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The Rebirth of Classical Political Economy: Pedro Schwartz
13 paragraphs found.
 

In their diverse ways, Friedrich Hayek, Milton Friedman, Gary Becker, James Buchanan and Ronald Coase can be seen as leaders of the group of economists who helped reestablish the philosophy of freedom, economic and political, after the drift of the first part of the 20th century. I could bring more names into the fray but I will take these five champions as the representatives of different ways of restating the philosophy of the free market. They did not see eye to eye on everything, especially in matters of methodology. But this group of Nobel laureates is rightly seen as having brought about real progress in economic theory and policy. They were not the clique of 'neo-liberal' ideologues that market haters say they are. Indeed, one could follow William Coleman in glorying in the 'neo-liberal' moniker, so as to show pride in what they and their many followers have contributed to the science and application of political economy.1 I still incline to saying 'classical liberals'.

 
Friedrich Hayek (1899-1992)

The first contribution I want to note among the many made by these classical liberals is that of Friedrich Hayek in the field of the economics of knowledge. The story opens in 1935 with Hayek's edition of a collection of essays under the title Collectivist Economic Planning, which I mentioned in my last column when discussing Oskar Lange's market socialism. As I said there, Ludwig von Mises in 1920 had written a seminal article on the impossibility of centralized economic calculation. Hayek decided to republish it, together with studies of central planning by other authors and an introduction and a conclusion from his pen. In a gesture of unwonted fairness he as an appendix added the prime essay of the pro-central planning community, Enrico Barone's "The Ministry of Production in the Collectivist State" (1908). 2 Nobody believes in a centrally planned economy anymore, but then it was quite a discovery to show that the market was much more efficient than a central board in setting prices, because the dynamic of their movements reflected the knowledge of millions of different people, when a single person, be he planner or individual participant, could only know a minimal fraction of reality. What Mises and Hayek had explained in theory in the 1930s was proven right in fact when the protecting screen of the Berlin Wall was dismantled in 1989 by Germans thirsting for freedom. It was the planned economy, not the market economy that proved to be chaotic.

 

Hayek retook the central idea of that book in his 1945 essay "The Use of Knowledge in Society"3—since selected as one of the top twenty articles published by the American Economic Review in the hundred years of its existence. Hayek's object was to amplify his rebuttal of Oskar Lange's and Enrico Barone's proposal of a socialist society that would use a replica of the market to facilitate the calculations of the planner. He now widened his criticism by adverting to the dispersed role of all knowledge in an economy.

 

Hayek not only showed that the economic data needed by a central planner could not be accessed centrally, he rejected the conception of the economic market implicit in "many of the uses made of mathematics" by economists. He did not mention by name Lionel Robbins's famous definition that "Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses" (page 16); but he in essence rejected the concept of the economic problem encapsulated in that definition. The ends are not given or generally known and neither are the scarce means and their alternative uses. Both aims and resources will only be discovered through the market process itself.

 

This led Hayek to distinguish two kinds of knowledge in the functioning of the economy: the scientific knowledge that can be summarized in statistics and the kind of personal and local knowledge that can only be gathered and used individually and practically, like the knowledge of a realtor about the local housing market or that of a speculator about disequilibrium prices. Now, this latter kind of knowledge is difficult to generalize and in perpetual flux and is only made generally available through the price system. One of the conclusions to be drawn from Hayek's theory of information in society was that the perfect knowledge of perfectly competitive markets could only be assumed as an analytical tool, as an approximation to the study of some markets but not as a full representation of reality. We would have to wait for Ronald Coase to understand that the market itself was far from a costless institution, so that frequently pyramidal organizations such as corporations were substituted for the horizontal dispersion of market processes.

 

Also important for helping redress the negative view of the free market prevalent during the first half of the 20th century were Hayek's efforts to retell the economic history of capitalism and of economic thought. This was a necessary condition of the re-founding of liberalism, as he had said at the first meeting of the Mont Pelerin Society in 1947. In 1954 he edited Capitalism and the Historians, where he put together a collection of essays by different authors, with the aim of changing the then accepted picture of the Industrial Revolution. The false picture of an idyllic life of plenty in the countryside and the misery of exploitation in urban factories and dwellings was negated by evidence. 4 Of course, life is hard for the poor at the beginning of industrialization. Even today the harsh realities of urbanization in developing countries seem to tell against capitalist development, though they themselves imply progress: thus in China today, where the miserable masses of inland peasants move to the coast, whose living standards are a step forward for them despite the poor conditions of Chinese workers in Western eyes. Finally, it has become commonplace today to underline the extraordinary transformation of human society wrought by capitalism, of which the recently published Cambridge History of Capitalism (2015) bears witness, but this was certainly not the accepted view during the dark years between the two World Wars.

