by E. K. Hunt, Mark Lautzenheiser. 2011
2. [절 제목] Liberal and Conservative Neoclassical Economics
From the late 19th century to the present, thers has been a split in the neoclassical intellectual tradition between a liberal wing and a conservative wing.
- These terms are sometimes confusing because the 19th century doctrine of laissez-faire was then known a "liberalism" whereas today the more extreme advocated of laissez-faire are now called conservative[,] and
- the neoclassical economists who temper their analysis and advocate government intervention to correct "market imperfections" or"market failures" are now called liberals.
[a] The conservative were not, however, very deeply impressed with the Great Depression. They retained their faith in laissez-faire capitalism.
[b] The liberals had a number of reservations about laissez-faire capitalism, however.
(1) The inherent instability of capitalism, as seen by Keynes, was only one of four general areas in which they believed that the government should actively intervene to promote national economic well-being. With an active fiscal and monetary policy, liberals believed that capitalism could, if not eiminate, then certainly mitigate this inherent instability.
(2) Second, liberals recognized the existence of powerful, giant corporations that would not, if left alone, behave in the manner depicted in the theory of perfect competition. Here the liberals believed that government antitrust laws and regulatory agencies could force these giants to act in the general public interest. So, with a little help from government, the invisible hand still basically did its beneficent, harmony-creating task.
(3) Third, liberals recognized that some commodities were "socially consumed" and are desirable, even though a private capitalist could not make a profit on the production of these commodities. Once again, they believed the government could solve this problem. It could produce and distribute these commodities in order that society's general well-being would be maximized.
(4) Fourth, liberals recognized that "externailities" (see Chapter 14) would cause private costs and social costs (which include costs such as pollution) to diverge. The government could cure this problem too, they argue, with a system of taxes and subsidies that would bring the private costs and social costs into equality.Thus, from the 1950s to the present, liberal neoclassical economists not only do not advocate extreme laissez-faire, they enthusiastically embrace government intervention in the economy. Government became a deus ex machina that conveniently allows liberals to recognize the validity of many of the objections to neoclassical theory while still defending their faith in the three fundamental ideological tenets of neoclassicism.
- They concede that the invisible hand is not by itself sufficient.
- They give what frequently appears to be a fair hearing to the many objections to laissez-faire, but they always end up defending all three tenets of neoclassical ideology.
- They conclude, more frequently implicitly rather than explicitly, that although the invisible hand, helped along the visible fist of government, is not perfect, it is the closest thing to perfection that current levels of human knowledge allow. Those difficulties that remain appear to be resolvable by a mere continuation of the reforms of the past century.
3. [절 제목] Paul A. Samuelson Versus Milton Friedman and the Conservative Neoclassicists
In the liberal and conservative traditions of neoclassical economics, two thinkers have had the greatest influence during the period since WW II, Paul A. Samuelson and Milton Friedman, respectively. Samuelson's impact has been more powerful than that of any other economist.
- He dominated the course of development of, as well as the teaching of, liberal neoclassical economics.
- Because liberal neoclassical economics has dominated the academic economics profession, Samuelson can be said to have been the most influential economist since WW II.
Friedman's influence on the extreme laissez-faire tradition of neoclassical economics, although very great, has not been as decisive as has Samuelson's influence on the liberal tradition. For that reason, in the next section we will discuss the ideas of Samuelson as our only representative of contemporary liberal neoclassicism, and in the following section we will discuss the ideas of Friedman as well as those of other advocates of extreme laissez-faire.
The relationship between Samuelson and conservative neoclassicists is strikingly similar to the relationship in the mid-19th century between John Stuart Mill and Frederic Bastiat (discussed in Chapter 8). Samuelson, like Mill, was an eclectic, which accounted for many of his strength as well as some of his weaknesses. Like Mill, he had an urbane, flexible, and non-dogmatic style.
- He considered and generally granted some validity to many of the objections to neoclassicism.
- When one reads Samuelson, as with Mill, one cannot help but be aware that he would have preferred capitalism to be a somewhat more humane system than it in fact is.
- Like Mill, he did not hesitate to admit many of the inequalities as injustices of capitalsim. But also like Mill, he had a faith in gradual reform within the institution of capitalism, and when one sorts out the eclecticism of his approach, his neoclassical ideas culminated (... ...)
(... ...) socially and cannot be efficiently produced for individuals; and (4) a closely related problem to public goods is the issue of pervasive external economies and diseconomies whereby individuals are everywhere and always effected by thousands of acts of production and consumption over which they have no control. Samuelson believed, however, that these four problem areas should not undermine our faith in the neoclassical ideology.
First, laissez-faire capitalism is economically unstable. But the extension of government has, he argued, created a "mixed economyㅡthe mixture being one of the invisible hand of the market and the visible fist of the government." The mixed economy has not totally eliminated instability but has rendered it moderate and tolerable:
The business cycle has been tamed, even if not completely made a thing of the past. Although democratic mixed economies are unlikely to experience old fashioned, prolonged depression ever again, recessions and periods of relative stagnation will no doubt still ocurr even though fiscal and monetary policies can moderate their frequency, intensity, and duration. 
So some tolerable version of Say's Law, enforced by government fiscal and monetary policies, can be maintained.
Second, Samuelson recognized the existence of giant oligopolistic business firms. "In appraising oligopoly," he writes, "we must note that the desire of corporations to earn a fair return on their past investments can at times be at variance with the well being of the consumer."  As we would expect, he assures the reader that "government regulation and government antitrust laws are the principal weapons a mixed economy uses to improve the workings of the price system."  So, on this second qualification of the utilitarian laissez-faire doctrine, he concludes:
We cannot expect competition to become everywhere "perfectly perfect," in the strict sense of the economist. But what we must strive for is what the late J. M. Clark years ago called "workable competition." ... But laissez-faire cannot be counted on to do this. Public vigilance and support for antitrust will be required. 
