Dangerous Currents: The State of Economics, by Lester Thurow, New York: Random House, 1983, 237 pp., $16.95.
Lester Thurow is the liberal's answer to Arthur Laffer, the voice of supply-side economics. Young, clever, glib, and marketable, both stand in sharp contrast to the conventional image of an economist: old, stuffy, dull, and incomprehensible.
Thurow is clearly a rising star in the liberal camp. He turns up on talk shows everywhere, inherited Paul Samuelson's Newsweek column, and appears regularly in the New York Times. Unfortunately for the liberals, however, there is much in what Thurow says that runs counter to liberal dogma. In the past, for example, he has called for abolition of both the corporate income tax and antitrust laws, among other things. But free-market advocates can take little heart in this, for he is fundamentally a liberal who supports the further expansion of government into the economy.
This seemingly contradictory attitude is amply demonstrated in Thurow's book, Dangerous Currents: The State of Economics. Reasonably well written, by economists' standards, what comes across most strongly is Thurow's effort to be controversial—even at his own expense. For example, in one of the best chapters in the book Thurow carefully dissects the pseudoscience of econometrics, economists' high-power statistics, although he himself has done considerable econometric work.
Thurow points out, quite correctly, the basic flaw of econometrics: in human affairs, unlike in the natural sciences, there are no constants; only variables. So one can never forecast the future using econometric techniques, beyond mere extrapolation—in effect saying that the future will be just like the recent past. All of the elaborate equations used in the major forecasting models really add nothing to their predictive value. They exist merely to give the appearance of precision and to break the basic forecast down into extreme detail (useful when marketing the models to business clients concerned about what the forecast means for them).
In discussing the failure of econometrics, Thurow does err in his unwillingness to give credit to members of the Austrian School of economics for making the same points years earlier. Nevertheless, anything that helps debunk econometrics—which is so often used to cook up phony numbers to justify government intervention—is all to the good.
Other portions of Thurow's book are less praiseworthy. Although Thurow does attack Keynesian economics, he does so for its reliance on the price system. Thurow argues that markets, especially labor markets, are so inflexible that virtually any form of macroeconomic policy to alter the course of the economy as a whole is doomed to failure. Thus he also attacks the other major schools of macroeconomic policy—supply-side economics, rational expectations, and monetarism—for much the same reason.
Thurow's criticism of supply-side economics is particularly shallow and uninformed. There are good arguments to be marshaled against supply-side economics (although I believe they are mostly wrong), but Thurow does not use them. His technique is largely just ad hominem ridicule and name calling. For example, he refers to Reagan's policies as a "punk" form of supply-side economics, where punk is defined as "extreme to the point of being bizarre," and he dismisses Arthur Laffer as a "punk" economist.
To be sure, Laffer has his faults. He has a tendency to oversimplify and has been slow to formalize his economic model, leading to charges that it consists of nothing more than napkin drawings (the legendary origins of the Laffer curve showing that total tax revenues will fall as taxes are increased, because people will work less).
But Laffer also has a list of major economic writings at least as substantive as Thurow's, and he has a far better record of economic forecasting and of producing top graduate students. Laffer's recent book, Foundations of Supply-Side Economics: Theory and Evidence (Academic Press), coauthored with Vic Canto and Doug Joines (former students of his), is as substantive as anything currently being produced by so-called mainstream economists. Nor can one ignore the rich heritage of classical economics upon which supply-side economics is based or the growing body of academic journal articles in support of the main points of supply-side economics.
Thurow presents no evidence whatsoever that the basic propositions of supply-side economics are wrong. All he can do is set up straw men, based on highly selective and simplistic representations of supply-side views, and then arbitrarily reject them. Yet he cannot fully dismiss supply-side economics except by painting it with the same brush he uses against the Keynesians. The Thurow argument goes as follows: the price system only works if there is a free market. Since there is no free market, all prices are "administered" (determined by sellers rather than the interplay of supply and demand) to some degree. Therefore, any economic model based on the price system is doomed to failure.
In the end, Thurow ends up implicitly arguing for economic planning. Since the price system doesn't work and since all existing schools of macroeconomics are worthless, there is nothing left except direct controls—a thoroughly liberal conclusion, that. He does not come right out and say this, of course, but rather talks about how "there are many social reasons for not letting the economy take its natural course." No doubt, Thurow's development of a new economic model to replace the ones he has dismissed will appear in another book. In the meantime, we will just have to muddle through.
Bruce Bartlett is the deputy director of the Joint Economic Committee of Congress and the coeditor of The Supply-Side Solution (Chatham House), a collection of recent journal articles on supply-side economics.
This article originally appeared in print under the headline "Swimming with the Liberal Stream".