The Great Persuasion

Reinventing Free Markets since the Depression

Angus Burgin

• Publisher: Harvard University Press
• Year: 2012
• Print ISBN: 9780674503762, 9780674058132
• eBook ISBN: 9780674070493
• Topic: History
• Subtopic: Business General
• Index: History

Just as today's observers struggle to justify the workings of the free market in the wake of a global economic crisis, an earlier generation of economists revisited their worldviews following the Great Depression. The Great Persuasionis an intellectual history of that project. Angus Burgin traces the evolution of postwar economic thought in order to reconsider many of the most basic assumptions of our market-centered world.

Conservatives often point to Friedrich Hayek as the most influential defender of the free market. By examining the work of such organizations as the Mont Pèlerin Society, an international association founded by Hayek in 1947 and later led by Milton Friedman, Burgin reveals that Hayek and his colleagues were deeply conflicted about many of the enduring problems of capitalism. Far from adopting an uncompromising stance against the interventionist state, they developed a social philosophy that admitted significant constraints on the market. Postwar conservative thought was more dynamic and cosmopolitan than has previously been understood.

It was only in the 1960s and '70s that Friedman and his contemporaries developed a more strident defense of the unfettered market. Their arguments provided a rhetorical foundation for the resurgent conservatism of Barry Goldwater and Ronald Reagan and inspired much of the political and economic agenda of the United States in the ensuing decades. Burgin's brilliant inquiry uncovers both the origins of the contemporary enthusiasm for the free market and the moral quandaries it has left behind.

1

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MARKET ADVOCACY IN A TIME OF CRISIS

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In the spring of 1933, nearly a decade after Keynes had proclaimed the end of laissez-faire, Friedrich Hayek ascended to the podium for his inaugural lecture at the London School of Economics (LSE). His subject, like Keynes’s, was the shift away from classical economics, but in all other respects the circumstances of his presentation markedly differed. In the intervening years the world had descended into a state of severe depression, casting the established paradigms of the economics profession’s leading figures into doubt even as they assumed increasing prominence in the public sphere. In contrast to Keynes’s genteel Oxford environs, Hayek’s audience consisted of members of an institution that was not yet four decades old, still populated largely by occasional students, and bordering a slum.1 Hayek himself was seventeen years Keynes’s junior and little known outside small circles of social scientists in England and his native Austria. His speech was distinguished by a thick Viennese accent that many in his audience struggled to follow.2 And although Hayek agreed with Keynes that the social philosophy of the free market was in eclipse, the purpose of his remarks was to lament rather than to celebrate its decline.

Among Hayek’s audience were a number of economists who sympathized with his views, including Edwin Cannan, an aging conservative who had shaped the department at the LSE largely in his image, and Lionel Robbins, Cannan’s young protégé, who had invited Hayek on the visit that led to an offer of a professorship. Surveying the crowd, Hayek was quick to acknowledge that support for the workings of the free market was not uncommon within the economics profession. The problem, he said, was that their ideas had demonstrated no capacity to influence a broader public. He saw little difference between planning and socialism, and few public officials appeared willing to question the merits of planning. “In this sense,” he sadly concluded, “there are, of course, very few people left to-day who are not socialists.” Popular opposition led the dissenting economist to feel “hopelessly out of tune with his time, giving unpractical advice to which the public is not disposed to listen and having no influence upon contemporary events.”3 He believed that his colleagues possessed scientific knowledge with obvious relevance to the world situation but lacked opportunities to bridge the divide between theory and practice.

Hayek was in the early stages of a career in which he would often feel that his views ran against the tenor of the times, but at no other period was the contrast as stark as in the early 1930s. As governments adopted increasingly radical approaches to an extraordinary economic crisis, academic opponents of government intervention felt ever more marginalized. Around the Atlantic world they clustered in academic environments that prided themselves on fostering opinions that challenged the mainstream, including Hayek’s own London School of Economics, the University of Chicago, and the Institute for International Studies in Geneva. The leading economists in each of these institutions expressed despair at the trajectory of public opinion. Even before Hayek’s arrival in London, Lionel Robbins had decided that economic reasoning would never be grasped by a broader public. “The hope that Economics will ever become something which the layman can comprehend without training,” he asserted in 1930, “is doomed for ever to frustration.”4 In Chicago, Frank Knight had entered into a depression that lasted for much of the decade, precipitated in part by a sense that failures of public deliberation had rendered democracy an unsustainable form of government. By 1934 he believed that there likely remained “a decade or two at the most before we see the end of anything like freedom of inquiry in the United States and all the rest of the liberal European world where it has not already been sunk.”5 Prior to his arrival in Geneva, the displaced German sociologist and economist Wilhelm Röpke had concluded that the time had come to “recognise that the case of Liberalism and Capitalism is lost strategically even where it is still undefeated tactically.”6 Economists who supported the free-enterprise system perceived themselves to be the final defenders of a social philosophy that was in the midst of passing away.

