White, a professor of economics at George Mason University, shows how the world turned away from the laissez-faire experiment after World War I, and how the New Deal put another nail in the coffin of capitalism. For a long time we have been living in societies not remotely identifiable as laissez-faire. Friedrich Hayek, a future Nobel economics prizewinner (1974), observed in 1935 that “[w]e are certainly as far from capitalism in its pure form as we are from any system of central planning.” “The world today,” he added, “is just interventionist chaos.”
End of laissez-faire | Many will be surprised to discover how, by the time of the New Deal and even before World War I, mainstream economists had come to embrace heavy state intervention in the economy. In the late 19th century, classical economist John Stuart Mill and economist-philosopher Henry Sidgwick “came to regard an increasing number of activities as exceptions to laissez-faire.” Jeremy Bentham had already provided them with good utilitarian tools for that purpose. Alfred Marshall, founder of the neoclassical school of economics and probably the most important economist of his time, wrote in 1907 that “[e]conomists generally desire increased intensity of State activities for social amelioration,” even if “they are opposed to that vast extension of State activities which is desired by Collectivists.”
The Clash of Economic Ideas is full of telling quotes and stories. The American Economic Association was founded in 1885 by anti-laissez-faire economists inspired by German socialists. Their leader, Johns Hopkins University’s Richard Ely, argued that “[a]ll the great instruments of production, like telegraphs, telephones, railways, forests, arable lands, and large manufacturing plants, must become collective property.” However, he added reassuringly, “socialism does not imply that it is necessary to restrict individuals in the acquisition of the instruments of production on a small scale—for example, a wheelbarrow or a cart.” As the reader will discover later in White’s book, state planning is not really more sophisticated than a wheelbarrow.
Another famous economist of the early 20th century, Yale University’s Irving Fisher, wrote in 1907 an article titled “Why Has the Doctrine of Laissez Faire Been Abandoned?” A defender of eugenics and an advocate of Prohibition, Fisher hailed “the change from extreme laissez faire doctrines of the classical economists to the modern doctrines of governmental regulation and social control.”
We tend to forget how statist American intellectuals were during the Progressive Era. By 1921, philosopher and economist Thornstein Veblen, author of the well-known The Theory of the Leisure Class (1899), was arguing that the economy would be more efficient if run by a “Soviet of Engineers.”
By the time of the Great Depression, laissez-faire had been abandoned by both theorists and policymakers. “[L]aissez-faire is dead,” wrote in 1939 Rexford Guy Tugwell, a Columbia University professor who had joined the Roosevelt administration. In a 1932 article, “The Principle of Planning and the Institution of Laissez Faire,” Tugwell had already argued that “order and reason”—that is, planning—“are superior to adventurous competition.”
When, in 1936, John Maynard Keynes published The General Theory of Employment, Interest, and Money, he was sowing an already fertilized soil. Keynes argued that government intervention had to boost consumption to correct and prevent crises of overproduction such as (he claimed) the Great Depression. White shows instead how the Great Depression was a result of government failure, not of market failure, and how the New Deal accumulated government failure after government failure. But Keynes’s influential book provided an a‑posteriori rationalization for the New Deal and a justification for the economic fine-tuning that was to characterize fiscal and monetary policy for several decades afterward.
Although he was not a communist, Keynes believed, as White puts it, that “[a]n enlightened government should take control.” In 1926, Keynes had published a monograph titled The End of Laissez-Faire. By the time the General Theory appeared, many leading economists, including free-market economists at the University of Chicago, had proposed government spending and public works programs to counter the Great Depression. In other words, Keynes only represented the spirit of the times, though perhaps with a vengeance.
World War II marked another big step in government intervention: as Randolph Bourne said, war is the health of the state. After the war, and even though most wartime controls were finally abolished, it was now generally believed that dirigisme was good. This was especially obvious in the UK and other European countries, but the trend was also glaring in America.
