POEC 301 Syllabus

Schedule (* denotes a reading from the packet):

Thu 9/8 Introduction and Organization

John Locke, Second Treatise on Government, Chapter 5 "Of Property," secs. 25-28 [photocopy to

be handed out in class].

Locke's Chapter V has been considered an awkward defense of property and definitely not Locke at his best. These reflections nevertheless represent what has been an influential way of thinking about an important problem, justifying private property.

I. CLASSICAL THEORIES OF POLITICAL ECONOMY

A. Free-Market Liberalism: Adam Smith

Mon 9/12 Principles of a Free Market Economy

The Wealth of Nations (henceforth WN), Introduction through [Book.chap.sec.] I.iii.,8; I.iv.1-5,

11-18; I.v.1-10; vi-vii (pp.--text not general introduction--10-36; 37-39; 44-46; 47-52; 65-81).

Adam Smith saw a direct link between the division of labor and human civilization. He considered this idea so important that he placed it first: the famous example of the pin factory is no digression but rather an illustration of what Smith considered fundamental to all that followed. The discussion goes on to relate the division of labor to market size and to money. Smith then turns to price determination in chaps. V-VII (which we will discuss also next time). There he employs what was in his time a fairly common scheme describing three great classes in society--those who earn their living from wages, those who live by profits, and those who receive rent. These definitions, based entirely on roles in production rather than on income levels (not to mention "lifestyles"), appear later in Ricardo and Marx. Note: “corn” follows British usage to mean “grain;” “police” corresponds roughly to our “policy.” “Stock” is just invested capital.

Study Questions:

1. Why is it, according to Smith, that some nations are rich while others are poor (I)?

2. Do people really have a natural “propensity to truck, barter, and exchange one thing for another” (25)? How would Smith’s argument differ if he had begun from Hobbesian premises—say, with a “propensity to steal”?

3. Compare the division of labor in Chapter I (the pin factory) with the examples given in Chapter II. If the division of labor arises from voluntary decisions, why does it intensify work?

4. For Smith, how should we properly regard profit? How does he distinguish it from rent—economically and (it seems) ethically (VI)?

5. What is the difference between “absolute demand” and “effectual demand” (73)? How do Smith’s definitions compare with those of modern economics? Why is the distinction important?

Thu 9/15 Prices, the Distribution of Income, and Economic Growth

WN I.viii.1-33, 36-48; I.ix.1-4, 11-24; I.x.a., I.x.b.1-34; I.x.c.1-32, 60-63; I.xi.a.1-9; I.xi.p.1-10;

II.iii.1-9, 13-22, 28-32; (pp. 82-93, 96-102; 105-06; 109-15; 116-28; 135-46;157-59; 160-62; 264-67;

330-34,337-39, 341-44).

The readings for this class focus on Adam Smith's views of the determinants of prices, income distribution, and economic growth. Here you can find his some of his most trenchant critiques of the guild system along with a view of markets that places labor (and the laborer) front and center. You’ll also find a great deal of attention to politics. Note: in Chapters x.a.2 and x.c, the "policy of Europe" refers to the mercantile system (which involved national economic strategy and had an important role for guild regulations) and "corporations" to guilds.

Study Questions:

1. What is Smith's rather complicated view of the relationship between high wages and general prosperity (pp. 91-93, 96-99)? Does it still apply in the international market of today? What do you think about Smith's (related) arguments about population and slavery (pp. 98-99)?

2. On pp. 79 and 116, Smith refers to a situation of "perfect liberty." What does he mean by this term? How does Smith's conception of liberty compare to your own sense of what freedom entails?

3. In chapter X, Smith discusses the perceived sources of inequality among wage laborers. What are the real sources of these differences, according to Smith? Do they suffice to explain wage differences today—say, between an NBA star and a housepainter? (Or between a housepainter and a housewife?)

4. Is Smith right about his assessment (pp. 264-67) of the degree of confluence between the particular interests of each of the three fundamental social groups (those who receive rent, profits, or wages, respectively) and the general interest?

5. How does Smith distinguish between productive and unproductive labor (Book II, chap. iii)? We will see a similar distinction at work in the tale of the profligate landlords (III.iv). Is such a distinction relevant today?

Mon 9/1915 Progress and Policy

WN III.iv.1-7, 10-18; IV.ii.1-16, 23-45; IV.ix.48-52; V.i.b.1-20, 25; V.i.c.1-2; V.i.d.1-8;

V.i.f.1-16, 47-61; V.ii.b.1-6 (pp. 411-15; 418-22; 452-60, 463-72; 686-88; 708-20, 722-26; 758-64,

781-89; 825-27).

Here is Smith on how good government can result from the spread of markets—and how, in turn, government can foster market expansion and national wealth. In both cases he uses an argument that forms the bedrock of liberal optimism—that freedom has non-obvious, usually unintended, but highly beneficial consequences. Book III gives a quick historical sketch of how state power was tamed by capitalism—an account that, in broad terms, was anticipated by Montesquieu and the physiocrats, and has been repeated by many others since Smith’s time. Books IV and V give us some of Smith's best arguments for laissez-faire--and for government. The former begins with the "invisible hand" passage, which occurs at the conclusion of a well-formed syllogism about how to maximize aggregate national value-added (pp. 455-57). Because of its importance, both to Smith's purpose (here is a formula that directly involves the wealth of nations) and to liberal optimism generally, the argument deserves close attention. Book V (introduced and summarized at the end of chapter ix, Book IV) is on fiscal policy, but it contains lots of philosophical and sociological asides. Its careful discussion of appropriate revenue sources—especially the four maxims on taxes (825-28)--is still relevant today. Also revealing is Smith’s honest statement of his misgivings (V.i.f.) about the same division of labor he praised so highly at the outset.

