Economists From The United States

"The second dimension is called "command," and it refers to those aspects of economic relationships that involve power, coercion, hierarchy, subordination, or authority. In capitalist (and many other) societies, command is a central aspect of the workplace, the household, and the government. It concerns relations among nations, classes, races, men, women, and other groups in society as well."

"The first dimension is called "competition," and it refers to that aspect of an economic system in which exchanges of one sort or another play the most important part. In capitalism, of course, competition and exchange occur primarily in markets."

"Writers after Coase have referred to the authority structure of the firm as a "visible hand" that works in combination with Smith's invisible hand. The everyday fact that employers exercise power over their employees — not news to most employees — had been a central theme in Marx's economics, but it was (and generally continues to be) overlooked by most neoclassical economists. Early in his studies Coase noted the similarity between the hierarchical organization of capitalist firms, with their reliance on command relations, and the then-existing system of centralized economic planning in the Communist countries, where production was carried out in accordance with orders from higher authorities and where market competition played little role."

"The point is that coordination can be achieved by either of two means: (1) with no one dictating anyone else's precise behavior, but everyone observing a set of rules, or (2) with someone (or perhaps more than one) directing the behavior of others. We refer to the first of the two means as coordination by rules and the second as coordination by command."

"There is something fundamentally wrong with treating the earth as if it were a business in liquidation."

"It is with considerable reluctance that I criticize the monetarists, because, though I consider their proposed monetary policy unfeasible, they are after all much more nearly right in their assumptions and prescriptions than the majority of present academic economists. The simplistic form of the quantity theory of money that they hold is not tenable; but they are overwhelmingly right in insisting on how much "money matters," and they are right in insisting that in most circumstances, and over the long run, it is the quantity of money that is most influential in determining the purchasing power of the monetary unit. Other things being equal, the more dollars that are issued, the smaller becomes the value of each individual dollar. So at the moment the monetarists are more effective opponents of further inflation than the great bulk of politicians and even putative economists who still fail to recognize this basic truth."

"I do not mean to suggest that all those who call themselves monetarists make this unconscious assumption that an inflation involves this uniform rise of prices. But we may distinguish two schools of monetarism. The first would prescribe a monthly or annual increase in the stock of money just sufficient, in their judgment, to keep prices stable. The second school (which the first might dismiss as mere inflationists) wants a continuous increase in the stock of money sufficient to raise prices steadily by a "small" amount—2 or 3 per cent a year. These are the advocates of a "creeping" inflation. … I made a distinction earlier between the monetarists strictly so called and the "creeping inflationists." This distinction applies to the intent of their recommended policies rather than to the result. The intent of the monetarists is not to keep raising the price "level" but simply to keep it from falling, i.e., simply to keep it "stable." But it is impossible to know in advance precisely what uniform rate of money-supply increase would in fact do this. The monetarists are right in assuming that in a prospering economy, if the stock of money were not increased, there would probably be a mild long-run tendency for prices to decline. But they are wrong in assuming that this would necessarily threaten employment or production. For in a free and flexible economy prices would be falling because productivity was increasing, that is, because costs of production were falling. There would be no necessary reduction in real profit margins. The American economy has often been prosperous in the past over periods when prices were declining. Though money wage-rates may not increase in such periods, their purchasing power does increase. So there is no need to keep increasing the stock of money to prevent prices from declining. A fixed arbitrary annual increase in the money stock "to keep prices stable" could easily lead to a "creeping inflation" of prices."

"Let us begin with the simplest illustration possible: let us, emulating Bastiat, choose a broken pane of glass.A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $50 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $50 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye."

"So we have finished with the broken window. An elementary fallacy. Anybody, one would think, would be able to avoid it after a few moments’ thought. Yet the broken-window fallacy, under a hundred disguises, is the most persistent in the history of economics. It is more rampant now than at any time in the past. It is solemnly reaffirmed every day by great captains of industry, by chambers of commerce, by labor union leaders, by editorial writers and newspaper columnists and radio commentators, by learned statisticians using the most refined techniques, by professors of economics in our best universities. In their various ways they all dilate upon the advantages of destruction."

