Zombie Economics: How Dead Ideas Still Walk Among Us: Review



Zombie Economics: How Dead Ideas Still Walk Among Us is a critique of many of the free market ideas that have defined government policy in the last 30 years. The author John Quiggin a professor of economics at the University of Queensland is a well known Keynesian. The fact Professor Quiggin advocates a return to regulation of financial services and a returned to the mixed economy is not surprising. Taking this into account readers shou

Zombie Economics: How Dead Ideas Still Walk Among Us: Review



Zombie Economics: How Dead Ideas Still Walk Among Us is a critique of many of the free market ideas that have defined government policy in the last 30 years. The author John Quiggin a professor of economics at the University of Queensland is a well known Keynesian. The fact Professor Quiggin advocates a return to regulation of financial services and a returned to the mixed economy is not surprising. Taking this into account readers should not expect a balanced account of the pros and cons of the neo-liberal policies that replaced Keynesian policy that had existed since the end of the second world war. The book however, provides a thoughtful critique of some of the ideas that have been used to justify many of the polices carried out in the last 30 years.



The zombies Quiggin slay include, the great moderation, the efficient markets hypothesis, dynamic stochastic general equilibrium, trickle-down economics and privatisation. Despite my free market bias I found myself agreeing with his arguments against the folly that was the great moderation and absurdity that is the efficient markets hypothesis when applied to financial markets.



If history has proven anything, claims that the business cycle has been tamed tend to end in tears. Keynesians made similar claims which ended in the stagflation of the 1970s. Likewise, claims by the advocates of deregulation and the efficient markets hypothesis have ended in the great recession. What seems clear is that at present there exists no economic philosophy capable of taming the business cycle indefinitely.



I first encountered the efficient market hypothesis when studying accounting theory. The argument went, that players in the market have access to perfect information and the financial markets are in the best position to provide valuations of companies. This extended to notion that the marketplace had access to information not publicly available. This was used to justify why accounting standards were unnecessary and that there would a be a market for lemons. Clearly, the collapse of Enron in the mid 2000s and the incorrect valuation of financial assets prior to the 2008 recession should have killed this idea once and for all. Unfortunately, this flawed idea of financial markets being highly efficient is still being peddled to resist regulation of the financial system.



Equally, I found myself agreeing with Professor Quiggin on the trickle down effect, this idea has been used to justify massive tax cuts to the rich. Unlike, Quiggin I believe that reducing taxes on income (the benefit of a person's work) is desirable. He makes the point that at present income rate rates once loopholes in tax law are taken into account the tax system is actually regressive. I would argue that it is better to close the loopholes rather than return the top marginal tax rate to 70%-90%. On the broader point of the trickledown effect, many studies into this area have shown that tax cuts do not pay for themselves through increased growth. Many studies have shown that changes to the marginal rate of taxation has a little impact on the willingness of males to work (Who are usually the major income earner in a family). They do partly pay for themselves but ultimately the costs to a government budget exceed any benefits. Equally, there is little evidence that the poor actually benefit from the rich getting tax cuts. This probably suggests that tax cuts are probably better targeted at the bottom reducing the dis-incentive for people switching from welfare to work.



The greatest area of disagreement I had with this book was the chapter on privatisation. The book paints a picture of well run profitable government owned corporations being sold off at bargain basement prices and consumers losing out in the process. Quiggin does provide some interesting arguments against privatisation and makes a good case that government often leaves monopolies in place when privatising making it unlikely that efficiencies promised will be realised.



Overall I would recommend this book for anyone interested in economic policy. Even those of us who are friends of the free market have to accept that financial deregulation has contributed to the 2008 recession. I do worry that this book in the wrong hands will encourage ill-informed people to rally behind the idea of the mixed economy with out a serious consideration of its many downsides. A good counter to this book would be Milton Friedman's series and book Free To Choose which highlights the many problems of the mixed economy.