Front Page Titles (by Subject) III: Economic Thought and Values - Literature of Liberty, Summer 1980, vol. 3, No. 2
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III: Economic Thought and Values - Leonard P. Liggio, Literature of Liberty, Summer 1980, vol. 3, No. 2 
Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.
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Economic Thought and Values
This set of summaries discloses the intimate connection between economic theory or history and political, moral, and religious values. The Keller study of business and legal history in America shows shifting legal and moral values interacting with business and economic growth. The closing O'Driscoll summary reveals the weaknesses of a wertfrei economic approach to law. The studies of Menger, Schumpeter, and Saint-Simon point out evaluations given to market and nonmarket economic approaches. Bauer's and Novak's summaries examine “the market in the dock,” or the alleged case against the free market.
Business and Legal History
“Business History and Legal History.” Business History Review 53(Autumn 1979):294–303.
The two winners of the 1978 Bancroft Prize in American History, Alfred D. Chandler's The Visible Hand: The Managerial Revolution in American Business and Morton J. Horwitz's The Transformation of American Law 1780–1860, are prime examples of important scholarly work currently being done in the fields of business and legal history. Each is a notable and worthy contribution to its own area of research; yet, while each deals with his subject in a broad institutional manner, neither author fully relates the impact of his own subject area to the other's field. Business and law, it would seem, developed institutionally independent of each other.
A duality governing the nineteenth and twentieth centuries in America was that of growth versus order. Following in the tradition of James Willard Hurst, Horwitz demonstrates how the law was fashioned and interpreted early in the nineteenth century to “release energy” and to create the nationwide conditions for economic growth. Later in the century the law was used, at least in part, to regulate the economic environment. The history of the late nineteenth and twentieth centuries has been described as a balance between “release” and “control.” Yet Horwitz sees the period as one of rigid formalism that continued mainly to serve business interests. Chandler, however, sees the institutional growth and development of nineteenth century business to be a function of its own inner dynamic, remaining largely unaffected by changes in the law. Neither author takes into consideration the sheer scale of the American legal system. In the 1930s, for example, fifteen million legal actions per year were recorded in the United States. Surely many of these litigations had a great impact on business conduct and institutions, and, these changes in turn had their effect on the law itself.
The three authors of the articles which constitute this issue of Business History Review approach their task by studying legal development within the context of economic and business history and vice versa. Tony Freyer studies the struggle during the late nineteenth century between the federal courts and local interests and its subsequent effect on the rise of a national economy. It was a struggle in which the federal judiciary resolved most of the issues along nationalist lines but one whose results nevertheless still maintained a considerable residue of local diversity. Gary Libecap examines the interplay between Western mining, the law, and its consequent legal and public policy effects. Freyer and Libecap show that the American economy developed within a considerable panoply of regulation long before the generally acknowledged rise of the Administrative State.
Charles McCardy discusses the development of corporate law in relation to the antitrust question. He concludes that the Supreme Court's action in the United States versus E.C. Knight Company case—which made the distinction between commerce and manufacturing—was a well established legal distinction and not a contrivance to enervate the Sherman Act.
These three articles show that the courts played an important and assertive role in the development of the United States economy both on the “macro” and the “micro” level. The interplay of business and law is a clear reality, and much more interdisciplinary work needs to be done to capture the results of this important interrelationship.
Schumpeter's Economic Theories
“Joseph Alois Schumpeter.” Journal of Economic Issues 13(March 1979):141–157.
Joseph Schumpeter (1883–1950) studied economics under the Austrian economists Wieser, Philipovich, and Bohm-Bawerk at the University of Vienna where Bohm-Bawerk took a special interest in the brilliant young economist. Among his classmates were the later leader of the Austrian economists, Ludwig von Mises, and the Austro-Marxists Otto Bauer, Rudolph Hilferding, and Email Lederer. The twin perspectives of Marxian and the Austrian school of economics were to influence Schumpeter's view of the social process throughout his career. After receiving his doctorate in 1906, Schumpeter traveled to England to continue his research and to follow up on his growing interest in mathematical economics, an interest that can be clearly seen in his first major publication, Das Wesen und der Haupinhalt der theoretischen Nationalökonomie.
It is, however, with his second publication, The Theory of Economic Development (1912), that Schumpeter first advanced what was to be his most important contribution to economic theory and what was to remain a constant theme in his work throughout the rest of his life. In this work (unlike his first work where he had “solved” to his own satisfaction the allocation problem in a static setting) Schumpeter turns his attention to the real world of dynamic change. It is here that he unveils the driving force of the market economy—the innovator-entrepreneur. It is the entrepreneur who bursts onto the static scene and, armed with unusual insight, innovation, and perseverance, disturbs the static equilibrium and throws the whole economic system into a frenzy of change, growth, and development.