Study Questions:

1. Consider Smith’s tale of the merchants, landlords, and “civil government” in Book III. Is the argument plausible? Why? If merchants, once rich, decide to become landlords, why don’t they adopt the traditional attitudes of the class?

2. Outline the logic (three premises plus conclusion) of the "invisible hand" argument. Is it persuasive? Are the premises realistic?

3. Consider Smith’s discussion of the “natural” causes of “subordination” (710-14). Smith remarks that these—which include “riches”--are “antecedent to any civil institution,” but he later asserts that "civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all” (715)? Can these two propositions be reconciled? Are these causes of deference just as “natural” to us now?

4. In Smith’s discussion of justice and revenue (715-20), how does justice emerge from the self-interested actions of sovereigns and litigants? Is Smith’s account a convincing one—above all, does he answer the critic who alleges that a free market in judges’ decisions would be more “ natural”?

5. Smith issues a scathing indictment of the division of labor for its effects on the minds of workers (pp. 781-86). Is his proposed remedy adequate? Does the increase in wealth from the division of labor make this sacrifice worthwhile in Smith's view, or in yours?

Thu 9/22 Moral Foundations of Capitalist Society: Smith and his Progeny

Excerpts of The Theory of the Moral Sentiments from Heilbroner, The Essential Adam Smith, pp. 65-69, 78-110, 118-23.*

Richard Cobden, “Free Trade”: Speech at Covent Garden, Sept. 28, 1843.*

William Cullen Bryant, “Introduction” to the Political Writings of Richard Cobden, American edition, 1866.*

Arthur Latham Perry, “On Free Exchange” and “On Production,” from his “Papers on Political Economy” in the Springfield Republican, 1864.*

Smith fir st published The Theory of Moral Sentiments in 1759, well before the Wealth of Nations, but he continued to think highly of it until his death. In it we may find support for some of the moral premises of the later, more famous arguments; but there are also points on which Smith may have changed his mind. Richard Cobden (1804-65) was a Manchester cotton textile manufacturer early in his life; he was later the leader of the Anti-Corn Law League (“the League” for short) and the member of Parliament most responsible for repeal of the Corn Laws in 1846. He was also a lifelong advocate of peace, and paid a heavy political price for his unpopular opposition to the Crimean War. William Cullen Bryant (1794-1878) was one of the most renowned men of letters of 19^th-century America. He was an influential opinion-maker by way of the New York Evening Post, which he edited and published for fifty years (1829-78), and through organizations like the American Free Trade League, of which he was the first president. Bryant and other reformers, including fellow Williams alumnus (and professor) Arthur Latham Perry (1830-1905), battled for free trade in the United States in a campaign modeled after Cobden’s anti-Corn Law agitation. Perry’s 1864 “Papers on Political Economy” in the Springfield Republican evolved shortly afterwards into his Elements of Political Economy, the most widely read American economics textbook in the last decades of the 19^th century.

Study Questions:

1. What distinction does Smith make between beneficence and justice? What is the significance of each to the proper ordering of economic life?

2. What does Smith mean by “sympathy” and what role does it play in the TMS?

3. Do you think Smith (especially TMS 123) romanticizes the poor? How does the passage on p. 123 relate to his thinking as a whole?

4. What is the role of public life—through human vanity and the sentiment of shame—in sustaining morality? Does Smith muddle the distinction between shame and conscience?

5. Adam, Adam, Adam Smith

Listen what I charge you with!

Didn't you say

In class one day

That selfishness was bound to pay?

Of all of the doctrines that was the Pith,

Wasn't it, wasn't it, wasn't it, Smith?

How would you reconcile the arguments in The Theory of Moral Sentiments with those in The Wealth of Nations? In particular, how does Smith see the relationship between virtue and the pursuit of self-interest?

6. Is the moral force of Cobden’s argument derived from beneficence, justice, religion, or some other wellspring? What about Perry’s? Does each perceive the marketplace to have the same moral status as Smith does?

7. If, to Cobden, free trade has all the implications articulated at the conclusion of his speech, there must be a more fundamental principle recommending it. What is that principle? How was it at stake during the U.S. Civil War, in which Bryant claims (not entirely accurately) that Cobden championed the Union’s cause.

B. Early Critiques of Economic Liberalism

Mon 9/26 Elaboration and Critique of Classical Political Economy

David Ricardo, Principles of Political Economy and Taxation (1821), chap. 5 and sect’ns 9-19 of chap. 7.*

Karl Marx and Friedrich Engels, “The Communist Manifesto” [1847], part I, and “Wage Labor and Capital,” in Tucker, ed., The Marx-Engels Reader, pp. 473-83; 211-17; 53-54; then 26-46)

Smith's influence on political-economic thinking during the nineteenth century would be hard to overstate. But one notable difference can be seen already in Ricardo's much more pessimistic tone. Much of this was due to the influence of Thomas Malthus and his famous population theory, according to which a geometric increase in population combined with an additive increase in food production entailed a future of increasing misery. It shows up here in Ricardo's argument about the trend of real wages; its horrible implications also animated Marx and Engels's rejection of "bourgeois ideology" in favor of a revolutionary alternative. (Note: the poor laws in force until 1834, about which Ricardo writes, provided subsidy payments based on family size and were administered at the local parish level. The 1834 reform reflected the triumph of arguments like Ricardo’s; it appalled Marx and Engels.) The last two excerpts of Marx and Engels direct their critique toward religion and its role in a capitalist society O . (Note: in "On the Jewish Question," whose first part is your last reading, be sure to distinguish between Marx's own words and his long quotes and paraphrases of Bruno Bauer.) The readings on religion are difficult, but please note that there is much more here than a critique of “the opiate of the masses.”

