Hayek's and Friedman's ideas drove the deregulation and reforms of the 1970s - 2000. But then the GOP dumped economic freedom and embraced cronyism, and the Democrats were only too happy to go along. Especially since TARP the American economy has been a strange confusion of excessive regulation mixed with anarchy.
I am sympathetic to Schumpeter for accurately describing Capitalism yielding to Corporatism / Socialism. I view Cronyism as Corporatism and Crony Capitalism / Corporate Socialism is the form of economics that currently dominates the US.
Re: "the big concerns of the 21st century seem to be climate change, terrorism, and various cultural issues. Economics is not as central as it was to these issues. Economists have retreated to playing 'small ball, finding datasets to exploit to look at relatively minor questions."
Largely true, but there are notable exceptions.
For example, some prominent mainstream economists focus on big questions around nations and globalization. Paul Krugman (international trade), David Autor ('China shock'), George Borjas (international migration), Alesina/Spolaore/Wacziarg (endogenous nationhood) come to mind. Here, too, much discussion revolves around trade-offs between growth and floors.
There is an interesting fracture in normative economic theory between those who advocate "predistribution" (i.e., policies that increase labor market power at some margins, for example, minimum wage, tariffs, trade unions, job guarantees) and those who advocate "redistribution" (taxes and transfers, like UBI, NIT, Food Stamps, etc).
Good question. On free markets vs. central planning, Hayek's central argument wins on the basic principle, but with leftists still winning in many specific instances, such as health insurance and income distribution. On the causes of mass unemployment, Keynes "won," but I suspect mostly because deficit spending is really popular rather than because it is such a great tool for managing the economy. If Keynes had really won, economists would be clamoring now for the government to run a budget surplus, because we are at full employment. As for social justice, one can argue that Marxism seemed to fall with the Soviet Union, but it came back as social justice, and if it isn't winning, it certainly is not easily defeated.
The climate change agenda -- the setting of 'net zero' as a target, coupled with subsidies for wind and solar power -- looks like central planning to me. Indeed, this Western version of central planning has the potential to be much worse than the Soviet version. At least the Soviet central planners managed to keep the lights on.
Overplayed? I’m not sure; you might be right, but it makes for a great story, especially for the intellectually curious, unfamiliar with economics. Most economics undergraduates will hear very little on Hayek. They will be stuffed full of Keynesian economics. So in this sense Keynes vs Hayek is underplayed. Many would probably benefit from hearing the Overplayed version? I found the Commanding Heights documentary pretty exciting the first few times I watched. https://www.pbs.org/wgbh/commandingheights/hi/story/
So while i agree with Arnold on this in terms of the overall direction of the profession, we still recognize and reward those who successfully work on the big questions. I don't think there is a single economist alive who would not exchange their career with that of Acemoglu and I don't think there is any question that what he and his collaborators have worked on is among the most important problems in social science.
Excellent summary from what little I know/observed about economics over my lifetime.
However, I have also observed the evolution of institutions as internal bureaucracies and fiefdoms all attempt to expand their domains to the efficiency decrease of the whole institution. With age this evolutionary decay strongly impacts monopolies who don't face the possibility of being killed by outside competition. Non-monopoly institutions with "good cultures" keep the internal bureaucrats under control while taking advantages of economies of scale, new research, learning-by-doing, etc. to obtain a net increase in economic efficiency.
As all government institutions are monopolies in their domains they rapidly evolve into incompetent bureaucracies, which more than offsets the theoretical advantages of "better planning" and centralization.
I consider the main reason capitalism is more innovative and successful than socialism is that capitalism has the threat of bankruptcy (economic failure) to keep bureaucratic evolution down. That does create economic pain as a selector.
It is useful to note that natural evolution of life also has similar problem when you eliminate "natural selection" (aka death) from occurring. An entire strain of domesticated life can accumulate little negative genetic changes as we only select for things like grow rates or dog shows. How long will that "dog show champion" last against a pack of wolves?
Interesting topic and an interesting list of contributions by various people. I disagree on a few points you make.
While many do indeed suffer from income shocks at one time or another, extremely few Americans have "very low income." American poor largely suffer from relatively low income or what is more popularly called income inequality. I'd argue American poor generally have as much or more than communist middle class but suffer because they can't help but compare themselves to Americans with more. Most of the exceptions are mentally ill people we've given the "freedom" to live on the streets and drug addicted who have made this choice. Could we do more for those people? Sure, and maybe some interventions work marginally well.
The US negative income tax (Earned Income credit) is not universal. It only applies to people who work for income. Your footnote accounts for people with income above a phased-out cutoff but leaves them with entirely different options for leaving the labor market. We can quibble over whether it is a basic income or a supplement. SSI, Medicaid, Obamacare and a variety of welfare benefits complicate things quite a bit.
