Few books on economics today are readable, let alone interesting, but Lawrence White’s The Clash of Economic Ideas (2012) is both. It offers a lively overview of the major policy debates and the economists who shaped them over the last century, and in so doing it provides helpful context to make sense of our current economic landscape.
For example, what caused economists to move away from free-market ideas? Contrary to what many assume, it was not the Great Depression. Dr. White explains that two ideologies developed in the late-nineteenth century, first a political movement known as “Progressivism,” and second an intellectual movement known as the “German Historical School.” Together they encouraged the belief that “experts,” or self-anointed leaders of a newly emerging “scientific” mode of inquiry, should use the government to direct other people’s lives. Furthermore, early forms of Marxism and Socialism were also seducing intellectuals into self-flattery at this time. It is thus no wonder that federal power was significantly expanded around the turn of the 20th century, through legislation such as the Sherman Antitrust Act, the Hepburn Act, the Federal Reserve Act, as well as the establishment of the federal income tax.
Moreover, the growth of government power was hardly unique to the United States. In fact, major countries around the globe centralized their economies in ways that the US never did. The disaster of Soviet communism is well known. Lesser known, however, is the economic record of Nazi Germany. An important section of the book delineates the extent to which the National Socialist German Workers (Nazi) Party exacted control of the economy under Hitler, which included exchange controls; a centralized “Four Year Plan”; nationalized agricultural policies; import quotas; price and wage controls; rationing; and decrees dictating the quantities of goods that businesses must produce.
Put simply, the Third Reich was no friend of free markets.
As much of the world degenerated into centralized graveyards during the 1930s and 1940s, capitalism remained under fire due to the mistaken belief that it caused the Great Depression plaguing the globe, which cast serious doubt on free-market solutions. Nevertheless, two mercurial minds, F.A. Hayek and Milton Friedman, emerged to combat this erroneous view. Together, they launched the Mont Pelerin Society in 1947 to reintroduce the virtues of free enterprise and classical economic principles, and to expose the folly of central planning.
Building on the insight of earlier economists like Ludwig von Mises, one of their arguments against centralization was that government planners face an intractable “calculation problem.” In a free economy, businesses plan based on information provided by prices on the market, which are determined by firms and entrepreneurs freely bidding for resources. If a business plans a project that cannot cover the cost of resources plus earn a profit, it means that the fruit of that project—the final good or service—is not in high enough demand by consumers to render the use of those resources worth the cost, and the business should not proceed. This profit-and-loss calculation is vital for planning and growth, both for individual firms and for the economy, and its absence lies at the heart of what is wrong with central planning. Lacking market prices, central planners have no way to know whether their plans cover their costs, which leads to a squandering of resources and wealth so monumental that even basic necessities like food go unproduced. Hence the widespread famines engendered by communist states.
Moreover, consider the fate of the consumer in each of these cases. While we often hear that under capitalism corporations “exploit” customers, the truth is that in a profit-and-loss economy consumers are ultimately the ones in control. They decide the price of the products and services that corporations produce, not the other way around. Firms survive by pleasing consumers, by producing goods and services that their customers want, which is all the more reason why price signals are imperative for planning, as even minor miscalculations by a business can mean the difference between survival and failure. Under communism, by contrast, the consumer counts for nothing and state planners face no consequences for exploiting them while recklessly devouring resources. They, not the desires of the customer, dictate what resources get created and in what quantities.
White does a masterful job of reconstructing issues like these, and readers will walk away with a good introductory grasp of the economists and ideas that animated the policy debates over the last hundred years. For that, it is well worth a read.
This article, The Clash of Economic Ideas: The Perfect Book for Understanding Our Economic Climate, was originally published by the Foundation for Economic Education and appears here with permission. Please support their mission.