Does Economic Theory Entail or Support Free-Market Ideology?

A few weeks ago, via Twitter, Beatrice Cherrier solicited responses to this query from Dina Pomeranz

It is a serious — and a disturbing – question, because it suggests that the free-market ideology which is a powerful – though not necessarily the most powerful — force in American right-wing politics, and probably more powerful in American politics than in the politics of any other country, is the result of how economics was taught in the 1970s and 1980s, and in the 1960s at UCLA, where I was an undergrad (AB 1970) and a graduate student (PhD 1977), and at Chicago.

In the 1950s, 1960s and early 1970s, free-market economics had been largely marginalized; Keynes and his successors were ascendant. But thanks to Milton Friedman and his compatriots at a few other institutions of higher learning, especially UCLA, the power of microeconomics (aka price theory) to explain a very broad range of economic and even non-economic phenomena was becoming increasingly appreciated by economists. A very broad range of advances in economic theory on a number of fronts — economics of information, industrial organization and antitrust, law and economics, public choice, monetary economics and economic history — supported by the award of the Nobel Prize to Hayek in 1974 and Friedman in 1976, greatly elevated the status of free-market economics just as Margaret Thatcher and Ronald Reagan were coming into office in 1979 and 1981.

The growing prestige of free-market economics was used by Thatcher and Reagan to bolster the credibility of their policies, especially when the recessions caused by their determination to bring double-digit inflation down to about 4% annually – a reduction below 4% a year then being considered too extreme even for Thatcher and Reagan – were causing both Thatcher and Reagan to lose popular support. But the growing prestige of free-market economics and economists provided some degree of intellectual credibility and weight to counter the barrage of criticism from their opponents, enabling both Thatcher and Reagan to use Friedman and Hayek, Nobel Prize winners with a popular fan base, as props and ornamentation under whose reflected intellectual glory they could take cover.

And so after George Stigler won the Nobel Prize in 1982, he was invited to the White House in hopes that, just in time, he would provide some additional intellectual star power for a beleaguered administration about to face the 1982 midterm elections with an unemployment rate over 10%. Famously sharp-tongued, and far less a team player than his colleague and friend Milton Friedman, Stigler refused to play his role as a prop and a spokesman for the administration when asked to meet reporters following his celebratory visit with the President, calling the 1981-82 downturn a “depression,” not a mere “recession,” and dismissing supply-side economics as “a slogan for packaging certain economic ideas rather than an orthodox economic category.” That Stiglerian outburst of candor brought the press conference to an unexpectedly rapid close as the Nobel Prize winner was quickly ushered out of the shouting range of White House reporters. On the whole, however, Republican politicians have not been lacking of economists willing to lend authority and intellectual credibility to Republican policies and to proclaim allegiance to the proposition that the market is endowed with magical properties for creating wealth for the masses.

Free-market economics in the 1960s and 1970s made a difference by bringing to light the many ways in which letting markets operate freely, allowing output and consumption decisions to be guided by market prices, could improve outcomes for all people. A notable success of Reagan’s free-market agenda was lifting, within days of his inauguration, all controls on the prices of domestically produced crude oil and refined products, carryovers of the disastrous wage-and-price controls imposed by Nixon in 1971, but which, following OPEC’s quadrupling of oil prices in 1973, neither Nixon, Ford, nor Carter had dared to scrap. Despite a political consensus against lifting controls, a consensus endorsed, or at least not strongly opposed, by a surprisingly large number of economists, Reagan, following the advice of Friedman and other hard-core free-market advisers, lifted the controls anyway. The Iran-Iraq war having started just a few months earlier, the Saudi oil minister was predicting that the price of oil would soon rise from $40 to at least $50 a barrel, and there were few who questioned his prediction. One opponent of decontrol described decontrol as writing a blank check to the oil companies and asking OPEC to fill in the amount. So the decision to decontrol oil prices was truly an act of some political courage, though it was then characterized as an act of blind ideological faith, or a craven sellout to Big Oil. But predictions of another round of skyrocketing oil prices, similar to the 1973-74 and 1978-79 episodes, were refuted almost immediately, international crude-oil prices falling steadily from $40/barrel in January to about $33/barrel in June.

