The Revival of Laissez-Faire in American Macroeconomic Theory
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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.
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Chapter 8: Conclusion

Sherryl Davis Kasper

Extract

8. Conclusion At the end of our investigation of the evolution of attitudes toward laissezfaire the question remains whether the revival was due to significant theoretical developments, to social problems or to ideological influence. A preliminary answer to this question emphasizes the fact that the social problems arising out of the late-1960s acceleration in the rate of inflation and the 1970s episodes of stagflation opened the way for the consideration of alternative theories of macroeconomic activity. For when macro-economists reconsidered the Keynesian theory of inflation in more detail, they discovered theories of demand-pull and cost-push inflation that could explain accelerated rates of inflation only by assuming an unlimited supply of idle money balances or passive monetary accommodations by the monetary authority. Further, Keynesian economists could demonstrate the inflation-unemployment trade-off explicit in the Phillips curve, which served as the analytic base for policy discussions in both the academic and the political spheres, only by assuming that individuals were subject to money illusion or that the economy only adjusted with lags. To maintain that rational economic agents did not eventually learn about the effects of money illusion or lagged responses seemed an increasingly untenable proposition in the face of the realworld accelerated rates of inflation. In addition, the Keynesian economists had not provided a rigorous explanation of why the full employment rate of unemployment was so high or why the zeroinflation rate of unemployment was even higher. With such a multitude of gaps in Keynesian theory, it seemed inevitable that macro-economists would...

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