Wonderful! This is one of the last books my late partner read before he died. He built two med tech companies, took both public, sat on several corporate boards & was a venture investor. He understood economics and thought we needed a broader lens for defining a healthy economy. He recommended the book so I read it after his death. I was disappointed. Raworth reminds me of education pundits who have inspiring ideas for transforming learning but little understanding of what society expects from schools. Your critique is thorough & clear. Thanks!
I assume that Noah wrote the first paragraph of the post as a parody of the story that heterodox economists like to tell, but in case readers missed that point, I want to set the record straight. The "math heavy" economics of the 60s and 70s was not the basis for the libertarian view of the market, which was most often based on Hayekian type arguments. Actually, most of people who built the general equilbrium framework were at least left of center.
The main reason for the development of the theory was intellectual. The demand and supply framework, which forms the basis of some of Noah's diagrams, consider a single market. There was a need to understand how it expanded to many interrelated markets (you need fertilizer and land to produce oranges, and machines to transform them in juice).
The fact that the theory has dropped out of favor is actually a big problem. For instance, people will compute social surplus on the basis of a demand and supply diagram, without realizing that the interpretation as a measure of social welfare depends on the fact that the supply curve and the demand curve are computed with prices of inputs, complements and substitutes that are not distorted.
For what it is worth, I went to MIT to do a MS in management, and decided to do a PhD economics because of the course taught by Duncan Foley on the basis of Koopmans first essay on the state of economic science. This was basically a course on the basis of general equilibrium theory, and it never entered my mind that it was a defence of a libertarian or conservative project, and Duncan would reveal soon after that he was in fact a Marxist!
Her writing style is very clear to people who haven't studied economics (I never took a formal class beyond high school). Her earlier chapters are the strongest because they function much like a textbook. It starts to fall apart in the application and solutions section, though. It seems like the diagram was the main point and the other stuff was just kinda tacked on.
Basically, Noah is spot on. It can be a nice diagram to communicate ideas that's more intuitive and less-intimidating than actual graphs. It could be a communication tool for mainstream economists to describe to laypeople who really do struggle with the math aspects.
The debate on the basics of economics is rather extensive for a Substack comment, but I do have to point out that these mental models matter and have real world consequences. If the mental model that gets taught in economic classes is one of increasing marginal costs and rational behavior and equilibrium and efficient markets, then this is what people who come out of this class will end up believing, and this is what starts informing people's behaviors and the design of our laws and institutions and policy. (OR, people end up wondering the rest of their lives whether economists really do believe this shit). Limits to growth matter, yet mostly this hasn't informed policy in the countries where it matters most. Of course politics often overrules any intellectual input, but it doesn't help when influential economists (like Solow) for decades have pretended as if there aren't such things as environmental constraints, or didn't counter the idea that a 'free market' is somehow possible. Development economist like Sen, Rodrik and Raworth know this to be true, although their level of opposition to the mainstream model differs. Raworth is opposing the 'orthodox' model because she has from her own experience learned that it has been holding back development opportunities. She knows we need to tell the right story, if we want to take the right actions. (Also why Sen tried to shift the conversation to capabilities, I guess)
The doughnut is interesting because it clearly shows, in one image, a whole set of variables that all matter. The standard image economics gives is that price and quantity matter, and nothing else. I know that economists do not believe that to be true (although, when reading Mankiw's introduction to micro, you sometimes get the impression that he actually believes the world works like that...). But the foundational models matter, and the story matters, even if somewhere in between you still throw in some of those 'orthodox' models if they've been proven to be accurate.
People don't like economics because economics describes how the world actually works, which is different than they way they want it to work.
But if you want to achieve policy goals you need to understand the way the world actually works, and the tradeoffs that will occur when trying to achieve those policy goals.
Economics is and should be value neutral. Then politicians can look at the various tradeoffs and decide what policy to pursue. But failing to understand those tradeoffs will usually mean you don't achieve the policy goals, and will often break other things in the process.
An alternate book for those interested in thoughtful critiques is "Beyond Growth" by Herman Daly. He's a World Bank Economist but makes a number of interesting points.
For example, growth (as defined by ever increasing resource use) has limits, but development (better use of those resources) does not.
Note I have a BA in economics and I thought it was still a bit technical for me, but still enjoyable.
But that's a strawman because it's not how anyone ever defined growth.
A similar thing happened to leftists because they redefined charity to mean "money rich people give out to control you" so they had to start calling actual charity "mutual aid" despite it not being mutual aid.
Great essay, but what would a new economics that is based on absorbing the reasonable criticism of their revisionist opponents of rational free markets look like?
