Elizabeth Warren, the Democratic candidate for the U.S. Senate in Massachusetts, recently created a media flap when she said:

There is nobody in this country who got rich on his own. Nobody. You built a factory out there—good for you!

But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did. Now look, you built a factory and it turned into something terrific, or a great idea—God bless. Keep a big hunk of it.

But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.

Conservatives and libertarians took offense at Warren’s claim that the government has a superior claim to “a hunk” of people’s earnings merely because every individual lives in and benefits from a society to whose creation many other people have contributed.

The critics might well have been grateful for small blessings, however. Warren was prepared, rhetorically at least, to let people keep “a big hunk” of their earnings.

U.S. government officials in earlier times were sometimes unwilling to admit that people had a right to retain any of their earnings, and forthright in their declarations that everything people possessed really belonged to the government.

Striking examples of such views may be found in the recently published book by Burton Folsom and Anita Folsom, FDR Goes to War. There the Folsoms present a meaty discussion of the congressional debate that occurred in 1943 in regard to bills eventually enacted in compromise form as the Current Tax Payment Act of 1943—the statute that, among other things, established income-tax withholding at the source. In that debate, the following statements were made in Congress:

Rep. Emanuel Celler (D-N.Y.)—The government can at any time make income taxes as thumping big as the necessities of war require. Thus, if any plan does not raise enough money, taxes can at any time be increased. The government always has a moral if not actual lien on all our income. (p. 200, emphasis added)

Sen. Happy Chandler (D-Ky.)—[A]ll of us owe the government; we owe it for everything we have—and that is the basis of obligation—and the government can take everything we have if the government needs it. . . . The government can assert its right to have all the taxes it needs for any purpose, either now or at any time in the future. (p. 200, emphasis added)

Rep. Wilbur Mills (D-Ark.)—The public, with money in its pockets, will inevitably try to use this money to buy what it wants, what it may need. . . . [T]o check the forces making for inflation, we must direct our tax policy toward diverting an ever larger part of the funds of persons above subsistence levels into the Public Treasury. (p. 201, emphasis added)

So, lighten up, small-government friends. Be grateful that you must contend only with Warren, and not with the likes of Celler, Chandler, and Mills. Maybe there is progress after all.

An important factor in these movements is the fundamentally anarcho-syndicalist tenor of the union movement, which demands an ever greater share of national income. Public-sector unions like the American Federation of State, County and Municipal Employees have been prominent in the “occupy” movement. Wisconsin AFSCME proudly sent pizzas “in solidarity” with the Wall Street occupiers.

Rutgers University labor economist Leo Troy calls public-sector unionism “the new socialism.” The old socialism was based on state ownership of the means of production. The new socialism involves the transfer of an ever greater share of the economy to the public sector. Government at all levels took about 5% of GDP a century ago and 13% on the eve of the Great Depression. The New Deal increased the proportion to one-third by 1960. We are in the forty percent range now, and the full nationalization of health care will put us over half.

Unions have been a primary force in the expansion of state power. Even the reputedly “conservative” American Federation of Labor called for “the abolition of the wage system.” A.F.L. President Samuel Gompers put organized labor’s goal as simply “more” — exactly what Johnny Rocco, the Al Capone-like figure portrayed by Edward G. Robinson in the 1939 film “Key Largo,” explained as his ultimate end. The New Deal’s expansion of state power was based principally on private-sector unionism that began with the “occupy Flint” sit-down strikes of 1936.

Congress had empowered unions by the National Labor Relations (Wagner) Act to balance the power of corporations. But they had become a law unto themselves. Roscoe Pound, the Harvard Law School Dean who had done much to promote labor reform in the progressive era, noted in 1958 that unions were free to commit torts against persons and property, interfere with the use of transportation, break contracts, deprive people of the means of livelihood, and misuse trust funds, “things no one else can do with impunity. The labor leader and labor union now stand where the king and government . . . stood at common law.” Rather than a countervailing force to limit corporate power, unions had themselves gained “a despotic centralized control.” The private-sector union quest for “more” finally killed the auto and steel industries and private-sector unionism itself.

