The Economists' Hour

False Prophets, Free Markets, and the Fracture of Society


By Binyamin Appelbaum

Read by Dan Bittner

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In this “lively and entertaining” history of ideas (Liaquat Ahamed, The New Yorker), New York Times editorial writer Binyamin Appelbaum tells the story of the people who sparked four decades of economic revolution.

Before the 1960s, American politicians had never paid much attention to economists. But as the post-World War II boom began to sputter, economists gained influence and power.

In The Economists’ Hour, Binyamin Appelbaum traces the rise of the economists, first in the United States and then around the globe, as their ideas reshaped the modern world, curbing government, unleashing corporations and hastening globalization.

Some leading figures are relatively well-known, such as Milton Friedman, the elfin libertarian who had a greater influence on American life than any other economist of his generation, and Arthur Laffer, who sketched a curve on a cocktail napkin that helped to make tax cuts a staple of conservative economic policy.

Others stayed out of the limelight, but left a lasting impact on modern life: Walter Oi, a blind economist who dictated to his wife and assistants some of the calculations that persuaded President Nixon to end military conscription; Alfred Kahn, who deregulated air travel and rejoiced in the crowded cabins on commercial flights as the proof of his success; and Thomas Schelling, who put a dollar value on human life.

Their fundamental belief? That government should stop trying to manage the economy.
Their guiding principle? That markets would deliver steady growth, and ensure that all Americans shared in the benefits.

But the Economists’ Hour failed to deliver on its promise of broad prosperity. And the single-minded embrace of markets has come at the expense of economic equality, the health of liberal democracy, and future generations.

Timely, engaging and expertly researched, The Economists’ Hour is a reckoning — and a call for people to rewrite the rules of the market.

A Wall Street Journal Business Bestseller
Winner of the Porchlight Business Book Award in Narrative & Biography


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When modern science appeared, medieval Christianity was a complete, comprehensive system which explained both man and the universe; it was the basis for government, the inspiration for knowledge and art, the arbiter of war as of peace and the power behind the production and distribution of wealth—none of which was sufficient to prevent its downfall.

Michel Houellebecq, The Elementary Particles (1998)1

I can calculate the motions of the heavenly bodies, but not the madness of people.

—Isaac Newton (1720)

In the early 1950s, a young economist named Paul Volcker worked as a human calculator in an office deep inside the Federal Reserve Bank of New York. He crunched numbers for the people who made decisions, and he told his wife that he saw little chance of ever moving up.2 The central bank’s leadership included bankers, lawyers, and an Iowa hog farmer, but not a single economist.3 The Fed’s chairman, William McChesney Martin, was a stockbroker with a low opinion of the species. “We have fifty econometricians working for us at the Fed,” he told a visitor. “They are all located in the basement of this building, and there is a reason why they are there.” They were in the building, he said, because they asked good questions. They were in the basement, he continued, because “they don’t know their own limitations, and they have a far greater sense of confidence in their analyses than I have found to be warranted.”4

Martin’s distaste for economists was widely shared among the midcentury American elite. President Franklin Delano Roosevelt privately dismissed John Maynard Keynes, the most important economist of his generation, as an impractical “mathematician.”5 President Dwight D. Eisenhower, in his farewell address, urged Americans to keep technocrats from power, warning that “public policy could itself become the captive of a scientific-technological elite.” Congress took testimony from economists but, as a rule, it did not take that testimony very seriously. “Economics was viewed generally among top policymakers, especially on Capitol Hill, as an esoteric field which could not bridge the gap to meet specific problems of concern,” an aide to Wisconsin senator William Proxmire, a leading Democrat on domestic policy, wrote in the early 1960s.6

When C. Douglas Dillon, the U.S. Treasury secretary, commissioned two studies in 1963 of potential improvements to the international monetary system, he pointedly declined to consult academic economists. Another official explained their advice “was practically useless to those in charge of decision-making.”7

That same year, the Supreme Court upheld the government’s decision to prevent the merger of two Philadelphia banks despite evidence the merger would produce economic benefits. The court described the economic evidence as irrelevant.8

But a revolution was coming. 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.

As the quarter century of growth that followed World War II sputtered to a close in the 1970s, these economists persuaded political leaders to reduce government’s role in the economy—to trust that markets would deliver better results than bureaucrats.

Economics is often called the “dismal science” for its insistence that choices must be made because resources are limited. But the real message of economics, and the reason for its popularity, is the tantalizing promise that it can help humankind to loosen those surly bonds of scarcity. Alchemists promised to make gold from lead; economists said they could do it ex nihilo, through better policy making.

