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Will economists prove more helpful today, when the challenges are as pressing as the Great Depression?
COMMENT | DANI RODRIK | At the end of 1933, John Maynard Keynes sent a remarkable public letter to U.S. President Franklin Delano Roosevelt. FDR had taken office earlier that year, in the midst of an economic slump that had pushed a quarter of the labour force into unemployment. He had launched his ambitious New Deal policies, including public works programs, farm subsidies, financial regulation, and labour reforms. He had also taken the U.S. off the gold standard to give domestic monetary policy freer rein.
Keynes approved of the general direction of these policies, but also had some sharp criticism. He worried that FDR complicated the economic recovery effort by broadening his policy agenda unnecessarily. FDR was doing too little to increase aggregate demand and too much to change the rules of the economy. Keynes took particular aim at the National Industrial Recovery Act, which, among other things, greatly expanded labour rights and fostered independent unions. He fretted that the NIRA would sap business confidence and weigh on the federal bureaucracy, without making a direct contribution to recovery. He wondered whether some of the advice FDR was getting “is not crack-brained and queer.”
Keynes did not think much of FDR’s economics, but at least he was a sympathetic critic. Because much of the New Deal ran against the prevailing economic orthodoxy, FDR’s policies had little support from leading economists of the day. For example, as Sebastián Edwards explains in his fascinating recent book `American Default’, the predominant view among economists was that breaking the dollar’s link with gold would create havoc and uncertainty. The only bona fide economist in FDR’s “brain trust” was Rexford Tugwell, a little-known 41-year old Columbia professor who did not even teach graduate students.
Will economists prove more helpful today, at a time when the challenges we face are nearly as pressing as those during the Great Depression? Unemployment may not be a severe problem in most advanced countries currently, but large segments of the labour force seem cut off from economic progress. Record levels of inequality and poor earnings prospects for younger, less educated workers are eroding the foundations of liberal democracies. The rules that underpin globalisation are badly in need of reform. And climate change continues to pose an existential threat.
These problems demand bold responses. Yet, for the most part, mainstream economists seem preoccupied with marginal fixes – a tax-code tweak here, a carbon tax there, perhaps a sprinkling of wage subsidies – that leave untouched the structures of power underwriting the rules of the economic game.
Economists can rise to the challenge by adopting a broader vision. Last month, I joined a group of prominent economists to launch an initiative that we have called “Economics for Inclusive Prosperity” (EfIP). From labour markets and finance to innovation policies and electoral rules, the goal is to advance ambitious policy ideas that pay much closer attention to inequality and exclusion – and to the power imbalances that produce them.
