The Clash of Economic Ideas
“Behind these movements and countermovements in economic policy lies an ongoing and often dramatic clash of economic ideas.”
Introduction
The Structure of Intellectual Production
Stages of intellectual production:
Governments versus Markets
Economic policy ideas clash hen there are different views about the role of government in the economy.
Socialism versus Capitalism
Socialism: a system of government control over the commanding heights of the economy, over the financial system and major industries.
Capitalism: leaving finance and production in private hands subject to the guidance of free market forces, supply and demand, the price system.
Stages of intellectual production:
- Academic economists seek to advance their understanding of the world and develop ideas that will be useful and novel by other researchers.
- Academic and think-tank economists seek to develop the ideas further, by confronting them with historical and statistical evidence.
- Journalists and economists sort through and repackage applied research to provide ideas to policy makers and the general public.
Governments versus Markets
Economic policy ideas clash hen there are different views about the role of government in the economy.
Socialism versus Capitalism
Socialism: a system of government control over the commanding heights of the economy, over the financial system and major industries.
Capitalism: leaving finance and production in private hands subject to the guidance of free market forces, supply and demand, the price system.
Chapter 1
The Turn Away from Laissez-faire
JOHN MAYNARD KEYNES
1883-1946
Started lecturing at Cambridge – editor of the Economic Journal – advisor and official of UK treasury.
Keynes argues against a post-war return to the gold standard.
“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.”
Great Depression:
Cause – investors lost their nerve
Cure – government must expand its spending to boost aggregate demand and particular investment.
FRIEDRICH A. HAYEK
1899-1992
Worked under Mises – headed a business cycle research institute – teacher at London School of Economics – founder of Mont Pelerin Society – University of Chicago – University of Freiburg, Germany
Hayek’s business cycle theory:
KEYNES ON THE END OF LAISSEZ-FAIRE
Keynes rejected Adam Smith’s invisible hand theory.
Market forced could not be counted on to deliver a great enough volume of investment in the aggregate – a government should be in control.
KEYNES VERSUS HAYEK ON THE ROLE OF GOVERNMENT
JOHN MAYNARD KEYNES
1883-1946
Started lecturing at Cambridge – editor of the Economic Journal – advisor and official of UK treasury.
Keynes argues against a post-war return to the gold standard.
“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.”
Great Depression:
Cause – investors lost their nerve
Cure – government must expand its spending to boost aggregate demand and particular investment.
FRIEDRICH A. HAYEK
1899-1992
Worked under Mises – headed a business cycle research institute – teacher at London School of Economics – founder of Mont Pelerin Society – University of Chicago – University of Freiburg, Germany
Hayek’s business cycle theory:
- Economic boom period is fueled by artificially cheap credit.
- Credit boom ends in bust because low interest rates lured investments into forms that turn unprofitable when the interest rates rise toward equilibrium.
KEYNES ON THE END OF LAISSEZ-FAIRE
Keynes rejected Adam Smith’s invisible hand theory.
Market forced could not be counted on to deliver a great enough volume of investment in the aggregate – a government should be in control.
KEYNES VERSUS HAYEK ON THE ROLE OF GOVERNMENT
POLITICAL ECONOMY IN AMERICA'S PROGRESSIVE ERA
Progressive Era
A period of ideological change towards a more active government. Late 19th century.
These economists organized; they opposed Laissez-faire ideas.
Richard T. Ely
New School thinkers
Scientific truth seekers whose historical investigations uncovered:
Old view – Laissez-faire:
“The self-interest of individuals will always direct them to the industrial activities most conducive to wealth and well-being of the community of which they are members.”
Doctrine of Utilitarianism:
We should aim to maximize aggregate net happiness.
They evaluate each government proposed activity by whether its social benefits would exceed its social cost.
KEYNES WAS NOT THE FIRST TO TURN AWAY FROM LAISSEZ-FAIRE IDEAS
The amount of economists following Laissez-faire have been exaggerated; both before the Great Depression and today.
THE GLOBAL ECOCONOMY BEFORE 1914
Before 1914 there was a period of economic growth accompanied by relatively market friendly policies.
There was a great reach of travel and commerce world wide.
THE FEDERAL RESERVE ACT AND THE FIRST WORLD WAR
The progress before 1914 was interrupted in 1913. The majority of the economists favored the creation of a central bank.
The scope of the Federal authority over money and banking was expanded by the Federal Reserve Act of 1913.
THE RUSSIAN REVOLUTIONS OF 1917
“In Russia, a longer-lasting policy experiment in government control of the economy began in 1917.”
This caused Tsar Nicholas II to abdicate.
