Do economists in dusty academic offices ever really change the course of history? British economist John Maynard Keynes argued they do: ‘The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else.’
If Keynes is right, how does this happen? How do the ideas of ‘academic scribblers’ actually change what happens in the real world?
The answer is that different economists have influence in different ways. Some influence other economists and change the way economic analysis is done. Others influence government officials, elected and unelected. Still others change the views of the general public. And some succeed with various combinations of these groups.
Arthur Laffer, who argued cutting tax rates would increase tax revenues, is an example of an economist who had great influence on politicians and on the general public. His argument, sketched on a napkin at a Washington, D.C., restaurant, changed the Republican Party from one of “sound finance” to that of “deficits don’t matter.” His ideas have become the accepted wisdom among a significant slice of the U.S. citizenry. But he had virtually no influence within economics, even among those Republicans who generally favor low taxes and small government.
Kenneth Arrow, 1972 Nobel laureate, is at the opposite end of the scale. His work in abstract theory had enormous influence on how other economists thought. He is one of a handful of the greatest academic economists of the past 70 years, but it is hard to find a noneconomist who even would recognize his name, and the direct effects of his work on government policy are near zero.
Eugene Fama, long on lists of possible Nobel laureates, also is a theoretician, but in the more applied area of finance. He avoided politics and never wrote for the general public. But his “efficient markets” hypothesis changed how Wall Street operated and how regulators viewed their tasks. So he had great influence on financial markets and firms and on government policy, even if he remains largely unknown by politicians or the general public.
Milton Friedman was an enormously gifted economist who managed to influence all three groups — other economists, government policy makers and the general public. He was not an abstract thinker like Arrow, and he was not as mathematically adept as his contemporary, Paul Samuelson.
But his painstaking work in monetary history changed views within economics, including that of Ben Bernanke, on the causes of the Great Depression.
Moreover, his insistence that the excessive money-supply growth alone caused inflation led to the policies of Paul Volcker at the U.S. Federal Reserve and of Margaret Thatcher’s government in the United Kingdom that choked off a decade of growing inflation. His prescription for privatization of many functions commonly carried out by government started a worldwide wave of such change in the 1980s.
Friedman wrote scholarly works respected by other economists. He wrote a regular magazine column and hundreds of op-ed pieces that influenced the general public, along with an influential book, “Free to Choose,” which eventually was made into a TV documentary series.
Paul Samuelson, who died last week, was like Friedman in that he excelled at influencing his peers, the government and the public. His theoretical work was even broader than that of Arrow. (Arrow’s sister is married to Samuelson’s brother, and they are the parents of Lawrence Summers, former Treasury Secretary and current economic official in the Obama administration.)
Although Samuelson turned down a government post, he, like Friedman and Laffer, had the ear of presidents and other high officials at crucial times.
Unlike the others mentioned here, Samuelson also wrote an introductory economics textbook studied by millions of people — including thousands now in government and the media. More than any other factor, Samuelson’s text popularized the idea of British economist John Maynard Keynes that governments could and should control the business cycle of recessions and booms by manipulating taxes, government spending and interest rates. Never afflicted with excessive modesty, Samuelson once boasted: “I don’t care who writes a nation’s laws — or crafts its advanced treatises — if I can write its economics textbooks.”
How did any of this change history? Many think Keynes’ ideas, amplified and disseminated by Samuelson, led to worldwide growth in the quarter-century after World War II. Critics argue these same policies led to the simultaneous high inflation and high unemployment of the 1970s. Friedman’s recommended policies ended that inflation and reduced the role of government in many countries in the 1980s.
Laffer’s ideas contributed to the burgeoning of the national debt after 1980. That increase in government indebtedness, together with excessive trust in the ability of financial markets to regulate themselves (stemming from Fama’s work) and further combined with Fed monetary policies that ignored Friedman’s wisdom, led to the financial bubble and collapse that brought us to where we are now.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.