The Clash of Economic Ideas: The Perfect Book for
Understanding Our Economic Climate
by David Weinberger, May 1, 2022, Foundation For Economic Education
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-19th
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.
https://fee.org/articles/the-clash-of-economic-ideas-the-perfect-book-for-understanding-our-economic-climate
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