Hopefully, this part 2 of this essay…
Or maybe you could take that challenge on in another essay.
Noah, I also read the book and agree with many of your positive comments. However, it seems to me that you were often triggered by a few words and then saw what you wanted to see in them, rather than what she actually wrote. I would have much preferred if you had discussed the major themes of the book (i.e. the chapters), rather than skim and "see" details you might disagree with. For example, you criticize Raworth’s comments on state banks and QE. As I read the book, her point with the quotes you gave was that having state banks separate from the Fed and private banks, you could separate what interest rate was charged for different purposes. She cared about the common person who has little or no money invested in stocks and bonds, over the “rentiers,” (like you and me) who gained profits, while the little guys got hurt. Only the state of North Dakota has a state bank, and it seems to help common people. What is your feeling about having state banks in more (or all) states? How about the USPS having accounts for poorer people to cash their work checks, and lend money at low rates, so that they do not need to go to high-rate payday loan companies?
It seems to me that you sometimes twist what she wrote to fit your criticism. For example, in her chapter called “Be Agnostic about Growth” (with which I agree), rather than you addressing that topic, you criticize details without even paying attention to her point. She mentions the Easterlin study and also that it had been called into question by the paper you referenced. She actually wrote “Even if we were to accept Easterlin’s data at face value, the fact that people’s happiness stayed flat while their income rose is no proof that happiness would still stay level if incomes flatlined.” When I read your articles, you pay lip service to the common people, but actually seem to care more about the wealthy capitalists. Perhaps that's because you believe that they are what makes capitalism work…
"you could separate what interest rate was charged for different purposes"
The market loans out money based on risk, with the interest rate dependent on the riskiness of the investment (how likely it is to get paid back). The riskier it is, the higher the interest rate.
When you replace that with government bureaucrats deciding who should get the money at below market rates you are going to get malinvestment. Basically by definition you will be loaning money below market rates to people who are too risky to get money at that rate.
IE a huge subsidy. Now maybe there are some limited instances where the cost of that subsidy justifies it. But as a general matter it's just a REALLY bad idea.
Also, it should be noted over 60% of Americans have a retirement plan that invests in some combination of stocks and bonds. IE the majority of Americans do.
Finally, it's not some herculean task get a bank account. You get just a bit of cash and open it. You can easily do this at 18. People go to payday lenders not because they can't get a bank account, but because they are such horrible credit risks, that nobody else will loan to them.
What about the other 40%? Public banking is working in North Dakota (look it up: Bank of North Dakota. It only lends locally and returns the interest to the state govt), and has been working for many, many years in Germany: local Sparkassen und Landesbanken. I know, I lived there many years ago, and they still work now. Also, the USPS offered secure bank accounts for people from 1911 to 1967. I used to work there.
The other 40% either need to earn more income, or spend less money so they can save more and invest.
I'll give you an example, one of my buddies his family were immigrants. They had 4 families that got together, they all bought a house together. 4 families lived in that one house until they had saved up enough to buy each family a house.
My wife and I moved in with my parents for several years AFTER we were married. We did that to save up for a home.
Before that I was seeing a girl where all the rooms had multiple bunkbeds in there were the adults lived.
You need to do what you have to do to get ahead. IE live below your means. Yep that will suck sometimes.
As for state banking, I don't believe that's necessary. The current banking system works just fine in 99% of cases.
What is the mechanism for a public bank being able to help people?
A bank that targets a specific industry can help the people in that industry because it has expertise and can help you with business plans, loan to better ones and avoid worse ones, etc.
But when I see this public bank idea it seems like you're just proposing stealing money from account holders and giving it to "the common people". Because where else does the money for their unnaturally low interest loans come from?
Did you read the refs I gave? It really helps local economies. For example, please read about the Bank of North Dakota to get a better feel: https://thebndstory.nd.gov/bnd-partnership-with-local-lenders/ BND works with local banks and credit unions to give lower rate loans to local small businesses and farmers than large national banks would if they gave a loan at all. The nationals give lower rates and fewer fees to large companies and wealthy individuals. The locals know their people better than the large national banks.
Blockchain will save the environment??? Thanks Noah I no longer need to read this so called critique of economics. How does an energy intensive scam make the environment better? I liked your recommendation to read Duflo and Banergees Good Economics for Hard Times. I think that book does a better job of criticizing Friedman style neoliberal economics!
I'm also dubious that blockchain can save the environment, but in fairness the author was referring to Ethereum which has moved to the much less energy intensive Proof of Stake algorithm as opposed to Bitcoin's Proof of Work.
