reallocating resources to newer, more productive ones. I read Schumpeter
in my twenties and always thought he was right, and I've watched the process
at work through my entire career.
The telegraph was a perfect illustration. By the time my friend Herbie
and I had set out as kids to learn Morse code in the late 1930s, the telegraph
industry was at its peak. Starting in the heyday of those quick-fingered operators
in the 1850s and 1860s, it had transformed the entire American
economy. By the late 1930s, well over half a million telegrams were being
sent per day, and the Western Union messenger boy was as familiar a sight
as the FedEx person is now. Telegrams tied together cities and towns across
America, compressing the amount of time it took businesses and people to
communicate, and connected U.S. industrial and financial markets to the
rest of the world. They were the way all important or urgent family and
business news arrived.
48
THE MAKING OF AN ECONOMIST
Yet despite this enormous success, the industry was on the verge of disappearing.
Those lightning-fast telegraph operators I'd idolized were already
long gone. Teletypewriters had replaced the old single-key transmission
equipment, and Western Union operators now were essentially typists who
relayed your message in English, not Morse. Learning Morse code had literally
become child's play.
Now telephones were the new growth business—they would displace
the telegraph as the best tool for remote communication. By the late 1950s
at Townsend-Greenspan, Bill Townsend might send a telegram to an old
client once in a while, but the telegraph no longer played any major role in
the firm. We used phones to maintain contact with clients between visits:
they were efficient, cost-effective, and therefore productive. I always felt
wistful about the artistry lost when the new technology put the Morse
code experts out of business. (Then again, it was they who had displaced
the Pony Express.)
I saw this pattern of progress and obsolescence repeat over and over.
During my consulting days, I had a ringside seat at the demise of the tin
can. The 1950s was the era of tuna casseroles and tinned soup; cooking dinner
for your family from canned and packaged food was a hallmark of the
suburban lifestyle, and a can opener was an essential tool in the modern
kitchen. Food manufacturers loved the tin can: it offered a way to pack
vegetables, meats, and beverages that allowed shipping over long distances
and then stocking over long periods. The old-fashioned grocery store, where
a clerk measured out the food a customer wanted to buy, never stood a
chance. It was replaced by self-service supermarkets that were more efficient
and offered lower prices.
Those tin cans of the fifties weren't literally made of tin, but rather tin-
plated steel, and the steelmakers I consulted for at Townsend-Greenspan
sold a lot of it. In 1959, it accounted for five million tons, or about 8 percent
of the steel industry's entire output. At that point, the industry was
hurting. A bitter nationwide strike had brought production to a standstill
for nearly four months, during which, for the first time, Big Steel found itself
facing major competition from rivals in Germany and Japan.
The aluminum industry was hurting too—the recession was squeezing
the profits of the three big producers, Alcoa, Reynolds, and Kaiser. Five mil
49
THE AGE OF TURBULENCE
lion tons a year was a lot of can sheet, and the market seemed too good an
opportunity to pass up. Aluminum cans, which were just then being developed,
were lighter and simpler in construction than steel cans—they required
two pieces of metal rather than three. Aluminum was also easier to
print on with colorful labeling. In the late 1950s it was already being used
to make the ends of containers for frozen juice concentrate. Then Coors
Brewing Company attracted a cult following by selling beer in seven-ounce
aluminum cans, instead of conventional twelve-ounce steel cans. The smaller
amount just seemed to add to the appeal, though the truth was that no one
had yet figured out how to manufacture full-size aluminum beer cans. But
by the early 1960s, the can makers had solved that puzzle.
The innovation that had the biggest impact was the pop-top, introduced
in 1963. It eliminated the need for "church key" can openers—and
pop-tops could be made only of aluminum. The biggest aluminum producer,
Alcoa, was my client; its CEO was looking for ways to diversify beyond basic
aluminum into new and profitable areas, much as Reynolds had done by
pioneering household aluminum foil. His executive vice president was a
zealot for cans: "Beer cans are the future of Alcoa!" he would say. And when
pop-tops came along, he and the CEO put their weight behind the idea.
The first major brewery to sell beer in pop-top cans was Schlitz. Others
quickly jumped on board and by the end of 1963, 40 percent of all U.S.
beer cans had aluminum pop-tops. The soft drink giants came next: Coca-
Cola and Pepsi both shifted to all-aluminum cans in 1967. The steel beverage
can went the way of the telegraph key, and money followed the innovation.
The shift to aluminum cans helped lift Alcoa's profits in the fall of 1966
to the highest level for any quarter in its seventy-eight-year history. And
in the hot stock market of the late sixties, investors flocked to aluminum
stocks.
For the steelmakers, losing the market for beer and soda cans was just
one step in a harrowing long-term decline. Until then, the United States
hadn't imported much steel, because the conventional wisdom was that
foreign steel was not up to American quality standards. But as the 1959
strike stretched into its second and then its third month, automakers and
other big customers had to search elsewhere. They discovered that some of
the steel coming in from Europe and Japan was first-rate, and that much of
50
THE MAKING OF AN ECONOMIST
it was cheaper. By the end of the 1960s, steel had lost its status as the icon
of American business, and the glamour had shifted to high-growth compa
nies like IBM. What Schumpeter called "the perennial gale of creative de
struction" was starting to hit Big Steel.
Though my work at Townsend-Greenspan was in demand, I was care
ful not to expand too fast. I focused instead on keeping our profit margin
high—on the order of 40 percent—and never becoming so dependent on
any single client or group that losing the account would jeopardize the
business. Bill Townsend completely agreed with this approach. He contin
ued to be the best partner I could imagine. Though I had him for only five
years—he died of a heart attack in 1958—we grew extraordinarily close.
