The Economists’ Hour by Binyamin Appelbaum [Book Summary – Review]

For a long period of time, economists were primarily hidden scholars, concealed in libraries as well as classrooms. Still, in the decades following the Second World War, only a few managed to break through and become affluential – and also, change the American way of life while doing that.

This book narrates the remarkable journey of this rise to prominence and the far-reaching consequences it has had on our daily existence. They go back to how the usually radical, market-oriented views of intellectuals such as Walter Oi, Milton Friedman, and Arthur Laffer turned into the prevailing ideology for numerous political people in the United States and across the globe. In depicting this cultural transformation, these blinks talk about the reason why governments have grown increasingly passive while businesses have gained greater strength. 

In this book, you will discover

  • the reason the right-wingers dislike the draft;
  • the reason why AT&T shared its patents; and
  • the person who went out of their way to offer advise to the Chilean dictator Pinochet.

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Chapter 1 – Economists who supported the free market championed the abolition of the draft – and succeeded.

In the year 1996 on the 11th of May. A pandemonium happened at the University of Chicago. A lot of students marched into the administrative buildings of the school. They engage in chanting, flag-waving, and singing protest songs. Their request was: they seek the termination of the military draft in the United States.

Dramatic events such as these are frequently credited with the ultimate termination of military conscription. However, all the praises should not be given to them alone. In reality, behind cameras, there was also an entirely distinct people who played a crucial role in advocating for the termination of compulsory military service.

Therefore, who were these unexpected advocates? They were the Right-wing, economists. all through the 1960s and 1970s, their persistent promotion of free-market beliefs assisted conservative politicians in rationalizing the discontinuation of the draft.

Decades after the Second World War, the United States made use of a draft strategy to fill its colossal military ranks. This implies that a specific number of eligible men were bound to join the military, regardless of whether they were interested or not. As the Vietnam War escalated during the 1960s, this plan grew increasingly unpopular. However, political leaders were hesitant to abolish it. They thought that depending on volunteer recruits would be expensive and also fail to gain sufficient recruits.

A rising group of economists held a contrasting viewpoint. This consisted of people like Walter Oi, Milton Friedman, and Martin Anderson. These groups of people are convinced that mandating military service is an ethical violation of individual rights. Their stance was that the government should give them a fair salary for their work and only employ the people who willingly showed interest. Most importantly, they believed that being a soldier should be seen just like any other job in the labor market.

They articulated their perspective through speeches, written works, and publications. According to them, it would be fairer to have an all-volunteer system and also essentially, it would be more financially efficient. Truly, the government would need to spend more money to entice recruits; however, doing this will make volunteers more dedicated and serve for a long period of time. Some critics expressed concerns that such a system might disproportionately lure people who are poor with fewer choices. However, these concerns were disregarded.

These concepts gradually got support, particularly after Martin Anderson presented a memorandum outlining the proposal to Richard Nixon who was the presidential candidate then. Touched by the discussion, Nixon supported abolishing the draft. Following his election in the year 1968, he actively advocated for the establishment of an all-volunteer military force. His efforts were fruitful, as the draft was officially terminated in 1973.

This policy transformation was the primary huge win for economists such as Oi, Friedman, and Anderson. Also, the decades after would lead to more of it. 

Chapter 2 – In the 1960s, the influence of Keynesian thinking started to decline.

From the beginning of Sputnik in the year 1957, to the first person that went on the moon in the year 1969, the space race was marked as a significant competition during the 1960s. Nevertheless, this competition between the USSR and the United States was not the sole rivalry unfolding during that eventful decade.

Another conflict was occurring within the American government and it was among the economists. On one part were the followers of John Maynard Keynes, known as the Keynesians. On the other side, there was the Chicago School, led by Milton Friedman and his colleagues.

Central to this dispute was a fundamental question: To what extent should the government attempt to run the economy?

