Have Economists Failed to Keep Us Safe from Economic Chaos?

Edward J. Dodson

[November, 2008]

In this time of severe economic stresses, our public officials are certainly listening to economists for constructive policy direction. At the same time, it is clear that few economists forecasted the current crisis. We might ask: "What is it about our economic system that is so difficult for so many highly-trained individuals to grasp?

As a starting point, we might benefit from an objective discussion of what economics professors and economists actually do. Their predecessors, the political economists, sometimes acquired a position of influence because of they took strong positions on public policy, based on some combination of their empirical work and an expression of their personal moral perspectives. They were, as a result, not always objective or scientific in their analyses, but they identified with the role of either change agent or defender of the status quo. Today, there are economists who also accept - even pursue - one of these roles. The public generally assumes - if they assume much at all about economists, that they are both objective and scientific. It is appropriate to ask whether this public trust is warranted.

The first thing I will say in the interest of full disclosure is that some of my best friends are members of the economics profession. I admire and respect these individuals for their efforts to discover truth and to challenge conventional wisdoms when the logic and evidence dictate such a course should be followed. However, in my experience, theirs are voices in the wilderness. This does not mean that everyone else who teaches economics or performs economic analyses for a living is of one mind. Economists align with one another or are in disagreement with one another over critical theoretical issues and policy questions. This has been the case from the early decades of the profession.

Thinking about all this, I vaguely recalled the rather remarkable way Harry Gunnison Brown began his Basic Principles of Economics, first published in 1942 (confirmed by searching out the original text):

"Economics is concerned with the problem of 'getting a living'. It deals, therefore, with an important phase of the 'struggle for existence'. Unfortunately, this fact operates to prevent unprejudiced investigation of its laws and of the effects of various economic policies. An examination that would show the effects of various policies form which a part of the public was benefiting, to be injurious to the remainder, might not be an examination which those who were profiting by the policies in question would desire to have made. And if such an examination were made, acceptance of its inevitable logical conclusions would probably be vigorously opposed."[1]

Coming from within the discipline, Brown's indictment of his fellow practitioners could not have gone over very well. Some would have been quite uncomfortable, some defensive and others angered. The nature of the problem, which he described as "a bias of special and class interest and of political affiliation" was a bias he was certain "most teachers of economics know from personal experience."[2] Some would examine Brown's own body of work and question whether he lived up to his own admonition:

"The student of economics who would serve well his country and the world, needs most of all, perhaps, an enthusiasm for disinterested inquiry. He must seek above all things to avoid prejudice in his thinking, to think clearly, to acquire information of scientific value and to use it logically."[3]

That particular question is beyond the scope of this brief commentary, but it is fair question. Remarkable for its inclusion in a basic text, Brown also challenged his colleagues to be willing to take action, to be heard, when their analyses identified "relationships of cause and effect in the economic realm an understanding of which can help to solve the problems of economic society and to further [the common] welfare."[4]

Brown's book was not widely used as an introductory text and certainly not read outside of the small community of professors (of economics and other social sciences) who likely shared his views and were within his inner circle of professional colleagues. It is also worth noting that his economics was sufficiently orthodox that his text did not even include mention of John Maynard Keynes, and he continued to believe the central cause economic depression was "born of currency deflation"[5] even though he was a consistent defender of the central arguments made by Henry George.

Harry Gunnison Brown was fighting a losing battle against the coming Keynesian revolution. His was clearly a voice in the wilderness. As young men and women emerged from their formal university studies in the 1950s, they were welcomed into business and government circles to an extent few professors of Brown's generation ever thought possible. Increasingly, economists were sought out for their opinions by the popular media. Some became the official spokespersons for their government agency, industry association or think tank.

The mixed economy, with a balance of political and economic power shared by business, government and labor, seemed to be running well enough, its downturns and inflationary moves softened by timely applications of fiscal and monetary policy tools. By the 1970s, however, the world had changed considerably, and the warnings of dissenters within the economics discipline became more pronounced. The momentum was shifting away from Keynesian perspectives in favor of a repackaged body of so-called conservative thought on economic affairs. The result would be calls for less taxation, less regulation, less bureaucracy and freer trade.