The authors’ answer to their own question is “The Greatest Good, for The Greatest Number, over The Longest Run;” and,
The way to achieve this is an economy built on sound market economics, along with progressive taxation adequate to ensure that the current “losers” of any given economic moment can be protected from ultimate harm and that the winners of any moment are responsible for “keeping the game running” (and how they do that is to pay most of the taxes).
I still think both things are true! But I can’t vouch for any of that other stuff this review claims the book discusses.
Could add a 3rd “way” to that second point: regulations and laws defending against the price-distortions of monopoly and other barriers to entry into that “sound market”.
Yes, a market means a competitive market. If you have a monopoly situation, or allow firms to employ uncompetitive practices (such as price fixing) then things break down.
Minor quibble in an excellent review: QE does lower the ror on risky assets, i.e., the cost of borrowing or selling stock for risky borrowers; that is how it's supposed to work.
I would love to read your take on the role of negative externalities. GDP does not seem to address the cost of environmental degradation or the impact on health expenses caused by air pollution. Costs are assumed by people who overwhelmingly do not directly benefit from decisions made by companies. I’m not a fan of regulation to address this, but without pricing in the cost and letting markets find the most cost effective solution, there seems not to be a mechanism to address this. Water, air, and biodiversity are not free - there is a price and someone always ends up paying it.
Sometimes I think the world has an oversupply of smart and "smart" people. With an undersupply of humble insightful thinkers.
Paradigm changers know in almost every case, absolutely everything about the "giant shoulders they stand on".
Galileo knew all about the world of Aristotle and Stole my.
Newton knew everything about them and Galileo and Copernicus.
Einstein and Bohr knew everything that Newton knew.
Even Steve Jobs, Bill Gates knew everything about the science and technology of computers and software.
I do appreciate that the Paradigms of Macroeconomics have fuzzy and sometimes amorphous boundaries.
Good review!
Thanks!!
Wonderful! This is one of the last books my late partner read before he died. He built two med tech companies, took both public, sat on several corporate boards & was a venture investor. He understood economics and thought we needed a broader lens for defining a healthy economy. He recommended the book so I read it after his death. I was disappointed. Raworth reminds me of education pundits who have inspiring ideas for transforming learning but little understanding of what society expects from schools. Your critique is thorough & clear. Thanks!
I assume that Noah wrote the first paragraph of the post as a parody of the story that heterodox economists like to tell, but in case readers missed that point, I want to set the record straight. The "math heavy" economics of the 60s and 70s was not the basis for the libertarian view of the market, which was most often based on Hayekian type arguments. Actually, most of people who built the general equilbrium framework were at least left of center.
The main reason for the development of the theory was intellectual. The demand and supply framework, which forms the basis of some of Noah's diagrams, consider a single market. There was a need to understand how it expanded to many interrelated markets (you need fertilizer and land to produce oranges, and machines to transform them in juice).
The fact that the theory has dropped out of favor is actually a big problem. For instance, people will compute social surplus on the basis of a demand and supply diagram, without realizing that the interpretation as a measure of social welfare depends on the fact that the supply curve and the demand curve are computed with prices of inputs, complements and substitutes that are not distorted.
For what it is worth, I went to MIT to do a MS in management, and decided to do a PhD economics because of the course taught by Duncan Foley on the basis of Koopmans first essay on the state of economic science. This was basically a course on the basis of general equilibrium theory, and it never entered my mind that it was a defence of a libertarian or conservative project, and Duncan would reveal soon after that he was in fact a Marxist!
Most of the Hetrodox economists might just be, as Noah insinuated here, those who can't handle the math. :)
Relevant webcomic: https://www.smbc-comics.com/?id=2383
Her writing style is very clear to people who haven't studied economics (I never took a formal class beyond high school). Her earlier chapters are the strongest because they function much like a textbook. It starts to fall apart in the application and solutions section, though. It seems like the diagram was the main point and the other stuff was just kinda tacked on.
Basically, Noah is spot on. It can be a nice diagram to communicate ideas that's more intuitive and less-intimidating than actual graphs. It could be a communication tool for mainstream economists to describe to laypeople who really do struggle with the math aspects.
