Economics 101: Who's Up, Who's Down

Mr. Toplin, Professor of History at the University of North Carolina, Wilmington, has published a dozen books, including Radical Conservatism: The Right’s Political Religion.

Customers at my local Barnes & Noble store are likely to get the impression that books about Franklin D. Roosevelt are all the rage these days. When they stand in line to pay the cashier, they come upon a large display of volumes dealing with FDR and the Great Depression. All of these books tend to portray Roosevelt as a remarkably gifted politician who effectively shepherded the American people through difficult times.

FDR is more popular now as a historical icon than he has been for years, and his predecessor in the White House, Herbert Hoover, now receives historical reviews that are almost as sharply negative as the assessments he received when he was a troubled President back in the early 1930s. Comparisons between Hoover and George W. Bush appear frequently in the national media.

Historians never rehabilitated Hoover in the manner they lifted another troubled president, Harry S. Truman from low ratings, but in recent decades various advocates of “free markets” have tried to improve Hoover’s image. Scholars at the Hoover Institution at Stanford University, the libertarian-oriented CATO Institute in Washington, D.C., and authors associated with other conservative think tanks maintained that Hoover was on the right track when he warned that government interference in the economy could produce creeping socialism. Some of these writers claimed that FDR erred by intervening extensively in the economy. They say Roosevelt extended rather than shortened the Great Depression.

FDR’s current popularity in the history books and the decline of attention to Herbert Hoover signal a broad change in the way Americans are interpreting modern economic history. For decades now, much of the thinking that sprang from FDR’s approach to the economy has been shunted aside by professional economists. In contrast, the philosophy of Herbert Hoover gained new respect in the late Twentieth Century. Hoover’s conservative, free-market perspective became widely influential in the economics departments of American universities. Economists and business professors often avoided direct reference to the disgraced president when discussing these ideas. They turned, instead, to the writings of market-oriented theorists such as Ludwig von Mises, Friedrich Hayek, and Milton Friedman.

During the last quarter of the Twentieth Century, Milton Friedman of the University of Chicago emerged as the most articulate spokesperson for Hoover’s view that government leaders almost always gets things wrong when they intervene in economic affairs. Friedman argued that free markets are infinitely complex. Government bureaucrats cannot broadly understand how these markets work or deal effectively with them. Markets are largely self-regulating, Friedman assured his readers, and the economy is most vibrant when business people enjoy freedom from state interference.

Friedman’s views and those of other scholars of the “Chicago School,” have been popular for many years with business and economics professors and with politicians. Although most advocates of the Hoover-Friedman outlook concentrated in the Republican Party, the perspective also won degrees of respect from powerful figures associated with the Democratic Party. Robert Rubin, President Bill Clinton’s Treasury Secretary, and Charles Schumer, Democratic senator from New York, were among the most influential proponents of de-regulating financial markets in recent years.

Now that U.S. financial institutions are in a meltdown, the nation’s auto industry is near collapse, millions of Americans are facing foreclosure, and unemployment is climbing fast, the public has been losing confidence in the idea that “free” markets are self-regulating. Many analysts are suggesting that recent economic mistakes resemble the disastrous financial judgments of the pre-Depression years. Speculation got out of control in the 1920s and, again, in our times. As President-Elect Barack Obama remarked, somewhat sarcastically, the nation’s financial system has been in need of “adult supervision” for a long time.

The current troubles have brought a dramatic reevaluation of economic history, at least among pundits and some leading politicians. Actions by Franklin D. Roosevelt are now receiving more favorable treatment in popular discussions about lessons from the past. Pundits and politicians are also expressing more interest in the ideas of noted economists who welcomed the government activism of FDR’s New Deal.

John Maynard Keynes, a British economist and contemporary of FDR, has attracted renewed attention. Barack Obama and his economic team are considering Keynes’ ideas because the actions of the Federal Reserve and the Treasury Department have failed to jump-start the economy. Obama’s advisers are calling for a massive stimulus – a form of deficit spending that Keynes had recommended for situations when ordinary fiscal policies fail to get industry and commerce to move quickly out of a slump. Economists who favored the Chicago School’s approach to markets have been suspicious of Keynes’ arguments, but Obama’s advisers are turning to Keynes’s ideas as they try to understand how Americans recovered from the Depression in the 1930s and early 1940s.

