On September 11th 1973, while Americans were deeply distracted by the Vietnam War, various clandestine operatives of their government organized the overthrow of the government of Chile. Her mild-mannered president had been deemed too leftish for our sensibilities so he had to be killed. In the chaos following that coup d’état, a team of economists who were mostly students of a far-right crank at the University of Chicago named Milton Friedman, rushed in to introduce economic “reforms.” Citizens of USA did not know it at the time, but the first shot in a global war of economic ideas had been fired.
The new economic agenda was not new at all. It was a rehash of the ideas that had been discredited by the Great Depression and the New Deal. It was the economics of the robber barons so it benefited only a tiny minority—it was not an economic agenda that the vast majority of people on the planet would choose (if they had a choice). So the vast apparatus of New Deal economics would have to be destroyed.
Because economic arguments tend to be obscure anyway, the roll back of New Deal economics would happen in think tanks, government offices, bank boardrooms and deadly-dull conferences of academics. Most of the necessary legislation happened without meaningful public debate. Even the academic debates were surprisingly muted.
The biggest problem with the "new" economics is that it doesn't work very well. It destroys the lives of millions of people so there is chronic social chaos. But even when the middle and working classes have been successfully repressed so the plundering can proceed, the bigger problem emerges. Poor poor people eventually make for poor rich people so that by 2008, the defaults of sub-prime borrowers are threatening the richest financial institutions of the planet. It turns out those "old" New Deal-era regulations and economics ideas may have been destroyed, but the reason they existed in the first place was quite valid indeed.
My economic education was at an institution that took great pride in their role as inventors and teachers of New Deal economics. In 1970, I had the
privilege of hearing Walter Heller teach economics in his famous Intro
class. He was the “chief Keynesian” at
the VERY Keynesian University of Minnesota who had come from a job with
I thought it was cool that the former chairman of the Council of Economic
Advisors to CAMELOT would explain the large ideas of economics to kids
at a Minnesota
public university. Heller was outrageous and told lame jokes (example:
An economist is someone who would marry Elizabeth Taylor for her money.)
was an energetic,
brilliant, passionate man who cared for his subject.
Learning economics was probably never more enjoyable. But behind the showmanship
and the claims he taught JFK the principles of Keynes, the man was serious. Economics
IS a serious business—it is the study of how people survive and the root cause
of most of the wars and social upheavals of history. And Heller wanted everyone
to know why understanding the ideas of Keynes was key to their lives—it was why
he taught an Intro class.
Keynesianism was a collection of ideas that grew up as a response to the fundamental
dilemma of the industrial age. Simply put, if you want to build something very
difficult (like the automobile) you can only justify the expense of the tools
if you have a LOT of customers. Industrialization could produce virtually unlimited
and very sophisticated goods if the economists could arrange for unlimited customers.
So the Keynesians spent most of their time working on ways to increase the purchasing
power of the greatest possible number of consumers. (There were other variations
of these principles in other parts of the world but in the English-speaking countries,
they came to be associated with John Maynard Keynes largely because he wrote
about them so clearly and effectively. Ironically, of all the industrialized
nations, Keynesianism was probably least successful in England for a host of
Keynes staked out a centrist economic position. The laissez faire economists
taught that all economic activity should be private and unregulated and that
all useful information came from the markets. The Marxists taught that everything
should be regulated, centrally planned, and collectively owned. There was an
amazing amount of intellectual space between these two extreme positions. And
so Keynesianism became this sprawling doctrine that believed that markets were
important but had to be regulated to keep them from destroying themselves, that
there was plenty of room for private initiative AND central planning, and there
must be public AND private investment and ownership.
is not easy. Folks with a simple one-size-fits-all philosophy substitute
tenacity for reason and thoroughly mistrust anyone
an answer to a question with “that depends on a host of circumstances.” But
that was exactly what the Keynesians were trying to do—answer questions with “that
depends.” It was an attempt to match the subject of political economy
with the complexity of industrialization. As a result, the economic fundamentalists
mistrusted the complexity embraced by the Keynesians. And even after
more than 40 years of Keynesian influence, the laissez faire fundamentalists
from the economic debate—and certainly not at the academic level.
Facing packed lecture
halls, Heller invited debate and controversy as a teaching style. One
day, a crew-cut young prairie banker's son baited
the idea that regulation of the financial business was an example of “creeping
Socialism.” Heller stood very still. He was visibly annoyed as
if he were a world-class astrophysicist confronting a member of the flat-earth
Since this was over 34 years ago, my quote may not be exact but as I
remember it Heller said, “Young man, what I am teaching is not
creeping, walking, or any other ambulatory form of Socialism. We saved
because Capitalism without regulations does not work.”
