Archive for the 'History of Economic Thought' Category

South Africa and Ending Apartheid: W. H. Hutt and the Free Market Road Not Taken

December 14, 2013

William Hutt (left) with F.A. Hayek.

William Hutt (left) with F.A. Hayek.










by Richard M. Ebeling*

The public eulogies marking the passing of Nelson Mandela at the age of 95 on December 5, 2013 have refocused attention on the long struggle in South Africa to bring about an end to racial discrimination and the Apartheid system.

Forgotten or at least certainly downplayed in the international remembrance of Mandela’s nearly three decades of imprisonment and his historical role in becoming the first black president of post-Apartheid South Africa is the fact that through most of the years of his active resistance leading up to his arrest and incarceration he accepted the Marxist interpretation that racism and racial discrimination were part and parcel of the capitalist system.

Mandela was a member of a revolutionary communist cohort who were insistent and convinced that only a socialist reorganization of society could successfully do away with the cruel, humiliating, and exploitive system of racial separateness.

With the fall of communism in Eastern Europe and the Soviet Union in the late 1980s and early 1990s, the communist model of socialist transformation was too tarnished and delegitimized to serve a as a guidebook for post-Apartheid South Africa by the time that Mandela assumed office as the first black president in that country in May 1994.

Instead, Mandela’s government followed the alternative collectivist path of a highly “activist” and aggressive interventionist-welfare state, with its usual special interest politicking, group-favoritism, and its inescapable corruption and abuse of power. Its legacy is the sorry and poverty-stricken state of many of those in the black South African community in whose name the anti-Apartheid revolution was fought.

But this did not have to be the road taken by South Africa. There were other voices that also opposed the racial and Apartheid policies of the white South African government, especially in the decades after the Second World War.

These voices argued that racial policies in that country were not the result of “capitalism,” but instead were precisely the product of anti-capitalist government interventionism to benefit and protect certain whites from the potential competition of black Africans.

One of the most prominent of these voices was economist, William H. Hutt. Hutt had come to South Africa from Great Britain in 1928 and taught at the University of Cape Town until the 1970s, when he moved to the United States where he died in 1988. Born in 1899, he had attended the London School of Economics and studied under Edwin Cannan, the noted historian of economic thought and liberal free trade economist. Read the rest of this entry »

Adam Smith and Obamacare

November 14, 2013

by Mario Rizzo

Based on my non-scientific sampling of the morning talk-programs on TV, the “progressives” have discovered the law of unintended consequences. There seems to be universal agreement that if Obamacare is altered to allow people to keep their current healthcare insurance, regardless of whether it covers all of the contingencies the law has so far mandated, the entire Obamacare framework will begin to unravel. As Steve Rattner (of the auto bailout “fame”) admitted on the MSNBC program “Morning Joe,” the law is a complex web of interrelated provisions. Once you pick at one, the law may unravel.

Let me take this opportunity to remind everyone of the famous passage from Adam Smith’s Theory of Moral Sentiments in which he sees so clearly the problem with statist redesign of social institutions.

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder (VI.II.42, Liberty Press edition).

There really is nothing more to add. So I will not (for now).

Lawrence Klein: Keynesian Economist Who Wanted to Sidestep the Constitution

October 24, 2013

By Richard M. Ebeling

Nobel Prizing-winning Keynesian economist, Lawrence Klein died on October 20, 2013, at the age of 93. A long-time professor of economics at the University of Pennsylvania, he was awarded the Nobel Prize in 1980 for his development of econometric (or statistical) models of the United States “macro” economy for purposes of prediction and “activist” government policy making.


He also was a senior economic advisor to Jimmy Carter during his successful run for the presidency in 1976, but Klein declined a position in the Carter Administration for fear of the negative publicity from his membership in the American Communist Party in the 1930s. 


What is less well known today is that immediately after World War II he was one of the great popularizers of the “new economics” of John Maynard Keynes, especially in his widely read book, The Keynesian Revolution, published in 1947.


