So in my brief pause between courses and starting in on my very long prelim reading list, I’ve been trying to read up on the history of the economics profession. Other than David Warsh’s excellent, but specific, book Knowledge and the Wealth of Nations (a history of economists’ understanding of growth and knowledge and the connection between the two), Michael Bernstein’s A Perilous Progress: Economists and Public Purpose in 20th Century America is the first book-length history of economics I’ve read*. With that in mind, I’m not going to try and assess the accuracy of Bernstein’s historical account, but rather summarize some of the most interesting threads in his tale and try to see if I can make sense of them.

Bernstein’s book focuses on the role economists played in public policy in the United States in the 20th century (and thus has a shockingly accurate title). The book is front-loaded, with the chapters on the Great Depression and the two World Wars being by far the most interesting and meaty**. Bernstein tracks the rise of economics in governmental decision making, from completely outside the apparatus of government at the start of the 20th century, to being the only profession with its own organization within the executive branch (the Council of Economic Advisers) in 1946. The book follows a number of threads, including: the push by economists to become more important in policy making, the push by economists to have their discipline seen as scientific (which was both complemented and contradicted the drive to be relevant in policy-making), the interplay of changes in the economy with changes in economic ideas, the success and failure of various economic interventions and the use of economists and economics by political figures (mostly different presidents, from Hoover to Reagan).

I’m particularly interested in the story Bernstein tells about the changes in the status of economics as a science, in terms of how it was perceived by policy makers and the public. This story is not as fleshed out in the book as I would like, but that’s not really a critique as much as a thirst for more details. Economics’ struggle to be seen as science is old, Charles Camic of Northwestern gave an excellent talk about how economists began to succeed at this task in the 1890s by downplaying conflicts within the field and playing up consensus. The aim was explicit: Economists wanted economics to be a science. This desire was not particularly unique to economics, but they seem to have pulled it off. But when? And how? Similarly, when and how and to what extent did economists become a force in policy-making?

Bernstein tracks a number of failures on both counts and then on shining success. The failures took place in World War I, when economists failed to gain much traction or contribute very usefully to the war efforts. The attempt to do so, however, helped economists build an organization that would be in place for the next big war. By 1929, academic economists and their students had begun to gain some traction with Herbert Hoover. Unfortunately, none of them predicted the coming of the Great Depression, nor provide many useful ideas about how to ameliorate its worst effects. While Keynes published his magnum opus, The General Theory of Employment, Interest and Money in 1936, his insights were too late to have much impact on actual Depression-era policy. The real birth of economics as a tool for policy came not from macroeconomic theories about inflation or employment, but from applied macroeconomic models of utility maximizing individuals.

At first this might seem a bit counterintuitive. How did models of hyperrational individuals serve the government more usefully than macroeconomics? During World War II, the federal government basically ran the entire economy as a planned economy. The entire set of workers, factories, farms, mines, etc. needed to be finely tuned to produce what the US needed to fight the war. Enter applied economists with quantitative tools for optimizing the use of scarce resources given a particular utility function. The utility function in this case came not from an individual’s preferences but from the war effort. Ironically, the free market oriented neoclassical economists found a niche for themselves as planners – by thinking of the government as a single economic agent with a fairly complicated, but well-specified, utility function, all the tools they had developed for analyzing individuals consumption suddenly became useful for directing government expenditures. Here’s Bernstein’s take (p. 89):

It is one of the great ironies of this history that a discipline renowned for its systematic portrayals of the benefits of unfettered, competitive markets would first demonstrate its unique operability in the completely regulated and controlled economy of total war.

This successful foray into policy work by academic economists paved the way for the discipline as a whole.

Thus, in 1946, on the heels of playing an integral part of winning the war, economists managed to get the Council of Economic Advisers created. Interestingly, the CEA was created as part of the employment act of 1946, and its initial mission was to guarantee full employment throughout the country (by using Keynes’ insights). By 1978, with the decline of Keynesianism in the wake of stagflation, the CEA’s mission was changed by law to emphasize price stability as much as or more than full employment (and thus demonstrating how much Friedman and his followers had gained in such a short amount of time).

The history of the CEA’s founding and its first few years make a really nice case study in the problems of an academic discipline trying to be both a science of understanding and a tool for policy-making. There were internal divisions about the role of the CEA – dispensing scientific advice or helping presidents’ achieve certain political goals, for example. The CEA started off with an image of itself as the Supreme Court of economics, where the 3 Council members should try to be above politics (ok, what happened to that sentence? Moving on…). Rapidly the CEA turned political, and already its second director saw himself as a servant of the President more than an as a high priest dispensing economic wisdom.

Thus, the successes of economists in policy-making of one sort (planning a war time economy) led to influence in another (macroeconomic policy during an era of peace), and a gain in ‘scientificity’. But these gains were put in danger at least somewhat by the partisan tone of the CEA in the 1950s and beyond, and then the chaos of the 70s changed the game entirely.

Alright, I can see that I’m not going to be able to capture anymore of the historical nuance in this post, so I’ll cut it off here and close by saying that I highly recommend Bernstein’s book to anyone interest in the interconnections between academic knowledge production and public policy, or in economists themselves.

Oh, last thought: Bernstein also does a good job analyzing Reagan’s Keynesianism. Yeah, I said that right. While Reagan advocated the principles of Friedman and Hayek, his actual policies – massive tax cuts along with massive deficit spending – are exactly the prescriptions of Keynesianism for ending a depression. The ultimate champion of Friedman was the ultimate practitioner of Keynes, another of the history of economics and policy’s great ironies. And yet, Bernstein explains how Reagan followed Keynesian prescriptions while making it impossible for his successors to continue to do so. Reagan’s tax cut were framed as permanent reductions in the rate of taxation, and not countercyclical adjustments, thus Bernstein writes (p. 167):

In this sense, although the Reagan administration practiced a kind of Keynesianism in its dramatic expansion of military spending while at the same time reducing federal taxes, supply-side economics did unambiguously achieve one particular policy objective: it made the future use of Keynesian spending policies entirely problematic, if not impossible.

* A couple more arrived this past week, but I’m afraid I may not get to them before I devote myself to prelim reading.
** Although the chapter on how economists managed to get ride of all the Marxist and heterodox economists in the 1950s by simply saying that these heterodox thinkers were not qualified is really interesting. Instead of directly accusing these scholars of communism, they simply denied them tenure or did not hire them because they did not meet the new standards of academic rigor. Unlike in other ‘science-y’ or even ‘art-y’ disciplines, in the social sciences (and esp. econ in the mid 20th century) policy-prescriptions and academic practice were too close to be neatly separated. One could not easily be a neoclassical socialist or Marxian free trader.