Dangerous Currents: The State of Economics

Lester Thurow has been an important American economist for nearly forty years. His first book, Generating Inequality (1975), was cool and bracing breath of fresh air wafting through the heavily mathematicized, conceptually peculiar, and politically reactionary tomes and journal articles that constituted the bulk of academic economic literature at that time. In this context, Thurow had the temerity to make a generally accessible, data driven, and persuasive argument that compensation for capital was routinely exaggerated, while labor was routinely underpaid. As the years have passed and Keynesianism has lost its prominent public policy position to slash-and-burn Friedmanesque montearism, Thurow's work has been moved still farther from the mainstream. Today, he and a handful of like-minded mavericks are sometimes referred to as Post-Keynsians, the sort of scholars who would endorse the late Joan Robinson's judgment that monetarism is "sillyness." (Robinson did not elaborate on this assessment, but seemed to think it was self-evident.) In the process of reinforcing his status as a maverick, even if a very successful one, Thurow published Dangerous Currents (1983), a scathing and systematic critique of academic economics as a source of reliable knowledge and a useful tool for public policy makers. For those of us who have seen econometric methods gain a place of analytical pre-eminence in a broad range of other social science disciplines, including sociology and political science, the most interesting part of Thurow's critically evaluative account is Chapter 4, titled simply "Econometrics." Here is a priceless, perhaps also frightening, quotation from page 106 - 107: "When we look at the impact of education on individual earnings, what else should be held constant: IQ, work effort, occupational choice, family background? Economic theory does not say. Yet the coefficients of the primary variables depend on precisely what other variables are entered in the equation to 'hold everything else constant.'" Thurow develops his argument that economic theory, as well as available data and justification for customarily used proxy variables, is not up to the task of providing a point of departure for the regression equations that econometricians use to explain economic activity and make predictions regarding crucial variables such as interest rates, rates of inflation, unemployment rates, level of gross domestic product, and so on. Again and again he persuasively concludes that heavily mathematicized economic theory is vague, ambiguous, incomplete, and otherwise inadequate to the task of providing a basis for building econometric models. Dangerous Currents was published twenty-six years ago. Have things changed for the better? Has economic theory discovered law-like relationships on which to ground the empirical work of econometrics. Recent catastrophic experience with the U.S. economy seems to make clear that it has not. And the same is cert