But my generation in more recent times thought we had transformed economics into “the cheerful science.” This was to be brought about by two reinforcing elements: (1) The efficiencies of a competitive market system would speed up the growth of productivity and thereby elevate the quality and duration of humane human life. (2) Equally important, those instabilities and inequalities inseparable from old-time pure capitalism can be moderated – moderated, not eliminated – by evidence-based government policies of central-bank macroeconomic controls cum tax and expenditure programs that lean against the winds of both excessive inflation and insufficient demands for job seekers.

A pathetic and unrealistic dream of utopian do-gooders? That was a view expressed by libertarian philosophers such as the late Austrian Friedrich Hayek and the late American Milton Friedman. However, economic historians, measuring the macroeconomic performances from 1950 to the present time on four continents, document a different story.

The ‘serfdom’ that both Hayek and Friedman feared would be the outcome from centrist Mixed Economy programs has turned out to be a popular way of life in many democracies. My Harvard mentor Joseph Schumpeter thought that what he called “capitalism in an oxygen tent” would stagnate. Not his first erroneous prediction.

Economic historians document happier scenarios. From the wee island of Mauritius off the African coast to the snowy fields of Finland or the semi-tropics of Eastern Asia, the Mixed Economy has alleviated poverty and lengthened life spans of improved quality. Far, far from perfection, yes. But almost like a controlled experiment in the biology lab, China and India now contrast beneficially with Mao’s China or Nehru’s India.

Their older antipathies to the market cost them dearly. And at the same time the advanced economies of Western Europe and North America gained naught from the deep sleeps of earlier India and China.

My readers might say, OK, if you were writing those words back in the 1990s. But the realities now – for 2008 and the coming few years – warn that America’s new financial engineering gimmicks have jammed up the whole financial system. Centuries ago, bubonic plague spared no one.

Today and tomorrow subprime shenanigans in mortgage and other lending may well foretell a long period of slump and even bankruptcies for many.

If lucky Americans find it hard even to contemplate such pessimism, Japanese observers might help clue them in. Before 1990, Japan had been in her “miracle” of fast development. Within only a few decades, she had grown from a poor, Asian level of living to second place to America as a world economy. In 1990, this came to an abrupt stop.

Older Japanese will remember Japan’s long, long post-World War I slump, from 1919 to beyond 1929. Some of that history repeated itself after two bubbles burst in 1989: the Nippon stock market crash and the bursting of Japan’s real estate bubble.

One can speak accurately of Japan’s subsequent ‘lost decade.’ That might be an understatement. From their overconfident view about a new Japanese pattern of corporate governance – with its decision-making by unanimity and its sought-for pattern of lifetime employment with one firm – there has been a long distance to fall.

Strange to say, when I lecture in various places in the US today, I detect similar beginnings of an American self-identity crisis. Of course, such tides do rise and ebb in recorded history. But this does not mean that all ups and downs are of the same amplitude or duration.

What, then, have the last few years done to dispel the complacencies of Economics the Cheerful Science described in my opening paragraphs?

I suspect that honest contemporary economists will be asking themselves increasingly: At the Bank of England and the Federal Reserve, did we become over-focused on the topic of “inflation targeting”?

Did the Bank of England forget that a Northern Rock Bank had no insurance for its depositors such as what US banks have had since the 1930s? And yet it watched, without raising an eyebrow, when Northern Rock was doing the stupid, risky things that gigantic Citibank, Bank of America and American Insurance Group were then doing.

Human nature always seeks a scapegoat. The jury, after hanging at random a few of us MIT creators of financial engineering temptresses, will have to pin major blame on the post-1980 Reagan Republican Party deregulators.

When lobbyists’ election gifts paralyzed their consciences, the Reagan-Bush-Bush crowd emasculated Securities Exchange Corporation controls against dishonest accounting practices. They had to know that if you dangle a loophole before a CEO – be he human or chimpanzee or robot – he will reach for it.

Millions around the world have been the victims. But most CEOs – at least those who don’t go to jail – can smile all the way to the bank after cashing in their golden-umbrella severance pay and stock options. Alas.

© 2008 Paul Samuelson. Distributed by Tribune Media Services, Inc.