Page 4 - CROSSROADS
MAY 1972
The New Economics.
Is It Already Outdated?
Isabelle E. Hart, Professor of Economics
It seems only a few years ago that people were inquiring about
the meaning of “new” as applied to economics - how did the “New
Economics^’ differ from conventional theories? When told that
new economics was based on the analysis of J.M. Keynes and his
recommendations that an economy could be planned to avoid
depressions and runaway booms and that it could be stabilized
through government monetary and fiscal actions, well-informed
people could reply: “We tried all that during the 1930’s with the
pump priming, the public works, and the deficit spending of the
Roosevelt era. What’s so new then?” But these measures were
temporary, irregular, erratic, and intended for one specific
purpose - to bring the country out of the Great Depression. That
Keynesian economics become permanent to either stimulate or
hold down consumer expenditure and business investment and so
lead the country to sustained erowth - this was not accepted, in
deed was bitterly attacked, and still is, as bringing an end to free
enterprise and the operation of the market system. That the
government deliberately go deeply in debt, through heavy spen
ding and lowering of taxes in order to put more purchasing power
in the hands of the public and business, seemed to reverse the
conventional wisdom of thrift and laissezfaire! Such policies were
taught for more than a generation in colleges before the public
accepted and public officials acknowledged them. Kennedy was
the first president to endorse the new economics in a public ad
dress when he declared, “We’re all Keynesians now.”
With the Employment Act of 1946, which set up the Council of
Economic Advfsers to the President, the government specifically
took responsibility for seeking three main goals: economic
growth, full employment, and price stability. The primary role of
the government is to devise the proper mix of spending, taxation,
and monetary policy. The policy principles were developed
irregularly in a series of national administrations and expressed
in annual reports of the Council of Economic Advisers. For years
the program seemed to be working: in post-Keynesian days
Keynesian economics appeared to provide an efficient framework
for running a modern industrial economy. The middle-income
majority obtained material benefits from economic expansion
effectively managed by the concentrated power of big business
and big government. “Big government needs big business
because the giant corporation has become the key to effective
functioning of the economy and because big business is the source
of weaponry on which national defense rests.” The soaring 60’s
saw the GNP spurting to nearly $1 trillion through a combination
of tax reductions for individuals and businesses, low interest rates
to promote credit for consumer spending and business in
vestment, favorable depreciation and depletion allowances for
capital goods, heavy federal spending on the military and
aerospace programs, and increased federal spending on high
ways, education, and welfare.
Then several factors entered the economy which seem at
present to be incapable of solution under simplistic post-
Keynesian economics. The first was rapid inflation. Prices began
to rise above the allowable rate of 2 to 3 percent per annum. The
goals of full employment and price stability had always been
recognized as hostile bedfellows. When 97 percent of the labor
force is at work (considered “full” employment), its spending
power will usually cause demand inflation. But rising prices
eroded the purchasing power of money, and the big unions called
for increased wages for their members and implemented their
demands by long, costly strikes. The increases in benefits won by
the unions were passed on in the form of again higher prices - the
wage-price spiral. Domestic inflation raised the price of
Amerman exports, so that the United States became a han
dicapped compeitior in world markets.
The response of the government in combating inflation was to
cut back expenditures on the Indochina war, the space programs,
and social programs at home, resulting in a considerable
decrease in employment. The unemployment rate for the past
two years has been hovering around 6 percent, double the 3 per
cent full-employment ratio. Under the theories of the new
economics, inflationary prices should have come down; yet last
August and again in November a Republican administration
imposed wageprice controls under Phase I and Phase II of a
program which was an acknowledgement of the failure of
Keynesian policies in stabilization.
The devaluation of the dollar, so alarming sounding to the
American public, is another indication of circumstances not
anticipated. For several generations our merchandising account,
exports minus imports, gave us a plus figure in the GNP. But in
1971 the outflow of gold to pay for our imports exceeded its receipt
for exports. This negative figure added to the deficit in the
balance of payments caused by heavy U.S. investments abroad,
financial commitments to underdeveloped nations, and overseas
military expenditures, resulted in draining off U.S. dollars. It is
impossible to separate economic policies from international
politics. Our domestic policies influence our balance of in
ternational payments, while the balance of payments limits the
freedom our country has in pursuing domestic goals. We are the
dominant nation in world trade, and we have chosen to contain the
spread of communism, both through military measures and
through aid to underdeveloped nations. Our aims and actions are
complex and wide-spread. At present - and it is too soon to tell -
the results seem to have been more costly than successful.