Heller's annoyance at the partisan of deregulated Capitalism that day was probably
due to his frustration that even though he and his kind had found the political
center, fundamentalism in economics had not been slain. Keynesian ideas were
complex and had to be taught—and obviously, the banker's son had not been doing
his homework. Fundamentalist ideas, like Arthur Laffer's famous curve, could
be explained on a bar napkin. The Keynesians were at the political center in
1970 only because of their unequalled record for successful economic guidance.
The Keynesians had a right to be a little arrogant. When their school of thought
came to prominence in the early 1930s, the global economy was a total and complete
disaster. After they took over, they organized the economic recovery from the
Great Depression, fought World War II without triggering inflation, organized
an industrial conversion to a peacetime economy in Japan and Europe after the
War, while raising living standards in USA to heights never seen before in human
Yet by 1973, things had started going seriously wrong for the Keynesians. They
had figured out how to balance consumption with industrial potential, but they
never got around to dealing with the problems of how to value energy, waste,
or other contributions of the natural order. For the first time in history, energy
costs were set beyond the reach of their regulation. Cheap energy was at the
very foundation of the prosperity the Keynesians liked to take credit for. The
monetary prescriptions of Keynesians in response to the massive run-up in energy
prices triggered a global outbreak of inflation.
had long been suspicious that the Keynesians were soft on inflation.
With the investor classes howling in pain worldwide,
solution to inflation suddenly gained credibility. One of the foundation
principles of the Keynesians was that banking and monetary policy was
too important to
be left simply to the bankers—there ARE other players in the economic
valid interests. The fundamentalist response was, “See! We let others into
our business and just LOOK what they have done.” So to prove one's
intellectual credentials in the new economic world order, it was not
sufficient to be against
inflation—Keynesians also hated inflation, after all—one had to believe
that all other economic interests would be subordinate to interests of
The Nobel committee awarded the economics prize in 1973 to a cranky guy from
the University of Chicago who had long preached the evils of regulation named
Milton Friedman. The rout of the Keynesians was virtually complete. Grads of
the University of Chicago became hot properties; Keynesians were unemployable.
The fall from influence had been swift indeed.
Adam Smith neckties
on Wall Street heralded the new order. Regulation was bad. High interest
rates would be the tool to fight inflation. Public
never worked. And the market was always the final word on any matter,
and not just any market, mind you—the market was only “perfect” if
it most resembled a bankruptcy auction.
often liked to call themselves “Post-Industrial” as
they merrily destroyed the institutions created by the Keynesians to
nurture industrialization, but in fact they were quite pre-industrial.
quote David Ricardo, a 19th-century Englishman whose main contribution
was a more scientific way on how to calculate the absolute minimum you
could pay the help. They quoted Adam Smith whose industrial expertise
at a pin factory.
But as any Keynesian
could tell you, if you choose to fight inflation by drying up consumer
demand, you WILL cause a global depression. It
certain, not to mention the reason the Keynesians ever got the chance
things in the first place. So Ricardo can teach the fundamentalists how
to drive down living standards, the Keynesian response is to ask…why
would you ever want to do THAT?
Like teenagers in a high-powered car, the theorists behind the anti-Keynesian
counter-revolution were virtually certain to wreck things because they did not
understand the complexity of the task they were attempting to undertake. And
crash the industrial economy is exactly what they did. Because if inflation was
the flaw that brought down the Keynesians: deflation is the Achilles heel of
the laissez faire fundamentalists.
Deregulation was synonymous with freedom itself in the eyes of the fundamentalists and was accorded priority status. Air transport, trucking, and the phone system were deregulated with some success in fighting inflation but at a high cost for the affected employees who saw dramatic declines in living standards. It also gave us old trucks driven by exhausted drivers plus thousands of bankruptcies and wild financial instability in the transportation business. Agricultural deregulation did not lower the price of food but did drive hundreds of thousands of farmers from the land. Telecommunications deregulation had small economic effects but did drive down programming standards in broadcast networks. And the deregulation of energy markets gave us the disaster of Enron.
Yet in fact, all these forms
of deregulation were insignificant by comparison to that ultimate test
of economic fundamentalism-financial deregulation.
