Five decades ago an economist at the University of California Los Angeles called Axel Leijonhufvud wrote a comic essay about his discipline that investors should read as they watch the Biden administration.
Entitled “Life Among the Econ”, it described the profession as if an anthropologist were observing a traditional community “in the far North”. It noted that the “Econ” culture was marked by “extreme clannishness” and “xenophobia”, with particular “distrust and contempt” for the “Polscis and the Sociogs” (the tribes of political scientists and sociologists).
But there were also fierce status battles between different “castes” of Econ, Leijonhufvud noted, adding that “juniors” only achieved power by impressing “elders” via the creation and ritualistic display of elaborate “implements called ‘modls’” (models).
“The facts (a) that the Econ are highly status-motivated, (b) that status is only to be achieved by making ‘modls’, and (c) that most of these ‘modls’ seem to be of little or no practical use,” were distinctive cultural traits, he concluded, lamenting “the trend toward making modls more for ceremonial than for practical purposes”.
At the time, these wry observations prompted both hilarity and irritation among real life economists, not least because other academic disciplines can be just as clannish. (The tribe of cultural anthropologists that I come from is as bad.)
But the points about status matter now, as the Biden administration tries to introduce its multitrillion dollar fiscal programme.
Ever since the details first emerged, they have attracted entirely predictable criticism from the political right. For instance, Glenn Hubbard, formerly chief White House economic adviser to President George W Bush, says that such spending will undermine productivity and that President Joe Biden is lying when he claims these plans will not entail huge tax increases.
What is more surprising, though, is that some former officials in previous Democratic administrations have attacked the plans too. Steven Rattner, who worked in the Obama administration, views Biden’s plans to expand the government’s role as “worrisome.”
The most striking voice of criticism, however, has been that of Larry Summers, Treasury secretary in the Clinton administration. This week he accused the Federal Reserve of “dangerous complacency” about the risks of its ultra-loose monetary policy. He has also branded Biden’s plans a dangerous mistake, arguing they are far too excessive in scale and create a “very substantial” risk of inflation.
Three of the economists shaping the White House’s economic policy — Cecilia Rouse, Jared Bernstein and Ernie Tedeschi — disagree. Bernstein and Tedeschi issued a memo last month explaining why. “Summers is flat out wrong,” Bernstein declared.
Summers replied that the memo “failed to address the calculations” that make him (and others) worried, specifically what their models predict about inflation and the output gap. And he says that the maths cannot be ignored because economics is a “quantitative field.”
Hubbard agrees. “I do worry from the way the Biden administration is talking about policies that economists just aren’t very involved at all,” he notes. “It is a concern for the economics profession.”
What should people outside the “Econ” tribe conclude from the fight? One obvious point is that an ideological battle has erupted about whether there should be a bigger role for the state in the US. A second, less obvious, issue is that a tussle over epistemology is under way too.
In recent decades, mainstream economic thought has tended to assume that the economy functions like a machine in a lawlike and predictable fashion with a single equilibrium around which activity fluctuates, but to which it ultimately reverts.
Summers comes from this mainstream tradition. But the White House trio view the economy as a complex, evolving system without any single equilibrium. They think the “rules” can be changed by active policy decisions and micro-level qualitative trends.
Then there is a third interpretation of events: that a status war, of the type described by Leijonhufvud, has erupted. Economic thinking in Democrat administrations has up to now been dominated by “elders” such as Summers, his ally Robert Rubin and a tribal network of juniors whom they mentored. But now a new group is in the ascendant.
Might this status shift be temporary? Could the power pendulum swing back if Summers’ criticism turns out to be right? Perhaps.
But until then the key point is this: investors should not assume that the recent past of economic thinking among Democrats is a straightforward guide to the future.
Biden is trying to reshape the economy, as described in a striking speech by Treasury secretary Janet Yellen (a rare economist who tries to straddle all tribal castes). And the White House is quietly seeking to remake economic thought at the same time.
Leijonhufvud, who is still an emeritus professor at UCLA, at the age of 87, should write “Life Among the Econ — part two”.