Government: More or Less?

Lessons from the History of Economic Thought

Dale R. DeBoer, Ph.D.2013

Tea Party Platform

•Allowing free markets to prosper unfettered by government interference is what propelled this country to greatness with an enduring belief in the industriousness and innovations of the populace.

• http://www.teaparty-platform.com/

J.M. Keynes

•Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.

Where to begin?

•Pre-classical thought

- Focus on ethics of outcome

Where to begin?

•Pre-classical thought

•Western economic thought

- Emphasis on efficiency of means

Where to begin?

•Pre-classical thought

•Western economic thought

•Where is this conflict seen today?

https://commons.wikimedia.org/wiki/File:Combination_of_October_2011_global_protests.jpg

It's no secret that in New York during the last 30 years there has been a tragic exodus from the churches into materialism, secularism and humanism.-Billy Graham

An attitude to life which seeks fulfillment in the single-minded pursuit of wealth - in short, materialism - does not fit into this world, because it contains within itself no limiting principle, while the environment in which it is placed is strictly limited.

-E. F. Schumacher

Schools of Thought

•Mercantilism

Mercantilism

•Thomas Mun (1571-1641)

•Measure of societal wealth

•Precious metals

http://timerime.com/en/event/828184/Thomas+Mun/

Mercantilism

•Thomas Mun (1571-1641)

•Measure of societal wealth

•How can these be obtained?

•Discovery

•Capture

•Trade

Mercantilism

•Thomas Mun (1571-1641)

•Measure of societal wealth

•How can these be obtained?

•Role of the government

Two flaws

•The Price-Specie Flow Mechanism

•David Hume (1711-1776)

•A “hoarding” mechanism?

https://en.wikipedia.org/wiki/File:Painting_of_David_Hume.jpg

Two flaws

•The Price-Specie Flow Mechanism

•The wrong source of wealth

•Adam Smith (1723-1790)

https://en.wikipedia.org/wiki/File:AdamSmith.jpg

Two flaws•The Price-Specie Flow Mechanism

•The wrong source of wealth

•Adam Smith (1723-1790)

• It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country.

Who is mercantilist today?

•China

•By plan or accident?

•Hoarding?

Who is mercantilist today?

•China

•US

•Concerns about an undervalued yuan

•Legislative “Buy American” provisions

Schools of Thought

•Mercantilism

•Classical liberalism

Smith’s role for government

•All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.

Smith’s role for government

•People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

Not a minimal role•But limited to situations of market failure

•Unfortunately, not well specified during the period of the Classical Liberals

•John Stuart Mill (1806-1873)

•Were I framing a code of laws according to what seems to me best in itself ... I should prefer to restrict what any one should be permitted to acquire ...

Schools of Thought

•Mercantilism

•Classical liberalism

•Neo-classical economics

Neo-classical economics

•Refinement/mathematization of economic models

•William Jevons (1835-1882)

•Mariginal utility theory of value

https://en.wikipedia.org/wiki/File:Picture_of_jevons.jpg

Neo-classical economics

•Refinement/mathematization of economic models

•William Jevons (1835-1882)

•Leon Walras (1862-1910)

•General equilibrium theory

https://en.wikipedia.org/wiki/File:Walrass.jpg

Neo-classical economics

•Refinement/mathematization of economic models

•William Jevons (1835-1882)

•Leon Walras (1862-1910)

•Carl Menger (1840-1921)

•Founder of the Austrian School

•Rejected labor theories of valuehttps://en.wikipedia.org/wiki/File:CarlMenger.png

Neo-classical economics

•Refinement/mathematization of economic models

•Final model assumptions

•Many actors

•Homogenous products

•No barriers to market entry/exit

•Symmetric information

•No external costs/benefits

The role of government

•Limited

•Correction of market failures

•Imperfect competition

•Sherman Act, 1890

The role of government

•Limited

•Correction of market failures

•Externalities

•Henry Sidgwick (1838-1900)

https://en.wikipedia.org/wiki/

File:Henry_Sidgwick.jpg

The role of government

•Limited

•Correction of market failures

•Externalities

•Arthur Pigou (1877-1959)

https://en.wikipedia.org/wiki/File:A.C._Pigou.jpg

The role of government

•Limited

•Correction of market failures

•Asymmetric information

•George Akerlof (1940- )

https://en.wikipedia.org/wiki/

File:George_Akerlof.jpg

The role of government

•Limited

•Correction of market failures

•Was this universally accepted?

•Walras

•Nationalization of land

What was missed?

•Instability

•Inequality

Schools of Thought

•Mercantilism

•Classical liberalism

•Neo-classical economics

•Socialism/Marxism

Which Socialism?

•Utopian

•Anarchist

•Market

•Fabian

•Marxist

Focus

•Social justice, not efficiency

•The limits of neo-classical thought

Marx and Marxism

•Karl Marx (1818-1883)

•Stages of development

https://en.wikipedia.org/wiki/File:Karl_Marx_001.jpg

Government in the final stages

•Socialism

•“The proletariat seizes from state power and turns the means of production into state property ...”

•The state as the agent of coercion

Government in the final stages

•Socialism

•Communism

•“The state is not 'abolished'. It withers away.”

•A maximal state as tool to obtain a minimal state

Schools of Thought

•Mercantilism

•Classical liberalism

•Neo-classical economics

•Socialism/Marxism

•Keynesian

J.M. Keynes

•1883-1946

•Father of modern macroeconomics

•Failure of aggregate demand

https://en.wikipedia.org/wiki/File:John_Maynard_Keynes.jpg

Stabilization policy

•Short-run stimulus

•Austerity debate

Schools of Thought

•Mercantilism

•Classical liberalism

•Neo-classical economics

•Socialism/Marxism

•Keynesian

•Chicago School

Chicago School

•Intellectual forebear

•Friedrich Hayek (1899-1992)

https://en.wikipedia.org/wiki/File:Friedrich_Hayek_portrait.jpg

Chicago School

•Intellectual forebear

•Founder

•Milton Friedman (1912-2006)

https://en.wikipedia.org/wiki/File:Portrait_of_Milton_Friedman.jp

g

Chicago School

•Intellectual forebear

•Founder

•Opposition to “naive Keynesianism”

•Complexity of stabilization policy

Chicago School

•Intellectual forebear

•Founder

•Opposition to “naive Keynesianism”

•Importance of monetary policy

•Monetary growth targeting

Schools of Thought

•Mercantilism

•Classical liberalism

•Neo-classical economics

•Socialism/Marxism

•Keynesian

•Chicago School

•(Social) Welfare Economics

(Social) Welfare Economics

•Amartya Sen (1933- )

•Redistribution policies

•Equality of capabilities

https://en.wikipedia.org/wiki/File:Amartya_Sen_NIH.jpg

Where are we now?

•No closer to an answer

•Austerity debate

•Short-term gains vs. long-run costs

Where are we now?

•No closer to an answer

•Austerity debate

•Redistribution

•“We are the 99%”

Where are we now?

•No closer to an answer

•Austerity debate

•Redistribution

•Pollution

•Global warming

•Fracking

Where are we now?

•No closer to an answer

•Austerity debate

•Redistribution

•Pollution

•Competition policy

•Apple and the DoJ

•TTIP

Why?

•The political problem of mankind is to combine three things: economic efficiency, social justice and individual liberty.

•J.M. Keynes

•Are these always compatible?

In the end ...

•Politics trumps economics though economic reality will eventually have its say