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When Markets Ruled the World
In the early 1950s, a young economist named Paul Volcker worked as a human calculator at the Federal Reserve Bank of New York, with little hope for advancement in an institution that kept economists in the basement. The American elite widely distrusted economists then - from FDR dismissing Keynes as an impractical "mathematician" to Eisenhower warning against technocratic control. But a revolution was brewing. Market-oriented economists were about to rise to unprecedented influence, transforming government, business, and everyday life in ways that continue to shape our world today.
"The Economists' Hour" by Binyamin Appelbaum chronicles this remarkable transformation from 1969 to 2008, when economists led efforts to curb taxation, deregulate industries, and promote globalization. The book has become required reading in policy circles, with former Treasury Secretary Larry Summers acknowledging its importance despite disagreeing with some conclusions. Even Barack Obama included it on his 2019 reading list, recognizing how these economic ideas fundamentally reshaped American society - for better and worse.
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The Rise of Market Fundamentalism
Milton Friedman, a small man with large glasses and boyish enthusiasm, became one of the twentieth century's most influential ideologues. His central belief was simple: open markets represented the best system of human governance, far superior to traditional government, which should be minimized. A formidable academic who won the Nobel Prize in 1976, Friedman was also a masterful communicator who reshaped economic thinking worldwide.
Born to immigrant parents in Brooklyn in 1912, Friedman grew up in Rahway, New Jersey, where his family owned various small businesses. After studying at Rutgers University, he shifted from mathematics to economics during the Great Depression. Ironically, Friedman and his future wife Rose Director found employment through New Deal programs that created a "boom market for economists" in Washington. During WWII, Friedman worked for the Treasury Department, where he helped create tax withholding, which Rose never forgave him for.
Friedman's first major policy victory came through ending military conscription. In 1967, Martin Anderson, a libertarian economics professor connected to Richard Nixon's inner circle, proposed ending the draft based on Friedman's ideas. Friedman argued for an all-volunteer military recruited through competitive wages rather than forced service. Despite warnings from advisers that ending the draft might alienate conservative voters, Nixon embraced the proposal, calling the draft "one of the severest and most unfair restraints on the free market."
The transition faced significant resistance in Congress. House Armed Services Committee Chairman F. Edward Hebert famously quipped, "The only way to get an all-volunteer army is to draft it." Many war opponents still valued conscription as a civic institution, with Senator Thomas Eagleton warning that ending the draft would make war "the business of the poor." Nevertheless, the legislation narrowly passed, with the last draft call occurring on June 30, 1973.
This shift fundamentally changed Americans' relationship with military service. The all-volunteer force, supplemented by contractors in equal numbers during recent conflicts, has made war more remote from most Americans' lives. As predicted, "increased taxes generate far more public discussion than increased draft calls," allowing war to become a permanent, low-grade conflict commanding little public attention.
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The Battle Against Inflation
In December 1933, amid the Great Depression, John Maynard Keynes published an open letter in the New York Times urging President Roosevelt to embark on government spending to stimulate the economy. This challenged the prevailing view that government borrowing and spending was merely "moving money from the left pocket to the right pocket."
Keynes argued markets wouldn't automatically deliver optimal outcomes - businesses uncertain about the future would refrain from investing and people would remain unemployed. His 1936 book "The General Theory of Employment, Interest and Money" revolutionized economics, particularly influencing younger economists like Paul Samuelson.
By the late 1950s, economists made increasingly bold claims about managing the economy. Samuelson and Solow suggested governments could choose from a "menu" of unemployment and inflation rates using the Phillips curve. In Britain, economists debated whether unemployment should be limited to 1.25% or 1.75%, with anyone suggesting 2.5% "regarded as, more or less, a Nazi."
The Kennedy administration embraced Keynesian economics, particularly through Walter W. Heller, who became Council of Economic Advisers chairman. Heller persistently argued for tax cuts to promote job growth, describing the gap between actual and potential economic output as roughly "the size of the Italian economy." This marked a tactical shift from traditional Keynesian emphasis on government spending to tax cuts that would return money to the private sector - an approach that appealed to conservatives who preferred smaller government.
Kennedy's tax cut delivered on its promise - growth surged as Americans spent their windfall, and unemployment dropped to around 3.5% by the late 1960s. The expansion created optimism that "modern economics" could perpetuate endless growth. In 1965, Time put Keynes on its cover, crediting his ideas for "the most sizable, prolonged and widely distributed prosperity in history."
