Tuesday, January 21, 2020

The Economists' Hour

Binyamin Appelbaum, The Economist’s Hour: False Prophets, Free Markets, and The Fracture of Society, (Boston: Little, Brown and Company, 2019), 332 pages, $30.00

Economics education in the United States walks a fine line between education and indoctrination. Applied economics in the United States walks a fine line between economic policy and religious faith. Author Binyamin Appelbaum understands this well. In his 2019 book the Economists’ Hour he writes a lively, clearly written narrative of the post WWII economist ideologues, their rise to influence, their one and only policy and trail of devastation.

Appelbaum defines the economist’s hour in the introduction as the period 1969-2008. Before 1969 economists struggled to be heard and economics remained the dismal science where scarce resources limit choices and opportunities. In the post WWII economists campaigned to make free markets the best way to bring annual economic growth and benefits to all. The book narrates the economist’s rise to power with brief biographies of economists and their pitch for growth and happiness via free markets, which in combination Appelbaum calls a biography of a revolution. Readers should be advised Milton Friedman’s name appears first on page six of the introduction and in every chapter and the conclusion after that.

The book has 332 pages divided into ten chapters between the introduction and a conclusion. The first chapter tells the story of the campaign to end the draft and convert the army to “volunteers” recruited by offers of pay and benefits. Here Milton Friedman leads the way in a political campaign to make troops just like hires in the private sector. This chapter includes a four page biography of Friedman, one of the longest of many more to come.

Chapters two, three and four can be called the macroeconomics chapters. Chapter two entitled Friedman v. Keynes follows the debate between monetary and fiscal policy, also known as the AM-FM debates, after economists Ando and Modigliani on the fiscal side and Friedman and Meiselman on the monetary side. The ideologue Friedman insisted the money supply set to grow at a predetermined rate should be the one and only policy. Keynes died in 1945, but his famous book the General Theory of Employment, Interest and Money lives on. The General Theory is not a general theory at all but a book of special cases. For decades Keyne’s colleagues in the economics profession counseled, wait, because they insisted an economy self corrects; prices and interest rates will fall, generating an increase in spending and production, and so depressions end automatically. Free market ideologues believe an economic system works like Newtonian physics.

In 1936 after 5 years of worldwide depression Keynes filled his book with examples where an economy might not be self-correcting, where the spending needed to restore production and employment might not recover. He was so bold as to suggest the government could help by putting funds in the spending stream to restore the economy. Since then Republicans and free enterprisers have hated Keynes as readers will find in chapter two.

Chapter three and four continue the macro debates by following the key economic advisers through the presidents of 1969 to 2008. Chapter three follows the “stagflation” debate with Nixon and Arthur Burns, Jimmy Carter and Paul Volker and on to the Alan Greenspan era. Chapter four covers the demand free enterprisers make for lower taxes and less government spending and their conviction these will be an aid to economic growth.

Chapters five, six and seven cover domestic microeconomics issues and policies. Appelbaum describes the ideologues opposition to Antitrust law, market regulation in the airline and truck transportation industries, safety and environmental regulation and their preferred arguments against them.

Chapters eight, nine and ten shift to international economic issues. Chapter eight, the longest chapter in the book, recounts the death of the gold exchange standard established in the 1944 Bretton Woods agreement and the ideologues view that nothing should be done to influence international exchange rates after the end of the fixed exchange rate era.

Chapter nine covers the ideologues advance into the economies of Chile and Taiwan. I learned that during the 1960’s a third of the graduate students in economics at the University of Chicago came from Chile; they were known there as the Chicago boys. They campaigned for the free market policies they absorbed under the tutelage of Milton Friedman. There was stout resistance at first, but with a few visits from Friedman and several colleagues the ideologues got their way, although not with the happiest results for Chile.

Chapter Ten makes a review of the people and financial concoctions of the 1990’s that brought the 2008 financial meltdown and two year recession. Those entrusted to manage the nations financial assets used their protected political status and new concoctions to gamble with the nations loanable funds. They lost the gamble, but not to worry “W” and the Republicans were there to bail them out. It was all supported by free market ideologues like Alan Greenspan and approved by the ever helpful Bill Clinton.

It turns out Republicans and their corporate allies support all of the free market arguments of the free market ideologues. Milton Friedman and some of his confreres made themselves into unpaid corporate spokesmen by effectively advocating growth while ignoring the troubles it generates, especially the inequality. Generations of economics students in the United States read Milton Friedman’s “Essay in Positive Economics” that explains so well how economics should be an empirical science where hypotheses about free markets should be proved. While “Uncle Milton” as we graduate students of the 1960’s used to call him, made a good salesman he marched along from theory to policy without the empirical proof, a still common practice, especially in microeconomics.

In each of the chapters Appelbaum names the players, often with some biography, narrates the arguments, the disagreements and the consequences when the ideologues prevail, as they inevitably did after 1969. As an example, chapter 7 gives a history of the use and abuse for cost-benefit analysis for health and safety regulations. In 1967 actress Jayne Mansfield and two others were killed when their car slid under a truck stopped in a fog of pesticide. The Johnson administration proposed a regulation to require installing a safety bar to prevent future accidents. After stalling for years President Ford killed the regulation because it would only save 180 lives a year they valued at $200,000 a life. The benefit of lives saved did not justify the cost of installation, estimated at four times the benefits.

True blue free enterprisers cite the workings of the market place as the best safety protection. Milton Friedman was adamant the health department does not need to regulate health standards in restaurants: “the quality of restaurants was assured by the availability of other restaurants” i.e. the competition. When the coast guard found 90 percent of Bayley “survival suits” were defective the ideologues at the FTC blocked recall and correction: “If deaths actually occur market forces – such as lawsuits by surviving heirs – may be adequate to remedy the problem.”

When Carter Administration economists Charles Schultze and William Nordhaus demanded to scrap “brown lung” air quality regulations in the textile industry Senator Edmund Muskie objected “that it was undemocratic for economists to substitute their own tallies of costs and benefits.”

Senator Muskie saw the problem exactly, corporate America and their economist spokesmen do not care about democracy; it can interfere with markets and hurts profits. Since the benefits of regulations go to individuals and the larger society, corporate America objects to any costs they incur from regulations. The use and abuse of benefit cost analysis lets them disguise their aims in a haze of economist’s easily manipulated cost-benefit justifications.

The chapters report many failures of free markets, which Appelbaum pulls together in a seventeen page conclusion. He suggests the broader consequences of all these failures on the economy: growing inequality of income and wealth, the dismal job prospects for the powerless working class and the threat to public civility and democratic institutions. Here he reminds readers that markets function from the constructs of property and contract rights determined in a political process. They do not come down from heaven.

The book avoids economic jargon and while it will be of special interest to economists it can be read by a much broader audience. There are 88 pages of footnotes, which give references but also include some long background discussions his editor may have convinced him to take out of the text. The more engaged reader should take a look.

Appelbaum tells readers in the introduction his father was born in 1951 while he was born in 1978. I am closer to his father’s age and went to graduate school in the 1960’s and finished a doctorate in economics in the 1970’s. Finally, I say, the younger generation has assembled a thoughtful and readable attack on doctrinaire economics. It’s about time.

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