Public-sector unionism had suffered a major setback with the Boston police strike of 1919, which exposed the anarchical consequences of what Massachusetts Governor Calvin Coolidge called a “strike against the public safety” and which President Woodrow Wilson called “an intolerable crime against civilization.” Government employees were expressly excluded under the Wagner Act. As President Franklin D. Roosevelt explained, “the very nature and purposes of government” made collective bargaining impossible, because a public employer is “the whole people, who speak by means of laws”—that is to say, the government is sovereign. A union that could compel it to bargain must perforce become the new sovereign.

The ethos of organized labor could often be predatory and nihilistic. It reminds one of the famous “Melian dialogue” in Thucydides’ history of the Peloponnesian War. The Athenians tell the citizens of Melos that they must join their alliance against the Spartans. When the Melians reply that they have a just right to remain neutral, the Athenian ambassadors reply that “we both alike know that into the discussion of human affairs the question of justice only enters where the pressure of necessity is equal, and that the powerful exact what they can, and the weak grant what they must.” When the Melians insist on their rights, the Athenians annihilate the city, kill all the men, and enslave the women and children.

This was the spirit of Representative William Clay’s advice to the air traffic controllers in 1980. He urged them to:

“…completely revise your political thinking. It should start with the premise that you have no permanent friends, no permanent enemies, just permanent interests. It must be selfish and pragmatic. You must learn the rules of the game and learn them well. Rule Number 1 says that you don’t put the interest of any other group ahead of your own. What’s good for the federal employees must be interpreted as being good for the nation. Rule Number 2 says that you take what you can, give up only what you must. Rule Number 3 says that you take it from whomever you can, whenever you can, however you can. If you are not prepared to play by the rules then you have not reached the age of political maturity and perhaps you deserve everything that’s happening to you.”

The United States dodged a bullet when Congress refused to enact Representative Clay’s National Public Employee Relations Act—a “Wagner Act for public employees”—in the mid-1970s. It was helped by a close Supreme Court decision that suggested that such an act was beyond Congress’ heretofore limitless power to regulate interstate commerce. Reagan’s breaking of the air traffic controllers strike also helped to ensure that the United States did not go as far as Italy, Greece, or even Great Britain–before Margaret Thatcher–in turning over its government to public-employee unions.

The ethos of “more” for the public sector has driven most of the West to the point where the private sector cannot produce enough to stave off bankruptcy. Occupy Wall Street drivel notwithstanding, the outright confiscation of all of the income of the “1%” would not even eliminate this year’s federal deficit.

The opening paragraphs indicate the direction of Abrams’s argument:

The next time someone argues that the New Deal failed, and only the Second World War ended the Depression, as ‘proof’ that government spending does not work, one can respond with the details of economic growth and unemployment reduction up to 1940, or one can ignore the claim and thank them for making your case for massive government spending in a deep, broad recession.

Right wing politicians are loathe to credit the New Deal with any success in hoisting the United States out of the Great Depression, but credit World War II for that achievement, believing that that somehow disproves Keynesian economic theory.

That claim, however, undermines their entire premise.

Abrams concludes that “massive government spending at a time of severe economic downturn and dislocation can indeed get an economy humming again,” as World War II shows; the New Deal was merely too timid. He seems unaware that his argument merely restates the fallacy-ridden hodge-podge of conventional wisdom about how World War II “got the economy out of the Depression” that has dominated the thinking of economists, historians, and the public ever since the war itself.

When I began to teach U.S. economic history at the University of Washington in the late 1960s, I quickly realized that this tale of the wartime “Keynesian miracle” could not withstand critical scrutiny once one went beyond the barest account of it in terms of the elementary Keynesian model and the standard government macro measures, such as GDP, the consumer price index, and the rate of civilian unemployment.

