I first heard the names Adam Smith and John Maynard Keynes when I was a high-school sophomore. My teacher announced, as if it were a fact as firm as any law of thermodynamics, that the Great Depression was caused by laissez-faire policies advocated by Smith, and that salvation came from the more scientifically sound ideas of Keynes – ideas expertly put into practice by Franklin Roosevelt.
‘Depressions are a thing of the past,’ my teacher proclaimed. ‘Keynes taught us how to prevent them.’
‘Cool!’ I recall thinking with as much relief as a 15-year-old can muster about such matters.
Seven years later, I graduated from college with a degree in economics. By then I’d learned that my high-school history teacher’s history was bunk. The Great Depression wasn’t a failure of capitalism or of the ideas of Adam Smith. Instead, it was caused chiefly by the Federal Reserve foolishly allowing the money supply to shrink by more than a third. Further, this economic downturn was prolonged by Herbert Hoover’s and FDR’s unprecedented economic interventions. (I learned only years afterward that Keynes wisely opposed most of these interventions.)
Yet I had the good fortune early in college to stumble into an economics course taught by an inspired and inspiring professor. Otherwise I’d likely to this day believe that the free-market ideas of Adam Smith are mistaken, and that active government intervention is necessary to keep economies steady and growing. And any candidate for political office who said otherwise would have had no chance of gaining my vote.
Obviously, our beliefs about the past exercise an immense influence on the way we interpret today’s economic events and policies. Former US Senator Phil Gramm – himself an accomplished professional economist – and I wrote our new book ‘The Triumph of Economic Freedom’ with the express purpose of challenging what we regard as the seven most dangerous myths about American economic history.
Our challenge to these myths mostly takes the form of confronting them with straightforward historical facts. The myths that we take on aren’t the products of subtle differences in interpretations of facts known and accepted by all. Instead, these myths spring from a shocking ignorance of basic, clear-cut empirical realities.
Consider what we call ‘the Genesis myth,’ which is that the industrial revolution that began in Great Britain in the 18th century enriched factory owners by impoverishing industrial workers. Although economic historians disagree about exactly when real wages for ordinary workers began to rise, few doubt that by the 1840s those wages were on their way permanently upward, and not a small amount of evidence supports the proposition that these wage increases began several decades earlier. As unattractive as those early 19th-century factory jobs would be to us today, they were quite attractive to the workers in Britain who sought them out.
Likewise with America’s own industrial revolution, the ‘Gilded Age’. American schoolchildren are taught that the final third of the 19th century witnessed John D. Rockefeller and other ‘robber barons’ jacking up prices to extortionate levels, poisoning consumers with unsanitary food, suppressing wages down to pauper rates and driving their workers like slaves.
Yet despite still being a staple feature of American textbooks and in the popular media, this tale is false. This era witnessed remarkable economic growth in the US – growth that was shared by ordinary Americans. Although the US population nearly doubled between 1865 and 1900, real per-capita GDP surged upward by 83% and the real annual earnings of all nonfarm workers rose by 62%. The rise in the average real hourly wage of manufacturing workers was especially impressive, jumping – as found by the economist Lawrence Officer – by 158% between 1865 and 1905.
At the dawn of the 20th century, ordinary Americans had more and better food, housing, clothing and leisure than their parents did three decades earlier.
No myth, however, looms as large and ominously today as that which insists that America’s industrial economy and middle class have been ‘hollowed out’ over the past half-century by globalisation. We Americans are told incessantly that starting in the mid-1970s, US industry began to be shipped abroad as trade became freer – a figurative defenestration of the US economy that only accelerated with the 1994 North American Free Trade Agreement (NAFTA) and China’s 2001 entry into the WTO.
And yet all the evidence contradicts this claim. US industrial output is today at an all-time high, as is US industrial capacity. Ditto for real wages (including those of production and nonsupervisory workers) and for the real net worth of the average American household.
In our book, Senator Gramm and I bring forthright facts to bear on these and other popular claims about American history, both long-past and recent. These facts, we believe, expose these claims as false. And exposing false claims is an important step in diminishing the chances that destructive policies will be pursued.
‘The Triumph of Economic Freedom’ is published by Rowman & Littlefield.
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