Front Page Titles (by Subject) I: Economics & Political Economy - Literature of Liberty, Autumn 1982, vol. 5, No. 3
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I: Economics & Political Economy - Leonard P. Liggio, Literature of Liberty, Autumn 1982, vol. 5, No. 3 
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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Economics & Political Economy
In the debate over the proper monetary order for a free and prosperous society, as presented in Pamela Brown's lead essay, “Constitution or Competition? Alternative Views on Economic Reform,” we discern the powerful, dogmatic role of ideology or what David Levy has called the “metatheoretical framework” in creating tragic economic results [see “Rational Choice and Morality: Economics and Classical Philosophy,” History of Political Economy 14 (Spring 1982): 1–36]. If there is a divergence between one's monetary theory and reality or practical results, which is to change? Consistently, over the past half century, blind fidelity to the ideology of centralized control over money and credit and contempt for the spontaneous ordering of our economy through individuals' free choices has proven socially disastrous. Recessions, a debilitating inflation, and the current specter of the collapse of the world-wide monetary and economic order should provide sufficient “anomalies” to provoke us into questioning conventional wisdom on how to “run” an economy. Literature of Liberty's opening “Editorial” appropriately celebrates the uncompromising genius of Ludwig von Mises in challenging the counter-productive ideology of interventionism.
Mises on Money & Inflation
“Ludwig von Mises: His Insight and Foresight on Money.” Review essay of On the Manipulation of Money and Credit by Ludwig von Mises. Dobbs-Ferry, N.Y. Free Market Books, 1978. The Intercollegiate Review 16 (Fall 1980): 53–56.
Ludwig von Mises (1881–1973), a leading spokesman of the “Austrian School” of economics, was well known for his keen economic insight and consistent logic. “As his fellow Austrian, Nobel prize economist F. A. Hayek, has written, even those who cannot follow his line of reasoning precisely usually find that later events prove him right. Thus, his analysis of money, inflation, and credit expansion becomes increasingly important the more people expect inflation to continue.”
“Mises' On the Manipulation of Money and Credit contains new translations of several studies, not previously available in English, which Mises wrote between the two World Wars when he was an economic adviser to the Austrian government.” The first of these, Stabilization of the Monetary Unit—from The Viewpoint of Theory (1923) predicts the runaway inflation that Germany was to experience later that year. The second study, Monetary Stabilization and Cyclical Policy (1928) analyzes schemes that resemble current plans to stabilize the purchasing power of money by indexation as a means to avert a depression. The third study, The Causes of the Economic Crisis (1931), “explodes the ‘full employment’ recommendation Keynes was to make five years later in his General Theory (1936).”
In our “age of inflation,” Mises' analysis of the evils and consequences of governmental increases in the quantity of fiat money is all too relevant. Inflation produces higher money prices and wages and motivates people into panicky buying of homes, cars, and major appliances today on speculation or out of fear that prices will be even higher tomorrow. In addition to shifts in prices and purchasing power, monetary expansion disturbs economic relationships. Inflation deceives businessmen by distorting economic calculations. It seduces businessmen into capital consumption and malinvestment until consumers demonstrate that they prefer buying lower order consumer goods rather than higher order capital goods and the products they provide.
Mises' volume incisively covers topics of crucial importance for our age: the German paper money inflation, credit expansion, the business cycle, deficit financing, trade balances, gold outflow, price indices, interest rates, and the creation of bank credit. Mises' analysis led him to advocate free banking and to warn against all attempts to manipulate interest rates and the quantity of money and credit: “The most important prerequisite of any cyclical policy, no matter how modest its goal may be, is to renounce every attempt to reduce the interest rate, by means of banking policy, below the rate which develops on the market.”
British Free Banking & Monetary Theory
“Free Banking in Britain: Theory, Experience, and Debate, 1800–1845.” Ph.D. thesis; University of California, Los Angeles, 1982.
Free banking—the system under which the paper currency of an area is issued by unregulated and competitive private banks on the basis of convertibility into standard coin—was widely advocated in the nineteenth century. White's dissertation studies the question of free banking as it confronted policy makers and economic writers in Britain in the first half of the nineteenth century. The study intertwines monetary theory, economic history, and the history of economic doctrine.
Chapter 1 undertakes to build a theory of free banking as a framework for the historical and doctrine-historical discussions of later chapters. The author models the individual bank of issue as a profit-maximizing firm and finds that the desired banknote circulation of the bank is limited by cost considerations. He next models the system as a whole, viewing it as a small open economy on an international specie standard, and finds its nominal magnitudes determinate. He then examines the equilibrating mechanisms which restrain banks from over-issuing by bringing about a “reflux” of excess notes. Reflux occurs as holders of excess notes re-establish their asset-holding preferences. Commonly the route of reflux passes through a note-exchange system, an inter-bank clearing mechanism whose origins are explained in an invisible-hand fashion.