Economic policies cannot be separated from social aims.
Among the first to criticize the goal of economic growth was J.K.
Galbraith. Growth for what? What is the use of a steadily rising
GNP if “a large portion of the gain is used for destructive or
wasteful purposes?” “An economy dominated by private
decisions about production and consumption tends to starve its
public sector.” “Private spending on luxuries expand while such
foundations of the future as education and basic science are
slighted.” Furthermore, modern marketing techniques are used,
by business firms “to mold consumer spending to their needs as
producers, instead of adjusting production to match consumer
wants. The system as a whole operates for the benefits of
producers rather than consumers,” and “its goal is the aggran
dizement of business wealth instead of the individual’s welfare.”
We Americans are an ambivalent mixture, confusing,
irrational, and perhaps hopeful, of the practical and the ideal.
Certainly we are materialistic minded: we want more and better
goods and services. We have achieved the highest scale of living
in history for the most people. The Bureau of Labor Statistics, in
compiling a price index that measures the cost of living for
“moderate incomes,” includes such items as TV sets, beauty
care, and recreational travel, as well as the basic necessities of
food, clothing and shelter. “What, no caviar?” remarks a N.Y.
newspaper. Yet on the other hand, we also lead the world in our
generosity toward the less fortunate, in charitable giving and in
giving our time and effort in volunteer services. Part of the
American dream is a moral commitment, a social conscience that
reaches beyond the individual.
“The persistence of poverty and the emergence of an urban-
racial crisis in the late 60’s showed that a large portion of the
American people were not participating in the affluence gained by
many.” “The orthodox post-Keynesian economist has good
reason to doubt that the private-enterprise market-oriented
economy can resolve its problems effectively.” Growth is seen by
many as “unbalanced, misdirected, and destructive of en
vironment.” It is essentially “malign rather than benign, an
tagonistic to humane values rather than supportive of them.”
Perhaps the new economics “has strayed into an artificial
world of oversimplification and modish mathematics’.’ and is
“increasingly out of touch with its ultimate subject - the men and
women who people economics.” “Certainly the economists’ once
exalted reputation for worldly wisdom has been tarnished of
late.” Economists have been preoccupied with growth, but “the
worrisome lesson of the past decade is that (this preoccupation) is
no answer to what ails the U.S.” “We have failed to anticipate the
deterioration of the environment from rising production,
population growth and technology.” “We have not foreseen the
impact of economic change on America’s cities” - overcrowding
in bad housing, traffic congestion, crime in the streets, the asphalt
jungle. “One must question the adequacy of economic tools for
improving human welfare.” We have a new generation of youth
“disenchanted with the materialism of America, of workers
dissatisfied with the monotony of their jobs, of blacks and Latins
condemned to low wages.” “Disenchantment, hostility, and
alienation have become facts of life for the economist, as well as
the psychiatrist, to consider.
Hicks sees economics as free of social values, “entirely neutral
with respect to pain and pleasure, frustrations and opportunities
of individuals composing the social universe.” The most in
fluential Paul Samuelsom recast economic theory into a set of
mathematical principles: “The mathematizing of economics was
no doubt an heroic achievement, but by the values of society
profoundly retrograde.” Thirty years of intense activity by
Establishment economics has produced little of substantive
significance in promoting fhe true well-being of Americans.
At present we are in a state of confusion about our roles in
society, our purposes, our future. “If the body of economic
thought is out-of-date, what handed-down ideology is not? Being
out of date, economics is, after all, very much in tune with the
times.”
Acknowledgements to The Saturday Review, the N.Y. Times,
Galbraith, Daniel Fusfeld, Robert Solo, and Leonard Silk. In
dividual identification upon request.