The Economists’ Hour is quite a fascinating book by Binyamin Appelbaum that traces the major influences of well-known economists on policy making. Economists have traditionally not been regarded highly for policy making and often lawyers were given precedence. They were valued for their ability to think but not quite for being able to do practical things. It was probably the Depression and its aftermath which gave them practical importance and since the Second World War, they have had their ‘hour’.
While being concentrated in the US geography as well as political history following the World War up to contemporary times, the author explains how economists like Milton Friedman, Arthur Laffer, and George Stigler, etc, wielded considerable power over policy making. Such was their influence that they were able to have considerable impact in countries like the UK, which is not surprising, but also China, Chile and Taiwan, where economists with such leanings were imported to formulate policy. In fact, these countries had used the services of economists, including Friedman, to formulate their approach for economic development and hence a lot of economic liberalisation could be attributed to their theories. Alexander Cairncross was welcomed in China while Margaret Thatcher had no use of his work in Britain.
The common thread in their prescriptions was that markets should determine everything, as the government everywhere was the problem. Therefore, from the period 1969 to 2008, which is almost four decades, US policy in particular was directed at deregulation, which was looked as a panacea for all economic ailments. Keynes and his economics dominated post-Depression years. In 1964, under President Johnson, Walter Heller got in the three major government programmes that are now followed in several countries in different forms — medicare and medicaid health, issuance of food stamps and subsidies. Heller agreed active management was not good but intervention was required for sure. Under President Nixon, too, it was Keynes that prevailed with high levels of spending that led to inflation. It was then that the wheels turned and the new breed of economic values got ingrained.
Friedman steered policy making, and his brand of monetarism, which came to be called ‘fresh water school’ as against ‘salt water school’ covering Harvard, Princeton, and Columbia, etc, where the existing order was espoused. The basic premise is that the market does better than what several bureaucrats sitting together can do and the underlying theme was ‘in markets we do trust’.
Interestingly, two specific arguments which flowed from market economics of Friedman which affected American society were in areas of conscription and rent. He looked at conscription as a tax on humanity which did not pay well and was analogous to the dictates of the Pharaohs of ancient Egypt who used slaves to build their pyramids. With constant lobbying he had these rules annulled and the youth joined the military out of patriotism and were supported by market-based pay. Similarly, rent controls were used as an argument for preserving equality but led to housing shortage as the rich did not buy property to rent out because of these controls. Removing them helped in reviving the housing market. He was supported by economists like Frederich Hayek, who attacked any action that would potentially lead to socialism.
President Jimmy Carter got in Paul Volcker as head of the Federal Reserve and reversed the spending principle and blamed excess profligacy, while Ronald Reagan blamed government spending. Volcker, on his part, blamed the unions for higher wages and inflation. He, therefore, continued to increase interest rates which choked growth. When President Reagan ruled, Arthur Laffer had his hour with the supply side phenomenon, which became very popular as tax cuts and expenditure increases became Reganomics, and across the Atlantic, UK under Thatcher followed the same principles. Laffer used taxes as tool, but got support from Friedman as it meant less government intervention through lower taxation, which is what the market wanted.
Economists also had their way with corporate policies and the author highlights the anti-trust legislation which was used in the USA to curb monopolistic power. Companies like General Electric, IBM, and Microsoft have all been under the scanner. The focus was always on ensuring that consumers get goods and services at the lowest prices. Here economist George Stigler had his hour as he worked against such laws and propagated antitrust laws to control government intervention. The premise was that that the government should not try to fix anything that is not broken. By doing so the system was justifying unions and regulation which led to sub-optimal states. The same was extended to utilities by Alfred Kahn, which ended up with significant deregulation.
While this is the good part of the story, Appelbaum, towards the end, highlights that such policy transformation during the economists’ hour has led to funnelling of the benefits to a small plutocratic minority. This goes back to the theory of Piketty, which is now gaining acceptance across the world as the economic structure has gotten skewed in favour of the capitalist. The financial crisis was the result of unbridled use of markets as a solution for everything. The market is not right if it is controlled by the elite, which has been the case in most countries.
The Economists’ Hour is very well researched and shifts across countries and time periods to blend the views of liberal economists with the prevalent regimes, with a little bit about the background of the protagonists. This should provide inspiration for economists who want to make a difference to look for new areas that need attention. There is hope to stay relevant.
Madan Sabnavis is chief economist, CARE Ratings