The Economists’ Hour: False Prophets, Free Markets, And the Fracture of Society
by Binyamin Appelbaum
Little, Brown and Company, 2019

Binyamin Appelbaum, who writes on business and economics for the New York Times editorial page, has written The Economists’ Hour, a new book based on a false but popular premise, buttressed often (but not entirely) by examples that do not support his thesis, and is oversaturated with fanciful anecdotes, often at the expense of analysis.

Appelbaum argues that “The Economists’ Hour,” a term coined by the historian Thomas McCraw, is “the four decades between 1969 and 2008” where “economists played a leading role in curbing taxation and public spending, deregulating large sectors of the economy, and clearing the way for globalization.” That is, Appelbaum’s book is really a new screed in a long line of literature railing against what is referred to as ‘the neoliberal consensus.’ This is captured when he writes: 

Economists are a diverse group. Any reasonable roster includes both Milton Friedman and Karl Marx. . .Yet I think it is possible to speak of economists, particularly in the United States in the second half of the twentieth century, as a homogeneous community. Most American economists – and in particular, those who were influential participants in public policy debates – occupied a narrow portion of the ideological spectrum.

The book is intended to be “a biography of the revolution.” A revolution where:

Economists who believed in the power and the glory of markets were on the cusp of a rise to influence that transformed the business of government, the conduct of business, and, as a result, the patterns of everyday life.

Also, it is “a reckoning of the consequences.” He writes: 

In the pursuit of efficiency, policy makers subsumed the interests of Americans as producers to the interests of Americans as consumers, trading well-paid jobs for low-cost electronics. This, in turn weakened the fabric of society and the viability of local governance. . . The emphasis on growth also has come at the expense of the future: tax cuts delivered smalls bursts of sugar-high prosperity at the expense of spending on education and infrastructure; limits on environmental regulation preserved corporate profits – but not the environment.

Now let’s turn to the issues with The Economists’ Hour indicated above, dealing with them in reverse order:

Appelbaum clearly read a great deal of secondary literature and amassed a litany of anecdotes and biographical details, both scholarly and personal. This is often entertaining to those already familiar with the personalities, and sometimes informative to those who aren’t. Most importantly it is useful in illustrating his thesis. For example, the book begins with Paul Volcker working “as a human calculator in an office deep inside the Federal Reserve Bank of New York.” Later we find him “as president of the New York Fed, seeking to strengthen the Fed’s resolve to fight inflation.”

Unfortunately, even early on some of these details reveal Appelbaum’s own ignorance. This undermines his credibility as an author criticizing what he characterizes a homogenous field. To take a simple but telling example, about the Nobel Prize winning economist Friedrich Hayek he writes:

Hayek, who was born in Austria in 1899, and whose career took root before the Great Depression, was raised in the free-market faith and never abandoned it. In his most famous book, The Road to Serfdom, published in 1944, Hayek attached the interventionist brand of economics associated with John Maynard Keynes. Hayek argued that socialism was bad and that the expansion of government’s role in managing the economy was  a slippery slope that would end in socialism. 

Very little of this is true. First, Hayek was a democratic socialist until he was converted to classical liberalism after reading Ludwig von Mises’ book Socialism. Second, in The Road to Serfdom (and other places) Hayek is not as doctrinaire as Appelbaum makes him out to be. Much to the chagrin of the pure of heart, he advocated the need for government intervention where profits could not be made privately, approved of a social safety net (including insurance in the case of natural disasters), and even suggested the state can “prohibit the use of certain poisonous substances,” among other things.  Third, Keynes read the book on his way to the Bretton Woods conference and replied to Hayek writing that The Road to Serfdom was “a grand book” and that “morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement” – only qualifying that Hayek “gives[s] us no guidance whatever as to where to draw it [the line]” (the line between state intervention and restraint, or what Alvin Hansen, another great economist, referred to in The New Republic as “good planning” and “bad planning”). Lastly, Hayek’s argument was not a slippery slope. He could be quite forceful about this in private. In a letter to Paul Samuelson he indicated his resentment of the allegation, writing that he could “only regard it as a malicious distortion which has largely succeeded in discrediting my argument. . .How anyone who has read my book can in good faith say this when ever since the first edition I say right at the beginning…‘Nor am I arguing these developments are inevitable. If they were, there would be no point in writing this. . .’” Samuelson had asserted the inevitability argument in the 11th edition of his Economics and responded to Hayek’s letter with an apology. Although we can happily agree that Hayek was born in Austria in 1899, his career took root before the Depression, and socialism is bad, each of the above mistakes could have been corrected by simply reading The Road to Serfdom. So when he tells us that ideas held by the members of the Mount Pelerin Society, founded by Hayek, “were widely viewed as dangerous and old-fashioned,” we must doubt his acquaintance with these ideas. 

