Greatest Generation audio file (mp3)

The Greatest Generation—Economics Division

Jonathan Larson 2008

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 the Kennedy administration. 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.) He 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 interesting reasons.)

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.

Being reasonable is not easy. Folks with a simple one-size-fits-all philosophy substitute tenacity for reason and thoroughly mistrust anyone who begins 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 had not disappeared 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 Heller with 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 society. 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 Capitalism from itself. There are regulations 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 history.

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.

The fundamentalists had long been suspicious that the Keynesians were soft on inflation. With the investor classes howling in pain worldwide, anyone with a 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 game with 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 investors.

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 planning had 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.

The fundamentalists 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. They would quote David Ricardo, a 19th-century Englishman whose main contribution to economics was a more scientific way on how to calculate the absolute minimum you could pay the help. They quoted Adam Smith whose industrial expertise was exhausted 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 is mathematically certain, not to mention the reason the Keynesians ever got the chance to run 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.
Usury—charging interest on borrowed money—is the heart of possibly the oldest recorded economic argument. Scathing denunciations of the practice occur over 50 times in the Bible and the Koran flatly prohibits it. For almost 15 centuries, the Catholic Church considered it a crime worse than murder. Not until John Calvin, a 16th century French theologian living in Geneva, were Christians allowed to practice usury without religious condemnation. Because the Puritans were Calvinists, USA would be founded by folks who thought usury was a perfectly acceptable practice.

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 disasters to afflict the giant industrialized middle classes the Keynesians had labored so long to help create. There are at least four reasons why decriminalizing usury 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 to something other than the project itself. If the economy is thought of as a car, interest rates 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. Sound economic policy demands that rates be both fixed and low. The high-interest-rate environment 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 rates demand compound growth in the rest of the economy, environmental destruction is certain. Compound growth in a finite biosphere is mathematically absurd—demanding such 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 then some. 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 interests that are not being heard because the high-interest-rate policy silences them.

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 some government in the 1970s borrowed a few billion dollars for the usual purposes of weapons and some Swiss bank accounts. Through the magic of refinancing and other wonders of high interest, this debt now exceeds $140 billion, and the government is forced to make cuts in pensions and other public services, and most of all, CUT THEIR IMPORTS!!! What difference can it make if Argentina has no formal import barriers to trade, if they are prohibited by the Lord of International Finance from 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 in 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 industrialized nation.

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 police barricades.

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 25 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 known these 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, the value 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 CNNfn economists who are discussing Keynes these days most certainly do NOT have such a wide-ranging economic agenda—they are simply discussing government borrowing as fiscal pump priming. Of course, Keynes DID teach the value of such borrowing. However, Keynesian fiscal stimulus only works when interest rates are something like 1%—-government borrowing at usurious rates is merely a way to sell the children into slavery.

The old Keynesians were not without their flaws. They have a LOT to answer for in their single-minded quest to stimulate consumption. From nuclear power plants to PCBs in polar bears, the Keynesian unwillingness to make value judgments about what forms industrialization took means they winked at some pretty serious environmental 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 of petroleum by encouraging novel ways to start fires (and how many internal combustion engines do YOU own?). The new Keynesians will have to organize prosperity while putting 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 these primitive 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 are huge. “If 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 sewing tongues 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 folks making 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 the Veblen-Clark lecture series at Carleton College in Northfield if there were any schools in USA these days where someone who thought and wrote like Thorstein Veblen (the 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 of the earth 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 given to 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 massive poverty 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 tuberculosis.

From this devastated base, a new and improved Keynesianism must emerge. Socialism did not work and as the Russians discovered, unregulated Capitalism can actually be worse. These were failures of extreme thinking. The Keynesian era demonstrated the economic superiority of centrist thinking. With appropriate modifications, a new Keynesianism could bring back prosperity by putting people to work solving the great environmental problems of our age.