Almost immediately I saw that unemployment had disappeared during the war not because of the beautiful workings of a Keynesian multiplier, but entirely because about 20 percent of the labor force was forced, directly or indirectly, into the armed forces and a comparable number of employees set to work in factories, shipyards, and other facilities turning out war-related “goods” the government purchased only after forcing the public to pay for them sooner (via wartime taxes and inflation) or later (via repayment of wartime borrowing).

Thus, the great wartime “boom” consisted entirely of (1) some people’s mass engagement in wreaking death and destruction and (2) other people’s employment in producing supplies for these warriors after the government’s military labor drain, turning out “goods” never valued by consumers or private producers in voluntary transactions, but rather ordered by government functionaries and priced completely arbitrarily in a command-and-control economy. In no sense was the alleged “wartime prosperity” comparable to real, normal prosperity. The pervasive regimentation, rationing, price controls, direct government resource allocations, and forbidden forms of production (e.g., civilian automobiles) should have served as a tip-off.

After teaching my own students along these lines for many years, I eventually began to write articles and books pulling together my various studies. The most coherent of these books is my Depression, War, and Cold War, published originally by Oxford University Press in 2006. For all of the good I’ve done in correcting people’s understanding of what happened to the U.S. economy during World War and what lessons one might justifiably draw from that experience about, say, the scientific validity of the Keynesian model or its related fiscal-policy implications, I might just as well have held my breath and turned blue. Here we are in June 2011, and millions of Americans are being presented with the purest potion of economic misinformation one can imagine, an account in no way superior to those the young Keynesians were peddling so confidently in 1944, when I was born. Perhaps my mother ought to have strangled me in my crib, to spare me the bitter disappointment of seeing the research and writing I’ve carried out over more than forty years prove to have been completely in vain.

For the Paul Abrams’s of this world, of course, none of this makes the slightest difference. They are at pains not to understand how the economy actually works or to endorse policies that promote its greater productivity, but only to concoct a plausible rationale for the government’s taxing “the rich” more heavily and spending oodles of money on a laundry list of leftist idols — government “infrastructure,” green energy-conservation programs, high-speed rail, and the rest of the wasteful and economically foolish purposes that progressive politicians espouse to feather their own nests and enrich their cronies and political dependents at public expense. If they haven’t learned any sound economics by this time, chances are slim to none that they will ever learn any, but I cannot believe that they care about such learning, in any event. Politics is the name, plunder’s the game.

There’s a lesson here, besides the obvious one that public discourse consists overwhelmingly of ideological sound and fury, signifying nothing solidly connected to reality. For me, the main lesson is: mommas, don’t let your babies grow up to become economic historians. If you do, you only put them in line to have their hearts broken.

I’ll resist the temptation to offer a “How many congressmen does it take to change a light bulb law?” joke, and just say that any bill that has to reference the definition of “medium screw base” as stipulated in the Energy Policy and Conservation Act is kind of complicated.

Still, the BULB Act is only two pages in length.  And its constitutional justification is simple:  the law enacted in 2007 that put Thomas Edison’s light bulb on course of ultimate extinction is an unwarranted federal intrusion into a matter better left to free markets and individual choice.

Yes, it’s come to this:  Congress must pass a law that undoes another law so that the plain old 100-watt light bulb can survive to see 2012.  (Sixty-watt incandescents are set to dim by 2013, and 40-watt bulbs will be extinguished by 2014).  As of now there is little chance that the Senate—which has gone 800 days without passing a budget, much less a light bulb bill—will adopt the BULB Act.  Even if both chambers pass the Act, there is even less likelihood that President Obama will sign it into law.

Thus the long death of the incandescent light bulb will go down in history as a bipartisan achievement—a bill signed into law by President George W. Bush, and kept in place by Democrats.