Study Questions:

1. What view of the world lay behind Ricardo's recommendations about relief for the poor? Do you agree with his conclusions, and with his premises?

2. What historical role do Marx and Engels assign to capitalism? Do they, for instance, reproach it for having destroyed indigenous cultures around the world? Could a serious Marxist be an investment banker?

3. For Marx and Engels, "the executive of the modern State is but a committee for managing the common affairs of the whole bourgeoisie". How does this differ from Smith's view that "the proposal of any new law or regulation which comes from [the merchants and dealers]"..."comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public" (p. 267)?

4. According to Marx, in the liberal revolutions of the 18th and 19th centuries, "Man was not liberated from religion; he received religious liberty. He was not liberated from property; he received liberty to own property" (45). Does Marx think people should be forcibly "liberated" from religion and property?

5. What, for Marx, accounts for the existence of religion? Why does he think of it as "alienating"?

Thu 9/29 Protection and the Utopia of the “American System”

The Marx-Engels Reader, pp. 392-97, 160-163.

Henry Clay, “Defence of the American System”: in the Senate of the United States, Feb. 2, 3, and 6, 1832. (pp. 9-25, 46-50).

Henry C. Carey, selections from “Man and Land” and “Concentration and Centralization”: chapters I and X of The Past, the Present, and the Future (1847).

In the Marx readings we work backward , mostly from to find out what Marx thinks , he writes extensively about what it means to be free--genuinely emancipated. The first reading refers to different kinds of division of labor—one in which independent producers exchange goods in a market and another in which a factory manager assigns jobs to workers. While it’s easy to expect Marx’s antipathy toward the second, note his pejorative description of the first. The next reading is about how any division of labor restricts freedom and has as its political counterpart an "illusory from of communal life." Henry Clay (1777-1852) was a longtime Whig congressman, senator, speaker of the U.S. House of Representatives from Kentucky, and presidential candidate in 1844 and 1848. He was the chief advocate among politicians of the “American system” of trade protection for manufactures -- the history and effects of which he traces in this speech. Henry C. Carey (1793-1879) was his theoretical counterpart and the principal foe of Bryant and Perry. A descendant of Irish immigrants and an early advocate of free trade, his conversion to protectionism came to him “as with a flash of lightining” in 1845. He worked out the theory and published it as The Past, The Present, and The Future in 1847. Carey famously accused the apostle of laissez-faire, Frederic Bastiat, of plagiarism. Consider as you read Carey’s book how he could make such a charge -- but consider at the same time the similarity of his methods to Marx’s.

Study Questions:

1. Bourgeois intellectuals, according to Marx (p. 395), approve of rigorous planning and central control within factories, but are horrified at the prospect of extending such planning to the economy as a whole. Is there an important contradiction here?

2. Marx says that in his ideal society, "nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes," (and in the next, famous passage) "to hunt in the morning, fish in the afternoon, rear cattle in the evening...just as I have a mind" (160). Does this mean that the division of labor is abolished? Would such a life be desirable? Possible to achieve for most Americans?

3. What would Marx have to say about people who argue against welfare on the grounds that it wrongfully denies richer people the opportunity for acts of charity?

4. What kinds of anxieties underlie the nationalist argument against free trade? How would a liberal respond?

5. Perry argues that the gains from trade stem from the growth of production; Clay, too, argues that the gains from protection stem from the growth of production. Perry, Bryant, and other free traders argued that the protectionists favored “monopoly”; Clay, Carey, and other proponents of the American system argued that the free traders supported monopoly. Adjudicate between their arguments.

6. How, according to Carey’s system, could restrictive legislation be necessary to guarantee freedom? Why is demolition of Ricardo’s theory of rent so important to his case?

C. Reformist Liberalism and Social Democracy: Mill, George, Keynes

Mon 10/3 9/29 Socialism and Private Property

John Stuart Mill, Principles of Political Economy, pp. 199-234, 936-971.*

In the nineteenth century, John Stuart Mill (1806-73) was just as famous for his political economy as for his other philosophical works.O The Principles went through six editions in his lifetime (the readings come from the last of these, which came out in 1871). Through his father he was influenced heavily by Bentham's utilitarian thought, turning these principles in a reforming direction and staking out then-radical positions on free speech and women's rights. In these readings you see a relentlessly logical mind seeking to justify private property and government action, and perhaps straining logic when his valued principles come into conflict.

Study Questions:

1. Mill says that “the laws of private property have never yet conformed to the principles on which the justification of private property rests.” (207). What does he mean by this, and how does he propose to remedy the problem?

2. What do you think of Mill’s separation of production and distribution?

3. Mill devotes a long section to the question of inheritance (218-26). Do you agree with his position? Why do you think the problem is so important to him?

4. Is it true that "the uncultivated cannot be competent judges of cultivation" (p. 947)? Who is competent to judge such matters? Are reformers like Mill necessarily also elitists?

5. How does Mill's discussion of defensible government interventions in the economy differ from that of Smith? How might you explain those differences?

Thu 10/6 Poverty and Public Finance2 PovePoverty and Public Finance.

Henry George, selections from Protection or Free Trade? (1886): Ch. XX, “The Abolition of Protection”; Ch. XXI, “Inadequacy of the Free-Trade Argument”; Ch. XXII, “The Real Weakness of Free Trade”; Ch. XXIV, “The Paradox”; Ch. XXVI, “True Free Trade”; Ch. XXVIII, “Free Trade and Socialism”;

Henry George and David Dudley Field, “Land and Taxation: A Conversation”. The North American Review, July, 1885.