As the voice of the Right acquired political standing, from the Left came many responses, one of which was offered in the book Economists at Bay (1976) by an economics professor named Robert Lekachman. Lekachman taught economics from a Marxist perspective at Lehman College of the City University of New York. Earlier in his teaching career he taught at the State University of New York at Stony Brook, L.I., Barnard College, Columbia College and the Columbia School of Business. Upon his death in 1989, the Chancellor of City University, Joseph S. Murphy, commented that Lekachman's ''legacy of intellectually rigorous analysis of the economy and the effects of government policy on the poor and working class should strongly influence the way scholars study economics in the future.'' Harold M. Proshansky, president of City University's Graduate Center said this about Lekachman:

''He brought a liberal, left-wing, Marxist point of view to economics, but he was in no sense an ideologue. He never argued in generalities, and his openness and objectivity captivated even those who disagreed with his basic positions.''

When Economists at Bay first appeared, it was reviewed in Worldview Magazine by Paul Heyne, a professor of economics at the University of Washington. Professor Heyne found Lekachman's observations about other economists to be poorly supported by the evidence provided. Heyne also pointed out that "criticisms along the lines of Lekachman's are regularly published, read at professional meetings, discussed among graduate students, and even summarized in introductory textbooks." Heyne forewarned potential readers that while Lekachman had listed all the ideas of other economists with which he disagreed, he provided "no answer to the crucial question" he raised; namely: "How has the socialization of economists prevented the vast majority of them from recognizing the distorting and limiting effects of thought within which they work?" Indeed, this is an extremely important and challenging question.

Professor Heyne does a credible job challenging Lekachman's assertions of intellectual blindness endemic to the practitioners of economics. He also questions Lekachman's familiarity with then current critical work undertaken by many economists. One example was the debate over the usefulness of the Phillips curve:

"Lekachman speaks of 'the persistent popularity of the Phillips curve in the writings of mainstream economists'; but the Phillips curve has been under a critical cloud for a decade now and was attacked even before that by the 'Chicago' economists, whom Lekachman especially despises."

And, in the end, Professor Heyne found little written by Lekachman with which he could identify:

"There are a number of accurate observations about economists' behavior in this book. The professional journals are indeed, as Lekachman maintains, filled with matters of interest only to economists. But does anyone complain if medical journals are filled with matters of interest only to physicians? Lekachman fails to point out that many eminent economists also write and lecture for lay audiences. Fortunately, many of them have more respect for facts and fairness when they do so than Lekachman displays in Economists at Bay.

With Professor Heyne's comments as a forewarning to readers of this paper, I want to take a second look at Robert Lekachman's book. It was, after all, a sincere attempt to stir up the dust within the ranks of economists. And, he does begin with an acknowledgement that "most economists are individuals of good will, eager to extirpate poverty, redeem the cities, diminish pollution, feed the hungry, heal the sick, and house the unsheltered."[6] Yet, he sounds a bit like we sound today when we diminish Thomas Jefferson 's contributions to the advance of democratic republicanism by emphasizing his lifelong enslavement of people of color to provide for his needs:

"In the good old days when capitalism was young and John Maynard Keynes was unheard of, recurrent depression was accepted even by its victims as an act of God. …Economists pointed to the beneficial side effects. Depression shook the weaker brethren out of the economy."[7]

We might be even more critical than Lekachman of the early generation of economists who failed to grasp and embrace the significance of Henry George's analysis of the causes of economic depressions. But, then, we would be placed in a position of having to include Harry Gunnison Brown in that group. Brown repeated his essential view in an article published in 1961 by the Henry George News:

"[I]t does not follow that even the adoption of a perfect taxation system, involving the taking of all or practically all of the rent of land, would guarantee us against distressing depression. For a significant decrease of the volume of money and checking accounts could bring such a depression."[8]

This is not the place for an analysis of Brown's position, other than to suggest the appropriateness of a distinction between an economic slowdown and a full-blown depression, the latter being less likely absent a credit-fueled period of hyper speculation in land. All that Lekachman adds in the volume under review is to remind readers that it was "[m]assive military outlays" that finally brought the Great Depression to an end. There were, however, lessons to be learned from the war years and the economic expansion that occurred thereafter:

"The moral appears to be that in conservative societies dominated by corporate interest Keynesian measures operate successfully during large and popular wars or … during spells of economic growth rapid enough to offer a little something to the officially poor who populate the bottom fifth of the income distribution."[9]

And, it is with the concentration of income and wealth that Lekachman is greatly concerned. He provides a long list of public subsidies benefiting those at the top of the economic ladder at the expense of the remaining population:

"Despite wars, a New Deal, a Fair Deal, a New Frontier, a Great Society, and a New American Revolution; despite civil-rights statutes and women's liberation, the distribution of income, wealth, and power has been remarkably impervious to change."[10]

Defenders of the status quo, he points out, have been able to maintain "the myth of unlimited opportunity … in the land"[11] - so much so that "many or most Americans believe that the rich deserve their riches."[12] Even thirty-two years later, my sense is that this is still very much the case. Widespread opposition to estate taxation is one clear indication that the myth remains.

