THE CLASH OF ECONOMIC IDEAS
Chapter 1 The Turn Away from Laissez-Faire
Menger’s Principles of Economics had co-launched a marginalist-subjectivist revolution in economic theory, a revolution that provided the new ideas in Marshall’s synthesis.
Keynes wrote The General Theory of Employment, Interest, and Money. He argued that the economy’s current aggregate output is governed by its current aggregate demand, and that the most volatile component of aggregate demand is current investment spending. The reason for the Great Depression- investors had lost their nerve. Solution- Government must expand its spending to boost aggregate demand and particularly investment.
HAYEK
Market prices as signals that enable society to coordinate the efforts of millions of decentralized decision-makers.
Dispersed knowledge- allow the efficient use of resource-without central design.
Business-cycle theory of Hayek- the economic boom period is fueled by artificially cheap credit. The credit fueled boom inevitably ends in bust because the unsustainably low interest rate had lured investment into forms that turn unprofitable when, as it must, the interest rate rises toward equilibrium.
The road to serfdom- Hayek warns the dangers of central planning for personal and social freedom.
Keynes of the end of laissez-faire
Keynes denied the decentralized market forces were adequate for determining the volumes and allocations of saving and investment.
Keynes versus Hayek on the role of government
Keynes leads the view that government should take greater control over the economy. Hayek lead the view that government should interfere less with market forces.
Keynes rejected the intervention of government as Marxism. And hayek rejected anarcho-capitalist view.
Keynes suggested greater role for gvt in labor markets. Whether wages should be fixed by the forces of supply and demand in accordance with the orthodox theories of laissez-faire, or whether we should begin to limit the freedom of those forces by reference to what is fair and reasonable having regard to all the circumstances.
Political Economy in America’s Progressive Era
Progressive Era- a moment in 19 century in the US that changes the ideological perspective and government had a greater active role.
American Economic Association became the leading professional organization of economists, but among its original mission was to organize economists opposed to laissez-faire ideas.
Principle statements- the state is an agency whose positive assistance is one of the indispensable conditions of human progress.
Keynes was not the first to turn away from laissez-faire ideas
Marshall
Keynes- krugman
Ely, Commons, Sifwrisk, Pigou. Iving fisher, economic theorist
Alfred Marshall and Irving Fisher on laissez-faire
Marshall warned that supplanting private with gvt ownership of most industries would be going too far, but he endorse municipal ownership of public utilities as well as city land use planning. He made utilitarian case for moderate redistribution of income.
He noted with satisfaction the change from the extreme laissez faire doctrines of the classical economists to the modern doctrines of governmental regulation and social control over the previous decades.
Fisher noticed two flaws in the laissez-faire doctrine. 1. Anticipating keynes view that individuals acting separately are often too ignorant or to weak to do what is good for them, - social benefit of guidance by experts should trump the principle of letting individuals make their own decisions.
The second fallacy the failure to grapple with external effects- laissez-faire doctrinaires have overlooked in which the injury to society outweighs the benefit to the individual. They did not specify how gvt might remedy social racing- the suicidal effects of blindly following individual self-interest.
Gustave di Molinari- competing private police forces would provide better service than government police.
The global economy before 1914
Very free.
The Federal Reserve Act and the First World War
The scope of federal authority over money and banking was expanded by the Federal Reserve act of 1913.
Command and control methods would be a precedent for new deal programs
The British gvt under Prime Minister Lloyd undertook a similar wartime revolution of extensive state control over the economy.
The Russian Revolution of 1917
Strikes and military desertions led tsar Nicholas II to abdicate in Feb. The Bolsheviks led by Lenin overthrew the relatively liberal provisional gvt in Oct and faced the challenge of building a socialist economy inspired by Marx.
Marx and Engels insisted on a scientific socialism, and never spelled out how production would be organized under the socialism to come.
Experimentation is the very essence of science.
Marx added that production is to be consciously regulated by associated men in accordance with a settled plan.
How, according to what principles, would the nation centrally plan the new conditions of production?
Karl Marx
From the classical economists, Marx took two key ideas: the labor theory of value and the analysis of income shares along class lines. From these he derived an exploitation theory of profit. The capitalists’ income came not from any productive contribution but from surplus value derived by paying workers less than the whole value of what the workers produc
ed.
Keynes wrote The General Theory of Employment, Interest, and Money. He argued that the economy’s current aggregate output is governed by its current aggregate demand, and that the most volatile component of aggregate demand is current investment spending. The reason for the Great Depression- investors had lost their nerve. Solution- Government must expand its spending to boost aggregate demand and particularly investment.
HAYEK
Market prices as signals that enable society to coordinate the efforts of millions of decentralized decision-makers.
Dispersed knowledge- allow the efficient use of resource-without central design.
Business-cycle theory of Hayek- the economic boom period is fueled by artificially cheap credit. The credit fueled boom inevitably ends in bust because the unsustainably low interest rate had lured investment into forms that turn unprofitable when, as it must, the interest rate rises toward equilibrium.
The road to serfdom- Hayek warns the dangers of central planning for personal and social freedom.
Keynes of the end of laissez-faire
Keynes denied the decentralized market forces were adequate for determining the volumes and allocations of saving and investment.
Keynes versus Hayek on the role of government
Keynes leads the view that government should take greater control over the economy. Hayek lead the view that government should interfere less with market forces.
Keynes rejected the intervention of government as Marxism. And hayek rejected anarcho-capitalist view.
Keynes suggested greater role for gvt in labor markets. Whether wages should be fixed by the forces of supply and demand in accordance with the orthodox theories of laissez-faire, or whether we should begin to limit the freedom of those forces by reference to what is fair and reasonable having regard to all the circumstances.
Political Economy in America’s Progressive Era
Progressive Era- a moment in 19 century in the US that changes the ideological perspective and government had a greater active role.
American Economic Association became the leading professional organization of economists, but among its original mission was to organize economists opposed to laissez-faire ideas.
Principle statements- the state is an agency whose positive assistance is one of the indispensable conditions of human progress.
Keynes was not the first to turn away from laissez-faire ideas
Marshall
Keynes- krugman
Ely, Commons, Sifwrisk, Pigou. Iving fisher, economic theorist
Alfred Marshall and Irving Fisher on laissez-faire
Marshall warned that supplanting private with gvt ownership of most industries would be going too far, but he endorse municipal ownership of public utilities as well as city land use planning. He made utilitarian case for moderate redistribution of income.
He noted with satisfaction the change from the extreme laissez faire doctrines of the classical economists to the modern doctrines of governmental regulation and social control over the previous decades.
Fisher noticed two flaws in the laissez-faire doctrine. 1. Anticipating keynes view that individuals acting separately are often too ignorant or to weak to do what is good for them, - social benefit of guidance by experts should trump the principle of letting individuals make their own decisions.
The second fallacy the failure to grapple with external effects- laissez-faire doctrinaires have overlooked in which the injury to society outweighs the benefit to the individual. They did not specify how gvt might remedy social racing- the suicidal effects of blindly following individual self-interest.
Gustave di Molinari- competing private police forces would provide better service than government police.
The global economy before 1914
Very free.
The Federal Reserve Act and the First World War
The scope of federal authority over money and banking was expanded by the Federal Reserve act of 1913.
Command and control methods would be a precedent for new deal programs
The British gvt under Prime Minister Lloyd undertook a similar wartime revolution of extensive state control over the economy.
