Moments in Time

This page provides the historical context behind the NAE.

    General Economic Notions:
    The more we produce the more we can have, and the better off we are as a result.
    The stuff we produce is called "output," and how much we produce is the size of our economy.
    Output (or, the size of our economy) is measured as GNP or GDP.

    Cockamamie Terms & Definitions from the '60s:
  • THE FULL EMPLOYMENT BUDGET:  A budget designed to remain in deficit until the economy is growing at a "full employment" pace. (In the 1960s, "full employment" meant 4% unemployment. In the 1980s it meant 6%.)
  • POTENTIAL GNP: A measure of how much stuff we'd be producing in a perfect world. (The "full employment" budget would come into balance when actual GNP and "Potential GNP" were equal.)

 A New Era

"The high tide of the [Federal Reserve] System was undoubtedly the rest of the [nineteen-] twenties... It did not prevent fluctuations in the economy but it did contribute to keeping them mild.... [and] it avoided inflation....  It was widely trumpeted that a new era had arrived, that the business cycle was dead, dispatched by a vigilant Federal Reserve System." [Milton & Rose Friedman, Free to Choose. ch3, p.78]


Keynes, 1926

"As things are now, we have nothing to look forward to except a continuance of Conservative Governments ... until their mistakes have mounted up to the height of disaster." [J.M.Keynes, Liberalism and Labour, 1926. In Essays in Persuasion]



Accepting the Republican presidential nomination in August, 1928, Herbert Hoover declared, "We in America today are nearer to the final triumph over poverty than ever before in the history of any land." [William E. Leuchtenburg, Franklin D. Roosevelt and the New Deal. Chapter 1, p.16]

"The proportion of actual to eligible voters increased significantly when, in 1928, they had an opportunity to vote for a qualified man." [Will Durant, The Pleasures of Philosophy. p.296]

"In early September, 1929, the stock market broke, rallied, then broke again. By early October, Radio had tumbled 32 points, General Electric over 50 points, Steel almost 60 points. Still there was no panic. 'Stock prices,' announced Irving Fisher of Yale, in what was to become a classic statement, 'have reached what looks like a permanently high plateau.'" [William E. Leuchtenburg, The Perils of Prosperity. Chapter XIII, page 244.]



"The popular view is that the depression started on Black Thursday, October 24, 1929, when the New York stock market collapsed. After several intermediate ups and downs, the market ended up in 1933 at about one-sixth the dizzying level of 1929." [Milton & Rose Friedman, Free to Choose. Chapter 3, p.79.]


Keynes, 1934

"I see the problem of recovery, accordingly, in the following light: How soon will normal business enterprise come to the rescue? What measures can be taken to hasten the return of normal enterprise? On what scale, by which expedients and for how long is abnormal government expenditure advisable in the meantime? For this, I think, is how the administration should view its task." [John Maynard Keynes in The New York Times, 10 June 1934.]


Keynes proposed massive government spending to revive a withering private sector, but he proposed it as a temporary measure to get us out of the Great Depression.

Keynes, 1936

"The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones...." [John Maynard Keynes, The General Theory of Employment Interest and Money, 1936. Preface, p.viii.]



"Keynes's theoretical analysis of the new social and economic reality is a masterpiece that will endure." [Peter Drucker, Men, Ideas & Politics. Chapter 12, pp.235-36.

" the Great Depression, economists wrote about unemployment as if it were a bad hailstorm; then the Keynesian revolution gave some hope that nations could do something about the 'economic blizzards' that had previously been considered as random as the weather." [Adam Smith, The Roaring 80s. page 183, expressing Kenneth Boulding's view.]

"…in experimenting in this direction, we shall have carefully to watch our step if we are to avoid making all economic activity progressively more dependent on the direction and volume of government expenditure." [F.A.Hayek, The Road to Serfdom, Chapter 9, p.135]



"Congress adopted the Keynesian course in 1946, when it passed the Employment Act....' [Time magazine, 31 Dec 1965.]

"By proper use of monetary and fiscal policies, nations today can successfully fight off the plague of mass unemployment and the plague of inflation." [Paul A. Samuelson, Economics. 1958 edition, Chapter 29, p.588.]

"In Washington the men who formulate the nation's economic policies have used Keynesian principles not only to avoid the violent cycles of prewar days but to produce a phenomenal economic growth and to achieve remarkably stable prices." [Time magazine, 31 Dec 1965.]



"Though Keynes is the figure who looms largest in these recent changes, modern-day economists have naturally expanded and added do his theories, giving birth to a form of neo-Keynesianism.... As Keynes might have put it: Keynesianism + the theory of growth = The New Economics." [Time magazine, 31 Dec 1965.]