Heydays of planning | Oh, how hubristic were the times from the 1950s to the 1970s! Economic planning was seen as simply the use of reason in human affairs. An academic in good standing had to be more or less socialist. A non-socialist intellectual was nearly an oxymoron. Many academics and intellectuals supported Soviet communism, often even after Stalinist violence had been revealed.
Although they tended to be more critical, economists generally believed in their enlightened capacity to plan the whole economy, to put society on its production possibility frontier as shown in textbook graphs. The zeitgeist is captured by White’s prose nearly as intimately as with a smart-phone camera. Supporters of central planning assumed, as White puts it, “that the production functions can be found in an engineering manual available to the central administrators.”
Ragnar Frisch, a Norwegian econometrician and a darling of the times who was to share the first Nobel Prize in economics, thought that the Soviet Union was overtaking the West. Paul Samuelson, winner of the second Nobel Prize in economics, wrote in his famous introductory textbook Economics as late as 1989, “The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.”
Perhaps nowhere more than in the field of development economics did the infatuation with planning wreak havoc. John Kenneth Galbraith, the Harvard professor and popular economist, wrote in 1962 that in the developing countries, “the word planning has ceased to be controversial.” “The country which does not have goals, and a program for reaching these goals, is commonly assumed to be going nowhere,” the learned professor pontificated. “This may well be so,” he nodded. In the 1950s, Galbraith brought the gospel of planning to India. After three decades of this regime, White notes, India’s real personal incomes had fallen from three-fifths of South Korea’s to less than one fifth.
Planning advocates realized that much regulation would be required. Tugwell wrote that “[n]ew industries will not just happen as the automobile industry did; they will have to be foreseen, to be argued for … before they can be entered upon.” Imagine Steve Jobs arguing for personal computers before the Central Planning Bureau, or Mark Zuckerberg pitching social networks to a congressional committee!
The planning elite would naturally substitute their own preferences to the Plebs’. Maurice Dobb, a famous Marxian economist at Cambridge University, later declared: “Few, surely, could seriously maintain that the amount and sort of music to be played by the BBC should be decided by a market mechanism.”
Challenges to orthodoxy | As Leviathan was growing uncontrollably, several currents of economic thought played contrarian. The Austrian school of economics, born in late 19th century Vienna, started early. From the 1920s on, it was represented by economists Ludwig von Mises and Friedrich Hayek. After World War II, neoclassical economists also became more critical of the accepted statist wisdom, often returning to the insights of Adam Smith and other classical economists. White brilliantly reviews the development of these countercurrents.
As early as the 1920s and 1930s, Mises and Hayek argued that efficient planning is impossible. Planning an economy requires a quantity of information that the planners cannot possess. The problem is not mainly one of computation, but lies in the dispersion, across individual minds, of local knowledge about preferences and costs. This practical knowledge is inaccessible to planners. Only a freely functioning price system can incorporate such information in price signals so that inputs are used efficiently to serve consumer demand. It took much time for mainstream economists to become persuaded of this.
The most enlightened socialists later confessed that Mises and Hayek had won what came to be known as the socialist calculation debate: “It turns out, of course, that Mises was right,” graciously admitted economist Robert Heilbroner after the collapse of the Soviet Union.
Peter Bauer was among the first economists to challenge statist models of development. Today, more economists have realized, in the spirit of Adam Smith, that economic growth depends on suitable institutions that protect private property and foster enterprise.
When Richard Nixon declared in 1973, “I am now a Keynesian in economics,” he was riding the last wave of Keynes’s macroeconomics tsunami. During that very decade, Keynesianism was battered by the unexplainable coexistence of inflation and unemployment while budget deficits soared. The Austrian theory of the business cycle provided an alternative explanation, but never really caught on. It was left to monetarism to successfully challenge the reigning monetary and fiscal orthodoxy.
At the forefront of this challenge was Milton Friedman, who reformulated and improved the quantity theory of money. He won the 1976 Nobel Prize in economics for his work in monetary economics and related advances in economic theory. Friedman showed that monetary policy was mainly effective in creating inflation, while being incapable of solving unemployment problems. Although he opposed discretionary monetary policy, he did not believe in the fixed exchange rates implied by a gold standard.