The Russian Revolution of 1917
Strikes and military desertions led tsar Nicholas II to abdicate in Feb. The Bolsheviks led by Lenin overthrew the relatively liberal provisional gvt in Oct and faced the challenge of building a socialist economy inspired by Marx.
Marx and Engels insisted on a scientific socialism, and never spelled out how production would be organized under the socialism to come.
Experimentation is the very essence of science.
Marx added that production is to be consciously regulated by associated men in accordance with a settled plan.
How, according to what principles, would the nation centrally plan the new conditions of production?
Karl Marx
From the classical economists, Marx took two key ideas: the labor theory of value and the analysis of income shares along class lines. From these he derived an exploitation theory of profit. The capitalists’ income came not from any productive contribution but from surplus value derived by paying workers less than the whole value of what the workers produc
ed.
Chapter 2 The Bolshevik Revolution and the Socialist Calculation Debate
Lenin asked for the government of the Bolshevik revolutions about a checklist of concrete measures they might take, urging their most urgent and most extensive implementations.
The list went to say a lot of regulation they had to do in order to implement socialism, and the economic policy had to be improvised because there were no concrete guidelines form marx and engels.
The Bolsheviks make economic Policy
Marx suggests a plan rejecting capitalism through replacing it with a unitary state plan.
Bolsheviks quickly organized a central planning agency known as The Supreme Economic Council.
Nationalized the banks in 1917
Foreign trade became a state monopoly in 1918
All good were to be distributed by government rationing
In 1921 due to the starvation Lenin introduced the new economic policy, allowing market exchange,
5 year plan industrialization
Vienna 1920
Otto Bauer, guild socialism
Hayek- the desire to reconstruct the world that led many of us to the study of economics. Socialism told us that we had been looking for improvement in the wrong direction.
Mises
In economic policy, mises argued for free markets based on their beneficial practical results.
Mises’s critique of the socialist economy
Socialist didn’t addressed the basic problem imposed by scarcity, choosing how to produce
The socialist would not know how to combine resources to produce goods economically. Unable to calculate profit and loss. Socialism would create waste and privation, not prosperity.
To abolish private property in the means of production is to abolish competitive bidding by capitalists,
Soviet Shortages
Soviet union in practice failed to get consumer goods right. Failed to accurately price (and to allow makets to supply) food, clothing, and housing.
The need for input prices
Mises argued, they would still need guidance from market prices in producer goods to know how best to produce consumer goods.
Evaluate profitability by comparing dollar revenues to its dollar expenses.
Crusoe production versus specialized production and trade
Socialist face the problem of how to divide tasks among specialized production units, how to allocate resources among the, and how to direct them to best advantage.
Input is needed to communicate to each producer the other producers’ valuations for alternate uses of those inputs.
Only a market for producer goods “enables us to extend to all goods of a higher order the judgment of value” of producers.
Which production projects are worth it?
The market pricing process, driven by bidding from profit- seeking entrepreneus, assigns prices to inputs according to their anticipated value-added in producing consumer goods.
The profit test makes “intellectual division of labor possible”
Profit calculation allows for many descentralized production decision-makers.
Mises- descentralization in a world of scarcity “entails a kind of intellectual divison of labor, which would not be possible without some system of calculating production and without an economy.”
Why not valuation by labor input?
Marginal productivity theory of factor prices: the price of the productive input in a market where entrepreneurs competitively bid for it, reflects the value of the input’s marginal contribution to the revenue from output sales.
Classical labor theory of value: a good’s appropriate price is proportional to the necessary amount of labor time it embodies.
The planners simply assign appropriate prices in proportion to necessary labor time.
The labor theory of value is a false theory of price.
The labor theory of value and its problems
Marx- competition equalizes rates of return across investments.
The most fundamental flaw of the labor theory of value is its supposition that the price of a good reflects an intrinsic feature of the good, something infused during its production, rather than something in the minds of its buyers.
The problem of incentive under socialism
Factory managers who do not keep any profits have little incentive to think creatively or even to work hard at reducing waste in routine tasks.
There still remains the problem of measuring the result of economic activity in a socialist common wealth which does not permit of any economic calculation.
Oskar Lange’s response to Mises’s challenge
Lange proposed to guide a socialist economy using modern marginalist economic theory.
Oskar Lange
He was an official in Poland’s central planning efforts.
Lange’s answer to Mises
Prices are merely trade-off ratios, the “Terms on which alternatives are offered.”
Lange characterized the general logic of resource allocation as a mathematics problem.
1. Preference scale
2. Knowledge of the terms on which alternatives are offered
3. Knowledge of the amount of resources available.
How does the Socialist Planning Ministry gain the knowledge it needs?
1-3 are determined ultimate by the technical possibilities of transformation of one commodity into another, i.e. by the production functions.
Determining prices for inputs without markets
Set prices by trial and error.
Equation-solving captures what markets do, and that a board could know in real time the right set of equations to be solved, fully incorporating all of the economy’s tastes, least-cost production functions, and resource endowments.
Why prefer Socialism, if it merely replicates competitive markets?
Benefits of socialism according to Lange:
1. It can redistribute endowments, namely toward greater equality, “so as to attain the maximum social welfare”.
2. It can modify prices to correct for external effects
3. Eliminate monopoly pricing, in both ways approaching the ideal of perfect competition more closely than a market economy
4. Socialism is better able to foster technological progress.
To maximize the social utility derived from income, central planners are to equate the “marginal utility of income” across people.
Internalize externalities: raise price facing an actor wherever it falls short of the social cost of his action.
Lange didn’t explain how the Central Planning Board, would know or could use trial-error to discover, the precise magnitude of external effects so as to adjust prices appropriately.
A state-owned factory facing no competitive rivals has little or no incentive to go out on a limb by undertaking risky technological innovation.
Mises’s response to Lange
Completely taxing profits away would completely suppress entrepreneurial activity.
Hayek’s initial critique of market socialism and Lange’s letter in reply
Instructing producers to treat output and input prices as “given” and “constant” would actually block efficient production by eliminating rivalry among producers to treat output and input prices as “given” and “constant” would actually block efficient production by eliminating rivalry among producers, that is, the underbidding for customers and outbidding for inputs by lower-cost producers who seek to expand operations and attract more customers. Such rivalry is the main force by which “a truly competitive economy brings about the reduction of costs to the minimum discoverable”.
Bits of knowledge and hunches about lower-cost production techniques are scattered across many minds, waiting for the market process to assemble and test them. Central planning rules out the process of entrepreneurial discovery.
Key Information is dispersed
Each business owner knows “particular circumstances of time and place”. Tht others do not know.
It is a problem of the utilization of knowledge which is not given to anyone in its totality.
“the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place.
Who plans for whom?
Centralization of planning. Who is to do the planning?
Planning- direction of the whole economic system according to one unified plan
Competition- decentralized planning by many separate persons.
Markets coordinate decentralized plans through price signals
How do we get current users to cut back on the least valuable uses?
The list went to say a lot of regulation they had to do in order to implement socialism, and the economic policy had to be improvised because there were no concrete guidelines form marx and engels.
The Bolsheviks make economic Policy
Marx suggests a plan rejecting capitalism through replacing it with a unitary state plan.
Bolsheviks quickly organized a central planning agency known as The Supreme Economic Council.
Nationalized the banks in 1917
Foreign trade became a state monopoly in 1918
All good were to be distributed by government rationing
In 1921 due to the starvation Lenin introduced the new economic policy, allowing market exchange,
5 year plan industrialization
Vienna 1920
Otto Bauer, guild socialism
Hayek- the desire to reconstruct the world that led many of us to the study of economics. Socialism told us that we had been looking for improvement in the wrong direction.
