Written by Matt Morgan, The Daily Bell.com:
In 1885, Richard Ely founded the American Economic Association. He was 31 years old, freshly back from Germany with a PhD, and he had a clear purpose. The AEA was not a scholarly society. It was a lobbying operation. Its founding statement declared that the state was “an agency whose positive assistance is one of the indispensable conditions of human progress,” and its explicit goal was to displace the older laissez-faire economists from the profession.
This is the origin story of American academic economics. Not curiosity, or the pursuit of truth. It was a deliberate campaign to hand the profession to the state.
The credential you were taught to trust was built to produce a particular result.
The State’s Mechanism for Building the Credential Factory
Friedrich Hayek called intellectuals “second-hand dealers in ideas.” They are not, for the most part, original thinkers. They are distributors. They take ideas generated by a small number of theorists and move them through universities, journalism, and professional associations until those ideas feel like common sense.
This matters because whoever controls what gets distributed controls what eventually becomes policy. The state figured this out during the Progressive Era and has been exploiting it ever since. The mechanism is straightforward: the state raises the income and prestige of credentialed professionals through licensing and regulatory capture; credentialed professionals provide the intellectual cover for state expansion. Both sides profit, but the public pays.
The Trade
Ely was trained at Heidelberg, where he encountered the German Historical School, a movement that had declared war on deductive economic theory. The argument was that to be “genuinely scientific,” economics had to abandon general laws and focus instead on historical facts and institutions. This sounds like rigor. It was a clearing operation. Deductive theory, applied honestly, shows that free markets produce order and that government intervention produces distortions. Strip out the theory, and every intervention becomes defensible. The facts, without a framework, can be arranged to support almost anything. Murray Rothbard documents this operation in detail in The Progressive Era:
“Gustav Schmoller, the leader of the Historical School, proudly declared that his and his colleagues’ major task at the University of Berlin was to form ‘the intellectual bodyguard of the House of Hohenzollern.’”
Ely brought this approach to America and institutionalized it. At Johns Hopkins, he trained a generation of statist economists and social scientists, including Woodrow Wilson. He ran the AEA as a vehicle for statist commitment until his allies softened its public mission to attract laissez-faire members, at which point Ely left in protest. He moved to Wisconsin, where his circle became the intellectual engine of the Progressive governorship of Robert La Follette, pioneering welfare-state programs at the state level that would later become federal templates. The full account of Ely’s political empire-building is in Benjamin Rader’s biography.
During World War I, the deal reached its natural conclusion. Economists and statisticians from Ely’s network staffed the wartime planning bureaus. They were not there as scholars. They were there as administrators, drawing government salaries, exercising real power over the allocation of the national economy. After the war, this same network founded the National Bureau of Economic Research. The NBER is still the official body that dates American recessions. Its founding circle included former Marxists, General Electric statisticians, and associates of J.P. Morgan. It was built to produce a particular kind of economic consensus. It still does.
What the Credential Actually Certifies
The PhD is not an epistemological guarantee. It certifies that the recipient completed a course of study designed by people who were credentialed in the currently dominant paradigm and who have a professional interest in that paradigm’s continuation.
Hayek understood this better than almost anyone. In “The Intellectuals and Socialism,” he noted that the best people on the pro-market side become businessmen, engineers, and doctors. The best people on the anti-market side become intellectuals and scholars. This is not random. Academic careers are long, badly paid in the early years, and dependent on the approval of established scholars for advancement. The personality type suited to that path is different from the one suited to building a business. And the institutional incentives, once you are inside the academy, point consistently toward expanding the state’s role.
The state restricts entry into professions. Restricted entry raises incomes. Higher incomes attract people who owe their prosperity to the licensing regime and who have every incentive to defend it. The AMA is the cleanest example: it used the Flexner Report in 1910 to eliminate “irregular” medical schools and consolidate control of the profession. The framing was public safety. The result was a cartel. Physician incomes remain among the highest in the country. The supply of physicians remains politically restricted. These two facts are not unrelated.
The Arrangement Is Still Running
Ely’s specific network is long gone. The institutional pattern he helped to build, is not. Academic credentials still provide the cover that policy needs. Expert consensus still arrives with “the science says” attached. The professional associations still control who gets published, who gets cited, and who gets the government research contracts. The difference between 1910 and today is not structural. It is cosmetic.
The question to ask of any “scientific consensus” is not whether the people expressing it have credentials. It is whether those people’s incomes and careers depend on a particular answer. Ely had a PhD. He also had a political mission and a network of patrons who rewarded him for advancing it. The credentials and the mission are not in conflict. They were designed to work together.
That is the deal. It was struck in the 1880s. Nobody has cancelled it ever since.