George H. Blackford, Ph.D.

 Economist at Large

 Email: george(at)


It ain't what you don't know that gets you into trouble.

It’s what you know for sure that just ain't so.
Attributed to Mark Twain (among others)


Economic Papers
Political Essays

Where Did All The Money Go?


This book is available in Kindle and paperback format at for a nominal contribution to this website.


[T]he ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is . . . exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas . . . which are dangerous for good or evil.

John Maynard Keynes


A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.
Max Planck,

I am a state-school economist. By that I mean I had the privilege of teaching undergraduate economics students at state colleges and universities for some twenty years prior to 1987. I believe this gives me a perspective on the discipline of economics that is somewhat different from those who have not been equally blessed. It also helps that I left academia in 1987 and no longer had to deal with the revolution that had been taking place in the discipline for some time—a revolution that seems to have come to fruition in 2008.

I spent the twenty years leading up to 2008 reading mostly mathematics and statistics books and paid little attention to the real world other than to watch the news. The financial crisis that reached its climax in that year took me entirely by surprise. I knew there was a problem in the housing market and that economic nonsense had been at the center of the political debate in our country for over thirty years, but I assumed, naively it turned out, that cooler heads would prevail, and sound economic policies would always be enforced. I had no idea our financial institutions would be allowed to overextend themselves to such an extent they could bring down the economy of the entire world. After the crash I decided to set aside other pursuits and try to find out what had been going on in the world of economics since I left academia.

When I began this quest I was stunned to find the extent to which free-market ideological beliefs had taken over the discipline of economics. I have a decidedly pragmatic, nonideological view of the world derived from an inductive analysis of history and real-world observations aided by deductive reasoning. I emphatically reject any ideological view that begins with first principles and attempts to deduce from those principles the way the world works aided by inductive analysis when history and real-world observations are consistent with those principles and oblivious when they are not.

I consider myself neither a freshwater (Chicago School) nor a saltwater (Keynesian) economist, to use the terms coined by Robert Hall and recently revived to describe the most important division within the discipline of economics today, but rather one who attempts to find the truth and reject the nonsense wherever it may be. If anything, I identify with the traditions of Institutional Economics as exemplified by the writings of Thorstein Veblen, Karl Polanyi, and John Kenneth Galbraith though the influences of Adam Smith, John Stuart Mill, Alfred Marshall, John Maynard Keynes, Paul Samuelson, and Milton Friedman are hard to deny, especially since I was trained within the traditions of Neoclassical Economics.

My rejection of ideology means, of course, that I totally reject the ideological dogma that has defined freshwater economists since the 1930s. I have always seen their elevation of “economic liberalism and free markets above all else” and their relentless struggle against “government intervention” in the economic system as being incomprehensibly naïve if not outright paranoid.

As for saltwater economists, at least they are not hobbled by the ideological blindness created by the doctrinaire approach of freshwater economists, but their adherence to neoclassical methodology leads to a kind of streetlight effect as personified by the man who lost his keys in the park but looks for them under the streetlight because “this is where the light is.” Neoclassical methodology hinders the ability of saltwater economists to see problems and seek solutions that exist beyond the light shed by their neoclassical models. It seems to me this leads to a problem in their ability to understand how we got to where we are today and in formulating effective policies to deal with the root cause of the economic problems we face. This can be seen in the way their neoclassical models lead freshwater economists to recommend expansive monetary policy combined with increasing government expenditures and decreasing taxes to deal with the economic problems created by the housing bubble bursting. These policies, undoubtedly, would have solved our employment problem had they been forcefully applied, but they offer only a short-run solution to this problem, and they do not come to grips with the fundamental long-run problem we face today.

An extraordinary level of monetary expansion was absolutely essential to maintain the stability of the financial system during the crisis in 2008, but there is little reason to believe the quantitative easing that followed has made much of a positive contribution. Even if this policy is successful in reducing real rates of interest and thereby increasing investment and employment, the redistribution effects of the inflation this policy relies upon will do harm, and, in the end, could do more harm than good. This is fairly obvious even within the context of Saltwater Economics. (Stiglitz Summers)

As for increasing government expenditures and decreasing taxes, this is a formula for increasing government deficits and debt. While this may provide a short-run solution to our employment problem it also means increasing the transfer burden on taxpayers as increasing interest payments are transferred from taxpayers to government bondholders. Since government bondholders tend to be among the wealthiest members of our society, increasing government deficits is likely to have the added effect of increasing the concentration of income at the top of the income distribution. This is a problem that is not clearly understood by saltwater economists.

