How I Learned Economics

Dear Friends,

In TQE #96 I began, not simply to teach Quakers economics, but to explain how, over my lifetime, I learned it myself. One day in 1938 I marched in a parade down Boylston Street in Boston, singing "Solidarity forever, for the union makes us strong." I may not have known what I was singing, but the union people were very friendly, and I felt sure I was promoting a cause. It was the Roosevelt era, and our great leader was piloting the country out of its worst depression ever — or so I thought.

I believed Roosevelt was the savior of our country. Not all my Harvard professors agreed, but if not, they did not let on. We were taught three kinds of economics, and (as I remember from sixty years ago) no one noticed how they conflicted.

First was classic liberal economics, as understood by Adam Smith, David Ricardo, and other economists ot the nineteenth century. In this, individuals and companies make deals only where each party gains. A loaf of bread means more to me than the price I pay for it. That price means more to the supermarket than the bread on the shelf. Therefore we both gain when I buy it. The sum of these billions of transactions around the world make for the greatest human welfare possible. This is now known as micro-economics because it operates at the product level, explaining what is produced and  how prices are determined.

Only later, as I had professional assignments around the world, did I discover that governments of less free countries remained undeveloped. When I did the historical research underlying my book, Centuries of Economic Endeavor (1973-92), I learned that Western countries and Japan, that adopted liberal (free trade) policies, were the very ones that became more developed. Most economists reason that these differences arise out of the ability of citizens to invent and innovate, with a minimum of government interference.

Second was macro-economics, created by John Maynard Keynes in 1936. Before Keynes, economists believed in Say's law ("supply creates its own demand"): workers would buy back what they produced. If they did not buy it all, that meant that some would produce goods that were not demanded. They would be exactly offset by others who produced not enough to meet the demand. Those former would go out of business, while capital would flow into the latter. Until production was re-balanced with demand, there would be unemployment. That was depression. But when production once again equaled demand, the depression would end.

[Pardon me if you don't understand the above paragraph. I'm trying to squeeze a semester of economics into one paragraph, and this is the best I can do. If you don't understand it, just trust me that before 1933, depressions were generally short, and economic theory explains why — correctly, I think. Now, read on.]

The interest rate was the mechanism causing capital to re-flow to the right outlets. If earnings were higher than the interest rate, profitable firms would borrow more, but if profits were lower, they would not borrow. Thus capital would flow to the profitable ones.  Keynes said: No, if investors do not foresee profits, they will not invest at all, no matter how low the interest rate falls. The depression can go on indefinitely, unless government intervenes. Thus macro-economics (study of the "total economy") was born. Though I was not in the delivery room, I was waiting outside.

The third kind was corporate economics. Berle and Means (the major text) taught us that corporations were greedy. They tended toward monopoly, which violated the price mechanism of classic liberal economics. (Adam Smith had agreed with that.) The solution would be the anti-trust laws (1890 et ff.), to preclude business monopolies. But public utilities and railroads were by nature monopolies (only one rail line between two cities, only one telephone company per area). The solution there would be to control their prices (through the Interstate Commerce Commission and statewide utilities commissions, 1890 et ff.). My favorite professor, Ed Mason, championed this idea. (He supervised my honors thesis, on railway freight).

Not until I entered the "real world" did I begin to question what I had learned at Harvard. I encountered governments far more powerful than corporations. All over Asia, Africa, and Latin America governments were sucking the profits out of corporations. As their economic advisor, I was helping them do it until I "caught on" and quit. I began to question the power of corporations.

Many Quakers believe multinational corporations dominate governments. Yet all over Latin America oil companies have been acquired, kicking and screaming, by governments. Here is an example of a different kind from Africa: in Nigeria, the oil companies pay about 50% of their profits to local and national governments, presumably to buy schools and other social services. But local politicians usually pocket the cash, and the social services do not materialize. If the oil companies do not go along, they will be kicked out. It's easy to find other oil companies that will go along. In my professional assignments throughout the less developed world, I found similar examples over and over and over again.