"Among the most viable of all economic delusions is the belief that machines on net balance create unemployment. Destroyed a thousand times, it has risen a thousand times out of its own ashes as hardy and vigorous as ever. Whenever there is long-continued mass unemployment, machines get the blame anew. This fallacy is still the basis of many labor union practices. The public tolerates these practices because it either believes at bottom that the unions are right, or is too confused to see just why they are wrong. The belief that machines cause unemployment, when held with any logical consistency, leads to preposterous conclusions. Not only must we be causing unemployment with every technological improvement we make today, but primitive man must have started causing it with the first efforts he made to save himself from needless toil and sweat."

"Though some of them would disdain to say that there are net benefits in small acts of destruction, they see almost endless benefits in enormous acts of destruction. They tell us how much better off economically we all are in war than in peace. They see “miracles of production” which it requires a war to achieve. And they see a postwar world made certainly prosperous by an enormous “accumulated” or “backed up” demand. In Europe they joyously count the houses, the whole cities that have been leveled to the ground and that “will have to be replaced.” In America they count the houses that could not be built during the war, the nylon stockings that could not be supplied, the worn-out automobiles and tires, the obsolescent radios and refrigerators. They bring together formidable totals.It is merely our old friend, the broken-window fallacy, in new clothing, and grown fat beyond recognition. This time it is supported by a whole bundle of related fallacies. It confuses need with demand."

"It is often sadly remarked that the bad economists present their errors to the public better than the good economists present their truths. It is often complained that demagogues can be more plausible in putting forward economic nonsense from the platform than the honest men who try to show what is wrong with it. But the basic reason for this ought not to be mysterious. The reason is that the demagogues and bad economists are presenting half-truths. They are speaking only of the immediate effect of a proposed policy or its effect upon a single group. As far as they go they may often be right. In these cases the answer consists in showing that the proposed policy would also have longer and less desirable effects, or that it could benefit one group only at the expense of all other groups. The answer consists in supplementing and correcting the half-truth with the other half. But to consider all the chief effects of a proposed course on everybody often requires a long, complicated, and dull chain of reasoning. Most of the audience finds this chain of reasoning difficult to follow and soon becomes bored and inattentive. The bad economists rationalize this intellectual debility and laziness by assuring the audience that it need not even attempt to follow the reasoning or judge it on its merits because it is only “classicism” or “laissez-faire,” or “capitalist apologetics” or whatever other term of abuse may happen to strike them as effective."

"The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

"The spread-the-work schemes, in brief, rest on the same sort of illusion that we have been considering. The people who support such schemes think only of the employment they would provide for particular persons or groups; they do not stop to consider what their whole effect would be on everybody.The spread-the-work schemes rest also, as we began by pointing out, on the false assumption that there is just a fixed amount of work to be done. There could be no greater fallacy. There is no limit to the amount of work to be done as long as any human need or wish that work could fill remains unsatisfied. In a modern exchange economy, the most work will be done when prices, costs, and wages are in the best relations to each other."

"Suppose a clothing manufacturer learns of a machine that will make men’s and women's overcoats for half as much labor as previously. He installs the machines and drops half his labor force.This looks at first glance like a clear loss of employment. But the machine itself required labor to make it; so here, as one offset, are jobs that would not otherwise have existed. The manufacturer, how ever, would have adopted the machine only if it had either made better suits for half as much labor, or had made the same kind of suits at a smaller cost. If we assume the latter, we cannot assume that the amount of labor to make the machines was as great in terms of pay rolls as the amount of labor that the clothing manufacturer hopes to save in the long run by adopting the machine; otherwise there would have been no economy, and he would not have adopted it.So there is still a net loss of employment to be accounted for. But we should at least keep in mind the real possibility that even the first effect of the introduction of labor-saving machinery may be to increase employment on net balance; because it is usually only in the long run that the clothing manufacturer expects to save money by adopting the machine: it may take several years for the machine to "pay for itself."After the machine has produced economies sufficient to offset its cost, the clothing manufacturer has more profits than before. (We shall assume that he merely sells his coats for the same price as his competitors, and makes no effort to undersell them.) At this point, it may seem, labor has suffered a net loss of employment, while it is only the manufacturer, the capitalist, who has gained. But it is precisely out of these extra profits that the subsequent social gains must come. The manufacturer must use these extra profits in at least one of three ways, and possibly he will use part of them in all three: (1) he will use the extra profits to expand his operations by buying more machines to make more coats; or (2) he will invest the extra profits in some other industry; or (3) he will spend the extra profits on increasing his own consumption. Whichever of these three courses he takes, he will increase employment."