Under communism you have no freedom and you are poor, much poorer than the poorest in a capitalistic system. And Keynes was actually in love with Bolshevism to be precise, so the dilemma is about state driven economic and laissez faire
The UBI and negative income tax appear equivalent in the narrow sense of Footnote 1. However, if there are two people, one earning (pre-tax and UBI) 20k and the other 90k, then in the case of UBI, government spending on the UBI is 10k+10k = 20k (18% of GDP), taxes collected are 3k+10k = 13k, for a deficit of 7k. With the negative income tax, government spending is only 7k+0 = 7k (6.4% of GDP), taxes collected are zero, and the deficit is still 7k.
While it might be theoretically possible to administer the 20k UBI program and IRS agency collecting 13k in taxes with the same size bureaucracy as one that collects zero taxes and pays 7k in negative taxes, I'm not sure that is what would actually result.
When it comes time to decide who should pay the 7k in deficit, it's also not clear that both situations will result in the same outcome. In the UBI case, it looks like the high-income person earning 90k pre-tax received the same welfare benefit of 10k as the low-income person earning only 20k. The high-income person paid 10k in taxes (11% of pre-UBI income, 10% post-UBI), while the low-income person paid 3k in taxes (15% of pre-UBI income, 10% post-UBI). So, even though the 7k deficit came *entirely* from providing a 7k net welfare benefit to the low-income person --- he ended up with 27k net on 20k of pre-tax income while the high-income person ended up with 90k net on 90k pre-tax income --- the statistics above may deceive people into thinking that the high-income person actually received as much welfare as the low-income person while paying a lower tax rate! (Think of how many people still don't understand, and are encouraged not to understand, that a capital gains tax rate of 0 is neutral, neither favoring nor penalizing savers.)
The negative income tax is less deceptive in showing where the 7k deficit came from. The low-income person received 7k in welfare ("paid" negative 7k in tax), and the high-income person neither received welfare nor paid tax.
Even now, without UBI, we know that the bottom 47% of earners are net receivers, i.e., they effectively pay a negative tax rate. Yet, because they do pay gross taxes and receive gross benefits (as do higher income earners), many people don't understand just how redistributive and progressive our tax and benefits system already is. The lesson seems to be that tax and benefits stats are least deceptive when government collects and pays only net amounts rather than collecting large gross taxes and giving much of that back in the form of large gross benefits.
I am not aware of Friedman advocating for a UBI. What he did, successfully, suggest to President Reagan was the Earned Income Tax Credit, which gives low-income working taxpayers a subsidy that rises with earned income, up to a point, but then decreases as earned income continues to rise.
Friedman wanted this to replace existing welfare programs in which eligibility for benefits ends suddenly and completely at a specific income amount, thus making it in recipients' interest to make sure they don't earn more than the "cliff" amount. With the EITC your earned income + benefits always increases with your earnings, even if less than 1:1 in the later part of the curve, so it is always in the recipient's interest to do more work if he can get it.
Of course Friedman did not get his way about the EITC replacing other welfare programs, so it now exists in addition to them.
Not mentioned is that Buchanan's "Public Choice" should have been more correctly labeled as "Government Choice" -- it's actually the government decision making agents who choose.
While the Govt Parks are open to the public, within reasonable rules and times, most often the Govt schools are not open to the public. It's very good to focus on the actual incentives the decision making agents have, including accountability for when they make mistakes.
It would have been better to label the stuff government does as govt rather than public. Neither a private nor public company is a government organization. Govt funding sounds more accurate than public funding, for those activities the govt funds.
While it's never too late to change, it would take a bigger effort than any leader seems willing to put in; which then seems to make sense to never mention it. (Sort of how reported thefts in SF are going down -- if reporting the theft costs time but has no benefit since the cops ain't gonna do nuthin, why bother? )
I'd be happy to see some Nobel winner create and publicize a modified Govt Choice theory which changes the name; but not holding my breath.
Excellent whirlwind tour of the history of economic thought. Unfortunately, we have yet to solve the problems of "the commanding heights" and business cycles.
the allies could have left GNP alone but the West pounded them with Western propaganda and the alore of wealth and money thru bribes to have them walk to the other wide to what we call today Ologarchal capitalism. Boy did they get doped
Hayek's and Friedman's ideas drove the deregulation and reforms of the 1970s - 2000. But then the GOP dumped economic freedom and embraced cronyism, and the Democrats were only too happy to go along. Especially since TARP the American economy has been a strange confusion of excessive regulation mixed with anarchy.
I am sympathetic to Schumpeter for accurately describing Capitalism yielding to Corporatism / Socialism. I view Cronyism as Corporatism and Crony Capitalism / Corporate Socialism is the form of economics that currently dominates the US.
Re: "the big concerns of the 21st century seem to be climate change, terrorism, and various cultural issues. Economics is not as central as it was to these issues. Economists have retreated to playing 'small ball, finding datasets to exploit to look at relatively minor questions."