The Bolsheviks then overthrew the provisional government and tried to install a socialist economy based on Karl Marx’s ideas.
Theory of the communists: abolition of private property.
Marx believed that private property is not the most effective way to deal with scarcity, because private property only benefits the owners. Production had to be nationalized.
KARL MARX
Mark took two ideas from the Classical Economists:
Progressive Era
A period of ideological change towards a more active government. Late 19th century.
These economists organized; they opposed Laissez-faire ideas.
Richard T. Ely
New School thinkers
Scientific truth seekers whose historical investigations uncovered:
- Benefits of labor unionization and strikes.
- Found important and overlooked things in socialism.
Old view – Laissez-faire:
“The self-interest of individuals will always direct them to the industrial activities most conducive to wealth and well-being of the community of which they are members.”
Doctrine of Utilitarianism:
We should aim to maximize aggregate net happiness.
They evaluate each government proposed activity by whether its social benefits would exceed its social cost.
- John Stuart Mill
- Henry Sidgwick
KEYNES WAS NOT THE FIRST TO TURN AWAY FROM LAISSEZ-FAIRE IDEAS
The amount of economists following Laissez-faire have been exaggerated; both before the Great Depression and today.
THE GLOBAL ECOCONOMY BEFORE 1914
Before 1914 there was a period of economic growth accompanied by relatively market friendly policies.
There was a great reach of travel and commerce world wide.
THE FEDERAL RESERVE ACT AND THE FIRST WORLD WAR
The progress before 1914 was interrupted in 1913. The majority of the economists favored the creation of a central bank.
The scope of the Federal authority over money and banking was expanded by the Federal Reserve Act of 1913.
THE RUSSIAN REVOLUTIONS OF 1917
“In Russia, a longer-lasting policy experiment in government control of the economy began in 1917.”
This caused Tsar Nicholas II to abdicate.
The Bolsheviks then overthrew the provisional government and tried to install a socialist economy based on Karl Marx’s ideas.
Theory of the communists: abolition of private property.
Marx believed that private property is not the most effective way to deal with scarcity, because private property only benefits the owners. Production had to be nationalized.
KARL MARX
Mark took two ideas from the Classical Economists:
- The labor theory of value
- The analysis of income shares along class lines.
Chapter 2
The Bolshevik Revolution and the Socialist Calculation Debate
In 1919 revolutionaries took a hold of Munich and declared a Bavarian Soviet Republic.
THE BOLSHEVIKS MAKE ECONOMY POLICY
Lenin thought that in the communist future, the state would wither away.
The Bolsheviks established a central planning agency – The Supreme Economic Council – who:
Results:
In 1921 after seeing the results, Lenin started the New Economic Policy, which allowed peasants to sell their produce and readmitted market exchange.
VIENNA 1920
Marxist-Leninists ideas also captured the minds and governments in central Europe:
But… Ludwig von Mises came in with his arguments against socialism.
“When socialism first appeared, its impact was profound. It gradually but fundamentally altered the outlook of many young idealists returning to their universities after World War I. I know, for I was one of them…. We were determined to build a better world, and it was this desire to reconstruct society that led many of s to the study of economics. Socialism promised to fulfill our hopes for a more rational, more just world. And them came this book. Our hopes were dashed. Socialism told us that we had been looking for improvement in the wrong direction.” F.A. Hayek
In 1919 revolutionaries took a hold of Munich and declared a Bavarian Soviet Republic.
THE BOLSHEVIKS MAKE ECONOMY POLICY
Lenin thought that in the communist future, the state would wither away.
The Bolsheviks established a central planning agency – The Supreme Economic Council – who:
- Nationalized the banking system.
- Nationalized industrial firms and put worker committees in charge of them.
- Monopolized foreign trade.
- Distributed goods with government rationing.
Results:
- Famine
- Strikes
- Rebellion
In 1921 after seeing the results, Lenin started the New Economic Policy, which allowed peasants to sell their produce and readmitted market exchange.
VIENNA 1920
Marxist-Leninists ideas also captured the minds and governments in central Europe:
- Budapest
- Munich
- Vienna
But… Ludwig von Mises came in with his arguments against socialism.
“When socialism first appeared, its impact was profound. It gradually but fundamentally altered the outlook of many young idealists returning to their universities after World War I. I know, for I was one of them…. We were determined to build a better world, and it was this desire to reconstruct society that led many of s to the study of economics. Socialism promised to fulfill our hopes for a more rational, more just world. And them came this book. Our hopes were dashed. Socialism told us that we had been looking for improvement in the wrong direction.” F.A. Hayek