In many ways, the incandescent light bulb ban is the perfect encapsulation of the administrative state, which stands today as the signal achievement of more than a century of Progressive politics.

First off, the original piece of legislation that banned the old bulb—all 806 pages of it—is not really a law, if we take that term in its traditional meaning.  Rather, it’s just a concatenation of rules and regulations, jargon and bureaucratic gibberish, strung together like one huge long set of Christmas lights, with every other one malfunctioning and all the red ones blinking.  Good laws are reflective of reason, not merely will, and the energy bill of 2007—like nearly all omnibus legislation—is much more will than reason, more “force” than “reflection,” to recall the first Federalist.

Secondly, the mandatory replacement of the outmoded bulbs was sold as an economically and environmentally necessary measure.  Many of the ideas of the original Progressives (Woodrow Wilson & Co.), plus the programs of the New Deal (Franklin D. Roosevelt), the Great Society (Lyndon B. Johnson), and of Progressivism 4.0 (Obama/Pelosi/Reid) follow a similar strategy:  emphasize the necessity of a proposed measure, tout its irresistible societal benefits, and sell the bill of goods to the people.  Combined with a strict “no returns” policy, this ensures that the beneficiaries come to realize whatever it was that the experts claimed to know all along.

Thirdly, with the light bulb ban, as with the administrative state as a whole, liberty is lost gradually, not immediately.  It’s kind of like what happens to your eyes when you try to read in a room lit by the compact fluorescent light (CFL) bulbs that are supposed to replace Edison’s old bulbs.  Before you know it, your eyes hurt and you have a headache.  Pretty soon, you can’t see much at all.

And watch out if you break one of those CFL’s—not only will you have to clear the kids out of the room—but you might have to clear out your house altogether.  A new study published in Environmental Engineering Science warns that after it is broken, a CFL bulb continues to release mercury vapor into the air for up to months at a time at a level that may be unfit for human exposure.  So keep your EPA-recommended clean-up guides handy—you might need them starting January 1, 2012.

The fourth point is that in addition to selling its “innovations” based upon necessity, the administrative state, especially its current version, also loves to enlist private enterprise in its efforts so as to demonstrate its supposed friendliness to market competition.  In reality, Progressives harbor a deep distrust of markets, but today seem to think that their distrust can be masked by support of “public-private partnerships.”

In the case of the light bulb ban, the same law that effected the elimination of the old bulbs mandated a contest for the creation of energy-efficient alternatives, complete with $20 million in taxpayer-funded prizes.  Although the bill requiring the competition was enacted in 2007, it seems that the Energy Department is only now getting around to opening up the contest.  The names of the prizes as specified in the legislation do have a certain catchy ring to them—for example, the Parabolic Aluminized Reflector Type 38 Halogen Replacement Lamp Prize—but alas, like much of the rest of the federal government, the Web site link for the contest is broken.  Real innovation is not catalyzed by gimmicky government intervention.

The fifth and final way in which the light bulb ban encapsulates the administrative state is that once in place, edicts of the administrative state are very difficult to undo.  Whether for a comparatively little thing like a light bulb ban or the massive entitlement programs of the New Deal and Great Society, the administrative state’s enactments have an inertial force that is nearly irresistible.

The House’s anticipated action this week —something that according to Republican promises made during the election should have been accomplished many months ago—comes with no committee hearings, testimony, or even a carefully coordinated plan.  One of the chief proponents of the original light bulb ban, Michigan Republican Fred Upton, now finds himself—as the powerful House Energy and Commerce Committee Chairman—as the reluctant but key proponent of its partial repeal.

If “we the people” can’t even reverse a lousy federal ban on incandescent light bulbs, how will we see the light on the larger things of our national future?