During the 1930s, the global economy was severely affected by the Great Depression. The price plummeted, production crumbled, and a quarter of the American workforce was without a job. Faced with this catastrophe, John Maynard Keynes a British economist proposed a way of fixing it. He advocated for the government to stimulate the economy through substantial public spending initiatives. This approach would create employment opportunities for people, allowing them to have more income to spend on additional goods and services.

Franklin Roosevelt who was the president then utilized a mild type of this strategy to guide the nation through the problem. In the subsequent decades, the United States essentially adhered to this strategy, although with minor adjustments. Towards the late 1960s, President Johnson made use of this reasoning to support his huge and effective social initiatives such as Medicaid, Medicare, and various anti-poverty initiatives. Keynesian economics was in charge. 

However, there was a hitch. The substantial spending resulted in inflation. Although fair Keynesian theory advocated for elevated taxes as a way to control this issue, this policy was excessively politically unwanted to put into practice. Consequently, legislators were faced with a conundrum. How can the government proceed in how they run the economy? Friedman together with his colleagues proposed how to help: the government needs to step back.

In December of the year 1967, Friedman gave a good speech to address the American Economic Association. In that address, he stated that the state does not need to be completely involved in the economy. He acknowledged that the Federal Reserve could attempt to fight inflation by adjusting the money supply – just that. This approach is known as monetarism. Although this strategy marked a significant radical departure, Friedman’s concepts would gain even greater popularity in the following decade.

Chapter 3 – During Reagan’s era, supply-side economics as well as tax cuts were the reigning ideas. 

During the late 1970s, a single word was shown on every headline, news broadcast, as well as casual discussion: and the word was stagflation. This term was coined to explain the two issues afflicting the economy: namely ‘stagnant job growth as well as extreme inflation.’

The issue of stagnation was a pressing concern, prompting President Carter to appoint Paul Volcker as the head of the Federal Reserve in a desperate bid to restore economic stability. Volcker trusted in Milton Friedman’s monetarist ideology. Therefore, he instantly started limiting the money flow. The main objective of this approach was to reduce inflation; however, the outcome led to increased interest rates, factories closing down, and a surge in unemployment.

Two years after Ronald Reagan became the president, over eight million Americans found themselves without work. Although this policy had a harsh impact on the lives of ordinary citizens, it proved advantageous for the financial field. Over time, this pattern repeated itself as a new economic theory became rampant

When Ronald Reagan became the president during the 1980s, the United States was still trying to fit into the consequences of Volcker’s monetarist policies. It looked as though, minimizing inflation always came with an increase in unemployment. This signified that the demand of the consumer remained low and ultimately brought about a recession in the economy. The Keynesian answer to this predicament would involve boosting demand via government spending. However, a fresh group of economists proposed a completely different method. 

During the 1960s and 1970s, economists such as Arthur Laffer and Robert Mundell started promoting tax reduction as the remedy for addressing both inflation and unemployment. Arthur and Laffer’s plan revolved around the notion that reducing taxes on personal incomes, businesses, as well as investments would strengthen business activity and enhance the supply of goods and services in the economy. This supply-part ideology argued that the effect of economic growth would benefit the rich people, and subsequently, these riches would trickle down in the form of more salaries for employees at the lower end of the spectrum.

Reagan liked this notion and implemented it through various substantial tax reductions all through the board. In the year 1981, Reagan reduced the top income tax rate to about 50% and, some years after reduced it more to about 33%. The outcomes were less mind-blowing than he had anticipated. In spite of a moderate rise in economic activity, normal Americans didn’t witness an increase in their income. As a matter of fact, inequality increased rapidly compared to that at any point since the Second World War. 

Even the government’s finances were adversely affected too. Reduced taxes resulted in reduced income for infrastructure, social initiatives, as well as other vital resources. The government used reducing services and huge substantial deficit spending in order to bridge the financial difference. In spite of the shortcomings, this approach to economic governance, known as Reaganomics, continues to have popularity among lawmakers even to this day.

Chapter 4 – Monopolies dominated the markets as a result of the pursuit of economic productivity.

