William Vikrey, 1996 Nobel Memorial Award in Economics.

October 5, 1996

Much of the conventional economic wisdom prevailing in financial circles, largely subscribed to as a basis for government policy, and widely accepted by the media and the public, is based on incomplete analysis, contra factual assumptions, and false analogy. For instance, encouragement to saving is advocated without attention to the fact that for most people encouraging saving is equivalent to discouraging consumption and reducing market demand, and a purchase by a consumer or a government is also income to vendors and suppliers, and government debt is also an asset. Equally fallacious are implications that what is possible or desirable for individuals one at a time will be equally possible or desirable for all who might wish to do so or for the economy as a whole.

And often analysis seems to be based on the assumption that future economics output is almost entirely determined by inexorable economic forces independently of government policy so that devoting more resources to one use inevitably detracts from availability for another. This might be justifiable in an economy at chock-full employment, or it might be validated in a sense by postulating that the Federal Reserve Board will pursue and succeed in a policy of holding unemployment strictly to a fixed “ non-inflation- accelerating “ or “ natural “ rate. But under current conditions such success is neither likely nor desirable.

Some of the fallacies that result from such modes of thought are as follows. Taken together their acceptance is leading to policies that at best are keeping us in the economic doldrums with overall unemployment rtes stuck in the 5 to 6 percent range. This is bed enough merely in terms of the loss of 10 to 15 percent of our potential production, even if shared equitably, but when it translates into unemployment of 10,20, and 40 percent among disadvantaged groups, the further damages in terms of poverty, family breakup, school truancy an dropout, illegitimacy, drug use, and crime become serious indeed. And should the implied policies be fully carried out in terms of a “ balanced budget “, we could well be in for a serious depression.