According to the rhetoric of the Reagan administration much of the machinery of government should be dismantled and its functions, ideally, be limited to those intended by the Founding Fathers to serve the needs of the simple, agricultural community. Public opinion is becoming increasingly skeptical of this view and most professional economists, except for a small but very vocal group of “libertarians,” disagree with it. Even some of Reagan’s own economists claim that our immensely complex and highly vulnerable modern economy can be managed only through skillful manipulation of several powerful instruments controlled by the federal government—tax rates, budget deficits and surpluses, and the interest rates and monetary supply controlled by the Federal Reserve. I doubt it.
The different varieties of economic policies we hear about and try to practice are usually justified by theoretical constructions such as Phillips Curves, Laffer Curves, full-employment budgets, “rational expectation” theorems, and similar abstract notions. The builders of more and more intricate econometric models try in vain to compensate for their lack of hard, systematically organized factual information by relying on increasingly ingenious but utterly unreliable methods of indirect statistical inference.
While debate over these theories continues, the economy steadily deteriorates. A year ago when President Reagan issued his first budget I observed that the proposed combination of drastic tax cuts with unprecedented tightening of credit could very likely bring about a slump threatening to lead into a deep depression. The explosive rise in productive investment so confidently predicted a year ago failed to materialize notwithstanding all the tax concessions passed last summer.
Would refining the old theoretical schemes, or, as some propose, redefining the money supply to be controlled by the Federal Reserve, remedy the failure of recent economic policies? Can one seriously believe that a significant contribution to the solution of our economic problems will be made by efforts to increase the reliability of econometric forecasts through tinkering with already highly sophisticated statistical procedures, or by making marginal improvements in the accuracy of aggregate price and other indices that would identify the day and hour when recession ends and recovery begins? I doubt this can be done and so, I believe, does much of the informed public.
The inadequacy of the trial and error approach that still dominates our national economic policies will, I believe, become clear when we have to face the full consequences of the rising wave of new technology. The interdependence of the different sectors of a national economy is bound to grow with the increase in their internal complexity and the scale of operations. Many projects started today—whether for producing energy or for more advanced computers—will come to fruition only in ten, fifteen, or even twenty years. Their ultimate success will depend on whether they are coordinated with other developments taking place not only in our economy but in other parts of the world. Corporate decision making in this country, while effective so far as it goes, often suffers badly because it cannot …