 
Milton Friedman (1912-2006)

Milton Friedman's contribution to the defense of free market economics showed a different emphasis and a less philosophical bent compared with Hayek's, but it turned out to be just as important in the battle for freedom. As a well-trained statistician, Friedman launched the more empirical way of approaching economic questions that became the hallmark of the Chicago School. He showed special attention to measurable data, both in his macroeconomic and monetary studies, and in his historical research. For him, statistics were not a way to gather comprehensive knowledge about society but, more modestly, a way to show that a theory was mistaken because it was contrary to fact, as Karl Popper had taught.5

 

To the end that collective decisions were not taken on the basis of protecting losers or shackling innovators, Buchanan laid down that collective decisions be taken in two separate steps: one, in the constitutional mode, when the basic rules of the game should be decided unanimously or nearly so; the other, in the political mode, where decisions can be taken by some form of majority vote. The starting step would be the selection of rules; then came political action within those rules. You do not change the rules of poker during the game, he would say. People would be careful to draft a constitution that guaranteed their basic rights of personal freedom, private property, the rule of law, and the free market, so that they would not suffer oppression if their future situation in society might weaken compared to their present one. The rules would be based on what he (and Hayek) called "the Generality Constraint" 9 or the rule that no social group or individual should be discriminated against in law or by the administration of the state: thus, no progressive income tax or positive discrimination or subsidies to firms or industries.

 

For more on some of the people and topics discussed in this column, see the EconVideo at A Conversation with Gary Becker, the EconTalk podcast episode Burgin on Hayek, Friedman, and the Great Persuasion, Industrial Revolution and the Standard of Living, by Clark Nardinelli, in The Concise Encyclopedia of Economics, and Austrian Economics, by Peter Boettke, in The Concise Encyclopedia of Economics.

 

I am no eclectic in questions of method nor indeed in matters of economics. I do think that social reality is many-faceted.16 I do not see why studies of aspects of social life by economists such as Gary Becker or Milton Friedman should be excluded on principle by strict followers of the Austrian School. Economists should be free to make the assumption they think most productive to explain social phenomena and see how many miles they can run with them. The basis should be individualistic and the object to find the truth—if possible. The choice I have made of the five rescuers of freedom economics shows that I deny that there is a single orthodox methodology in social questions: philosophical reasoning as in Hayek, statistical criticism and historical revision as in Friedman, microeconomic explanation and prediction as in Becker, democratic individualism in Buchanan, or the new institutional theorizing initiated by Coase should not be ruled out of court just because they do not fit our methodological preconceptions—as long as they hold to strict individualism and give fruitful results.

 
References

Barone, Enrico (1908): "The Ministry of Production in the Collectivist State", in Hayek (1933).

 

Hayek, Friedrich, ed. (1933): Collectivist Economic Planning. Routledge.

Hayek, Friedrich (1944): The Road to Serfdom. Routledge and Chicago.

Hayek, Friedrich (1948): "The Use of Knowledge in Society",AER, vol. 35, nr. 4, pgs. 519-30.

 

Enrico Barone (1859-1924) was a disciple of Leon Walras and Vilfredo Pareto, a distinguished member of the Italian school of mathematical economics, and a political economist of fascist tendencies, who proposed "producers' syndicates to supplant cut-throat competition, rationalise production, and resist [socialist] labour demands". This was despite his inclination for free trade. (Cardoza (1982), pgs. 190-191). Paul Samuelson (1947, pg. 214) called it a "masterly article", which says a great deal about the biases of the great Samuelson himself. The writing an essay with Marxist overtones by a person who tended to sympathise with Fascism indicates how right Hayek was to dedicate The Road to Serfdom (1944) "to the socialists of all parties".