In typical fashion, the Keynesians had attempted to split the difference between outright prohibition of usury and its unfettered practice. Industrialization required huge amounts of capital that could only be provided with borrowing. On the other hand, over three thousand years of experimentation with usury had demonstrated that the practice could be very harmful. So the usury laws passed in the 1930s allowed usury but set strict limits on how much interest could be charged. In many states, interest rate ceilings were written in their constitutions.
By the late 1970s, the financial deregulators had managed to dismantle
virtually all meaningful usury laws nationwide. The prime rate hit an
astonishing 21% in
1981. Not surprisingly, 1981 saw the most damaging recession since the
Great Depression. But this would only be the beginning of the economic
afflict the giant industrialized middle classes the Keynesians had labored
so long to help create. There are at least four reasons why decriminalizing
would cause such destruction.
1) Usury is a drag
on productive people and their work. The higher the interest rates,
the greater the proportion of effort must be diverted
other than the project itself. If the economy is thought of as a car,
are the accelerator. If interest rates are at 1/8% per year simple, projects
with long horizons like re-growing forests can make economic sense. If
the rates are 100% per day compounded, even a drug deal is nearly impossible.
policy demands that rates be both fixed and low. The high-interest-rate
that has existed since the late 1970s has spawned an epidemic of corporate
raiding, asset stripping, and a tulip-mania-style Internet bubble. It
is an economics
based on plundering the work of the previous generations. Economic fundamentalism
is ultimately doomed to create depressions because without regulation, the
institutions responsible for setting interest rates will push the
accelerator so hard, a crash is inevitable. Worse, because compound interest
compound growth in the rest of the economy, environmental destruction
is certain. Compound growth in a finite biosphere is mathematically absurd—demanding
growth is destructive and futile.
2) Usury confers too much power on the lenders. One of the reasons that
military coups fail is that the military is too specialized to run a
whole economy. The
same holds true for bankers, and with the high-interest rate regime in
place since the late 1970s, they have had the powers of martial law and
And like a military government that hangs on too long, this coup of the
bankers must ultimately fail because there are other important and competing
that are not being heard because the high-interest-rate policy silences
3) Usury is the ultimate
trade barrier. The reason a bright teenager in Argentina will not be
getting a new computer this year is because
the 1970s borrowed a few billion dollars for the usual purposes of weapons
Swiss bank accounts. Through the magic of refinancing and other
wonders of high interest, this debt now exceeds $140 billion, and the
is forced to make cuts in pensions and other public services, and most
IMPORTS!!! What difference can it make if Argentina has no formal import
barriers to trade, if they are prohibited by the Lord of International
importing that Dell Computer the folks in Texas would be so happy to
sell them. So instead
of learning a fascinating new skill, the Argentine teenager will be happy
if he has enough to eat while his government decides whom to pitch overboard
order to pay interest rates of 14% or more in foreign currency.
4) Usury is ultimately plunder. And if it is gross enough, it cannot
be anything except a form of slavery. Note that ancient texts like the
Bible actually rank
usury as worse than slavery because while there are many condemnations
of usury, the Bible never really condemns slavery. There is a reason
for this—usury enslaves
whole groups of people who are clearly better off acting as free people—merchants,
small businessmen, builders and trades-people, large corporations, and
ultimately governments. This is just TOO much slavery to run a successful
It took a long list of disasters, but the fundamentalists in economics
have finally provoked wide-ranging countermeasures. The great economic
gatherings that cities
used to fight over for hosting rights are now scenes of massive demonstrations
with expensive and legally controversial security measures. This phenomenon
is only new for places like Seattle and Quebec City and Genoa-anti-fundamentalist
demonstrations against their economic prescriptions have been common
in the less
developed world for over a decade. The few remaining old Keynesians must
be taking some comfort from the fact that THEY never had to meet behind
It is a sign of the
panic among responsible people concerned with the problems of national
economic performance that after nearly 30 years
in the wilderness,
Keynes is now even mentioned on CNNfn by carefully prepped economists
from places like Goldman Sachs. And in a reversal of pattern that lasted
years, the Nobel
committee on economics has begun to award their prize to an economist
specializing in development problems. And just to make certain everyone
gets the point,
the 2001 Nobel went to (with two others) Joseph Stiglitz who is best
days as fundamentalism's most outspoken critic. The works cited in the
prize were Stiglitz's writings on the flaws in the market—especially
that “perfect” one.