At the same time, I began to wonder if there was such a thing as a monopoly (single seller of any good). Even Microsoft has its competitors. If a "monopoly" overcharges, consumers can shift to substitute products. When IBM was almost destroyed by U.S. government "trust-busters" during years and years by court proceedings without any resolution, I began to think the market was better at controlling abuses than governments. Will the same be so with Microsoft and the European Union?

No previous depression had lasted as long as that of the thirties. Why (until 1933) did we recover so quickly? In prosperity, prices and wages rise, and when we have overstretched our resources — demanding more than we are capable of producing — the turning point comes. People are thrown out of work, so they cannot buy all we can produce. Depression follows, which causes lower prices and wages, thus encouraging business to start investing again. Before 1933, the market was allowed to do all the above, bringing wages and prices down to the point where businesses would invest again.

But Roosevelt made the mistake of confusing cause and effect. He thought rising wages and prices would bring about prosperity, instead of being the result of it. Therefore, he intervened to force up wages and prices, and instead of creating prosperity, he prolonged the depression. Roosevelt created "corporations" (or bodies of producers) required by law to keep their prices high. My own home (like many others) sported a blue eagle in the window, saying: "NRA (National Recovery Administration) We do our part."

Roosevelt disliked corporations intensely. Many times he said they had caused the depression. Economists now generally conclude that instead, the main causes of the Depression were high interest rates that restricted the money supply, and high tariffs.

By executive decree (bypassing Congress), Roosevelt set up a large number of "government corporations," all designed to keep wages and profits high. He awarded unions special privileges to give them an advantage in dealing with employers. All this is described in a recent (2003) book by Jim Powell, FDR's Folly. In this one short book Powell tells the Roosevelt story that took me a professional lifetime to learn.

Many believe that Roosevelt employed Keynesian economics, spending during depression and (presumably) running a surplus during the following prosperity. Instead, Keynes wrote Roosevelt several letters criticizing his policies. Roosevelt provided employment (the Civilian Conservation Corps) for those young people who had lost their jobs because of other Roosevelt programs. He overspent during depression, and that became our custom. We did not compensate by saving during prosperity.

Just as Roosevelt thought that corporations played the devil's role, so President Bush thinks they are angels. Taxes that favor corporations and the wealthy will bring about investment and jobs, so Bush thinks. Roosevelt and Bush were (are) both wrong. I have come to understand that corporations play their role in a structure consisting of consumers, workers, and capitalists (most Westerners being in more than one category). The competition among producers keeps prices down, to equal cost plus a "reasonable" profit. If in any industry the profit becomes "unreasonable," capital will flow toward it, until profit is brought down again. "Reasonable" is what custom thinks it is, as determined by supply and demand, product by product.

So I have come full circle, back to classic liberal economics and Say's law. I no longer think of Roosevelt as "the savior."  First, he brought us social security "on the cheap." Younger workers pay the benefits of older ones, and nothing is saved. The implied liabilities of our government, to pay retirement benefits until the end of life, are not included in publication of the national debt, which is morally far greater than it is financially. Second, governments usually overspend and have to cut back. When they do, the poor are the first to lose (as with Medicaid and schools). But third, and most of all, we rely on government to protect us from economic harm, so we no longer take care of ourselves (as in pensions, health care, etc.). Early Quakers taught self-reliance. Later ones are teaching "government-reliance," a poor substitute.

I believe in sidewise accountability (see TQE #48), in which those harmed by the actions of others (e.g., Enron employees) form organizations to bring justice through the courts. We do not need a new law for every new transgression. I believe the sum of transactions by all people does lead to the greatest good, though I propose some redistribution of wealth to put a safety net under the poor. There is no such thing as "good government intervention" (Roosevelt) and "bad government intervention" (Bush). If you advocate one, you accept the other.

