The Revival of Laissez-Faire in American Macroeconomic Theory

The Revival of Laissez-Faire in American Macroeconomic Theory

A Case Study of the Pioneers

Sherryl Davis Kasper

This book provides the definitive account of this watershed and traces the evolution of laissez-faire using the cases of its proponents, Frank Knight, Henry Simons, Friedrich von Hayek, Milton Friedman, James Buchanan and Robert Lucas. By elucidating the pre-analytical framework of their writings, Sherryl Kasper accounts for the ideological influence of these pioneers on theoretical work, and illustrates that they played a primary role in founding the theoretical and philosophical use of rules as the basis of macroeconomic policy. A case study of the way in which interwar pluralism transcended to postwar neoclassicism is also featured.

Chapter 1: Introduction

Sherryl Davis Kasper

Subjects: economics and finance, austrian economics, economic psychology, history of economic thought

Extract

The principle of laissez-faire endures as a compelling idea in economic thinking. In essence, this standard suggests that, in economic affairs, a harmony of public and private interests exists such that maximum social welfare is guaranteed given individual choice in free markets. Its attraction is manifold. Economic theories premised on individual maximization in free markets assure determinant solutions. Corollary policy recommendations are simple and direct: the scope for government intervention is limited to the provision of a legal framework to maintain competition and of limited public goods such as defense and education. In relation to philosophy, laissez-faire connotes a natural design principle that appeals to the search for an underlying order of natural law.1 In relation to social philosophy, laissez-faire complements the democratic ideal of individualism with its emphasis on the primacy of private choice in all decisions. Thus it is not surprising that laissez-faire would serve as a standard in the minds of economists as they construct theories with corollary policy recommendations. And in fact the development of American economics in the twentieth century substantiates this position.2 At the turn of the century, the majority of American economists accepted the notion that the research of Alfred Marshall and John Bates Clark had produced a ‘satisfactory logical synthesis of the older classical and the utility school doctrines’, a union which had preserved the laissez-faire doctrine as a point of departure in policy considerations (Dorfman 1959:5, p. 464). At the same time, American economists confronted contemporary industrial conditions that evidenced...