Lekachman deserves admiration for his early expressions of concern for the health of our physical environment, earlier than many other economists:

"Climatologists warn of long-run weather shifts adverse to food production. Overfishing has diminished the potentiality of the oceans as a protein source. Miscellaneous environmental hazards: pollution, damage to the ozone barrier, and lowering of water tables among others, threaten, to an extent not yet thoroughly understood by the experts, the future of the human race."[13]

To what extent he thought economists could reach consensus over environmental policy options and work to see them implemented he does not say. He does call for economists "to rethink old assumptions, old certainties, and old emphases."[14] What prevents too many economists from this course of action, he asserts, is that "common-sense dismissal of treasured theoretical propositions is profoundly unsatisfactory to those who live by abstractions."[15] And, perhaps even more important, Lekachman believes "economists accept the major features of an economy which has rewarded them quite amply."[16] Later on, he added that a graduate education in economics "enables its survivors to rise above the common sense with which no doubt they were endowed at birth."[17] He is clearly laying down a set of challenges regarding the manner by which his discipline had grown.

What is certainly true is that economics professors who teach those aspiring to enter the profession tend to have a lasting influence on the thinking of their students. Young minds are molded by mentors. This begs the question of whether individuals attracted to economics as a discipline and profession are more prone than others to accept what they are taught without the skepticism associated with scientific discovery. The sarcasm deliberate, Lekachman said it was "a tribute to the intelligent realism of most students that few of them take more than a single introductory course in economics."[18] Students drawn to a particular university, where economics is known to be taught from a given perspective are already predisposed to accept and absorb what the great minds of that school of thought deliver as truth. Only the foolish or truly courageous would venture into the belly of the beast eager to take on those with whom disagreement is a certainty. As Lekachman puts it:

"A twenty-four-year-old degree candidate in economics at a good university has been well-trained in a cluster of fashionable mathematical and econometric techniques. Unfortunately youth and training conspire to render him ignorant of the central economic institutions of his society."[19]

Could these shortcomings be overcome? Not every likely. He observed that graduate programs in economics turned "thoroughly socialized young practitioners into institutional conservatives, wary of structural change, dependent upon official sources for data, and skeptical of inquiry into emerging institutions and impure issues which combine politics and economics."[20] In the real world, he knew, separating economics from politics was not possible; politics dictates economic outcomes. Lekachman argues for greater equality in the distribution of wealth, which in his mind equates to greater justice. He chastised "liberal economists" for their "lapses during the Kennedy years when growth superseded distribution as the target of national policy."[21] This reflected a regrettable "infatuation with competitive markets" to the detriment of "democratic planning."

Lekachman was writing at a time when many cities in the United States were losing population and suffering from a decaying infrastructure, aging housing stock and high levels of social problems. In response, he called for economists to devote far more of their intellectual capacity to develop and advance policies that would reverse these trends. He reminded his fellow economists that cities potentially offered tremendous cultural and economic efficiency advantages:

"As the cities became safer, cleaner, and more convenient, population migration to suburbs and exurbs would slow, stop, and ultimately reverse itself. The role of the automobile at that happy moment would permanently decline. Cities are more than traditional centers of intellectual originality and aesthetic excitement: they are potentially the thriftiest institutional mechanism for supporting large numbers of people."[22]

Lekachman reached back to the political economists, and to John Stuart Mill in particular, for insight into proper government intervention on behalf of the common good. He drew on Mill to support his own view that the rights of the individual to claim property in land were limited. "The claim of the landowners to the land is altogether subordinate to the general policy of the state," Lekachman quoted from Mill. Many of us would prefer the use of the community as opposed to the state, but the sentiment is one that carries a strong moral weight.