Upon reading this Letter in draft form, J.D. Von Pischke, a Friend from Virginia, formerly with the World Bank, and member of my editorial board, wrote the following:

"I belong to a weekly discussion group that meets at the World Bank. Most participants would be in broad agreement with mainstream Quakers regarding social issues, the role of government and their view of corporations. Corruption comes up as a topic from time to time because of its prevalence in development assistance. It does not take long in our discussions before the collective finger of guilt is pointed at businessmen or women, rather than at the officials on the receiving end. This view is defended on the grounds that those on the receiving end are relatively poor — even in those cases in which it is clear that no deal could occur without having to pay them off and that some of them are fabulously rich crooks. I have protested from time to time that the officials, not the business people, bear the greater blame because of their blocking power and, more importantly, because they should be held to a higher standard than the business folks. Why a higher standard?  Because the majority of our group members believes that government and civil service are a higher calling than business. Who would want their daughter to go into business? Consistency, anyone?" — J.D.

Sincerely your friend,

Jack Powelson

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Readers' Comments

A wonderful economics history, 250 years in one essay! I am a believer in liberal economics as initially detailed by Adam Smith, Ricardo, and others. As an aside, I take interest in the re-definition of "liberal" in the last 50 years. Adam Smith lived in a time of divine-right monarchs (seldom benevolent) and a "command economy" based on government by hereditary rule and a quasi-feudal economic system His insight was that a society based on unregulated interaction between the citizens would create far more well-being and prosperity than the command system of the monarchy. That was "liberal" then — free markets. In the US, the term has now come to mean a belief in the intervention of the government through a command system of laws and regulation. This is "liberal" now — highly regulated markets.

— Christopher Viavant, Salt Lake City (UT) Meeting.

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When consumers don't have complete access to important information, we don't know whether entering into a relationship with a corporation is a winning or losing proposition for both parties, as you suggest.  In part the government serves the role of corporate/consumer referee.  It adds an important voice to debates over such issues as whether thalidomyde is good or bad for pregnant mothers, whether locked factory exit doors are necessary to keep out intruders, or whether lead in the water supply is harmful to children or not. A democratic government in a free society levels the corporate/ consumer playing field and helps its citizens make smarter, healthier and safer choices.

— Paul Murphy, Herndon Friends Meeting, Herndon, VA.

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Once again you have told truth. I agree completely that FDR was not the "savior" of the economy so many believe he was. It wasn't only the Ponzi scheme called Social Security which he bought on the cheap. TVA and other dam projects created the illusion of cheap electric power by transferring many of the costs of producing power away from the buyers who should have been paying them. The rest of the country still pay the taxes these government-run enterprises don't collect and pay. In my ideal world, the corporate income tax would be abolished completely. Since this will never happen, public power customers have an unfair advantage by escaping the taxes the rest of us pay in our electric rates. FDR was arguably one of the major causes of this.

— Dick Bellin, Friends Meeting of Washington, DC.

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Thanks for a great synopsis of economic theory and history! The Quaker Economist should be required reading for all Americans.

— Mike Marquardt, Herndon (VA) Friends Meeting

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Very good economics lessons which reminds me of the old adage:  Knowledge plus experience equals widsom. Thank you Jack.

— Phyllis Rawley, El Paso, TX Friends Meeting

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I couldn't agree more with the ideas of free association, democracy, free market, and good Quaker stewardship. However, in the United States at present, we have none of these. Rather, we have monopolistic corporate greed and government corruption on a grand scale.

In my county, depending upon how you do the calculation, between 35% and 50% of the families are below the poverty level. The number is increasing. Meanwhile, our taxes are forcibly taken to enrich the military-industrial complex and to subsidize a variety of wealthy corporations. I see no way to counter this, given that elections are only won by those taking what can only be described as "huge bribes" in campaign contributions.

I believe we've lost our country and the economic result can only be worldwide crash, probably as the result of some military adventure. So, I work locally with the food bank and homeless relief, local farmers and business people, hospice, and the natural foods co-op. If there is any hope, it will be the small local communities, self-sufficiency, and getting off the cheap energy dole before it disappears.

If there is a purpose for a national government, it is to guarantee a free market and constrain monopolies, or so I think. Since that is unlikely to happen, the study of economics appears to be a waste of time.

— Don Sanders [9 June 2006].