Chapter 2 examines the record of free banking in Scotland, the world's clearest-cut example of free banking in practice. The author traces the evolution of the Scottish banking industry, emphasizing competitive entry and innovation. He then contrasts the arrangement, legal framework, and macroeconomic record of Scottish banking in its heyday with those of contemporary English banking, and finds the Scottish system superior.
The third chapter shows that the question of free banking versus central banking as the remedy for business cycles was a focal point of British monetary policy debates between 1820 and 1845. He revises the standard “Currency School-Banking School” picture of these debates by identifying the Free Banking School as an important third body of monetary thought. He traces the debates chronologically. Adam Smith and then the Bullionist controversy of 1800–1820 are treated as precursors. He next examines the free banking controversy of 1820–1845 in detail, placing the major contributors and their contributions against two sets of background events, the era's successive business cycles and its Acts of banking legislation.
Chapter 4 deals issue-by-issue with the major analytical differences dividing the Currency, Banking, and Free Banking School theorists. The issues treated are: (1) free trade in the production of currency; (2) over-issues under free banking and under central banking; (3) the origin and transmission of business cycles; (4) the “currency principle,” the monetary rule proposed by the Currency School; (5) “banking principles,” among which the author distinguishes the real bills doctrine, the needs of trade doctrine, and the “law of the reflux”; and (6) spontaneous (undesigned) order versus constructed order in monetary systems. In general the positions of the Free Banking School on these issues are found to have the greatest cogency.
The final chapter argues the relevance of free banking to contemporary discussion—particularly Hayek's call for “denationalization of money”—of alternative monetary institutions. White pictures free banking as a means of escaping the problem that a government monetary authority must be dangerously flexible or dangerously inflexible. Free banking dispenses with government authority over money, and allows an orderly yet unmanipulated monetary system. Its use of precious metals as a monetary base is not inefficient when consumers prefer speciebased currency for its greater trustworthiness. A free market in currency is the only means of discovering the monetary system most preferred by consumers.
Smith as a Monetary Economist
“Adam Smith as a Monetary Economist.” The Canadian Journal of Economics 14 (May 1981): 185–200.
Professor Laidler's main purpose is to argue that Adam Smith was a much better monetary economist than he is usually given credit for. The author argues that Smith believed the general price level to be determined by the cost of production of gold relative to that of goods, and that so long as bank money was convertible into specie, the general price level would therefore not vary. Smith's analysis of the influence of the creation of bank money on the balance of payments must be viewed against the background of this theory of the general price level, as must his adherence to the Real Bills Doctrine. Finally, Smith's analysis of the replacement of specie with paper money makes his banking theory an integral part of his theory of economic growth.
Monetarism & Economic Ideology
“Monetarism and Economic Ideology.” Economy and Society 10 (February 1981): 27–71.
The author presents a socialist economic and political ‘critique of ideology’ directed against the current ‘monetarism’ espoused by the government of Great Britain. Specifically, Thompson looks at the economics of ‘monetarism’ as presented in two recent booklets: Tim Congdon's Monetarism: An Essay in Definition produced by Sir Keith Joseph's Centre for Policy Studies, and Bryan Gould's (et al.) The Politics of Monetarism, a Fabian Society Tract. In addition, Thompson comments on a recent document issued jointly by the Treasury and the Bank of England which is concerned with the issue of money supply control: Cmnd. 7858, Monetary Control published by HMSO and known as the Green Paper.
After a discussion of the conceptualization of money and the way it functions, the author highlights the mechanisms by which ‘monetarism’ analyzes the relationship between the money supply and price formation. Borrowing from Tim Congdon's “fundamental precepts” of monetarist theory, Thompson lists three items on which, he claims, monetarists would agree:
Thompson criticizes, from a socialist economic position, the inadequacy of the monetarist definition of the relationship between the money supply and price formation. The monetarist analyses of this relationship are inadequate largely because they are couched at an aggregative macro-level. A reformulation is suggested based upon the necessity to define the economic agents in the economy whose practices and processes provide the basis for the price formation and money-supply generation.
The concept of a ‘money-supply’ is raised and the difficulties of defining and controlling this in a developed financial system are discussed. “The attempt to control the money supply by Monetarist methods has so far been a failure. The financial system has gone on creating credit largely independently of Treasury and Bank of England policy. This focuses the main political point within this struggle—something which Congdon, Gould et al. and the Green Paper fail to appreciate—that the struggle is over which agents should have the monopoly of control over the creation of credit and money within the economy.”
