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THE CLASH OF ECONOMIC IDEAS

Lawrence H. White

Subtitle: The Great Policy Debates and Experiments of the Last Hundred Years. Cambridge Univ. Press, 428 pgs., 2012, index, figures, paperback

 
 

Reviewer comments
- This is a very important book that contains much more information than that which appears on the surface. The content itself reveals that the causes of our current political/economic condition go back over a hundred years. But when the reader combines this information with the century of political and social history the full story becomes clear. The author has focused, as his title indicates. on the realm of economic theory. But, as Richard Weaver wrote, "Ideas Have Consequences'. And consequences can accumulate and build on each other creating more and more adverse outcomes. When false ideas become central in the education system, generations will come to believe whatever they are taught. Dr. White describes the origins of the ideas over which the 'clash' on which he focuses were brought by the late 19th century "Progressive' movement economists from Germany and incorporated right into the foundation of the American Economic establishment. But throughout the 20th century these ideas were continually challenged by other economists who held a variety of competing ideas and theories. Dr. White's organization of his material is mostly chronological, with asides and 'flashbacks' as needed to reveal antecedents.

The text is strong on providing biographical studies of the leading economists whose ideas were clashing. Dr. White's own assessments of the validity of individual ideas are apparent, but his full treatment is even-handed. For instance, a given biography is simple and factual, so the reader can draw his own conclusions about the person described. One theme that is clear, but not explicitly noted, is the strong influence from generation to generation by a named teacher on his named students who went on to equal or greater influence and fame. Throughout, the names of Dr. Lord Keynes and Dr. Frederick Hayek recur as these two economists not only serve as symbols of two major opposing schools of economic theory but also were in practice the longest active proponents in the public eye. But Dr. White shows that there were many other very influential advocates of one or another economic theory.

This brings me to propose one of my own theories, political influence, outside the scope of the book itself. It is clear from the direct quotations of many of these economists that the motivations of successive generations shifted from more pure pursuit of theoretical knowledge for itself to active desire to change the world via exercise of influence on governmental policy. And this shift was not coincidental, but accompanied the growth of the modern state apparatus whose political leaders (rulers) sought theoretical justification to legitimize their expanding power over the economic as well as all other aspects of the lives of their citizens. All rulers from as far back in antiquity as we delve are observed as requiring some legitimizing theory.

Another theme is the urgency in which economists seek to proclaim that their discipline is 'scientific' - the more so the less it actually employs 'scientific method'. But the clash has been conducted in much more personal, even vitriolic, terms than typical clashes in say, chemistry or physics. And, as noted above, so many of the theories in economics are clearly designed not only to influence political leaders, but also to advance the position ( career) of the economist.

The reader also may compare this battle of theories with those waged in the 13th century by the competing Dominicans and Franciscans at Universities such as Paris and Cambridge.

I will insert much more of my commentary along side the summary descriptions of the content of each chapter.

 
 

Introduction
- Dr. White begins by identifying many of the "dramatic experiments in economic policy" of the last hundred years. He describes these clearly in terms of the actual political - social events and trends that were either caused by or resulted from these theories. He is specific in writing: "Behind these movements and countermovements in economic policy lies an ongoing and often dramatic clash of economic ideas." The key words link 'ideas' and 'policy'. Ideas indeed do have consequences. Dr. White writes a history of the development of ideas About economics, rather than an economic history. But he does indicate the link between these Theories ( stress theories) about economics and the results seen in economic history.

The author continues: " Economists are notorious for the frequency of their policy disagreements." He continues: "The immediately policy-relevant parts of economic thought are not the whole of economic thought, and the other parts involve somewhat less disputation and more collaboration." And: "In this book the focus is on economic theory and empirical work that are related to public policy, though much of the literature was written for other economists rather than for the layman." Therefore, he writes, the book is organized in terms of the sequence of politically relevant controversial economic theories with attention also to their adherents, rather than as an encylopedia of economic thought en total.

Dr. White then provides a summary outline of the content. He writes: "The episodes and debates examined here were chosen for their historical importance and for the light they shed on how the rival positions have evolved that are held in today's major disagreements over economic policy. Policy - relevant theorizing rarely arises in a self-contained ivory-tower, or purely in response to other theories."
The reader should note, therefore, that the economists are indeed seeking to influence public policy and are developing theories they hope will achieve that purpose. The result, if they are successful, will be to provide a theoretical basis for the legitimacy of real and significant political decisions. And this, in turn, is because governments today play and seek to play a much more intrusive role in the economic life of their citizens and of course then also base their legitimacy for the votes of citizens on providing favorable economic conditions.