Keynes’ Conception of Government as Savior

In The General Theory of Employment, Interest, and Money (1936) Keynes had argued that the market economy was inherently unstable and susceptible to wide and unpredictable swings in output, employment, and prices. Worse yet, he asserted, the market could get stuck in a prolonged period of high unemployment and idle resources. Only judicious government monetary and fiscal policy could assure a return to sustainable full employment. Read the rest of this entry »

Herbert Davenport: The Economics of Enterprise

October 16, 2013

Economics of EnterpriseHerbert davenport

by Richard M. Ebeling*

This year marks the hundredth anniversary of the publication of Herbert J. Davenport’s (1861-1931), The Economics of Enterprise, which appeared in the early months of 1913.

Both mainstream economists as well as many “Austrians” seem to have long since forgotten Herbert Davenport. But during his time he was recognized as one of the early formulators of a subjectivist conception of opportunity cost, a harsh critic of Alfred Marshall’s attempt to partly preserve the “real cost” doctrine of the Classical Economists, and a lucid expositor of the central role of the entrepreneur in a dynamic vision of the market process.

His earlier article, “Proposed Modifications in Austrian Theory and Terminology” (Quarterly Journal of Economics, May 1902), and his book, Value and Distribution (1908) were “friendly criticisms” meant to clarify inconsistencies or ambiguities in the “Austrian” approach with which he was, in general, highly sympathetic.

Born in Vermont, he earned a PhD in economics under J. Laurence Laughlin (a strong defender of laissez-faire economics) at the University of Chicago, but was also influenced by (though critical of) Thorsten Veblen. For many years he served as the Dean and Department Chair of the College of Business at the University of Missouri. He later served as a professor of economics at Cornell University.

According to Paul Homan, he was a captivating classroom professor: “One remembers him most vividly and typically leaning back in his chair, his penetrating eyes touched with the shadow of a smile, as of triumph, while he deployed his arguments, humorously but with devastating order and precision, usually at the expense of someone, preferably Marshall, whom other people took seriously and whom he regarded as hopelessly muddle-headed.”

The Economics of Enterprise presents his full analysis of the market order in terms of subjectivism, causality, and entrepreneurial competitiveness. Read the rest of this entry »

In Defense of Herbert Spencer

July 10, 2013


by Mario Rizzo

This my letter as it appears in today’s Financial Times (July 10, 2013):

Sir, John Kay (“Darwin’s  humbling lesson for business”, July 3) makes good points about evolutionary  theory and the social sciences. But he is wrong about Herbert Spencer, the noted  English philosopher and evolutionist. Spencer was not a Darwinist of any kind  nor an advocate of eugenics. He had his own theory of evolution that predates  Charles Darwin’s publication of Origin of Species by a few years.  Spencer was broadly speaking a Lamarckian.

In other words, he believed in the heritability of acquired characteristics.  He further believed that a free market would produce a discipline on individual  actions that would, at once, make them more efficient and more moral. Since  these traits could be passed on to future generations, there was no need for  eugenics.

James M. Buchanan: A Preliminary Appreciation

January 9, 2013

by Mario Rizzo

The great economist James M. Buchanan died today at 93. I am still too stunned to write a proper appreciation of his tremendous contributions to economics and, indeed, to moral philosophy.

Buchanan won the Nobel prize in Economics in 1986. But even this does not capture his greatness. There have been many Nobel prizes in Economics since 1969, the year they were initiated. (In my view there have been too many.) Many of these prize winners will be long forgotten and even viewed with puzzlement by future generations, but this prize will stand out. Read the rest of this entry »

Clarifications of the Austro-Wicksellian Business Cycle Theory

December 31, 2012

by Mario Rizzo

There has been a lively debate on forecasts of high inflation made by those worried about the Fed’s recent policy of quantitative easing. For details I refer the reader to Daniel Kuehn’s excellent blog. The question to which I address myself is solely “What do these predictions have to do with core Austrian Business Cycle Theory?” This is my answer.

