Defunct Economists


Paris.--There is a curve in the progress of ideas and theories that goes from innovation to acceptance and influence, passing to peak, popularization, vulgarization and overextension, and then descending into caricature and collapse.

This curve is evident today with respect to that clutch of ideas that produced the monetarism-free-market-deregularization theory dominating Western economic policy and public debate during the 1980s, known best as Reaganism-Thatcherism.

Promulgated in the United States by the editorial page of the Wall Street Journal, and in England by several anti-orthodox think-tanks, based on ideas ranging from the monetarism of the University of Chicago economic school to the magical mystifications of the Laffer Curve and ideological libertarianism, it was welcomed by the businessmen to whom it told what they wanted to hear, and won the heart and mind of Ronald Reagan -- and, in its more rigorous version, of Margaret Thatcher as well.

It became the truth of the 1980s, otherwise recognizable as that treacherous phenomenon, the conventional wisdom. Free-market monetarism now is universally prescribed, to the reconverted Communist apparatchiki of the East bloc and the bewildered elites of African countries scarcely possessing an economy to deregulate. It has by now clearly arrived at its stage of vulgarization and overextension. Collapse cannot be far off.

The Columbia University sociologist Herbert Gans asked recently (in a letter to the New York Times Magazine) why it is that, contrary to the prediction of free-market theory, productivity gains in practice always do away with jobs, but seem never to create them. The theory, of course, opposes government policies that would create jobs because that would interfere with market forces. Professor Gans notes that the theoreticians nearly always are "academics who have lifetime job tenure," remarking, "I often wonder what they would recommend for the economy if they suddenly joined the ranks of the downsized."

But Keynes long ago contested the dogma that when wages go down employers hire more workers, and that low interest rates always generate new business investment. He wrote in 1930, of the Crash, that while business, during a boom, recovers more in profits than it has invested in production, in a slump the opposite is true. He said that it was an illusion to think that by reducing overall business costs in a recession or depression, by cutting production and wages, equilibrium will be restored. Reducing production reduces receipts, and reducing wages reduces the buying-power of consumers. Firing workers eliminates their buying-power. This cycle has to be broken. Keynesianism accomplished it through government spending.

Robert Eisner of Northwestern University notes that while the conventional wisdom says that restricted government spending and tight-money policy are necessary to suppress inflation, "There has, in fact, been little inflation in United States history, aside from wars and supply shocks like those related to oil prices, and they have little to do with government spending; we clearly have little or no inflation now."

Until Britain was forced out of the European Monetary System, it insisted that unemployment and deindustrialization were necessary to achieve zero inflation. Germany is fighting inflation because of the way in which the two German economies were united in 1990. The French franc until now has shadowed the German mark by means of austerity policies that have produced a level of unemployment unknown since the Great Depression. The French government says that if the franc were to lose value against the mark, this would import inflation. Inflation in France currently is around 2 percent. Surely something has gone wrong.

Keynesianism is a theory on its way back. The Clinton administration has attempted to convince Congress and the public that government spending can be an investment in the economic future. Robert Heilbroner has a new book called "21st Century Capitalism" (Norton, New York) that argues that while there may be "a threshold of necessary acquisitiveness to maintain a system's elan vital, so there is also a limit beyond which acquisitiveness no longer serves, and may well disserve, the adaptability of the [capitalist] order. . . . There is also a limit beyond which indifference turns into a dysfunctional social injustice."

We are surely at that point. Market economics has served a useful function in purging the Western economies of systemic dysfunctions, but it has reinstalled social dysfunctions that the Western democracies 20 years ago had prided themselves on overcoming.

Market doctrine currently is creating unemployment without restoring employment, and reducing Western living standards as a result. Mr. Heilbroner writes that while capitalism was driven in the past by a popular sense of progress and expanding opportunity, the "feelings of dismay that are so much a part of our contemporary frame of mind" result from the fact that for the first time since World War II people in the democracies anticipate a worse future, rather than a better life.

The great lack in market theory is its lack of social consciousness. It tends to treat people as abstract economic units. It leaves justice to the indifferent workings of the market place, and that is a blind faith.

The time has come to restore to economic policy making considerations of social justice, and of social as well as economic efficiency. The purpose of economic policy surely ought to be to raise the lowest to the levels of the highest, not to reduce the living standard of workers in the advanced countries to the standards of the poorest. The time has come for a social charter to be incorporated into planning for the future of GATT's international market place. This is where economic debate in the West should now turn.

William Pfaff is a syndicated columnist.

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