Henry George (1839-1897) was the author of Progress and Poverty (1879). His attribution therein of widespread poverty amidst national affluence to private ownership of land, and his outspoken and eloquent advocacy of the single tax on land as a solution to the problem, claimed enormous attention in the late 19^th century (and maintains some of it to this day). Protection and Free Trade is his contribution based on the same principles to the U.S. tariff controversy. David Dudley Field (1805-1894), an esteemed lawyer known for his systematic rewriting and simplification of the Civil Code of New York, was successor to William Cullen Bryant as president of the American Free Trade League. He shared George’s commitment to free trade, although for different reasons -- and he doubted both the viability and desirability of George’s single tax.

Study Questions:

1. Would Cobden have come to George’s conclusion about the “inadequacy of free trade” if he had lived another twenty years?

2. Is George a conservative or a radical? A capitalist or a socialist? Where he argues that consistency with the free trade principle requires governmental controls (p. 310), is he in agreement with Henry Carey?

3. What impediments are there to the implementation of George’s proposal for public finance? Are they practical or metaphysical?

4. Consider again the passage of Perry’s paper “On Production” where he writes about “the gratuitous help of nature.” Does Perry’s system support, or is it antagonistic towards, Henry George’s central idea?

5. Could, or should, Henry George’s proposal be adopted today? In what instances, and why?

6. Thinking back to Locke’s ideas about property rights and labor, would you consider George’s, or Field’s, position to be closer to Locke’s?

Mon 10/10 6 No class, Reading Period

Thu 10/13 Imperfect Markets, Finance, and Knowledge

J.M. Keynes, "The End of Laissez-Faire,“National Self-Sufficiency," and, from The General Theory of Employment, Interest, and Money, sections V and VI from chap. 12 on equity markets (pp. 153-61) and "Concluding Notes."*

Doug Henwood, Wall Street: How It Works and For Whom (1997), pp. 72-86, 277-94..*

James Surowiecki, The Wisdom of Crowds (2004), chaps. 1-4.*

There are a lot of pages here but they read very quickly, especially those from the last book. John Maynard Keynes (1883-1946) is famous for his General Theory of Employment, Interest, and Money (1936), from which the last two excerpts comes. Keynes thought the massive unemployment of workers during the Great Depression effectively refuted the classical liberal belief that capitalism would work well if only markets were left alone. A believer in personal liberty, he did not advocate the abolition of capitalism, proposing to rescue it through government intervention, yet his position on finance (including the “euthanasia of the rentier”) sounds radical today. Keynes, himself an immensely successful stock market investor (a rare case amongst economists!), was skeptical of the ‘collective rationality’ of the stock market. That the stock market somehow indicates our collective (and rational) economic forecast was a mere convention to him – a convention developed by man so that “he need not lose his sleep merely because he has not any notion what his investment will be worth ten years hence.” The daily fluctuations in the stock market only reflected the precariousness of this convention—but to Keynes, theyse fluctuations were a positive menace for they triggered booms and busts in the real economy and thus became self-fulfilling. In the HenHenwood piece we read a contemporary version of this critique, directed at Wall Street. Editor of Left Business Observer, he earned this reaction from the then-Executive Editor of the Wall Street Journal: “you are scum”…”it’s tragic you exist.” This approximates Henwood’s own attitude toward the financial sector (not the people, he says, but the system). He argues that Wall Street serves no economic purpose worthy of its immense wealth and power. The last reading, by Surowiecki, builds on Keynes in a different way: by asking when the “average wisdom” of large groups of people does (Who Wants to Be a Millionaire?) or does not (asset price bubbles) improve upon individual human rationality.

Study Questions:

1. How does Keynes treat the relationship between free trade, global investment flows, and world peace? Do you agree?

2. What does Keynes mean by "the euthanasia of the rentier" (Concluding Thoughts, p. 376)? How does it relate to his argument about finance (“let finance be national”) in “National Self-Sufficiency”? What do you think about these arguments?

3. What is Henwood’s argument against the view that the stock market is an important source of investment capital? Do you agree?

4. So what, for Surowiecki, distinguishes situations in which the aggregate judgment of a crowd is wise from those in which it is biased and wrong?

5. What does his conclusion about the judgment of experts imply about highly paid fund managers and CEO’s? Do you agree?

II. CONTEMPORARY WRITINGS ON POLITICAL ECONOMY

A. Contemporary Liberalism: the Defense of the Market

10/17 Mon The Case against Central Planning

F. A. Hayek, The Road to Serfdom, introduction by Friedman and pp. 37-

Hayek, The Road to Serfdom, pp. 56-111.

Perhaps the most important contribution of Hayek (1899-1992) provides an overview of his theory of the market process, a theory which some have taken to be incompatible with and superior to the theory of the market in neoclassical economics. Perhaps his most important contribution to social theory is his insistence that knowledge--of talents, capacities, scarcities, and potential consumer demands--is dispersed among countless individuals, so central planners cannot coordinate all this knowledge as effectively as markets. Along with laying the groundwork for this important point, The Road to Serfdom develops an argument that central planning not only produces poverty, but also destroys liberty.

Study Questions:

1. Chapter VI of The Road to Serfdom posits a distinction between the formal operation of laws which apply to all people equally and the exercise of ad hoc judgments in the awarding of privileges and rights in a planned economy. Is the distinction workable? Why is important?

2. Hayek describes democracy as one means for attaining the end of liberty. Just saying something is democratic doesn't mean it is good, because the democratically imposed will of the majority can be just as dangerous to freedom as the rule of the autocrat (pp. 70-71): "Democratic control may prevent power from becoming arbitrary, but it does not do so by its mere existence." What do you think?

