Transcript Classic Liberal Economics

J. Huie
The control of the
production of wealth is
the control of human life
itself.
Hilaire Belloc
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Economics is the study of the issue of
scarcity. There are more demands on
resources available than the ability to fulfill
these demands.
There are three basic questions which any
economic system tries to resolve:
1.
2.
3.
What will be produced?
How will it be produced?
For whom will it be produced?
 Traditional economics tended to be resolved in a
consistent manner. Usually the chief political body
made the decisions if there was not some customary
allocation.
 While it was fairly predictable if practiced in an
unbiased way, the potential for arbitrary access or
lack of access to resources could become very
significant to certain individuals.
 Small groups rather than large countries have a better
chance at operating successfully under this type of
system.
 Based on the idea of a favorable balance of
trade, mercantilism was a policy whereby a
state tried to maximize exports purchased with
hard currency while minimizing imports
through tariffs and quotas.
 Hard currency accumulation—such as silver
and gold—was viewed as the source of wealth;
those countries which possessed the most
gold and silver were thought to be the most
powerful.
 Since most European states began adopting
these policies in the 1500s, there was little
chance, unless a country possessed some good
or service which was otherwise unavailable, of
achieving an advantage over rivals because
they were doing the same thing. Therefore,
control of foreign markets became a necessity.
Thus, mercantilism was a key factor for
imperialism.
 Mercantilists viewed competition as a negative
force, because it directed energies away from
a perceived greater efficiency in unified action.
 Mercantilist governments frequently awarded
monopolies. Classic examples are the
Hudson’s Bay Company and the English East
India Company.
 Colonial trade was tightly controlled to the mother
country’s advantage. This, too, created problems.
Taxes, tariffs, controls on imports, were considered
unjust, especially after many Enlightenment ideals
had proposed the equality for men, including,
implicitly, colonials.
 Control of and taxes on tea were an impelling feature
of the Thirteen Colonies rebellion against and
eventual independence from Great Britain and its
mercantilist policies.
 The nature of mercantilism encouraged
conflict, and with the increasing imperial
rivalries, European states were forced to
expend large sums to administer and to
protect their empires. War was a frequent
event during the seventeenth and eighteenth
centuries between these mercantilist states.
 The Enlightenment, following upon the scientific
revolution, tried to discover natural laws that
governed human institutions.
 John Locke, an English philosopher had undertaken
work to support the rights of the govern to remove
their government when it failed to meet their needs.
The principle of individualism thereafter played a
large role in the Enlightenment thinkers’ ideas. This
call for a change to the then absolutist governments
and economic control would come to be known as
classical liberalism.
 Modern understandings of economics
began with the work of the physiocrats.
These French economic thinkers of the
mid-eighteenth century made
suggestions to improve the economy.
 Their arguments did little to sway their
French rulers. However, their ideas
influenced others.
 Adam Smith (1723-90)
 The chair of moral philosophy at the University of
Glasgow, Smith keenly studied the wealth of the
tobacco merchants in the Scottish city. From what
he observed from them and
other activities by other Scots,
he came to develop the study of
political economy. As such, he
is often considered to be the
father of economics.
 Much of Smith’s observation and thought can be
found in A Theory of Moral Sentiments (1759), but his
larger and later An Inquiry into the Nature and Causes
of the Wealth of Nations (1776) is viewed as the tome
founding his laissez-faire economics.
 Smith recognized, despite the focus on individualism,
that positive social relations were inherent in a
properly functioning market. Honesty and trust
played a role.
 In these exchanges, both parties had to have their
needs met to a degree—a win-win situation.
 Supply and demand for goods and services
would best determine prices, rather than
arbitrary rules established by some person or
group, whose access to all necessary and
relevant economic information was unlikely.
 Government intervention was to be minimal,
as its actions distorted the marketplace
signals. Government had only three legitimate
tasks. (see next slide)
 Supplying an army and navy . . .for defense
purposes only
 Police and courts . . . rule of law . . . to protect
property rights, personal well-being, and
enforce contracts
 Provide certain public services where it was
impracticable or dangerous for private
ownership (in terms of distorting the market) .
. . consider the lighthouse
 Smith held that the specialization of tasks (division of
labor) increased efficiency and quality. As individuals
did small tasks repetitively they became expert. His
study of the pin factory was used to illustrate this.
