The Economists’ Hour

“What happens when the theories of academics shape the policies of nations? The lives of millions are transformed—for better or worse.”

1. Free-market theories helped end the military draft

Right-wing economists, typically advocates for free-market principles, played a surprising role in ending the United States military draft. Figures like Milton Friedman believed that conscription infringed on personal freedoms. This view framed military service as a profession like any other, with voluntary enlistments incentivized by fair wages. Their arguments influenced key policymakers, including Richard Nixon, who eventually abolished the draft in 1973.

Their claims combined ethics and economics: paying soldiers would create a more motivated and efficient military. Critics feared such a system might disproportionately attract poorer individuals, but the economists dismissed these objections to prioritize cost-efficiency and individual choice. They believed offering adequate compensation would be more equitable and attract long-term recruits.

This success marked the first significant policy victory where free-market ideals directly shaped U.S. governance. The all-volunteer military model that emerged paved the way for broader adoption of economist-driven reforms in future decades.

Examples

• Economist Milton Friedman likened the draft to slavery in speeches and writings.
• Nixon’s campaign in 1968 heavily leaned on ending the draft after Martin Anderson presented him with a compelling memo.
• Post-reform, the draft was formally abolished in 1973, making way for a professional military.

2. The decline of Keynesian economics in the 1960s

Once dominant, Keynesian economics fell out of favor as inflation gripped the United States in the 1960s and 1970s. Keynesians had long advocated for government spending to promote growth and employment. However, their lack of effective tools to combat inflation made room for the rising influence of Milton Friedman and the Chicago School economists, who had fundamentally different ideas.

While Keynesianism called for fiscal policies like increased taxes to curb inflation, the public and politicians resisted these measures. Friedman proposed monetarism instead, advocating minimal government intervention. He argued that inflation could be controlled by regulating the money supply, leaving most economic activity to market forces.

Friedman’s ideas, considered radical at the time, eventually gained traction among policymakers, signaling a shift toward conservative economic philosophies. Within a few years, monetarism became a mainstream economic approach.

Examples

• President Lyndon Johnson relied on Keynesian ideas for programs like Medicare and Medicaid, but such spending led to inflation.
• Milton Friedman’s speech at the American Economic Association in 1967 articulated the flaws of Keynesianism, making monetarism more appealing.
• Policymakers adopted monetarist policies to reduce inflation in the 1970s, leading to rising unemployment but curbing inflation over time.

3. Reaganomics promoted tax cuts and trickle-down theories

In the 1980s, President Ronald Reagan implemented supply-side economics, emphasizing massive tax cuts for businesses and individuals. Advocates like Arthur Laffer argued that tax reductions would encourage spending and investment, boosting economic growth and benefiting all society layers—a concept often called trickle-down economics.

Reagan signed significant tax cuts into law, reducing the top tax rate from 70% to 33%. While the economy saw some marginal growth, wages for average workers stagnated, and income inequality soared. Wealth concentrated among the top earners, while middle- and lower-class citizens experienced little to no financial improvement.

Reaganomics also slashed government revenue, diminishing funding for infrastructure and social programs, while increasing national debt due to deficit spending. Despite these consequences, the tax-cut philosophy remained influential in American politics long afterward.

Examples

• Reagan reduced individual and corporate taxes in 1981 and again mid-decade.
• Supply-side proponents predicted tax cuts would “pay for themselves” through higher growth, though this rarely materialized.
• Wealth inequality widened, with stagnant middle-class wages becoming a hallmark of the Reagan years.

4. Deregulation paved the way for monopolies

Until the 1970s, the U.S. government actively restrained corporate monopolies through laws like the Sherman Antitrust Act. However, free-market advocates began pushing the idea that markets should prioritize efficiency over fairness—a perspective that allowed corporate mergers and increased consolidation.

George Stigler, one such economist, argued that big companies should be free to dominate markets as long as they provided low prices. Government oversight waned in response, leading to increased concentration across industries. For example, deregulation in the airline sector initially reduced ticket prices but eventually left Americans with fewer, more dominant airlines charging higher fares.

By weakening antitrust laws, laissez-faire policies encouraged monopolistic practices, curbing innovation and competition while benefiting the largest corporations.

Examples

• AT&T once shared patents due to government mandates, but later, reduced oversight permitted tech monopolies to thrive.
• Deregulated airlines intensified price wars, but by the 2010s, just four companies controlled 80% of the U.S. market.
• Meatpacking industry consolidation saw the market share of five firms rise from 25% to over 70%.

