Classical Liberalism: The Foundation for a New Economics?

ABSTRACT

In Robust Political Economy, Mark Pennington argues for a minimal state founded not on neoclassical economic principles but on a return to classical liberalism. Pennington makes his case on the basis of Hayek’s “knowledge” problem and public-choice theory’s “incentive” problem. While this is a welcome start, classical liberalism is a promising agenda for a new economics, and for the “reform of capitalism,” only if it is accompanied by an explicit rejection of Milton Friedman’s subordination of normative to positive economics, and by a move beyond the traditional division of the economy into twin spheres (the state and the market) to embrace a third element: the domestic sphere.

Keywords:

• economic history
• family
• incentive problem
• knowledge problem
• Milton Friedman
• F. A. Hayek
• Mark Pennington
• normative economics
• public choice theory
• robust political economy

Notes

1. These data are discussed in “General Government Expenditures,” in Government at a Glance 2015, OECD Publishing, Paris. Latest figures for the UK and United States are for 2014, obtained from the OECD databank for general government spending.

2. Such assumptions include perfect competition, perfect information, the absence of externalities, a full set of futures markets, and the absence of public-goods properties. Intervention is then recommended for cases of monopoly, asymmetric information, externalities, and public goods.

3. As Hunt and Lautzenheiser (2015, 476) note, Samuelson's influential textbook in economics takes the benevolence and insight of government for granted: Samuelson “fails to discuss the fact that government regulatory agencies have generally promoted the interests of the oligopolistic industries they are supposed to regulate … fails to mention the fact that imperialism and militarism have been the principal tools of Keynesian policy … [and] fails to mention the fact that these tools have created the potential for a crisis that could be worse than the crises that they have avoided.”

4. Keynote address to the American Economic Association, 2003.

5. In regard to Knight's distinction between measured risk and uncertainty, Friedman was certainly clear: “I do not believe it is valid” (quoted in Mosini 2012, 129).

6. On the question of whether competition will, in the long run, work in our best interests, see Frank 2012. Akerlof and Shiller 2015 point out that markets provide entrepreneurs with an incentive to appeal to our cognitive failures, playing on our fears and addictions.

7. It is, however, receiving increasing attention in India, particularly in regard to toilet facilities.

8. See, e.g., Maki 2009.

9. Even for Hayek, disagreements were not over the issue of whether markets needed to operate within the “right” institutional context, but precisely what that institutional setting should entail (Caldwell 2011, 315; Burgin 2015).

10. McCloskey 1983 argues that “[a]ny economist believes more than his evidence of a suitably modernist and objective sort implies,” leading to conclusions that are more far-reaching than are truly deserved, and often as a result of taking something for granted that is in fact open to debate. This is a point emphasized by the Critical Realism school of Tony Lawson.

11. Also see Offer 1997. It should be noted that whilst economists have given consideration to market institutions and state institutions, the institutions of the family have been largely neglected (see Carmichael 2016, 30-37).

12. For further discussion, including of the interaction between family institutions and wider institutions, such as those of the labor market, see Ogilvie and Carus 2014, 462-68. Carmichael 2016, 30-37 notes the potential feedback effects between the extent of equality and democracy at the family level and that of political institutions, with family institutions influencing political systems and political systems influencing the family. Bateman 2016b notes the relevance for the modern day.