To say that we live in strange economic times in America is perhaps the understatement of the decade. Whether it is proposals to establish price-floors for certain goods, the Federal Government acquiring shares in specific companies, major US corporations being told by the same Federal government to keep open factories identified as surplus-to-needs, or on-again off-again changes in tariff policy, I find myself wondering what will be the next move that, only a decade ago, many people across the political spectrum would have described as, at best, economically dubious.
By “strange times,” however, I do not mean that advocacy of interventionist policies is suddenly de rigueur in American politics. For, even during the supposed dominance of market liberalism from the 1980s until roughly 2008, interventionist ideas and policies were never comprehensively vanquished. The rhetorical embrace of free markets during Republican and Democratic presidential administrations did nothing to stop the relentless expansion of the Code of Federal Regulations throughout those three decades. Nor was there ever a shortage of Democrats and Republicans who supported various expressions of industrial policy in this period.
Rather, the oddness that I have in mind is less about today’s bipartisan turn to dirigiste policies than the attitudes underlying this shift. It is one thing to be an interventionist because you strongly believe in neo-Keynesian macroeconomics. It’s quite another to support interventions because you effectively reject economics as an established social science in favor of what the British economist and civil servant, the late David Henderson (1927–2018), described in his 1985 Reith Lectures as “Do-It-Yourself Economics” (DIYE). Later published as Innocence and Design: The Influence of Economic Ideas on Policy, Henderson’s reflections on DIYE from forty years ago provide us with invaluable insights concerning the chaotic conduct of economic policy in the present.
Wrong on Everything?
This widespread repudiation of economics—and, by extension, economists—was on full display in a recent Financial Times interview with former US Trade Representative, Robert Lighthizer. Lighthizer has long been a critic of what he denotes as “the theology of free trade.” But when asked in the interview about the relationship between tariff increases and the type of price-rises that disproportionately affect poorer Americans, Lighthizer’s response far exceeded his usual spirited denunciation of free trade. Economists and their “studies,” he exclaimed, “are all malarky! … It’s like they’re the College of Cardinals, you know, interpreting the virgin birth? Economists have been wrong on everything!”
Wrong on everything—that’s quite a statement. And like such all-encompassing claims, it immediately runs into problems. There is plenty of evidence to prove that economists have in fact been right, for example, to state that trade liberalization generally bolsters economic growth, or that protectionism facilitates cronyism.
But the deeper significance of Lighthizer’s comments goes beyond these specifics. His off-hand remarks are indicative of the mindset presently driving US economic policy—one which parallels David Henderson’s description of DIYE.
In his Reith Lectures, Henderson detailed how he first encountered DIYE as a young economist working in HM Treasury in the late 1950s. In later life, Henderson became a convinced market liberal, but at the time, Henderson notes, he and his Treasury colleagues were Keynesians to a man. It wasn’t, therefore, any a priori commitment to free market economics that alerted Henderson to the major differences between the outlook of professional economists and what he calls the “economic ideas” (which he labels as “innocence”) he regularly encountered in other government departments. A broadly educated man, Henderson perfectly understood that civil servants in the Foreign Office or ministries like Defense or Education had to think about questions that went far beyond the economic calculus. Still, he was shocked at how much “innocence” masquerading as “economic ideas” abounded in Whitehall.
By “economic ideas,” Henderson meant thoughts that “have a strong intuitive appeal, so strong that it may not even cross the minds of those who hold them that any alternative could exist.” The difficulty with such ideas, he stated, is that they are generally “not supported by any reference to published work, or to the results … of professional economic inquiry.” According to Henderson, this absence of any interest in economic theory and its supporting empirical apparatus (what he calls “design”) as well as “the informality and lack of system which go with it” was characteristic of “the collection of beliefs and perceptions” that constitutes DIYE.
Soap Opera Economics
DIYE’s problems, however, involve more than simply an absence of intellectual rigor. As a young Treasury official, Henderson recalls, he found that whenever he and his Treasury colleagues raised points at interdepartmental meetings that reflected some basic economic principles and mountains of supporting evidence, DIYE invariably reared its head. In part, Henderson believed, DIYE functioned to deflect economic critiques of the pet schemes of ministers and civil servants as well as the agendas of different interest groups whose rent-seeking priorities often dominated government departments like manufacturing or agriculture.
Henderson, however, also identified three “dispositions” underpinning DIYE, all of which should be familiar to us today. He gave these inclinations the nomenclature of “soap operatics” because they resembled, in his words, “the script of a soap opera both in its crude assumptions and in its failure to reflect the complexities of real life.”
In what way is America less American because millions more people work today in the services sector than in manufacturing?
The first disposition listed by Henderson is the fallacy of “manifest economic destiny”: the idea that France, for example, simply must have a large agricultural sector if it is to be truly France, or that the United States is somehow diminished as a nation if the number of people working in the manufacturing sector shrinks.