Mises
In economic policy, mises argued for free markets based on their beneficial practical results.
Mises’s critique of the socialist economy
Socialist didn’t addressed the basic problem imposed by scarcity, choosing how to produce
The socialist would not know how to combine resources to produce goods economically. Unable to calculate profit and loss. Socialism would create waste and privation, not prosperity.
To abolish private property in the means of production is to abolish competitive bidding by capitalists,
Soviet Shortages
Soviet union in practice failed to get consumer goods right. Failed to accurately price (and to allow makets to supply) food, clothing, and housing.
The need for input prices
Mises argued, they would still need guidance from market prices in producer goods to know how best to produce consumer goods.
Evaluate profitability by comparing dollar revenues to its dollar expenses.
Crusoe production versus specialized production and trade
Socialist face the problem of how to divide tasks among specialized production units, how to allocate resources among the, and how to direct them to best advantage.
Input is needed to communicate to each producer the other producers’ valuations for alternate uses of those inputs.
Only a market for producer goods “enables us to extend to all goods of a higher order the judgment of value” of producers.
Which production projects are worth it?
The market pricing process, driven by bidding from profit- seeking entrepreneus, assigns prices to inputs according to their anticipated value-added in producing consumer goods.
The profit test makes “intellectual division of labor possible”
Profit calculation allows for many descentralized production decision-makers.
Mises- descentralization in a world of scarcity “entails a kind of intellectual divison of labor, which would not be possible without some system of calculating production and without an economy.”
Why not valuation by labor input?
Marginal productivity theory of factor prices: the price of the productive input in a market where entrepreneurs competitively bid for it, reflects the value of the input’s marginal contribution to the revenue from output sales.
Classical labor theory of value: a good’s appropriate price is proportional to the necessary amount of labor time it embodies.
The planners simply assign appropriate prices in proportion to necessary labor time.
The labor theory of value is a false theory of price.
The labor theory of value and its problems
Marx- competition equalizes rates of return across investments.
The most fundamental flaw of the labor theory of value is its supposition that the price of a good reflects an intrinsic feature of the good, something infused during its production, rather than something in the minds of its buyers.
The problem of incentive under socialism
Factory managers who do not keep any profits have little incentive to think creatively or even to work hard at reducing waste in routine tasks.
There still remains the problem of measuring the result of economic activity in a socialist common wealth which does not permit of any economic calculation.
Oskar Lange’s response to Mises’s challenge
Lange proposed to guide a socialist economy using modern marginalist economic theory.
Oskar Lange
He was an official in Poland’s central planning efforts.
Lange’s answer to Mises
Prices are merely trade-off ratios, the “Terms on which alternatives are offered.”
Lange characterized the general logic of resource allocation as a mathematics problem.
1. Preference scale
2. Knowledge of the terms on which alternatives are offered
3. Knowledge of the amount of resources available.
How does the Socialist Planning Ministry gain the knowledge it needs?
1-3 are determined ultimate by the technical possibilities of transformation of one commodity into another, i.e. by the production functions.
Determining prices for inputs without markets
Set prices by trial and error.
Equation-solving captures what markets do, and that a board could know in real time the right set of equations to be solved, fully incorporating all of the economy’s tastes, least-cost production functions, and resource endowments.
Why prefer Socialism, if it merely replicates competitive markets?
Benefits of socialism according to Lange:
1. It can redistribute endowments, namely toward greater equality, “so as to attain the maximum social welfare”.
2. It can modify prices to correct for external effects
3. Eliminate monopoly pricing, in both ways approaching the ideal of perfect competition more closely than a market economy
4. Socialism is better able to foster technological progress.
To maximize the social utility derived from income, central planners are to equate the “marginal utility of income” across people.
Internalize externalities: raise price facing an actor wherever it falls short of the social cost of his action.
Lange didn’t explain how the Central Planning Board, would know or could use trial-error to discover, the precise magnitude of external effects so as to adjust prices appropriately.
A state-owned factory facing no competitive rivals has little or no incentive to go out on a limb by undertaking risky technological innovation.
Mises’s response to Lange
Completely taxing profits away would completely suppress entrepreneurial activity.
Hayek’s initial critique of market socialism and Lange’s letter in reply
Instructing producers to treat output and input prices as “given” and “constant” would actually block efficient production by eliminating rivalry among producers to treat output and input prices as “given” and “constant” would actually block efficient production by eliminating rivalry among producers, that is, the underbidding for customers and outbidding for inputs by lower-cost producers who seek to expand operations and attract more customers. Such rivalry is the main force by which “a truly competitive economy brings about the reduction of costs to the minimum discoverable”.
Bits of knowledge and hunches about lower-cost production techniques are scattered across many minds, waiting for the market process to assemble and test them. Central planning rules out the process of entrepreneurial discovery.
Key Information is dispersed
Each business owner knows “particular circumstances of time and place”. Tht others do not know.
It is a problem of the utilization of knowledge which is not given to anyone in its totality.
“the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place.
Who plans for whom?
Centralization of planning. Who is to do the planning?
Planning- direction of the whole economic system according to one unified plan
Competition- decentralized planning by many separate persons.
Markets coordinate decentralized plans through price signals
How do we get current users to cut back on the least valuable uses?
Chapter 3 The roaring twenties and Austrian business cycle theory
Could the downturn have been avoided, or was there something about the boom years that destined them to come to an end?
The roaring 20’s
The greatly increased open market purchases of the reserve banks in the first half of 1927, and the nesuing reductions in discount schedules had brought about an extremely large growth in bank loans and record volume of corporate security issues, thereby financing a remarkable expansion of our capital equipment.
Pre Keynesian macroeconomics
Hayek thought that loose monetary policy had kept interest rates too low and thereby distorted production into an unsustainably top-heavy structure. What is loose monetary policy?
Keynes: loss of nerve by investors meant that investment spending failed to make up for too little consumption spending. How is this proved?
Keynes suggestions in particular easier monetary policy and an increase in gvt spending financed by borrowing.
The mises-hayek theory of the boom-bust cycle
Starts according to mises since the banking system expands the supply of loanable funds beyond the supply of voluntary savings, reducing its interest rate below the equilibrium value.
Mises policy was to avoid economic downturns, avoid creating the credit booms that precede them.
Hayek versus keynes’s treatise
Monetary expansion is the source of difficulty, because it distorts the interest rate.- hayek.
Forced saving- the diversion of economic activity toward more investment and less present consumption than the public prefers, which ocurrs because the monetary expansion goes disproportionately into new business loans.
The Hayekian triangle
Intertemporal equilibrium
The planned and actual real quantity of emerging consumption goods in each period equals the real quantity demanded at correctly anticipated prices and interest rates.
Why bust follows boom
Hayek’s policy prescription
Price level stabilization- hayek was against
In a growing economy, prices should fall
Because monetary expansion adds to the available supply of loanable funds, it reduces the interest rate below the rate that would otherwise prevail.
Eugen von bohm-bawerk’s theory of interest
Is determined by the interaction of savers’ time-preferences with the inverstors’ anticipated returns from time-consuming production projects.
The equilibrium interst rate coordinates saving and investment plans.
Mises, wicksell, and the british currency school
How is a systemb based on gold redeemability?
1. creation of checkable deposits
2. international standard- gold
uninterrupted acceleration would lead to a hyperinflation, any interruption would trigger the crisis.
