Government: Less or More (Lessons from the History of Economic Thought)

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Presentation for the Colorado Council for Economic Education

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Government: Less or More (Lessons from the History of Economic Thought)

  1. 1. Government: More or Less? Lessons from the History of Economic Thought Dale R. DeBoer, Ph.D. 2013
  2. 2. Tea Party Platform •Allowing free markets to prosper unfettered by government interference is what propelled this country to greatness with an enduring belief in the industriousness and innovations of the populace. • http://www.teaparty-platform.com/
  3. 3. J.M. Keynes •Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.
  4. 4. Where to begin? • Pre-classical thought - Focus on ethics of outcome
  5. 5. Where to begin? • Pre-classical thought • Western economic thought - Emphasis on efficiency of means
  6. 6. Where to begin? • Pre-classical thought • Western economic thought • Where is this conflict seen today?
  7. 7. https://commons.wikimedia.org/wiki/File:Combination_of_October_2011_global_protests.jpg
  8. 8. It's no secret that in New York during the last 30 years there has been a tragic exodus from the churches into materialism, secularism and humanism. -Billy Graham An attitude to life which seeks fulfillment in the single-minded pursuit of wealth - in short, materialism - does not fit into this world, because it contains within itself no limiting principle, while the environment in which it is placed is strictly limited. -E. F. Schumacher
  9. 9. Schools of Thought • Mercantilism
  10. 10. Mercantilism • Thomas Mun (1571-1641) • Measure of societal wealth • Precious metals http://timerime.com/en/event/828184/Thomas+Mun/
  11. 11. Mercantilism • Thomas Mun (1571-1641) • Measure of societal wealth • How can these be obtained? • Discovery • Capture • Trade
  12. 12. Mercantilism • Thomas Mun (1571-1641) • Measure of societal wealth • How can these be obtained? • Role of the government
  13. 13. Two flaws • The Price-Specie Flow Mechanism • David Hume (1711-1776) • A “hoarding” mechanism? https://en.wikipedia.org/wiki/File:Painting_of_David_Hume.jpg
  14. 14. Two flaws • The Price-Specie Flow Mechanism • The wrong source of wealth • Adam Smith (1723-1790) https://en.wikipedia.org/wiki/File:AdamSmith.jpg
  15. 15. Two flaws • The Price-Specie Flow Mechanism • The wrong source of wealth • Adam Smith (1723-1790) • It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country.
  16. 16. Who is mercantilist today? • China • By plan or accident? • Hoarding?
  17. 17. Who is mercantilist today? • China • US • Concerns about an undervalued yuan • Legislative “Buy American” provisions
  18. 18. Schools of Thought • Mercantilism • Classical liberalism
  19. 19. Smith’s role for government • All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.
  20. 20. Smith’s role for government • People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
  21. 21. Not a minimal role • But limited to situations of market failure • Unfortunately, not well specified during the period of the Classical Liberals • John Stuart Mill (1806-1873) • Were I framing a code of laws according to what seems to me best in itself ... I should prefer to restrict what any one should be permitted to acquire ...
  22. 22. Schools of Thought • Mercantilism • Classical liberalism • Neo-classical economics
  23. 23. Neo-classical economics • Refinement/mathematization of economic models • William Jevons (1835-1882) • Mariginal utility theory of value https://en.wikipedia.org/wiki/File:Picture_of_jevons .jpg
  24. 24. Neo-classical economics • Refinement/mathematization of economic models • William Jevons (1835-1882) • Leon Walras (1862-1910) • General equilibrium theory https://en.wikipedia.org/wiki/File:Walrass.jpg
  25. 25. Neo-classical economics • Refinement/mathematization of economic models • William Jevons (1835-1882) • Leon Walras (1862-1910) • Carl Menger (1840-1921) • Founder of the Austrian School • Rejected labor theories of value https://en.wikipedia.org/wiki/File:Car lMenger.png
