Present at the Creation: The Free Market Counterrevolution

Mark Blaug’s Economic Theory in Retrospect argues that the Keynesian revolution in economics after the publication of The General Theory was a unique event in economic history because of its rapid and almost complete conversion of the economics profession to its central ideas.  Frank Knight’s Presidential Address to the American Economic Association in 1951 actually acknowledges this victory of Keynesian ideas within the economics profession but laments that Lord Keynes has successfully dragged economic thinking back to the dark ages.  Keynes himself argued forcefully in The General Theory that a revolution in thinking was in order given how difficult it was to change the habitual modes of thought of classical economics.

I bring up this background because Burgin’s narrative begins after the Keynesian revolution had in fact taken place, or at the tail end of that revolutionary phase.  And as Burgin also perceptively observes, prior to the Keynesian revolution it is not as if all economists were laissez faire advocates.  In fact, in the US the institutionalist tradition had a strong foothold within the emerging academic profession of economists, and certainly among public policy decision-makers.  But that observation reveals perhaps a bit more than Burgin is prepared to understand — the institutionalist tradition rejected the core teachings of neo-classical price theory that emerged in the wake of the marginalist revolution.  If an economist is one who accepts economic theory (classical and neoclassical), then the situation prior to the Keynesian revolution was more or less as Friedrich Hayek argued in his “The Trend of Economic Thinking” (1933).  An economist schooled in classical political economy and the refinements of neoclassical price theory will be sensitized to the dynamic and robust nature of the market economy, and the difficulties associated with government intervention and planning will be familiar to them.

Only those who deny the teachings of classical political economy, and reject the refinements of neoclassical price theory could be strong, rather than reluctant, advocates for intervention and planning.  The fact that by the end of that decade, Hayek’s judgment about the state of economic thinking turned out to be faulty is a significant factor in his decision to probe deeper the tacit presuppositions (philosophically [epistemics and political/legal]) of his peers within the economic profession (including many of his former students).

The decade of the 1930s in the UK and the US was defined by the neoclassical development of the models of imperfect competition, models of market socialism, and the Keynesian model of aggregate demand deficiency as the explanation of unemployment and macroeconomic instability.  With those models, there came a set of policy prescriptions to address the problems of inefficiency and instability that these models purported to identify.  Alongside the arguments about inequality a new theoretical critique of capitalism was forged, and given the historical reality of the Great Depression, theory and history seemed to align perfectly for a complete transformation of the way people saw the relationship between the economy and the state.  And this is indeed what happened.

Most seductive in this transformation was the fact that Keynes seemed to combine the worst fear of unbridled capitalism (mass unemployment) with the source of the greatest resentment (the idle rich) into a coherent explanation for the troubles that plagued the US and the UK.  Not only was this message seductive to politicians seeking both a scapegoat and a program for action, it was attractive to the young and brilliant economists who were entering into the economics profession during the 1930s and 1940s. They were given a purpose – economic science could be a tool of social control that when utilized appropriately could balance the economy, eliminate inefficiencies and curb injustice.

This is the world that F. A. Hayek and company challenged.  It is the great “counter-revolution” in economic thought in the 20th century.  Angus Burgin’s The Great Persuasion is the best social history yet written on this episode.[1] Burgin’s book is thoroughly researched and clearly written.  All readers – left as well as right leaning – can learn amazing details in this book about the sociology of knowledge and the historical construction of an intellectual movement.  Warts and all are exposed in Burgin’s account ofan intellectual movement attempting to find a way to form an effective counter-offensive to an emerging hegemony within the mainstream of the economics profession.  I say “warts and all” because Burgin does provide us with details about the battles – personal and professional – that took place during the classical liberal counter-revolution.  Central to this is the establishment of the Mont Pelerin Society, the financial role played by the Volker Fund, and the politics, personalities, and positioning that all intellectual movements experience.  These things are never smooth – upward and onward marches from darkness to intellectual light.  There are always critical junctures where pivotal players play decisive roles in the advancement or failure of movements.[2]

We learn of the internal battles in the Mont Pelerin Society between Ludwig von Mises and his contemporaries over how strident the defense of laissez faire that one could offer; of the battles over the leadership of MPS; of the intellectual climate of MPS which begins quite challenging and devolves into more or less cheerleading, etc.  Yet, Burgin also discusses how ideas such as those developed in Hayek’s The Constitution of Liberty, or James Buchanan and Gordon Tullock’s The Calculus of Consent, or Milton Friedman’s Capitalism and Freedom are developed out of discussions in those meetings.  In these pages we also learn of the role the Volker Fund played in supporting and encouraging the development of a new generation of scholars with the establishment of summer research and educational programs, and the establishment of research centers and lectures series.  Again, the story is not smooth, but with jagged edges.  And, Burgin tells his reader of ideological tensions and intellectual disputes.

One fascinating story in The Great Persuasion is the battle over Milton Friedman and George Stigler’s Foundation for Economic Education (FEE) study “Roofs or Ceilings?” and the heated discussion over a paragraph which was deemed as too egalitarian in spirit.  The critical factor for the economist in this discussion is the dispassionate stance of economic analysis, which is not always recognized.  Good economic criticism takes ends of one’s opponents as given (in this particular case egalitarian goals) and restricts the analysis to the examination of the suitableness of chosen means (e.g., rent-control) to given ends (e.g., greater access to low cost housing for the least advantaged).  Friedman and Stigler demonstrate that the establishment of rent-controls was an ineffective means to obtain the ends sought.  Ironically, the FEE staff objected to Friedman and Stigler’s apparent endorsement of the egalitarian ends.  But this episode just demonstrates the failure of the FEE staff to absorb one of the main lessons from Mises’s praxeological perspective of positive economic analysis and the Weberian tradition of positive analysis upon which it is based.