Largely true, but there are notable exceptions.
For example, some prominent mainstream economists focus on big questions around nations and globalization. Paul Krugman (international trade), David Autor ('China shock'), George Borjas (international migration), Alesina/Spolaore/Wacziarg (endogenous nationhood) come to mind. Here, too, much discussion revolves around trade-offs between growth and floors.
There is an interesting fracture in normative economic theory between those who advocate "predistribution" (i.e., policies that increase labor market power at some margins, for example, minimum wage, tariffs, trade unions, job guarantees) and those who advocate "redistribution" (taxes and transfers, like UBI, NIT, Food Stamps, etc).
Professor Kling, I have a question. Who won the battle of ideas - Hayek, Keynes, or social justice? https://m.youtube.com/watch?v=GTQnarzmTOc
Good question. On free markets vs. central planning, Hayek's central argument wins on the basic principle, but with leftists still winning in many specific instances, such as health insurance and income distribution. On the causes of mass unemployment, Keynes "won," but I suspect mostly because deficit spending is really popular rather than because it is such a great tool for managing the economy. If Keynes had really won, economists would be clamoring now for the government to run a budget surplus, because we are at full employment. As for social justice, one can argue that Marxism seemed to fall with the Soviet Union, but it came back as social justice, and if it isn't winning, it certainly is not easily defeated.
The climate change agenda -- the setting of 'net zero' as a target, coupled with subsidies for wind and solar power -- looks like central planning to me. Indeed, this Western version of central planning has the potential to be much worse than the Soviet version. At least the Soviet central planners managed to keep the lights on.
What do you make of the whole debate about free markets and "democracy"?
People used to think these were intertwined, now they think they are separable (China, UAE, many of the "semi democratic" Asian countries, etc).
I think most would agree we were more free market when we were less democratic (Europe before WWI, America before women's suffrage/civil rights, etc).
I favor democracy and a relatively broad distribution of political power, though I'm not wed to universal equal suffrage.
Overplayed? I’m not sure; you might be right, but it makes for a great story, especially for the intellectually curious, unfamiliar with economics. Most economics undergraduates will hear very little on Hayek. They will be stuffed full of Keynesian economics. So in this sense Keynes vs Hayek is underplayed. Many would probably benefit from hearing the Overplayed version? I found the Commanding Heights documentary pretty exciting the first few times I watched. https://www.pbs.org/wgbh/commandingheights/hi/story/
This is one of the primary benefits of the comments section. A place to refine our understandings and word choices.
So while i agree with Arnold on this in terms of the overall direction of the profession, we still recognize and reward those who successfully work on the big questions. I don't think there is a single economist alive who would not exchange their career with that of Acemoglu and I don't think there is any question that what he and his collaborators have worked on is among the most important problems in social science.
Excellent summary from what little I know/observed about economics over my lifetime.
However, I have also observed the evolution of institutions as internal bureaucracies and fiefdoms all attempt to expand their domains to the efficiency decrease of the whole institution. With age this evolutionary decay strongly impacts monopolies who don't face the possibility of being killed by outside competition. Non-monopoly institutions with "good cultures" keep the internal bureaucrats under control while taking advantages of economies of scale, new research, learning-by-doing, etc. to obtain a net increase in economic efficiency.
As all government institutions are monopolies in their domains they rapidly evolve into incompetent bureaucracies, which more than offsets the theoretical advantages of "better planning" and centralization.
I consider the main reason capitalism is more innovative and successful than socialism is that capitalism has the threat of bankruptcy (economic failure) to keep bureaucratic evolution down. That does create economic pain as a selector.
It is useful to note that natural evolution of life also has similar problem when you eliminate "natural selection" (aka death) from occurring. An entire strain of domesticated life can accumulate little negative genetic changes as we only select for things like grow rates or dog shows. How long will that "dog show champion" last against a pack of wolves?
Interesting topic and an interesting list of contributions by various people. I disagree on a few points you make.
While many do indeed suffer from income shocks at one time or another, extremely few Americans have "very low income." American poor largely suffer from relatively low income or what is more popularly called income inequality. I'd argue American poor generally have as much or more than communist middle class but suffer because they can't help but compare themselves to Americans with more. Most of the exceptions are mentally ill people we've given the "freedom" to live on the streets and drug addicted who have made this choice. Could we do more for those people? Sure, and maybe some interventions work marginally well.
The US negative income tax (Earned Income credit) is not universal. It only applies to people who work for income. Your footnote accounts for people with income above a phased-out cutoff but leaves them with entirely different options for leaving the labor market. We can quibble over whether it is a basic income or a supplement. SSI, Medicaid, Obamacare and a variety of welfare benefits complicate things quite a bit.