Having only a marginal effect on domestic gasoline prices, via an implicit subsidy to imported crude oil, controls on domestic crude-oil prices were primarily a mechanism by which domestic refiners could extract a share of the rents that otherwise would have accrued to domestic crude-oil producers. Because additional crude-oil imports increased a domestic refiner’s allocation of “entitlements” to cheap domestic crude oil, thereby reducing the net cost of foreign crude oil below the price paid by the refiner, one overall effect of the controls was to subsidize the importation of crude oil, notwithstanding the goal loudly proclaimed by all the Presidents overseeing the controls: to achieve US “energy independence.” In addition to increasing the demand for imported crude oil, the controls reduced the elasticity of refiners’ demand for imported crude, controls and “entitlements” transforming a given change in the international price of crude into a reduced change in the net cost to domestic refiners of imported crude, thereby raising OPEC’s profit-maximizing price for crude oil. Once domestic crude oil prices were decontrolled, market forces led almost immediately to reductions in the international price of crude oil, so the coincidence of a fall in oil prices with Reagan’s decision to lift all price controls on crude oil was hardly accidental.

The decontrol of domestic petroleum prices was surely as pure a victory for, and vindication of, free-market economics as one could have ever hoped for [personal disclosure: I wrote a book for The Independent Institute, a free-market think tank, Politics, Prices and Petroleum, explaining in rather tedious detail many of the harmful effects of price controls on crude oil and refined products]. Unfortunately, the coincidence of free-market ideology with good policy is not necessarily as comprehensive as Friedman and his many acolytes, myself included, had assumed.

To be sure, price-fixing is almost always a bad idea, and attempts at price-fixing almost always turn out badly, providing lots of ammunition for critics of government intervention of all kinds. But the implicit assumption underlying the idea that freely determined market prices optimally guide the decentralized decisions of economic agents is that the private costs and benefits taken into account by economic agents in making and executing their plans about how much to buy and sell and produce closely correspond to the social costs and benefits that an omniscient central planner — if such a being actually did exist — would take into account in making his plans. But in the real world, the private costs and benefits considered by individual agents when making their plans and decisions often don’t reflect all relevant costs and benefits, so the presumption that market prices determined by the elemental forces of supply and demand always lead to the best possible outcomes is hardly ironclad, as we – i.e., those of us who are not philosophical anarchists – all acknowledge in practice, and in theory, when we affirm that competing private armies and competing private police forces and competing judicial systems would not provide for common defense and for domestic tranquility more effectively than our national, state, and local governments, however imperfectly, provide those essential services. The only question is where and how to draw the ever-shifting lines between those decisions that are left mostly or entirely to the voluntary decisions and plans of private economic agents and those decisions that are subject to, and heavily — even mainly — influenced by, government rule-making, oversight, or intervention.

I didn’t fully appreciate how widespread and substantial these deviations of private costs and benefits from social costs and benefits can be even in well-ordered economies until early in my blogging career, when it occurred to me that the presumption underlying that central pillar of modern right-wing, free-market ideology – that reducing marginal income tax rates increases economic efficiency and promotes economic growth with little or no loss in tax revenue — implicitly assumes that all taxable private income corresponds to the output of goods and services whose private values and costs equal their social values and costs.

But one of my eminent UCLA professors, Jack Hirshleifer, showed that this presumption is subject to a huge caveat, because insofar as some people can earn income by exploiting their knowledge advantages over the counterparties with whom they trade, incentives are created to seek the kinds of knowledge that can be exploited in trades with less-well informed counterparties. The incentive to search for, and exploit, knowledge advantages implies excessive investment in the acquisition of exploitable knowledge, the private gain from acquiring such knowledge greatly exceeding the net gain to society from the acquisition of such knowledge, inasmuch as gains accruing to the exploiter are largely achieved at the expense of the knowledge-disadvantaged counterparties with whom they trade.