 He thought that competition among producers of
goods and suppliers of services rather than
monopolization yielded greater efficiency and
satisfaction of wants. Why? Each competitor had to
do something special to win over a customer. This
usually was seen in ways of driving down costs.
 Private property allowed entrepreneurs to utilize these
resources in ways they best saw fit. It also helped secure
their ability to lay claim to any fruits from its use or nonuse.
 He noted that the market was coordinated by “the
invisible hand.” The interactions of buyers and sellers
provided information—usually in a “short-hand” of
prices—that informed them on how best to employ their
resources. For instance, if prices were high, it was an
indication that a business opportunity to provide that
good or service made sense, and thus the necessary
resources could be efficiently employed.
 It should be noted that Smith wanted perfect
competition. That is, there would be many,
many, many producers producing the same
item. At best all that could be achieved was
imperfect competition. Many producers
producing similar items. This tended to favor
small business.
 Smith opposed oligopoly—a few producers
producing similar items; and monopoly—one
producer.
 As Smith noted, quite often merchants and businesses will act
against competition in an attempt to secure more of the
market share for themselves. They will collude with
government to impose regulations and other coercive means
against their competitors, driving them out of the
marketplace.
 During the Progressive era activist governments, in the name
of public welfare, often allied with bigger businesses (in meat
processing and utilities) to impose onerous regulations to
ensure public health. Even when there was some truth to
their claims, it was usually done such that smaller competitors
could not afford to meet these regulations, leaving these
larger “cooperative” businesses alone in the market.
 Throw Pillow
 The real tragedy of the poor is the poverty of
their aspirations.
 It is not from the benevolence of the butcher,
the brewer, or the baker that we expect our
dinner, but from their regard to their own
interest.
 The real price of everything, what everything
really costs to the man who wants to acquire
it, is the toil and trouble of acquiring it.
 Folly and injustice seem to have been the
principles which presided over and directed
the first project of establishing those colonies;
the folly of hunting after gold and silver mines,
and the injustice of coveting the possession of
a country whose harmless natives, far from
having ever injured the people of Europe, had
received the first adventurers with every mark
of kindness and hospitality.
 The mean rapacity, the monopolizing
spirit of merchants and manufacturers,
who neither are, nor ought to be, the
rulers of mankind, though it cannot
perhaps be corrected, may very easily be
prevented from disturbing the tranquility
of any body but themselves.
 The Nobel prizing-winning economist and philosopher
Friedrich Hayek noted that the marketplace satisfied selfinterest through positive exchange with others, seeking to
satisfy their self-interest. Thus, whether intentionally or
not, people were helping others through the goods and
services they exchanged. And, unlike traditional societies,
these benefits occurred without an individual needing to
know or even care about the person with whom he or she
was exchanging resources. It widened the “circle” of
potential traders. Of course, this led to international
trade.
 The economic and science writer Matt Ridley noted that
these kinds of interactions contributed to the
evolutionary development of morality. In other words,
interaction in the marketplace rewarded characteristics
such as honesty, and those who practiced or exhibited
these characteristics tended to have more potential
exchange partners. Thus, those who had or adopted
those characteristics tended to be successful enough that
these became a customary practice.
 ZAK
 FRIEDMAN
 His idea of competitive advantage reinforced
the ideas of free trade and specialization put
forward by Adam Smith.
Ricardo also developed a
theory called the Iron Law of
Wages, which held that the
supply of labor, if large, could
drive down real (those
adjusted for inflation) wages.
 This Iron Law of Wages also noted that in the long-
term, wages would need to be depressed
to preserve the profit margin.
There are several criticisms,
from the economic left and
right (such as the pro-market
Austrian school) of this idea.
 This British merchant and statesman advocated free
trade. His anti-Corn Law stance and his objection to
tariffs would, he argued, facilitate world peace. The
conflicts resulting from protectionism would be gone.
 Some of his ideas were adopted and for
a while in the later 1800s there was
relative peace among the European states
regarding economic activities.
 The anti-individualist ideas of nationalism, militarism, and
protectionism, began to take hold, though as the
nineteenth century ended, ending this first phase of
(economic) globalization. The First World War (1914-18)
was in part caused by these antiindividualist actions. After the First World
War government interventions in
economics returned, notably in a series of
steps decreasing, if not stopping, free
trade.