"But this brings us to what I consider the fatal flaw in the monetarist prescriptions. If the leader of the school cannot make up his own mind regarding what the most desirable rate of monetary increase should be, what does he expect to happen when the decision is put in the hands of the politicians? … The fatal flaw in the monetarist prescription, in brief, is that it postulates that money should consist of irredeemable paper notes and that the final power of determining how many of these are issued should be placed in the hands of the government—that is, in the hands of the politicians in office. The assumption that these politicians could be trusted to act responsibly, particularly for any prolonged period, seems incredibly naive. The real problem today is the opposite of what the monetarists suggest. It is how to get the arbitrary power over the stock of money out of the hands of the government, out of the hands of the politicians."

"In brief, on net balance, machines, technological improvements, economies and efficiency do not throw men out of work."

"In the last decade or two there has grown up in this country, principally under the leadership of Professor Milton Friedman, a school calling itself the Monetarists. The leaders sometimes sum up their doctrine in the phrase: "Money matters," and even sometimes in the phrase: "Money matters most.""

"Every man knows there are evils in this world which need setting right. Every man has pretty definite ideas as what these evils are. But to most men one in particular stands out vividly. To some, in fact, this stands out with such startling vividness that they lose sight of other evils, or look upon them as the natural consequence of their own particular evil-in-chief."

"The "Austrian" economists, more consistently than those of any other school, have criticized nearly all forms of government intervention in the market — especially inflation, price controls, and schemes for redistribution of wealth or incomes because they recognize that these always lead to erosions of incentives, to distortions of production, to shortages, to demoralization, and to similar consequences deplored even by the originators of the schemes."

"But further analysis and experience soon raised doubts about the efficacy of these new tools. Empirical research indicated that the Keynesian multiplier was much smaller than earlier analyses had assumed, reduced by a crowding out of interest-sensitive spending caused by an induced increase in the demand for money and by the effect of the larger national debt on long-term interest rates. The leakage of demand through imports and the effect of the fiscal expansion on the exchange rate further reduced the multiplier."

"Instead of increasing intra-European harmony and global peace, the shift to EMU and the political integration that would follow it would be more likely to lead to increased conflicts within Europe."

"Although 50 years of European peace since the end of World War II may augur well for the future, it must be remembered that there were also more than 50 year of peace between the Congress of Vienna and the Franco-Prussian War. Moreover, contrary to the hopes and assumptions of Jean Monnet and other advocates of European integration, the devastating American Civil War shows that a formal political union is no guarantee against an intra-European war."

"Thanks to the work of John Maynard Keynes and of Milton Friedman, we now have a better understanding of how governments can (at least in principle) reduce the severity of major economic downturns. Keynesian economics taught us that government spending can raise GDP and reduce unemployment."

"The legacy of Keynesian economics — the misdiagnosis of unemployment, the fear of saving, and the unjustified faith in government intervention — affected the fundamental ideas of policy makers for a generation and altered such basic institutions of our economy as the tax laws, the social insurance programs and the financial system. Changing these deeply ingrained aspects of economic life can happen only slowly. But the economics profession has undoubtedly begun to re-examine and re-evaluate the Keynesian notions that have been so dominant for the past 35 years. There is a return to older and more basic economic truths and an attempt to adapt these ideas to the changing conditions of technology and affluence. From this is emerging a new view of unemployment, of saving, and of the role of government."

"Unfortunately, several decades of Keynesian instruction on the virtues of budget deficits have left the public and our political leaders confused about the costs of running persistent deficits. [...] Keynes has been that influential defunct scribbler for the past generation. But who would ever have thought that the politician hearing Keynes's voice in the air might be Ronald Reagan"

"What is clear is that a French aspiration for equality and a German expectation of hegemony are not consistent."

"The economic policy issues that we debate today—trade policy, inflation, the proper role of government, the eradication of poverty, and the means of raising the rate of economic growth—have been discussed by economists for more than two centuries. Many of today’s economic policies—both the good ones and the bad—are the result of the ideas of those past economists. And many of today’s debates about economic policy can be understood only by those who have at least some familiarity with the ideas of earlier economists. The giants of economic science during the past two hundred years have been men concerned with the critical policy issues of their time. They studied the working of the economy in order to advocate better economic policies. But despite their concern with policy, they were not polemicists or politicians but men who sought to persuade their contemporaries in government and in the broader public by analysis and evidence that would meet the standards of professional debate."