So the second objection is once again obviated by the deus ex machina of government, and sometimes called "workable competition" is achieved through "public vigilance" and government intervention.
Third, Samuelson recognized the existence of "public goods" that are socially needed but are not profitable for capitalists to produce and sell. In the mixed economy, he writes, we express our needs for these goods by the way we "vote on election day and in the way we acquiesce to the coercive fiats legislated by our responsive government, rather than in our day-to-day private purchasing." Once again, the utilitarian ideology is rescued by the impartial and benevolent government.
Fourth, Samuelson did not ignore the fact that acts of consumption and production have important effects on people who are not directly involved in these acts. These externalities result in what neoclassical economist call a divergence between private costs and social costs. As we saw in Chapter 14, the more that such divergence exist, the more impossible it is to argue that the invisible hand of the market creates rational prices and an efficient allocation of resources (we also saw that it is impossible on numerous other grounds as well). Nor surprisingly, Samuelson argue that "since no one profit maker has the incentive, or indeed the power, to solve problems involving 'externalities,' here is a clear case for some kind of public intervention."  Once again, however, the benevolent deus ex machina can restore the economy to an acceptably close approximation of the "bliss point" of neoclassical welfare economics (see Chapter 14) by "subsidy or public control, to expand situations fraught with external economies; and...to contract, by tax or fiat, activities involving external diseconomies." Samuelson does not, of course, tell the reader that this would involve literally millions of different taxes and subsidies, as we saw in Chapter 14. He simply has the faith that the government can and will create a situation tolerably close to Pareto optimality.
Having thus recognized the absolute necessity for literally millions of instances of government intervention into the economy and having a faith in the impartial benevolence of capitalist governments, Samuelson defends some variation of each of the three fundamental tenets of neoclassical ideology.
First, as we have seen, the market can be guided by a government armed with Keynsian insights to a situation tolerably close to automatic full employment.
Second, with millions of discrete, benevolent interventions into the market, something reasonably close to Pareto optimal rational prices and efficient allocation can be achieved. Samuelson writes:
Adam Smith, in his talk about an Invisible Hand, which leads the selfish actions of individuals toward so harmonious a final result, did have some point. Smith never could state or prove exactly what the point was, but modern economics can state this property of ideal competitive pricing: under perfectly perfect competition, where all prices end up equal to all marginal costs, where the genuine desires and well being of individuals are all represented by their marginal utilities as expressed in their dollar votingㅡthen the resulting equilibrium has the efficiency property that "you can't make any one man better off without hurting some other man."
What does this mean exactly? It means that a planner could not come along with a slide rule and find a solution, different from the laissez-faire one, which could improve the welfare of everyone. 
But the Samuelson, as we have seen, does not hold that the free market can automatically achieve this benevolent, harmonious state of bliss. It requires the help of his benevolent deus ex machinaㅡthe government. The reader should review the discussion in Chapter 14 of the present book to see the incredibly unrealistic and spurious assumptions underlying neoclassical welfare economics and then to judge whether Samuelson's deus ex machina can do the job (or even if it would be desirable to have the job done). In the early part of Economics, before he has yet demonstrated that benevolent government actions can result in tolerable corrections of every deviation from perfect competition, Samuelson writes:
Needless to say, the requirements for absolute perfect competition are as hard to meet as the requirements for a perfectly frictionless pendulum in physics. We can approach closer and closer to perfection, but can never quite reach it. Yet this fact need not do serious damage to the usefulness of our employing the idealized concept...
To be sure, not all today's markets are anywhere near to being perfectly competitive in the economist's sense. We shall see later .. that elements of monopoly power or of market imperfection may enter in, and these imperfections will require us to modify the competitive model. After we have learned how to handle such cases [by calling in the benevolent deus ex machina of government], we shall recognize ... that the competitive analysis, properly qualified, is still an indispensible tool for interpreting reality.
The third tenet of neoclassical ideology is the marginal productivity theory of distribution. Here it would seem that Samuelson's recantation in the reswitching debate (See Chapter 16) would require him to abandon this theory. But he, like Ferguson, has the faith that his "fairy tales" and "parables" illustrate profound truths of capitalism. So he tells the reader that "the demand for capital is its net productivity curve." Similarly, the demands for all factors are derived from the productivity of each factor, where capitalists "will want to hire more and more of ... [any factor] up to the point where its marginal-revenue-product is equal to its marginal rental." 
True to his "fairmindedness" and eclecticism, Samuelson has two pages of a brief appendix with a statement devoted to a discussion of reswitching. He concludes this appendix with a statement that is a toal obfuscation of the issue: "The science of political economy has not yet the empirical knowledge to decide whether the real world is nearer to the idealized polar cases represented by (a) the neoclassical parable, or (b) the simple reswitching paradigm."
This is a deliberate confusion of the issue for two reasons:
- first, as we saw in the previous chapter, Samuelson himself admitted that the reswitching controversy proved that in many cases (and, as we saw, these cases are the general rule) there is no logically consistent method of even defining which of different production techniques is more capital intensive. This means that no amount of empirical evidence will show that "greater capital intensiveness" leads to the results predicted by the neoclassical parable. This was, in fact, admitted by Samuelson in his esoteric journal article. But in his Economics, through which he influenced untold millions of readers, he denies it.
- Samuelson's second obfuscation, again contrary to his recantation in the esoteric journal article, is his failure to show the reader that the reswitching demonstration utterly destroyed the foundation of the neoclassical parable, as well as most neoclassical versions of the invisible-hand argument.
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