The currency, free banking and banking school
Currency school proposed a strict monopoly of note-issue taking the right of issue away from country banks, and the imposition of a rule on the one remaining issuer.
Currency principle called for the national stock of banknotes to shrink one for one with gold outflows.
Free banking school they put all the blame for overissues on the bank of England.
The free banking school proposed to replace the bank of england’s monopoly with a system of competitive note-issue in London.
Law of the reflux: any excess notes, will leave the circulation through loan repayments before they are spent on anything else.
Criticisms of hayek’s theory
Of two sorts:
1.arguments to the effect that lengthening and shortening of the structure of production could not account for the variation in aggrefate output and employment over the cycle.
2. arguments rejecting the meaningfulness of the Jevons-bohm-bawerk-wicksell capital theory and its idea of shorter or longer production periods, and by implication its usefulness in explaining the business cycle.
Ricardo effect
Did Hayek and Robbins deepen the Great Depression
Hayek admitted his mistake and denied that in these circumstances, monetary counteractions, deliberate attempts to maintain the money strem, are appropiate.
The real bills doctrine versus the Austrian cycle theory
Real bills- are short term transferable ious issued by business firms to finance goods in the process of production.
Norm of stable nominal income called for expansionary monetary policy to offset the severe shrinkage of nominal income in the 1930-33 period.
The real bill doctrine, in contrast, implied that monetary contraction was appropiate to match the shrunken volume of real bills offered for discount in a period of shrunken economic activity.
Elastic credit had thus enabled the launching of unsustainable new investemnts, creating the unsustrainable boom. Policy based on the real bills doctrine was for hayek, not just a minor error. It was a principal source of the great depression the world was experiencing.
Chapter 4 the new deal and intitutionalist economics
Before 1935 many Progressives could and did admire aspects of fascism’s economic system, despite their distaste for its repression of civil liberties.
Franklin Roosevelt and the command-economy model
Fascism retains nominal private ownership of business but puts government in close control of major investment and production decisions.
Franklin Delano Roosevelt and the NRA
Goals were: recovery and reform.
The means: extensions of federal government control over the economy
Tugwell believed that the GD had been caused by industrial overproduction that had clogged markets, driven by myopic profit-seeking and abetted by the absence of any top down oversight of the economy to prevent such problems.
Underconsumption and J.A. Hobson
The unearned surplus results in a maldistribution of income. The maldistribution of income means excess saving. Excess saving leads to overinvestment. Overivesment, the product of excess saving, means inadequate purchasing power. This leads to economic breakdowns.
Economic and legal problems with the NRA and AAA
After the NIRA codes adoption, industrial production dropped sharply while prices continued to increase.
Program was reborn in 1938, as a soil conservation measure, with stronger crop-limitation and income-support features. It remains the basis for current U.S. farm policy.
Institutionalist Economics
Influenced the progressive era and the new deal. It was American most dominant school.
Tugwell’s background
Rexford tugwell became key economic policy adviser to Franklin Delano Roosevelt, He was influenced by USSR.
Greenbelt communities program: described as a quasi utopian urban developmet project that sought to construct new self-sufficient cities from the ground up.
The rejection of the classical economists meant the rejection of the doctrines of free international trade, laissez-faire and the self-regulating economy.
Simon Patten
An American student that studied his doctorate in germany and wsa impressed by welfare state, and state socialism.
He favored economic cooperation over competition.
Thorstein Veblen
The theory of leisure class (book) introduced the concepts of conspicuous consumption and pecuniary emulation.
Veblen charged that businessman characteristically restrict output to gain monopoly profit, obstructing the technological advancement of industry.
He suggested the economy would be more efficient if an industrial directorate manned by engineers controlled the commanding heights, rather than the economy bein guided by entrepreneurial competition and the price system.
American institutionalism and German Historicism
German historical school of economics led by gustav schmoller, politically opposed classical liberalism and methodologically opposed the abstract theorizing of the old classical and the new neoclassical economics.
Schmoller and menger engaged in a battle over methods.
Roscher, Knies and Hildebrand. Treating economics as a historical standpoint. They initiated a movement which principles were the following:
1. it discards the exclusive use of the deductive method and stresses the necessity of historical and statistical treatment.
2. It denies the existence of immutable natural laws in economics, calling attention to the interdependence of theories and institutions, and showing that different epoch or countries require different systems
3. It disclaims belief in the beneficence of the absolute laissez-faire system. It refuses to acknowledge the adequacy of a scientific explanation, based the assumption of self-interest as the sole regulator of economic action.
Institutionalism and socialism
Bismarck’s system was called the state socialism as distinct from the proletarian socialism of Marx or the communitarian socialism of Owen.
Veblen aimed not at establishing socialism but a reforming capitalism.
Ely called for collective ownership of arable lands, but doubted that centralized management would work well in agriculture.
Taylorism
An industrial engineering approach based on the work of Frederick Wisnlow Taylor. He found that labor productivity in an industrial firm can be improved by motion and time studies that lead to the redesign of tasks so as to eliminate unnecessary worker motions.
To discover or develop the most productively efficient methods requires the gradual substitution of science for “rule of thumb” throughout the mechanical arts.
Tugwell’s agenda was clear: stop relying on ineffective market mechanisms, and institute central planning to manage the coming abundance.
The principle of planning
Planning calls for abolition of business.
Tugwell’s vision would be taylorism in a larger scale.
Economy-wide central planning, aims to abolish the guidance of production by market prices.
Tugwell was sure that we need not rely on the profit motive for the management of factories.
The institutionalist legacy
Galbraith rejected the idea of reviving the german economy through decontrol of prices and allocations. He defended policies that would dispense with a free price system.
Stronger labor unions would provide countervailing power to big business, which previously had uncontested control over the economy.
He foresaw America runned by big business, big labor and federal government NRA corporativism.
Franklin Roosevelt and the command-economy model
Fascism retains nominal private ownership of business but puts government in close control of major investment and production decisions.
Franklin Delano Roosevelt and the NRA
Goals were: recovery and reform.
The means: extensions of federal government control over the economy
Tugwell believed that the GD had been caused by industrial overproduction that had clogged markets, driven by myopic profit-seeking and abetted by the absence of any top down oversight of the economy to prevent such problems.
Underconsumption and J.A. Hobson
The unearned surplus results in a maldistribution of income. The maldistribution of income means excess saving. Excess saving leads to overinvestment. Overivesment, the product of excess saving, means inadequate purchasing power. This leads to economic breakdowns.
Economic and legal problems with the NRA and AAA
After the NIRA codes adoption, industrial production dropped sharply while prices continued to increase.
Program was reborn in 1938, as a soil conservation measure, with stronger crop-limitation and income-support features. It remains the basis for current U.S. farm policy.
Institutionalist Economics
Influenced the progressive era and the new deal. It was American most dominant school.
Tugwell’s background
Rexford tugwell became key economic policy adviser to Franklin Delano Roosevelt, He was influenced by USSR.
Greenbelt communities program: described as a quasi utopian urban developmet project that sought to construct new self-sufficient cities from the ground up.
The rejection of the classical economists meant the rejection of the doctrines of free international trade, laissez-faire and the self-regulating economy.
Simon Patten
An American student that studied his doctorate in germany and wsa impressed by welfare state, and state socialism.
He favored economic cooperation over competition.
Thorstein Veblen
The theory of leisure class (book) introduced the concepts of conspicuous consumption and pecuniary emulation.
Veblen charged that businessman characteristically restrict output to gain monopoly profit, obstructing the technological advancement of industry.