For example, substantial resources are now almost certainly wasted by various forms of financial research aiming to gain information that would have been revealed in due course anyway slightly sooner than the knowledge is gained by others, so that the better-informed traders can profit by trading with less knowledgeable counterparties. Similarly, the incentive to exploit knowledge advantages encourages the creation of financial products and structuring other kinds of transactions designed mainly to capitalize on and exploit individual weaknesses in underestimating the probability of adverse events (e.g., late repayment penalties, gambling losses when the house knows the odds better than most gamblers do). Even technical and inventive research encouraged by the potential to patent those discoveries may induce too much research activity by enabling patent-protected monopolies to exploit discoveries that would have been made eventually even without the monopoly rents accruing to the patent holders.

The list of examples of transactions that are profitable for one side only because the other side is less well-informed than, or even misled by, his counterparty could be easily multiplied. Because much, if not most, of the highest incomes earned, are associated with activities whose private benefits are at least partially derived from losses to less well-informed counterparties, it is not a stretch to suspect that reducing marginal income tax rates may have led resources to be shifted from activities in which private benefits and costs approximately equal social benefits and costs to more lucrative activities in which the private benefits and costs are very different from social benefits and costs, the benefits being derived largely at the expense of losses to others.

Reducing marginal tax rates may therefore have simultaneously reduced economic efficiency, slowed economic growth and increased the inequality of income. I don’t deny that this hypothesis is largely speculative, but the speculative part is strictly about the magnitude, not the existence, of the effect. The underlying theory is completely straightforward.

So there is no logical necessity requiring that right-wing free-market ideological policy implications be inferred from orthodox economic theory. Economic theory is a flexible set of conceptual tools and models, and the policy implications following from those models are sensitive to the basic assumptions and initial conditions specified in those models, as well as the value judgments informing an evaluation of policy alternatives. Free-market policy implications require factual assumptions about low transactions costs and about the existence of a low-cost process of creating and assigning property rights — including what we now call intellectual property rights — that imply that private agents perceive costs and benefits that closely correspond to social costs and benefits. Altering those assumptions can radically change the policy implications of the theory.

The best example I can find to illustrate that point is another one of my UCLA professors, the late Earl Thompson, who was certainly the most relentless economic reductionist whom I ever met, perhaps the most relentless whom I can even think of. Despite having a Harvard Ph.D. when he arrived back at UCLA as an assistant professor in the early 1960s, where he had been an undergraduate student of Armen Alchian, he too started out as a pro-free-market Friedman acolyte. But gradually adopting the Buchanan public-choice paradigm – Nancy Maclean, please take note — of viewing democratic politics as a vehicle for advancing the self-interest of agents participating in the political process (marketplace), he arrived at increasingly unorthodox policy conclusions to the consternation and dismay of many of his free-market friends and colleagues. Unlike most public-choice theorists, Earl viewed the political marketplace as a largely efficient mechanism for achieving collective policy goals. The main force tending to make the political process inefficient, Earl believed, was ideologically driven politicians pursuing ideological aims rather than the interests of their constituents, a view that seems increasingly on target as our political process becomes simultaneously increasingly ideological and increasingly dysfunctional.

Until Earl’s untimely passing in 2010, I regarded his support of a slew of interventions in the free-market economy – mostly based on national-defense grounds — as curiously eccentric, and I am still inclined to disagree with many of them. But my point here is not to argue whether Earl was right or wrong on specific policies. What matters in the context of the question posed by Dina Pomeranz is the economic logic that gets you from a set of facts and a set of behavioral and causality assumptions to a set of policy conclusion. What is important to us as economists has to be the process not the conclusion. There is simply no presumption that the economic logic that takes you from a set of reasonably accurate factual assumptions and a set of plausible behavioral and causality assumptions has to take you to the policy conclusions advocated by right-wing, free-market ideologues, or, need I add, to the policy conclusions advocated by anti-free-market ideologues of either left or right.

