Economics as a Social Science: A Review of ECONned by Yves Smith

I was going to call this review "Naked Came the Economist", but ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism by Yves Smith of Naked Capitalist is too well written. ECONNED can be divided in two major sections. The first part deals with the flawed economic assumptions that led to the collapse of Big Shitpile and other economic fun times. The second part provides a natural history of what happened, while, at the same time, relating it to the flawed economic assumptions. To deal with the last part first, it's a very good description, although those lacking any familiarity with what has happened over the last few years might find it tough going. This isn't Smith's fault: finance, like introductory biology, has a larger glossary than introductory French (seriously, check out some textbooks).

But what really sets this book apart is the deconstruction of the neoclassical paradigm in economics in the first three chapters. Those three chapters should not only be required reading for economics majors, but for anyone interested in economic policy.

Unlike most 'Keynesians', who only turn to Keynes when everything goes to shit, Smith makes the case that the assumptions of neoclassical economics rarely, if ever pertain. Keynes' animal spirits--human irrationality (in the economic, not cognitive sense)--aren't just a property of bubble manias (e.g., tech stocks in the1990s, and the recent housing bubble). Animal spirits are always operative, and often fouling up supposedly efficient markets. I hope this point--arguably the most critical--doesn't get lost, but I fear it will.

ECONned isn't merely partisan bashing (although given the total embrace of neoclassicism by conservatives, they do get dinged a lot more): Paul Krugman comes under criticism too. The first major criticism is the failure by neoclassicists to understand the relevant economic 'natural history': that is, those stupid fucking natural history facts do matter. In Krugman's case, he gets whacked, and rightly so, for claiming that the run up in oil prices wasn't driven by speculation (it was), since he didn't understand how the oil futures market is structured. Conservatives get whacked due to all sorts of ridiculousness too--there's an entire appendix dedicated to bashing one of the most basic neoclassicist models.

But I think the other great insight (other than the universality of animal spirits) is how economics as a discipline, and the intellectual edifice of that discipline, is precarious at best. Smith several times describes economics as a social science, not a hard science. In her opinion, economics failed to catch the bubble, and even contributed to it due to a slavish devotion to mathematical theory (e.g., Gaussian copula functions), when it should have been focused much more on the sociology of economic phenomena (which makes sense given the importance of animal spirits). The false security endowed by supposedly hard (dare we say tumescent?) science blinded much of the discipline to the reality on the ground, whereas some old-fashioned fact gathering might have helped a lot more. A sociologist interviewing buyers and sellers in the CDS and CDO markets would have done a world of good.

In short, this is a superb book, if at times a bit jargon laden, and should be recommended reading for anyone who cares about economic policy and theory.