A common meme about the financial crisis blames it on capitalism run amok and holds the rise of free-market fundamentalism among economists responsible for unleashing the greed. Academic economists, the argument runs, are largely free-marketers, and they convinced politicians to deregulate important swathes of the American economy, and the unbridled capitalists then engaged in a feeding frenzy that led to the collapse. Let’s call that meme, “The Narrative.”
Tiny elements of The Narrative are true: there are some free-market economists, there have been some deregulations, and some capitalists have behaved badly.
But let’s look more closely now at only one element of the story – the part that claims that a large proportion of professional economists are free-market economists. Paul Krugman, for example – Nobel-Prize-winner, best-selling author, Ivy League professor, and champion of The Narrative – believes that it’s true and in The New York Times recently blamed the economics profession for allowing “the dominance of an idealized vision of capitalism, in which individuals are always rational and markets always function perfectly.”
How do we find out what beliefs dominate economists’ thinking? Well, we could ask them, as economics professors Daniel Klein and Charlotta Stern did in 2007:
“We surveyed American Economic Association members and asked their views on 18 specific forms of government activism. We find that about 8 percent of AEA members can be considered supporters of free-market principles, and that less than 3 percent may be called strong supporters. The data are broken down by voting behavior (Democratic or Republican). Even the average Republican AEA member is ‘middle-of-the-road,’ not free-market.”
Note that the study was published in 2007 and so reflects the views of economists before the crisis became apparent.
So, if I am reading the results correctly, less than one American economist in ten is a free-marketer. Ninety-two percent, by contrast, are middle-of-the-roaders, advocates of significant government management of the economy, or outright socialists. That makes it a puzzle for The Narrative: How could a tiny percentage of free-market economists have exerted so much power?
A bigger puzzle arises when we consider Europe. The financial crisis was and is a European phenomenon as well, including severe problems in Italy, Spain, Greece, Ireland, and other nations. But does anyone believe that Greek and Spanish economists are ideologically more free market than American ones? I don’t think so. Yet to believe The Narrative we’d have to believe that the even tinier number of European free-market economists were able to exert huge influence.
There’s a long and important story here, but – contrary to The Narrative – for over a century, free-market thinking has been a minority position among economists. Here are a few prominent data points:
Go back to the late 1800s, before American universities began granting Ph.D. degrees in economics. Most aspiring economists went off to German universities for their advanced studies. German economics was heavily dominated by socialist and other anti-market thinking, and the young Americans absorbed it. Upon their return, some were inspired to start the American Economics Association in 1885. The three founders of the AEA – Richard Ely, Edwin Seligman, and Simon Patten – were all German-educated, opposed to free-market capitalism, and saw the purpose of the AEA as ideological – to undermine laissez-faire capitalism in theory and practice. Ely was later to become, at Johns Hopkins University, the influential teacher of a future Progressive president, Woodrow Wilson. For more, I recommend economic historian Lawrence White’s indispensable The Clash of Economic Ideas (Cambridge University Press, 2012).
Jump ahead a generation to World War One and its state-managed war economy. Most economists signed on enthusiastically, as they were to do a generation later in World War Two.
Between the wars were the Great Depression and President Franklin Delano Roosevelt’s New Deal, with its government-managed cartels and monopolies. Most economists cheered the giant steps towards a state-run economy.
Columbia University economist Rex Tugwell is representative here. The top man in FDR’s “Brain Trust,” Tugwell was a great admirer of Mussolini’s fascist and Stalin’s communist regimes. On a trip to Rome in 1934, Tugwell wrote in his diary that that Mussolini’s regime was “doing many of the things which seem to me necessary” and was “the cleanest, neatnest [sic], most efficiently operating piece of social machinery I’ve ever seen. It makes me envious.” A few years earlier, in 1927, Tugwell had also visited the Soviet Union. He was so positively impressed with what he saw there that he wrote a number of scholarly articles defending various communist methods and recommending their adoption in the United States. Again, see White’s book for details.
The post-World-War-Two economics landscape was shaped by Cambridge University economist John Maynard Keynes. Keynes argued, persuasively to most economists, that governments should actively control interest rates, the money supply, wage rates, state debt spending, and more, so as to manage the economy’s ebbs and flows.
Keynes’s ideas so completely dominated the economics profession for decades that President Richard Nixon’s declaration in 1971, as he took the United States off the gold standard – “We’re all Keynesians now” – captured an important truth.
And now, another generation later, economists’ views are as reported by professors Klein and Stern.
So where are all the free market economists who have supposedly been dictating policy? Of course there have been some prominent free-marketer economists – Milton Friedman and Friedrich Hayek are well known. But mostly they are foils and whipping boys in a profession that largely disagrees with their views.
The fact is that most economists are interventionists who advocate a mixture of free markets and government control. A few economists at either end of the spectrum are principled advocates of free markets or total government control. But when 90 percent of economists are generally favorable to government intervention while only 10 percent are generally opposed, then the tendency of their policy recommendations will run heavily toward further state control of the economy. And that has been the trajectory for a long time now.
What all of this most crucially means is that when we analyze complicated messes like the financial crisis that began in 2007, our starting position should be to recognize that our economy has free-market elements with many heavy doses of government regulation. And it should at the outset be an open question whether we blame the crisis on the free-market elements, the government regulations, or a dysfunctional mixture of the two.
I have my suspicions, but the first hypothesis to be rejected should be The Narrative.
If anything, the opposite is more likely to be true – that the fault lies with the many economists who have advocated tinkering and tweaking and outright control over critical sectors of the economy.
Don’t miss last week’s column: Who Really Wants to Solve the Problem of Poverty?
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Stephen Hicks is the author of Explaining Postmodernism: Skepticism and Socialism from Rousseau to Foucault and of Nietzsche and the Nazis. He blogs at StephenHicks.org. For future columns on The Good Life, feel welcome to send your philosophical questions and moral dilemmas to him at .