The hu­mil­ity of mar­kets

The Washington Times Weekly - - Culture, Etc. -

The clash of eco­nomic ideas per­haps has never been this bit­ter. The pos­si­ble breakup of the eu­ro­zone may bring Europe into un­charted wa­ters, but the de­bate over the fu­ture of the Con­ti­nent is shaped by ideas that are at least a cen­tury old: re­straint in pub­lic fi­nance ver­sus eco­nomic stim­u­lus. John May­nard Keynes gig­gled: “Prac­ti­cal men, who be­lieve them­selves to be quite ex­empt from any in­tel­lec­tual in­flu­ence, are usu­ally the slaves of some de­funct econ­o­mist.”

Eco­nomics is a plu­ral­is­tic sci­ence, but there is a sin­gle key ques­tion that still un­der­pins the de­bates on eco­nomic pol­icy: What role, if any, should the govern­ment play in the econ­omy? Di­ver­gent an­swers to this ques­tion in­formed the great po­lit­i­cal ex­per­i­ments of the last cen­tury, from Rus­sian col­lec­tiviza­tion to Thatcherite pri­va­ti­za­tion in Bri­tain.

In “The Clash of Eco­nomic Ideas: The Great Pol­icy De­bates and Ex­per­i­ments of the Last Hun­dred Years,” Ge­orge Ma­son econ­o­mist Lawrence H. White pro­vides a mas­ter­ful treat­ment of the strug­gle be­tween dif­fer­ent ap­proaches and dif­fer­ent schools of thought. Mr. White’s book is an un­easy cock­tail: He beau­ti­fully mixes his­tory of eco­nomic think­ing, po­lit­i­cal his­tory and bites of bi­og­ra­phy (each chapter be­gins with a vi­gnette) that hu­man­ize econ­o­mists for his read­ers but also con­vey a sense of the real ex­cite­ment that re­search and pol­icy ad­vo­cacy can en­gen­der.

For Mr. White, the clash of eco­nomic ideas in the 20th cen­tury is best epit­o­mized by the in­tel­lec­tual strug­gle be­tween two men: John May­nard Keynes and Friedrich von Hayek. Mr. White’s book is re­spect­ful and fair to Keynes, but the au­thor — a lead­ing con­tem­po­rary pro­po­nent of the Aus­trian school — is firmly set in Hayek’s camp.

The cham­pi­ons of Cam­bridge and Vi­enna are aptly por­trayed in the first chapter of the book: Per­sonal friends, they both some­how were re­luc­tant con­verts to eco­nomics. It was the great Al­fred Mar­shall that “pestered” Keynes, then “a clever grad­u­ate math­e­mat­ics stu­dent,” to turn pro­fes­sional econ­o­mist, whereas Hayek read his first eco­nomic books in the trenches of World War I but was re­ally turned on to the sub­ject by Carl Menger’s “Prin­ci­ples of Eco­nomics.”

“Keynes as a young man, and Hayek as boy, lived through a re­mark­able pe­riod of eco­nomic growth that ac­com­pa­nied the rel­a­tively mar­ket-friendly poli­cies in the decades be­fore 1914,” Mr. White notes.

How­ever, their re­sponses to the col­lapse of the Euro­pean equi­lib­rium with the two world wars and to the Great De­pres­sion were po­lar op­po­sites.

Keynes ba­si­cally con­cluded that “the mar­ket econ­omy had col­lapsed on its own, had be­come trapped in a vi­cious cir­cle, and could not free it­self.” It needed, there­fore, govern­ment help. The over­all lack of de­mand leads to vol­un­tary un­em­ploy­ment, and thus to re­duce un­em­ploy­ment quickly, you need spe­cific govern­ment poli­cies.

Mr. White points out that Keynes’ ideas were not com­pletely novel when his “The Gen­eral The­ory of Em­ploy­ment, In­ter­est and Money” was pub­lished: “Many lead­ing and non-rad­i­cal econ­o­mists had pro­posed govern­ment spend­ing on pub­lic works pro­grams to re­lieve the un­em­ploy­ment of the early Great De­pres­sion.” How­ever, if those pro­pos­als al­ready were around, Keynes’ book ap­peared with pitch-per­fect tim­ing: The politi- cal classes wanted a ra­tio­nale for the poli­cies they al­ready were im­ple­ment­ing, and they thought it would be good to con­sol­i­date their vot­ing bases.

Hayek came from a dif­fer­ent back­ground. Whereas Keynes fo­cused mostly on la­bor mar­kets, Hayek’s ap­proach was “cap­i­tal­based macroe­co­nomics.” He re­flected on the chang­ing struc­ture of cap­i­tal­ist pro­duc­tion dur­ing the busi­ness cy­cle. This is why, at the time the De­pres­sion hit, Hayek’s pol­icy rec­om­men­da­tion “to let output and em­ploy­ment on their own as bank­rupt­cies and lay­offs re­leased work­ers and ma­chines to find more suit­able em­ploy­ments, was re­garded by many as a coun­sel of de­spair.”

Plan­ners’ mis­takes tend to be more ex­pen­sive than in­di­vid­u­als’ be­cause the con­se­quences of their fail­ures are wider in scope. Plan­ners also are less re­silient. Rather than al­ter their plans when proved wrong, they tend to twist facts to con­form to their no­tions. Today’s Euro­pean Union pro­vides a good il­lus­tra­tion of this phe­nom­e­non. The strug­gle of eco­nomic ideas is ul­ti­mately a philo­soph­i­cal bat­tle be­tween those who think in­di­vid­u­als are bet­ter judges of what’s best for them and those who think the govern­ment is.

Al­berto Min­gardi is direc­tor gen­eral of the Isti­tuto Bruno Leoni.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.