Although these lamentations at times drifted into an apocalyptic excess, their grim tone was not unjustified. This was a period of extraordinary isolation for academic opponents of government intervention. Popular magazines and newspapers were quick to dismiss their views as the prattle of outmoded cranks. Conservative political parties, confronting the specters of communism and fascism in the international environment even as they struggled to cope with economic crises at home, no longer provided reliable havens for economic orthodoxy. Established industries, eager to maintain protective tariffs and negotiate monopoly advantages with regulatory bodies, remained untrustworthy allies at best.7 And despite Hayek’s words to the contrary, even within the economics profession market advocates were increasingly disregarded. Among American social scientists the left-leaning historicism of institutionalist economics remained a powerful force, and in England Keynes had become the preeminent economist in both the academic world and the public imagination.8 Soon after the publication of The General Theory of Employment, Interest, and Money in 1936, Keynesianism had permeated economics departments on both sides of the Atlantic. Economists in London and Chicago found ever fewer allies within both the profession and the public.

In the Anglo-American world since the onset of the Industrial Revolution, the marginalization of market advocates during the early and middle years of the 1930s remains a singular event. This can be attributed in part to the loss of trust in markets that tends to accompany the onset of severe financial crisis. But while events seem to shape the horizons of a discursive world, their hold on the ideological life of a community is not complete. However dismayed economists may feel at the level of public debate, their ideas, arguments, and assumptions all help frame its content and structure. This influence is most palpable in periods of uncertainty, when settled assumptions can suddenly become objects of debate within a broadened public sphere. Hayek’s frustrations can be attributed in part to the tenor of the times and in part to the rhetorical force of the message that he and his colleagues conveyed.

Although the market advocates at the LSE and the University of Chicago shared a skepticism about the accelerating government interventions of the time, their opinions were rarely united and often opposed. In London, Lionel Robbins and Friedrich Hayek initially espoused an extraordinarily constrained vision of the government’s ability to redress the economic crisis. Blaming the downturn primarily on a business cycle that had become overstimulated by government interference, they argued that further interventions would only repeat the same disastrous pattern. Although their views developed pockets of influence, by the mid-1930s their council of quietism was increasingly ignored by a public and a profession that were eager to find positive solutions to a seemingly intractable crisis. In Chicago, Frank Knight, Jacob Viner, and Henry Simons developed a more moderate response to the events of the time. All three were quick to denounce the excesses of laissez-faire, and they varyingly embraced the prospect of public works projects, progressive taxation, social insurance, and vigorous antitrust policies. This brought them much closer to the profession’s mainstream than their colleagues in London, but made it difficult for others to associate them with any ascertainable doctrine or plan. Considered in conjunction, the economists in London and Chicago reveal a world of market advocacy that was very much in disarray. Some corners held firm to reactionary extremes that few were willing to follow; others much more readily made concessions but proved incapable of articulating a coherent oppositional worldview.

The leading figures on both shores remained reluctant to endanger their scientific authority by wading into venues of popular debate, and instead sought to leverage their influence primarily among their colleagues in the profession. They also shared no institution in which they could discuss their ideas, develop new rhetorical strategies, establish networks of communication, or assist younger colleagues who were sympathetic to their views. Instead, they pursued their ideas in discrete universities in separate countries, connected only by the lectures or personal friendships that occasionally inspired them to make the slow journey across the Atlantic. In some cases they devoted as much energy to attacking one another as they did to contesting those with whom they more vociferously disagreed. Their ideas remained fragmented, and they failed to adopt anything resembling a common voice. Businesses demonstrated little interest in funding the world of ideas, and few in the academic world made any efforts to identify themselves as members of a purposive group.9 Without finding rhetorical traction among themselves or significant sources of institutional support, they had little capacity to influence a public that was already being courted by ideological communities that were better organized and shared a more cohesive point of view.