5. Cost-benefit analysis replaced moral decision-making

Economists like Charles Hitch transformed policymaking by introducing cost-benefit analysis. This method involves quantifying actions in monetary terms and weighing them against potential outcomes. Though useful in theory, applying this system to human lives led to questionable choices where profit trumped morality.

For instance, regulatory agencies started valuing lives in dollar terms to justify policies. Creating air filters or installing life-saving equipment was often deemed unworthy of investment if deemed too costly. During the Reagan administration, cost-benefit analysis became standard across government agencies, reducing the number of safety and environmental rules passed.

While this approach streamlined regulation, critics argue it sidelined ethical concerns. Government decisions without moral consideration have sometimes prioritized short-term gains over long-term public well-being.

Examples

• Charles Hitch used cost-benefit analysis to evaluate military weapons during the Cold War.
• Economists assigned a $200,000 value to human life in the 1970s, guiding regulatory decisions.
• Reagan’s 1981 executive order institutionalized cost-based assessments, curbing life-saving policies.

6. Removing fixed exchange rates destabilized global trade

The Bretton Woods system established predictable fixed exchange rates, helping postwar economies flourish. However, by 1971, mounting U.S. dollar reserves and gold shortages made the system untenable. President Nixon abandoned Bretton Woods, advocating market-determined exchange rates.

This move, rooted in Friedman’s ideas, introduced unprecedented currency volatility. Investors speculated heavily on fluctuating exchange values, enriching financial markets but destabilizing manufacturing. A strong dollar hurt U.S. exports, costing millions of jobs in industries such as steel and automotive.

While the deregulation created thriving trade markets, it disproportionately harmed working-class communities, highlighting the uneven benefits of global economic shifts.

Examples

• Germany and Japan’s economic resurgence strained fixed-rate reserves, forcing change.
• Nixon and economist George Shultz championed floating exchange rates in 1971.
• Midwest industrial hubs suffered lasting job losses due to elevated dollar value.

7. Chile’s free-market experiment created chaos

Chile’s dictatorship under Pinochet became a testing ground for Milton Friedman’s free-market theories. Pinochet eliminated trade protections, privatized industries, and cut government spending. Initially, foreign investors profited, but the average worker faced job losses and declining living standards.

Decades later, Chile remained deeply unequal. While Friedman touted the economic success of his policies, critics highlighted how deregulation disproportionately benefited elites and widened wealth gaps. Public protests in recent years called attention to the continued fallout from these policies.

Instead of fostering economic growth for all, Chile’s experiment exposed the dangers of prioritizing markets over people.

Examples

• Chile’s GDP briefly rose but later stagnated under Pinochet’s deregulatory policies.
• Foreign investors acquired critical Chilean industries, leaving the country heavily indebted by the 1980s.
• Nationwide protests in 2016 demanded higher pensions after decades of inequality.

8. Deregulated finance sowed global crises

Unfettered markets led to repeated financial disasters throughout the late 20th and early 21st centuries. Alan Greenspan championed deregulation, even as unchecked behaviors triggered major collapses. Unregulated credit derivatives caused bankruptcy crises in the 1990s, yet no major reforms followed.

The subprime mortgage bubble, fueled by greed and predatory loans, caused the 2008 crash. Calls to regulate the banking sector went unheeded for years, exacerbating risks. The fallout proved enormous, underscoring the fragility of unregulated financial systems.

Each catastrophe highlighted how unchecked markets could spiral into chaos, costing public money and trust.

Examples

• Orange County’s bankruptcy in 1994 stemmed from unregulated derivatives losses.
• Barings Bank collapsed in 1995 due to speculative trading.
• Subprime mortgages grew unchecked until the 2008 global financial crisis devastated economies.

9. Economists reshaped the world—but at a cost

Economists like Milton Friedman and his peers became incredibly influential. Their ideas profoundly reshaped government policy, prioritizing free markets, lower taxation, and limited public regulation. While they promised prosperity, the long-term effects have often included stagnating wages and widening inequality.

Corporate power grew as regulations diminished. Critical public services faced cuts, while financial markets thrived at citizens’ expense. Many countries adopted similar policies, resulting in global inequality patterns. Economists’ influence unquestionably transformed modern economies—but these changes often benefited the few rather than the many.

Examples

• Inequality trends since the 1980s mirror widespread adoption of free-market economics.
• Deregulating airlines, manufacturing, and finance concentrated wealth among corporate elites.
• Public-sector investments diminished as low-tax principles dominated policymaking.

Takeaways

1. Push back against policies rooted solely in efficiency over equity to ensure fairer systems.
2. Recognize the importance of strong financial regulations in preventing economic crises.
3. Evaluate economic reforms not just by growth metrics but their human and social impacts.