Certainly we are all within our rights to advocate for policy conclusions that are congenial to our own political preferences, but our obligation as economists is to acknowledge the extent to which a policy conclusion follows from a policy preference rather than from strict economic logic.


22 Responses to “Does Economic Theory Entail or Support Free-Market Ideology?”

  1. 1 Benjamin Cole December 28, 2017 at 8:19 pm

    A deeply thoughtful post.

    In general, I too support “free markets.”

    However, some may ponder if free markets, capitalism and resulting urbanism are family-friendly, even in theory. The dissolution of extended families, and even families, seems underway. Most nations fall below population replacement rates at a certain point.

    As income or survival is derived not from the family plot or extended family anymore, such institutions fade away, replaced by organizations which have income to offer.

    At any rate, no one really believes in free markets anyway. Ask anyone should property zoning be abolished, even in their own neighborhood. Totally legalize push-cart vending? The sex industry? Polygamy? I could go on.

    People tout free markets and free trade when advantageous. It is all baloney.

    Those are my final words for 2017.


  2. 2 David Glasner December 28, 2017 at 8:59 pm

    Thanks for the kind words, Benjamin. You have been with me since I started, and your “loyalty” is deeply appreciated. I think we agree that almost no one totally believes in free markets, at least no one in full possession of his or her faculties — Ayn Rand being a sort of a borderline case. But most people have a variety of beliefs that aren’t totally consistent and they have to reconcile their conflicting beliefs and values. So I don’t think it’s hypocritical for someone to “believe” in free markets and acknowledge that there can be exceptions. So I wouldn’t call it baloney.


  3. 3 Shaun December 29, 2017 at 3:56 am

    I’ve discovered this blog only lately, but boy, your writings are one of the best discoveries I’ve made on the internet, ever. As an aspiring economist, I couldn’t be more grateful to you (I am archiving every word you’ve written, just in case you decide to take down this website for some reason).

    I’m also looking into RG Hawtrey and his works, since he seems to have influenced you so much. Thank you for that as well.


  4. 4 richard December 29, 2017 at 5:00 am

    Too often, free markets is used as a slogan for policies which favor a preferred group. It doesn’t seem so much that we’re dealing with conflicting beliefs and values as we are dealing with a clear agenda to favor some over others and using “free markets” or “free trade” as selling points divorced from any coherent meaning.

    Those who advocate the loudest for “free markets” just about always want to free business of the burdens of consumer protections and antitrust laws, while they almost never want to decrease intellectual property laws, occupational licensing, zoning, etc.


  5. 5 nottrampis December 29, 2017 at 3:20 pm

    I do not want to sound pedantic but I assume most economists prefer competitive markets not free markets. Free markets are preferred by Crony capitalists who control the market.
    Competitive markets are where the benefits mostly go to the consumers whereas it is the opposite in free markets.

    Perhaps the most ironic thing is you need a strong government with appropriate regulations to have a competitive marker.

    Shaun you will learn a lot and be very grateful


  6. 6 James Beckman December 30, 2017 at 5:59 am

    As a renegade economist, long doing international business consulting, I find everything is context. This seems consistent with comments above.
    Do we believe in free markets for labor, meaning immigrants pile in to our nation to offer their services? Do we buy from Apple although most of its fabrication is done in other, lower labor cost nations? Answer: it probably depends upon whether we benefit from these cheaper human services or not.
    Yes, this is a wonderful site! More commentary, please.