The debate on the basics of economics is rather extensive for a Substack comment, but I do have to point out that these mental models matter and have real world consequences. If the mental model that gets taught in economic classes is one of increasing marginal costs and rational behavior and equilibrium and efficient markets, then this is what people who come out of this class will end up believing, and this is what starts informing people's behaviors and the design of our laws and institutions and policy. (OR, people end up wondering the rest of their lives whether economists really do believe this shit). Limits to growth matter, yet mostly this hasn't informed policy in the countries where it matters most. Of course politics often overrules any intellectual input, but it doesn't help when influential economists (like Solow) for decades have pretended as if there aren't such things as environmental constraints, or didn't counter the idea that a 'free market' is somehow possible. Development economist like Sen, Rodrik and Raworth know this to be true, although their level of opposition to the mainstream model differs. Raworth is opposing the 'orthodox' model because she has from her own experience learned that it has been holding back development opportunities. She knows we need to tell the right story, if we want to take the right actions. (Also why Sen tried to shift the conversation to capabilities, I guess)
The doughnut is interesting because it clearly shows, in one image, a whole set of variables that all matter. The standard image economics gives is that price and quantity matter, and nothing else. I know that economists do not believe that to be true (although, when reading Mankiw's introduction to micro, you sometimes get the impression that he actually believes the world works like that...). But the foundational models matter, and the story matters, even if somewhere in between you still throw in some of those 'orthodox' models if they've been proven to be accurate.
People don't like economics because economics describes how the world actually works, which is different than they way they want it to work.
But if you want to achieve policy goals you need to understand the way the world actually works, and the tradeoffs that will occur when trying to achieve those policy goals.
Economics is and should be value neutral. Then politicians can look at the various tradeoffs and decide what policy to pursue. But failing to understand those tradeoffs will usually mean you don't achieve the policy goals, and will often break other things in the process.
repeat after me,
There is no free lunch
An alternate book for those interested in thoughtful critiques is "Beyond Growth" by Herman Daly. He's a World Bank Economist but makes a number of interesting points.
For example, growth (as defined by ever increasing resource use) has limits, but development (better use of those resources) does not.
Note I have a BA in economics and I thought it was still a bit technical for me, but still enjoyable.
https://www.amazon.com/dp/0807047090/?bestFormat=true&k=beyond%20growth&ref_=nb_sb_ss_w_scx-ent-pd-bk-d_k0_1_13_de&crid=BLDSIJD0XA44&sprefix=beyond%20growth
Who defines growth as increasing resource use? GDP growth comes from increasing the rate at which they're exchanged, not used.
The book separates growth from development so we can better understand the constraints to growth in the real world.
The traditional definition doesn't provide a framework for doing that, so you can't understand when you are getting in trouble.
But that's a strawman because it's not how anyone ever defined growth.
A similar thing happened to leftists because they redefined charity to mean "money rich people give out to control you" so they had to start calling actual charity "mutual aid" despite it not being mutual aid.
Great essay, but what would a new economics that is based on absorbing the reasonable criticism of their revisionist opponents of rational free markets look like?
Hopefully, this part 2 of this essay…
Or maybe you could take that challenge on in another essay.
Noah, I also read the book and agree with many of your positive comments. However, it seems to me that you were often triggered by a few words and then saw what you wanted to see in them, rather than what she actually wrote. I would have much preferred if you had discussed the major themes of the book (i.e. the chapters), rather than skim and "see" details you might disagree with. For example, you criticize Raworth’s comments on state banks and QE. As I read the book, her point with the quotes you gave was that having state banks separate from the Fed and private banks, you could separate what interest rate was charged for different purposes. She cared about the common person who has little or no money invested in stocks and bonds, over the “rentiers,” (like you and me) who gained profits, while the little guys got hurt. Only the state of North Dakota has a state bank, and it seems to help common people. What is your feeling about having state banks in more (or all) states? How about the USPS having accounts for poorer people to cash their work checks, and lend money at low rates, so that they do not need to go to high-rate payday loan companies?
It seems to me that you sometimes twist what she wrote to fit your criticism. For example, in her chapter called “Be Agnostic about Growth” (with which I agree), rather than you addressing that topic, you criticize details without even paying attention to her point. She mentions the Easterlin study and also that it had been called into question by the paper you referenced. She actually wrote “Even if we were to accept Easterlin’s data at face value, the fact that people’s happiness stayed flat while their income rose is no proof that happiness would still stay level if incomes flatlined.” When I read your articles, you pay lip service to the common people, but actually seem to care more about the wealthy capitalists. Perhaps that's because you believe that they are what makes capitalism work…
"you could separate what interest rate was charged for different purposes"
The market loans out money based on risk, with the interest rate dependent on the riskiness of the investment (how likely it is to get paid back). The riskier it is, the higher the interest rate.
When you replace that with government bureaucrats deciding who should get the money at below market rates you are going to get malinvestment. Basically by definition you will be loaning money below market rates to people who are too risky to get money at that rate.
IE a huge subsidy. Now maybe there are some limited instances where the cost of that subsidy justifies it. But as a general matter it's just a REALLY bad idea.