In the year 1952, AT&T patented a groundbreaking invention called the transistor. Instead of hoarding this innovative technology, the telecom giant took an unusual approach by publishing a comprehensive instruction manual, allowing its competitors to create their own transistors. How nice of them!

In reality, AT&T’s decision wasn’t driven by generosity; it was compelled to give it out. The government knew the potential dangers of entrusting a single corporation with significant technological control. 

This action wasn’t entirely unexpected, considering the government’s history of intervening in the marketplace and restraining corporate dominance, starting with the Sherman Antitrust Act of 1890. However, as new economic philosophies gained momentum, this vital government role began to wear off.

Prior to the 1970s, the government played a role that is kind of related to that of a referee in the marketplace. It utilized its power to diffuse huge corporations, hinder extensive collaborations, as well as enforce labor regulations. The main aim was to prevent monopolies from amassing excessive power and stifling out all rivalries.

Nevertheless, economists such as George Stigler viewed things in another way. These economists proposed that governments need to be concerned more about efficiency instead of fairness. In essence, companies must be at liberty to do whatever they want provided they offer consumers low prices. In other promote this notion, companies such as Exxon, IBM, and General Electric gave funding to powerful institutions to educate policymakers on this ideology. In 1990, over 40% of federal judges had been educated in these institutions.

Due to that, the government adopted a more hands-off strategy for business. This led to an increase in corporate mergers all through the 1970s and 1980s. For example, by the year 1992, the five biggest meatpacking businesses increased their market share from 25% to over 70%. However, the most significant achievement of this approach was the deregulation of the airline field.

From 1938, the government imposed strict regulations on the airline field, ensuring high operational quality; however, also maintaining high ticket prices. During the late 1970s, the United States stopped making these regulations mandatory. In the following void, airlines engaged in intense competition by reducing prices, maximizing passenger loads, and eliminating routes that were not profitable. Initially, this made air travel more affordable. However, over time, monopolies emerged, and by the year 2010s, only four companies transported 80% of US passengers, charging higher fares compared to their better-regulated European rivals.

Chapter 5 – Moral judgment was substituted with the use of cost-benefit analysis by Economists.

Assuming you are in charge of a truck company. One day, a tragic accident occurred involving one of your trucks and a passenger car, resulting in the loss of three lives. After investigating the damage, engineers determined that putting some additional parts on every truck could avert fatal accidents in the future.

This might appear as the normal action to take. However, an economist could offer a different approach. The implementation of such safety equipment comes with a huge cost. Also, if accidents are not that common, you could be allocating a huge amount to save only a few lives. Therefore, the question arises: are these changes actually relevant? The answer differs. What is the worth of human life?

It might appear insensitive to assess the worth of a human life in terms of money. Nevertheless, in previous decades, economists have utilized this manner of cost-benefit analysis as an important part of government regulation.

Cost-benefit analysis is a type of logical thinking that evaluates any kind of action based on its likely advantages and disadvantages. Originally created by the economist Charles Hitch who is an economist. This was first used during the early days of the Cold War to aid the Department of Defense in determining which weapons represented the most affordable investments for the U.S. military.

Elsewhere, this manner of reasoning wasn’t fast growing. All through the 1960s as well as the beginning of the 1970s, the government frequently utilized new agencies such as the Environmental Protection Agency and the Occupational Safety and Health Administration to implement regulations that are related to workers and the environment. These regulations mandated measures such as factory air filters and pollution limits, with the primary objective being the protection of individuals, in spite of the associated costs.

However, this approach did not remain for long. Intellectuals such as Howard Gates as well as Jim Tozzi advocated the notion that every regulation should be subjected to cost-benefit analysis. Naturally, this needed to know the amount human life costs. In the year 1972, Gates employed a set of discreet measures to approximate that the worth of one human life was approximately $200,000. Knowing this estimate, free-market economists could resist new regulations that were deemed to cost more than the potential savings they offered.