He suggested the economy would be more efficient if an industrial directorate manned by engineers controlled the commanding heights, rather than the economy bein guided by entrepreneurial competition and the price system.
American institutionalism and German Historicism
German historical school of economics led by gustav schmoller, politically opposed classical liberalism and methodologically opposed the abstract theorizing of the old classical and the new neoclassical economics.
Schmoller and menger engaged in a battle over methods.
Roscher, Knies and Hildebrand. Treating economics as a historical standpoint. They initiated a movement which principles were the following:
1. it discards the exclusive use of the deductive method and stresses the necessity of historical and statistical treatment.
2. It denies the existence of immutable natural laws in economics, calling attention to the interdependence of theories and institutions, and showing that different epoch or countries require different systems
3. It disclaims belief in the beneficence of the absolute laissez-faire system. It refuses to acknowledge the adequacy of a scientific explanation, based the assumption of self-interest as the sole regulator of economic action.
Institutionalism and socialism
Bismarck’s system was called the state socialism as distinct from the proletarian socialism of Marx or the communitarian socialism of Owen.
Veblen aimed not at establishing socialism but a reforming capitalism.
Ely called for collective ownership of arable lands, but doubted that centralized management would work well in agriculture.
Taylorism
An industrial engineering approach based on the work of Frederick Wisnlow Taylor. He found that labor productivity in an industrial firm can be improved by motion and time studies that lead to the redesign of tasks so as to eliminate unnecessary worker motions.
To discover or develop the most productively efficient methods requires the gradual substitution of science for “rule of thumb” throughout the mechanical arts.
Tugwell’s agenda was clear: stop relying on ineffective market mechanisms, and institute central planning to manage the coming abundance.
The principle of planning
Planning calls for abolition of business.
Tugwell’s vision would be taylorism in a larger scale.
Economy-wide central planning, aims to abolish the guidance of production by market prices.
Tugwell was sure that we need not rely on the profit motive for the management of factories.
The institutionalist legacy
Galbraith rejected the idea of reviving the german economy through decontrol of prices and allocations. He defended policies that would dispense with a free price system.
Stronger labor unions would provide countervailing power to big business, which previously had uncontested control over the economy.
He foresaw America runned by big business, big labor and federal government NRA corporativism.
Chapter 5 The Great Depression and Keynes’s General Theory
Keynes ideas have been so widely accepted.
Keynes influence on policy was most famously confirmed when Richard Nixon, said “I a m a Keynesian in economics”.
Keynes central theme: the modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by the intervention and influence of the government.
The depths of the depression
From 1937-1938 industrial production fell by one-third.
Why was the economy languishing through the 1930s? a number of economic historian have cited government policies that hampered market adjustments and thereby delayed recovery.
Perverse economic policies.
To reestablish their desired free reserves, banks reduced the amount of deposits they created per dollar of reserves.
“sterilizing” gold inflows from abroad, offsetting the expansionary effect the inflows would normally have on bank reserves.
This worsen the recovery of the us.
Keynes’s diagnosis
Keynes said the market economy had collapsed on its own, had become trapped in a vicious circle, and could not free itself. It needed government help.
Saving as such was a problem: it is utterly harmful and misguided- the very opposite of the truth.
In Hayek’s theory the crisis was a result of credit expansion having allowed investment to outrun voluntary saving, so government policies to augment consumption demand at the expense of saving would only deepen the crisis.
Friedman and Schwartz offered a third diagnosis, their retrospective recovery prescription focused on restoring the level of the money stock.
Did Keynes “invent macroeconomics”?
Keynes was a monetary theory of production. He incorporated the theory of money into a theory of production and showed how what people did with their money could affect the level of production.
What was new in Keynes
What was new in the general theory was the disappearance of inherited past investment from the theory of what determines the volume of consumable output.
Propensity to consume
The paradox of thrift
An attempt by the public to save more will diminish total current expenditure, thereby reducing the level of current output, leaving unchanged the amount successfully saved out of shrunken incomes.
Ceteris paribus- paradox of thrift
Principle of acceleration: according to which investment falls in response to a decline in consumption spending, and consequently amplifies the decline via the multiplier effect.
The liquidity reference theory of interest
The interest rates clears the market for money balances- according to Keynes
Between the demand and the supply of money, demand for liquidity and the means of satisfying the demand.
Philips curve
Hayek versus keynes’s general theory
Consumption and investment represent alternative uses of the economy’s resources.
Full employment of resources implies a trade-off, a production possibilities frontier. More consumption means less investment and vice-versa.
Hayek statement of a trade-off “an increase in the demand for consumption goods will tend to decrease rather than increase the demand for investment goods”
Hayek- ithe interest rate clears the market for loanable funds, equating the quantity supplied with the quanity demanded.
Keynes focused on the labor markets. And hayek on the changing structure of capitalistic production during the business cycle.
Keynes versus “classical” economics
Keynes show that it was possible for the output of an economy to be below its potential, and the classical economists had never seen how this could be possible.
Keynes theory was not tied to the proposition that workers were being systematically underpaid
Malthus and Sismondi versus Ricardo and Say on underconsumption
Malthus- value of output=the value of total factor payments= wages + rents + profits.
Ricardo- the demand for consumer goods = the supply of consumer goods
Demand is only limited by the wil and power of purchase.
Say’s Law of Markets
“products are paid for with products”
vent for national industry
supply creates its own demand
say’s law implies that production is the limit to prosperity
it is the aim of good government to stimulate production, of bad government to encourage consumption.
An important caveat
Sales in general can be dull in the short run if there is an excess demand for money.
Keynes’s critique of say
By rejecting that the more sweeping grounds that nothing matches producers’ and consumers’ plans.
Keynes denied that the interest rate works to coordinate production over time with planned consumption, or investment with savings.
Frictional unemployment
Voluntary unemployment
Keynes remedy for unemployment was to raise consumer prices by pumping up nominal aggregate demand.
Depression theory versus business cycle theory
Keynes explained why the economy sometimes operates far below full employment. Keynes focused on a question that could be answered- how to create more employment?
Hayek considered the never mind why approach as an irresponsible search for a superficial fix.
Why Keynes’s theory caught on
Keynes gave people hope that something could be done to speed recovery from the Great Depression.
The general theory was published during the great depression, when there was a search for alternative frameworks for understanding economic crisis.
Keynesian economics after Keynes: the IS-LM model
Inflation and the Phillips curve
Phillips curve proposed a continuous trade off between inflation and unemployment with diminishing returns in either direction.
Post Keynesian and new Keynesian economics
Post Keynesian prefers the heterodox Keynes unalloyed with neoclassical microeconomics, they are influenced by institutionalism, Marxism, and the neo-ricardian economics.
The new Keynesian economists, seek to incorporate Keynesian type concepts like sticky prices and coordination failure into models having otherwise neoclassical microeconomic foundations.
Keynes influence on policy was most famously confirmed when Richard Nixon, said “I a m a Keynesian in economics”.
Keynes central theme: the modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by the intervention and influence of the government.
The depths of the depression
From 1937-1938 industrial production fell by one-third.
Why was the economy languishing through the 1930s? a number of economic historian have cited government policies that hampered market adjustments and thereby delayed recovery.
Perverse economic policies.
To reestablish their desired free reserves, banks reduced the amount of deposits they created per dollar of reserves.
“sterilizing” gold inflows from abroad, offsetting the expansionary effect the inflows would normally have on bank reserves.
This worsen the recovery of the us.