"In the beginning, at least for academics, there was philosophy. All of learned inquiry occurred within the discipline of philosophy and was carried out by philosophers. We retain the vestiges of this organization in our practice of awarding a single advanced academic degree, the Ph.D. or Doctor of Philosophy.’ As our understanding of the world around us grew, however, various areas of philosophy became sufficiently well understood to graduate into their own disciplines. Mathematics and the physical and biological sciences were the first to appear, followed more recently by the social sciences. Emerging as its own discipline is only the first step toward becoming a mature field of study. Economics is unique among the social sciences for the number of remaining steps it has taken. Unlike many social sciences, economics has a well-defined core set of methods. The first year graduate program in economics is virtually indistinguishable across American universities, consisting of microeconomics, macroeconomics and econometrics. As a result, economics can be easily defined by its tools of inquiry as by the target of its inquiry."

"preferences ⊕ institutions ⊕ physical possibilities = outcomes"

"What use are experimental results to someone who is interested in something vastly larger and more complicated, perhaps fundamentally different than anything that can be studied in a laboratory setting?"

"Evolutionary game theory is one of the most active and rapidly growing areas of research in economics. Unlike traditional game theory models, which assume that all players are fully rational and have complete knowledge of details of the game, evolutionary models assume that people choose their strategies through a trial-and-error learning process in which they gradually discover that some strategies work better than others. In games that are repeated many times, low-payoff strategies tend to be weeded out, and an equilibrium may emerge."

"Almost anything one says or has said about what society wants or should get is threatened with internal inconsistency."

"A critical feature of the EU(European Union) in general and EMU in particular is that there is no legitimate way for a member to withdraw... The American experience with the secession of the South may contain some lessons about the danger of a treaty or constitution that has no exits."

"I would guess that most MIT Ph.D.’s since 1980 might deem themselves not to be “Keynesians.” But they, and modern economists everywhere, do use models like those of Samuelson, Modigliani, Solow, and Tobin. Professor Martin Feldstein, my Harvard neighbor, complained at the 350th Anniversary of Harvard that Keynesians had tried to poison his sophomore mind against saving. Tobin and I on the same panel took this amiss, since both of us since 1955 had been favoring a “neoclassical synthesis,” in which full employment with an austere fiscal budget would add to capital formation in preparation for a coming demographic turnaround."

"As long as research uses sample data to make inferences (which can hardly be avoided), the problem of interpretation cannot be avoided, regardless of the particular statistical method or even methodology we use. In everything we do, we are forced to make decisions based on assumptions formed in part from our experiences with the behavior of others, which in turn reflect only part of the whole picture. These assumptions reflect conscious or unconscious values (such as giving people the benefit of the doubt, presuming the innocence of an accused person, etc.). This reality does not entail that we cannot strive for scientific detachment once these fundamental pre conditions have been set and the research proceeds. Within the particular “research design,” we may still strive for and insist upon scientific detachment, even though our values have necessarily influenced the design itself."

"Frank Knight wrote some polemics against Slichter's textbook in The Journal of Political Economy in the early 1930s. He smelled some kind of heresy in Slichter. But Knight's discussion was methodological. He argued that old Slichter was a do-gooder who thought he could change human nature, and that governments can do some good. Hardened, experienced people, by contrast, know that people are cussed. I think there's a lot of merit in Knight, but a lot of demerit, too. Whether his total effect on me was more bad than good I'm not sure. But from 1932 to 1936 I was besotted on Frank Knight. It's not true, I'll say categorically, what Milton Friedman at one time tried to sell: that there was a very subtle Chicago oral tradition on the demand for money and monetary theory. Read Robertson's handbook on Money, and you will have plumbed the depths of Chicago's monetary sophistication."

"To Knight the task for economists (and for social philosophers) is not to be located at the extensive margin of "science." The task is to be located squarely at the level of elementary common sense. No sophisticated analysis is required to recognize that legally-enforced wage floors cause unemployment or that inflation cannot increase production in any long-term sense. But many men are prejudiced and romantic fools."

