The Rise Of The Free-Market Economists Who Reshaped Our World

This is Part I of our "pop-up" series on capitalism. Listen to Part II here.

With Meghna Chakrabarti

How ideas about free markets and a doodle of an economic curve on a cocktail napkin reshaped the U.S. economy, for better and worse. New York Times economic journalist Binyamin Appelbaum tells the story.

Binyamin Appelbaum, author of "The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society." New York Times editorial board member who writes about business and economics. He covered the Federal Reserve from 2010 to 2019 as a Washington correspondent for the Times. (@BCAppelbaum)

On why we should make inequality a focus of public policy

"The problem we are confronting is inequality. And, so, the solution is to make inequality — reducing inequality — a focus of public policy. It sounds simple, but it's something we simply haven't done for the last 40 years. And I think that the solution begins by doing that. I'll give you one simple example of a policy that we know works and helps, and that's universal pre-kindergarten. Getting kids into the classroom at an early age begins to level the playing field, and allows children from different economic backgrounds the opportunity to thrive. And that's ultimately not just good for them — but for society as a whole."

On what midcentury economists missed about inequality

"What we've learned [from four decades of data and accumulated experience] is that inequality is really harmful. That countries with high levels of inequality actually grow slower over time than countries with lower levels of inequality. That that basic sort of foundational premise that economists preached in the midcentury was quite simply wrong. And, so, again, I think the big idea going forward needs to be that inequality needs to be treated seriously as a policy problem. And by doing that, we may be able to find a firmer basis for a free market society that is constructed on sustainable principles."

"The 1990s — which are often remembered as, sort of, the last time everything was going right — I think are really better described as a period in which we were picking all the fruit in the orchard."

Binyamin Appelbaum

On the legacy of the economists featured in "The Economists’ Hour" 

"It's primarily three things. The first is that we actually didn't get increased growth in any significant way. Growth has been declining, decade over decade, since the 1960s. The second is massive inequality. This indifference to inequality resulted in a lot more inequality, and that has turned out to be much worse than we were told. Inequality itself is harmful. It mimics the effects of poverty in many ways. But, the last aspect of it, is that this focus on growth has also come at the expense of the future. The turn away from government meant the government was no longer investing in the economy. So the 1990s — which are often remembered as, sort of, the last time everything was going right — I think are really better described as a period in which we were picking all the fruit in the orchard.

"We had, for example, the most educated workforce in the developed world because of the investments we had made in education in the midcentury. But we weren't continuing to invest. We weren't funding research. We weren't funding infrastructure. We weren't funding education. And the consequence is that the current generation is no longer the most educated in the developed world. And we're running short on ideas. And the environment is another dimension on which I think our, sort of, short-term focus on maximizing growth is coming at a tremendous long-term expense."

On how midcentury economists impacted our current economic system

"In the midcentury, there had been a real compression of inequality. The level of inequality had been significantly reduced. And in that context, people were not particularly focused on it as an issue. But one of the most important things that economists said, and preached, and convinced policymakers [on], was that there was a tradeoff between focusing on inequality and trying to reduce inequality on the one hand, and maximizing economic growth on the other hand. That a society that was trying to make sure that there was inequality of outcomes would inevitably suffer slower growth as a consequence.

"And, so, they urged policymakers to focus on maximizing growth, and to set aside a concern for redistribution or equality of opportunity. And they argued, basically, that that would be OK. That as long as everyone was benefiting, it shouldn't matter if some people were benefiting more. That was a message that, frankly, appealed immensely to elites. You're basically telling rich people that they were doing what was best for society, by making as much money as possible. You're validating corporations and their role in the economy. And it really took hold. And that message is at the root of our current problems."

Excerpt from "The Economists' Hour" by Binyamin Appelbaum

During the Great Depression, the federal government bought large chunks of hardscrabble farmland on the eastern shoulder of the Allegheny Mountains, about sixty miles north of Washington, D.C. The land was denuded and rocky but not without charm. In that very different time, the Roosevelt administration decided to build a rustic retreat for federal workers. Most of the campgrounds at Catoctin Mountain Park eventually were opened to the public, but one was reserved for the president. Dwight Eisenhower dubbed it Camp David.

On the afternoon of Friday, August 13, 1971, President Nixon slipped out of hot and sticky Washington for a weekend at the mountain retreat. Gathering his advisers shortly after three o’clock in the Aspen Lodge, the president’s cottage, he solemnly encouraged them to sign the guest book. Some already knew why they had been gathered; the rest did not have long to wait. Nixon told them they were about to embark on “the most significant economic action since World War II.” They were going to dismantle something else that Roosevelt had built: they were going to blow up the international monetary system.

