By Higgs, Robert
Freeman , Vol. 61, No. 5
Although the Great Society should be under-stood as primarily a political phenomenon - a vast conglomeration of government policies and actions based on political stances and objectives - economists and economic analysis played important supporting roles in the overall drama. Even when political actors could not have cared less about economic analysis, they were usually at pains to cloak their proposals in an economic rationale. If much of this rhetoric now seems to be little more than shabby window dressing, we might well remind ourselves that the situation in this regard is no better now than it was then.
Regardless of how political actors in the 1960s might have sought to exploit economic analysis to gain a plausible public-interest rationale for their proposed programs, the most prominent body of economic analysis in those days - the sort taught by the leading lights at Harvard, Yale, Berkeley, and the other great universities - virtually cried out to be exploited in this way. During the mid-1960s the so-called Neoclassical Synthesis achieved its greatest hold on the economics profession.
This term "synthesis" refers to the combination of a microeconomic part, which contains the theory of individual markets that had been developed over the preceding two centuries, and a macroeconomic part, which contains the ideas about national economic aggregates advanced by John Maynard Keynes in his landmark 1936 book The General Theory of Employment, Interest, and Money and further developed by Keynes's followers during the three decades after the book's publication.
On the microeconomic side, the Neoclassical Synthesis incorporated the so-called New Welfare Economics that had been developed during the 1930s, 1940s, and 1950s. In this form microeconomic theory advanced a general-equilibrium theory of the economy's various markets, identified the conditions for the attainment of equilibrium in this idealized system, and demonstrated that various "problems" - springing from external effects, collective goods, less-than-perfect information, and less-than-perfect competition, among other conditions - would cause the system to settle in a state of overall inefficiency: The value of total output would fall short of the maximum that would have resulted from systemic efficiency, given the economy's available resources of labor and capital and its existing technology.
Attainment of such an inefficient state was characterized as a "market failure," and economists expended enormous effort alleging the existence of such market failures in realworld markets and in proposing means (mainly taxes, subsidies, and regulations) by which the government might, in theory at least, remedy these failures and thus maximize "social welfare."
Had economic theorists rested content with using the microeconomics of the Neoclassical Synthesis strictly as a conceptual device employed in abstract reasoning, it might have done little damage. However, as I have already suggested, this type of theory cried out for application - which, in practice, was nearly always misapplication. The idealized conditions required for theoretical general-equilibrium efficiency could not possibly obtain in the real world; yet the economists readily endorsed government measures aimed at coercively pounding the real world into conformity with these impossible theoretical conditions.
Closely examined, such efforts represented a form of madness. As the great economist James Buchanan has observed, the economists' obsession with general equilibrium gives rise to "the most sophisticated fallacy in [neoclassical] economic theory, the notion that because certain relationships hold in equilibrium the forced interferences designed to implement these relationships will, in fact, be desirable."
Great Society measures such as the Elementary and Secondary Education Act (1965), the Higher Education Act (1965), the Motor Vehicle Safety Act (1966), and the Truth in Lending Act (1968), as well as many of the consumer-protection and environmental-protection laws and regulations, found ready endorsement among contemporary neoclassical economists, who viewed them as proper means for the correetion of purported market failures. …