3. Hayek argues that the term "privilege" should not apply to the ownership of property: "to call private property as such, which all can acquire under the same rules, a privilege, because only some succeed in acquiring it, is depriving the word privilege of its meaning" (TRtS, 89). He contrasts formally open ownership with the closed ownership of feudal times. What do you think? If I am born rich, am I privileged or not?

Thu 10/13 No class, Reading Period

10/20 16 Hayek's Critique of the Welfare State

F.A. Hayek, The Constitution of Liberty, pp. 22-53; 133-147; 306-323.*

F. A. Hayek, "Competition as a Discovery Procedure."*

Thanks in no small part to the force of Hayek's logic, few people still believe in the desirability of central planning. But if central planning is a dead issue, mustn't Hayek be irrelevant to the burning issues of our day? These excerpts from the Constitution of Liberty (1960) are part of Hayek's attempt to demonstrate the continued relevance of his arguments in the era of the welfare state. In "Competition as a Discovery Procedure," Hayek (1899-1992) returns to his theory of the market process, a theory which some have taken to be incompatible with and superior to the theory of the market in neoclassical economics.

Study Questions:

1. According to Hayek, "the more civilized we become, the more relatively ignorant must each individual be of the facts on which the working of his civilization depends” (CoL, 26). What does he mean? In he consistent here? How does a person (say, Hayek himself) come to know these facts? Is this an abandonment of rationality, or does he give us good reasons to submit to something unintelligible?

2. Early in his discussion of progressive taxation, Hayek says that the idea of the interpersonal comparability of utilities has been “generally abandoned”(309). Yet it has not: many economists and policymakers continue to believe that a rich person gains less utility than does a poor one from income gains of the same magnitude. Is this belief plausible? If we deny comparability, must we also abandon the Golden Rule?

3. According to Hayek, "What is required [in the field of taxation] ... is a rule which, while still leaving open the possibility of a majority's taxing itself to assist a minority, does not sanction a majority imposing upon a minority whatever burden it regards as right" (CoL, p. 314). Is this a good argument for a "flat tax"?

4. What do you think of Hayek's statement ("Competition..." p. 255) linking the value of competition to its production of unpredictable results? Does this exempt market outcomes from criticism?

5. Suppose Hayek is right to claim that freedom is essential to generate and mobilize information about human wants and capabilities. Does this make an iron-clad argument for freedom?

Mon 10/24 0 Liberty, State, and Market

Milton Friedman, Capitalism and Freedom, Intro., Chaps. 1, 2, 7, 10.

Milton Friedman was Ronald Reagan's favorite economist. An early opponent of Keynesian economics (though not initially on public-finance grounds), he has written influential works on economic methodology, the consumption function, and most famously, on money. But he has also written influential works of advocacy, like this one and the lighter Free to Choose, which have been important guides for Republicans in recent years.

Study Questions:

1. Friedman asserts that "underlying most arguments against the free market is a lack of belief in freedom itself" (15). How does he define freedom? How does it differ from that of Marx in his discussion of "emancipation," or from that implied by Henry George?

2. Is Friedman a democrat? Consider also his idea that markets offer a kind of proportional representation (15).

3. Friedman argues that minorities have often wrongly blamed capitalism for the "residual restrictions" upon their lives, "rather than recognize that the free market has been the major factor enabling these restrictions to be as small as they are" (p. 109). What do you think?

4. Is Friedman a utilitarian in his argument for free markets, arguing that they maximize well-being, or does he stand on somewhat different ground?

5. Are inequalities resulting from chance easier to accept than those from other sources (pp. 165-66)? Who is the better liberal on this point, Friedman or Hayek (TRtS , 104), who argues the opposite? How would things be different if economic rewards were distributed entirely randomly?

Thu

10/27 3 Liberal Principles Applied

Friedman, Capitalism and Freedom, Chaps. 6, 11-13.

Here Friedman takes on the problems of public schools, public housing, and anti-poverty policy. Along with his thoughts on the proper role of the central bank, perhaps the most enduring contribution of Friedman's book to public policy debate is its proposal of a voucher system for education. The idea was embraced by the Reagan administration under the influence of William Bennett, a Williams graduate.

Study Questions:

1. Friedman takes the individual to be the "ultimate entity in society" (p. 5). Based on what you've seen in this book, where does Friedman think the values, beliefs, and preferences of individuals come from? Are they shaped by our society? If individual wants are social creations, should we respect consumer sovereignty?

2. Friedman’s proposal for a negative income tax stands in stark contrast to the conservative welfare reform enacted in the mid-1990’s, which was more paternalistic and intrusive—and less generous. In your opinion, is the difference a result of Friedman’s being too liberal (in the classical sense)—that is, loving liberty too much?

3. How would you evaluate Friedman's proposal for school vouchers?

4. Friedman hints (p. 197) that much of the case for liberalism may rest upon our ceasing to assume that public officials are beneficent and disinterested. This idea, in others' hands, helped ground a whole branch of political economy now called (somewhat misleadingly) "public choice." Is the assumption of self-interested official behavior a good one? Of the figures we've read so far, whose arguments does it challenge most decisively?

Mon 10/31 0/27 Microeconomics and Renascent Liberalism: Ronald Coase

Ronald Coase, "The Nature of the Firm."*

Ronald Coase, "The Problem of Social Cost.”* [skip sections III and IV]

The two articles we discuss today are largely responsible for Coase's 1991 Nobel Prize in economics. In "The Nature of the Firm" (1937), Coase introduces the fertile concept of transactions costs, a concept whose implications are still being explored by economists. It has political-economic implications, too. In "The Problem of Social Cost" (1960), Coase suggested that free markets were in fact able to correct many of the problems associated with externalities that conventional theory generally believed could only be addressed by government action. After attending a dinner party at which Coase presented these ideas before their publication, Milton Friedman (next reading) commented that he had witnessed a revolution in economic thought. By the end of the twentieth century this had become the most often-cited article in economics.