However, the Keynesian triumph proved short-lived. By late 1965, the economy began overheating and inflation rising. The administration's aggressive growth stimulation and Vietnam War spending demonstrated that adding too much fuel to an economic fire causes it to burn out of control.
Milton Friedman built a counterrevolution case, arguing that governments should return to the pre-Keynesian consensus that they couldn't stimulate economic growth. Friedman's 1967 presidential address to the American Economic Association explained that printing money could boost employment and growth only by tricking people. Once people realized what happened, maintaining growth would require printing even more money, leading to accelerating inflation.
By the mid-1970s, Americans faced "stagflation" - simultaneous high unemployment and inflation. The 1973 oil embargo triggered the worst downturn since the Depression. Ford's "WIN" (Whip Inflation Now) campaign failed as unemployment reached 9% while inflation exceeded 10%.
Friedman's explanation was simple: unemployment rose because the economy was weak, while inflation persisted because government kept printing money. As Keynesian economics faltered, interest in Friedman's ideas grew. Germany's Bundesbank adopted monetarist principles in 1974, and Friedman won the 1976 Nobel Prize.
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The Volcker Revolution
Paul Volcker, standing six-foot-seven with a perpetually grumpy expression, brought intellectual heft and anti-inflation conviction to the Federal Reserve. Born in 1927 in Teaneck, New Jersey, Volcker was educated at Princeton where Austrian emigres who had witnessed post-WWI hyperinflation shaped his economic thinking. His 1949 senior thesis warned about "the disastrous effects of a sharp price rise" and the need to control the money supply - foreshadowing his later policies.
When Carter appointed him Fed chairman in 1979, Volcker was clear about his intentions to tighten monetary policy. By then, inflation had eroded the dollar's value to 39 cents compared to 1970. At his confirmation hearing, Volcker offered no comfort to those worried about high interest rates, stating firmly, "I don't think we have any substitute for seeking an answer to our problems in the context of monetary discipline."
On October 6, 1979, Volcker announced the Fed would adopt monetarism - focusing on controlling the money supply rather than interest rates. This technical shift carried a powerful message: unlike previous anti-inflation campaigns that had been abandoned when the economy began to suffer, Volcker intended to "slay the inflationary dragon" regardless of short-term pain. Interest rates soon climbed above 20%, triggering a severe recession that cost millions their jobs, homes, and retirement security.
The execution was painful. Factory workers suffered most, with unemployment reaching 23% in the auto industry and 29% among steelworkers. When Fed governor Nancy Teeters asked how much harder they needed to squeeze the money supply, her colleague Emmett Rice simply replied, "We don't know. We will keep bringing it down until we find out." As Americans suffered, they sent Volcker keys to unsold cars and wooden beams from unbuilt homes. A Kentucky builders' association published a wanted poster accusing him of "Murder of the American Dream."
When Ronald Reagan delivered his first inaugural address in January 1981, over 8 million Americans were unemployed, yet he focused primarily on inflation as the nation's greatest economic threat. Unlike Carter who blamed the American people's profligacy, Reagan blamed government spending, embracing monetarism as his economic philosophy.
By summer 1982, Volcker began easing his anti-inflation campaign, telling Congress "the inflationary tide has turned in a fundamental way." As interest rates fell, the economy rebounded, and Reagan celebrated "morning in America." But the victory came at a permanent cost - the median income of full-time male workers in 1978 ($54,392 in inflation-adjusted terms) would not be matched or exceeded in the next four decades.
Ironically, monetarism itself didn't survive its own success. The Fed quietly abandoned monetary targets when Friedman's assumption about the stability of money velocity proved wrong. Despite these implementation failures, Friedman had won the ideological war. Central banks now played the dominant role in macroeconomic policy, focusing primarily on controlling inflation even at the expense of unemployment.
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The Tax Revolution
In April 1971, University of Chicago economist Robert Mundell shocked colleagues by claiming that both inflation and unemployment could be solved simultaneously without pain through substantial tax cuts. The proposal was met with incredulity from both Keynesians and monetarists. Yet within a decade, his radical idea would move from academic fringe to mainstream Republican economic ideology.