 Laissez-faire never really existed as Smith advocated.
However, during the industrial revolution (c. AD 17501850) in Great Britain, government provided few services
beyond what Smith had proscribed. Britain retained a
huge empire, which interfered with the real actions of the
market, though.
 The United States of America is often cited as an example,
at least before the 1930s. However, the government was
always larger and interfering more than Smith advocated.
 The first American administration of George Washington
was a small government, but even his administration took
a larger role, such as Alexander Hamilton’s creation of a
national bank and the incurring of a national debt to
establish a credit history, than laissez-faire permitted.
 The Civil War saw an expansion of government and its
intervention in the economy.
 World War I led to significant government control over
the economy. In fact, President Woodrow Wilson was a
Progressive—essentially a party connected with modern
liberalism.
 While Calvin Coolidge (1923-29) was essentially hands off, the US
maintained high tariffs, nonetheless.
 After all, the chief business of the American people is business. Of course
the accumulation of wealth cannot be justified as the chief end of existence.
Note: he also said, in the same speech,
We make no concealment of the fact that we want wealth, but there are
many other things that we want very much more. We want peace and
honor, and that charity which is so strong an element of all civilization. The
chief ideal of the American people is idealism. I cannot repeat too often
that America is a nation of idealists. That is the only motive to which they
ever give any strong and lasting reaction.
From: "The Press Under a Free Government,” Washington, D.C. on January
17, 1925.
 Hayek argued that the market system, because of its
decentralized approach, was the best economic system.
Why? It is impossible, he pointed out, for planners to
know all the requisite economic data to meet economic
needs. What is more, the question of using that data
objectively becomes problematic. Planners’ decisions are
influenced by their own or the regime’s subjective
qualities and interests.
“It is the absence of market prices that makes socialism unworkable,” as
Ludwig von Mises pointed out in the 1920s. Socialists have often
considered the question of production an engineering question: Just do some
calculations to figure out what would be most efficient. It’s true that an
engineer can answer a specific question about the production process, such
as, What’s the most efficient way to use tin to make a 10 ounce soup can, that
is, what shape of can would contain 10 ounces with the smallest surface
area? But the economic question—the efficient use of all relevant
resources—can’t be answered by the engineer. Should the can be made of
aluminum, or of platinum? Everyone knows that a platinum soup can would
be ridiculous, but we know it because the price system tells us so. An
engineer would tell you that silver or platinum wire would conduct electricity
better than copper. Why do we use copper? Because it delivers the best
results for the cost. That’s an economic problem, not an engineering
problem.
—David Boaz
In a country where the sole
employer is the State, opposition
means death by slow starvation.
The old principle: who does not
work shall not eat, has been
replaced by a new one: who does
not obey shall not eat.
Leon Trotsky (1937)
It is significant that the
nationalization of thought has
preceded everywhere pari passu
with the nationalization of
industry.
E. H. Carr
Ideas evolve by descent with modification,
just as bodies do, and Darwin at least partly
got this idea from economists, who got it
from empirical philosophers. Locke and
Newton begat Hume and Voltaire who begat
Hutcheson and Smith who begat Malthus and
Ricardo who begat Darwin and Wallace.
(continued)
Before Darwin, the supreme example of an
undesigned system was Adam Smith’s
economy, spontaneously self-ordered
through the actions of individuals, rather
than ordained by a monarch or a parliament.
(continued)
Where Darwin defenestrated God, Smith had
defenestrated government. Neatly, this year
also sees a Smith anniversary, the 250th
birthday of his first book, The Theory of
Moral Sentiments, a book that is very
Darwinian in its insistence that sympathy is
what we would today call innate, that people
are naturally nice as well as naturally nasty.
 Smith, Adam, An Inquiry into the Nature and Causes
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of the Wealth of Nations.
Smith, Adam, A Theory of Moral Sentiments.
Boaz, David, Libertarianism: A Primer.
Hayek, F. A., The Road to Serfdom.
Hayek, F. A., The Fatal Conceit.
Lindsey, Brink, “The Decline of the First Global
Economy”.
Ridley, Matt, The Origins of Virtue: Human Instincts
and the Evolution of Cooperation.
 Reason TV.com.
 Youtube