The weekend at Camp David was memorialized in dramatic detail by the Nixon speechwriter William Safire, and so it is often portrayed as the decisive moment. It is more accurately described as thirty-six hours of Federal Reserve Chairman Arthur Burns beating his head against a wall, trying to persuade the President to abandon the plan. Burns warned that financial markets would convulse and trade would unravel, just as it had in the 1930s. “Pravda will headline this as a sign of the collapse of capitalism,” he said. In his diary he used stronger language, writing, “The gold window may have to be closed tomorrow because we now have a government that seems incapable, not only of constructive leadership, but of any action at all. What a tragedy for mankind!”

Yet Burns was not a man to stand on principle. He met privately with the President to make a final plea for the old system, and then pledged to support its abandonment. “When Arthur barks, he also wags his tail,” one rival later wrote.

While Nixon worked on his speech, the President’s men gathered for dinner. Paul Volcker, the Treasury economist who had hatched the plan, was convinced some at the table did not grasp the enormity of the decision. He told them that if he had a billion dollars to invest before the President spoke, he could make enough money to retire the federal debt, then roughly $23 billion. H. R. Haldeman, the President’s chief of staff, leaned forward with a mock-serious look and said, “Exactly how?”

The phone rang. It was the President, calling to ask Safire to deliver the message that Burns was a “rare jewel” and a good man. The flattery continued in the morning: Burns wrote in his diary that when the President promised all present a Camp David jacket with their name on the front, he, Arthur Burns, received the additional gift of a pair of Camp David glasses.

That Sunday night, Nixon began his televised speech to the nation by boasting the Vietnam War was going so well that it was time to talk about the economy. There were three problems, he said: unemployment, inflation, and Bretton Woods. To create jobs, Nixon announced billions of dollars in tax cuts. To curb inflation, he announced the first peacetime controls on wages and prices in American history. And to rebalance trade, he announced the United States no longer would guarantee the exchange value of the dollar. The price of a British pound, and every other currency tied to the dollar, was suddenly an open question. “There is no longer any need for the United States to compete with one hand tied behind her back,” Nixon said.

The President made a point of reassuring Americans the devaluation of the dollar would not affect the prices of domestic goods, but this was a smoke screen: The effect of devaluation was to make foreign goods more expensive. Nixon closed the speech with a flourish, quoting a Philadelphia diarist who wrote in the summer of 1775, “Many thinking people believe America has seen its best days.” Now, as then, Nixon said, “our best days lie ahead.”

It was a declaration of economic nationalism, and in the United States, the initial reaction bordered on euphoria. The Dow Jones stock index posted its largest one-day gain; opinion polls showed such a jump in Nixon’s popularity that one pollster compared it to the nation rallying behind Roosevelt after the attack on Pearl Harbor.

Just as Burns had predicted, the Communists also were delighted. Leonid Brezhnev, the leader of the Soviet Union, hailed “the possibility of a profound crisis of the capitalist system.”

The rest of the world was less enthused. “A Declaration of War in Trade Policy” read the banner headline in one of Germany’s leading news- papers, Süddeutsche Zeitung. Oil-producing states, which had long insisted on payment in dollars, threatened to raise prices, the initial step toward the first “oil shock” two years later. Japanese prime minister Eisaku Satō, already rocked by Nixon’s decision to go to China, got a call from Secretary of State William P. Rogers just ten minutes before Nixon spoke. “Not again!” Satō said.

Over the next few years, exchange rates jitterbugged and nations wasted vast amounts of money trying to make those rates stop moving. The Archbishop of Canterbury urged the British to “pray earnestly” for the pound sterling. The New Yorker ran cartoons about exchange rates. The French finance minister, Valéry Giscard d’Estaing, said the subject of money had been elevated from obscurity: “At stake is the expansion of international trade, that is to say, the growth of the world economy.”

Giscard d’Estaing found himself elevated, too, from relative obscurity to head of state, as were other finance ministers of his generation: West Germany’s Helmut Schmidt, Great Britain’s James Callaghan, and Japan’s Takeo Fukuda. Economics was moving to the foreground, and policy makers faced the challenge of defining a new relationship between governments and markets.

Excerpted from the book THE ECONOMISTS' HOUR by Benyamin Appelbaum. Copyright © 2019 by Benyamin Appelbaum. Reprinted with permission of Little, Brown and Company. All rights reserved.