Let’s take two big issues, health care and long term financial security or retirement funding. These are two of the biggest issues we face as people, because they are critical and significant areas of life that concern everyone. For a long time we’ve had social security, Medicare and Medicaid crammed down our throats and washed down by some liberal progressive dogma, and are now told that two of the biggest concerns we face in our lives are no longer a concern because big brother has our back. Well the bill is coming due on this scheme, and it’s coming due on state and local government pension promises. It came due in the private sector with companies like GM, which was being crushed under an unsustainable health care and union pension system until we bailed them out. And it’s going to come due at your company soon, at least as it relates to your healthcare, because prices cannot continue to exponentially go up and companies be expected to pay.

The issue lost in the rhetoric of the traditional left/right argument is not about circumstances and poor people, but rather one of philosophy. Collective systems operate on a kind of “parent-child” philosophy. Citizens are told they are children who cannot take full responsibility for themselves and instead are taught to rely on their parents. Bureaucratic systems take care of them, decide the right choices for them, and always tell them that the system has their best interests at heart. The parent tells the child that they can’t be trusted. That the enemy out there will not protect their future but destroy their future. To the collective the enemy is the individual. And the individual is you! What has happened to the responsibility and empowerment of “doing it yourself”? We are not children and the parental control system is not taking care of us!

The supposed benefits of collective parenting are based on massive superstructures that make most of the choices we as individuals should be making. The collective program then buries our potential individual participation under stifling layers of further bureaucracy. For example, why should the job I choose to have and the place I choose to live dictate my healthcare plan or my retirement plan? Our individual choice is eradicated by a system that stamps these very important personal decisions into a collective mold.

In the New Deal and Great Society progressive view point of the world, this idea of socializing benefits has grabbed hold in a tremendous way. Their dream of course is that grandiose one of universal single payer centralized benefits. The central government would be the sole provider of medical care, retirement, education and all the other highly used basics of all individuals. That is one massive den of snake creeping darkness.

Consider the qualitative incentives placed upon collective work place benefits. You cannot set up a pension or 401k for yourself with remotely the same level of tax benefits you get by doing it through your company. It is the same case with your health care. These qualitative incentives charge your employer with being responsible for your long term financial security and your health care. Think about that for a second. Apple is great at making electronics, but why would you want your tech company managing your present and future health and retirement security? It makes no sense that those things are tied together. Look no further as to how wrong this system can go than GM or Chrysler.

The work place benefits system not only undermines the basic market concept of the end user being the purchaser of a product, but also advances something much more nefarious: the softening of our free minds and individual spirits to the collectivist ideology.

Think about the inherent basic philosophical difference between someone who sees that the best is achieved through maximum individual liberty versus someone who sees the group as the subject to be celebrated. Maintaining individualism doesn’t mean you can never be a part of a group, but it means that your groups should be voluntary and should be focused on a singular mission.

Over the last 100 years of progressivism the individualistic spirit has been systematically destroyed not just directly by government but indirectly through soft kill methods that are purposefully kept hidden by the collective system. Perhaps the most egregious example of this is seen in our current banking system. Once bifurcated and individually responsible, the bank collective has been tied together into a corporate super structure centralized by the Federal Reserve System. Where do you think systemic risk came from? I mean what idiot ties the entire financial system together so that if you go down, I go down; and if you and I go down then all our neighbors go down too? And now individuals who once had common sense and a spirit of liberty look at this mess of destruction and argue all day that this is the way America needs to be. Really? Collective thinking Americans need to wake up!

Free market individualism has brought more wealth and prosperity to more people than anything ever created. “Free market” just means that each actor in the market place is conducting commerce for their self interest. The only role the government even has in this is protecting property rights and punishing fraud. The idea that we are one mass economy that the government can manipulate into becoming prosperous again is just more collectivist spew. They can do nothing to help, but get out of the way. We are not one giant economy but rather millions of small economies, individual economies if you like, that find spontaneous order in the chaos to increase wealth and prosperity for the many.