Political Economy & Economic Science
“Economics and Political Economy.” Richard T. Ely Lecture. The American Economic Review 71 (May 1981): 1–10.
Following David Hume's Treatise of Human Nature and Carl Menger's Grundsätze, Professor Robbins first defines the subject matter of Economic Science as the study of human behavior conditioned by scarcity. As such Economic Science conceives of scarcity as the relationship between objectives, either personal or collective, and the means of satisfying them. The limitation of goods confronted with conceivable demand is the necessary condition of the activity of human economizing.
As regards the status of economics as a science, Robbins sees no reason to deny its susceptibility to the usual logical requirements of a science, though he emphasizes the peculiar nature of its subject as concerned with conscious beings capable of choice and learning. He does not believe that such analysis necessarily involves ideological bias. But beyond that, in the application of Economic Science to problems of policy, he insists that we must acknowledge the introduction of assumptions of value that are essentially incapable of scientific proof. For this reason, while not denying the value of some thought going under that name, he urges that the claims of Welfare Economics to be scientific are highly dubious. He then goes on to argue the lack of realism which is involved by some of the inferences which may be drawn from the assumptions of Welfare Economics.
In the place of Welfare Economics, Robbins recommends what he calls Political Economy which, at each relevant point, ought to declare all nonscientific assumptions. He next furnishes some indications of the leading criteria and fields of speculation which should underlie this intellectual field.
In his conception of the task of Political Economy, he believes that “as teachers of the subject, our instructions will be more fruitful if, side by side, they run parallel with suitable courses in Politics and History—Politics because it deals systematically with philosophical and constitutional matters which as regards Political Economy only arise incidentally; History, because while it certainly does not lay down laws by which we can foretell the future, it does give a feeling for the possibilities of action.…I fancy that such exhortations are more at home in my own country where excessive specialization in the first-degree stage, productive of one-eyed monsters, is too frequently the order of the day.”
Political Economy, Politics, & Paradigm Shifts
Review Essay of The Economist in Parliament. By Frank Whitson Fetter. Durham, N.C.: Duke University Press, 1980; & Economic Doctrine and Tory Liberalism, 1824–1830. By Barry Gordon. London: The Macmillan Co., 1979. In History of Political Economy 13 (Winter 1981): 860–864.
Students of classical economics owe an enormous debt of gratitude to the pioneering studies of E.R.A. Seligman and Frank Whitson Fetter. Seligman, in 1903, directed attention to such previously ignored ‘lesser’ classical economists as Nassau Senior and Mountifort Longfield. Fetter further broadened the horizons of economic history by his careful study of early 19th-century periodicals. His research of the sources and social context of classical economics culminated in his book, The Development of British Monetary Orthodoxy, 1797–1875 (1965). Fetter continued illuminating the drama of classical economics by detailed discussions of economic arguments used in Parliament. He presented this analysis in his two volumes, the first being an excellent account of Ricardo's years in Parliament, Political Economy in Parliament, and the second being the volume reviewed in Rashid's essay. Barry Gordon's Economic Doctrine and Tory Liberalism similarly clarifies our understanding of the strange ways in which political economy influenced British parliamentary politicians.
Professor Fetter's The Economist in Parliament studies those parliamentarians who performed serious economic analysis. Mainly Whigs and Radicals, they entered Parliament with a sense of a reforming mission. They sought to advance public education, remove the legal privileges of the Anglican church, curb imperialism, and achieve democratic electoral reform. Those Tories who joined the ranks of these reformers did not hold fast to Tory economics but rather endorsed the new political economy. Fetter's two chapters on government regulation—of working conditions and of business practices—reveals how willing the economists were to compromise their faith in laissez faire.
Barry Gordon's Economic Doctrine and Tory Liberalism chronicles the paradoxical role of the Tory Party leaders in forcing free trade and some of the tenets of political economy on Britain's Protectionists. The old Tories were baffled by the conversion of their leaders to the Smithian free trade and anti-protectionist policies of political economy.
Both Gordon and Fetter erroneously believe that Smithian classical economics was a new beginning, a first systematic attempt to apply rational thinking to economic problems. In fact, commercial, capitalist society and economic theory arose in England around 1660. As William Grampp convincingly showed in “The Liberal Element in English Mercantilism” (1952) Smith differed from his predecessors not in espousing freer trade but in his world view that believed in the automaticity of full employment in free-market economics. Smith, however, opened a Pandora's box by allowing unprincipled ad hoc exceptions to his free trade beliefs. We need to investigate what higher principles Smith and others invoked in order to go beyond the principles of political economy.