  26. 26. Neo-classical economics • Refinement/mathematization of economic models • Final model assumptions • Many actors • Homogenous products • No barriers to market entry/exit • Symmetric information • No external costs/benefits
  27. 27. The role of government • Limited • Correction of market failures • Imperfect competition • Sherman Act, 1890
  28. 28. The role of government • Limited • Correction of market failures • Externalities • Henry Sidgwick (1838-1900) https://en.wikipedia.org/wiki/File: Henry_Sidgwick.jpg
  29. 29. The role of government • Limited • Correction of market failures • Externalities • Arthur Pigou (1877-1959) https://en.wikipedia.org/wiki/File: A.C._Pigou.jpg
  30. 30. The role of government • Limited • Correction of market failures • Asymmetric information • George Akerlof (1940- ) https://en.wikipedia.org/wiki/File: George_Akerlof.jpg
  31. 31. The role of government • Limited • Correction of market failures • Was this universally accepted? • Walras • Nationalization of land
  32. 32. What was missed? • Instability • Inequality
  33. 33. Schools of Thought • Mercantilism • Classical liberalism • Neo-classical economics • Socialism/Marxism
  34. 34. Which Socialism? • Utopian • Anarchist • Market • Fabian • Marxist
  35. 35. Focus • Social justice, not efficiency • The limits of neo-classical thought
  36. 36. Marx and Marxism • Karl Marx (1818-1883) • Stages of development https://en.wikipedia.org/wiki/File:Karl_Marx_001.jpg
  37. 37. Government in the final stages • Socialism • “The proletariat seizes from state power and turns the means of production into state property ...” • The state as the agent of coercion
  38. 38. Government in the final stages • Socialism • Communism • “The state is not 'abolished'. It withers away.” • A maximal state as tool to obtain a minimal state
  39. 39. Schools of Thought • Mercantilism • Classical liberalism • Neo-classical economics • Socialism/Marxism • Keynesian
  40. 40. J.M. Keynes • 1883-1946 • Father of modern macroeconomics • Failure of aggregate demand https://en.wikipedia.org/wiki/File:John_Mayna rd_Keynes.jpg
  41. 41. Stabilization policy • Short-run stimulus • Austerity debate
  42. 42. Schools of Thought • Mercantilism • Classical liberalism • Neo-classical economics • Socialism/Marxism • Keynesian • Chicago School
  43. 43. Chicago School • Intellectual forebear • Friedrich Hayek (1899-1992) https://en.wikipedia.org/wiki/File:Friedrich_ Hayek_portrait.jpg
  44. 44. Chicago School • Intellectual forebear • Founder • Milton Friedman (1912-2006) https://en.wikipedia.org/wiki/File:Portrait_o f_Milton_Friedman.jpg
  45. 45. Chicago School • Intellectual forebear • Founder • Opposition to “naive Keynesianism” • Complexity of stabilization policy
  46. 46. Chicago School • Intellectual forebear • Founder • Opposition to “naive Keynesianism” • Importance of monetary policy • Monetary growth targeting
  47. 47. Schools of Thought • Mercantilism • Classical liberalism • Neo-classical economics • Socialism/Marxism • Keynesian • Chicago School • (Social) Welfare Economics
  48. 48. (Social) Welfare Economics • Amartya Sen (1933- ) • Redistribution policies • Equality of capabilities https://en.wikipedia.org/wiki/File:Amartya_ Sen_NIH.jpg
  49. 49. Where are we now? • No closer to an answer • Austerity debate • Short-term gains vs. long-run costs
  50. 50. Where are we now? • No closer to an answer • Austerity debate • Redistribution • “We are the 99%”
  51. 51. Where are we now? • No closer to an answer • Austerity debate • Redistribution • Pollution • Global warming • Fracking
  52. 52. Where are we now? • No closer to an answer • Austerity debate • Redistribution • Pollution • Competition policy • Apple and the DoJ • TTIP
  53. 53. Why? • The political problem of mankind is to combine three things: economic efficiency, social justice and individual liberty. • J.M. Keynes • Are these always compatible?
  54. 54. In the end ... • Politics trumps economics though economic reality will eventually have its say

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