There Ain't No Placebo Effect!
Jude Wanniski
May 30, 2001


Memo To: Gina Kolata, NYT Science Writer
From: Jude Wanniski
Re: Teaching Myths

For the last few days, I’ve been thinking about your article in the Sunday “Week in Review” section, “Putting Your Faith in Science.” The discovery that placebos really have no curative effects is incredibly important. We learn this after textbooks and medical journals have been telling us for decades that about one third of patients get better when given a dummy pill or a sham treatment. I certainly have had the idea embedded in my noggin, always assuming that medical science would not have allowed it to become conventional wisdom if it had not been subjected to rigorous proofs. You report that the discovery was made by two Danish researchers that placebos crept into the books because of one 1955 paper, “The Powerful Placebo,” by a Boston doctor who used selective statistics to make his case.

As a political economist who never studied the economics that is taught in our institutions of higher learning, I’ve been mystified as to how so many myths have crept into the conventional wisdom of “economic science.” In many ways economic and medical science are “soft sciences,” as opposed to physics, chemistry and mathematics, which deal in hard facts. Medical science treats the human body and economic science treats the political body economic. There is plenty of room for mythology in both, and your article about the placebos for the human condition comes at a propitious time, as global political leaders are scratching their heads about the maladies of the world economy. It is my considered opinion that the economic textbooks are replete with economic myths the equivalent of the placebo effect in medicine. Political leaders who are paid to “manage” their domestic economies or, in our case, the world economy, are misled again and again into false prescriptions. Here are just a few:

1. President George Bush has been advised by his favorite economists that “putting more money into people’s pockets” will cause the economy to grow faster and overcome recession. It will not. And there is no “scientific” evidence to support that idea. If there were, there would be no poor countries. Governments everywhere could borrow and put money into their people’s pockets and the countries would get rich. This placebo, which is taught in schools of higher learning everywhere, is based on the observation that the Great Depression ended when the U.S. entered WWII and borrowed hundreds of billions of dollars from U.S. citizens to finance the production of war material.

2. President Richard Nixon was talked into ending the gold standard by conservative and liberal economists who said a cheaper dollar would make U.S. exports more attractive to foreigners. They would buy more stuff from us; our workers and capitalists would sell more and make greater profits and higher wages. Classical theory, which is no longer taught, advises that you cannot change the terms of trade by changing the unit of account. Arthur Laffer and Marc Miles more than 20 years ago studied 101 currency devaluations and found the trade deficit increased 51 times and decreased 50 times. No correlation. The “placebo” effect of currency devaluation had so many professional economists on the payroll that the Laffer/Miles study was laughed off. The “placebo effect” has been a source of misery to all mankind, but it remains in the economic textbooks as gospel.

3. A corollary is the idea that a dollar as good as gold -- a gold standard -- caused the Great Depression and must be avoided like the plague. I’ve spent 25 years trying to find a link between the gold/dollar and economic depression and have found none. Yet the idea is embedded in the economics textbooks and scientific journals as FACT. A host of Nobel Prize winners perpetuate the myth, which they were taught when they were in school. The implications are enormous. If I am correct, there would be nothing more propitious for the world economy than a restored dollar/gold link.

4. The econ texts universally worry about the possibility that taxpayers will convert ordinary income to capital gains and thus avoid income tax. Again, there are Nobel Prize winning economists who believe this, which is why they support higher capital-gains taxes. Fed Chairman Alan Greenspan persuaded me that it is impossible to convert income to capgains. He said he had devoted a good part of his Wall Street career trying to figure out how it could be done and finally gave up. When it hit me that you cannot have a capital gain until you have put after-tax income at risk, I realized the textbooks were all wrong. There is zero chance of such a conversion. A zero capgains tax is a solution to the Social Security/Medicare deficits, but the wrong “scientific” answer freezes the politicians in place.

Gina, this only scratches the surface of the scientific myths, the placebo effects, that are layered into our public consciousness. Our young men and women of science almost never decide to “check things out for themselves,” as those two Danish researchers did. We are now amused to read about how medical science believed a century ago that you had to “bleed” patients to drain off the bad stuff so they could be cured. It is bad enough when this practice is limited to individuals. It is calamitous when it is applied to all of human civilization.