The fundamental difficulty faced by saltwater economists in attempting to understand the problems caused by an increase in the concentration of income is that the distribution of income does not appear as a variable in neoclassical models in a way that makes it possible to examine the effects of changes in the distribution of income within the economic system. In order to find answers to questions about how an increase in the concentration of income affects the economic system one must move out from under the light shed by neoclassical models and into the non-neoclassical park where the light is not so good. (Stiglitz) That’s where I have been for the past five years.

As I recount my journey through the non-neoclassical park in the pages below I come to the inescapable conclusion that it was the ideological faith in the self-adjusting powers of free markets on the part of policy makers over the past forty years that has brought us to where we are today. This faith led policy makers to 1) abandon the managed exchange system embodied in the Bretton Woods Agreement, 2) institute the tax cuts that have occurred since 1980, and 3) deregulate our financial system. These policy changes made it possible for our financial institutions to increase debt beyond any sense of reason. These policy changes also led to a rise in our current account deficits (increasing debt to foreigners) and to the financing of speculative bubbles which, when combined with the tax cuts that have occurred since 1980, led to the increase in the concentration of income at the top of the income distribution that we see today.

The resulting increase in the concentration of income has led us to what I consider to be the fundamental problem we face today. Namely, that 1) given the increased concentration of income, 2) the degree of mass-production technology that exists within our economic system, and 3) the size of our current account deficits it is impossible to sustain the mass markets (i.e., the large numbers of people with purchasing power) needed to fully employ our economic resources in the absence of a continual increase in debt relative to income.

This is a problem because continually increasing non-federal debt relative to income is unsustainable in the long run since it increases the transfer burden on debtors as income is transferred from debtors to creditors through the payment of interest. This means that eventually the system must breakdown as interest payments increase and non-federal debtors eventually find it impossible to meet their financial obligations. This leads to financial crises in which the financial system must be bailed out by the federal government to keep it from collapsing and bringing the rest of the economic system down with it.

Continually increasing federal debt relative to income is a problem because as interest payments on the federal debt grow they must eventually overwhelm the federal budget. This will make it more and more difficult to fund essential government programs such as Social Security, Medicare, Medicaid, and national defense. And most important, as was noted above, an increase in government debt is likely to contribute toward a further increase the concentration of income. This will make the long-run problem we face worse because a further increase in the concentration of income will increase the rate at which debt must increase relative to income in order to fully employ our resources. Even though the federal government has the legal right to print the money needed to pay the interest on its debt, this does not solve the problem since it is fairly certain that doing so on a continual basis will eventually destabilize the economic system.

As a result, I reject the saltwater policy of increasing government expenditures and decreasing taxes that offers a short-run solution to the problems we face in favor of a policy of increasing government expenditures and increasing taxes in a way that 1) reduces the concentration of income and our current account deficits, 2) deleverages the non-federal sector of our economy, and 3) stabilizes the federal debt relative to GDP.

This is the only long-run solution I have been able to find in the non-neoclassical park I have been wandering in for the past five years. It seems to me that if we do not increase both government expenditures and taxes in a way that stabilizes the federal budget and reduces the concentration of income and our current account deficits, our economic situation can only get worse. In the absence of an increasing debt relative to income our ability to produce will be diminished as our employment problem is solved through the transfer of resources out of those industries that produce for domestic mass markets (our most productive industries) and into those that serve the wealthy few. In addition, our diminished ability to produce through the utilization of mass-production technologies portends stagnation or a fall in the standard of living for the vast majority of our population.

This is the story I tell in the pages below, and, given the nature of the debate within the discipline of economics today, I see little reason to believe this story will change anyone’s mind. There is certainly no hope at all that it will change the minds of freshwater economists as this story flies in the face of their most firmly held ideological convictions. There is, of course, some hope it will motivate saltwater economists to include the distribution of income as a variable in their models in a way that allows them to investigate the effects of the concentration of income on the viability of mass-production technology in the absence of increasing debt. The only real hope, however, is with the young who have not yet formed the opinions that will—for better or for worse—serve them for the rest of their lives. It is to the young that I dedicate this eBook for it is with the young that our hope for the future lies.

This book is available in Kindle and paperback format at for a nominal contribution to this website.


Where Did All The Money Go?

How Lower Taxes, Less Government, and Deregulation Redistribute Income and Create Economic Instability




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