Schumpeter's scholarly interests were both wide ranging and deep. His knowledge of the theoretical economic literature was astounding, yet his interests were far broader than economics narrowly defined. In his well known essay, Imperialism (1918), Schumpeter sets forth his contention that imperialism is not due to modern capitalist forces but rather to feudal atavisms that remain in the not yet totally modern socio-economic system—an obvious challenge to the theories of Lenin and Hilferding. According to Schumpeter, the purely economic forces are self-equilibrating. It is, therefore, within the political realm that one must look for the causes of market failure and social breakdown.
For years Schumpeter continued work on his theory of innovation and change, and in 1939 he published the fruits of his life-long research: Business Cycles—A Theoretical, Historical and Statistical Analysis of the Capitalist Process. The reception from the profession was disappointing, but, undeterred, he pushed on. In 1942 he published the remarkably successful Capitalism, Socialism and Democracy. This work, addressed to the educated layman, set forth Schumpeter's unique analysis of the capitalist system, a system whose very successes would cause its downfall.
Joseph Schumpeter died in 1950 while at work on yet another and perhaps his most erudite work: History of Economic Analysis. Two years later his wife Elizabeth Boody Schumpeter published the manuscript which detailed two thousand years of economic thought in well over one thousand pages of rich and stimulating prose.
Menger and Entrepreneurship
Perception, Opportunity and Profit: Studies in the Theory of Entrepreneurship. Chicago: University of Chicago Press, 1979.
What contribution to entrepreneurial theory can we find in the writings of the founder of the Austrian School of economics, Carl Menger? Frank Knight claimed that Menger, his contemporaries, and even his successors in the Austrian School were of little help to later economists in the subject of entrepreneurship. Eric Streissler, on the other hand, contends that no less an entrepreneurial theorist than that of Joseph Schumpeter built his own theory of innovative entrepreneurship on Mengerian foundations. W. Jaffe, too, stresses the entrepreneurial element in Menger's work. Schumpeter, however, dismissed Menger's work on entrepreneurship as practically non-existant. Streissler's focus on Menger's preoccupation with the information problem in economics, nevertheless, may give the investigator a promising lead with which to discover Menger's own position of entrepreneurship, if one is to be found.
Menger, it is true, specifically mentions entrepreneurship only briefly in his Grundsatze. Perhaps, however, it is possible to find an implicit understanding of the entrepreneurial function. If so, it will depend on how he treats the following: knowledge, error, and uncertainty.
Knowledge is the constant theme found throughout the Grundsatze—especially knowledge in relation to the activity of economizing. The individual must first perceive that his needs are greater than his means. Second, he must gain specific knowledge about his given circumstances and knowledge of the means to improve his condition.
Knowledge is of course necessary to overcome ignorance, and the market process can be seen as a vehicle for the modification of error over time. W. Jaffe argues that Menger does see the market as such and that therefore Menger's perception of the market was an entrepreneurial one. In reading Chapter Five of the Grundsatze, however, one finds that Menger has completely eliminated error from any role in the determination of prices. The truth is that Menger's price theory was entirely an equilibrium theory in which error and the consequent entrepreneurially driven learning processes were considered an abnormality.
How is this apparent inconsistency to be cleared up? By understanding Menger's differentiation between “economic prices” and “uneconomic prices” one can understand how Menger could place such an emphasis on information, change, and knowledge and at the same time set forth a static equilibrium notion of price determination. For Menger economic prices are those that would obtain under conditions of complete knowledge on the part of all relevant market participants. Uneconomic prices are those found in the real world. It is these prices which ignite the spontaneous development of market institutions which improve the environment within which prices are set and which, over time, modify the “uneconomic” character of these very same prices.
Although Menger posits a theory which is infused with the dynamics of the real world, he never specifically points to the precise element in the process that tends to push the system from uneconomic or distorted prices to economic prices or to prices which correctly reflect the underlying valuations of market participants. As such he never did develop an entrepreneurial theory. Nonetheless, economists as diverse as Schumpeter and Mises working at least in part on the foundation laid by Menger did see the central role of the entrepreneur and did much to develop and clarify the theory of the entrepreneurial market process.
Saint-Simonian Economic Ideas
“The Saint-Simonians in Industry and Economic Development.” American Journal of Economics and Sociology 38(January 1979):83–96.
Ideas as well as narrowly defined economic interests often serve as causal forces in the flow of economic history. To understand economic history the historian must delve into and come to grips with the history of ideas. This article is a study of the relationships between the utopian ideas of the Saint-Simonians and the real world of investment banking and European industrialization, and as such it can serve as a useful methodological lesson for current cliometricians.