In the four decades between 1969 and 2008, a period I call the “Economists’ Hour,” borrowing a phrase from the historian Thomas McCraw, economists played a leading role in curbing taxation and public spending, deregulating large sectors of the economy, and clearing the way for globalization.9 Economists persuaded President Richard Nixon to end military conscription. Economists persuaded the federal judiciary largely to abandon the enforcement of antitrust laws. Economists even persuaded the government to assign a dollar value to human life—around $10 million in 2019—to determine whether regulations were worthwhile.

Economists also became policy makers. The economist Arthur F. Burns replaced Martin as the Fed’s chairman in 1970, inaugurating an era in which economists—including Volcker—led the central bank.10 Two years later, in 1972, George Shultz became the first economist to serve as Treasury secretary, the job once held by Dillon.11 The number of economists employed by the U.S. government rose from about two thousand in the mid-1950s to more than six thousand by the late 1970s.12

The United States was the epicenter of the intellectual ferment and the main laboratory for the translation of ideas into policies, but the embrace of markets as the cure for economic stagnation was a global phenomenon, seizing the imagination of politicians in countries including the United Kingdom, Chile, and Indonesia. America began to eliminate government price regulation in the mid-1970s. By the end of the decade, France was allowing bakers to set the price of baguettes for the first time in that nation’s history.13

Even the world’s largest Communist country joined the revolution. In September 1985, the Chinese leader Zhao Ziyang invited eight prominent Western economists for a weeklong cruise on the Yangtze River with a large chunk of China’s economic policy-making elite. Mao Zedong had preached that economic considerations were always subordinate to political considerations. The discussions that week helped to persuade a new generation of Chinese leaders to place greater faith in markets, catalyzing China’s construction of its own version of a market-based economy.14

This book is a biography of the revolution. Some leading figures are relatively well-known, like Milton Friedman, who had a greater influence on American life than any other economist of his era, and Arthur Laffer, who sketched a curve on a cocktail napkin in 1974 that helped to make tax cuts a staple of Republican economic policy. Others may be less familiar, like Walter Oi, a blind economist who dictated to his wife and assistants some of the calculations that persuaded Nixon to end military conscription; Alfred Kahn, who deregulated air travel and rejoiced in the cramped and crowded cabins on commercial flights as the proof of his success; and Thomas Schelling, a game theorist who persuaded the Kennedy administration to install a hotline to the Kremlin—and who figured out a way to put a dollar value on human life.

This book is also a reckoning of the consequences.

The embrace of markets lifted billions of people around the world from abject poverty. Nations have been tied together by the flows of goods and money and ideas, and most of the world’s 7.7 billion people live wealthier, healthier, and happier lives as a consequence. Chinese businessmen eat salmon from Chile; children in India are treated with medicines made in Israel; Cameroonians watch their countrymen play basketball in the NBA. Infant mortality is lower today than it was in 1950 in every country on the face of the Earth.

Markets make it easier for people to get what they want when they want different things, a virtue that is particularly important in pluralistic societies which value diversity and freedom of choice. And economists have used markets to provide elegant solutions to salient problems, like closing a hole in the ozone layer and increasing the supply of kidneys available for transplant.

But the market revolution went too far. In the United States and in other developed nations, it has come at the expense of economic equality, of the health of liberal democracy, and of future generations.

Economists instructed policy makers to focus on maximizing growth without regard to the distribution of the gains—to focus on the size of the pie rather than the size of the pieces. Charles L. Schultze, the chairman of President Jimmy Carter’s Council of Economic Advisers, said economists should fight for efficient policies “even when the result is significant income losses for particular groups—which it almost always is.”15 Keith Joseph, a key adviser to British prime minister Margaret Thatcher, declared that the United Kingdom needed more millionaires and more bankruptcies. “If we are to reduce poverty in this country and to raise our standard of living,” he said, “we need more inequality than we have now.”16

The medicine did not work. In the United States, growth slowed in each successive decade during the half century described in this book, from an annual average of 3.13 percent in the 1960s to 0.94 percent in the 2000s, adjusting for inflation and population.17

A few people became rich beyond the wildest dreams of Croesus, but the middle class now has reason to expect that their children will lead less prosperous lives.* My father was born in 1951. Seventy-five percent of American men born in that year made more money at the age of thirty than their fathers had made at that age. I was born in 1978. Only 45 percent of American men born in that year made more than our fathers at the age of thirty. For my children and their generation, the outlook is even bleaker.18

In the pursuit of efficiency, policy makers also 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. Communities mitigate the consequences of individual job losses; one reason mass layoffs are so painful is that the community, too, often is destroyed. The loss exceeds the sum of its parts.

