Longtime University of Minnesota economics professor and 2004 Nobel laureate Edward Prescott is dead. So is the 1995 laureate, Robert Lucas, a University of Chicago professor who had a long research relationship with the Minneapolis Federal Reserve. Yet if either were living, the monetary policy farce that played out in recent weeks might have prompted both to repeat Simon Bolivar’s dying lament, “We have plowed the sea.”

Bolivar liberated South America from Spain but died as the new nations lapsed into dictatorships. Similarly, brilliant economists strove to refute economic theories they saw damaging national economies, bringing misery to tens of millions. Yet after 25 years of work in which they had largely won the intellectual battle, the U.S. Federal Reserve and other central banks have returned to discredited practices with a vengeance.

These policies involved central bank attempts to micromanage economies by juggling money supplies and thus interest rates. This was to minimize fluctuations, whether booms or recessions. The widespread belief that the Fed both can and should create an economic “soft landing” in 2024 is one example. So are calls for the Fed to flood markets with money when stock markets fall 3 percent. Both prove the body of economic thought called “rational expectations” is dead as a doornail. On the whole that intellectual sea change is bad, but is only part of why we are on a dangerous path.

One needs a quick review of economic thought to understand this.

Four centuries ago, people believed a nation’s prosperity depended on government regulating all economic activity. We wear “denim” jeans because in France, weaving sturdy blue cloth except in the city of Nimes was outlawed. Such regulation extended to all products and all trade.

Scottish philosopher Adam Smith forcefully rebutted this in his 1776 opus “The Wealth of Nations.” If people interacted freely about making and selling or buying and using what they wanted, such market activity taken together would allocate scarce resources efficiently. More human needs and wants would be met without government action. This was one of the most important insights in the history of human thought.

If anything, Smith was a keen, skeptical observer. He saw ways markets could fail. They were not perfect. But market-based economies were better than all alternatives.

However, followers who formalized his ideas more systematic were not so reflective. By the mid-1850s, prevailing doctrine was that any government “interference” at all in market activities made society worse off. This era was “classical” economics.

In following decades, expressing economic ideas in graphs and mathematical equations became common. British economist Alfred Marshall invented the supply-demand diagram that bedeviled millions of students ever since. The “neo-classical” era had begun. As before, government should play little role.

Some economists argued Social Darwinism. Poverty that appalled Charles Dickens or Victor Hugo was necessary and healthy for society. Deaths of the poor eliminated the least fit and strengthened society.

Not everyone went that far. But the belief that government should not interfere in the economy at either the “micro” level of the household or firm nor at “macro” national levels was accepted doctrine for a century.

The Great Depression of the 1930s in which output, employment and trade collapsed shook faith in this conventional wisdom. Communist dictators like Stalin or fascists like Hitler gained millions of followers. Free markets stood at a crossroads if not the brink of a cliff.

In 1936, however, British economist John Maynard Keynes challenged conventional thought. While free markets were good generally, there were times when government actions were vital. These included both fiscal ones, governments varying taxing and spending. Monetary ones, jockeying money supply and thus interest rates, fell to central banks. Harmful recessions avoided. Prices could be kept constant — no inflation.

Governments had to cut taxes and raise spending to stop recessions. The central bank had to push down interest rates by increasing the money supply.

If inflation reared, governments must cut spending and raise taxes. The central bank had to constrict the money supply to raise interest rates. Problems solved!

It was World War II rather than Keynesian policies that ended the Depression. After the war, however, Keynesian policies soon dominated economic teaching and policies. By 1960, all popular textbooks and governments of all industrialized countries were Keynesian. University of Minnesota professor Walter Heller was the economic guru for President John Kennedy. His “dream team” of supporting economists included two eventual Nobelists. With the Cold War, the “space race,” solid-state electronics, jetliners and the Vietnam War, the U.S. economy boomed. France was in its “glorious 30” years of rapid growth, as were Germany and Japan. Even obsolescent Britain swung in culture and incomes. Economic nirvana had arrived.

In the 1970s, however, that rapidly crumbled. The Bretton Woods system of international payments collapsed. Thus U.S. farming boomed, but U.S. imports cheapened. Japanese goods including autos flooded the market. Industry turned into the “rust belt.” Oil prices soared, and inflation hit levels not seen for 25 years. Recessions with high unemployment became more frequent.

Keynes had seen inflation and recession as polar opposites. You had one or the other, but not both at the same time. But in the 1970s, “stagflation” combining stagnation and inflation became common.

Within economics, an anti-Keynes reaction gained strength. New thinkers saw successive cycles of Keynesian stomping on gas and brake pedals not just as futile, but as self-destructive. People, they argued, learned results of such jockeying. Each household rationally taking measures to best cope with the expected outcomes made the collective reactions of society as a whole directly counteract policy objectives.

This “rational expectations” school had grown out of the “monetarism” of Milton Friedman, a libertarian at the University of Chicago. It was Friedman who inspired conservatives like Margaret Thatcher to expunge Keynesianism from policy, not the new theorists. But university professors and research economists in think tanks and central banks joined the movement. Ph.D. dissertations based on Keynes became rare.

Nevertheless, belief in the need for economic micromanagement still dominated financial journalism and the Democratic Party. Few Republicans actually understood rational expectations theory but opposed government economic activism on historic principles.

Fed Chair Paul Volcker, a pragmatic monetarist, crushed inflation out of our economy. Alan Greenspan, his successor, was a libertarian favoring tight money and hands-off policies.

That takes us to the 1990s. Entering that decade, the U.S. economy was in the best shape in 30 years. Yet at its end, we began throwing that all away in reaction to external shocks and the predictable results of our own folly. That merits a column of its own.

St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.