Jack Kemp, former Buffalo Bills quarterback turned congressman, championed business concerns by introducing corporate tax cuts in 1974. He hired economist Paul Craig Roberts, who brought in Norman Ture to craft the "Job Creation Act," claiming it would generate enough growth to offset revenue losses. Jude Wanniski joined their circle in 1976, and Herbert Stein dubbed them "supply-side fiscalists."
Supply-side economics gained political momentum in 1977 when Congressman John Rousselot proposed replacing Democrats' Keynesian stimulus with a 5% reduction in personal income tax rates. Though Democrats dismissed this as "trickle-down economics," Jack Kemp and Senator William Roth soon introduced more ambitious legislation cutting rates by 10% annually for three years.
The Republican National Committee endorsed the plan despite fiscal conservatives' discomfort. Dick Cheney, then running for Congress, cautiously supported it while warning Wanniski, "You guys better know what you're talking about."
By 1980, even the Joint Economic Committee under Democratic Senator Lloyd Bentsen unanimously endorsed supply-side thinking as "a new era of economic thinking" that could reduce inflation without increasing unemployment.
The Reagan tax cuts failed to deliver on supply-side promises. While everyone expected handing out money would boost growth, the specific supply-side claim was that lower rates would encourage more work and investment. Yet Americans didn't increase savings rates as predicted, and despite corporate tax rates falling to negative levels for machinery investments, business investment actually declined. U.S. Steel used its tax windfall to buy Marathon Oil rather than upgrade aging steel mills.
The impact on demand proved modest too. The 1980s saw average annual growth of just 2.2 percent after adjusting for population and inflation - slightly slower than the 1970s. Even Dick Cheney later admitted, "I'm not convinced that the Reagan tax cuts worked."
With promised growth failing to materialize, the government borrowed on the largest scale since World War II. By late 1981, even Republican stalwarts like Senator Bob Dole were acknowledging problems with supply-side economics. After witnessing a debate between Fed Vice Chairman Frederick Schultz (who viewed Reagan's policies with horror) and Citicorp CEO Walter Wriston (a Reaganomics defender), Dole admitted, "You won the debate. I think we are going to have to do something on the fiscal side." He later joked: "Good news is, a bus full of supply-siders went over a cliff last night. Bad news is, there were three empty seats."
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Dismantling Antitrust
In April 1952, AT&T invited engineers from rival companies to learn how to make transistors, even providing factory tours and publishing complete instructions in what became known as "Mother Bell's Cookbook." This technology sharing enabled companies like Texas Instruments to develop silicon transistors and Sony to create transistor radios.
AT&T's generosity wasn't voluntary - the federal government forced the company to share its innovations as part of a broader campaign to prevent powerful companies from hoarding technology. Between 1941 and 1959, regulators required over 100 companies to license patents. Later, forcing IBM to allow others to write software for its computers enabled new companies like Microsoft to emerge.
This government intervention through antitrust regulation was part of a distinctly American tradition dating back to the 19th century. As railroads and large corporations threatened the ideal of economic independence, the Sherman Antitrust Act of 1890 criminalized market power abuse. Senator John Sherman argued Americans should not "endure a king over the production, transportation and sale of any of the necessaries of life."
The rise of economics transformed antitrust law in America. Economists gradually persuaded the judiciary to abandon the original goals of antitrust in favor of a single objective: providing goods at the lowest possible prices.
Aaron Director, though publishing almost nothing, profoundly influenced a generation of Chicago-trained lawyers by challenging conventional antitrust thinking. His students, including Robert Bork, became "Janissaries" spreading his doctrine that corporate behavior typically reflected efficiency rather than predation.
Director's followers challenged traditional antitrust enforcement throughout the 1960s. When the Supreme Court protected Utah Pie Company from larger competitors who slashed prices, Robert Bork complained they "were convicted not of injuring competition but, quite simply, of competing."
Robert Bork's influential 1978 book "The Antitrust Paradox" provided intellectual cover by rewriting history, falsely claiming the Sherman Act's original purpose was solely to maximize consumer welfare rather than to prevent concentration of power or protect small businesses - a claim contradicted by the Congressional Record.
The Reagan administration dramatically shifted antitrust enforcement in 1981 when Attorney General William French Smith declared the government would stop interfering with corporate concentration. The Justice Department issued new guidelines in 1982 embracing the Chicago School's tolerant view of mergers, while halving the antitrust division's staff and enrolling remaining attorneys in mandatory economics classes.