The followers of Henri de Saint-Simon (1760–1825) such as Enfantin, Chevalier and especially the Pereire brothers, Emile and Isaac, foresaw and labored to achieve a world of industrialism, peace, and harmony, a world united by railways and fueled by a mammoth credit institution.
The problem with laissez-faire as stated in The Doctrine of Saint Simon, is that “the accident of birth blindly distributes the instruments of production.” Fortunately, however, the capitalist system has within itself the seeds of the correct answer to the problem—the banking system itself. The banks serve as intermediaries between those with capital and those who have none. The banks perform the crucial function of directing the tools of production into the hands of those who most need them. It is the banking sector which will be expanded, strengthened, and centralized to carry out the function of determining and guiding the direction of the future industrialized economy. A central bank will organize and direct secondary banks which will in turn serve as feed back centers, sending information to the central bank concerning local conditions. Each industry is to have its own specialized bank designed to meet its own particular needs.
The success of these Saint-Simonian ideas can be measured by the magnitude of their implementation. Friedrich Hayek has pointed out that the Saint-Simonians, especially Enfantin, were forerunners of the Suez Canal Company in Egypt. Enfantin then went on to create the merger of the Paris-Lyon-Mediterranean Railroad. Michel Chevalier, coauthored the Anglo-French Treaty of 1860 which greatly expanded trade and industrialization throughout France. But by far the most significant implementation of Saint-Simonian ideas appears in the economic activities of Emile and Isaac Pereire who founded the Paris-St. Germain railroad and then were instrumental in creating the famous Credit Mobilier. The Credit Mobilier pioneered in numerous investment and central banking functions, including discounting, advances of long term credit, industry-wide rationalization and reorganizations.
Imitators of the Credit Mobilier sprang up all over Europe during the last half of the nineteenth century, often under the direction of the Pereire brothers: the Darmstadter Banks in Germany, Credito Mobiliario Espanol in Spain, Credito Mobiliare Italiano in Italy and the Credit-Anstalt in Austria. An indication of the perceived worthiness of the Saint-Simonian ideas can be seen in the fact that when the Rothchilds moved to block the Credit Mobilier, they were moved to adopt the same method of organization and operation as the institution they replaced.
The Free Market & the Third World
“The Market in the Dock.” Policy Review (Fall 1979):101–121.
The Third World's political and economic discourse maintains a consistent hostility to the free market. Prof. Bauer traces the origins of this opposition and chronicles the progress of anti-market ideas throughout the twentieth century.
During the hundred years before the Second World War, the market system regulated domestic and foreign trade in much of Asia, Africa, and Latin America. During the period, impressive material progress was achieved over much of this area—notably in the Far East, Southeast Asia, and West Africa. Since the war, however, the Third World has raised a loud outcry against the market. Criticisms range from the liberal economy's “failure” to assure public or private happiness to its inability to provide uniform material progress to all strata of society at the same time. Currently, the anti-market, centralized planning approach to economics is axiomatic in underdeveloped countries.
Although this hostility emanates from the Third World, it originates in the West. For example, developmental economics in Western universities propound a strong centralist position. Third World students trained in those schools return home to spread the message of market failures and state planning successes.
In addition, United Nations agencies and national aid organizations, such as the U. S. agency for International Development, explicitly exclude from economic consultant positions all those who do not espouse the planning model. Finally, international reporting, documentary films, and even the visual arts and entertainment propagate the centralist approach among intellectuals not versed in economics and among the masses in general. As a result, economic debate in the Third World revolves mainly upon the choice of the Soviet or Chinese model of development. The options have thus grown excruciatingly narrow. In Third World economic discussion, protocol discourages citing examples of free market development such as Japan, Taiwan, Hong Kong, and Singapore—areas which have advanced farther and more rapidly than their centrally planned counterparts.
It must be stated, however, that, if Third World socialism originated in the West, Third World conditions allowed it to flourish. The authoritarian tradition of most underdeveloped nations readily accommodates the coercive style of the centralized planners. In addition, Third World politicians, as politicians elsewhere, can rarely resist opportunities to extend their influence. With increased licensing of economic activities, control of foreign trade, and establishment of state trading monopolies, politicians can considerably enhance their power. Also, many intellectuals in poor countries cannot resist the lure of preferment as government consultants or the opportunity to lord it over an unlettered populace. Few such avenues to privilege would exist in a free market society.
Democratic Capitalism, Justice, & Religion
“Productivity and Social Justice” in Will Capitalism Survive? ed. Ernest W. Lefever. Ethics and Public Policy Center: Georgetown University, Washington D.C. 1979.