"Hayek greatly praised Knight on several occasions. In 1951, he grouped Knight, with Ludwig von Mises and Edwin Cannan, as one of three primary transmitters of classical liberalism during the 1920s and 1930s. Even more significantly, Hayek wrote in the beginning of the “Acknowledgments and Notes” section of The Constitution of Liberty: “If I had regarded it as my task to acknowledge all indebtedness and to notice all agreements, these notes would have been studded with references to the work of Ludwig von Mises, Frank H. Knight, and Edwin Cannan.” Hayek referred to Knight eight times in The Constitution of Liberty. Notwithstanding Hayek’s praise and references to him, Knight ripped the book in a 1967 review."

"Knight is the first to use the circular-flow diagram as a means of explaining the way in which the interaction of individuals and businesses in goods and factor markets simultaneously solve all the functions required for effective social organization (Knight 1951, pp. 61–6). Prices provide a measure of the social importance of goods and services (albeit ‘not a true index of social importance according to any recognized ethical standard’), ensure that productive resources are allocated to the production of goods and services which place the highest value on them, and simultaneously distribute income across the productive resources accordingly. ‘The principal connection between the price system and social progress’, meanwhile, ‘is mediated by the phenomenon of interest on capital’ (pp. 63–5)."

"[The Economic Organization by Frank Knight provided] the elements of theory that helped to establish for Chicago its eminence in neoclassical economics."

"In Professor Pigou's study the argument that free enterprise lead to excessive investments in industry having relatively upward-sloping cost curves is developed with the aid of concrete example, the case of two roads; Suppose that between two points there are two highways, one of which is broad enough to accommodate without crowding all the traffic which may care to use it, but is poorly graded and surfaced; while the other is a much better road, but narrow and quite limited in capacity. If a large number of trucks operate between the two termini and are free to choose either of the two routes, they will tend to distribute themselves between the roads in such proportions that the cost per unit of transportation, or effective returns per unit of investment, will be the same for every truck on both routes. As more trucks use the narrower and better road, congestion develops, until at a certain point it becomes equally profitable to use the broader but poorer highway."

"[In 1932, Lionel Robbins declared economics ‘the science of choice’ (Robbins 1932). In the same year, when students at the University of Chicago opened their social sciences course reader, they read Knight’s response:] Such definitions come too near to saying that economics is the science of things generally, of everything that men are for practical reasons interested in. Such a definition is useless and misleading"

"A civilization which is dominated by this matter-of-fact insight must prevail against any cultural scheme that lacks this element. This characteristic of western civilization comes to a head in modern science, and finds its highest material expression in the technology of the machine industry."

"Knight's monograph The Economic Organization (1933) was prepared in the mid-1920s while Knight was at the University of Iowa and was later duplicated for student use at Chicago... It contains the elements of theory that helped to establish for Chicago its pre-eminence in neoclassical economics. While, according to Buchanan, there was little in the monograph that was wholly original, its value was in its emphasis on key points, its clarification of ambiguous concepts and notions, and its integrated approach to the economy as a social organization. According to Buchanan, several generations of undergraduate students at Chicago obtained their vision of the totality of the economic process only after encountering Knight (and Simons)."

"The Ethics of Competition is a book of Frank H. Knight's writings on a common theme: the problem of social control and its various implications. Knight believed in free economic institutions but was also aware that the competitive economic system could be improved. One of the central figures of neoclassical economics in the twentieth century, Knight pursued a lifelong campaign against irrationalities of nationalism, religious fanaticism, and group conflict, while conceding that these were fundamental orientations of human action that might yet frustrate his own work as an economist. While Knight vigorously defended human freedom and the liberal order, he also was sufficiently moved by the shortcomings of liberalism as to condemn it as rife with abuse."

"In spite of all the foregoing, there is a science of economics, a true, and even exact, science, which reaches laws as universal as those of mathematics and mechanics. The greatest need for the development of economics as a growing body of thought and practice is an adequate appreciation of the meaning, and the limitations, of this body of accurate premises and rigorously established conclusions. It comes about in the same general way as all science, except perhaps in a higher degree, i.e., through abstraction. There are no laws regarding the content of economic behavior, but there are laws universally valid as to its form. There is an abstract rationale of all conduct which is rational at alt, and a rationale of all social relations arising through the organization of rational activity."

"[Weber] is the only one who really deals with the problem of causes or approaches the material from that angle that can alone yield an answer to such questions, that is, the angle of comparative history in the broad sense."

"Most striking feature... is the author’s failure to understand the elementary mechanics of the competitive economic organization."

"Economics and ethics naturally come into rather intimate relations with each other since both recognizedly deal with the problem of value."