Another analyst who had lost favor in the economics departments of American universities, John Kenneth Galbraith, is also gaining ground these days. Galbraith, a liberal activist who served in Democratic administrations from FDR to LBJ, rejected the neoclassical economic theories of Milton Friedman. Writing as a neo-Keynsian, John Kenneth Galbraith recognized that government had an important role to play in economic affairs. In recent months politicians and pundits have shown renewed interest in two of Galbraith’s humorous but insightful books about speculative bubbles – The Great Crash, 1929 (1954) and A Short History of Financial Euphoria (1990). Galbraith showed that financial memory is remarkably short. Supposedly wonderful new financial instruments are often just modifications of earlier schemes that ultimately went bust. Galbraith’s message that human behavior in speculative activity often operates through mass psychology rather than by objective analysis sounds relevant today. Legislators are finding Galbraith’s analysis pertinent as they try to figure out why stock values tumbled recently and why government agencies didn’t do a better job making investors aware of the risks.

Obama and his advisers are now studying examples of earlier New Deal activism as they consider their choices in the current economic crisis. They note that in the 1930s deficit spending by the federal government helped to move the economy out of the doldrums. Members of the Obama team notice, also, that FDR’s Emergency Banking Act helped to stem financial fears, that large-scale public works projects boosted the nation’s infrastructure and reduced unemployment, and that legislation favoring working people fostered development of a strong middle-class in subsequent decades. Suddenly, talk about government’s potential to do good for the overall society is fashionable again.

In the popular media, the reputations of former leaders and thinkers have shifted. Franklin D. Roosevelt once again is a popular figure for study. Herbert Hoover, who had been the subject of a modest rehabilitation by conservative scholars, has slipped again. John Maynard Keynes and John Kenneth Galbraith are attracting new interest. Milton Friedman and his acolytes have lost ground.

The repercussions of this change are not likely to affect classroom teaching for some time in economics departments and in the business schools. Varieties of classical theory remain prominent in the textbooks of those programs. Those ideas also remain fresh in the memories of college instructors who recall confident lectures they heard in their younger days from mentors who claimed that largely unfettered markets were a great workable ideal.

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Robert Brent Toplin - 12/30/2008

On the subject of FDR’s handling of the Great Depression, some HNN readers have been adding comments that suggest Roosevelt made the Depression worse by his intervention in the economy. These writers employ strongly confident words to make their case. One quotes a study of long ago by one of the libertarian fathers, Murray Rothbard, saying Rothbard succeeded in creating a “demolition” of the pro-FDR interpretation. Another cites the work of Amity Shlaes, The Forgotten Man: A New History of the Great Depression (2007), claiming that author “gets it exactly right” (evidently in showing that the New Deal made the Depression worse).
Debate is always welcome, but I find David Sirota’s conclusions pertinent (see the link). Academic historians and a lot of prominent economists offer a much more favorable picture of the economic impact of the New Deal. The debate is not closed and the conclusions are not as obvious as some seem to think. –Robert Brent Toplin

Dan McLaughlin - 12/29/2008

Before Hoovers and FDR's intervntions, the normal depression lasted a year or two, with the longest one lasting 4 years. How can you seriously propose that the interventions shortened the depression when it turned out to be 4 or five times longer than depressions that had little or no intervention?

A little serious thought on the matter would show that something is seriouysly awry with that interpretation.

Kevin Raeder Gutzman - 12/29/2008

See Murray Rothbard's _America's Great Depression_ for a 46-year-old demolition of the myth of Hoover as free marketeer. He was no less an enemy of economic freedom and no more devoted to constitutional government than Roosevelt.

Dan McLaughlin - 12/29/2008

What Herbert Hoover are your talking about? You certainly must not be speaking of the social engineer that was president before FDR. Not the one that Rexford Tugwell said "We didn't admit it at the time, but practically the whole New Deal was extrpolated fom programs that Hoover started." You must not be talking about the Hoover who argued that there was a technical solution to every social and economic problem.

