A near perfect graphical illustration of the power of economic theory is provided by the following graph; copied from RWER Blog
The impact of the roaring 20’s can be seen clearly as the shares of the bottom 90% drop steadily from 20% to around 13%, while the shares of the top 0.1% shoot up. The Great Depression led to a slew of regulations on banking, and also eventually the development and implementation of Keynesian ideas, which provide an economic rationale for government interventions to reduce unemployment. From 1930 to 1980, we see the rise of populist ideas, implementation of Keynesian theories, and the eclipse of Hayek and the Chicago School. After reaching a nadir in 1978, we see an upswing in the fortunes of the top 0.1%. The stagflation of the early 1970’s sets the stage for a rejection of Keynesian theories and a resurgence of the Chicago School. The Reagan-Thatcher era translates these theories into policies. When I was going to graduate school in the 70’s, the Chicago School was still an outcast, but they were plotting a triumphant re-entry, as documented by Sabina Alkire & Angus Ritchie in Winning Ideas: Lessons from Free-Market Economics. Among the many important lessons from this well worth reading paper, I note here only their first. Free market economists attempted to seize the higher moral grounds – they argued for FREEDOM as an ideal, a vision for a great society (and not on rational grounds). These lessons are worth studying for those who (like me) would like to reverse the tide. The inexorable upward march of the fortunes of the top 0.1% from the 80’s is matched by the rise to ascendancy of the Chicago School. Among the many indicators of the change is the exceedingly large number of Nobel Prizes bestowed upon its members. Foucault’s Power/Knowledge thesis is so well borne out by this graph, where the wealth of the extremely wealthy marches upwards in perfect tune with the Chicagoization of Economics and corresponding decline of heterodox schools, as well as the previous Keynesian orthodoxy. The global story of this correspondence between the Chicago School and fortunes of the wealthy has been extremely well documented by Naomi Klein in her fantastic book: The Shock Doctrine. She has put together the pieces of a huge jigsaw puzzle; I believe that no one can claim to understand twentieth century economics without reading this book.
The last point that I want to make in connection with reading the graph above is a bit depressing. I think the Great Depression took everyone by surprise and there was a huge popular uprising which led to strict regulations of the financial sector, and the corresponding fifty year decline in their fortunes. However, this time, the Global Financial Crisis did not take the extremely rich by surprise. To the contrary, they precipitated the crisis and very smoothly managed the aftermath so as to prevent a repeat of what had happened after the Great Depression. For example, they carefully manipulated public opinion to block the natural solution – bailout of the distressed mortgagors (see my blog post Deception and Democracy). All legislation proposed to address problems which had led to the crisis was effectively blocked in Congress (unlike what happened after the Great Depression). For example, there was only an eight year gap between the repeal of the Glass-Steagall Act and the Global Financial Crisis. The Falsehood Fabrication industry has tried its best to hide the link between the two, but the following graphic is enough as refutation: (taken from Too Big Has Failed – Let’s reform Wall Street for good)
Although the Dodd-Frank act was passed as a replacement, it is a 300 page monstrosity full of loopholes, unlike the short and crisp 30 page Glass-Steagall act which effectively prevented banks from gambling. Similarly, Gram-Leach-Bliley Financial Services Modernization act of 1999 unleashed the power of derivatives – which are pure gambles – to allow the finance industry to buy up the rest of us – the bottom 90% that is. At the time of the global financial crisis, the value of derivatives was estimated at TEN times the global GNP. Since the crisis, all attempts to regulate derivatives have been blocked, and some laws which were passed in the heat of the moment have been quietly repealed. We used to talk about regulatory capture; the regulated industry captures the regulators. The problem we face now is of Government capture – the body which makes the rules has been captured by big finance.
POSTSCRIPT: See also “Completing the Circle: From GD ’29 to GFC 2007”, “The Keynesian Revolution and the Monetarist Counter-Revolution“, and a 90m youtube video-lecture introducing “Core Macroeconomic Concepts”