The “New Economists” and the Great Depression of the 1970s
During the 1960s, when Keynesian economics came to truly dominate the economics profession, there was a large influx of these “new economists” into government. The disastrous results included the “keynesianisation” of the economy and what is best described as an economic depression lasted throughout the 1970s and into the early 1980s.
Like the 1920s and 1990s, the decade of the 1960s was a period of remarkable prosperity in the
Credit for the expansion was given to two primary factors. The first factor was scientific management of the economy by the “new economists”1 who were brought to
Academic economist Arthur Okun was a prominent member of President Johnson’s Council of Economic Advisors. Right before the crash he described the economic expansion as “unparalleled, unprecedented, and uninterrupted.” Okun believed that the economy was on a new “dramatic departure” from the past:
The persistence of prosperity has been the outstanding fact of American economic history of the 1960s. The absence of recession for nearly nine years marks a discrete and dramatic departure from the traditional performance of the American economy.2
After declaring the business cycle dead, he went on to demonstrate that research on the business cycle was now a thing of the past and that a “new” approach to the economy had replaced it. In fact, he even took the dangerous step of ridiculing those who stubbornly stuck to the old economics, where business cycles were viewed as an inevitable feature of the market economy. In fact, he charged this old school with viewing recessions in a positive light for correcting past excesses:
When recessions were a regular feature of the economic environment, they were often viewed as inevitable. Indeed, the Doctor Panglosses saw them as contributors to the health of our best of all possible economies, correcting for the excesses of the boom, purging the poisons out of our productive and financial systems, and restoring vigor for new advances. And the latter-day Machiavellis saw potentially great political significance in the timing of turning points. They spun out fantasies, suggesting or suspecting—depending upon whether their party was in or out of office—that the business cycle would be controlled so that the inevitable recession would come between elections and would be replaced by a vigorous economic recovery during the campaign period.3
He confidently declared that the death of the business cycle is “proof par excellence” that economic controversies can be solved. How was the business cycle killed? Okun found that the slayer was not new theories or policy tools, but simply a more confident and scientifically rigorous implementation of existing tools that resulted in the efficient scientific management of the economy.
More vigorous and more consistent application of the tools of economic policy contributed to the obsolescence of the business cycle pattern and the refutation of the stagnation myths. The reformed strategy of economic policy did not rest on any new theory.4
For Okun, the New Deal had employed fiscal stimulus of the economy a la Keynesian economics. He considered those experiments successful and as far as he was concerned they provided evidence of the success of countercyclical fiscal policy. In his view, the much older “fiscal religion” of limiting the size of government
Article from Mises Wire