Magnificent
Under communism you have no freedom and you are poor, much poorer than the poorest in a capitalistic system. And Keynes was actually in love with Bolshevism to be precise, so the dilemma is about state driven economic and laissez faire
The UBI and negative income tax appear equivalent in the narrow sense of Footnote 1. However, if there are two people, one earning (pre-tax and UBI) 20k and the other 90k, then in the case of UBI, government spending on the UBI is 10k+10k = 20k (18% of GDP), taxes collected are 3k+10k = 13k, for a deficit of 7k. With the negative income tax, government spending is only 7k+0 = 7k (6.4% of GDP), taxes collected are zero, and the deficit is still 7k.
While it might be theoretically possible to administer the 20k UBI program and IRS agency collecting 13k in taxes with the same size bureaucracy as one that collects zero taxes and pays 7k in negative taxes, I'm not sure that is what would actually result.
When it comes time to decide who should pay the 7k in deficit, it's also not clear that both situations will result in the same outcome. In the UBI case, it looks like the high-income person earning 90k pre-tax received the same welfare benefit of 10k as the low-income person earning only 20k. The high-income person paid 10k in taxes (11% of pre-UBI income, 10% post-UBI), while the low-income person paid 3k in taxes (15% of pre-UBI income, 10% post-UBI). So, even though the 7k deficit came *entirely* from providing a 7k net welfare benefit to the low-income person --- he ended up with 27k net on 20k of pre-tax income while the high-income person ended up with 90k net on 90k pre-tax income --- the statistics above may deceive people into thinking that the high-income person actually received as much welfare as the low-income person while paying a lower tax rate! (Think of how many people still don't understand, and are encouraged not to understand, that a capital gains tax rate of 0 is neutral, neither favoring nor penalizing savers.)
The negative income tax is less deceptive in showing where the 7k deficit came from. The low-income person received 7k in welfare ("paid" negative 7k in tax), and the high-income person neither received welfare nor paid tax.
Even now, without UBI, we know that the bottom 47% of earners are net receivers, i.e., they effectively pay a negative tax rate. Yet, because they do pay gross taxes and receive gross benefits (as do higher income earners), many people don't understand just how redistributive and progressive our tax and benefits system already is. The lesson seems to be that tax and benefits stats are least deceptive when government collects and pays only net amounts rather than collecting large gross taxes and giving much of that back in the form of large gross benefits.
I am not aware of Friedman advocating for a UBI. What he did, successfully, suggest to President Reagan was the Earned Income Tax Credit, which gives low-income working taxpayers a subsidy that rises with earned income, up to a point, but then decreases as earned income continues to rise.
Friedman wanted this to replace existing welfare programs in which eligibility for benefits ends suddenly and completely at a specific income amount, thus making it in recipients' interest to make sure they don't earn more than the "cliff" amount. With the EITC your earned income + benefits always increases with your earnings, even if less than 1:1 in the later part of the curve, so it is always in the recipient's interest to do more work if he can get it.
Of course Friedman did not get his way about the EITC replacing other welfare programs, so it now exists in addition to them.
Covered in his book Capitalism and Freedom.
Not mentioned is that Buchanan's "Public Choice" should have been more correctly labeled as "Government Choice" -- it's actually the government decision making agents who choose.
While the Govt Parks are open to the public, within reasonable rules and times, most often the Govt schools are not open to the public. It's very good to focus on the actual incentives the decision making agents have, including accountability for when they make mistakes.
It would have been better to label the stuff government does as govt rather than public. Neither a private nor public company is a government organization. Govt funding sounds more accurate than public funding, for those activities the govt funds.
While it's never too late to change, it would take a bigger effort than any leader seems willing to put in; which then seems to make sense to never mention it. (Sort of how reported thefts in SF are going down -- if reporting the theft costs time but has no benefit since the cops ain't gonna do nuthin, why bother? )
I'd be happy to see some Nobel winner create and publicize a modified Govt Choice theory which changes the name; but not holding my breath.
This is a wonderful summary! It belongs on undergrad reading lists!
Excellent whirlwind tour of the history of economic thought. Unfortunately, we have yet to solve the problems of "the commanding heights" and business cycles.
I would have to say that economics, as we know it, is near obsolete in certain respects.
The problem is that there is no measure of the worthiness of Govt expenditure, now about 40% of US GDP.
We are never going to get anywhere until there is an enforceable standard.
So here is the very simple answer staring at us all!
The title should have been, An End of Tyranny. But editors ...
https://www.realclearmarkets.com/articles/2021/04/26/replaced_the_taxed_citizen_with_citizen_as_petulant_public_banker_774293.amp.html
Really enjoyed reading this layman’s explainer, thank you
the allies could have left GNP alone but the West pounded them with Western propaganda and the alore of wealth and money thru bribes to have them walk to the other wide to what we call today Ologarchal capitalism. Boy did they get doped