have more of a particular output, say, coffee. The economists assume people always want more and more of most things, and economics is really the “science” of making choices, given that while we want more, we may be constrained by our incomes. In this case, imagine that there has been an increase in consumer incomes, leading them to want more coffee. In terms of the supply and demand graphs, this is shown as a rightward shift in the demand graph, indicating that at every price, more will be purchased. The price of coffee will rise, and, given that the new equilibrium (intersection of the old supply graph and the new demand graph) shows a greater quantity of coffee supplied, profits must increase. Then, the economists argue that, over the long run, higher profits will attract new firms to this market, shifting the supply graph to the right as well, raising supply but also forcing prices and profits down. In fact, the theory claims, supply will rise until profits are reduced to zero. Zero, you say? When the filmmaker presses Professor Mankiw on this, he says that economists don’t conceive of profits as ordinary people do. Profits may appear to be zero, but this is because this what the economists think of as profit is really a cost of production, just like wages and the costs of raw materials. The cost is an “opportunity cost,” what the capitalist gives up by going into business in the first place. The money laid out by a business firm could have been put into an asset with a guaranteed return, such as a federal government bond. If on average, such bonds yield an interest of 3 percent, then while what an accountant would count as profit will be reduced to zero by competition, but there will still be economic profit, namely the 3 percent. However, this isn’t really profit but a cost of doing business.
It might seem strange to consider profit as a cost of production. And, indeed it is. As one of the critical economists says in the film, why would a businessperson go to all the trouble of starting a business, only to find that he or she could have done as well over the long run by buying that government bond. The unreality of this truly is mindboggling. Adam Smith said in the Wealth of Nations, published 244 years ago, that those engaged in business never meet with one another without discussing ways to restrict competition by implementing barriers to the entry of new firms, in the form of monopolies (one firm controlling a market) and oligopolies (a few firms doing the same). If such arrangements are successful, the entire competitive theory falls to the ground because profits will not fall and neither will prices. Mankiw tells Mary Filippo that monopoly power is greatly exaggerated, but, not surprisingly, he offers no proof. As you might guess, there is plenty of evidence contrary to what he believes.(6)
The final part of the film covers the development of macroeconomics, the study of the overall economy rather than individual markets. The split between the analysis of particular markets and the entire economy came about as a result of the failure of the market approach to explain the Great Depression of the 1930s. It is most associated with the name of John Maynard Keynes. The neoclassical model predicted, although the film does not make this clear, that long-term involuntary unemployment (a curious phrase as why would anyone needing money to live choose to be unemployed?) is impossible in a market economy. Unemployment would put in motion a set of chain reactions, such as falling wages, prices, and interest rates, that would cause the economy to reverse course and, over the long run, eliminate the unemployment. Keynes and others argued that this wasn’t likely to be the case, and only if some outside force, such as the government, consciously stimulated the demand for goods and services through its own spending, would a severe downturn come to an end. Keynes famously quipped, in a pointed jab at the neoclassical notion that economic problems will always disappear in the long run that “In the long run, we are all dead.”
The critics of the mainstream view in the film point out that the Keynesian view is correct, but rather than admit this, neoclassical true believers have managed to incorporate Keynes’s insights once again into their demand and supply analyses in such as way as to basically eradicate what Keynes was trying to tell them. However, the discussion of this in the film is unsatisfactory, jumping all over the place and, I would guess, confusing viewers unnecessarily. Suffice it to say that today Keynes is not much taught, and markets have once again taken over the textbooks.
Overall, this film is well-done, and by letting neoclassical economists indict themselves and their ideas, it makes its points without becoming heavy-handed. Yet, two shortcomings stick out in this reviewer’s mind. First, most of the on-camera critics assembled by Mary Filippo as counterpoints to Mankiw, Borts, et. al. do indeed make clear just how awful is mainstream economics, as are the textbooks students must buy to help them learn it. However, these economists make basically liberal and not radical critiques. Only John Bellamy Foster, editor of Monthly Review and professor at the University of Oregon, gets to the heart of the matter, namely that capitalism is a system focused only on the exchange value of goods and services. It ignores what is most important—their use value. The distinction between the two is central to Karl Marx’s profound analysis of economics as professed then, in the mid-to late 1800s, and now, in 2020. Liberal economists, most notably Keynes, have often enough sharply and intelligently opposed the standard wisdom taught by mainstream economists, from Irving Fisher and George Stigler to Milton Friedman and Gary Becker. But they have no real grasp of capitalism either, and this they share with their conservative, libertarian colleagues.
Consider Nobel Economics Prize winner and former head of the World Bank, Joseph Stiglitz.
During the Occupy Wall Street movement of 2011, he said this to the occupiers in Manhattan:
You are right to be indignant. The fact is that the system is not working right. It is not right that we have so many people without jobs when we have so many needs that we have to fulfill. It’s not right that we are throwing people out of their houses when we have so many homeless people. Our financial markets have an important role to play. They’re supposed to allocate capital, manage risks. We are bearing the costs of their misdeeds. There’s a system where we’ve socialized losses and privatized gains. That’s not capitalism; that’s not a market economy. That’s a distorted economy, and if we continue with that, we won’t succeed in growing, and we won’t succeed in creating a just society.
