The End of Normal One Growth Now and Forever To begin to understand why the Great Financial Crisis broke over an astonished world, one needs to venture into the mentality of the guardians of expectation--the leadership of the academic economics profession--in the years before the crisis. Most of today''s leading economists received their formation from the late 1960s through the 1980s. But theirs is a mentality that goes back further: to the dawn of the postwar era and the Cold War in the United States, largely as seen from the cockpits of Cambridge, Massachusetts, and Chicago, Illinois. It was then, and from there, that the modern and still-dominant doctrines of American economics emerged. To put it most briefly, these doctrines introduced the concept of economic growth and succeeded, over several decades, to condition most Americans to the belief that growth was not only desirable but also normal, perpetual, and expected. Growth became the solution to most (if not quite all) of the ordinary economic problems, especially poverty and unemployment. We lived in a culture of growth; to question it was, well, countercultural. The role of government was to facilitate and promote growth, and perhaps to moderate the cycles that might, from time to time, be superimposed over the underlying trend.

A failure of growth became unimaginable. Occasional downturns would occur--they would now be called recessions--but recessions would be followed by recovery and an eventual return to the long-term trend. That trend was defined as the potential output, the long-term trend at high employment, which thus became the standard. To see what was new about this, it''s useful to distinguish this period both from the nineteenth-century Victorian mentality described by Karl Marx in Capital or John Maynard Keynes in The Economic Consequences of the Peace, and from the common experience in the first half of the twentieth century. To the Victorians, the ultimate goal of society was not economic growth as we understand it. It was, rather, investment or capital accumulation. Marx put it in a phrase: "Accumulate, accumulate! That is Moses and the Prophets!" Keynes wrote: "Europe was so organized socially and economically as to secure the maximum accumulation of capital . Here, in fact, lay the main justification of the capitalist system.

If the rich had spent their new wealth on their own enjoyments, the world would have long ago found such a régime intolerable. But like bees they saved and accumulated" (Keynes 1920, 11). But accumulate for what? In principle, accumulation was for profits and for power, even for survival. It was what capitalists felt obliged to do by their economic and social positions. The purpose of accumulation was not to serve the larger interest of the national community. It was not to secure a general improvement in living standards. The economists of the nineteenth century did not hold out great hopes for the progress of living standards. The Malthusian trap (population outrunning resources) and the iron law of wages were dominant themes.

These held that in the nature of things, wages could not exceed subsistence for very long. And even as resources became increasingly abundant, the Marxian dynamic--the extraction of surplus value by the owners of capital--reinforced the message that workers should expect no sustained gains. Competition between capitalists, including the introduction of machinery, would keep the demand for labor and the value of wages down. Marx again: "Like every other increase in the productiveness of labour, machinery is intended to cheapen commodities, and, by shortening that portion of the working-day, in which the labourer works for himself, to lengthen the other portion that he gives, without an equivalent, to the capitalist. In short, it is a means for producing surplus-value." (Marx 1974, vol. 1, ch. 15, 351) Yet living standards did improve.

That they did so--however slowly, as Keynes later noted--was a mystery for economists at the time. The improvement might be attributed to the growth of empires and the opening of new territories to agriculture and mining, hence the importance of colonies in that era. But in the nineteenth century, economics taught that such gains could only be transitory. Fairly soon population growth and the pressure of capitalist competition on wages would drive wages down again. Even a prosperous society would ultimately have low wages, and its working people would be poor. This grim fatalism, at odds though it was with the facts in Europe and America, was the reason that economics was known as the "dismal science." Then came the two great wars of the twentieth century, along with the Russian Revolution and the Great Depression. Human and technical capabilities surged, and (thanks to the arrival of the age of oil) resource constraints fell away.

But while these transformations were under way, and apart from the brief boom of the 1920s, material conditions of civilian life in most of the industrial countries declined, or were stagnant, or were constrained by the exigencies of wartime. The Great Depression, starting in the mid-1920s in the United Kingdom and after 1929 in the United States, appeared to signal the collapse of the Victorian accumulation regime--and with it, the end of the uneasy truce and symbiotic relationship between labor and capital that had graced the prewar years. Now the system itself was in peril. For many, the question then became: could the state do the necessary accumulation instead? This was the challenge of communism, which in a parallel universe not far away showed its military power alongside its capacity to inspire the poor and to accelerate industrial development. In some noncommunist countries, democratic institutions became stronger--as they tend to do when governments need soldiers--giving voice to the economic aspirations of the whole population. For social democrats and socialists, planning was the new alternative--a prospect that horrified Friedrich von Hayek, who argued in 1944 that planning and totalitarianism were the same. By the 1950s, communism ruled almost half the world. In the non-communist part, it could no longer be a question of building things up for a distant, better future.

Entire populations felt entitled to a share of the prosperity that was at hand--for instance, to college educations, to automobiles, and to homes. To deny them would have been dangerous. Yet the future also could not be neglected, and (especially given the communist threat) no one in the "free world" thought that the need for new investments and still greater technological progress was over. Therefore it was a matter of consuming and investing in tandem, so as to have both increased personal consumption now and the capacity for still greater consumption later on. This was the new intellectual challenge, and the charm, and the usefulness to Cold Warriors, of the theory of economic growth. The Golden Years From 1945 to 1970, the United States enjoyed a growing and generally stable economy and also dominance in world affairs. Forty years later, this period seems brief and distant, but at the time it seemed to Americans the natural culmination of national success. It was the start of a new history, justified by victory in war and sustained in resistance to communism.

That there was a communist challenge imparted both a certain no-nonsense pragmatism to policy, empowering the Cold War liberals of the Massachusetts Institute of Technology (MIT) and the RAND Corporation, while driving the free-market romantics of Chicago (notably Milton Friedman) to the sidelines. Yet few seriously doubted that challenge could or should be met. The United States was the strongest country, the most advanced, the undamaged victor in world war, the leader of world manufacturing, the home of the great industrial corporation, and the linchpin of a new, permanent, stable architecture of international finance. These were facts, not simply talking points, and it took a brave and even self-marginalizing economist, willing to risk professional isolation in the mold of Paul Baran and Paul Sweezy, to deny them. Nor were optimism and self-confidence the preserve of elites. Ordinary citizens agreed, and to keep them in fear of communism under the circumstances required major investments in propaganda. Energy was cheap. Food was cheap, with (thanks to price supports) staples such as milk and corn and wheat in great oversupply.

Interest rates were low and credit was available to those who qualified, and so housing, though modest by later standards, was cheap enough for whites. Jobs were often unionized, and their wages rose with average productivity gains. Good jobs were not widely open to women, but the men who held them had enough, by the standards of the time, for family life. As wages rose, so did taxes, and the country could and did invest in long-distance roads and suburbs. There were big advances in childhood health, notably against polio but also measles, mumps, rubella, tuberculosis, vitamin deficiencies, bad teeth, and much else besides. In many states, higher education was tuition-free in public universities with good reputations. Though working-class white America was much poorer than today and much more likely to die poor, there had never been a better time to have children. And there never would be again.

Over the eighteen years of the baby boom, from 1946 to 1964, the fruits of growth were matched by a rapidly rising population to enjoy them. It wa.