If we want Life, Liberty and the pursuit of our happiness in health and financial security, then we need to get back to doing things ourselves. I want my job to pay me for the work I am hired to do. I do not need them to do anything else like help me choose a dentist. I want my government to do the job they are hired to do, which is laid out in our Constitution. They shouldn’t run our banks or provide our healthcare. They don’t need to centrally plan the economy or set up a collective retirement program. What they need to do, all they need to do, is to make sure our property and our liberties are protected. What do you think is the actual purpose of our national defense? It’s to make sure no one outside our borders comes to take our property and our liberty.

More than ever, and now not later, America needs to take a wholesale look at the philosophy behind the systems we have in this nation today and ask ourselves, “Are we paying attention to the dark places?” In all the loud mouth rhetoric and political stumping, have we forgotten that behind the lights and personal pork, there is a wicked snake slithering about the darkness? We need to shine a light on this snake and become a people of a different collective, a people who collectively take responsibility for our individual liberty by doing things again for ourselves. Don’t be afraid of responsibility. Embrace it. It’s what made this country great, and what will save this country for the future.

Nevertheless, in part because mainstream macroeconomics never settled into a fixed orthodoxy for very long, competing interpretations of the Great Depression continued to attract adherents and to incorporate new elements of analysis during the past thirty years. The Austrians, once again attracting young economists to their ranks from the 1970s onward, persisted in waging guerrilla warfare against Keynesian, monetarist, New Classical, and other varieties of interpretation of the Depression.

With the onset of the current economic troubles—what some call the Great Recession—the debate about the Great Depression flared up anew, because many commentators began to compare these two episodes of exceptionally subpar overall economic performance. In 2008, an article by Gauti Eggertsson, “Great Expectations and the End of the Depression,” was published in the leading mainstream journal, the American Economic Review. This article advances a variation on one of the leading themes among mainstream economists, attributing the U.S. recovery after 1933 to a regime change associated with the New Deal’s abandonment of the gold standard and its commitment to active intervention in the private economy, allegedly in sharp contrast to the Hoover administration’s hands-off policy stance.

Steven Horwitz has taken issue with Eggertsson’s article in an important critique published in 2009 in the online journal Econ Journal Watch, edited by Daniel B. Klein. Eggertsson replied to Horwitz’s critique in 2010. Now, Horwitz has rejoined this back-and-forth in a new contribution to Econ Journal Watch titled “Unfortunately Unfamiliar with Robert Higgs and Others: A Rejoinder to Gauti Eggertsson on the 1930s.” No one will be surprised if I recommend Horwitz’s original critique and his follow-up piece as important contributions to this highly significant debate.

Misunderstanding the Great Depression has caused much mischief in modern macroeconomics and, more important, in government fiscal and monetary policies based on or influenced by this faulty understanding. If we are ever to arrive at a sound understanding of the Depression, we will have to persuade the economics profession to take Austrian economics seriously, as most economists did before the publication of Keynes’s magnum opus in 1936. Keynesianism in particular has proven itself to be a fundamentally flawed mode of analysis, yet one that has survived, evolved, and—like the zombies in the film “Night of the Living Dead”—keeps coming back, no matter how many times anti-Keynesians credit themselves with having dealt it a fatal blow. Monetarist, New Classical, and other recent critiques have themselves been inadequate or indefensible in various ways, as well.

Horwitz’s recent contributions have valuable things to say, not only about our understanding of the Great Depression, but also about the most productive way to do economic analysis and about the importance of working with correct historical facts, as opposed to the “stylized facts” that mainstream economists all too often are content to accept as an adequate foundation for the development and testing of their models.

Consider the following commentary on the economic situation:

Foolhardy procedures which are divorced from economic realities, or whose economic implications are not understood by their promoters, do not perforce become sanctified and wise merely by designating them as “action”; tilting at windmills does not draw water.

