Economics vs. fakeonomics
By Ian Fletcher
Online Journal Contributing Writer
Sep 24, 2010, 00:14
We skeptics of free trade are used to being told, �You don�t
understand economics.� In fact, one major reason I wrote the book Free Trade
Doesn�t Work was simply to expose, once and for all, that there do
exist extremely serious and intellectually reputable arguments, within the
confines of accepted mainstream economics, which question free trade. And
indeed they exist.
But I�ve noticed something. We skeptics are often not really
struggling against real eco-nomics at all. When I pick up a copy of the Wall
Street Journal, or Forbes, or The New York Times, or turn on Fox TV or MSNBC, or read
papers issued by the libertarian Cato Institute or the Peterson Institute for
International Economics, I don�t even find economic arguments. I find a
mischievous substitute for economics we can call �fakeonomics.�
What is fakeonomics? It sounds like economics to the
uninitiated. It uses the same lan-guage, addresses the same issues, and fills
the same logical hole in the national policy discourse. Most people can�t tell
the difference. But fakeonomics is not the real thing.
How is fakeonomics fake? It tells a story that goes
something like this . . .
Free markets are always right, always and everywhere.
Anyone who doesn�t believe this is stupid. Smart people not
only understand that free markets are best, they like free markets,
because free markets mean opportunities to get rich.
Or maybe they�re corrupt. The opposite of free markets is
government. Government is always incompetent. It never does anything right. Ever.
Or maybe they�re evil. Anyone who doesn�t believe in
perfectly free markets is a Marxist wannabe or a loser jealous of
Free trade is just free markets applied internationally.
Therefore, all smart, good, successful people must
believe in free trade.
Unfortunately, fakeonomics is, at best, a crude parody of
economics. It is often larded with a thick layer of moral hectoring, courtesy
of a certain variety of the American Right which seems to think that economics
is its exclusive property, a stick given it by God to beat liberals with. There
is even a whole class of people, known as �libertarians,� who elevate
fakeonomics to the level of an all-encompassing moral ideology. (Their
fundamentalist sect is the old Ayn Rand cult, who call themselves
So let�s be clear about one thing: real economics does not
support the idea that 100 percent pure free markets are best. Not domestically,
not internationally. That�s why the U.S. has, like every other developed
nation, a mixed economy, with government amounting to about 35 percent
(pre-2008; it�s spiked since then) of our GDP and various laws, from child
labor laws to environmental laws and the SEC, regulating much of the rest. It�s
easy to fulminate against this fact in beautiful after-dinner speeches about
economic liberty, but the reality is that when in office, even conservative
Republicans grasp the necessity of most of these policies�whatever adjustments
on the margin they may make.
Surveys indeed show that about 90 percent of economists
support free trade. But, and this is crucial, only about 70 percent of them
support it without reservation.
Economists are, in fact, well aware of a number of problems with free trade,
- Free trade for America is
one-sided, with most major foreign economies practicing managed trade of
one kind or another.
- When free trade involves
trade deficits, it may be optimal in the short run but is unsustainable
over longer time horizons.
- Even if it increases GDP,
it has even stronger effects on income distribution and can thus harm
many, or even most, of the people in the economy.
- The adjustment costs of
declining industries�from unemployment checks to the rubble of Detroit�are
huge and ongoing.
- It brings us cheap goods
today at the price of building up economic rivals who will take markets
away from us tomorrow.
- It helps dirty industries
move from environmentally strict jurisdictions to environmentally lax
- Even if it is
efficient in the short run, efficiency per se has little to do with
long-term economic growth.
- The theory of comparative
advantage�which supposedly proves that free trade guarantees win-win
outcomes�doesn�t hold in the presence of capital mobility between nations.
None of the above is especially new information, though
these points are legitimately controversial like anything else. My point here
is simply that economics does not grant free trade the blank check many people
seem to think it does. Nonetheless, the juggernaut of fake-onomics, which
doesn�t understand this, rolls on.
The really scary thing about fakeonomics is that it is not
just a vulgar version of economics, served up to amuse the audience of Bill O�Reilly�s
TV show. It is also believed in by people who should know better. Like it or
not, fakeonomics is mistaken for real thinking by a disturbingly large
number of people with top MBAs, graduate degrees in serious fields,
Congressional staffers, et cetera. (I know; my job obliges me to talk to
these people all the time, and they tell me so.) Perhaps it�s just laziness on
their part, but people who should be taking their bearings from more serious
sources�people whose careers depend upon the idea that they have genuine
expertise�are drawing their ideas from fakeonomics. These are people who pride
themselves on understanding the most sophisticated ideas when it comes to, say,
corporate finance, but here they are, relying upon intellectual constructs of a
chat-show level of sophistication.
Make no mistake: fakeonomics matters. For one thing, it is
the implied theoretical model of current U.S. trade policy. That is to say, if
one looks at American trade policy and asks what picture of the economy one
would have to hold in order to believe that these policies make sense,
fakeonomics is that picture. So whatever sophisticated version of real
economics someone like ex-Harvard professor Larry Summers may have tucked away
in his head somewhere, when he acts as economic advisor to President Obama,
fakeonomics is what he dishes out.
One can, of course, gin up rationalizations bridging the gap
between real economics and fakeonomics on any given issue at will. So there�s
no point confronting people like Larry Summers with the gap between, say, their
own theoretical writings and the policies they support in office. If they
weren�t bright enough to pull off a piece of minor casuistry like that, they
wouldn�t be where they are in the first place.
Why are the nominally sophisticated so misguided? Because
fakeonomics tells them what they want to hear. At bottom, fakeonomics is the
ultimate free lunch story. Its seductive mes-sage is that we can consume all we
want, right now, and never
worry about the consequences. �Free� trade translates as �don�t worry about�
trade. The market forgives all sins.
Unfortunately for this happy fantasy, fakeonomics can only
maintain this fantasy vision by systematically ignoring half of economic
reality. It is, for one thing, almost exclusively focused on consumption,
ignoring the production side of the economy. So it has plenty to say about how
cheap imports provide consumers lower prices, but blithely airbrushes out of
the picture the way imports deplete our industrial base. Of course, in the long
run, nobody can afford imports, however cheap, without the ability to produce
something to exchange for them. But that, of course, is the long run, and
fakeonomics is about instant gratification and letting the chickens come home
to roost in the next administration.
What does all this mean? It means that there are really two
targets, for those of us who would criticize free trade. There is economics per
se, which tends to be
pro-free-trade, but is actually surprisingly well aware of the counterarguments
and becoming slowly but inexorably more skeptical. And there is fakeonomics,
which is dogmatically pro-free-trade, proactively ignorant of the counter-arguments,
and determined to stick its head in the sand. Shooting at the first target does
almost nothing, unfortunately, to hit the latter, which is arguably more
important, at least in the short run, for determining real-world policy
outcomes. As a result, the first question one must ask, when querying some
piece of economic reasoning offered as justification for policy is this: is it
Or is it fakeonomics?
Ian Fletcher is the author of the Free Trade Doesn�t Work: What
Should Replace It and Why (USBIC,
2010, $24.95) An Adjunct Fellow at the San Francisco office of the U.S.
Business and Industry Council, a Washington think tank founded in 1933,
he was previously an economist in private practice, mostly serving hedge funds
and private equity firms. He may be contacted at email@example.com.
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