April 2003


The Revival of Laissez-Faire in American Macroeconomic Theory:
A Case Study of the Pioneers
by Sherryl Davis Kasper
Cheltanham, UK: Edward Elgar, 2002. viii + 177 pp. 

The title phrase laissez-faire is pressed into service as the common denominator for this close-up look at the "pioneers" who have given shape to this country's market-oriented macroeconomics. In a chapter-per-pioneer format, Kasper presents the ideas of Frank Knight, Henry Simons, Friedrich Hayek, Milton Friedman, James Buchanan, and Robert Lucas. Each chapter provides a brief personal history, identifies a "pre-analytic vision," and presents the case for laissez-faire. The reader soon realizes that this common rally cry of classical liberalism serves only loosely as a common denominator. Laissez faire appears variously throughout the book as a presumption, a principle, a policy recommendation, a standard, an ideal, and a modeling technique.
        Kasper, who takes her own orientation from the institutionalist school, doesn't play favorites among the pioneers. As announced in the short introductory chapter, her primary concern is with the basis for the advocacy of laissez-faire: (1) Are there strong ideological influences? (2) Does the theoretical resolution to some contemporary economic problem add to the case for less rather than more government involvement? (3) Do new tools and methods help to reveal the merits of unhampered markets?
        Kasper's ultimate verdict is not easily summarized, but the careful reader will see that it emerges as an evolving pattern of answers to the questions about the basis for the advocacy of laissez faire.
        A passing reference (p. 149) to the "taint of ideological commitment to laissez-faire" supposedly associated with the early pioneers hints that the later pioneers labored under a taint by association. Kasper seems to take for granted that ideological commitments lie somewhere below the surface of the arguments actually made—just how far below being the only live issue. She acknowledges that there were genuine efforts in the 1960s and 1970s to understand the problems of inflation and stagflation—problems that were inadequately addressed by the Keynesian orthodoxy. And she makes the judgment that Friedman's monetarism and Buchanan's public choice theory had more appeal than could be accounted for in terms of the implicit ideology. But while monetarism and public-choice theory were born of ideology-cum-resolution-to-contemporary- problem, Lucas's new classicism was born of resolution-to- contemporary-problem-cum-new-tools-and-methods. Only in this most recent reincarnation was market- oriented macroeconomics able to dominate the field.
        But was it the rigor of new classical methods or the adherence to laissez-faire—or possibly something else—that won professional acceptance? Kasper's answer to this question seems to hinge on the nature of the arguments of the early and the late pioneers. The early pioneers made negative arguments. Because of unquantifiable uncertainties (Knight), the fragmentation of knowledge (Hayek), the lack of timely data (Simons and Friedman), and/or the lack of suitable motivation (Buchanan), we cannot expect policymakers to engineer results that are superior to those that emerge spontaneously in a competitive market economy. With such negative arguments, it was difficult to attract adherents in large numbers. Survival rather than revival was the order of the day, and to that end the Mont Pélerin Society—suggested by Simons before his untimely death in 1946 and organized by Hayek in 1947—became crucial.
        Lucas, by contrast, offered a positive argument. He brought laissez-faire into play up front as a modeling technique rather than save it as a possible policy recommendation. As a consequence, the macroeconomic modeler of the late 1970s and early 1980s could make full use of the mathematical techniques already in the economist's tool box, could learn some new modeling techniques that were part and parcel with new classicism, and could possibly develop still more techniques to push the envelope of this new mode of theorizing. Devising so-called fully articulated artificial economies, calibrating the models on the basis of actual movements in real-world macroeconomic magnitudes, subjecting the model economies to hypothetical shocks, and making predictions on this basis occupied many practitioners. And it was all heady business, despite—or possibly because of—the tenuous link between theory and reality. Kasper mentions—but almost as an aside—that during the heyday of new classicism, the revival may have been driven by the opportunity to employ sophisticated techniques in the pursuit of professional advancement.
        In the final page-and-a-half of the book, Kasper notes that the supremacy of laissez-faire in new classical dress was short-lived and argues that in any case Lucas's contribution was not free of the ideological taint. Beginning in the early 1980s, his Friedman-friendly version of new classicism gave way to real business cycle theory, which accorded no significant role to money, and to new Keynesianism, whose sticky wages and menu costs warned against leaving matters to the market. Further, an ideological taint attaches to Lucas's new classicism, in Kasper's reckoning, because the tools that Lucas borrowed from Friedman were themselves influenced by Friedman's ideological commitment to laissez-faire. The reader gets the idea that the issue of ideology has special significance for our understanding of market-oriented macroeconomics. But that special significance is never put into a more general context. No where in the book is there a discussion or even a mention of the ideological underpinnings of Marxism, Keynesianism, or Institutionalism.
        Nor does Kasper offer a comparison of new classicism with old classicism. The old classical economists favored a system of natural liberty partly on grounds of moral philosophy and partly because of their understanding of the economic order. Laissez-faire was a presumption, a default-mode policy. It assigned the burden of proof to anyone (including themselves) who proposed to interfere with the natural order. Would Kasper see the classical commitment to laissez-faire as ideologically tainted? Presumably she would, since the arguments offered by Adam Smith were the same in this respect as those offered almost two centuries later by Hayek, Friedman, and Buchanan.
       Beyond the issues of ideological taint, readers will find interesting material in Kasper's book. Her survey of the pioneers demonstrates, for instance, just how broadly the laissez-faire label is applied. Henry Simons, who is well known for wanting to use the tax system to redistribute income, also favored a tax on advertising, the revenues to be used for consumer education and the establishment of uniform commodity standards (p. 43). Milton Friedman, heavily influenced by Simons, reread his work in later years and was astounded to realize that these ideas were was once thought to have a pro-market orientation (p. 100).  

Roger W. Garrison
Auburn University