  7. 7 charlesstp January 1, 2018 at 2:27 am

    In a free market for food, there will be people who will go hungry. In a free market in housing, there will be homeless. In a free market in health care, there will be those who could be saved, but who will sicken and die. Etc. All consumers to the right of the equilibrium point will be denied whatever it is that that particular ‘free market’ provides. The poor must choose their deprivations.

    This is obvious. It is all but unbelievable that it is not more widely understood by the economics profession.

    Any good or service that you want *every* person to enjoy *cannot* be provided (only) by the market. This includes those (inalienable) rights whose provisionings libertarians are so eager to privatize.

    One could argue, in fact, that poverty is the result of market failure, and an inability of (pure) capitalism to live up to its promise, the promise of providing for, and distributing enough for, everybody. After all, no one who promotes the virtues of capitalism trumpets the claim that capitalism will only provide enough for some.


  8. 8 charlesstp January 1, 2018 at 2:34 am

    Also, left to themselves, ‘free markets’ naturally concentrate wealth and income. This is easy to show.


  9. 9 doug carmichael January 2, 2018 at 8:17 am

    Charles, love to see the argumrnt. i have assumed thst since the wealthy can borrow at a lower rate, and have on average advanced information about the likly movement of markets, that concentration is inevitable and the equilibrium of such a system is extreme concentration. your thoughts?


  10. 10 Eorr January 2, 2018 at 3:28 pm

    Even if actual value and social value are the same you still run into Arrow’s impossibility theorem which initially arose as a refutation of Kaldor, Hicks, and Hotelling and the social welfare functions. Potential Pareto improvements are non-sensical except in a highly stylized model. Ultimately you have to assume equal endowment of resources to actual construct a market economy that is truly “efficient” in allocating resources. This is only true because it is a minimax. This is why wealth inequality is such an important issue. Markets will become more likely to misallocate resources the more initial endowments are unequally distributed. This is before you get anywhere close to the objections of equating social value with prices. There is a whole lot of hand-waving and ignoring of the fact that market allocation is not necessarily efficient and “potential Pareto” based justifications require the same central planning redistribution of endowments that is so objectionable.


  11. 11 James Beckman January 3, 2018 at 3:59 am

    Eorr, & Doug (above) it is easy to empirically demonstrate your thinking by looking at BRexit & the Trump victory, that is, a few people with appropriate knowledge (social psychology/human contacts) & enough capital to “invest” in managing certain media (www, TV & press) to produce results which are far worse for the complainers/normal citizens & hold significant benefits for the manipulators. Pareto might be chuckling from the hereafter.


  12. 12 charlesstp January 4, 2018 at 9:00 am

    Hi, Doug. Sorry I took a couple of days.

    My statement that markets “naturally concentrate wealth and income” is basically an interpretation of the observation that the demand curve slopes up to the left away from the equilibrium point. In a final market, this merely means that the consumers far to the left of the equilibrium point have more fun with their purchases than those close to the equilibrium point. In a factor market, though, if implies that those far to the left derive greater profit from there buying and use of the factor, and since the market operates continuously they can reasonably be expected to persist in growing at a faster rate than less efficient users of that factor. Indeed, those consumers of factors close to the equilibrium point may not profit enough to grow at all, especially if we consider that much of that, or any, market near the equilibrium point is likely sustained by borrowing. That is, in the net, (at least some of) these people are losing out from participating in that market.

    The same is true, of course, regarding more efficient producers. It is in their interests to produce more, drive down the price, and drive the inefficient producers out of business. It seems the very essence of markets is as instruments of concentration.

    As for the distinction between factor and final markets, this is not so clear. One can always interpret (at least many important) final markets as factor markets for labor.

    I am an amateur. I am not paid to think about this sort of stuff. So if you have issues to raise with how I am interpreting the diagram, please, I need to hear them. I myself have other thoughts on how this diagram can be more closely interpreted, and other, interesting conclusions drawn.