Also, it should be noted over 60% of Americans have a retirement plan that invests in some combination of stocks and bonds. IE the majority of Americans do.
Finally, it's not some herculean task get a bank account. You get just a bit of cash and open it. You can easily do this at 18. People go to payday lenders not because they can't get a bank account, but because they are such horrible credit risks, that nobody else will loan to them.
What about the other 40%? Public banking is working in North Dakota (look it up: Bank of North Dakota. It only lends locally and returns the interest to the state govt), and has been working for many, many years in Germany: local Sparkassen und Landesbanken. I know, I lived there many years ago, and they still work now. Also, the USPS offered secure bank accounts for people from 1911 to 1967. I used to work there.
Read e.g. https://rooseveltinstitute.org/blog/banking-for-all/ or Ellen Brown's https://substack.com/home/post/p-167858756
The other 40% either need to earn more income, or spend less money so they can save more and invest.
I'll give you an example, one of my buddies his family were immigrants. They had 4 families that got together, they all bought a house together. 4 families lived in that one house until they had saved up enough to buy each family a house.
My wife and I moved in with my parents for several years AFTER we were married. We did that to save up for a home.
Before that I was seeing a girl where all the rooms had multiple bunkbeds in there were the adults lived.
You need to do what you have to do to get ahead. IE live below your means. Yep that will suck sometimes.
As for state banking, I don't believe that's necessary. The current banking system works just fine in 99% of cases.
Did you read the references I posted?? Not everyone is you. You have a rosy idea of what others can do. We need to agree to disagree.
96 percent of people have a bank account.There is not some huge unmet need for bank accounts
Anybody that wants one can get one
https://www.fdic.gov/news/press-releases/2024/fdic-survey-finds-96-percent-us-households-were-banked-2023
What is the mechanism for a public bank being able to help people?
A bank that targets a specific industry can help the people in that industry because it has expertise and can help you with business plans, loan to better ones and avoid worse ones, etc.
But when I see this public bank idea it seems like you're just proposing stealing money from account holders and giving it to "the common people". Because where else does the money for their unnaturally low interest loans come from?
Did you read the refs I gave? It really helps local economies. For example, please read about the Bank of North Dakota to get a better feel: https://thebndstory.nd.gov/bnd-partnership-with-local-lenders/ BND works with local banks and credit unions to give lower rate loans to local small businesses and farmers than large national banks would if they gave a loan at all. The nationals give lower rates and fewer fees to large companies and wealthy individuals. The locals know their people better than the large national banks.
Blockchain will save the environment??? Thanks Noah I no longer need to read this so called critique of economics. How does an energy intensive scam make the environment better? I liked your recommendation to read Duflo and Banergees Good Economics for Hard Times. I think that book does a better job of criticizing Friedman style neoliberal economics!
I'm also dubious that blockchain can save the environment, but in fairness the author was referring to Ethereum which has moved to the much less energy intensive Proof of Stake algorithm as opposed to Bitcoin's Proof of Work.
Eleven years ago or so, I read and enjoyed “What’s the Economy For, Anyway?” (https://www.goodreads.com/book/show/11220979-what-s-the-economy-for-anyway) and took two things away (clearly, I’m guilty of selective reading like everybody else):
The authors’ answer to their own question is “The Greatest Good, for The Greatest Number, over The Longest Run;” and,
The way to achieve this is an economy built on sound market economics, along with progressive taxation adequate to ensure that the current “losers” of any given economic moment can be protected from ultimate harm and that the winners of any moment are responsible for “keeping the game running” (and how they do that is to pay most of the taxes).
I still think both things are true! But I can’t vouch for any of that other stuff this review claims the book discusses.
Could add a 3rd “way” to that second point: regulations and laws defending against the price-distortions of monopoly and other barriers to entry into that “sound market”.
Yes, a market means a competitive market. If you have a monopoly situation, or allow firms to employ uncompetitive practices (such as price fixing) then things break down.
Geez that Doughnut diagram :rolleyes
Minor quibble in an excellent review: QE does lower the ror on risky assets, i.e., the cost of borrowing or selling stock for risky borrowers; that is how it's supposed to work.
I would love to read your take on the role of negative externalities. GDP does not seem to address the cost of environmental degradation or the impact on health expenses caused by air pollution. Costs are assumed by people who overwhelmingly do not directly benefit from decisions made by companies. I’m not a fan of regulation to address this, but without pricing in the cost and letting markets find the most cost effective solution, there seems not to be a mechanism to address this. Water, air, and biodiversity are not free - there is a price and someone always ends up paying it.
Noah
Well done.
Now we need a critique on Wolfgang Streeck.