Abstract
The author explains why both Friedrich Hayek and Milton Friedman gained academic and political prominence since the 1970s. They led the neoclassical counter-revolution against the Keynesian doctrine. Friedman proposed measures to counter stagflation, which the Keynesians didn’t know how to solve. They contributed philosophical underpinnings (Hayek) and, among other things, a monetary theory (Friedman) to economics. Summaries of Hayek’s The Constitution of Liberty (1960) and Friedman’s Capitalism and Freedom (1962) are included. They argue that the market represents a telecommunications system that translates economic activities into prices, bringing about economic equilibrium. Government intervention distorts the market’s functioning. A dissenter is Albert Hirschman, whose Exit, Voice and Loyalty (1970) strips the conceptual limitations of neoclassical economics bare. Biographies of Hayek, Friedman and Hirschman are included.
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Notes
- 1.
Stedman Jones, D. (2012) Masters of the Universe: Hayek, Friedman, and the British Neoliberal Politics. Princeton: Princeton University Press, 179.
- 2.
Cassidy, J. (2009) How Markets Fail: The Logic of Economic Calamities. London: Allen Lane.
- 3.
Ha-Joon Chang noted in Economics: The User’s Guide that there are differences between the Austrian school and neoclassical economics: ‘Not all Neoclassical economists are free-market economists … The adherents of the Austrian school are even more ardent supporters of the free market than most followers of the Neoclassical school … While emphasizing the importance of individuals, the Austrian school does not believe that individuals are atomistic rational beings, as assumed in Neoclassical economics … “custom and tradition stand between instinct and reason”, Hayek intoned’ (138–9).
- 4.
Wapshott, N. (2011) Keynes–Hayek: The Clash That Defined Modern Economics. New York: Norton & Company, 29.
- 5.
When Hayek reported at NYU, Jenks was at Cornell where he had a second professorship. Hayek took a temporary job as a dishwasher because he ran out of money. To Hayek’s relief, Jenks came back from Cornell just in time, and so he ended his short-lived dishwasher career. He would have loved to stay another year in the USA, but he received word of a Rockefeller scholarship too late; he was already on his way back to Austria.
- 6.
Nasar, S. (2011) Grand Pursuit: The Story of Economic Genius. London: Fourth Estate, 280.
- 7.
Skidelsky, R. (2003) John Maynard Keynes 1883–1946; Economist, Philosopher, Statesman, 833.
- 8.
Nasar, Grand Pursuit, 404.
- 9.
Cassidy, How Markets Fail, 38.
- 10.
Nasar, Grand Pursuit, 405.
- 11.
Wapshott, Keynes–Hayek, 257.
- 12.
Edition used: the Routledge Classics edition of 2006.
- 13.
The Constitution of Liberty, 35.
- 14.
Ibid., 61.
- 15.
Ibid., 77.
- 16.
Ibid., 113.
- 17.
Ibid., 140.
- 18.
Ibid., 192.
- 19.
Ibid., 206.
- 20.
Ibid., 210.
- 21.
Ibid., 227.
- 22.
Ibid., 266.
- 23.
Ibid., 340.
- 24.
Ironically, Milton Friedman commented in Two Lucky People: Memoirs (1998) that in later years he and Rose, who was an accomplished economist herself, came to be among the best-known critics of the growth in centralized government that the New Deal initiated. Yet, they admitted that the New Deal was a lifesaver for them. Friedman, M. and Friedman, R. (1998) Two Lucky People: Memoirs. Chicago: University of Chicago Press.
- 25.
At the NBER Simon Kuznets had found that the percentage of income saved in the USA since 1899 had not changed much. And the savings ratio after WWII had been even lower. This showed the inadequacy of Keynes’s consumption function.
- 26.
Alfred Marshall had this to say on the subject matter: economics cannot be compared with the exact physical sciences for it deals with the ever-changing and subtle forces of human nature.
- 27.
Apart from being Roosevelt’s Duchess County neighbour, before becoming Secretary of the Treasury, Morgenthau was a gentleman farmer specializing in growing Christmas trees.
- 28.