Appelbaum uses these stories most effectively to characterize Milton Friedman as a gadfly buzzing from place to place urging market reforms at any price.

On taxes: “In 1978, both [Arthur] Laffer and Friedman – fresh additions to the rolls of California taxpayers – agreed to back Proposition 13, an amendment to the state constitution to restrict property taxation…The campaign borrowed a needed measure of gravitas from Laffer and Friedman…Friedman called it “the best chance we have to control government spending.”

On regulation: “Friedman said competition was the best regulator. . . ‘alternative sources of supply,’ Friedman wrote in the book that accompanies the series [Free to Choose], ‘protect the consumer far more effectively than all the Ralph Naders of the world.’ And Friedman’s view was about to become government policy.

On trade with China: “Milton Friedman had insisted in 1967 that a trading partner like China would be good for the United States. “They are saying to us, ‘Look, if you’ll take some of our goods for cheap, we’ll give them to you,’” he said. Well, let’s not be fools, let’s take it.”  

The examples go on. If there is a villain of the book, it is Milton Friedman. Appelbaum recognizes there are some issues with elevating this particular gadfly to libertarian par excellence, but misses at least two serious issues as they relate to the point of the book. First, Friedman is called “the high priest of monetarism.” And monetarism is taken to be a core part of the neoliberal consensus. But that a private central bank with a monopoly on money creation and a dual mandate from congress to attain certain social ends, and all the associate consequences, is at odds with the principles of competition is never properly considered.    

Second, Friedman and the monetarists are set opposite of Keynes – not just on monetary issues; One represents laissez-faire, the other a balance of intervention and markets. With a clear preference he writes: “Keynesians regarded inflation as a complex phenomenon with many potential causes and many potential remedies…Friedman, by contrast, had a radically simple view.” There is certainly justification for this, but a few facts damage Appelbaum’s thesis. In a 1986 piece titled “Keynes Political Legacy” Friedman wrote that: 

Keynes’s heritage was twofold—to technical economics and to politics. I have no doubt that Keynes’s bequest to technical economics was extremely beneficial, and that historians of economic thought will continue to regard him as one of the great economists of all time…The situation is very different with respect to Keynes’s bequest to politics, which has had far more influence on the shape of today’s world than his bequest to technical economics. In particular, it has contributed substantially to the proliferation of overgrown governments, increasingly concerned with every aspect of the daily lives of their citizens.

They eye is understandably drawn to the latter half of this, but the first has relevance as well. In most areas Friedman and Keynes were at odds, however on methodology and the need for the government to smooth the business cycle, Friedman was not only a Keynesian (“I believe that Keynes’s theory is the right kind of theory in its simplicity, its concentration on a few key magnitudes, its potential fruitfulness”), he theorized at an even higher level of aggregation (quantity theory of money). 

This issue of monetarism and Friedman help us to segue to the second problem: evidence. Appelbaum tells us Ronald Reagan was “willing to accept the pain required by the monetarist approach.” And that although “Volcker doubted whether Reagan understood the details of monetarism…he did not doubt Reagan’s determination.” On the Fed’s actions he tells us:

The execution was painful. As the Fed tightened the money supply, interest rates climbed sharply. . .Consumers stopped buying homes and cars; millions of workers lost their job. And without jobs, many lost their homes and hopes of a comfortable retirement.