And the emphasis on growth, now, has come at the expense of the future: tax cuts delivered small 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.

Perhaps the starkest measure of the failure of our economic policies, however, is that the average American’s life expectancy is in decline as inequalities of wealth increasingly have become inequalities of health. Life expectancy rose for the wealthiest 20 percent of Americans between 1980 and 2010. Over the same period, life expectancy declined for the poorest 20 percent of Americans. Shockingly, the difference in life expectancy between poor and wealthy American women widened over that period from 3.9 years to 13.6 years.19

The origins of economics as a discipline are closely intertwined with the rise of liberal democracy. Governments of the people, by the people, and for the people began to replace coercion with persuasion. Simon Schama, in his cultural history of the Dutch Republic in the seventeenth century, described a striking change in state ceremonies, which became “public rather than secluded, bombastic rather than magical, didactic rather than illusionist.” The English economist William Petty, whom Karl Marx called the “founder of political economy,” made himself useful, first to the Commonwealth and then to King Charles II, by taking the measure of private wealth to inform and justify the state’s growing reliance on taxation.20

Partisans began to rely on the language of economics to muster public support for their views, and to shift government policy. The first great work of economics, published in 1776, was called The Wealth of Nations because Adam Smith had a recipe for increasing that wealth: free markets and free trade. A few decades later, in 1817, the economist David Ricardo sharpened the point, arguing that nations could prosper by abandoning production of some goods and focusing on areas of “comparative advantage.” The other stuff could then be imported. This insight electrified opponents of Britain’s Corn Laws, which limited imports of grain.* They spread Ricardo’s gospel using a new technology, the postage stamp, which facilitated distribution of a new magazine, The Economist.21 The 1846 decision by Prime Minister Robert Peel to end the Corn Laws is probably the first significant example of economists reshaping public policy.

The influence of economists grew with the availability of data, like bean vines wrapped around cornstalks. Governments knew little about their own nations at the dawn of the modern age. They had only a rough idea of how many people lived in their countries, how much they earned, how much they owned.22 Alexis de Tocqueville, in a memorable chapter-length harrumph in Democracy in America (1835), scoffed at the very idea that one could quantify the wealth of the United States. After all, he wrote, that kind of information wasn’t even available about European countries. But nations gradually began to gather statistics—a word that originally meant information about the state. In 1853, the U.S. government hired one of the nation’s first economics professors, James D. B. De Bow, to analyze the results of its decennial census, which had gathered more data than earlier iterations, including the first careful count of the number of acres under cultivation.23

De Bow’s statistical work helped to transform the political debate about slavery. In a bestselling and hugely influential 1857 polemic, The Impending Crisis of the South, a young southerner named Hinton Helper used the census data to argue that slavery was bad for the South. In Helper’s view, the critical problem with chattel slavery was not immorality but inefficiency.24

Over the next seventy-five years, the policy makers placed their faith in markets. The government slowly expanded its role in the economy, creating a national currency and then a central bank; establishing federal regulators, first for the railroads and then for a growing range of other industries; and legislating limits on monopolies. But the government remained a small and peripheral actor. As the country sank into the Great Depression, Congress still lacked basic information about the economy. In 1932, it commissioned an estimate of the decline in economic activity; the economist Simon Kuznets reported back in January 1934 that national income had fallen by half between 1929 and 1932. The data was two years old; it still seemed precious. The government printed forty-five hundred copies of the report, and quickly sold them all.25

From the first half of the twentieth century emerged a political consensus that governments should play a much larger role in managing the economy during the second half of the twentieth century. The excesses and inequalities of the early decades, and then the cataclysms of the 1930s and the 1940s, left people with little faith in markets. The economy had been treated as a rocking chair that might move forward or backward but reliably returned to the same place. Keynes made his mark by arguing the economy was more akin to a chair on wheels: after inevitable disruptions, the hand of government was needed to return the chair to its place. The economy required careful management both in good times, to prevent the unequal distribution of prosperity, and in bad times, to limit the pain. Conservatives in those years were people who argued for smaller increases in government regulation and in spending on social welfare.

The U.S. government extended regulation over large swaths of economic activity. Truckers licensed to carry exposed film by the Interstate Commerce Commission required a separate license to carry unexposed film. Antitrust regulators prevented midsized firms from merging and sought to break apart dominant firms like the Aluminum Company of America. Technology firms like AT&T were required to share discoveries with rivals. The banking industry, blamed for causing the Depression, was placed on probation.