He was like the ultimate benevolent dad. He insisted on dividing our prof
its equitably—by the end I was taking home a considerably greater share.
There was never any feeling of jealousy or competitiveness. After his death,
I bought out the stock from his children, but I asked their permission to
keep his name on the door. That felt right to me.
A
A
yn Rand became a stabilizing force in my life. It hadn't taken long for
us to have a meeting of the minds—mostly my mind meeting hers—
and in the fifties and early sixties I became a regular at the weekly gather
ings at her apartment. She was a wholly original thinker, sharply analytical,
strong-willed, highly principled, and very insistent on rationality as the
highest value. In that regard, our values were congruent—we agreed on the
importance of mathematics and intellectual rigor.
But she had gone far beyond that, thinking more broadly than I had
ever dared. She was a devoted Aristotelian—the central idea being that
there exists an objective reality that is separate from consciousness and ca
pable of being known. Thus she called her philosophy objectivism. And she
applied key tenets of Aristotelian ethics—namely, that individuals have in
nate nobility and that the highest duty of every individual is to flourish by
realizing that potential. Exploring ideas with her was a remarkable course
in logic and epistemology. I was able to keep up with her most of the time.
Rand's Collective became my first social circle outside the university
and the economics profession. I engaged in the all-night debates and wrote
51
THE AGE OF TURBULENCE
spirited commentary for her newsletter with the fervor of a young acolyte
drawn to a whole new set of ideas. Like any new convert, I tended to frame
the concepts in their starkest, simplest terms. Most everyone sees the simple
outline of an idea before complexity and qualification set in. If we
didn't, there would be nothing to qualify, nothing to learn. It was only as
contradictions inherent in my new notions began to emerge that the fervor
receded.
One contradiction I found particularly enlightening. According to objectivist
precepts, taxation was immoral because it allowed for government
appropriation of private property by force. Yet if taxation was wrong, how
could you reliably finance the essential functions of government, including
the protection of individuals' rights through police power? The Randian
answer, that those who rationally saw the need for government would
contribute voluntarily, was inadequate. People have free will; suppose they
refused?
I still found the broader philosophy of unfettered market competition
compelling, as I do to this day, but I reluctantly began to realize that if there
were qualifications to my intellectual edifice, I couldn't argue that others
should readily accept it. By the time I joined Richard Nixon's campaign for
the presidency in 1968, I had long since decided to engage in efforts to
advance free-market capitalism as an insider, rather than as a critical pamphleteer.
When I agreed to accept the nomination as chairman of the president's
Council of Economic Advisors, I knew I would have to pledge to
uphold not only the Constitution but also the laws of the land, many of
which I thought were wrong. The existence of a democratic society governed
by the rule of law implies a lack of unanimity on almost every aspect
of the public agenda. Compromise on public issues is the price of civilization,
not an abrogation of principle.
It did not go without notice that Ayn Rand stood beside me as I took
the oath of office in the presence of President Ford in the Oval Office. Ayn
Rand and I remained close until she died in 1982, and I'm grateful for the
influence she had on my life. I was intellectually limited until I met her. All
of my work had been empirical and numbers-based, never values-oriented.
I was a talented technician, but that was all. My logical positivism had discounted
history and literature—if you'd asked me whether Chaucer was
52
THE MAKING OF AN ECONOMIST
worth reading, I'd have said, "Don't bother." Rand persuaded me to look at
human beings, their values, how they work, what they do and why they do
it, and how they think and why they think. This broadened my horizons far
beyond the models of economics I'd learned. I began to study how societies
form and how cultures behave, and to realize that economics and forecasting
depend on such knowledge—different cultures grow and create material
wealth in profoundly different ways. All of this started for me with Ayn
Rand. She introduced me to a vast realm from which I'd shut myself off.
53
THREE
ECONOMICS
MEETS POLITICS
E
E
conomic forecasting took Washington by storm in the 1960s. It
started when Walter Heller, a witty, erudite professor from Minnesota
who was chairman of the Council of Economic Advisors, told
President Kennedy that a tax cut would stimulate economic growth. Kennedy
resisted the idea—after all, he had come into office calling for self-
sacrifice by the American people. Also, under the circumstances, a tax cut
would mean a major change in fiscal policy, because the government was
already in deficit. The economy back then was governed by the model
of household finance—you were supposed to balance your budget and
make ends meet. One year, President Eisenhower actually apologized to the
American people for running a $3 billion deficit.
But after the Cuban missile crisis, with the 1964 election already on
the horizon, the economy was growing too sluggishly, and Kennedy finally
let himself be persuaded. The $10 billion tax cut he proposed to Congress
in January 1963 was dramatic—it is to this day the biggest tax cut since
World War II, adjusting for the size of the economy, and almost as big as all
three of George W. Bush's tax cuts combined.
ECONOMICS MEETS POLITICS
Lyndon Johnson signed the tax cut into law soon after Kennedy's death.
To everybody's delight, it had the effect that the Council of Economic Advisors
had promised: by 1965 the economy was thriving. Its annual growth
rate was more than 6 percent, right in line with Walter Heller's econometric
forecast.
The economists were jubilant. They thought they'd at last solved the
riddle of forecasting, and they weren't shy about congratulating themselves:
"A new era for economic policy is at hand," the CEA's Annual Report in
January 1965 declared. "Tools of economic policy are becoming more
refined, more effective, and increasingly freed from inhibitions imposed
by traditions, misunderstanding, and doctrinaire polemics." It said that
economic policymakers should no longer just respond passively to events
but should "foresee and shape future developments." The stock market
boomed, and at the end of the year Time magazine put John Maynard
Keynes on the cover (even though he'd been dead since 1946), declaring,
"We are all Keynesians now."*
I could scarcely believe it. I'd never been confident in making macroeconomic
