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Saturday, March 28, 2020

Rising Influence

The journey of economists from university campuses to the White House

Written by Ishan Bakshi | Updated: September 21, 2019 12:45:40 am
Rising Influence Appelbaum, a journalist at The New York Times, argues that this new generation of economists firmly believed that left to themselves, markets would deliver steady growth and shared prosperity.

Book: The Economists’ Hour: How the False Prophets of Free Markets Fractured Our Society
Author: Binyamin Appelbaum
Publisher: Pan Macmillan
Pages: 439
Price: Rs 699

It may be hard to imagine, but there was a time when economists weren’t held in high regard. In fact, the great John Maynard Keynes was once dismissed by US President Franklin Delano Roosevelt as an impractical mathematician. Even the chairman of the US Federal Reserve was once a stockbroker. The almost hallowed status conferred upon the profession and its practitioners is a relatively recent phenomenon, whose origins can be traced to the Nixon era, when a new generation of economists began to exert tremendous influence on public policy. This journey of economists from university campuses to the White House has been elegantly traced in a new book titled The Economists’ Hour: How the False Prophets of Free Markets Fractured Our Society by Binyamin Appelbaum.

Appelbaum, a journalist at The New York Times, argues that this new generation of economists firmly believed that left to themselves, markets would deliver steady growth and shared prosperity. The notion that governments should not interfere with the workings of the market formed the cornerstone of their ideological edifice. This belief was a radical departure from the Keynesian school of thought which espoused that the the market economy needed government intervention. As Appelbaum notes, “The economists who led the counterrevolution against Keynesian economics marched under a banner emblazoned with, ‘in markets we trust’.”

As this new generation of economists grew in number, so too did their influence. Their ideas found acceptance in an increasingly conservative political class, enabling them to wield unmatched influence in various policy areas, ranging from not just determining the size of the government, but also on contentious issues such as regulations and price controls. In fact, their influence went beyond the realms of economic policy, affecting even issues such as military conscription to even determining the value of a human life.

A well-researched book, The Economists’ Hour provides a glimpse into the life and work of some of the well-known economists spearheading this counterrevolution, the likes of Milton Friedman and Paul Volcker. But, in a rather interesting departure from books of this nature, Appelbaum brings to light the work of relatively lesser-known economists, whom the uninitiated may, perhaps, be unfamiliar with. For instance, the book explores the work of Walter Oi, a blind economist who was instrumental in ending military conscription. And that of Alfred Khan, who helped deregulate air travel. Peppered with useful nuggets of information on the life and work of these economists, the book is an enjoyable read.

The common thread running through the chapters is that this counterrevolution, which has led to an excessive reliance on the market, has gone too far; that the embrace of markets has had dire consequences; that it has failed to deliver on their promise of shared prosperity. Instead, Appelbaum notes that the US is confronted with is rising economic inequality, ossification of social mobility, and worries about the health of the liberal democracy. He argues that “the rise in inequality has happened in large measure because policy makers haven’t decided to stop it.”

But it is disappointing that the author does not delve into these issues in greater detail. For instance, the shifts in the US labour market, the stagnation of median wages, the hollowing out of the middle class are not dealt with comprehensively. Nor does he address the argument posed by Raghuram Rajan, that rising inequality created the political pressure to push for higher home ownership rates, sowing the seeds for the financial crisis of 2008.

It would also be churlish to deny the benefits of the counterrevolution. As the author himself acknowledges, market-oriented reforms have lifted billions out of poverty. So is the question one of deregulation while ensuring a framework to mitigate the losses? To be fair, there is a reasonable argument to be made that regulation of, say, the financial industry leaves much to be desired. Or that the incentive structures need to be examined, or that issues of information asymmetry need to be addressed. But the author provides little insight into how these issues are to be addressed.

At one point, he does claim that, perhaps, the answer is to make markets less efficient. “Efficiency has no special claim as the primary purpose of a marketplace,” he claims. But he fails to elaborate on this in detail. He also contends that Western democracies might have taken a lesson from China. But is inefficient utilisation of capital a better alternative? Ensuring that displaced workers have access to training and health care should obviously be the focus of policymakers. But perhaps, a more carefully thought through analysis on where employment opportunities could exist, or what steps could be taken to reduce inequalities of opportunities could have been explored.

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