I think there is probably a more complicated history behind this episode than what Burgin reports, though he does rely extensively on Stigler’s telling of it.  I also think Burgin’s characterization of FEE is somewhat off given that this was the intellectual home in the U.S. of Henry Hazlitt and Ludwig von Mises.  But I confess to some serious bias in my judgment of FEE given my long history of association with the organization going back to my undergraduate days and to this day as a member of the Board.  However, I would clearly side with Stigler in this dispute as it is told — and I believe so would Ludwig von Mises.  As Stigler says, if FEE really stuck to the objections it had to “Roofs or Ceilings?” it could not have published analysis from Hayek, Simons, and Knight.

Besides the extensive discussion of MPS, Burgin devotes considerable space to the discussion of the “invention of Milton Friedman”.  Again, given the penchant of other historians of capitalism to demonize Friedman, Burgin’s discussion is wonderfully balanced and informative.  However, the tension that drives much of his narrative between the rise of Friedman’s “radical liberalism” and a somewhat more restrained Hayekian “traditionalism” I don’t believe can be sustained upon critical examination.  Members of MPS included traditionalists and Hayek sought to place the modern defense of liberalism within a broad intellectual tent, rather than a narrow and wooden laissez faire.  But the subtext of Hayek’s works and his maneuvers are a robust and vigorous defense of radical liberalism.  Here, I think, rather than relying on social history, Burgin would need to look at the evolution of Hayek’s argument in his “Abuse of Reason” project.

In The Constitution of Liberty, Hayek does acknowledge a role of tradition, but he also favors the progressive force of learning and dynamism in a free society. And, he explicitly challenges the “conservative” focus on traditional values exclusively.  He argues instead that all of society’s values are subject to criticism, but makes the epistemological argument that they cannot be criticized all at once.  One must treat some of society’s values as fixed, while criticizing others.  Then if we look at his next major project, Law, Legislation and Liberty, the radical nature of Hayek’s project from a “liberal” perspective becomes more apparent as he challenges the robustness of the US founding father’s constitutional project, seeks to challenge government monopoly in public goods provision, and even provides alternative institutional arrangements for the political economy of a free people.  Hayek is not bashful when it comes to being a radical liberal – consider his proposal for the denationalization of money that he came to late in life.

But there is no doubt that in Burgin’s narrative Friedman’s ascendency as a public intellectual for the radical liberal/free market cause should be central.  Friedman was the unique person who could talk equally effectively to his scientific peers within economics, his students at the university, the policy-makers that invited him to testify, and the general public who read his columns or watched him on TV.  Friedman was a special talent at communicating, and a brilliant mind so he could go toe to toe with anyone.  The phenomena of Milton Friedman from Capitalism and Freedom to Free to Choose would be worthy of an entire book itself.  I am sure that the history will again not be smooth, but jagged, just as Burgin tells this history. But Burgin’s history of Friedman is more in line with the meta-narrative of the book, which isn’t about Friedman per se, but the rediscovery and renewed confidence in the laissez faire idea of unbridled free markets.

For those who value free market ideas, Burgin’s book is a fascinating discussion of the rediscovery of these ideas among the academic and intellectual class in the post-WWII period and the spread of these ideas to the general public through new media and in new forms.  We have Max Hartwell’s book on the history of MPS as told by an insider, and we have others works discussing IEA and Thatcher, and the Hoover Institution and Ronald Reagan told by either true believers or vicious enemies, but dispassionate social history of MPS and the counter-revolution to the Keynesian hegemony has not been published before.

Angus Burgin’s The Great Persuasion is a must read for anyone who cares to think about the history of the modern argument about capitalism, and the role played by various individuals and organizations.  I cannot recommend this book highly enough – full of great scholarship; full of interesting insights; and enough to disagree with that it will encourage further work on the subject as the complex history of the ideas behind the philosophy, politics, and economics of radical liberalism continues to be written.

[1] I would argue that my colleague Lawrence White’s The Clash of Economic Ideas (Cambridge University Press, 2012) is the best ideas/doctrinal discussion of this modern history.

[2] At a recent professional meeting I informed one of the main historians of the neo-liberal movement that I had a graduate student working with me on the orchestration of the Keynesian revolution and that many of the same sort of critical factors associated with politics, personalities, and positioning took place during the 1930s that he often talked about in the orchestrating of the Chicago School.  He looked at me with complete puzzlement, and then finally said “I don’t see it.” The reason was that to him, the Keynesian revolution was just the advancement of truth in science, whereas the Chicago school was the manufacturing of falsehood.  For a social historian this is actually a massive intellectual error that too often is committed.  If you are going to move in that direction of research in the history of ideas, then one should be conscious that it applies equally to all intellectual movements because intellectual movements are orchestrated by human beings and instantiated through human institutions.  I would like to stress that to my reading Burgin does not suffer from this intellectual failing and it is actually one of the great strengths of his work that he is not committed to demonstrating an agenda of the moral bankruptcy of neo-liberalism that so many contemporary historians of capitalism seem to be wedded to in their work.