Economists are all finally speaking the same language, but they still can’t answer the bigquestions. By Justin FoxEconomists rule the world. This is not a new phenomenon. “The ideas of economists and politicalphilosophers, both when they are right and when they are wrong, are more powerful than is commonlyunderstood,” John Maynard Keynes wrote in 1935, in the famous conclusion to his General Theory ofEmployment, Interest, and Money. “Indeed, the world is ruled by little else. Practical men, who believethemselves to be quite exempt from any intellectual influences, are usually the slaves of some defuncteconomist.” The world went on to prove Keynes right: His General Theory became the basis of economicpolicymaking in the U.S. and Europe for decades after his death.Now the undisputed role of Keynesianism is long past, but the work of economics professors still rules. Whenwe talk about emerging-markets currency crises, about Japanese stagnation, about European unemployment,about U.S. prosperity, the words we use and the framework that shapes our thinking come from Adam Smith,from Keynes, from Milton Friedman, from other academics we may never have heard of.These days, in fact, it’s not just the economists’ ideas that have power. Of the three men who, by mostaccounts, currently run the world--Federal Reserve Chairman Alan Greenspan, Treasury Secretary RobertRubin, and Rubin’s deputy and likely successor, Larry Summers--two have economics Ph.D.s. And whileGreenspan has spent his career outside academia, Summers is a former Harvard and MIT professor ofimpeccable academic-economist stock--son of two professors, nephew of two Nobel laureates, and himselfthe 1993 recipient of the John Bates Clark Medal as the top under-40 American economist.Sitting in his office overlooking the Washington mall, Summers proudly reels off the names of other powerfulproducts of the Cambridge, Mass., economics tradition whence he sprang: IMF deputy director StanleyFischer; former finance ministers Pedro Aspe of Mexico and Domingo Cavallo of Argentina; current FinanceMinister Eduardo Aninat of Chile; Japanese vice minister of finance Eisuke Sakakibara (a stretch, althoughSakakibra did teach at Harvard for a year in the 1980’s); globetrotting adviser-to-governments Jeffrey Sachs.This isn’t a matter of politics. If the next President in Republican, he’ll likely turn for advice to Summers’academic mentor, Harvard professor Martin Feldstein. It is all, Summers concludes, “evidence of the triumphof a more analytically oriented approach.”This is an interesting claim. The field of economics--or at least macroeconomics, the study of big issues likeinflation, unemployment, and the business cycle--has been the scene of some very public battles over the pasthalf-century. Is Summers saying somebody won? Also, the world economy is in a scary state these days.Politicians don’t know what to do about it; the hedge fund managers who a couple of years ago seemed to berunning the show don’t have a clue. Is Summers saying the economists have an answer?No, and no again. The pitched battles of years past are over, but nobody really won. Academic economistshave indeed attained a state of relative peace and consensus, but they have done so by diminishing theirexpectations. They use similar analytical tools and come up with similar answers to narrow questions. Butwhen it comes to explaining the behavior of the global economy, economists can’t agree--in fact, most ofthem no longer seem to believe there is a single correct explanation. Economists rule the world, but theyWhat in the world happened to economics http://www.cbe.wwu.edu/Krieg/Econ. Documents/what_in_the_world_h...1 of 6 8/30/2010 11:15 AMaren’t quite sure what to do with it.It wasn’t always this way, of course. To understand how economics went from warring dead certainties topeaceful confusion, one has to go back a few decades. Back to the 1960s, when most everybody was surethere was one obviously correct explanation for the workings of the economy. And back even further, towhen the previous economic orthodoxy--which held that if the laws of supply and demand were allowed towork their magic, everything would turn out okay in the end--ran into the messy reality of the GreatDepression.In the U.S. in the 1930s, the financial system essentially stopped functioning, the market for real estate andother assets dried up, and unemployment remained stub-bornly high. “Nothing in what I was taught from nineo’clock to ten o’clock in economic theory had any room to explain that,” says Paul Samuelson, then anunder-graduate at the University of Chicago and now one of Larry Summers’ Nobel laureate uncles. “Finally,I heard [Chicago professor] Frank Knight say normal economics applies in normal times, but when it comes toreally pathological times, it doesn’t apply.”The job of designing an economics for pathological times fell to none other than John Maynard Keynes.Keynes--a lecturer at England’s Cambridge University as well as a journalist, an adviser to governments, aninsurance company executive, a commodities speculator, and husband of a famous ballerina--had, like everyother economist of his time, internalized the “classical” truisms that the laws of supply and demand interact toset prices at the appropriate level and that something called Say’s law decrees that every penny saved isautomatically converted into investment. In the alternative economics Keynes proposed in the mid-1930s,however, savings sometimes gets stuffed in mattresses, prices and wages don’t always adjust to fallingdemand, and it’s perfectly possible for an economy to get stuck in a slump unless the government acts tostimulate demand.By the 1950s this Keynesian economics had become the new orthodoxy--with first Cambridge University inEngland and then the Cambridge, Mass., neighbors Harvard and MIT as its temples. At MIT the high priestwas Samuelson, whose best-selling introductory textbook, Economics, first published in 1948, introducedKeynesian ideas to generations of college students. Of course, by the 1950s the U.S. economy was no longerthe pathological wreck that Keynes was trying to repair in the 1930s. But Samuelson and his fellowKeynesians figured they could banish economic downturns and mass unemployment by tweaking governmentfiscal and monetary policy. In the early 1960s, Samuelson and another MIT star and future Nobelist, RobertSolow, were able to