  13. 13 Richard lipsey January 9, 2018 at 12:53 pm

    Richard Lipsey
    Great blog and great comments so far. Two further points:
    (1)When I was as student and later a text book writer, the main argument that was presented was the pragmatic one of where to draw the line between private market and public sector production and distribution. E.g., prisons surely and hospital probably better run in the public sector. Today all too much debate is not on the where to draw line but: “Is government the enemy whose market intervention is to be minimized?”
    (2) Once it is accepted that technological change is endogenous and conducted under conditions of Knightian uncertainty, the whole intellectual case for completely free market falls to the ground – as John Rae observed in the 19th century and as is shown in some detail by modern evolutionary economics. The market, of course, has its place but that place is much less than it seems to be when the static model with given technologies is used as its intellectual base.


  14. 14 David Glasner January 18, 2018 at 7:13 pm

    To all my commenters, please forgive me for the long delay in responding.

    Shaun, Thanks for your kind words. I hope that you will keep up your interest in Hawtrey and study his many important contributions.

    richard, You are right that there are all too many advocates of free markets whose support is more pretextual than sincere. But support for free markets and free trade doesn’t have to be absolute. There are many positive values and it is not necessarily inconsistent to trade off some of one value for a little bit more of another value. But hypocrisy is definitely not a value.

    notrampis, I think most economists regard “free markets” as more or less synonymous with “competitive markets.” But I agree that sometimes a free market can be monopolized. In the absence of legal barriers to entry, it can be argued that the monopoly will eventually be eroded by new entry or by entirely new products that eliminate whatever monopoly power was once held. I am not that impressed by that line of argument, because there is no obvious reason why such a temporary monopoly cannot last for a long time even in the absence of legal protection, and the monopolist can entrench his monopoly by various contractual arrangements that reinforce the monopoly even if they will eventually be eroded or displaced. So I agree that good laws administered by a wise government can help make markets more competitive and more free than they would be otherwise.

    James, There are immediate effects and indirect effects, and the indirect effects can undo or mitigate the immediate ones. Immigrants that start working in one country at lower wages than workers already residing in the country, use their earnings to buy stuff that is primarily made by other domestic workers so they, after their immigration, they become a source of increased demand for domestic labor not just competition to domestic labor. There is a lot of empirical evidence that suggests that the net effect of the direct and the indirect effects is fairly small.

    charlesstp, There are very few advocates of free markets who don’t also believe that the incomes of people with low earning power should be supplemented so that they don’t go hungry and homeless and are able to receive medical care. I don’t understand why you don’t think that is understood by the economics profession. It is a rather obvious point that is something that is taught in elementary economics courses. A right is not a commodity; it is a legal (or moral) concept, so you are mixing up categories. Again, there is no logical reason why capitalism has to be or should be pure. Nor is there any reason why markets “should be left to themselves” and I don’t even understand what it means for a market to be left to itself.

    Doug, You may be right that wealth becomes more concentrated over time, but there may be other forces at play that work in the opposite direction.

    Eorr, I am afraid that you are putting a lot of different concepts together in a way that I can’t follow. All Arrow’s impossibility theorem says is that you can’t aggregate individual preference orderings into some grand rational social ordering of states of the world that conforms to democratic principles of majority rule and the like. I don’t think your comments directly relate to the distinction between private and social value that I am working with which takes the distribution of wealth and resources as given for purposes of the analysis.

    Richard Lipsey, Thanks, as always, for your comment. I find references to “completely free market” way too vague to be useful. All markets are premised on the existence of a legal order that defines the rights and obligations of transactors and third parties. In the real world as opposed to the Coasian world of zero transactions costs, the definition of legal rights and obligations matters, so we can’t even identify what sort of situation corresponds to the “completely free market.” That’s the message I took away from my UCLA training under Alchian, Demsetz, Klein, Thompson et al. And I think Hayek would also agree with that view, and indeed so would Coase as well.

    My knowledge of John Rae is very limited, mainly that Bohm-Bawerk credited him with having anticipated his theory of interest. What work of his are you referencing?