Policy makers consciously sought to limit economic inequality. In 1946, Congress passed a law requiring the government to minimize unemployment. In addition, Congress imposed a steeply progressive income tax, and other levies, which collected more than half of the income of those who earned the most. The rise of the labor movement, legitimated by the government during the Great Depression, helped to ensure that workers prospered alongside shareholders. More than a quarter of American wage earners belonged to a union in the 1950s, including a fading movie star named Ronald Reagan, who served as the head of the Screen Actors Guild.

The government also sought to mitigate the effects of inequality by ensuring people had the opportunity to rise, and by catching those who fell. Federal spending as a share of the nation’s total economic output roughly doubled between 1948 and 1968, to 20 percent from about 10 percent. The United States built an interstate highway system, subsidized the expansion of commercial aviation, and laid the groundwork for the rise of the internet. The government also invested heavily in public education, public health care, and public pensions: America wanted to show it could produce better lives for ordinary people than its Communist rivals.

For roughly a quarter century, Americans enjoyed an era of plump prosperity. There were plenty of problems—including the legal, social, and economic subordination of women and of African Americans—but economic gains were broadly shared. Foreigners remarked on the egalitarian veneer of American society: bosses and workers drove similar cars, wore similar clothing, and sat in the same pews. America was a factory town, and Wall Street was the part of town where modestly compensated men managed other people’s money. About a fifth of the American population moved to a new home in any given year, and most Americans succeeded in moving up the economic ladder during the course of their lives. In Detroit, car making carried a generation of workers into the middle class, and the cars carried them to the suburbs.

Economists began to enter government service in large numbers during the New Deal and World War II. They helped to calculate where roads and bridges should be built, and then they helped to calculate which roads and bridges should be destroyed. The economist Arnold Harberger recalled that a friend arrived in Washington during the war and found the National Mall filled with Quonset huts. “What is that?” he inquired. “Oh,” came the response, “that’s where the economists are.”26

As policy makers and bureaucrats struggled to manage the rapid expansion of the federal government, they began to rely on economists to rationalize the administration of public policy. Gradually economists also began to exert an influence over the goals of public policy. The disciples of Keynes began to convince policy makers that the government could increase prosperity by playing a larger role in the economy. The apogee of this “activist economics” in the United States came in the mid-1960s under Presidents John F. Kennedy and Lyndon B. Johnson, who deployed tax cuts and spending increases in an aggressive effort to stimulate economic growth and to reduce poverty.

For a few years, the effect seemed almost magical. Then unemployment and inflation began to rise together. By the early 1970s, the American economy was faltering—and Japan and West Germany were resurgent. “We can’t compete in making cars, or making steel, or making airplanes,” President Nixon fretted. “So are we going to end up just making toilet paper and toothpaste?”27 Nixon and his successors, Gerald Ford and Jimmy Carter, kept trying the interventionist prescriptions of the Keynesians until even some of the Keynesians threw up their hands. Juanita Kreps, an economist who served as Carter’s commerce secretary, told the Washington Post when she stepped down in 1979 that her confidence in Keynesian economics was so badly shaken that she did not plan to return to her position as a tenured professor at Duke University. “I don’t know what I would teach,” she said. “You do lose faith in the catechism.”28

The economists who led the counterrevolution against Keynesian economics marched under a banner emblazoned “In Markets We Trust.” In the late 1960s, they began to convince policy makers that the free movement of prices in a market economy would deliver better results than bureaucrats. They said the champions of activist economics had overstated the government’s influence and their own competence. They said that managing capitalism to improve life on Earth ended up making things worse.

It required a certain arrogance to announce a better way of doing everything, but there was also a striking element of modesty. The new economists were not claiming to have the answers. Indeed, they were claiming not to have the answers. Their assertion was that policy makers should get out of the way instead of trying to make good choices. Governments should minimize spending and taxation, limit regulation, and allow goods and money to move freely across borders. Where policy was necessary—for example, in allocating the cost of pollution—governments should approximate the workings of a market with all possible fidelity. “If it is feasible to establish a market to implement a policy, no policy-maker can afford to do without one,” J. H. Dales, an early advocate for using markets to reduce pollution, wrote in 1968.29

This call for faith in markets drew crucial support from other strains of conservatism in twentieth-century American life.30 It appealed deeply to the “muscular right,” which defined itself in opposition to communism and advocated for less government spending on everything except national defense. Midcentury liberals wrote about the resurgence of conservatism as a pathology gnawing at the fringes of society. But the historian Lisa McGirr has observed that the hotbeds of economic conservatism were in Sun Belt suburbs fattened on federal defense spending, including Orange County, California; Colorado Springs, Colorado; and Cobb County, Georgia. Its adherents were well-educated, prosperous people who thought of themselves as “thoroughly modern.”31 They took the view that things were going pretty well, and would continue to do so if government stopped messing around. (The dentists of Orange County did not acknowledge their dependence on the government that paid the contractors who came for cleanings twice a year.)