The following lyrics (to the tune of Gilbert and Sullivan’s ‘When I was a Lad’) were written by University of Chicago (U. of C.) graduate students and performed at an economics department party in 1949: When I was a lad I served a term/Under the tutelage of A.F. Burns/I read my Marshall completely through/From beginning to end and backwards too/I read my Marshall so carefully/That now I am Professor at the U. of C./(chorus) He read his Marshall so carefully/That now he is Professor at the U. of C./Of Keynesians I make mincemeat/Their battered arguments now line the street/I get them in their weakest assumption:/‘What do you mean by consumption function?’/They never gave an answer that satisfied me/So now I am Professor at the U. of C./(chorus) They never gave me an answer that satisfied me/So now he is Professor at the U. of C. Source: Ebenstein, L. (2007) Milton Friedman: A Biography. New York: Palgrave MacMillan, 59.
- 29.
Keynes, J.M. (1931) The End of Laissez Faire. In: Essays in Persuasion. London: MacMillan & Co., 312.
- 30.
In Free to Choose (1990), the Friedman’s devote an entire chapter, ‘The Anatomy of Crisis’, to the Great Depression and the Fed’s role in it .
- 31.
Friedman and Friedman, Two Lucky People, 233.
- 32.
Joseph Stiglitz challenged this reasoning. He wrote in The Price of Inequality, ‘Monetarism was based on the assumption that the velocity of circulation—the number of times a dollar bill turns over in a year—was constant. And while in some countries and in some places that had been true, in the rapidly changing global economy of the end of the twentieth century, it was not. The theory became deeply discredited just years after it was the rage among all the central bankers. As they quickly abandoned monetarism, they looked for a new religion consistent with their faith in minimal intervention in the markets.’ The Price of Inequality: How Today’s Divided Society Endangers Our Future. New York: W.W. Norton & Company, 258–9.
- 33.
Ebenstein, Milton Friedman, 113.
- 34.
Cassidy, How Markets Fail, 77.
- 35.
Later, New Keynesian Joseph Stiglitz provided one. He wrote in The Price of Inequality: ‘These ideas provided intellectual comfort to central bankers who didn’t want to do anything about unemployment. But there were strong grounds for skepticism about these ideas: some countries, like Ghana and Israel, have managed to bring down their inflation rates very quickly at little cost. The underlying hypothesis that there is a stable relationship between the unemployment level and the rate of acceleration of inflation has not withstood the test of time’ (262–3).
- 36.
Edition used: fortieth anniversary edition (2002). Chicago: University of Chicago Press.
- 37.
Friedman admitted that, in hindsight, the one major defect in his book was the inadequate treatment of the role of political freedom, which under some circumstances promotes economic and civic freedom, and under others inhibits both.
- 38.
Capitalism and Freedom, 38.
- 39.
Ibid., 45.
- 40.
Ibid., 54. Friedman’s ideas of the 1960s have been revitalized by market monetarists. The Economist of 31 December 2011 writes in its article entitled ‘Marginal Revolutionaries’, ‘The market monetarists point out that their 5 % target is consistent with inflation of about 2 %, provided the economy grows at about 3 % a year, its rough average for the pre-crisis years. If growth slowed to 1 %, inflation would have to be permanently higher, i.e. 4 %. If output suffered a one-time drop, inflation might have to surge temporarily above 5 %. But as growth returned to normal, inflation would recede.’
- 41.
Capitalism and Freedom, 97.
- 42.
Ibid., 136.
- 43.
Ibid., 195.
- 44.
bid., 202.
- 45.
Adelman, J. (2013) Worldly Philosopher: The Odyssey of Albert O. Hirschman. Princeton: Princeton University Press, 2.
- 46.
‘On the whole, he was reluctant to discuss the Spanish Civil War after he left Catalonia. His wife, Sarah—who met him years later—found him silent on the topic, and sensing his unease, she didn’t press him for details.’ Worldly Philosopher, 134.
- 47.
Worldly Philosopher, 261.
- 48.
Ibid., 272–3.
- 49.
Ibid., 351.
- 50.
Public-choice economists study the links between economics and politics. They apply economic analysis to study political decision-making as well as the behaviour of politicians.
- 51.
Worldly Philosopher, 447.
- 52.
Hirschman, A.O. (1998). Lemma on Hirschman. In: The New Palgrave: A Dictionary of Economics. Vol. 2. London: MacMillan, 219.
- 53.
Ibid., 519.
- 54.
Ibid., 614–15.
- 55.
Edition used: Harvard University Press, 1970.
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de Haan, P. (2016). The Return of Neoclassical Economics. In: From Keynes to Piketty. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-60002-8_5
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