Not long after he spoke, I wrote this:
Almost every sentence after the first one is wrong. The sentences about the unemployed and the homeless would be fine on their own, but unfortunately they follow the one that says that “the system is not working right.” How so? It is working exactly as capitalist systems work. They have always been marked by poles of wealth and poverty, periods of speculative bubbles followed by recessions or depressions, overworked employees and reserve armies of labor, a few winners and many losers, alienating workplaces, the theft of peasant lands, despoiled environments, in a word, the rule of capital. Losses are always socialized, and gains are always privatized. It is impossible to create a society that is both just and capitalist.(7)
Stiglitz, like Mankiw and Keynes himself for that matter, cannot imagine a society that is not fundamentally capitalist. He only wants capitalism to be fairer and more just. The same can be said of most of the liberals interviewed for the film and by such liberal stalwarts as Paul Krugman, columnist for the New York Times and also a Nobel Economics Prize winner. Radical economist and late editor of Monthly Review, Harry Magdoff, called Krugman a “prizefighter for capitalism”!(8)
Second, neoclassical economists have perpetrated a bold lie, a clever trick, in effect, one transparent to those who have examined it with a radical eye but believable by those who have not. Here is how I described the legerdemain deployed by the architects of the dismal science:
The main trick used by professors of economics is to draw their pupils into a make-believe world and then convince them that this world is a good approximation to the real world, enough so that the world in which we live can be studied effectively by analyzing the fantasy world. In fact, the professors also claim that this pretend world is a good approximation not just of the world of today but of the world of any time in human existence, so that any society can be studied through its lens. To them the neoclassical theory is as universal and timeless as the theories of Einstein. They see economics as the physics of the social world.
The economists take their analysis one step further. The hypothetical world of their theory is in all important respects an ideal world, the best we could have. Therefore, any deviation from it that we observe in the world of existence should, in the interest of human happiness, be eliminated.
It is a curious thing to say that something should change in the living world because it does not conform to a world which does not, . . . and could never, exist. For example, a minimum wage set by the government interferes with the efficient operation of the ideal world by causing a loss of employment. The neoclassical economists then conclude that we should not have a minimum wage in the actually existing world. Or, the economists conflate the ideal economy of their theory with the real economy, which is capitalism. Since the imaginary economy is good, so too is capitalism. It is no wonder that economics has been compared to religion. To hold such views requires a strong faith.(9)
One would think that if economics really were a science, then the failure of its predictions to stand up to empirical scrutiny would doom it as surely as the observations and mathematics of the early physicists and astronomers laid to rest the notion that the sun revolved around the earth. How has this not been the case? We must understand that stating the obvious fallacies of neoclassical economics and the manifest shortcomings of its proponents will not weaken its hold. It will only tumble to the ground if a significant number of students and economists ally themselves with working men and women—those who can and must be the agents of radical change—teaching them, writing for and with them, becoming one of them in their own workplaces. Only then is it likely that Mary Filippo could take an economics class and learn what she had in mind, to learn something about globalization. Does it really help people in developing countries? What are its downsides?”
Notes:
My Mis-Education in 3 Graphics,” a film by Mary Filippo. Website
- my-mis-education-in-3-graphics.org
- David Card and Alan Krueger, Myth and Measurement: The New Economics of the Minimum Wage, revised edition (Princeton, NJ: Princeton University Press, 2015). See www.epi.org for further evidence that raising the minimum wage does not reduce employment. The notion that higher wages are associated with more unemployment, a clear prediction of mainstream economics, has been refuted on a grand scale in David G. Blanchflower and Andrew J. Oswald, The Wage Curve (Cambridge, MA: MIT Press, 1995).
- See Michael D. Yates, The Great Inequality (London: Routledge, 2016).
- Samuel Bowles and Herbert Gintis, Schooling in Capitalist America: Educational Reform and the Contradictions of Economic Life (New York: Basic Books, 1977).
- One such explanation is the “signaling” hypothesis. Here, a college degree sends a signal to employers that a prospective job candidate is more productive than one without a degree. However, it can be shown that a less productive person with a college degree will still receive a higher wage than a more productive person without such a degree. See Michael Spence,. “Job Market Signaling,” Quarterly Journal of Economics, 87/3 (1973): 355–374.
- See John Bellamy Foster, Robert W. McChesney and R. Jamil Jonna. “The Internationalization of Monopoly Capital,” Monthly Review, 63/2 (June 2011): 1-23.
- Michael D. Yates, “”Occupy Wall Street and the Celebrity Economists,” monthlyreview.org
- The Editors, “A Prizefighter for Capitalism,” Monthly Review, 53/2 (June 2001): 1-5.
- Michael D. Yates, “All the Economics You Need to Know in One Lesson,” mronline.org