Published by EH.NET (February 2005)

David Laidler, Macroeconomics in Retrospect: The Selected Essays of David Laidler. Cheltenham, UK: Edward Elgar, 2004. xxii + 433 pp. $135 (hardcover), ISBN: 1-84376-384-2.

Reviewed for EH.NET by John H. Wood, Department of Economics, Wake Forest University

“Its own history is an integral part of macroeconomics, and I have not always found it helpful to distinguish sharply between my work on current issues and on historical topics.” David Laidler’s introductory statement is well-illustrated by the nineteen papers reprinted in this book. All deal with issues that were interesting, relevant, and controversial when they first arose and remain so today. This review consists of brief highlights of most of the papers followed by questions that some of them have raised. The numbers in parentheses refer to the papers as listed in the contents. Laidler’s current affiliation is the University of Western Ontario, but his introduction gives an interesting account of the academic journey (beginning with undergraduate at the London School of Economics and Ph.D. at Chicago) and associations that led to these papers (a small sample being Bernard Corry, Earl Hamilton, Don Patinkin, Harry Johnson, and Richard Lipsey).

Laidler argues that Adam Smith (1) and Alfred Marshall (5) were better monetary economists than they have been given credit for. Smith’s recommendation for real bills as a guide to monetary policy was not a recipe for indeterminate inflation because money was in the end limited by gold. Marshall’s innovative analysis of money demand should not be underestimated, and he was sympathetic to discretionary monetary policy. In the “shifting political affiliation of the quantity theory” (6), Laidler suggests that in Marshall’s period the quantity theory was used by the political left and in the next century by critics of government action, both in the interests of price stability.

When it comes to credit for the recovery of the quantity theory in the second half of the twentieth century, Laidler builds on Don Patinkin’s point that the Chicago School of the 1930s was a figment of Milton Friedman’s imagination (10, 11). Laidler argues that the so-called Chicago School’s belief in the power of monetary policy came to Chicago by way of Ralph Hawtrey and Harvard (Allyn Young and Lauchlin Currie). The distinctive Chicago contribution was Henry Simons’ advocacy of rules. Laidler “challenged two important myths: the American monetarist myth that Chicago had been home to a distinctive and scientifically based approach to monetary economics that had protected it from Keynesian ideology; and second, the American Keynesian myth that Harvard had been lost in darkness until the arrival of good news from the other side of the Atlantic.”

This reviewer is inclined to allow Friedman the extenuation that he was caught up in the general myth-making atmosphere that originated with Keynesian (not Keynes) contentions that concerns for macroeconomic problems had originated in 1936. Laidler points out that the stickiness of wages and prices was well known and analyzed by the classics (Keynes himself knew this and downplayed them), and that the New Keynesian consideration of stickiness is in fact a continuation of an old line of research (12).

Laidler is right to point out that the Radcliffe Commission had no interest in new ideas and that its report was influenced by the testimony of the government’s chief economic adviser, Robert Hall, that inflation was unaffected by demand (14). I wish he had gone a little further to explain the Commission’s purpose, which was to support the government’s policy of controls against murmurings from the Bank of England that the way to control inflation was to control money by means of Bank Rate. This could also have been linked to J.R. Hicks’ admission that monetary policy was impotent in a world committed to full employment, which to Hall and many others meant the need for controls (15).

Such an interesting and controversial collection is bound to raise disagreements, but that will not displease Laidler because he likes a good argument. Mine are as follows.

I think that on occasion Laidler was drawn into the majority that interprets nineteenth-century writings and events in terms of the institutions and attitudes of today even though he recognized the danger when he noted the failure of some of the bullion debates to appreciate the differences between monetary (fiat or convertible money) arrangements. I wish that his sympathy for Smith extended to Thomas Tooke. Tooke’s currency rule was admittedly inadequate but it was buttressed by gold (4). Laidler recognizes the cost of production theory of the value of money in a commodity standard, but I think he underestimates its importance, even in the fairly short run. Certainly the great price movements between 1820 and 1914 were dominated by gold discoveries and technological advances in its extraction.

I also think that Laidler’s very modern preference for official controls has led him to skip over some of the arguments and their institutional bases of nineteenth-century classical positions. For example, his opinion that the legal commitment of the convertibility of the currency on fixed terms was inferior to government discretion fails to appreciate the importance of contracts to which even governments were presumed to be subject in that less enlightened age (2). His easy dismissal of the possibility of competitive money also fails to appreciate either the arguments of the day or later analyses (3). He was more interested in finding antecedents of official monetary discretion, particularly in Thornton. His contentions that the Bank of England followed Bagehot’s lender-of-last recommendations and that the Federal Reserve rejected them in the Great Depression overlook the work of Fred Hirsch (“The Bagehot Problem,” The Manchester School, 1977), Elmus Wicker (The Banking Panics of the Great Depression) and others. The Bank of England never admitted in word or deed that it should hold the non-interest-bearing reserves necessary to bail out irresponsible bankers whose own reserves, the Bank pointed out, varied inversely with its own. They fully appreciated the principle of time inconsistency. A major force behind the formation of the Federal Reserve was the desire of bankers to get someone else to bear the burden of their reserve. A task that the Fed did not fail to perform was the provision of liquidity to the New York money market in the Great Depression, which did not experience the panic interest rates of earlier crises.

I have never understood how Keynesian-monetarist differences could be analyzed in terms of elasticities of IS-LM diagrams that have nothing to say about the fundamental differences between the two approaches, which concern expectations and the effectiveness of free markets. I am also surprised that Laidler does not see rational expectations as a supporter of monetarism (17, 18).

Finally, while sharing Laidler’s regret that the history of economic thought is not as important to current economists as it should be, and that courses in the area have been on the decline, the current relative neglect does not approach that of the general atmosphere following the appearance of the General Theory, which was thought by many as having rendered obsolete (even erased) previous macroeconomics. On the other hand, Laidler had a privileged view. The curtains on the window of history were not drawn as tightly at the LSE and Chicago as elsewhere.

The subjects of all these papers continue to reward study and argument, and I recommend this book to anyone who is interested in current monetary problems, which cannot be sharply distinguished from those of earlier times and about which we are still arguing.

John H. Wood is the author of “Bagehot’s Lender of Last Resort,” Independent Review, (2003); and A History of Central Banking in Great Britain and the United States, forthcoming from the Cambridge University Press.