We also get from Lekachman a common sense criticism of the way economists have measured economic growth, a criticism I believe brings attention to the reason why the general public is so misinformed about what is really happening:

"The oddities of GNP include its recorders' disposition to lump together good things, bad things, and indifferent things. …If …mills discharge chemical wastes into hitherto clean streams, GNP will certainly expand both because of the mills' increased output and because other enterprises and municipalities downstream from the polluters' headquarters are compelled to invest in cleaning devices designed to restore the water to usable condition."[23]

Lekachman's conclusion was that "the national income measures, crown jewels of economic statistics, are almost trivial indicators of anything worth measuring" and "ignores the costs, psychic and financial, of crowding, pollution, urban disorder, and the sheer pressures of humans upon each other."[24]

GNP has been displaced by GDP as the standard measurement regularly reported on by the mainstream media. Critics have argued that economists discard GDP because of its indiscriminate inclusion of all forms of spending as positive inputs in the calculation. Interestingly, Lekachman offered no alternative, although in a footnote he pointed to work being done at Yale University by William Nordhaus and James Tobin "to measure the disamenities of economic growth and subtract them from GNP."[25] Their proposal for a new Measure of Economic Welfare (MEW) was actually made public in 1972, and it was a dramatic improvement over the unadjusted GNP/GDP measurement. Another alternative was put forward in 1995, the Genuine Progress Indicator, by Redefining Progress. Importantly, what the GPI showed was that real economic growth began to stagnate in the 1970s.

What is equally or more important to those of us who look to Henry George's political economy for guidance is the failure of too many economists to recognize that land is the source of capital goods but is not a capital good. From our perspective, then, land must be treated as a common good from which private goods are produced. Lekachman touches on this dilemma but does not pursue either the moral or theoretical issues:

"Property in land, personal possessions, cash, securities, or other forms is aseptically taken as the fruits of the efforts and ingenuity of employees and entrepreneurs now alive or as inheritance from ancestors similarly engaged. By heavy implication, the existing pattern of ownership is accepted as at least tolerable if not equitable."[26]

Apparently ignorant of the reforms advanced by George, or even Harry Gunnison Brown and other economics professors who embraced Henry George's main proposals, Lekachman looks to democratic planning (i.e., social democracy) and the safety net of social welfare programs to mitigate distribution problems:

"What has cushioned many Americans in modest financial circumstances against the full force of the worst depression since the 1930s has been the existence of a set of entitlements which were a political consequence of the horrors of the Great Depression: retirement on increasingly liberal social security pensions; unemployment compensation benefits; food stamps; and even, despite its humiliations, public welfare."[27]

CONCLUSION

Our experience in the United States since the Reagan presidency, in the United Kingdom since the Thatcher government, in Australia since the Hawke government and elsewhere around the world, supports Lekachman's conclusion, in my view. The concentration of income and wealth ownership has increased the most where deregulation, deunionization of the work force and dramatic reductions in the marginal tax rates on income and so-called capital gains have been adopted as the new economic faith. The central problem, of course, is the failure to socialize the rental value of locations (in cities and towns), natural resource-laden lands, the broadcast spectrum and others sources of income gained by the issuance of licenses over the control of nature.

Economics as taught today continues to have its critics - from within and outside the discipline. Our voices - the voices of those who have accepted as our own the political economy taught by Henry George - remain voices in the wilderness. However, common sense messages (as we believe our message is) are finding there way to a broader and broader audience around the globe. We are beholden to the technical wizards who developed the internet and the personal computers and software that allows us to communicate so easily with one another. A few decades ago our message could be broadly conveyed only by the publication of books and periodicals (such as Progress) that reached hundreds or a few thousand readers. Today, Progress can be read online by millions of people. The English language text can be converted into other languages using inexpensive software programs. Our fellow world citizens are desperate to find their way out from under severe economic and social problems. Our economists (and their economists) are, for the most part, blinded by their own formal education and training. We are no longer the remnant; we are the vanguard of change.

REFERENCES

1. Harry Gunnison Brown. Basic Principles of Economics and their Significance for Public Policy (Columbia, MO: Lucas Brothers, 3rd edition, 1955. First published, 1942), p.3.
2. Ibid., p.4.
3. Ibid., p.8.
4. Ibid., p.8.
5. Ibid., p.109.
6. Robert Lekachman. Economists at Bay (New York: McGraw-Hill Book Company, 1976), pp.1-2.
7. Ibid., p.23.
8. Harry Gunnison Brown. "Keynesian Depression Analysis versus a Money and Credit Approach," Henry George News, September, 1961.
9. Robert Lekachman. Economists at Bay, p.161.
10. Ibid., p.58.
11. Ibid., p.69.
12. Ibid.
13. Ibid., p.37.
14. Ibid., p.38.
15. Ibid., p.39.
16. Ibid., p.57.
17. Ibid., p.108.
18. Ibid., p.177.
19. Ibid., p.184.
20. Ibid., p.270.
21. Ibid., p.287.
22. Ibid., p.78.
23. Ibid., p.113.
24. Ibid., p.122.
25. Ibid., p.123.
26. Ibid., p.135.
27. Ibid., p.159.