The humility of markets
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.