The meatpacking industry quickly consolidated after the government defended Cargill's acquisition of three plants. By 1992, the top firms controlled 71% of the market, up from 25%, resulting in a 35% decline in workers' wages as companies shuttered unionized plants.
Despite evidence that collusion was common, the government didn't reconsider its tolerance for consolidation. The courts continued narrowing antitrust law, as in the 1993 case where Brown & Williamson (represented by Bork) defeated Liggett's predatory pricing claim. Even Microsoft escaped breakup despite losing its tying case.
Corporate concentration has tilted power between employers and workers, allowing companies to demand more while paying less. Workers have fewer alternatives and less leverage, as illustrated when Steve Jobs got a Google recruiter fired for approaching an Apple engineer. Innovation suffers as tech giants like Amazon, Facebook, and Google swallow potential rivals rather than compete with them.
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The Deregulation Wave
In the mid-1930s, airline industry representative Colonel Edgar Gorrell convinced Congress that competition was threatening the industry's survival, describing it as "economic anarchy." Congress responded in 1938 by creating the Civil Aeronautics Authority, which licensed sixteen airlines and blocked new entrants for four decades, declaring Americans were now "safeguarded against uneconomic, destructive competition."
Michael Levine, an aviation enthusiast and Yale Law student in the early 1960s, discovered Pacific Southwest Airlines (PSA), California's unregulated discount airline. Founded in 1949, PSA operated entirely within California, outside federal regulation, selling tickets from a renovated airport latrine and charging less than half the rates of federally licensed carriers.
After researching PSA, Levine published a 1965 Yale Law Journal article concluding that U.S. air transportation regulation was "predicated upon erroneous economic assumptions" resulting in "unnecessarily high fares." Though briefly hired by the Civil Aeronautics Board chairman who wanted different perspectives, Levine quit within a year, finding little interest in his ideas.
By the mid-1970s, both the political left and right were questioning economic regulation. Ralph Nader, icon of the consumer movement, began campaigning against economic regulation that protected companies at consumers' expense. Senator Ted Kennedy seized the moment, recruiting Harvard Law professor Stephen Breyer to investigate airline regulation.
Kennedy's hearings in 1975 highlighted the dramatic price differences between regulated interstate flights and unregulated intrastate service - a ticket from San Francisco to Los Angeles on PSA cost $18.75 while a similar-distance Boston-Washington flight on American Airlines cost $41.67.
Jimmy Carter built his political career as a different kind of Democrat, emphasizing Americans as consumers rather than workers. In February 1977, Carter launched a push to deregulate commercial aviation, citing a government report that estimated regulation inflated ticket costs by $1.8 billion annually.
To lead the effort, Carter appointed economist Alfred E. Kahn to head the Civil Aeronautics Board. Kahn was an eccentric but brilliant choice - an effervescent professor who walked around his office in socks, lectured staff during daily swims, and maintained wry distance from politicians (keeping a sign reading "I Have Tenure at Cornell" in his office).
At the CAB, Kahn transformed the agency from one focused on preventing discounted tickets to one embracing competition. He created an Office of Economic Analysis led by economist Darius Gaskins, hired Michael Levine to fight legal obstacles, and famously demanded plain English in all communications.
Carter successfully pushed airline deregulation legislation, signing it on October 24, 1978. The CAB issued 3,189 new route licenses over the next five months before closing permanently in 1984. Carter then tackled the trucking industry, replacing reluctant regulators with economists like Darius Gaskins. Despite Teamster opposition (including an attempted bribe to a senator), Congress passed trucking deregulation in 1980, followed by railroad deregulation.
Transportation deregulation delivered economists' predicted benefits: logistics costs fell from 18% to 7.4% of GDP, and airline prices dropped 45% while passenger volume soared. However, it also transferred money from workers to consumers and executives - truck driver earnings fell 20% while airline CEO compensation skyrocketed from $373,779 to $11.33 million.
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The Value of Life
The U.S. military historically spent without restraint, claiming it was keeping pace with the Soviets while Congress lacked the will to control spending. When John F. Kennedy became president in 1960, he appointed Robert McNamara as Defense Secretary to overhaul this approach. McNamara hired economist Charles Hitch from the RAND Corporation, who had just published "The Economics of Defense in the Nuclear Age."
