The Price of Civilization_ Reawakening American Virtue and Prosperity - Jeffrey D. Sachs [10]
His lifetime of remarkable scholarly output both established and epitomized five core ideas of modern mixed capitalism, which my fellow students and I imbibed in our introduction to economics:
Markets are reasonably efficient institutions for allocating society’s scarce economic resources and lead to high productivity and average living standards.
Efficiency, however, does not guarantee fairness (or “justice”) in the allocation of incomes.
Fairness requires the government to redistribute income among the citizenry, especially from the richest members of the society to the poorest and most vulnerable members.
Markets systematically underprovide certain “public goods,” such as infrastructure, environmental regulation, education, and scientific research, whose adequate supply depends on the government.
The market economy is prone to financial instability, which can be alleviated through active government policies, including financial regulation and well-directed monetary and fiscal policies.
Samuelson’s great synthesis called on market forces to allocate most goods in the economy, while calling on governments to perform three essential tasks: redistributing income to protect the poor and the unlucky; providing public goods such as infrastructure and scientific research; and stabilizing the macroeconomy. This approach appealed enormously to me as a young student of economics and helped me understand the complementary responsibilities of the market and the government. I found the concept of the mixed economy to be compelling, and I still do after forty years.
The ideas of Samuelson and his great contemporaries, including Nobel Laureates James Tobin, Robert Solow, and Kenneth Arrow, did not arise from pure theorizing. Many aspects of the mixed economy were put into place during the New Deal, World War II, and the early postwar period. Pure theory helped those great economists account for what they observed in the economy, and their ideas, in turn, shaped further economic policies. Ideas and history thereby interacted in a dialectical process. Pivotal historical experiences such as the Great Depression and World War II guide economic theory, while economic theory helps to shape the next steps of history. This is the great drama and thrill of economics: with a deeper understanding of events comes the chance to help the world on its historic arc toward greater well-being.
Intellectual Upheaval in the 1970s
Little did I realize in my student days that a huge intellectual storm was about to hit the field of economics: the consensus over the mixed economy was about to be jolted. In 1971, the year before I entered college, the Bretton Woods dollar-exchange system collapsed, basically because America’s inflationary monetary and budget policies during the Vietnam War era were destabilizing the world economy. The United States abandoned its monetary links with gold on August 15, 1971. Inflation soared worldwide as the major market economies searched for a new approach to the global monetary system. The situation was further complicated when the oil-exporting countries sharply raised oil prices in the midst of the global inflation. The surge of oil prices during 1973–1974 led to the combination of economic stagnation and inflation, christened the “Great Stagflation.” The subject of stagflation became a major focus of my own early research.1
The crisis of the world economy during the 1970s proved to be a decisive break in U.S. economic and political governance. The optimism concerning the mixed economy was assailed. Within academia