Both volumes underline the intimate relationship between economic and political power. Left unanswered is why such a high percentage of Tory leaders converted to the new Smithian paradigm of ‘political economy’ after 1815: Canning, Castlereagh, Peel, Huskisson, Robinson, Wallace, Courtenay, and even Wellington. Rashid suggests that it was not so much rational understanding of the principles of political economy as prestige and awe that effected the conversion to the new paradigm.
Schumpeter and Papal Social Theory
“Schumpeter's Corporatist Views: Links Among His Social Theory, Quadragesimo Anno, and Moral Reform.” History of Political Economy 13 (Winter 1981): 745–771.
Joseph Schumpeter was one of several prominent social thinkers of the first half of our century to attempt an analysis of the legitimacy crisis afflicting capitalism during that period. Profs. Cramer and Leathers outline Schumpeter's diagnosis of capitalism's malaise, and they assemble hints from his writings and speeches concerning a likely remedy for this unsatisfactory situation. In the course of their discussion, they find close and perhaps not fortuitous parallels between Schumpeter's views and views expressed in the first two papal social encyclicals: Rerum Novarum and Quadragesimo Anno.
Schumpeter saw the sociopsychological foundations of capitalism to be in a state of rapid collapse. He perceived the cause of this debacle in the break-up of family arrangements which had hitherto allowed the bourgeoisie to serve as the governing class of Western society. The socially redeeming value of bourgeois individualism was its long-range character. The real basis of the old entrepreneur's effort and drive was his desire to move his family into a higher social status and a more secure economic situation. Dynastic motivation tended to cause the entrepreneur to take the long view and to acquire assets not necessary for his own short-run satisfaction.
The rise of the anonymous public corporation has drastically reduced the familial aspect of economic activity in capitalist countries. In its place, there has arisen a trend toward short-run profiteering in which managers directing the corporation concentrated more and more on end-of-the-year profit statements and their individual advancements.
Interestingly, both Popes Leo XIII and Pius XI likewise stressed the primacy of the family unit in society along with the natural right of property ownership. Leo wrote that the individual right to property can be “seen in a much stronger light if…considered in relation to man's social and domestic obligation,” i.e. his family. Capitalism fostered the “evil of individualism” which tended to undermine family integrity and solidarity in favor of an unbridled pursuit of personal gain. Similarly, Leo viewed socialism as an illegitimate system because it threatened to disturb the family.
Thus, clear parallels exist between Schumpeter's and the Popes' analyses of the sickness of Western society. Their prescriptions for a cure shjow certain resemblances as well. Profs. Cramer and Leathers admit that Schumpeter's views in this regard must be gleaned and reassembled from various writings and lectures. Nonetheless, they believe they find strong evidence that Schumpeter favored (at least ideally) the establishment of a corporatist society. Under such a system, voluntary associations would cooperate toward the orderly and mutually beneficial development of the economy—without substantial intrusion by the state. Such groups closely resemble the “vocational associations” proposed by Pius XI in Quadragesimo Anno. Schumpeter specifically referred to that encyclical in a 1945 speech in Montreal as he discussed the possibilities of reform.
In that same speech, however, Schumpeter indicates that, before corporatism could be implemented in the West, a “moral reform,” a basic change in human values, would have to take place. Pius XI would concur, setting forth Christian values as a prerequisite for the establishment of a just society. For Schumpeter, moral reform meant something more secular, namely a rejection of the hedonistic, short-sighted, and narrowly focused ideas of utilitarian individualism. In a democratic society stripped of its liberal fallacies, it would be possible to erect a corporatism in which the war of conflicting interests would be replaced by harmony and cooperation between related economic interest groups.
Political Economy & Geology
“Political Economy and Geology in the Early Nineteenth Century: Similarities and Contrasts.” History of Political Economy 13 (Winter 1981): 726–743.
In the first half of the nineteenth century, political economy was the most popular social science in England, while geology was the most popular natural science. Popular interest was no doubt heightened by the belief that both subjects were advancing and by the widespread opinion that the British were the leaders in both fields. Newspapers of the day and major periodicals made it a point to present extended accounts of the progress of both subjects.
It was no accident that both economics and geology made great strides between 1775 and 1830. These were the years of the Industrial Revolution and rapid economic growth. The consequent necessity of rethinking economic questions was the chief cause of the superiority of the British in this field. The influence on geology was more indirect. The minerological needs of the Industrial Revolution stimulated work on geological maps and led to the valuable maps of William Smith and others. James Hutton even wrote a paper on how best to distinguish coal from culm for purposes of taxation.