White provides masterful explanations of the differences between Keynesianism, the Austrian school, and monetarism. He also discusses more recent debates and macroeconomic theories. He is especially strong in his field of specialty: monetary theory and history. If you want a crash course in monetary economics, this is the book to read.
As White shows, much is wrong with the conventional wisdom that assumes the necessity of a central bank. In fact, private issuance of money could work, and did work in a few historical instances. White explains how a system based on metallic money is a self-regulating order, and how fiat money has historically led to higher inflation. He also shows how, even within the Austrian school of economics (of which he is one of the main contemporary theorists), different and often conflicting theories coexist—on the role of gold, for example.
One chapter of The Clash of Economic Ideas is devoted to public goods and Public Choice. Launched by James Buchanan (winner of the economics Nobel Prize in 1986) and Gordon Tullock, Public Choice theory was the latest (and perhaps the most devastating) attack on the economic orthodoxy that reigned during most of the 20th century. Public Choice economics shows how government is intrinsically incapable of solving the problem of public goods, if only because the very nature of these goods makes the revelation of individual preferences as opaque to government as to the market. More generally, it is not in the interest of politicians and bureaucrats to promote Pareto optimality. All these concepts are beautifully explained by White.
Role of the state | The Clash of Economic Ideas reviews many other economic issues: how the market is a continual bidding process; how trade protectionism is like dumping rocks in your own harbors in order to counter some other government doing so in its own country’s harbors; how goods take their values not from the labor expended in making them, but from the preferences of consumers; what is deadweight loss; what is Ricardo’s rent; what is the land tax proposed by Henry George; how bimetallism cannot work; how deficit spending is not a free lunch; what Ricardian equivalence means; and so on.
White is an excellent storyteller, whether he relates the “Roaring Twenties” and the following crash, the 1944 Bretton Woods accords, or any of the numerous historical episodes that run through The Clash of Economic Ideas. The book is full of interesting factoids: how the abolition of price controls in occupied Germany led to an almost overnight disappearance of queues; how the annual Federal Register grew from 2,060 pages in 1936 to more than 80,000 pages in 2010; and so forth.
Economic humor is finely distilled. For example, White recalls how, in an episode of the libertarian-tinged animated series South Park, a family bought on credit a $200 Margaritaville blender it could not afford. This imprudence, he points out, is nothing compared to the 400 Margaritaville blenders that the federal debt represents for each American household.
Have economists learned anything? Do they agree on anything? Yes, suggests White, if we consider our positive understanding of the social world. But disagreement over policy issues remains intense, partly because they involve normative issues.
The major normative issues in both economics and political philosophy relate to the role of the state. White illustrates again and again how “[t]he key insight of economics … is that, under the right conditions, an economic order arises without central design that effectively serves the ends of its participants.” The implication that the role of the state should be maintained at a minimum is very convincing, but ultimately rests on values that lie outside the scope of science. Yet, economics can help by tracing the likely consequences of state intervention. If you really want smartphones instead of wheelbarrows, don’t ask a state committee to plan their production.
White approaches all these issues with an inquiring and open mind, which is not always the most striking feature of libertarian theorizing. (In writing this, I am not casting a stone at anybody, since I have myself sinned earlier in my career.)
What is the relative impact of debates over ideas as opposed to competing interests? Sometimes, White seems to argue, ideas shape events as Keynes suggested; in other cases, as economist Vilfredo Pareto would have it, interests rule and ideas just follow. It is fascinating to watch the entanglement of economic events and ideas as described by White. The Clash of Ideas certainly brilliantly fulfills its promise to trace these connections.
For the reader with an elementary background in economics (like an undergraduate course in microeconomics and one in macroeconomics), this book provides an entry into the next stage: the fascinating intellectual adventure that justifies learning elementary economics in the first place. The more seasoned economist will find The Clash of Economic Ideas an exciting reminder of what he has learned, or should have learned better.
