During the interwar period, there was no consensus on how economics should be done. There was no “orthodoxy”, but rather various competing schools of thought. In the US, for example, there were schools that did neoclassical theory, and there was also strong movement in American Institutionalism at universities such as Texas and Wisconsin. Today, there is a dominant orthodoxy, and that is neoclassical economic theory.
Many view this newfound orthodoxy a great improvement, from a state of “disarray” and argument to a more rigorous and exact science. However, I would like to argue that the pluralism that existed in economics during the interwar period was in fact healthy for society. It allowed for debates and conversation, and for trying new economic theories when other ones failed.
During the Great Depression, for example, neoclassical theories fell out of favor and Institutional economists flocked to Franklin Delano Roosevelt’s administration. There they were instrumental in structuring New Deal programs such as social security, unemployment insurance, and corporate laws such as the 1933 Glass-Steagall Act which included banking reforms that were aimed at regulating speculation. Institutionalists also began collecting the national income accounts and founded the National Bureau for Economic Research.
The problem that the Obama administration faces is that they do not know where to look for economists other than the ones who got us into this current crisis. Whereas during the New Deal the United States was a diversified place in terms of economic theories, today there is only one. That is why the same economists who got us into the mess are still advising the president: former Treasury Secretary Robert Rubin is an advisor to the president; Tim Geithner who was president of the Federal Reserve Bank of New York from 2003-2009 is now the U.S. Secretary of the Treasury under Barack Obama; Paul Volcker was chairman of the Federal Reserve under Carter and Reagan and is now chairman of the Economic Recovery Advisory Board. The list goes and on demonstrates the poverty of the current situation of economic theory in the United States.
Perhaps the real fault of today’s mainstream economics is that it did not adjust to the greatest change in world economics, the 1971 end of the gold standard.
There we had a sea-change in economic reality, yet the mainstream economists made no revisions in their hypotheses. Prior to 1971, the U.S. government was not Monetarily Sovereign. Following 1971, it was. Suddenly, the U.S. government acquired the unlimited ability to create money, spend money and pay any bills of any size at any time.
This newfound ability made it impossible for the U.S. to be forced into bankruptcy. So, no agency of the U.S. government could be forced into bankruptcy. Such agencies as the Supreme Court, the Department of Defense, Congress, Medicare and Social Security all could be financed indefinitely by the U.S. government’s money-creation.
Thus, following 1971, taxes and borrowing no longer financed federal spending, and no longer were necessary as revenue sources.
All these dramatic changes occurred, yet today we still hear mainstream economists voicing the same concerns about Social Security and Medicare viability, the same concerns about the size of the federal deficit, the same concerns about “taxpayers’ money” (though taxpayers no longer pay for federal spending). We hear the same concerns about the U.S. government as we hear about Greece, though the former now is Monetarily Sovereign and the later is not.
It is as though the mainstream economists still debate the dangers of sailing off the edge of the world, even after sailors already have circumnavigated the globe. A science that does not change in the face of new facts, is not a science. It is a religion.
Rodger Malcolm Mitchell
[...] naturally raises the question, what has been the response from the other side? The point that I have made before, and Frank makes in this book, is that the response from the other side has been [...]