  15. 15 charlesstp January 19, 2018 at 2:40 am

    Thanks for your reply. I do not believe I am mixing categories with my use of the word ‘Rights.’ (I may be mixing theory with practice.) A ‘right’ is a benefit whose provision entails a cost. Rights are typically excludable, and tend to be rivalrous, especially with weak government. Based on the notion of ‘equal’ rights, rights are usually provided, in our experience, by some sort of government, and paid for by tax dollars,and not by a market. Rights are not free, and inadequate funding of the enforcement of rights leads to their decay. The members of a society may lose rights, if that society cannot pay for them, or if its members decide the benefits are not worth the cost. Libertarians, however, show a willingness to commodify ‘rights,’ (demonstrating the principle,) by privatising their provisioning and allocating them by a market.

    Even where rights are nominally provided by government, there may be a market in them. Consider, for instance, the ‘right’ to due process. In the US, the wealthy enjoy extensive protections, since they can pay for them. The poor, who except in rare cases, are extorted out of their right to just trial, must often negotiate their fate from weakness, often cannot pay for any defense on their own, and mostly can rely only on an underfunded public defender system when they come to the attention of the legal system. And that is only for criminal cases, never mind dealing with other more powerful private interests like those involving housing.

    If one wanted to draw a functional distinction between ‘rights’ and other economic products, one might say that rights were those goods and services provided equally to all members of a society, usually by government. No other distinction need, or should, be drawn.

    My personal view is that making ‘rights’ a separate ‘category,’ a category which ‘is not’ amenable to discussion in economic terms is seriously misleading.

    Is my disparagement of the economics profession undeserved? I am not accusing you or them of heartlessness. I do believe that the profession’s attachment to their ‘system’ leads them to advocate for (often far) less than optimal solutions, and a serious failure to examine their assumptions, and their unintended consequences. Consider, the notion of
    ‘economic man’ and its contribution to justifying libertarianism and other nonsense from the Right. Or Friedman’s famous statement from the 70’s that the only social responsibility of a corporation was to maximize its profit. The logical conclusion of this statement is that the most efficient capitalist is the one who can make a profit while producing nothing of social value, something our financial sector seems largely to have already achieved.

    Statements like these from authority and allowed to stand can bend the direction of social activity, and shape the allocation of wealth and income.

    A rather complacent incoherence, I think, would rather accurately describe my idea of their attitude and thought. The fact that the voice of the profession *is* incoherent or silent on many important issues, such as increasing inequality, suggests a certain justification.


  16. 16 David Glasner January 19, 2018 at 10:29 am

    charlesstp, Thanks for explaining what you meant in more detail. You make the valid point that it requires resources to enforce and validate rights and the allocation of those resources favors the rights of some people at the expense of others. In principle, the validation and enforcement of rights should be impartial and the fact that in general the rights of the well-off are more likely to be validated and enforced than the rights of the not-so-well-off is a very serious problem. Still, I would maintain that there is a conceptual distinction between a right and a benefit. Some rights are alienable or transferable, e.g,, property rights; some are not alienable or transferable, e.g., personal rights. There are active markets for property rights, but markets in personal rights are less common. So I agree with many of your concerns, but I don’t agree that you have the correct framework for analyzing those concerns, and judging from your criticism of Friedman’s position on the social responsibility of business (which, I agree, is problematic in a number of respects) and your criticism of the concept of “economic man” — strawman if there ever was one — I don’t believe you have correctly grasped what economists mean when they use terms like “social value” and “social cost.” Sorry if my remarks seem dismissive; I am just trying to give you a sense of what my view is without getting drawn too deeply into an open-ended discussion that I would rather not get drawn into just now.