Of course, I won't
believe that Keynes is really back until I hear regular guests on CNNfn
describing the economic benefits of industrial regulation,
of trade unions, and the need for the investment community to recognize
that they and their precious market are not qualified to make all the
necessary economic decisions of a complex industrialized society. The
who are discussing Keynes these days most certainly do NOT have such
a wide-ranging economic agenda—they are simply discussing government
pump priming. Of course, Keynes DID teach the value of such borrowing.
However, Keynesian fiscal stimulus only works when interest rates are
borrowing at usurious rates is merely a way to sell the children into
The old Keynesians were not without their flaws. They have a LOT to
answer for in their single-minded quest to stimulate consumption. From
to PCBs in polar bears, the Keynesian unwillingness to make value judgments
about what forms industrialization took means they winked at some pretty
errors. And their willingness to take economic credit that rightly belonged
to cheap petroleum was their undoing.
Keynes was famous for pointing out that you could stimulate economic
activity by hiring a crew to bury money one day and then pay them to
mine it the next.
If the Keynesians make a return, I hope they have a slightly more enlightened
plan for economic stimulation than make-work this time around.
They will have no shortage of macro-economic targets. A serious effort
to cut carbon emissions by 1/2 would probably get the economy of the
world going again
all by itself—it is THAT big a problem that will require huge investments
of time and money. The old Keynesians organized prosperity in the age
by encouraging novel ways to start fires (and how many internal combustion
engines do YOU own?). The new Keynesians will have to organize prosperity
out most of those fires AND cleaning up the mess left behind by their
careless industrial forebears.
The old Keynesians organized economies that could blast off to the moon
for the public relations value. The race in space taught us how to make
little devices for collecting solar power. The new Keynesians will have
to transform that primitive experiment so that the whole planet with
6 billion people with
raised aspirations can be solar-powered. BIG difference.
No wonder responsible
people want to give Keynesian ideas another turn at bat. Inflation
IS under control. Deflation is the problem. The problems
you think you Keynesians can solve the problem of human society will be powered,
you are most welcome to try,” the folks who are abandoning their fundamentalist
fascinations seem to be saying. We will be happy to let you share the blame for
our economic “mistakes” of the past generation and we will
certainly let you try to fix them. Besides, we liked it when we went
to IMF meetings
that didn't smell like tear gas.
This economics called
Keynesianism worked—spectacularly at times. The summer I graduated
from high school in 1967, I worked on a small construction
team that built homes. One home was for a guy who worked in a shoe factory
or something. You could tell he worked very hard because he would almost
fall asleep when he came over to see how we were doing after his work.
But the home
had three bedrooms, a modern kitchen and bath, a dining area and large
living room, and a garage. Remember this guy the next time you read how
shoes in Indonesia live these days. We built him a nice house—it is still
there and would probably sell these days for well over $100,000. For those too
young to remember the prosperity of the Keynesian heyday, just remember
this—we went to the moon for FUN!
Rolling back the
forces of economic fundamentalism will be a monumental task. I once
asked M.I.T. economist Lester Thurow who was speaking at
lecture series at Carleton College in Northfield if there were any schools
in USA these days where someone who thought and wrote like Thorstein
political economist who was an intellectual hero of the original American
Keynesians) could get a Ph.D. in economics. Thurow furrowed his magnificent
brow and said, “None
that I can think of.”
Thurow was probably
correct. Academic economics in USA is now the home to such extreme
economic fundamentalism; the religious fundamentalists
seem utterly tolerant and reasonable by contrast. The complexity the
old Keynesians embraced seems to frighten and baffle the new crop of
economists. To demonstrate
the performance difference between the greatest generation of economists
and the current bunch it is useful to compare the outcome of the advice
Russia after the fall of Communism in 1992 and that given to the destroyed
economies of Japan and Germany in the 1940s. The greatest generation
produced such prosperity
that the Germans called it Wirtschaftwünder (economic miracle) while
today's fundamentalists recommended a plan for Russia that resulted in
and unemployment, a 20 year drop in life expectancy in less than a decade,
and the return of diseases humanity had conquered a generation ago like
From this devastated base, a new and improved Keynesianism must emerge.
Socialism did not work and as the Russians discovered, unregulated Capitalism
be worse. These were failures of extreme thinking. The Keynesian era
demonstrated the economic superiority of centrist thinking. With appropriate
a new Keynesianism could bring back prosperity by putting people to work
solving the great environmental problems of our age.