The Reagan regime used this concept wholeheartedly. February of 1981, they issued an executive ruling mandating that every regulatory agency adhere to cost-benefit analysis. In the subsequent years, regulations were rapidly discarded on an economic basis, even though it meant they had the potential to save human lives. Successive governments have made small efforts to replace this approach, and even now, the value assigned to a human life continues to be a determining factor in assessing the worth of a law.

Chapter 6 – Stopping set exchange rates brought about a huge, volatile brand new approach to trade.

During the summer of 1944, the Allied nations came together at a little mountain retreat in Bretton Woods, New Hampshire, where they reached an agreement to oversee the entire international trade within the capitalist globe.

The outcome of these negotiations was the Bretton Woods Agreement, which established fixed exchange rates among various currencies, using the United States dollar as the benchmark. The primary goal was to enhance predictability in international trade by balancing currency values. Remarkably, it succeeded, although just for some decades.

Also, in August of the year 1971, this agreement stopped. During that summer, President Nixon again did another retreat at a resort on a mountain. This time around, in collaboration with George Shultz an economist, President Nixon chose to back out from Bretton Woods 

Decades after the Second World War, the Bretton Woods method appeared to be a mutually beneficial arrangement for all parties involved. In the absence of fixed exchange rates, this implied that in theory, a nation had the option to devalue its own currency in order for its exports to be more affordable. However, this kind of rivalry might bring about fluctuation and also hinder trade internationally as nations seek to protect their respective industries. Conversely, if all the nation’s currency is attached to the U.S. dollar at a set rate, it brings about better stability.

Nonetheless, problems gradually arose. Economies such as Japan, as well as Germany, experienced rapid recoveries by selling their products in the thriving U.S. market. Consequently, foreign companies as well as banks accumulated a substantial sum of U.S. dollars. The issue with that was, using the Bretton Woods approach, the United States was committed to backing every dollar with gold. Therefore, the surplus of dollars in the system was what made this promise difficult to abide by. A critical decision needed to be made in the year 1971.

Shultz, inspired by his colleague Friedman, proposed that the United States needs to abandon the fixed exchange rate method for the dollar. Rather, the nation needs to allow the value of the dollar to float freely or allow the market to determine its worth compared to currencies such as the pound, the yen, or the lira. President Nixon followed this advice, leading to tumultuous outcomes.

Over the subsequent years, the values of every currency experienced significant fluctuations as investors started making speculation within the recently established international money markets. The U.S. dollar, due to its relative stability, eventually became highly worthy and strong. This proved beneficial for consumers, who could now purchase more products globally. However, it had adverse effects on U.S. manufacturers who find it difficult to compete with the less expensive international imports. A lot of factory employees found themselves without jobs by the middle of the 1980s.

Chapter 7 – Pinochet implemented Friedman’s opinions, leading to tumultuous outcomes.

In the year 1973, in Santiago, Chile, the presidential house exploded. Augusto Pinochet’s forces, with some assistance from the CIA, displaced Salvador Allende, the nation’s democratically chosen president. In the subsequent years, Pinochet’s military detains, mistreats, and kills lots of protesters.

Pinochet’s violent revolt and the following tenure remain a dark mark and troubling chapter in the nation’s intricate archive. However, Milton Friedman viewed it as an advantage. Thus, in the year 1975, the economist traveled to the South to meet one-on-one and give guidance to the cruel oppressor.

Over the next decades, Pinochet together with Sergio de Castro who was his economic counselor, implemented a lot of Friedman’s economic principles. The outcome was an economic dynamic that did little to assist the individuals living in Chile.

Chile was never the wealthiest nation globally. However, by the beginning of the 1970s, it really wasn’t that terrible. Over the preceding decades, the government had utilized state affluence to meticulously nurture a growing industrial economy. In the year 1973, the per-capita income of Chile already exceeded that of the normal Latin American by 12%. Allende had plans to maintain this growth; however, Pinochet used another approach.