Despite the pain, inflation was halted and Reagan announced that “The long nightmare of runaway inflation is now behind us.” Still, “[M]onetarism did not survive the celebration. The Fed quietly abandoned monetary targets and returned to a policy of targeting interest rates. Friedman’s simple instructions had proved hard to follow.”

This indicates that the claim of monetarism being the policy of the early 1980s was not complete. More to the point, the assertion that the interest rate shock was following the counsel of our “high priest of monetarism” neglects Friedman’s several and severe criticisms of the Fed at the time. As just one example, In 1985 Friedman wrote: 

It is widely believed that monetarism was tried in the United States from 1979 to 1984 and that it did not work in practice. That is very far from the truth. In October 1979, the Federal Reserve in desperation adopted monetarist rhetoric. It did not then and has not since adopted a monetarist policy.

There has never been a neoliberal takeover of monetary policy. There are other complications with Appelbaum’s story, from deregulation (the importance of specific regulations can be debated, but the number of important economic regulations has been increasing, not decreasing), to putting a dollar value on human life, and a continued slander against market economists regarding Chile. However, an important argument in the book takes us to Appelbaum’s premise. He writes: 

Washington’s embrace of economics began in the engine rooms of government. Policy makers and bureaucrats struggling to manage the rapid expansion of the government’s role in American life turned to economists, particularly in complex areas like taxation. 

The assertion that the government was being staffed and influenced by a corps of free market economists is to make the case that we developed a bloated libertarian government. One might argue the irony is on the part of the economists, and to some extent it probably was, but it is an obvious wrinkle in Appelbaum’s premise. And, as he wrote, policy makers were struggling with the expansion of government’s role. There was no neoliberal takeover of policy. If there had been these jobs would not have existed. Now, there is some truth to the broad point on ideology. He writes: 

The collapse of the Soviet Union solidified this political consensus. The division of the world between Communist and capitalist societies was one of history’s great natural experiments, and the results seemed clear…The leaders of left-of-center parties who came to power in the 1990’s, like Bill Clinton in the United States and Tony Blair in the United Kingdom, largely continued the economic policies of their conservative predecessors.

No doubt there was general agreement about Communism (how could there not be?), but the push to lassie-faire just isn’t true. Our gadfly addressed this in a 1989 NewYork Times Op-ed. Friedman wrote: 

Conventional wisdom these days can be summarized in the form of a syllogism.

Major premise: Socialism is a failure. Even lifelong Communists now accept this proposition. Wherever socialism has been tried, it has proved unable to deliver the goods, either in the material form of a high standard of living or in the immaterial form of human freedom.

Minor premise: Capitalism is a success. Economies that have used capitalism - free private markets -as their principal means of organizing economic activity have proved capable of combining widely shared prosperity and a high measure of human freedom. A private market system has proved to be a necessary though not a sufficient condition for prosperity and freedom.

Conclusion: The U.S. needs more socialism. An obvious non sequitur, yet there is no denying that many apparently reasonable people - including most members of Congress and of the Bush Administration - accept all three propositions simultaneously.

It seems Friedman did not share our author’s assessment of his and his peers legacy. 

In a 1978 interview Hayek made an interesting comment: 

I am almost unique among economists of some reputation, of practically never having being tied up in government work. And I think it has done me a lot of good. Government work corrupts. I have observed in some of my best friends who as a result of the war got tied up in government work, and they have ever since been statesmen instead of scholars.  

So we can’t say that there isn’t a conversation to be had here. Appelbaum simply exchanges it for an attack on the market and some of its major proponents. The role of economists in government is well worth exploring, and often has not been for the betterment of society. It is also true that the field needs to look inward with greater skepticism than it has since World War Two. But the problem with Binyamin Appelbaum’s new book The Economists’ Hour is that his primary concern doesn’t appear to be that the government is staffed with economists, but that it isn’t pursuing the policies and ends he would prefer.  

—David Murphy holds a Masters of Finance from the University of Minnesota.