Study Questions:

1. The central puzzle of “The Nature of the Firm” occurred to Coase when he was an undergraduate (and a socialist), just after visiting Ford and GM: how could liberal economists fault the USSR for being run like a big factory when some very large firms can be run efficiently? Do you think he answers this question adequately?

2. Following Coase, what effect might we expect, on the economically optimal size of firms, from recent advances in information technology?

3. According to Coase's famous argument about social cost, in the absence of transaction costs, the socially efficient use of resources will be obtained if property rights are clearly defined--regardless of their distribution. Are there any reasons to doubt this? (Imagine that eBay finally permitted trade in human kidneys. Would it make any difference whether people were assigned property rights to the kidneys in their own bodies, or the Kidney Transplant Foundation were initially assigned the rights to all human kidneys?)

4. Given that in the real world, transaction costs are often significant, Coase maintains that the socially efficient use of a disputed resource would be obtained if the property rights to it were assigned to the party who would pay the most for them. How would the decision be made? What would Hayek think of this implication?

Thu 11/30/30 Law and Economics

Richard Posner, The Economics of Justice, Chap. 3.*

Richard Posner, Economic Analysis of Law, Chap. 28.*

The Coase Theorem and the notion of transactions costs have had a significant impact on the study of law. Richard Posner, an eminent legal scholar and a judge with the Seventh Circuit Court of Appeals, is a leading proponent of an economic approach to law. Posner’s main thesis is that courts act just like the markets in the sense that they deliver judgments that maximize the total wealth of the society. Posner also endorses, on ethical grounds, wealth maximization as a norm for formulating social policies. The first reading lays out his basic philosophical position regarding wealth maximization vis-à-vis other ethical principles. In the chapter from the second book (Chap. 28), Posner looks at the laws concerning freedom of speech from an economic standpoint.

Study Questions:

1. What are the shortcomings of utilitarianism as a principle guiding social policy? In what sense does wealth maximization differ from utilitarianism?

2. What are the arguments for moral superiority of wealth maximization over utilitarianism as a principle guiding social policy? Do you agree with the author? Elaborate your position.

3. If judges fail to embrace a single principle such as wealth maximization in deciding cases, are we condemned to arbitrariness in the law?

4. Please refer to the study questions at the end of chap. 28 (page 638).

B. Defenses of Politics and the State

Mon 11/7 73 An Economist Defends Politics

Albert O. Hirschman, Exit, Voice, and Loyalty, Chaps. 1-4, 7 (all but pp. 83-98), and 8 (to page 114 only).

Albert Hirschman was distinguished for his adept and enlightening "trespasses" across the boundary between politics and economics. His empirical works deal with power, trade, and economic development, but this book has been his most influential contribution to political economy. In what at first may seem a long statement of the obvious (or what is obvious to everyone except economists), he created a new vocabulary for looking at a wide range of problems. One of his underlying premises--that organizations are costly to create--is shared by what has lately become a whole new field called "the new institutional economics."

Study Questions:

1. Hirschman criticized the typical economist's bias for "exit" over "voice" and later (Chap. 8) remarks upon an American preference for "exit" as well. What drives the choice between one and the other? Would we have better politics and a stronger economy if we chose "voice" much more often than we do? Why or why not?

2. One novelty of Hirschman's book lies in its conception of "voice" (petitions to management, consumer complaints, ongoing communications between firms and their suppliers) as relevant to economic analysis. In your opinion, what is its most important implication for the liberal ideal of the self-regulating market?

3. Compare Hirschman and Friedman on the issue of schooling. Are Hirschman's arguments (especially in Chapter 4) enough to undermine Friedman's argument for free choice and vouchers? Why or why not?

4. Hirschman’s book is sometimes criticized for not giving greater prominence (beyond his mention of it at 82-83) to the idea that the threat of exit is crucial to having one’s “voice” taken seriously. What do you think? Are there situations in which such a threat has the opposite effect?

5. According to Hirschman (Chapter 7), why might irrational national chauvinism be an advantage for countries trying to advance economically in the modern world? How would a liberal object to this thesis?

Thu 11/10 6 Equality and the Welfare State

Arthur Okun, Equality and Efficiency, Chaps. 1 and 2.

Arthur Okun (d.1980) did most of his empirical work on labor markets and price theory. However, as a former policymaker and a lucid writer, he was also capable of writing a book that describes as clearly as any the areas of conflict between market distribution and political rules.

Study Questions:

1. Why, for Okun, must a clear line be drawn between dollars and rights? Do you agree with his reasoning?

2. Do you think the line between dollars and rights is clear enough, or in the right place, in the contemporary U.S.? Thinking of examples, would clarifying or moving this line have the beneficial effects Okun expects?

3. Okun found "the tolerance of the masses for economic inequality ... puzzling" (p. 33). How would you explain that puzzle? Why don't the poorest 51 percent of the voters expropriate the richer 49 percent?

4. According to Okun, "the issue of government versus private ownership of industry has little to do with freedom, but much to do with efficiency" (p. 61). Friedman and Hayek would obviously disagree. Who’s right?

5. Okun claimed that "To evaluate the net gain in freedom provided by private ownership (rather than public access) for any asset requires a balancing of pluses and minuses. The plus is the enhanced scope of the owner through exclusive powers over the asset; the minus is the restriction the keep-off sign imposes on non-owners" (37). What do you think? Does one person's property restrict the freedom of everyone else?

Mon 11/14 0 Inequality of Result vs. Equality of Opportunity?