Keynes’s diagnosis
Keynes said the market economy had collapsed on its own, had become trapped in a vicious circle, and could not free itself. It needed government help.
Saving as such was a problem: it is utterly harmful and misguided- the very opposite of the truth.
In Hayek’s theory the crisis was a result of credit expansion having allowed investment to outrun voluntary saving, so government policies to augment consumption demand at the expense of saving would only deepen the crisis.
Friedman and Schwartz offered a third diagnosis, their retrospective recovery prescription focused on restoring the level of the money stock.
Did Keynes “invent macroeconomics”?
Keynes was a monetary theory of production. He incorporated the theory of money into a theory of production and showed how what people did with their money could affect the level of production.
What was new in Keynes
What was new in the general theory was the disappearance of inherited past investment from the theory of what determines the volume of consumable output.
Propensity to consume
The paradox of thrift
An attempt by the public to save more will diminish total current expenditure, thereby reducing the level of current output, leaving unchanged the amount successfully saved out of shrunken incomes.
Ceteris paribus- paradox of thrift
Principle of acceleration: according to which investment falls in response to a decline in consumption spending, and consequently amplifies the decline via the multiplier effect.
The liquidity reference theory of interest
The interest rates clears the market for money balances- according to Keynes
Between the demand and the supply of money, demand for liquidity and the means of satisfying the demand.
Philips curve
Hayek versus keynes’s general theory
Consumption and investment represent alternative uses of the economy’s resources.
Full employment of resources implies a trade-off, a production possibilities frontier. More consumption means less investment and vice-versa.
Hayek statement of a trade-off “an increase in the demand for consumption goods will tend to decrease rather than increase the demand for investment goods”
Hayek- ithe interest rate clears the market for loanable funds, equating the quantity supplied with the quanity demanded.
Keynes focused on the labor markets. And hayek on the changing structure of capitalistic production during the business cycle.
Keynes versus “classical” economics
Keynes show that it was possible for the output of an economy to be below its potential, and the classical economists had never seen how this could be possible.
Keynes theory was not tied to the proposition that workers were being systematically underpaid
Malthus and Sismondi versus Ricardo and Say on underconsumption
Malthus- value of output=the value of total factor payments= wages + rents + profits.
Ricardo- the demand for consumer goods = the supply of consumer goods
Demand is only limited by the wil and power of purchase.
Say’s Law of Markets
“products are paid for with products”
vent for national industry
supply creates its own demand
say’s law implies that production is the limit to prosperity
it is the aim of good government to stimulate production, of bad government to encourage consumption.
An important caveat
Sales in general can be dull in the short run if there is an excess demand for money.
Keynes’s critique of say
By rejecting that the more sweeping grounds that nothing matches producers’ and consumers’ plans.
Keynes denied that the interest rate works to coordinate production over time with planned consumption, or investment with savings.
Frictional unemployment
Voluntary unemployment
Keynes remedy for unemployment was to raise consumer prices by pumping up nominal aggregate demand.
Depression theory versus business cycle theory
Keynes explained why the economy sometimes operates far below full employment. Keynes focused on a question that could be answered- how to create more employment?
Hayek considered the never mind why approach as an irresponsible search for a superficial fix.
Why Keynes’s theory caught on
Keynes gave people hope that something could be done to speed recovery from the Great Depression.
The general theory was published during the great depression, when there was a search for alternative frameworks for understanding economic crisis.
Keynesian economics after Keynes: the IS-LM model
Inflation and the Phillips curve
Phillips curve proposed a continuous trade off between inflation and unemployment with diminishing returns in either direction.
Post Keynesian and new Keynesian economics
Post Keynesian prefers the heterodox Keynes unalloyed with neoclassical microeconomics, they are influenced by institutionalism, Marxism, and the neo-ricardian economics.
The new Keynesian economists, seek to incorporate Keynesian type concepts like sticky prices and coordination failure into models having otherwise neoclassical microeconomic foundations.
Chapter 6 The Second World War and Hayek’s road to serfdom
Professors from liberal education were told by the nazi government to change their ideologies, some refused and had to leave the country immediately.
The nazis come to power
The lack of rational cohesion is characteristic of fascism.
Nazi germany amounted ad hoc interventionism plus collectivist phraseology which leads, in practice, to a heavily monopolistic-interventionistic society adorned by terminological and phraseological ornaments, with an extensive fovernment control of prices and capital investments and large socialization of losses.
The interventionist dynamic in Nazi economic policy
German government restricted permission to trade domestic for foreign currency, in order to avoid officially devaluing the Reichsmark.
It was the full employment policy which started the movement, and it was the implementation of this policy which led step by step towards a centrally administered economy .
Werner Sombart and the German historical schools
A new social philosophy exemplified the incoherence of fascist economics.
Planning doctrines in Britain and America
The world of today is just interventionist chaos.
“we have a choice only between democratic planning and totalitarian regimentation”
The political implications of central planning
Hayek saw central planning not as a way to avoid loss of liberty, but as a path toward its loss.
Like Italian fascism and German National Socialism were collectivist doctrines, antithetical to classical liberal individualism.
Democracy and socialism have nothing in common but one word: equality. But notice the difference: while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude.
Beyond the socialist calculation debate
it turned into serfdom, a system of obligation and dependency on state planners akin to a medieval serf’s obligation and dependency on his feudal lord.
People will find themselves with less and less freedom of choice.
Why the worst get on top
It was the predictable result of trying to impose a central plan on people who wished to pursue varied plans of their own.
The tragedy of central planning unintended political results
The logic of politics told hayek that this failure would likely lead not to the abandonment of planning but to stronger efforts at planning, efforts that would leave ever less choice to people as consumers, workers and citizens.
The alternative path
The abandoned road (hayek) was individualism and classical liberalism, fundamental principles were free choice, the rule of law, and private property.
Free choice- that in the ordering of our affairs we should make as much use as possible of the spontaneous forces of society, and resort as little as possible to coercion
The rule of law- government in all its actions is bound by rules fixed and announced beforehand.
Individualism. It is the recognition of the individual as the ultimate judge of his ends, the belief that as far as possible his own views ought to govern his actions, that forms the essence of the individualist position.
The book’s reception
The road to serfdom sparked the beginning of a revival of classical liberal thinking.
The clash between planning and democracy arises simply from the fact that the latter is an obstacle to the suppression of freedom which the direction of economic activity requires.
Political blowback in United Kingdom
The Gestapo remark, considered an intemperate and even absurd exaggeration in the british context.
After winning, the labour party under Atlee, set to work implementing its version of socialist policies.
The nazis come to power
The lack of rational cohesion is characteristic of fascism.
Nazi germany amounted ad hoc interventionism plus collectivist phraseology which leads, in practice, to a heavily monopolistic-interventionistic society adorned by terminological and phraseological ornaments, with an extensive fovernment control of prices and capital investments and large socialization of losses.
The interventionist dynamic in Nazi economic policy
German government restricted permission to trade domestic for foreign currency, in order to avoid officially devaluing the Reichsmark.
It was the full employment policy which started the movement, and it was the implementation of this policy which led step by step towards a centrally administered economy .
Werner Sombart and the German historical schools
A new social philosophy exemplified the incoherence of fascist economics.
Planning doctrines in Britain and America
The world of today is just interventionist chaos.
“we have a choice only between democratic planning and totalitarian regimentation”
The political implications of central planning
Hayek saw central planning not as a way to avoid loss of liberty, but as a path toward its loss.
