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 6: James Buchanan and Public Choice Theory

Sherryl Davis Kasper

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

Extract

At approximately the same time as Friedman was developing the monetarist model as one of the theoretical underpinnings for the revival of laissez-faire, James McGill Buchanan (b. 1919) was fashioning a second theoretical case for a rules-based macroeconomic policy. This case grew out of the work for which he received the Nobel Prize in Economics in 1986: ‘his contributions to the theory of political decision-making and public economics’, also known as public choice theory. Due to the timing of his work, Buchanan’s research offered a second theoretical foundation for laissez-faire as the Keynesian orthodoxy began to break down in the 1970s. Over his career, an assortment of events has brought Buchanan into contact with the laissez-faire pioneers. He began doctoral studies at the University of Chicago in 1946, studying with both Knight and Friedman during the two years he spent there, and they ‘are men with whom, broadly and generally, I agree on principles of politicalphilosophical order’ (Buchanan 1964, p. 215). However, unlike Friedman, Buchanan chose to build his analysis on some of the ideas he had learned from Knight, in particular his notion of indeterminate uncertainty. In the course of developing his sub-discipline of expertise, public finance, Buchanan also read and was influenced by the work Simons did on personal income taxation. As an early member and the 1984–85 president of the Mont Pelerin Society, Buchanan also shared an allegiance to liberalism and laissez-faire with Hayek. Some of the elder’s ideas found their way into Buchanan’s work, in...

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