Upon taking power with violence, the general put  Los Chicago Boys in charge of the nation’s economy. These Boys are a  set of right-wing, free-market economists who graduated from the University of Chicago. These economists diligently put in place Friedman’s preferred ideologies, which included cutting government initiatives, restricting the flow of cash, and making companies private. Consequently, Chile’s economy went through significant turmoil. A substantial portion of the nation’s working group was without work, while a selected few of Pinochet’s followers became extremely rich.

In addition to these actions, Pinochet removed the capital administrations and financial regulations in the nation. This opened the door for foreign investors to acquire a significant portion of Chile’s natural resources and compelled Chilean industries to take on substantial amounts of foreign currency loans. At the beginning of the 1980s, Chile was even in greater debt compared to other nations in that part. Mismanagement had led to the nation being less successful than Cuba by the completion of the decade.

Pinochet was eventually removed from power in the year 1990; however, the consequences of his free-market approach continue to linger. Where the nation was on time close to achieving a fairer form of economic development, it now faces the challenge of addressing the inequality of decades ago and political oppression. Nonetheless, there are indications of improvement. In the year 2016, about 10% of the nation came out to demand better pensions, and a fast-rising student campaign seems well-positioned to bring about actual; political transformation.

Chapter 8 – Markets that are not regulated usually bring about financial problems.

No regulation whatsoever is the only great type of regulation according to economist Alan Greenspan. All through Greenspan’s profession, he supported the belief that companies, hedge funds, banks, and actually all industries perform well when they are totally free from the meddling of the government.

Greenspan made his first public debut in the year 1964. He did this by delivering different lectures supporting the moral virtue of entirely unrestricted markets. During the 1970s, he campaigned against regulations mandating that banks give out financial details. Then, in the 1980s and 1990s, while serving as the chairman of the Federal Reserve, he opted not to restrict dangerous subprime mortgage lending.

To Greenspan’s merit, his views remained remarkably constant all through. He kept on campaigning for unregulated markets even though facts showed that he was wrong all the time. Also, a quick survey of the past few decades reveals various instances of unregulated industries rapidly getting out of hand. 

One of the main explanations behind financial regulations is to control actions that, although likely to yield profit for others, pose significant risks to other people. An enlightening illustration of this can be found in the narrative of credit derivatives. Initially launched in the 1990s, these complex financial tools basically enabled investors to speculate on whether borrowers would pay back their loans or not.

The banking field greatly persuaded to ensure that the derivatives market remains unregulated. Doing this permitted them to trade derivatives solely on lies and engage in highly dangerous stakes. This resulted in a lot of high-profile financial collapses. In the year 1994, Orange County, California, incurred losses amounting to over a billion dollars on derivatives and had to declare bankruptcy. The UK-based Barings Bank experienced a similar thing just a year later.

However, these problems were only a preview of even larger crises that were about to come. Again during the late 1990s, financial institutions introduced a different famous and perilous financial product, known as the subprime mortgage. These mortgages were unique loans described by complicated terms and often volatile interest rates. Banks generated substantial profits by extending these loans to people from a low-socio background who usually were unable to pay back. 

Interest groups implored the Federal Reserve as well as Greenspan to handle this sector. But, the Federal Reserve maintained the concept of Greenspan’s anti-regulation stance and allowed the ideology to persist. In the subsequent ten years, the subprime industry expanded significantly into a huge financial bubble. It wasn’t until 2008 that this bubble burst, leading to a global financial crisis – a calamity that could have been significantly alleviated with a few regulations.

The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society by Binyamin Appelbaum Book Review

After the end of the Second World War, a set of economists, that included Arthur Laffer,  Milton Friedman, George Stigler, and George Shultz, have grown into strong and prominent people. Their economic ideas support reduced taxation, unregulated markets, as well as a restricted governmental position in the private field. The United States together with numerous other Western nations has embraced these principles, but the outcome has been static wages, drained industrial as well as manufacturing fields, and increased rates of inequality.

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