Like Italian fascism and German National Socialism were collectivist doctrines, antithetical to classical liberal individualism.
Democracy and socialism have nothing in common but one word: equality. But notice the difference: while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude.
Beyond the socialist calculation debate
it turned into serfdom, a system of obligation and dependency on state planners akin to a medieval serf’s obligation and dependency on his feudal lord.
People will find themselves with less and less freedom of choice.
Why the worst get on top
It was the predictable result of trying to impose a central plan on people who wished to pursue varied plans of their own.
The tragedy of central planning unintended political results
The logic of politics told hayek that this failure would likely lead not to the abandonment of planning but to stronger efforts at planning, efforts that would leave ever less choice to people as consumers, workers and citizens.
The alternative path
The abandoned road (hayek) was individualism and classical liberalism, fundamental principles were free choice, the rule of law, and private property.
Free choice- that in the ordering of our affairs we should make as much use as possible of the spontaneous forces of society, and resort as little as possible to coercion
The rule of law- government in all its actions is bound by rules fixed and announced beforehand.
Individualism. It is the recognition of the individual as the ultimate judge of his ends, the belief that as far as possible his own views ought to govern his actions, that forms the essence of the individualist position.
The book’s reception
The road to serfdom sparked the beginning of a revival of classical liberal thinking.
The clash between planning and democracy arises simply from the fact that the latter is an obstacle to the suppression of freedom which the direction of economic activity requires.
Political blowback in United Kingdom
The Gestapo remark, considered an intemperate and even absurd exaggeration in the british context.
After winning, the labour party under Atlee, set to work implementing its version of socialist policies.
7 postwar British Socialism and the Fabian Society
The general election of 1945
Establishment of the socialist commonwealth of great Britain
National invesment board
Social priorities
Barbara Castle- red queen
Labour in power
Sysytem of fair shares
Rationing of consumer goods
Suppressing inflation
Exchange controls
Restricte by quotas
Meade
Liberal-soclists
Thermostatteres
Planned wage policy
Tate & lyle firm’s popular advertising campaing
The Fabian socialist roots of Labour Policy
Democratic socialist movement
George Bernard Shaw
Sidney Webb
Beatrice Webb
Fabian tracts
Sidney and Beatrice Webb
London school of economics and political sciences
New statesman
Labour and new social order
Death duties
One party system
George Bernard shaw
Playwright
Labor theory of value
Harold j. laski
A grammar of politics
Corporate interests
Stalin’s atrocities
Personal liberties
Pernicious tripe
Soviet style five-year industrial plans
William Beveridge
Unemployment: a problem of industry
Social insurance and allied services
The Fabian view of economic history
Equitable distributions of wealth
Gradual transformation to state ownership of the means of production, not immediate abolition of private property
Intellectuals and science would introduce the policies, marx thought that proletarians would.
Fabian economics and Ricardian rent theory
Classical theory of distribution- david Ricardo
Ricardian theory of rent
Differential rate
Marginal productivity theory of input rewards
Henry george
Seething influence
Henry george
Siphoned off
Ideal tax
The single tax
Georgist theory
The landlord game (monopoly)
From Georgism to the nationalization of land and capital
Rent plots
Rental income
Capital goods
Single tax would allow the removal all other taxes that discouraged private investment and enterprise.
Industrialists
Jeremy Bentham
Extrapolation
Aggregate happiness
Principle of utility
Market’s demand curve
Cost-benefit
Postulatum
Succinct
Utilitarianism and economic policy
Special-interest mercantilism
Utility maximizing policies
Universal suffrage
Parliamentary sovereignty
State intervention
John stuart mill
Prevent harm to others
On liberty
Happiness denotes “pleasure, and the absence of pain”
J.S Mill between Bentham and the Fabians
Expediency
Government coining money
General expediency
Unwarranted monopoly
Case of expediency
Legislative intervention
Prima facie
Quid pro quo
Socialism compatible with individual liberty
Income distribution
Establishment of the socialist commonwealth of great Britain
National invesment board
Social priorities
Barbara Castle- red queen
Labour in power
Sysytem of fair shares
Rationing of consumer goods
Suppressing inflation
Exchange controls
Restricte by quotas
Meade
Liberal-soclists
Thermostatteres
Planned wage policy
Tate & lyle firm’s popular advertising campaing
The Fabian socialist roots of Labour Policy
Democratic socialist movement
George Bernard Shaw
Sidney Webb
Beatrice Webb
Fabian tracts
Sidney and Beatrice Webb
London school of economics and political sciences
New statesman
Labour and new social order
Death duties
One party system
George Bernard shaw
Playwright
Labor theory of value
Harold j. laski
A grammar of politics
Corporate interests
Stalin’s atrocities
Personal liberties
Pernicious tripe
Soviet style five-year industrial plans
William Beveridge
Unemployment: a problem of industry
Social insurance and allied services
The Fabian view of economic history
Equitable distributions of wealth
Gradual transformation to state ownership of the means of production, not immediate abolition of private property
Intellectuals and science would introduce the policies, marx thought that proletarians would.
Fabian economics and Ricardian rent theory
Classical theory of distribution- david Ricardo
Ricardian theory of rent
Differential rate
Marginal productivity theory of input rewards
Henry george
Seething influence
Henry george
Siphoned off
Ideal tax
The single tax
Georgist theory
The landlord game (monopoly)
From Georgism to the nationalization of land and capital
Rent plots
Rental income
Capital goods
Single tax would allow the removal all other taxes that discouraged private investment and enterprise.
Industrialists
Jeremy Bentham
Extrapolation
Aggregate happiness
Principle of utility
Market’s demand curve
Cost-benefit
Postulatum
Succinct
Utilitarianism and economic policy
Special-interest mercantilism
Utility maximizing policies
Universal suffrage
Parliamentary sovereignty
State intervention
John stuart mill
Prevent harm to others
On liberty
Happiness denotes “pleasure, and the absence of pain”
J.S Mill between Bentham and the Fabians
Expediency
Government coining money
General expediency
Unwarranted monopoly
Case of expediency
Legislative intervention
Prima facie
Quid pro quo
Socialism compatible with individual liberty
Income distribution
Chapter 8 The Mont Pelerin Society and the Rebirth of Smithian Economics
April 1947. Lake Geneva a 36 libertarian thinkers met after WW2. First trip outside germany
The postwar climate of opinion
Libertarians who believed in the free market were very little, everyone was with collectivist ideas.
Hayek organized the society for long-range influence of economic policies, through different means.
Hayek founds the Mont Pelerin Society
Hayek worried for classical liberalism and free society.
Michael Polanyi two philosophers joined them.
I first came in contact with people that widened my perspective about issues and policies.
It has operated at the earliest stage of the intellectual structure of production, promoting academic discussion and networking among its members.
Main purpose is to promote a classical liberal philosophy, that is, a free economy, a free society, socially, civilly and in human rights.
Rolling back the state has proved more difficult to achieve
The rationale for an international society of classical liberals
The group’s object is solely by facilitating the exchange of views among minds inspired by certain ideals and broad conceptions held in common, to contribute to the preservation and improvement of the free society.
The classical liberal tradition
To learn from the socialist: their courage to be utopian which gained them the support of the intellectuals and therefore influence on public opinion which is daily making possible what only recently seemed utterly remote.
Intellectual adventure- a deed of courage
The spirit of Adam Smith
Recapturing the spirit of the classical liberal social theorists of the eighteen and nineteenth centuries.
Adam smith: jurisprudence, moral philosophy and history.
