The Revival of Laissez-Faire in American Macroeconomic Theory: A Case Study of the Pioneers

Published by EH.NET (April 2003)

Sherryl Davis Kasper, The Revival of Laissez-Faire in American Macroeconomic

Theory: A Case Study of the Pioneers. Cheltenham, UK: Edward Elgar, 2002.

viii + 177 pp. ?49.45/$75 (hardcover), ISBN: 1-84064-606-3.

Reviewed for EH.NET by Roger W. Garrison, Department of Economics, Auburn

University.

The title phrase “laissez-faire” is pressed into service as the common

denominator for this close-up look at the “pioneers” who have given shape to

market-oriented macroeconomics in the United States. In a chapter-per-pioneer

format, Kasper presents the ideas of Frank Knight, Henry Simons, Friedrich

Hayek, Milton Friedman, James Buchanan, and Robert Lucas. Each chapter provides

a brief personal history, identifies a “pre-analytic vision,” and presents the

case for laissez-faire. The reader soon realizes that this common rallying cry

of classical liberalism serves only loosely as a common denominator.

Laissez-faire appears variously throughout the book as a presumption, a

principle, a policy recommendation, a standard, an ideal, and a modeling

technique.

Kasper, who takes her own orientation from the institutionalist school, doesn’t

play favorites among the pioneers. As announced in the short introductory

chapter, her primary concern is with the basis for the advocacy of

laissez-faire: (1) Are there strong ideological influences? (2) Does the

theoretical resolution to some contemporary economic problem add to the case

for less rather than more government involvement? (3) Do new tools and methods

help to reveal the merits of unhampered markets?

Kasper’s ultimate verdict is not easily summarized, but the careful reader will

see that it emerges as an evolving pattern of answers to the questions about

the basis for the advocacy of laissez-faire.

A passing reference (p. 149) to the “taint of ideological commitment to

laissez-faire” supposedly associated with the early pioneers hints that the

later pioneers labored under a taint by association. Kasper seems to take for

granted that ideological commitments lie somewhere below the surface of the

arguments actually made — just how far below being the only live issue. She

acknowledges that there were genuine efforts in the 1960s and 1970s to

understand the problems of inflation and stagflation — problems that were

inadequately addressed by the Keynesian orthodoxy. And she makes the judgment

that Friedman’s monetarism and Buchanan’s public choice theory had more appeal

than could be accounted for in terms of the implicit ideology. But while

monetarism and public-choice theory were born of

ideology-cum-resolution-to-contemporary-problem, Lucas’s new classicism was

born of resolution-to-contemporary-problem-cum-new-tools-and-methods. Only in

this most recent reincarnation was market-oriented macroeconomics able to

dominate the field.

But was it the rigor of new classical methods or the adherence to laissez-faire

— or possibly something else — that won professional acceptance? Kasper’s

answer to this question seems to hinge on the nature of the arguments of the

early and the late pioneers. The early pioneers made negative arguments.

Because of unquantifiable uncertainties (Knight), the fragmentation of

knowledge (Hayek), the lack of timely data (Simons and Friedman), and/or the

lack of suitable motivation (Buchanan), we cannot expect policymakers to

engineer results that are superior to those that emerge spontaneously in a

competitive market economy. With such negative arguments, it was difficult to

attract adherents in large numbers. Survival rather than revival was the order

of the day, and to that end the Mont P?lerin Society — suggested by Simons

before his untimely death in 1946 and organized by Hayek in 1947 — became

crucial.

Lucas, by contrast, offered a positive argument. He brought laissez-faire into

play up front as a modeling technique, rather than saving it as a possible

policy recommendation. As a consequence, the macroeconomic modeler of the late

1970s and early 1980s could make full use of the mathematical techniques

already in the economist’s tool box, could learn some new modeling techniques

that were part and parcel with new classicism, and could possibly develop still

more techniques to push the envelope of this new mode of theorizing. Devising

so-called fully articulated artificial economies, calibrating the models on the

basis of actual movements in real-world macroeconomic magnitudes, subjecting

the model economies to hypothetical shocks, and making predictions on this

basis occupied many practitioners. And it was all heady business, despite — or

possibly because of — the tenuous link between theory and reality. Kasper

mentions — but almost as an aside — that during the heyday of new classicism,

the revival may have been driven by the opportunity to employ sophisticated

techniques in the pursuit of professional advancement.

In the final page-and-a-half of the book, Kasper notes that the supremacy of

laissez-faire in new classical dress was short-lived and argues that in any

case Lucas’s contribution was not free of the ideological taint. Beginning in

the early 1980s, his Friedman-friendly version of new classicism gave way to

real business cycle theory, which accorded no significant role to money, and to

new Keynesianism, whose sticky wages and menu costs warned against leaving

matters to the market. Further, an ideological taint attaches to Lucas’s new

classicism, in Kasper’s reckoning, because the tools that Lucas borrowed from

Friedman were themselves influenced by Friedman’s ideological commitment to

laissez-faire. The reader gets the idea that the issue of ideology has special

significance for our understanding of market-oriented macroeconomics. But that

special significance is never put into a more general context. Nowhere in the

book is there a discussion or even a mention of the ideological underpinnings

of Marxism, Keynesianism, or Institutionalism.

Nor does Kasper offer a comparison of new classicism with old classicism. The

old classical economists favored a system of natural liberty partly on grounds

of moral philosophy and partly because of their understanding of the economic

order. Laissez-faire was a presumption, a default-mode policy. It assigned the

burden of proof to anyone (including themselves) who proposed to interfere with

the natural order. Would Kasper see the classical commitment to laissez-faire

as ideologically tainted? Presumably she would, since the arguments offered by

Adam Smith were the same in this respect as those offered almost two centuries

later by Hayek, Friedman, and Buchanan.

Beyond the issues of ideological taint, readers will find interesting material

in Kasper’s book. Her survey of the pioneers demonstrates, for instance, just

how broadly the laissez-faire label is applied. Henry Simons, who is well known

for wanting to use the tax system to redistribute income, also favored a tax on

advertising, the revenues to be used for consumer education and the

establishment of uniform commodity standards (p. 43). Milton Friedman, heavily

influenced by Simons, reread his work in later years and was astounded to

realize that these ideas were was once thought to have a pro-market orientation

(p. 100).

Roger W. Garrison is Professor of Economics at Auburn University. He is author

of Time and Money: The Macroeconomics of Capital Structure (Routledge,

2001).