I'm not sure why the NY Times requested a review of Jeff Madrick's new book but Dr. Krugman wrote an interesting review. Mr. Madrick charges mainstream economists with damaging America. That's a tough thing to say about a group of Ph.D. doctors. Didn't we take the Hippocratic Oath? Dr. Krugman names Chicago names in his piece calling out Cochrane, Fama and Mulligan. What is going on here?
Here is a direct quote from Amazon with the publisher praising Mr. Madrick's work:
"A bold indictment of some of our most accepted mainstream economic theories—why they’re wrong, and how they’ve been harming America and the world. Budget deficits are bad. A strong dollar is good. Controlling inflation is paramount. Pay reflects greater worker skills. A deregulated free market is fair and effective. Theories like these have become mantras among American economists both liberal and conservative over recent decades. Validated originally by patron saints like Milton Friedman, they’ve assumed the status of self-evident truths across much of the mainstream. Jeff Madrick, former columnist for The New York Times and Harper’s, argues compellingly that a reconsideration is long overdue."
Wow!
As I understand University of Chicago economics in the year 2014, there are four main key ingredients;
1. People respond to incentives
2. People are forward looking
3. People differ with respect to their skills and ambitions and life goals
4. People use markets to sell and buy goods to help them achieve their life goals
5. Government is not an omniscient benevolent planner. Instead, different actors in government have their own private agendas, resource constraints and private information about whether they are "doing their job".
From these 5 building blocks, the job of economists is to devise a set of rules to achieve a pareto optimal allocation of resources. Without having read Madrick's book, I have a feeling that he has a very strong taste for equality and would be willing to sacrifice much U.S economic growth in return for a more equal income distribution.
If he favors a much higher minimum wage and barriers to free trade to keep Chinese exports out of the U.S, does he have a favorite economic model for predicting the long run effects on this nation? At the end of the day, there are many micro economic parameters that need to be known to answer the question of what is the shape of the equity/efficiency "frontier". The new group of Chicago economists are quite honest about the need to highlight these parameters and to estimate them.
Put simply, if Hilary Clinton in 2016 pursues a "middle class" agenda that features sharp taxes on the rich, limiting free trade to protect U.S manufacturing jobs, a higher minimum wage and an expansion of public works; will the U.S be a stronger nation in 20 years time? I think it would be a productive discussion for macro economists to be honest about what structural parameters do they know and not know because this would highlight why this is a very hard question to answer.