New York Times: "Opinion: Blame Economists for the Mess We’re In" — "In the early 1950s, a young economist named Paul Volcker worked as a human calculator in an office deep inside the Federal Reserve Bank of New York. He crunched numbers for the people who made decisions, and he told his wife that he saw little chance of ever moving up. The central bank’s leadership included bankers, lawyers and an Iowa hog farmer, but not a single economist. The Fed’s chairman, a former stockbroker named William McChesney Martin, once told a visitor that he kept a small staff of economists in the basement of the Fed’s Washington headquarters. They were in the building, he said, because they asked good questions. They were in the basement because 'they don’t know their own limitations.'

"Martin’s distaste for economists was widely shared among the midcentury American elite. President Franklin Delano Roosevelt dismissed John Maynard Keynes, the most important economist of his generation, as an impractical 'mathematician.' President Eisenhower, in his farewell address, urged Americans to keep technocrats from power. Congress rarely consulted economists; regulatory agencies were led and staffed by lawyers; courts wrote off economic evidence as irrelevant.

"But a revolution was coming. As the quarter century of growth that followed World War II sputtered to a close, economists moved into the halls of power, instructing policymakers that growth could be revived by minimizing government’s role in managing the economy. They also warned that a society that sought to limit inequality would pay a price in the form of less growth. In the words of a British acolyte of this new economics, the world needed 'more millionaires and more bankrupts.'

"In the four decades between 1969 and 2008, economists played a leading role in slashing taxation of the wealthy and in curbing public investment. They supervised the deregulation of major sectors, including transportation and communications. They lionized big business, defending the concentration of corporate power, even as they demonized trade unions and opposed worker protections like minimum wage laws. Economists even persuaded policymakers to assign a dollar value to human life — around $10 million in 2019 — to assess whether regulations were worthwhile."

The Atlantic: "How Economists’ Faith in Markets Broke America" — "A little more than a generation ago, a stealthy revolution swept America. It was a dual changing of the guard: Two tribes, two attitudes, two approaches to a good society were simultaneously displaced by upstart rivals. In the world of business, the manufacturing bosses gave way to Wall Street dealmakers, bent on breaking up their empires. “Organization Man,” as the journalist William H. Whyte had christened the corporate archetype in his 1956 book, was ousted by 'Transaction Man,' to cite Nicholas Lemann’s latest work of social history. In the world of public policy, lawyers who counted on large institutions to deliver prosperity and social harmony lost influence. In their place rose quantitative thinkers who put their faith in markets. It was The Economists’ Hour, as the title of the New York Times editorial writer Binyamin Appelbaum’s debut book has it.

"Together, Lemann and Appelbaum contribute to the second wave of post-2008 commentary. The first postmortems focused narrowly on the global financial crisis, dissecting the distorted incentives, regulatory frailty, and groupthink that caused bankers to blow up the world economy. The new round of analysis broadens the lens, searching out larger political and intellectual wrong turns, an expansion that reflects the morphing of the 2008 crash into a general populist surge. By excavating history, Lemann and Appelbaum remind us that Transaction Man and his economist allies were not always ascendant, and that they won’t necessarily remain so. This frees both writers to ask whether an alternative social contract might be imaginable, or preferable.

"The first section of Lemann’s elegant history conjures up the corporatist order that preceded Transaction Man’s arrival. The story is shaped around Adolf Berle, a lawyer who, with the statistician Gardiner Means, wrote The Modern Corporation and Private Property, a classic study of the concentration of power in the hands of company managers. Before the publication of that masterpiece, in 1932, other authors had drawn attention to what one of them called the 'prestidigitation, double shuffling, honey-fugling, hornswaggling, and skullduggery' employed by corporate executives to dupe their supposed masters, the shareholders. Berle went further. He laid out in detail how shareholders, being so dispersed and numerous, could not hope to restrain bosses—indeed, how nobody could do so. Enormous powers to shape society belonged to company chieftains who answered to no one. Hence Berle’s prescription: The government should regulate them."

Washington Post: "Opinion: How elite failure landed us in our disastrous current mess" — "The current political wars are unfolding in a context that was created largely by the failure of elite economists and their dogmatic faith in markets. That’s the thesis of a compelling new book by Binyamin Appelbaum, an economics writer for the New York Times.

"It’s often argued that the recent explosion in inequality is fueling the rise of populism on the left and the right — the latter of which has also given rise to the virulent nationalist strain of it that President Trump has demagogued to perfection, doing immense damage to our civic bonds and harming untold numbers of real people in the process.

"In 'The Economists’ Hour,' Appelbaum blames much of this on the economics profession. He charts a confluence of factors beginning in the 1960s: the rising influence of economists over policymaking and their unshakable adherence to the idea that lightly regulated markets are the only way to deliver prosperity and social progress."

Dorey Scheimer produced this hour for broadcast.