Since the two sciences were popular, it was not uncommon for men to maintain an active interest in both subjects. At its meetings, the Geological Society regularly discussed current economic problems, such as those connected with currency or the Corn Laws. In the other direction, no less an economist than David Ricardo regularly attended sessions of the Geological Society.
The different methodological biases of the two nascent subjects may best be seen by considering the salient doctrines of the period. Surprisingly, Adam Smith's great work left no clear methodological guidelines. The principal effect of The Wealth of Nations was to make a new metaphysical value judgment acceptable to serious thinkers: i.e. the existence of a pre-established harmony in economic affairs.
The corresponding judgment which evolved in geology was the acceptance of Time as the sole source of change in the geological world. Providence was no longer called upon to act in the geological universe. Geology was thus important in providing the first major example (soon to be followed by biology) of a subject concerned with the causal analysis of past events. From the twentieth-century viewpoint, the economists intruded a nonscientific presumption into their subject, while the geologists dispensed with one.
It was not until David Ricardo's Principles of Political Economy and Taxation in 1817 that economics came to possess a tightly knit, coherent, but largely abstract structure. The theoretical framework for geology erected by James Hutton presented a considerable contrast to Ricardo's. In Hutton's structure, a closer correspondence between fact and theory was continuously maintained. Hutton argued that the most important geological forces were those of erosion and denudation in combination with subterranean volcanic forces.
The sway of a priori notions in political economy eventually led to questions about its scientific character. By 1878, Sir Francis Galton went so far as to propose the removal of Economics (Section F) from the British Association. On the other hand, geology, with its emphasis on precise measurements and definite laws, was able to preserve its prestige intact.
The Economic Theory of Property Rights
“The Market and the Meta-market: A Review of the Contributions of the Economic Theory of Property Rights.” Documento de Trabajo 1980–1981. Working Paper from the Instituto de Economia de Mercado (Nunez de Balboa, 39; Madrid, Spain), 29 pages.
The author's object is to summarize a new and fruitful development in economic thought, the economic theory of property rights. Although economists have been concerned with property rights and the legal organization of society since the 18th century, it is only recently that they have begun to try to define with precision the relationship between the institutional meta-market and the economic market. It was only after 1960 that there was a rebirth of interest on the part of economists in the economics of property rights and the reciprocal influence exerted between the market and society's legal institutions. A recent development in this trend has been the spread of this kind of analysis to all aspects of Law, so that we now see the emergence of an “economic theory of law.” The author wishes to show the importance of such developments to economists, sociologists, anthropologists, and students of the law.
The author traces the starting point of the new analysis of the economics of property rights to Ronald Coase's “Coase's Theorem” (originally formulated in 1960 as a solution to the problem of externalities). Coase defined three conditions under which it was a matter of indifference to whom property rights were attributed: whatever the attribution the market would reach an optimum if: (a) the property rights were clearly defined; (b) transaction costs were zero; and (c) payments originating in the transactions through which the optimum was reached did not alter the pattern of demand.
Certain practical conclusions can be drawn from the first two of these three conclusions: for example, that it is convenient that the system of property rights should be universal; and that it is advantageous constantly to introduce improvements into the functioning of the market process so that transaction costs be reduced. It is better, therefore, that all things belong to someone, and that deals with owners should be facilitated. This conclusion suggests a research program into the defects of communal property, which is of special interest to economic historians.
Given that conditions (a) and (b) may not fully obtain in reality, even in such efficient markets as the great stock exchanges, society is confronted with the need, not of directly intervening to correct market failure, but rather of improving its functioning indirectly by a correction of meta-market or institutional framework. Posner's Hypothesis provides us, argues the author, with the analytical instrument for this task. According to this hypothesis legal institutions can be economically analyzed in order to determine to what extent they further economic productivity. The meta-market shows a tendency continually to redefine property rights, as technological conditions in supply, or tastes in demand, change; also, when transaction costs are high, it tends to grant property rights to those who will use them most productively.
This analysis offers a critique of the growing government intervention in the economic market which has taken place in our century. This analysis indicates that the market works well enough if left alone and that a spontaneous evolution of the non-political institutions of the meta-market favors a growing efficiency and ‘economism’ of life in society.
This critique of government intervention is reinforced when Coase's third condition is examined. This condition demanded that payments made to transact with property owners should not affect the pattern of demand. Hence, the use of resources by pressure groups to obtain concessions from the government implied that society would reach a suboptimal state.
In sum, perhaps the social problems we face are not the alleged defects in the economic market but rather the result of the malfunctioning of the political meta-market with its intervention into property rights.