Hitch introduced cost-benefit analysis to the military, requiring each branch to articulate their goals, options for achieving them, and the costs and benefits of each option. This wasn't replacing an earlier decision-making system - it was introducing the very discipline of making choices. When military officials resisted economic judgment of their decisions, Hitch's 30-year-old aide Alain Enthoven famously retorted, "General, I have fought just as many nuclear wars as you have."
In 1965, economist Charles Schultze, the new White House budget director, proposed extending this approach across government. Johnson's domestic adviser Joseph Califano, frustrated with "unsystematic and chaotic and anarchic" budgeting, strongly endorsed the idea. Within two weeks, President Johnson ordered the implementation of cost-benefit analysis throughout the executive branch to bring "a finer life" to Americans "at the lowest possible cost."
As cost-benefit analysis expanded, economists developed increasingly sophisticated methods for pricing the previously unquantifiable. The National Park Service, initially resistant to monetizing recreation, eventually adopted Harold Hotelling's approach of calculating how much visitors spent to access parks.
The Nixon administration first formally valued human life in regulatory analysis in 1971, shocking government officials. Using insurance industry logic, they calculated a human life at $140,000 (about $885,000 in 2019). By 1974, this valuation led to rejecting "Mansfield bars" on trucks that would have saved lives but cost too much per life saved.
Thomas Schelling revolutionized this approach in 1965 by arguing that the value of life should be determined by "the people who may die" rather than by their economic output to others. Younger economists built on this by analyzing wage premiums for dangerous jobs to infer how workers valued their own safety. By 1978, the Consumer Product Safety Commission was using a $1 million per life figure in regulatory analyses.
W. Kip Viscusi sought to persuade liberals to embrace cost-benefit analysis rather than reject it outright. His doctoral dissertation in 1976 was among the early papers using wage data to estimate the value of human life. Though initially rebuffed in the Carter administration by an official who called such valuation "immoral," Viscusi's work gained traction in the 1980s. When OSHA needed to justify warning labels on workplace chemicals, Viscusi's valuation of human life at $2-3 million (versus the agency's few hundred thousand) helped demonstrate the rule's benefits exceeded its costs.
Despite liberal hopes that Clinton would abandon cost-benefit analysis, his administration maintained regulatory review, with regulatory czar Sally Katzen arguing regulation was good and cost-benefit analysis made it better. Even Vice President Gore declared himself a convert.
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The Legacy of the Economists' Hour
Since the early 1970s, economic growth has become erratic, with benefits flowing primarily to the wealthy. The top 10% of households increased their share of total income from 31% in 1971 to 48% by 2016, returning inequality to Gatsby-era levels.
America's transformation from manufacturing to services was largely inevitable due to technological progress and globalization. But the policies of the Economists' Hour made this transition unnecessarily painful by accelerating economic evolution while concentrating benefits among the wealthy. The high dollar and focus on low inflation hastened manufacturing's decline, while weakened unions and increased corporate concentration shifted bargaining power to employers.
The minimum wage, which peaked in value in 1968, lost 40% of its purchasing power during the Economists' Hour. Even liberal economists like Samuelson and Tobin viewed unions as cartels and minimum wages as job-killers, making it easier for politicians to attack worker protections. The result: workers' share of economic output has been falling since the early 1970s.
For the bottom 99% of households, income growth in France actually outpaced the United States during the Economists' Hour, challenging perceptions of American economic superiority. The problem isn't markets themselves, but their imbalanced implementation without adequate safety nets. Countries with stronger social protections experience less backlash against globalization.
Markets need not prioritize efficiency above all else. The government already protects affluent Americans through professional cartels like medical associations and real estate agents' commissions, while zoning laws benefit current homeowners. These protections should extend to the less fortunate by acknowledging that losing a dollar hurts more than gaining one pleases, and by slowing the pace of change to reduce pain.
Research consistently shows people value fairness over pure economic gain. Sometimes the right answer is to do without markets entirely, as when they undermine democratic access. America has allowed markets to determine access to healthcare, education, and even citizenship, unlike other developed nations.
Friedman claimed markets reduce social strain by limiting issues requiring agreement, but relationships strengthen through use, not avoidance. When wealthy people can simply exit failing systems rather than improving them, social bonds weaken. America's problem is "too many markets, and too much walking away." Markets remain powerful wealth creators, but "the measure of a society is the quality of life at the bottom of the pyramid, not the top." Liberal democracy depends on reducing the strain of inequality.