Edward N. Wolff, “Recent Trends in Living Standards in the United States,” from Wolff, ed., What Has Happened to Quality of Life in the Advanced Industrial Nations? (Elgar, 2004).*

Bruce Ackerman and Anne Allstot, The Stakeholder Society (1999), chaps. 1-2.*

Jacob Schelsinger and Nicholas Kulish, “As Paper Millionaires Multiply, Estate Tax Takes a

Public Beating,” WSJ, 7/13/00.*

“Defending the Estate Tax,” The New York Times (editorial), 2/16/01.*

Jacob Hacker, “False Positive,” New Republic 8/6/04.*

In the mid-1990’s, after almost two decades of rising income and wealth inequality, welfare benefits in the U.S. were made more restrictive. Wolff presents a comprehensive analysis of living standards; the section on wealth distribution is especially relevant (pp. 16-21). In the central reading of the day, the book by Ackerman and Alstott proposes a radical proposal for wealth redistribution--in the name of equal opportunity and freedom. The two opening chapters from this book are followed by some clips on the estate tax. The last reading discusses the significant in US family income instability, which it attributes in part to public policies that have shifted risk downward. It calls for policies quite different from those championed by Ackerman and Alstott.

Study Questions:

1. If there is no [absolute] poverty, should we care about [relative] inequality?

2. Why—apart from the point about poverty noted just above-- might a liberal such as Hayek or Friedman argue that the apparent trend of income and wealth distribution should elicit no policy response by the government? Do you agree?

3. Would Ackerman and Alstott's proposal really achieve a substantial increase in equality of opportunity? At too great a cost, in your opinion?

4. Would the repeal of estate taxes weaken the legitimacy we ascribe to wealth by gradually undermining the presumption that wealthy people got rich through their own talent and effort?

5. What might Hacker say to Ackerman and Alstott? Would you agree?

Thu 11/17 3 Power and Autonomy at Work

Samuel Bowles and Herbert Gintis, Democracy and Capitalism, Chap. 3.*

John Case, "Collective Effort," Inc. January 1992.*

"A Firm of Their Own," Economist 6/11/94.*

Farhad Manjoo, “United’s ESOP Fable,” Salon.com 12/12/02.*

Daniel Pink, Free Agent Nation (2001), chap. s. 1. -3( (pp. 9-255) and pp. 179-181.*

“Prison as Profit Center,” Wall Street Journal 3/15/01.*

Nearly all of these readings present various arguments, on efficiency and equity grounds, against the existing structure of corporations and capital markets. The work of Bowles and Gintis, radical economists at the University of Massachusetts, Amherst, makes the case that economic power should be just as accountable as formally constituted political power, ending up by advocating that a firm’s employees should own it. The next three readings discuss that option in practice. The excerpt that follows is from a widely praised book that heralds the rise of independent white-collar jobs as an opportunity for self-actualization and resolving the conflict between work and family life (there may seem to be a lot of pages here but they read very fast). The final article describes a different but increasingly important kind of workplace, and returns us to issues raised by Bowles and Gintis.

Study Questions:

1. What is the "labor commodity" proposition? Do you agree with Bowles and Gintis’ critique of it? Could you agree with their critique and still disagree with their conclusions?

2. How about the “asset neutrality” proposition? Do we have to assume that all good ideas get funded in order to regard capitalism as fair? Efficient?

3. Referring to the magazine articles, what are the advantages and problems of worker-owned firms? Are these understandable in the terms articulated by Bowles and Gintis?

4. How does thePink’s “free agent nation” change the politics of work? Thinking of Coase, aAre there limits to its feasibility?

5. How does prison labor relate to the issues raised by Bowles and Gintis? Is the spread of prison labor a good idea? What does it imply, for example, for the US position in negotiations over human rights with China?

Mon 11/21 17 Is "More of the Same" Feasible? Social Scarcity and Positional Goods

Jonathan Kaufman, “Amid Economic Boom, the ‘Haves’ Envy the ‘Have-Mores’,” WSJ 8/3/98.*

Fred Hirsch, Social Limits to Growth (1976), pp. 1-54.*

Robert Frank and Philip Cook, The Winner-Take-All Society (1995), pp. 1-14, 32-44.*

Conventional economics focuses on the policies most conducive to rapid and sustainable economic growth, since it is commonly held that economic growth promotes human happiness and well-being. Writing in 1976, Fred Hirsch questioned the wisdom of these policies by asking if growth can actually deliver the benefits it promises. He focused on people's desire for relative rather than absolute gains, coining the term "positional goods." The Frank and Cook book can be seen as an update or an elaboration of Hirsch, with less philosophical depth but with a few added wrinkles and using more contemporary economic language. In these pages they describe “winner-take-all markets” and where they come from.

Study Questions:

1. What are positional goods, and why does Hirsch think they have important implications for our thinking about the political economy of affluent societies?

2. Hirsch believes that "education"..."is a filter as well as a factory" (p. 48). What does he mean by this, and what does his argument imply about the prospects for equalizing opportunity by broadening access to education?

3. One possible response to the increased competition for leadership positions is for the compensation attached to them to fall. Hirsch provides a list of reasons for expecting this not to occur. Do you find his list persuasive?

4. Are there significant differences between Hayek and Hirsch on the question of how to deal with the problem of the "tyranny of small choices"? (See Hayek, Constitution of Liberty pp. 50-52).

5. What are the most important sources of "winner-take-all market" growth? Do you agree with Frank and Cook that these are increasingly important to the economy? Do you share their moral concern? Why or why not?

Thu 11/24 No class, Thanksgiving

Mon 11/28 0 Does Modern Capitalism Undermine its Moral Foundations?