Economics was an affirming religion. Earlier faiths took a dim view of wealth, because it was generally assumed that one person’s pleasure came at the expense of others’ pain. And this was true in a world where productivity barely increased over time: the medieval system of guilds limited entry to skilled crafts because there was only so much demand for bread in Rouen.32 But Adam Smith recognized that the industrial revolution had altered this reality. As productivity increased, wealth could be accumulated by increasing the size of the economy. Being selfish could be good for everyone. It’s worth emphasizing that Smith did not think selfishness was always good for society. But economics has roughly the same relationship with its founding texts as the world’s other great religions. Smith’s nuanced accounting became “Greed is good,” which has proved to be a world-conquering credo, among both the wealthy and the many who aspire to join them.

Proponents of faith in markets also developed a close relationship with the corporate elite, which was not as inevitable as it may seem in retrospect. Conservative economists like Friedman and his close friend George Stigler initially expressed fear of corporate power and argued that restraining corporate concentration was one of the few legitimate functions of government. Some conservative economists still do. But many decided to make common cause with corporations against government power. The economists provided ideas and the corporations provided money: underwriting research, endowing university chairs, and funding think tanks like the National Bureau of Economic Research, the American Enterprise Institute, and the Hoover Institution at Stanford University.

In a celebrated 1972 paper, the UCLA economists Armen Alchian and Harold Demsetz described corporations as the apotheosis of capitalism—the best possible mechanism for ensuring people were efficiently employed and fairly compensated. A footnote told readers the professors had reached these conclusions with funding from the pharmaceutical giant Eli Lilly.33 Corporate executives and other wealthy Americans were only too delighted to see their beliefs and interests couched as scientific verities.

Economic conservatives had a more complicated relationship with the social conservatism of the “religious right” and with opponents of civil rights for minorities. Some of the most important early advocates for faith in markets, notably Friedman, a victim of anti-Semitic discrimination in his own academic career, argued that minority groups should embrace the turn toward markets as the best available defense against majoritarian persecution.34 Markets made it easier to accommodate diverse needs and preferences, inhibiting discrimination on any basis other than the ability to pay. Friedman, and other leading economists, also expressed views that pained social conservatives, including support for immigration, the legalization of drugs, and gay rights. Many social conservatives had hesitations about the 1964 presidential campaign of the libertarian Barry Goldwater; many economic conservatives were pained by the racist agenda of George Wallace’s 1968 presidential campaign. Yet by the 1970s the two camps had found a sufficient patch of common ground: social conservatives who feared for their moral values and economic conservatives who feared for their property values both felt profoundly threatened by the expansion of government. Religious leaders including Robert Schuller, pastor of the Garden Grove Community Church in Orange County, synthesized the two strains of conservatism by characterizing the pursuit of wealth as a moral enterprise. Schuller called his church a “shopping center for God” and told his congregants, “You have a God-ordained right to be wealthy.” One congregant told McGirr that her previous minister “was talking about Cesar Chavez and the grape boycott, and you just don’t want to go to church and hear that instead of the gospel.”35

Conservatism was a coalition of the powerful, defending the status quo against threats real and imagined. And that coalition was crucial in generating sufficient political support for market-oriented policies. For social conservatives, however, the results were mixed. The turn toward markets made the United States a more diverse and permissive society, but it also helped to limit the speed and magnitude of those encroachments. The prioritization of efficiency and economic growth provided a value-neutral justification for resisting redistributive policies and welfare programs. And economic discrimination—not just tolerated but celebrated—was itself a powerful and durable proxy for other forms of discrimination. The historian Daniel T. Rodgers has observed that economists initiated a shift in public discourse from contests among groups to transactions among individuals.36


On Sale
Sep 10, 2019
Hachette Audio


Binyamin Appelbaum

About the Author

Binyamin Appelbaum is the lead business and economics writer on the Editorial Board of The New York Times. From 2010 to 2019, he was a Washington correspondent for the Times, covering economic policy in the aftermath of the 2008 crisis. He previously worked for The Charlotte Observer, where his reporting on subprime lending won a George Polk Award and was a finalist for the 2008 Pulitzer Prize.

Learn more about this author