[W]hen a recovery program, which, while it may appear effective, depends for its efficacy upon much the same kind of “cheap money” inflation which . . . was the main cause of the recession from 2007 to 2009, then the present recovery must ultimately prove as illusory as the boom from 2001 to 2007, and it is the duty of economists to pierce the veil of illusion.

Certainly the recovery movement to the date of this writing [December 2010] is a peculiar one: it is shot through with anomalies. With [more than 15 million estimated to be] unemployed . . . with governmental relief rolls still at high levels, . . . there very obviously is something wrong, somewhere.

The fact would seem to be that the authorities who are undertaking the “management” of the current recovery, and congratulating themselves that prosperity is returning because they “planned it so,” are utterly oblivious of the fact that recovery is being engineered largely by the same means which produced the last boom – and recession. With this difference: whereas the banking system during the recent boom was producing an investment credit inflation by extending credit to business men and corporations, Government is now assuming the role of inducing new deposit currency in the banking system and thereby producing a consumption credit inflation. The Federal Government, instead of private corporations, is issuing the bonds which the banks are now purchasing, thereby inflating the deposit currency structure all over again. These “created” funds are in this instance being used principally to finance consumption expenditures through relief disbursements, make-work projects, and the like. . . . [T]he current inflation tends to conceal and to preserve the fundamental disequilibria which so prolonged the recession after 2007 and which we are now carrying over therefrom without having once squarely faced the problem of correcting them.

Notice, however, that the foregoing commentary, except for the terms in bold font, was written not yesterday, but, in its final form, in 1937. The authors, C. A. Phillips, T. F. McManus, and R. W. Nelson, placed this commentary, along with a wealth of related evidence and analysis, in their unjustly neglected book Banking and the Business Cycle: A Study of the Great Depression in the United States (New York: Macmillan, 1937). The quoted passages, which appear on pp. 212-14, originally read as follows:

Foolhardy procedures which are divorced from economic realities, or whose economic implications are not understood by their promoters, do not perforce become sanctified and wise merely by designating them as “action”; tilting at windmills does not draw water.

[W]hen a recovery program, which, while it may appear effective, depends for its efficacy upon much the same kind of “cheap money” inflation which . . . was the main cause of the Great Depression, then the present recovery must ultimately prove as illusory as the New Era of the ‘twenties; and it is the duty of economists to pierce the veil of illusion.

Certainly the recovery movement to the date of this writing [February 1937] is a peculiar one: it is shot through with anomalies. With [8 million to 12 million estimated to be] unemployed . . . with governmental relief rolls still at high levels, . . . there very obviously is something wrong, somewhere.

The fact would seem to be that the authorities who are undertaking the “management” of the current recovery, and congratulating themselves that prosperity is returning because they “planned it so,” are utterly oblivious of the fact that recovery is being engineered largely by the same means which produced the last boom—and depression. With this difference: whereas the banking system during the ‘twenties was producing an investment credit inflation by extending credit to business men and corporations, Government is now assuming the role of inducing new deposit currency in the banking system and thereby producing a consumption credit inflation. The Federal Government, instead of private corporations, is issuing the bonds which the banks are now purchasing, thereby inflating the deposit currency structure all over again. These “created” funds are in this instance being used principally to finance consumption expenditures through relief disbursements, make-work projects, and the like. . . . [T]he current inflation tends to conceal and to preserve the fundamental disequilibria which so prolonged the Great Depression and which we are now carrying over therefrom without having once squarely faced the problem of correcting them.

When policy makers repeat in the early twenty-first century the same mistakes they made in the 1920s and 1930s, and when mainstream economists fail to understand that these policies are misguided now, just as they were then, one can scarcely argue that the mainstream understanding of business fluctuations has advanced at all during the past eighty years. Indeed, the typical macroeconomist today is much inferior to Phillips, McManus, and Nelson, in no small part because today’s economists, owing to the high level of aggregation they employ in their theoretical and empirical work, miss what is most important for understanding business booms and busts: policy-induced structural disequilibria and malinvestments.