In the aftermath of the financial crisis, confidence in the long-term viability of Western-style capitalism seems to have plummeted. While opinions widely diverge about proposed solutions, everyone seems to agree that the status quo is unsustainable. Meanwhile, the success of East Asian Tigers, the rise of China, and the stagnation in Japan have opened new questions about the best paths to development. In this context, The Clash of Economic Ideas by Lawrence H. White provides a great intellectual service.
The book takes on a daunting task: to present the key economic debates over the past century about the interactions between markets and states in a way that is subtle, avoiding either cartoonish depictions or heavy-handed, deceptive dichotomies, while at the same time keeping the presentation accessible to undergraduate students of economics or interested laypersons. Professor White achieves this goal successfully. Any reader is guaranteed to learn a great deal from this book. Students will get a very good roadmap to otherwise complex macroeconomic dilemmas, while advanced readers are bound to learn plenty of surprising facts and unexpected connections.
As a general framework, the book is written as an economic history. However, this economic history is more of a narrative device, rather than a goal in itself. History provides the pretexts for delving into the theoretical details of competing economic perspectives, with each historic episode providing an anchor to an otherwise very analytic presentation that goes back and forth from Adam Smith to newly minted research. This narrative device, alongside interesting anecdotes illustrating the points and the short biographies of various economists and public figures, makes the book highly readable.
The book covers the following topics: (1) The move away from laissez-faire following the Bolshevik revolution and the Great Depression, covering the socialist calculation debate, the New Deal and the old institutionalist school, the Road to Serfdom interpretation of the rise of Nazism, the Keynesian theory of the Depression and the Austrian business cycle theory, and the modern debate on the role of the government in providing public goods and solving externality problems. (2) The importance of ideology, covering the success of the Fabian Society, the attempted counter-reaction of the Mont Pelerin Society, the success of German Ordoliberalism, and the great ideological debates in India about the best path to development. (3) The role of government in managing money and the attempts to smooth the business cycle, covering the Bretton Woods system, stagflation and the rise of Monetarism, and the current sovereign debt crisis faced by several countries. (4) The problem of public choice, describing the tension between hoping for benevolent government interventions that would fix market failures or promote equality, and the fact that politicians are in fact self-interested people like everyone else. This is covered throughout the book as a concern that affects most of the issues. It plays a particular role in the discussion of the rise of Nazism as an example of ‘why the worst get on top’, as a relevant constraint in the chapter on Indian development, in the chapters on money, explaining the tendency of governments to engage in deficit spending and inflation, rather than transparent taxation, and especially in chapters discussing the argument for free trade versus the infant industries argument for protectionism and the general reasons behind the growth of government.
The Clash of Economic Ideas is a highly recommended book. All history is to some extent stylised history as authors have to decide what is important enough to include in their presentation and how to ‘connect the dots’, but all too often stylised histories turn into mere caricatures. By contrast, White succeeds in laying out a fascinating history of thought that brings to life his characters, be they economists or economic theories. His story is one of a long debate between imperfect but improving ideas, of misguided and often tragic experiments, and of the uneasy relation between science and ideology.
This review first appeared in EA Magazine.