I would assume that you are discussing some other Hoover, someone who actually practiced non-intervention, someone who didn't pride himself in being engineer in chief.

If you are talking about the 31st president of the United States, I am disappointed that, as a history professor, you read only leftist, progressivist drivel and give only one side of the story. Your interpretation of current and past events is pathetically distorted from your bias.

I guess we shouldn't expect too much of our academic elite. History shows us how often they are biased and backwards.

Lawrence Brooks Hughes - 12/24/2008

Anyone interested in this topic should read "The Forgotten Man: a history of the Depression," by Amity Shlaes. (2007) It's now available in paperback, and she gets it exactly right.

Zak Bowster - 12/23/2008

"Herbert Hoover was an interventionist of the highest magnitude and it is not possible to make any link between him and the philosophy of free market economics."

Robert Brent Toplin - 12/23/2008

Thanks of your comments about Hoover and CATO.

The main point in that section relates to a theme in Jim Powell’s book. His study, FDR’s Folly, is one of the best examples of an argument that has gained leverage in recent years among several economists – that FDR’s policies prolonged rather than shortened the Depression. Powell, a CATO Senior Fellow, maintains that the New Deal’s labor policies made it expensive for companies to hire people and that the ND anti-trust policies undermined the confidence of businessmen who needed to invest more in commercial and industrial expansion if the country was to get out of the economic mess. Furthermore, increased taxes brought on by FDR’s policies troubled the business community in Powell’s estimation, further limiting the climb out of a Depression. I disagree with the main thrust of Powell’s points but find his arguments summarized much of the recent research quite impressively. We welcome such dialogue about history. As for Herbert Hoover, your point is appropriate in this example. Powell has complaints about Hoover’s measures, too, for Hoover tried degrees of federal intervention during his four years in office.

In pointing to Hoover in the article I intended to refer to his general ideas rather than specific actions taken during his troubled time in office. Somewhat like George Bush these days (who is supporting the kind of government intervention that he disdained in earlier speeches), Hoover got caught up in a profound economic crisis and sensed he had to take action. Some of those measures seemed to clash with a philosophy he had outlined before 1929 in speeches and in his book on American individualism. In later speeches, such as his address in 1937 to the Economic Club of Chicago, Hoover returned to the spirit of his earlier warnings about the overaggressive role of the federal government in American life and in business enterprise. In fact, Hoover was quite adamant in that address about the supposedly egregious errors of FDR and his New Deal. There are places in the speech where he sounds like Jim Powell of CATO!

If I had been writing an article especially about Hoover, I would have wanted to give him more credit for a life of important accomplishments. After all, he was a great humanitarian, organized relief efforts effectively, gave generously to Stanford University and so on. Moreover, he was one of the great spokespersons for American ideals of individualism, free enterprise, liberty, etc. He preferred market-oriented economics, not government-dominated economic activity. And that brings us back to your comment.

The reference in my article to which you refer is, as I mentioned, intended to speak to Hoover’s broad philosophy as it relates to free enterprise and the ideal of limited government. Important institutions such as the Hoover Institution and CATO honor those concepts through their support for scholarship (I am not implying here that the two are exactly the same in terms of mission or activities). I think the principles that Herbert Hoover identified before 1929 and after 1935 are the kind that many fellows at Hoover and CATO appreciate – in a general sense.

- Robert Brent Toplin

John H. Kimbol - 12/22/2008

I am outright accusing you of academic dishonesty. I cannot find a single article on Cato supporting your claims, that it (a) supported any of Hoover's policies, or (b) that any of Hoover's policies were "free-market" or anti-interventionist.

What I do find is a parade of articles that contradict both of these points.

Robert Lee Gaston - 12/22/2008

Give it about two years when Americans see the wave of inflation caused by about four trillion dollars in bail outs and "stimulus".

According to a group of Democratic mayors, rides in water parks have become part of our critical national infrastructure. It never fails. It just goes on and on. It would be tragic if it were not so damned predictable.

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