Hayek was a thoughtful observer of institutional dynamics, and he came to view the challenges he and his colleagues faced as an opportunity to learn lessons that would prove valuable in future years. In his inaugural lecture in 1933, he was already tempering his pessimistic views on contemporary politics with optimistic pronouncements about long-term processes of ideological change. Public opinion, he informed his audience, “can clearly be traced to the economists of a generation or so ago. So the fact is, not that the teaching of the economist has no influence at all; on the contrary, it may be very powerful.” His colleagues simply needed to remember that “it takes a long time to make its influence felt.”10 The problems that they identified during a challenging decade would help them shape the structure of market advocacy in the years that followed. Frustrated by their persistent fragmentation and isolation, they began to work together in the late 1930s to construct organizations in which they could develop and propagate their ideas. In the process, they turned their attention to the problems that continued to divide them: the foundations of their social-scientific methodology, the relationship between their economic analyses and their social philosophy, the degree and structure of those forms of government intervention that they might find acceptable, and the rhetorical strategies that would best enable them to persuade others to adopt their worldviews. Their activities helped frame the public life of ideas in the final decades of the twentieth century, as growing segments of the population came to believe that markets provided a constitutive freedom and that attempts to intervene in their dictates and adjudications were almost invariably misguided. The extraordinary successes of market advocates in the decades since the Great Depression were made possible, in part, by the failures they experienced in its early years.

During the early 1930s the London School of Economics became widely known as a center for economists who believed that the government could not contribute to the resolution of the ongoing crisis. Even as leading conservative economists across the Atlantic world advocated for public works and other emergency measures, Lionel Robbins and his colleagues dwelled on the dangers of intervention and the absence of quick solutions. For a brief period they captured the attention of the profession with their youth, their charisma, and the relative audacity of their views. The Economics Department at the LSE became a dynamic center within an increasingly prominent field, and students and faculty sensed that their discussions held a significance that extended well beyond the walls of their seminar rooms. By the end of the decade the sense of excitement that had permeated their discussions had dissipated. Some faculty, like Hayek, appeared increasingly irrelevant within a profession that had become preoccupied with other concerns; others, like Robbins, had already begun the process of bringing their views into closer alignment with the economic mainstream. Although the rapid ascent of Hayek and Robbins signified that the foundations of market advocacy were beginning to shift, their equally abrupt decline suggested that market advocates would need to reconstruct their message if they hoped to sustain public support for their ideas.

The LSE’s emergence as an institutional home for a reactionary economics struck many observers as a peculiar development. The university had been founded by members of the Fabian Society less than forty years before, under the theory that a thorough education in economics and political science would serve to further the spread of socialism. Its structure manifested a set of commitments that made the Fabians unusual among their socialist peers. As George Bernard Shaw wrote in a retrospective on the group, they were unabashedly elitist, perceiving themselves as “a minority of cultural snobs and genuinely scientific Socialist tacticians” who had “no time to spend on the conversion and elementary Socialist education of illiterates and political novices.”11 They were committed to a policy of intellectual openness, believing that their ideas would achieve “Permeation” if they were shared with unwelcoming audiences rather than just the converted.12 And they eschewed the language of revolution, preferring to pursue social change through, in the words of Sidney Webb, “the inevitability of gradualness.”13 Thus the LSE focused on advanced training in the social sciences rather than elementary education for workers and the masses; it welcomed a faculty and student body that represented a broad range of views rather than demanding adherence to a particular ideological perspective; and it sought to cultivate a capacity for critical reasoning rather than radical action.

By the early 1930s the Fabians could look back on their commitments to elitism, openness, and gradualism with some appreciation for their successes. In his introduction to a 1931 reissue of Fabian Essays, Shaw noted the “air of amazing advance in our political circumstances.” A Fabian Socialist served as prime minister, two of the society’s original essayists were in the House of Lords, and Parliament itself “swarm[ed] with Fa...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Dedication
• Contents
• Introduction: The End of Laissez-Faire
• 1. Market Advocacy in a Time of Crisis
• 2. Entrepreneurial Ideas
• 3. Planning against Planning
• 4. New Conservatisms
• 5. The Invention of Milton Friedman
• 6. Moral Capital
• Conclusion: The Spirit of an Age
• Notes
• Acknowledgments
• Index