The Anti-Economist — From the September 2013 issue

Saving Your Children from a Harvard Education

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In 1972, the economics department at Harvard denied tenure to the leftist professor Samuel Bowles. Responding to the decision in the Harvard Crimson, Bowles asserted that he had been passed over because he believed in democratizing the department, reducing the power of senior professors, giving students a greater voice in shaping the curriculum, and addressing problems — from poverty and inequality to the increasing power of corporations and financial institutions — too often neglected by the conventional economists who had come to predominate at the university. Bowles made a pointed distinction between the proper practice of economics as he understood it and the rising conservative orthodoxy he opposed. “Our definition of economics and of our roles as economists,” he wrote,

stems from our commitment to serve the people who suffer under the capitalist system, not those who run it. The differences between us and the conventional economists is thus intensely and (on our part at least) openly political. What is “useful knowledge” to us is often outside of, or even in conflict with their definition of their discipline, not to mention their own personal role in the capitalist order.

In the forty years since Bowles’s tenure was denied, Harvard’s economics department has become increasingly committed to a narrow, conservative agenda, thereby lending the university’s imprimatur to economic ideologies that have done terrible damage around the world.

Nearly every bad economic idea that has held some sway over the past two decades has had support from Harvard. When the Tea Party took over the House after the 2010 midterm elections, they called for deficit reductions based almost entirely on spending cuts rather than tax increases. Years of evidence and solid economic theorizing suggested that cutting spending during a recession was a bad idea, but the deficit hawks were armed with the research of Alberto Alesina, who along with a number of his colleagues at Harvard had issued statistical papers arguing for the possibility of “contractionary expansion.” Spending cuts, Alesina suggested, would produce economic growth, because they would quell fears of more dramatic cuts in the future. Alesina’s research has since been rubbished — not only by progressives but by establishment economists at the International Monetary Fund, who found that cutting debt when economies are weak usually leads to slower growth or outright recession, and ultimately to higher debt ratios (exactly what’s happened in those European nations that went down the path of austerity). Meanwhile, the tentativeness of the U.S. recovery owes much to the cuts in government spending that thinking such as Alesina’s justified.

Dubious work originating at Harvard has had serious consequences dating to well before our current troubles. Take the widespread use of stock options in executive compensation packages. For half a century after the Great Depression, this practice was uncommon. This changed in the early Nineties, after Michael Jensen, a Chicago-trained economist at Harvard Business School (from which, I mention in the interest of disclosure, I have a degree), published work encouraging corporations to pay executives with stock options, which he said would lead them to act like owners rather than mere managers. Jensen’s argument rested on the belief that stock price accurately reflected long-term value, meaning executives could benefit from options only if they ran their companies well. Instead, these rewards for boosts in stock price created perverse incentives. Many executives focused on cutting costs — particularly wages — in order to bolster short-term profits. Wages for American workers stagnated, while executive compensation soared.

Since theories developed at Harvard helped to exacerbate America’s inequality problem, it is appropriate that the so-called One Percent have found their most prestigious champion there. In a recent paper entitled, straightforwardly enough, “Defending the One Percent,” Greg Mankiw — former adviser to George W. Bush and current chair of Harvard’s economics department — writes that rising inequality is the natural result of socially productive work being fairly rewarded. His examples of typical One Percenters are Steve Jobs, J. K. Rowling, and Steven Spielberg, entrepreneurs who get rich creating things everyone wants. “My own reading of the evidence,” Mankiw writes, “is that most of the very wealthy get that way by making substantial economic contributions, not by gaming the system or taking advantage of some market failure or the political process.” Greater taxation of the rich, he continues, not only would be unfair but would reduce the benefits these well-paid workers bring to all of us.

[*] Not all students are oblivious to Mankiw’s biases. As part of Occupy Wall Street demonstrations in 2011, a group of students walked out of class in protest of his conservatism.

Such facile arguments are, unfortunately, more than some professor’s theoretical chatter. Mankiw teaches Harvard’s introductory economics course; the class is consistently the most popular on campus, with enrollment often exceeding 700 students. All economics concentrators are required to take it, which makes Mankiw’s influence particularly far-reaching.[*]

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