Hirsch, Social Limits, pp. 111-14, chaps. 8 (117-22), 10 (137-51), and pp. 169-77.*

Robert Putnam, Bowling Alone: The Collapse and Revival of American Community (2000), chaps. 1, 8, second part of chap. 9 (pp. 166-80), and 19.*

Putnam’s widely praised book is the fruit of a major research project, and national conversation, that began with his 1995 article by the same title. It also brings home many of the themes of a previous work, Making Democracy Work (1993), a comparative study of the regions of Italy. Putnam argues that our “social capital” (roughly, the degree of sociability, engagement in pubic affairs, and interpersonal trust) makes a variety of important contributions to the good life, that it has been declining significantly in the United States since the late 1960’s, that the decline has several identifiable causes, and that we ought to do something about it. Hirsch concluded something similar in 1976, but saw the norms of our market society as the problem, and no easy solutions.

Study Questions:

1. How do Keynesian economics and the interventionist state rely on "obligations and instincts deriving from an earlier preindustrial culture?" (122).

2. Hirsch argues that given the inevitable depletion of our "moral resources" (pp. 137-51), capitalism, if left to itself, would necessarily turn us into maximizers of our narrow self-interest. Do you agree? Are our only moral resources those we somehow find in the past? Why or why not?

3. What is the difference between “bridging” social capital and “bonding” social capital? Using examples from the rest of the selection, what are the most important implications of each? Which is more needed today, according to Putnam? Do you agree?

4. What is generalized reciprocity and why is it important? How has it eroded, and how might it be restored?

5. Why would Putnam’s analysis lead you to think that markets—or the Internet-- do not automatically fill social capital deficits?

Thu 12/1 1/24 Market and Place, 1: Suburban Sprawl

Andres Duany, Elizabeth Plater-Zyberk, and Jeff Speck, Suburban Nation: The Rise of Sprawl and the Decline of the American Dream (2000), chaps. 1, 2, 7, and conclusion.*

This book represents a good summary of what is now called the “New Urbanism” in architecture and city planning. It contends that suburban sprawl damages our quality of life not only by bringing the obvious problems of lost open space, abandoned city poor, and congested freeways, but also more deeply, in ways relating to community and aesthetics. It ties in with themes articulated by Hirsch and analyzed, from a different angle, in the Putnam book.

Study Questions:

1. What, according to the authors, have been the main public policies responsible for suburban sprawl? Do you agree, or might there be other factors?

2. Why do they think sprawl makes us unhappy? Do you agree? Would you prefer to live in one of their projects, or in a gated subdivision of conventional design?

3. Thinking about their recommendations, do the authors effectively answer Philip Howard’s charge (Death of Common Sense, 1996) that they wish to impose another form of detailed regularity on builders? If not, can anything be said in their defense?

4. Are the authors really “traditionalists,” as they claim, or merely statist radicals? In particular, what might Hayek think about their position?

Mon 11/27 No class, Thanksgiving holiday

12/5 1 Market and Place, 2: the Economy and the Environment

Herman Daly, Steady State Economics, pp. 180-94.*

Daly, “Postscript,” chap. 20 in Valuing the Earth (1993).*

Mark Sagoff, "Do We Consume Too Much?," June 1997.*

Paul Ehrlich, et al., “No Middle Way on the Environment,” Atlantic Monthly Dec. 1997.*

Draft of reply by Sagoff

John Tierney, "Recycling is Garbage," New York Times Magazine, 6/30/96.*

One of the most pressing issues facing political economists is the appropriate relationship between humanity and the environment. While Hirsch asks us to look at the social limits to growth, limits that have implications about how we should deal with environmental problems, Herman Daly--for many years an economist at the World Bank--asks us to attend to the biophysical limits to growth. Mark Sagoff, who teaches philosophy and public affairs at the University of Maryland, disagrees with Daly and others, arguing that technology and markets can and will overcome scarcities, but that the reasons for being an environmentalist lie elsewhere, on a spiritual plane. Ehrlich and his co-authors disagree, in an article written in response to Sagoff’s. Tierney offers a spirited and influential critique of recycling programs.

Study Questions:

1. Do you think that Daly claims that there is is right in claiming the existence of an "optimal scale" to a market economy? Why does he think that prices don’t tell us what that scale is? Do you agree?

2. It has been joked that at prevailing discount rates, today the net present value of Armageddon in 2200 would be about the price of a six-pack. Can markets effectively allocate resources over time? Can governments?

3. If Daly is right to believe there are biophysical limits to growth, does that justify government involvement in reproductive decisions? How would you relate Sagoff's argument to Hirsch's?

4. Is Sagoff right to define environmental issues as essentially political and spiritual rather than economic?

5. What would Sagoff say to Tierney's argument? How would Ehrlich et al. respond?

Thu 12/8 4 Failures of Government

James Buchanan, "Rent Seeking and Profit Seeking."*

Greg Rushford, "Don't Bother to Compete; Hire a Lawyer," WSJ 9/21/95.*

As we intimated in the last study question on Milton Friedman, liberal theorists are skeptical that government officials necessarily act according to some broadly conceived general interest. They argue that we should assume that public officials act according to their narrow self-interest, just as businesspeople and consumers are usually assumed to do. In addition, these "public choice" theorists maintain that the problem of “government failure’’ is often more acute that the problem of “market failure” that the government intervention seeks to cure. For the concluding class, we have assigned a short piece by another Nobel Prize-winning economist, James Buchanan (and a snippet from the WSJ that shares his ideas). The question on the table is whether these readings pose a decisive challenge to the various critics of liberalism we have studied in the second half of the course.

1From Stephen Leacock, Hellements of Hickonomics, p. 75, as quoted by Amartya Sen, On Ethics and Economics, p. 21.