Yet some of our top university professors, winners of Nobel prizes, and central bankers who are the subjects of adoring books, still preach the hyper-efficiency of self-correcting markets. They demonize the actions of policy makers who try to intervene to help offset demand contractions (as in the Recovery Act), impose regulatory structure on key markets (financial regulatory reform), strengthen social insurance (health care reform), invest in public goods (infrastructure spending), or pursue industrial policies to better position our national economy (President Obama's clean energy agenda).
The intellectual actions of these extreme free marketeers do not take place in a vacuum. They interact with a political structure comprised of lobbies and pseudo think-tanks to promote policies that, while wrapped in the cloak of promoting free markets, ultimately serve to redistribute growth to the top of the wealth scale. "Efficient market hypotheses" and "rational expectations"--the idea that absent government interference, market participants will make optimally efficient decisions--leads directly to supply-side tax cuts, deregulation of financial markets, the formation of financial bubbles, the acceptance of income stagnation, and disinvestment in public goods. And these measures, in turn, have delivered levels of income and wealth inequality not seen since the late 1920s, along with policy handcuffs that today have us arguing about how to reduce, rather than strengthen, regulations.
Shorter Jared Bernstein: "Braaaaaaaaaaaaaanes bad but good food."
Economics has been called "the dismal science" for good reason. It's bad science and usually gets the answer wrong (I'm aware of Carlyle's original meaning.) Economics, because it is so intertwined in the human experience, cannot make accurate predictions on its own. For example, it presupposes conditions that simply do not exist: rationality, perfect knowledge, perfect elasticity, free markets (or not.)
You can't theoretically test economics the way you can, say, physics or global environmental science. You can make limited predictions that might demonstrate some useful bits of information, but the application of that information becomes unwieldly, inaccurate, and ultimately self-defeating.
In many ways, the Heisenberg uncertainty principle applies first and foremost to the science of economics. Observing the phenomenon immediately voids the theoretical constructs involved.
This is not to suggest the economics has no value. For example, it's very good at helping us get a general understanding of how the world works from a commercial point of view. If you pull back the lens to a wide focus, you see a general application of principles, and they work pretty well: demand for a product does drive the price of the product up until supply catches up. Run a surplus of production and you have to lower prices to sell off the inventory.
Even socialism has value, as one of the few economic theories that tries to incorporate the human factor (it fails on other merits, to-wit the quality of that human factor. At least capitalism acknowledges greed as a motivator.) To each according to his needs, from each according to his abilities, that makes a lot of sense. On a limited scale, it works rather nicely, too.
But I digress.
The simple fact is, economics has become so divorced from the real world mechanics its supposed to describe, as Bernstein points out, that we cannot rely on it to be accurate. For example, it's not unusual for a stock market to go into decline when the economy is bad. It is unusual for the market to go into decline when companies are reporting record profits and projecting decent growth into the future.
That's a disconnect. There's something manipulating either the market or the economy, or both. Bernstein points out the intransigence of the "marketeers" which explains a lot. Even gravity will be suspended if you flap your arms fast enough. The trouble is, eventually, gravity sucks.