The Origins of the New Economics

Economics has come of age in the 1960s. Two presidents have recognized and drawn on modern economics as a source of national strength and presidential power. . . . The paralyzing grip of economic myth and false fears on policy has been loosened, perhaps even broken. We at last accept in fact what was accepted in law twenty years ago (in the Employment Act of 1946), namely that the Federal government has an overarching responsibility for the nation’s economic stability and growth. . . . These are profound changes. What they have wrought is not the creation of a “new economics,” but the completion of the Keynesian Revolution—thirty years after John Maynard Keynes fired the opening salvo. And they have put the political economist at the president’s elbow.[19]

Thus wrote Walter Heller, the primary architect of the new economics.[20] In a similar vein, another prominent new economist, Arthur Okun, described the role of the economist in advising government as assisting in the effective exercise of presidential leadership, which “consists of selecting priorities, making commitments, identifying the aims of the nation, and then working to fulfill them.”[21] In frankly characterizing the new economics as a “source” of the growing strength of the central state and of its embodiment in presidential power, the new economists ironically confirmed Murray Rothbard’s later evaluation of Keynesian economics as ultimately “the pure economics of power.”[22] For as Heller also recognized, such an expansion of the power of the federal government and its centralization in the executive branch is necessary for “unleashing] fiscal and monetary policy for the aggressive pursuit” of both short-run stabilization and long-run growth objectives.[23]

The crucial link between Keynesian macroeconomics on the one hand and centralized and unrestrained political power on the other was revealed much earlier by Keynes himself. Writing in the foreword to the German edition of the General Theory, which was published almost contemporaneously with the English edition, Keynes declared:

The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire.[24]

The stronghold of the new economists during the Kennedy and Johnson administrations was centered in the membership, staff, and outside consultants of the Council of Economic Advisers.[25] The most prominent among them were, almost to the man, academicians from Eastern establishment universities. Besides Heller and Okun who were from the University of Minnesota and Yale respectively, there were Robert Solow and Paul Samuelson from MIT, James Tobin from Yale, Otto Eckstein and Kenneth Arrow from Harvard, and Gardner Ackley from the University of Michigan. Two Harvard professors, John Kenneth Galbraith, who served on the White House staff during the early months of the Kennedy administration, and Seymour Harris, who headed up a standing committee of academic consultants to the Treasury Department under Kennedy and Johnson, were, along with Samuelson, also personal economic consultants to Kennedy during and after his campaign for the presidency.

These liberal economists were part of the coterie of left-leaning academicians who surrounded President Kennedy. As described by John H. Makin and Norman J. Ornstein, these liberal intellectuals

were impatient with the fundamentally conservative Truman and Eisenhower administrations. They viewed the decade and a half after 1945 as an interruption of what they saw as the thrust of the New Deal away from laissez-faire capitalism.[26]

From the left side of the political spectrum, economic historian Anthony S. Campagna has expressed a similar view, writing that:

The liberals, so weary of the dullness of the Eisenhower administrations, cheered as Kennedy raided the universities for advisers and searched for talent from previous public servants, so long on the sidelines. The eggheads from Cambridge, Massachusetts, together with the “Irish Mafia” from anywhere, gave the administration and Washington an intellectual excitement not felt since the New Dealers.[27]

Campagna’s choice of the term “eggheads” to describe the new economists is indeed an apt one, though probably unwittingly so. The new economists fit to a T John Flynn’s much earlier definition of an egghead, as

a character who pretends to the title of philosopher—a sort of professional intellectual—dedicated to the theory that the eggheads are the appointees of Destiny who will bring about something known in the trade as “security” to a creature known as the “common man” in return for which all they ask is that he deliver his soul to the management of a government operated by the eggheads. For Flynn, the term described “the intellectual lacking in common sense, a doctrinaire contemptuous of experience, a fuzzy-minded, starry-eyed dreamer.” Flynn perceptively summed up the egghead’s philosophy “in the two words which describe it—the Planned Society or Economic Planning.”[28]

Thus, it is no surprise that a number of the new economist-eggheads had served in economic planning capacities during and immediately after World War II. Heller was attached to the occupational military government of Germany, while Tobin and Ackley served with the Office of Price Administration (OPA). The OPA was headed for a time by Galbraith, before he was unceremoniously ejected. Harris was a senior member of the OPA staff and served as its liaison with the Board of Economic Warfare and with the State Department.[29] The heady experience of the economist’s brush with the exercise of political power during the New Deal, and the psychological consequences of suddenly being stripped of such power, has been well described by Galbraith. In his memoirs, Galbraith comments on being ousted from his position as the first director of the OPA in 1943:

The sudden loss of power leaves you suddenly, unimaginably empty, facing decompression and a psychic case of the bends. You are assailed, however unnaturally, by self-doubt. And by continuous thought of the decisions that now lack your guiding hand. Worst of all, and least expected, you are now naked to your enemies.[30]

Thus when Galbraith was asked by Arthur Schlesinger on behalf of Kennedy if he wished to serve as chairman of the CEA, a post eventually given to Walter Heller, he refused. “I was little enchanted by the thought of doing with slight authority, what I had done with vast power twenty years earlier,” he said.[31] Galbraith, in other words, as an unrepentantly old-fashioned New Deal socialist, saw the job of the new economist policymaker fundamentally as planning the national economy. So did his fellow new economists, although their rhetoric, as we shall see, was couched in more contemporary macroeconomic terms of “stabilizing” the economy and ensuring that its “actual” rate of growth coincided with its “potential” rate of growth.[32]