Today, it is not hard to find senior US government officials speaking this way about manufacturing in America. But in what way is America less American because millions more people work today in the services sector than in manufacturing? Or, to take another angle: what is un-American about the fact that people generally gravitate towards the services sector because of the higher wages typically paid in service industries compared to manufacturing?
The manifest economic destiny motif is closely related to another disposition, which Henderson designates as “structural snobbery”: the notion that some economic “activities are to be desired and favored for what they are, and others which, if not positively undesirable, can be seen to be lacking in dynamism or otherwise less worthy of esteem.”
One example would be the insistence that the autoworker who labors every week in a factory in Ohio is doing something inherently more valuable than the financial analyst who spends her day before a computer screen at a trading desk in Manhattan. But two questions immediately arise. First, who makes these types of determinations? Second, on what basis do they make such judgments?
Henderson noted in his lectures that “it is simply taken for granted that well-informed observers” (political leaders, activists, union officials, etc.) can easily make these assessments. But, he added, by what criteria can they do so? What precisely makes physical labor inherently better than desk work? Or vice versa? Trying to answer such questions involves any number of highly subjective valuations that make definitive responses elusive.
The third soap operatic characterizing DIYE is described by Henderson as “essentialism.” This concerns the belief that “the outputs and activities of an economic system can be usefully divided into two broad categories, essential and inessential, the distinction between which must be apparent to any experienced person.” If something is considered essential, it is deemed worthy of tariff protection, subsidies, export-controls, and various forms of industrial policy.
In populist times, however, the choice to bear witness to unpopular truths is often the difference between chaos and civilization.
But how does one identify what constitutes essential? Essential can be a very elastic term, and privilege-seeking business leaders and their political enablers are very proficient at producing rationales for why their product is somehow essential for the United States’ very survival. And even if a specific good is identified as truly essential, that by no means automatically implies that it must be supplied entirely by domestic producers, no matter what the costs and trade-offs. It may, for example, be more efficient to source any number of food products from abroad from countries that are close allies or geographically proximate to the United States, especially in peacetime.
Henderson does not deny that certain goods may well become more critical during crises than others. He even maintains “that it may well be worthwhile to incur some extra cost at the margin to achieve a higher degree of security.” But, Henderson cautions, the costs are invariably much higher than one expects, and the policies themselves always bring their own problems.
Take, for instance, the US shipbuilding industry. In the wake of World War I, the Jones Act was signed into law by President Woodrow Wilson. Its purpose was to maintain adequate US domestic shipbuilding capacity so that America would always have enough ships and merchant mariners available for service in wartime or national emergencies. To realize this goal, the Jones Act specified that all ships moving goods between American ports had to be mostly American-made, majority American-owned, majority American-crewed, and American-registered and flagged.
Yet, as the economist David Hebert points out, the protection from foreign competition that the Jones Act provided to US domestic shipbuilders massively increased the costs of shipbuilding in America. Over the past century, this has helped undermine national and international demand for US-made ships. This is one reason, Hebert states, why the United States presently produces a mere five ships each year, is short of mariners, and has just four shipyards. Such are the effects of essentialism.
DIYE, Planning, and Populism
There is, however, one entity that benefits from DIYE. The embrace of manifest destiny logic, sectoral snobbery, or essentialism inevitably magnifies the government’s role in economic life.
If you decide, for instance, that 1) it is America’s manifest destiny to produce steel, whatever the cost; 2) that the making of steel is inherently more worthwhile than working in the financial sector; and 3) that domestic steel production far in excess of what the US economy demands is essential for America’s well-being, then you have no option but to turn to the state to try and make these things happen. That in turn necessitates increased government intervention, more government spending, and a larger government bureaucracy to administer such activities.
In other words, DIYE translates into boom times for interventionists of all political stripes. That helps to explain why economists who challenge manifestations of DIYE are often ignored or, in more recent years, labelled “market fundamentalists.” For, as Henderson pointed out, sound economic theory and its supporting evidence get in the way of those who invoke some version of DIYE to justify interventionist policies, not least by revealing those “unseen” effects that many people don’t want to see.
This doesn’t mean, Henderson cautions, that the “design” of economics is somehow complete. Like any natural or social science, economics is in a constant state of development, and that process often involves verification, reverification, and ongoing corrections to the design. Henderson himself was also fully aware of the limits of economics. “Economics is not the whole of life,” he stated, “nor is economics a purely technical exercise.”
In an age, however, where DIYE is rampant throughout America, it becomes even more incumbent upon anyone who thinks that good economics has useful contributions to make to public debate and the formation of public policy to insist upon its ongoing saliency. That means a willingness to be unpopular in many circles. In populist times, however, the choice to bear witness to unpopular truths is often the difference between chaos and civilization. Therein may lie the economist’s prime vocation in our DIYE world.