Novak attacks the conventional theological condemnation of democratic capitalism. Such criticism usually exaggerates the evils of capitalism, blames it for imaginary faults, and refrains from offering us a superior social system. In this anti-capitalism, modern theologians are unfortunately following a long tradition. Contrary to Weber, Calvinist theologians always resisted capitalism; furthermore, Bonhoffer, Barth, Tillich, and the early Niebuhr were socialists.
Theologians are thus quite traditional in their nonmarket economics. First, their view of social justice contrasts modern alienation to a mythical simple community of togetherness where no one uses anyone as a means. Second, their view of social justice centers on distribution, thus ignoring Adam Smith's economic revolution which demonstrated that new wealth could be created and thus pointed to an ethic of productivity.
Theologians need to learn economics, need to make some empirical comparisons with socialism, and also need to devise a new theological account to match economic reality. Democratic capitalism consists of an economic market, a democratic polity, and a pluralistic culture. A theological analysis of it would go as follows. The aim of this social system is to improve the well-being of all mankind by creating wealth and thus liberating people by giving them more leisure, mobility, and opportunity. Second, the democratic capitalist system is highly fraternal since it requires associations and cooperation. Third, this system depends on a sense of sin, for in order to bend human nature successfully to produce social benefits, an awareness of the weakness of human nature is necessary.
Property, Law, and Economics
Two Reviews of A. Allan Schmid's Property, Power and Public Choice: An Inquiry Into Law and Economics. New York: Praeger Publishers, 1978. Journal of Economic Issues 13(September 1979):743–749.
These two reviews of A. Allan Schmid's book are generally complementary. Schmid identifies the way institutions shape interactions through property rights. Property rights create the opportunities, costs, and constraints of transactions and economic distributions. Schmid combines the positive analysis of such institutions with a normative analysis. He criticizes the predominant Pareto efficiency criterion and other criteria for welfare economics as being disguised value judgments. He also believes that economist's contributions ought to be limited to providing information about the source and consequences of conflicts over interests. This role of the economist is not, however, value free, since it assumes informed choices are better than uninformed choices.
The two reviewers' criticism is that Schmid fails to provide a convincing value criterion for economic analysis, given that he has criticized welfare economists for their disguised value judgments. Furthermore, Schmid does not discuss the fact that institutional “constraints” depend in part on people's perceptions concerning whether they are indeed constraints or liberating devices.
The Economic Analysis of Law vs. Values
“Justice, Efficiency and the Economic Analysis of Law: A Comment on Fried.” Journal of Legal Studies 9(March 1980):355–366.
O'Driscoll here criticizes Richard Posner's economic analysis of law, partly by commenting on a paper by Charles Fried on the same subject entitled “The Laws of Change”.
The economic analysis of law exhibits both a positive and a normative aspect. First, the positive analysis claims that common law has been efficient. This is so only in the trivial sense that any application of means to ends is rational and thus “efficient.” If we narrow the notion of efficiency, such as to economic efficiency, then common law could not be efficient. The economic variables are subjective and involve expectations, so ex post outcomes must involve disrupted expectations for at least one party and thus are not typically efficient. Similarly, ex post judicial decisions would not be efficient for both parties since one party's expectations have to be foiled. Nor is it possible for judges to assign rights and liabilities solely on efficiency grounds because utility or wealth maximization requires some set of rights and rules to govern the choice process.
Posner also errs in believing that where there are prohibitively high “transactions costs,” judges can mimic markets. But as the debates with the socialists of the 1920s and 1930s show, where information is lacking a market is impossible, and it is only where information is lacking that a need to “mimic” markets would arise.
Posner also claims that economic analysis will tell us why laws change, and that judges conceal their true (economic) reasons for their opinions. Fried correctly countered that the reasons laws change is due to moral reasoning, since law is a branch of morality. However, Fried goes too far in assuming moral arguments are the whole motivational story. Economic motivation plays some role. Nor should Fried chide economists for saying nothing about the content of preferences. All preferences are, for economist qua economist, equal with regard to allocational choices, and the economist has no business saying moral distinctions can or cannot be made within these preferences. In fact, when persons' changing preferences and their deliberations about such preferences are essential to the analysis, we are beyond pure economics. A theory for prescribing legal changes is not a pure economic theory.
Finally, O'Driscoll argues that both Fried and Posner (as well as John Rawls) share the same faulty view that law can be deduced from simple principles (moral principles and wealth maximization, respectively). Law evolves and grows and it is not just constructed. Hence it cannot really be deduced from axioms or principles.