Adam smith
1763 was tutor of henry scott, 3rd duke of buccleuch
Administered taxes on trade in Scotland
Adam smith as intellectual touchstone and icon
The first message of the Wealth of Nations
What matters for a nation’s well being is not its hoard of accumulated treasure, but its annual output or produce, the flow of goods and services, national income or gross domestic product.
(Hace tanto sentido que un pais va a ser rico, si esa persona es libre de escoger y de emplear para el propio beneficio de la empresa, generando empleos, mas ingresos, para esa familia y para la sociedad en general. Hay que crear mas negocios, de cosas que la gente quiera. Si no, es desperdicio.)
People specialize and trade out of self-interest
Self-interest trade, not selfless benevolence, makes society go.
How the division of labor promotes prosperity
The potential for increasing output, depends primarily on increasing the productivity of labor through greater specialization.
Technological improvement
Capital accumulation
Labor productivity
Allocation of capital goods increase output per worker.
Logic of produce in the free international trade: in make- or buy decisions to the level of the nation.
Never attempt to make at home what it will cost him more to make than to buy
Gains from specialization and gains from trade
The invisible hand of the market
Knowledge of profitable investment opportunities is decentralized.
Why we think that what’s best for the individual investor is also best for society?
The profit motive steers competing producers to provide what their customers are most willing to buy
The persuit of private interest through market activity thereby promotes the general interest.
There is really an external guiding hand that we can’t see with our eyes, the providential hand of God.
Economists- as a metaphor for the ordering processes of a competitive market system.
Led by market signals, and incentives to coordinate his behavior with other market participants as if he were led by an invisible guiding hand
Spontaneous order: emerging from human actions without being deliberately directed by any single will.
Natural course of things
Self-inerest as the driving force of the natural course of things, needing no help from the sovereign
The roles of government
Government should defend against foreign invasion it should maintain civil order, that is, protect property rights by preventing robbery and fraud, and thus afford to industry the only encouragement which it requires, some tolerable security that it shall enjoy the fruits of its own labour”.
Discuss smith’s third role of government- those public institutions and those public works, which, through they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain.
Smith on money and banking
Spread of banknotes
Not a shill fro business interests
Smith defended market competition
Businessman trying to take advantage of citizens.
Influences on smith: Francis Hutcheson and Bernard Mandeville
Self interest
A prosperous and well ordered economy did not require traming men’s selfish passions, but rather channeling them appropriately.
Beneficial overall results may emerge unintentionally from individual self-seeking
David Hume and Adam Ferguson
Economic development
Trade
Happiness peace
The Physiocrats
Favored rule by nature
A policy of laissez-faire in that era meant the removal of trade barriers, state sponsored monopolies and privileges, and guild restictions.
The problem of social coordination
How social coordination comes about in a large anonymous economy
Comparative advantage
A key to understanding why humans trade and form a society in the first place rather than each living alone without interaction.
In civilized society an individual stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons.
How can it be that institutions which serve the common welfare and are extremely significant for its development come into being without a common will directed toward establishing them?
Carl Menger
1840-1921
Menger’s theory of price formation
Recurrent orders
Cumulative orders
The emergence of money
Money is a medium of exchange.
The postwar climate of opinion
Libertarians who believed in the free market were very little, everyone was with collectivist ideas.
Hayek organized the society for long-range influence of economic policies, through different means.
Hayek founds the Mont Pelerin Society
Hayek worried for classical liberalism and free society.
Michael Polanyi two philosophers joined them.
I first came in contact with people that widened my perspective about issues and policies.
It has operated at the earliest stage of the intellectual structure of production, promoting academic discussion and networking among its members.
Main purpose is to promote a classical liberal philosophy, that is, a free economy, a free society, socially, civilly and in human rights.
Rolling back the state has proved more difficult to achieve
The rationale for an international society of classical liberals
The group’s object is solely by facilitating the exchange of views among minds inspired by certain ideals and broad conceptions held in common, to contribute to the preservation and improvement of the free society.
The classical liberal tradition
To learn from the socialist: their courage to be utopian which gained them the support of the intellectuals and therefore influence on public opinion which is daily making possible what only recently seemed utterly remote.
Intellectual adventure- a deed of courage
The spirit of Adam Smith
Recapturing the spirit of the classical liberal social theorists of the eighteen and nineteenth centuries.
Adam smith: jurisprudence, moral philosophy and history.
Adam smith
1763 was tutor of henry scott, 3rd duke of buccleuch
Administered taxes on trade in Scotland
Adam smith as intellectual touchstone and icon
The first message of the Wealth of Nations
What matters for a nation’s well being is not its hoard of accumulated treasure, but its annual output or produce, the flow of goods and services, national income or gross domestic product.
(Hace tanto sentido que un pais va a ser rico, si esa persona es libre de escoger y de emplear para el propio beneficio de la empresa, generando empleos, mas ingresos, para esa familia y para la sociedad en general. Hay que crear mas negocios, de cosas que la gente quiera. Si no, es desperdicio.)
People specialize and trade out of self-interest
Self-interest trade, not selfless benevolence, makes society go.
How the division of labor promotes prosperity
The potential for increasing output, depends primarily on increasing the productivity of labor through greater specialization.
Technological improvement
Capital accumulation
Labor productivity
Allocation of capital goods increase output per worker.
Logic of produce in the free international trade: in make- or buy decisions to the level of the nation.
Never attempt to make at home what it will cost him more to make than to buy
Gains from specialization and gains from trade
The invisible hand of the market
Knowledge of profitable investment opportunities is decentralized.
Why we think that what’s best for the individual investor is also best for society?
The profit motive steers competing producers to provide what their customers are most willing to buy
The persuit of private interest through market activity thereby promotes the general interest.
There is really an external guiding hand that we can’t see with our eyes, the providential hand of God.
Economists- as a metaphor for the ordering processes of a competitive market system.
Led by market signals, and incentives to coordinate his behavior with other market participants as if he were led by an invisible guiding hand
Spontaneous order: emerging from human actions without being deliberately directed by any single will.
Natural course of things
Self-inerest as the driving force of the natural course of things, needing no help from the sovereign
The roles of government
Government should defend against foreign invasion it should maintain civil order, that is, protect property rights by preventing robbery and fraud, and thus afford to industry the only encouragement which it requires, some tolerable security that it shall enjoy the fruits of its own labour”.
Discuss smith’s third role of government- those public institutions and those public works, which, through they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain.
Smith on money and banking
Spread of banknotes
Not a shill fro business interests
Smith defended market competition
Businessman trying to take advantage of citizens.
Influences on smith: Francis Hutcheson and Bernard Mandeville
Self interest
A prosperous and well ordered economy did not require traming men’s selfish passions, but rather channeling them appropriately.
Beneficial overall results may emerge unintentionally from individual self-seeking
David Hume and Adam Ferguson
Economic development
Trade
Happiness peace
The Physiocrats
Favored rule by nature
A policy of laissez-faire in that era meant the removal of trade barriers, state sponsored monopolies and privileges, and guild restictions.
The problem of social coordination
How social coordination comes about in a large anonymous economy
Comparative advantage
A key to understanding why humans trade and form a society in the first place rather than each living alone without interaction.
In civilized society an individual stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons.
How can it be that institutions which serve the common welfare and are extremely significant for its development come into being without a common will directed toward establishing them?
Carl Menger
1840-1921
Menger’s theory of price formation
Recurrent orders
Cumulative orders
The emergence of money
Money is a medium of exchange.