We must start with a few general points. First, I am talking about the Austro-Wicksellian business cycle theory as developed by Friedrich Hayek and Ludwig von Mises and as synthesized by Roger Garrison in his book Time and Money. I cannot take responsibility for versions constructed by others.  It is not that I think the others are necessarily wrong (and I mean no disrespect to them), but I do not know with sufficient precision what all these others are saying in the name of “Austrian theory.”

Secondly, the Austro-Wicksellian theory begins with either an endogenous increase in credit through the banking system or with an “exogenous” increase initiated by a central bank. In the latter case, however, the theory itself has little to say about the extent to which increases in base money will manifest themselves in increases in bank credit to producers.  (This may not be much of an issue during a boom but may be an issue during a recession or in a recovery.)

Third, the theory is fundamentally one about the “upper turning point” in the cycle – it is a theory about why a credit-induced boom must come to an end. It is not a theory, for better or worse, about the “secondary” factors that develop consequent on the break-up of the boom. These include possible recessionary-problems relating to bank runs (there is an Austrian inspired banking literature, but that is not the cycle theory) or what exactly will get investment expectations to turn around.  As to deflation, Lawrence White has argued that the logic of the theory requires the avoidance of deflation in accordance with Hayek’s very early recommendation to keep M V from falling.  (Hayek departed from this in the Depression, and later admitted he was incorrect to do so.)

Now to more specific points:   Read the rest of this entry »

“Modern Market” Monetarism?

October 17, 2012

by Mario Rizzo

Douglas Irwin, a very fine economist at Dartmouth College, has a very puzzling opinion piece in yesterday’s Financial Times. The root of the puzzle is that Irwin seems to accept what I consider the naïve monetarist view, yet calling it by a new name “market monetarism,” that the effectiveness of monetary policy largely revolves around portfolio adjustment effects that are induced by an increase in real balances. (Isn’t this warmed over Pigou, and 1970s monetarism?)

What seems to be new is the “Divisa monetary indexes” which weight the different components of the monetary aggregates by their monetary services. In principle, this is what Milton Friedman talked about in his course “Money: The Demand Side” in the early 1970s. He said then that he thought it would be a good idea to weight the various components of the money supply by their “degrees of moneyness.” He did wonder, as I recall, if these weights would be stable over time.

Now, by this new measure, monetary policy has been tight. In fact, the money supply is no higher today than in early 2008. Read the rest of this entry »

Wisconsin Policy Lab

August 20, 2012

by Chidem Kurdas

Paul Ryan is said to be influenced by Milton Friedman, Friedrich von Hayek and Ayn Rand. One might add that as the representative for Wisconsin’s first congressional district, he is from a state that has often been in the vanguard of policy thinking. Read the rest of this entry »

The Limits of Bayesian Inference

July 26, 2012

by Gene Callahan

Dan Klein’s Knowledge and Coordination has something interesting to say about Bayesian inference, although he never explicitly addresses that topic. Consider the following:

Here, we have the distinction between responding to the realization of events within a framework of recognized variables and relationships and the discovery of a fresh opportunity to embrace a new and better framework or interpretation. This element of epiphany, of finding fortune by interpreting the world differently, is the subtle and vital element in human decision making. Yet, it is absent from equilibrium model building. In equilibrium stories, agents never have a “light bulb” moment… (p. 13)

Kirzner’s alertness is the individual’s re-interpretation of that world [of a world of already-interpreted "facts"]. (p. 14)

“Equilibrium” is meaningful only in reference to a specified model… (p. 28)

Bayesian inference, similar to equilibrium theorizing, works within a fixed frame of interpretation: it “is meaningful only in reference to a specified model.” It cannot extend across instances when a new interpretive framework takes the place of the old. Read the rest of this entry »


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