Dr. Whites's outline
-Chapter 1 describes economic thought just prior to World War I and introduces John Maynard Keynes and Friedrich A. Hayek -
- Chapter 2 is about the controversy between theories for central planning and market price systems
- Chapter 3 is about early business cycle theory, especially the Austrian school concepts
- Chapter 4 is about the 'institutional school of economics
- Chapter 5 focuses on Keynes's very influential book "General Theory"
- Chapter 6 focuses on Hayek's book, Road to Serfdom
- Chapter 7 is about the British implementation of nationalization and socialist theory
- Chapter 8 focuses on the opposing theories advanced by the Mont Pelerin Society
- Chapters 9 and 10 focus on actual results of economic theory in two different countries
- Chapter 11 is focused on the economic theories implemented at the Bretton Woods conference
- Chapter 12 discusses the revival of monetarist theory that resulted from the collapse of the Bretton Woods policy
- Chapter 13 focuses on the expansion of government intervention after World War II and two different economic theories about this
- Chapter 14 is about the expansion of international trade and the conflict between theories of 'free trade' and 'protectionism'
- Chapter 15 is again about a clash between Keynesian theory and opponents over government debt.

Dr. White then turns to a discussion over the actual influence of original economic theories and real political decisions. He notes that both Keynes and Hayek claimed that economic theories influences political actions. In contrast, he notes, Vilfredo Pareto claimed that politicians do what they want and only select for public consumption the economic theories that support what they wanted to do anyway. Pareto's view is also that of George Stigler.

In the next section Dr. White considers how economic theories are developed and how they enter public discussion and acceptance as well as their possible influence on politicians.

He then turns to a discussion of "Governments Versus Markets". He writes: "Economic policy ideas clash when their advocates have different views about the role governments should play in the economy. In this section he also explains the Leninist concept of 'commanding heights'. This is exactly my point - that economists only began seriously to develop theories about economic behavior that clashed was when governments sought greatly expanded roles in controlling economic behavior.

In his final section of the Introduction Dr. White describes and defines the terms "Socialism versus Capitalism'

 
 

Chapter 1 - The Turn Away from Laissez Faire -
But first, "Keynes and Hayek would come to play leading roles in the clash of economic ideas during the Great Depression." Dr. White immediately provides brief professional biographies of both individuals, describing the influences on each by the current leading economist theoretitians. Next he notes that Keynes rejected Adam Smith and the laissez-faire theory and along with this he forcefully rejected theories that decentralized markets could or would adequately create economic well-being.

Dr. White summarizes the whole conflict thusly: "Keynes was a leading advocate of the view that government should take greater control over the economy. Hayek was a leading advocate of the view that government should interfere less with market forces.".

That is indeed the whole story. One does not have to imagine to realize which theory would be advocated then by people who wanted to increase their role as government politicans and bureaucrats.

Dr. White notes what we all see, that for most of the past century the Keynesian supporters of expanded government control have won. He begins his discussion of real history in the late 19th century 'progressive era' during which (without any advice from Keynes) American politicians such as T. Roosevelt and W. Wilson succeeded in their efforts. Dr. White identifies the role of German economic theory (German historical School) on the generation of Americans who professed to be economists even so far as to found theAmerican EconomicAssociation as a 'professional' organization dedicated to advancing both the role of economists and the expansion of government itself as well as its power.
I might interject that this was a period of greatly increased German influence in many fields after their victory in the wars with Austria and France - In economics is was through the "German Historical School".

Dr. White continues by noting that "Keynes was not the First to Turn Away from Laissez-faire Ideas". He writes that the role of Keynes and conversely the idea that most economists prior to him did believe in Laissez-faire are greatly exagerated by both Keynes himself and his adherents even today. (Krugman among them). He points out that the role of government greatly expanded prior to, then during World War I, and subsequently right into the Depression all prior to Keynes taking the public stage. As with so many of his other pronouncements, Krugman's pitch that Keynes faced the oppsition of most contemporary economists is false. Dr. White continues with analysis of the thought and influence of Alfred Marshal and Irving Fisher.

 
 

Chapter 2 - The Bolshevik Revolution and the Socialist Calculation Debate

 
 

Chapter 3 - The Roaring Twenties and Austrian Business Cycle Theory

 
 

Chapter 4 - The New Deal and Institutionalist Economics

 
 

Chapter 5 - The Great Depression and Keynes's General Theory

 
 

Chapter 6: - The Second World War and Hayek's Road to Serfdom

 
 

Chapter 7: - Postwar British Socialism and the Fabian Society

 
 

Chapter 8: - The Mont Pelerin Society and the Rebirth of Smithian Economics

 
 

Chapter 9: - The Postwar German "Wonder Economy" and Ordoliberalism

 
 

Chapter 10 - Indian Planning and Development Economics

 
 

Chapter 11: - Bretton Woods and International Monetary Thought

 
 

Chapter 12: - The Great Inflation and Monetarism

 
 

Chapter 13: - The Growth of Government: Public Goods and Public Choice

 
 

Chapter 14: - Free Trade, Protectionism, and Trade Deficits

 
 

Chapter 15: - From Pleasant Deficit Spending to Unpleasant Sovereign Debt Crisis.

 

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