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 2: Frank Hyneman Knight, the moral philospher

Sherryl Davis Kasper

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

Extract

2. Frank Hyneman Knight, the moral philosopher It is fitting to begin the analysis of the revival of laissez-faire by concentrating on the research of Frank Hyneman Knight (1885–1972). Both members and analysts of the Chicago School assert that he assumed the organizing role in the development of its version of the doctrine of laissez-faire. For example, ‘participant-observer’ Melvin W. Reder observed that Knight’s ‘contribution to the Chicago tradition was that of sage and oracle’; he was ‘the “baton-passer” ’ due to his immense ‘personal impact on a few influential students’, including Simons and Friedman, that went on to form a ‘Knight affinity group’ (Reder 1982, pp. 1, 6 and 7). Analyst John Henderson observed that Knight was ‘the moving spirit of the Chicago point of view, fostering . . . a strict laissezfaire philosophy’ (Henderson 1976, p. 355). Knight came of age during the progressive era of American history. Not all members of society shared in the unparalleled prosperity created by American industry during the second half of the nineteenth century. Thus politically it became a time when The spirit of reform took possession of the country. The question was not whether to change or not to change, but how to change. Counsels were widely divided between encouraging and destroying trusts, between centralizing and decentralizing the financial system, between expanding and limiting labor unions, between stimulating and stabilizing free enterprise. The one premise upon which nearly all reformers agreed, although not consciously, was the intervention of government in economics. (Dorfman 1949:...

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