  17. 17 James Beckman January 19, 2018 at 1:17 pm

    We all know Adam Smith’s words about bakers & candlestick makers all competing for their own benefit yet bringing the highest economic benefit for the public.
    Also: “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable” (Google on his most famous quotes). Politicians & academics both tend to select the data which most supports their viewpoints, do they/we not?
    If Smith had been writing at the time of Marx, who wrote much of his masterpiece while in England, surely Smith would have commented upon the disastrous effect on many locals without jobs from either farming or the new industrialization. Sounds like today, doesn’t it?


  18. 18 James Beckman January 19, 2018 at 11:41 pm

    Thanks again, David & all, for this stream. I met Friedman in San Francisco in the 1980’s, initially when he knocked on my apartment door. We had several fine discussions.
    Having served in the US military courtesy of the Cold War requirements, I inquired about private armies, medical care, education, research & the like. He did admit that the private sector didn’t have an answer when patriotism or massive basic public amenities were concerned. He cautioned, however, that the private had its enormous role–to which I of course agreed.
    The well-known Grecian mean appeals to me in this situation–not too much
    of either. I have classmates who gone through Wall Street to gigantic mounds of easy money (at the time), but having been raised in Silicon Valley I have seen the same with tech entrepreneurs using government- funded research to become billionaires and to support the globalization of
    Finally, for Americans most of our ancestors were persons who departed Europe & elsewhere seeking economic betterment as well as sometimes seeking better civil conditions. Mr Trump’s grandfather (Germany) & mother (Scotland) were two of them. Likewise the Hispanic, Muslim and so many other groups. At the moment I am a long-term resident of Germany & Denmark, at least a temporary immigrant. This offers perspective to me.


  19. 19 Richard lipsey January 25, 2018 at 3:07 pm

    David, You ask about the reference to Johan Rae that I was referring to. Here it is: Rae, John, (1905) The Sociological Theory of Capital, (New York: Macmillan) first published in 1834 as A Statement of Some New Principles on the Subject of Political Economy Exposing the Fallacies of the System of Free trade and of Some Other Doctrines Maintained in the Wealth of Nations. Rae argues cogently that when technological change is seen to be exogenous, the case for specialization in international trade according to current comparative advantages falls to the ground – as the Asian NICs showed in spades after the second war when they used policy to develop new comparative advantages that currently did not exist . Indeed as I have argued in many places, when the implications of accepting that technological change is exogenous and typically conducted under conditions of Knightian uncertainty, a great deal of what we teach in economics is found no longer to hold. Here is one place where I have argued this in some detail: “Some Contentious Issues in Theory and Policy in Memory of Mark Baugh”, in Mark Baugh: Rebel with Many Causes, (Marcel Boumans and Matthias Klaes, eds.), (Chatham: Edward Elgar) 2013, pp. 31-62.


  20. 20 James Beckman January 25, 2018 at 11:03 pm

    Good post, Richard. I am in the business of tech transfer. Raised in Silicon Valley, educated in US, teaching & consulting around the world. With Apple going specifically into microchip design & Amazon setting up research centers in Europe & elsewhere, among many things happening, new tech is coming–from marketing generally to Virtual Reality in movies to new weapons of war to….. The minute their patients are filed, other firms/ nations will jump on each bandwagon.

    Certainly tech is now endogenous, with both governments & the private sector/individuals all in high gear it seems to me.


  21. 21 David Glasner February 2, 2018 at 8:41 am

    James, Friedman just randomly knocked on your apartment door? That must have been interesting.

    Richard, Thanks for the reference, which I recognize, but have never actually seen. Rae, unfortunately, is just a name to me, but seems worth looking into. I remember reading your Blaug paper, which I think I have tucked away somewhere, with much enjoyment, I will try to have another look at it. I agree that Knightian uncertainty and disequilibrium upset much of what we think we know about how economies work.


  22. 22 James Beckman February 4, 2018 at 2:17 am

    Hi, David, Friedman knocked because a common friend indicated that I had studied economics at both Berkeley & Stanford, and might be able to help him find a place to live in San Francisco–even then not an easy place to relocate.


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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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