"[President John F.] Kennedy's economists, led by Chief Economic Adviser Walter Heller, presided over the birth of the New Economics as a practical policy and set out to add a new dimension to Keynesianism. They began to use Keynes's theories as a basis not only for correcting the 1960 recession... but also to spur an expanding economy to still faster growth. Kennedy was intrigued by the 'growth gap' theory...." [Time magazine, 31 Dec 1965.]


 It was not Keynes who proposed this theory of growth.

It was not Keynes who invented the new economics of the 1960s.

It was not Keynes who invented Potential GNP.

A New Era

"Says [President Lyndon Baines Johnson's] Budget Director Charles L. Schultze: 'We can't prevent every little wiggle in the economic cycle, but we now can prevent a major slide.'" [Time magazine, 31 Dec 1965.]

"Nowadays, [President] Johnson is not only practicing Keynesian economics, but is pursuing policies of pressure and persuasion that go far beyond anything Keynes ever dreamed of.... Some Keynesians believe that these policies violate Keynes's theories...." [Time magazine, 31 Dec 1965.]

"The economic climate during the postwar period from 1946 to the mid-1960's was favorable, often exuberant" [Sidney Homer & Richard Sylla, A History of Interest Rates. p.367]


It was not Keynes who invented the full-employment budget. Rather, he explicitly opposed such a notion, writing: "It is also obvious... that the employment of a given number of men on public works will... have a much larger effect... at a time when there is severe unemployment, than it will later on when full employment is approached." [The General Theory, Chapter 10, p.127]

The  End of an Era

"That was the high point. The dragons of inflation and unemployment began to snort in their caves, and 'stagflation,' an awkward beast, a hybrid of inflation and stagnation, roamed without serious natural enemies. Cynics said there were two sure signs that the Keynesian era was waning. One was that Time magazine put Keynes on its cover...." [Adam Smith, Paper Money. chapter 2, page 41.]

"His conclusions from this analysis proved wrong...; the economic policies which gave him his reputation and influence have failed." [Peter Drucker, Men, Ideas & Politics. Chapter 12, p.236.]

Keynesianism "expired from an inflationary overheating." [The Wall Street Journal, 23 feb 1995. p.a12]

"The fatal flaw" of Keynesian theory was "its inability to provide full employment and stable prices at the same time". [Melville J. Ulmer in New Republic, April 24, 1971]

"You have to have lived in the 1950s and 1960s to have experienced a good economy." [Jude Wanniski in Reader's Digest, Feb 1995, p.49]


The Time magazine article is available at this link:,9171,842353,00.html

The policies of Keynes were demonstrated to work. Then, in the 1970s (three decades after the death of Keynes) economists, unable to resolve a problem of their own making, rejected the teachings of their old master.


"Keynesianism was the economics of the world from around 1940 through the 1970s, but in the 1960s and 1970s came this extraordinary and quite unexpected inflation. And that took the bloom off the [Keynesian] rose. The Keynesian schema, which had tremendously wide acceptance, had no theory of inflation.... Since then, no new view that anyone can agree on has emerged, and there has been a vacuum in terms of a defining picture of what the hell economics is.... In the history of economic thought there has never been such a prolonged period of intellectual disagreement." [Robert Heilbroner in Forbes, April 22, 1996]

"In the 1970s and 1980s, when stagflation occurred, it became obvious that the relationship between inflation and employment levels was not necessarily stable.... Macroeconomists became more skeptical of Keynesian theories, and the Keynesians themselves reconsidered their ideas in search of an explanation of stagflation." From [5:04 AM 1/19/2009]

"Unfortunately, macroeconomics has been in utter disarray since the Keynesian consensus broke down in the 1970s." [Alan S. Blinder. Hard Heads, Soft Hearts. Page 67]

"Back in more serene times, a high level of debt was not considered a good thing.... But in the upside-down world of the Roaring '80s, debt has suddenly become a good thing...." [Adam Smith, The Roaring '80s, p.199]

"One hopes we are doing the right thing; one worries what may happen if we are not. Perhaps we are witness to a repeat of history. The last sustained period of Republican control of Congress stretched from 1919 to 1931 and ended with the Great Depression." [The Wall Street Journal, Jan 5, 1995, A16 table]


No theory of inflation. This is where the new Arthurian economics comes in.

No explanation of stagflation.



"Our economy, I think, still the fundamentals of our economy are strong." [Senator John McCain, 15 Sept 2008]



"On September 19, 2008, Paulson called for the U.S. government to use hundreds of billions of Treasury dollars to help financial firms cleanup nonperforming mortgages that threaten the liquidity of those firms. Due to his leadership and public appearances on this issue, the press labeled these measures the 'Paulson financial rescue plan' or simply the Paulson Plan." From [5:24 AM 1/19/2009]