# Crosscurrents (Vol. 4 No. 1) **URL:** **Published:** March 1, 1987 --- “Entrepreneurial decisions regarding what to produce are examples of the type of “dynamic” forces overlooked in standard theory.” ## Advances in the Theory of the Firm Former Institute for Humane Studies Resident Research Fellow Donald J. Boudreaux, now teaching economics at George Mason University, successfully defended his doctoral dissertation, “_Contracting, Organization, and Monetary Instability: Studies in the Theory of the Firm_” (Auburn University, 1986) in August. Boudreaux’s dissertation is a collection of five independent essays, linked by the common theme that the price system is not “ideal” in the sense used in models of “perfectly competitive equilibrium,” but that real uncertainty requires institutional devices other than the price system, such as long-term contracts and the firm. Boudreaux reveals the general-equilibrium foundations of Coase’s theory of the firm and the resulting blindness of the theory to dynamic forces that are operative in the establishment of firms in the real world. Entrepreneurial decisions regarding what to produce are examples of the type of “dynamic” forces overlooked in standard theory. Boudreaux also attempts to model — theoretically and empirically — the effects of monetary instability on the extent of vertical integration in a firm. ♦ ## Stability of Competitive Banking Examined A recent dissertation by former IHS Claude R. Lambe Fellow George Selgin, now an economist at George Mason University, compares the relative stability of the money supply under free banking with central banking. “_The Theory of Free Banking: A Study of the Supply of Money under Competitive Note Issue_” (New York University, 1985) is the first comprehensive study of the macroeconomic implications of free banking. Written under the supervision of NYU’s Lawrence H. White, an IHS Fellow and author of _Free Banking in Scotland: 1800-1845_ (Cambridge University Press, 1985), the dissertation 1) shows how a free-banking system evolves and what institutional features it is likely to have; 2) analyzes in detail money-supply processes under free banking, especially when the demand for money is changing; 3) compares free banking with central banking as a means for promoting economic stability; 4) examines the various criticisms of free banking, and 5) suggests a practical procedure for converting the present U.S. banking system to a free-banking system. The study concludes that free banking is not only more stable, but also more efficient than central banking, and that a free-banking reform could easily be implemented. ♦ ## Marxian Theory of Proto-Industrialization Scrutinized A recent dissertation by IHS Claude R. Lambe Fellow Sheilagh Ogilvie, “_Corporatism and Regulation in Rural Industry: Woolen Weaving in Wurttemberg, 1590-1740_” (Trinity College, Cambridge University, 1985) mounts the first comprehensive criticism of a recent Marxian theory known as the theory of “proto-industrialization.” This theory claims to fill the celebrated gap in the Marxian theory of history, that is, the question of how the transition from feudalism to capitalism took place, or is still taking place in some parts of the world. The theory argues that a certain form of production in the eighteenth century — dense cottage industry for foreign markets — was the key to Europe’s subsequent industrial revolution. Ogilvie shows, through extensive archival and other research, that only in the northwest corner of Europe did dense cottage industry take a “capitalistic” form. In the rest of Europe, coercive institutions (the State, merchant cartels, producer corporations) remained in control of the economy and that no transition to capitalism took place until these institutions were rendered powerless. Ogilvie argues that economic historians must take institutions (especially the State) into account, and that if they do so they will discover that apparently irrational human behavior can be explained in terms of the operation of individual rational choice in distorted markets. Ogilvie, whose dissertation has been accepted for publication by Cambridge University Press, is currently working on a Ph.D. in economics under an IHS Claude R. Lambe Fellowship at the University of Chicago. Her work at Trinity College was also sponsored by the Claude R. Lambe Fellowship program. ♦ ## Advance in Taxpayer History David Beito successfully defended his dissertation, “_Striking Against the State: Taxpayer Revolts During the American Great Depression, 1930-1935_” (University of Wisconsin, Madison, 1986), in October. Beito, currently a postdoctoral fellow at the Institute, has made an impressive contribution to understanding the role of taxation in history. Beito focuses on the tax-revolt movements of the 1930s, which centered around the general property tax, especially as it affected owners of real estate. The resisters linked their campaigns to a non-Marxian conception of class and class conflict. In his history of the antitax movement in Chicago, Beito makes extensive use of primary sources (city directories, tax and property records, and so forth) and explodes the “speculator” stereotype of the tax-strike leaders propagated by local politicians, bureaucrats, and municipal creditors. The results of Beito’s work, some of which are briefly presented in his contribution to this issue of _Humane Studies Review_, provide an impressive demonstration of the fruitfulness of the application of classical liberal class theory to political and social history. Beito, whose research was supported by an IHS Claude R. Lambe Fellowship, is currently preparing his work for academic publication. ♦ ## Relation Between Utility and Rights Explored One of the commonplaces in intellectual history is that during the first half of the nineteenth century the “metaphysical” theories of natural law and natural rights were refuted and replaced by the “scientific” utilitarianism of Jeremy Bentham and John Austin. It is also a common view that after this critique, considerations of utility and of individual rights could not both be accommodated within a coherent moral and political theory. A recent dissertation by IHS Fellow Emilio J. Pacheco, “Utility and Rights: The Science of Morals in Britain in the First Half of the Nineteenth Century” (St. Antony’s College, Oxford University, 1986), argues that the “victory” of the utilitarians was less complete than is often assumed, and that, in response to Bentham’s critique of natural-law and natural-rights theories, several writers presented moral theories in which utilitarian considerations support strong theories of rights. Pacheco’s work examines the theories of the young Herbert Spencer, especially his _Social Statics_, placing it in the wider intellectual context of the “empirical theories of morality” developed in the first half of the nineteenth century. Pacheco develops some aspects of modern theories of natural law and natural rights, especially the relationships between rationality and morality, and between expediency and justice. Attempts to integrate utility and rights, such as that of the political economist Thomas Hodgskin, are also explored. Pacheco concludes that Bentham’s utilitarianism was not the only, nor even the prevailing, type of “science of morals” in Britain during this period, and shows how a science of human nature and a theory of social change were used to support a consequentialist theory of individual rights. Pacheco, the 1985-86 R. C. Hoiles Postdoctoral Fellow at the Institute, is now associate professor of politics at the Catholic University in Caracas, Venezuela, as well as head of the Department of Education and Information of the Banco Central de Venezuela and editor-in-chief of Venezuela’s leading economics journal. ## Two New Hayek Studies Two recent dissertations by IHS Fellows Hannes Gissurarson and Chandran Kukathas explicate and extend the classical liberal social and political theories of F. A. Hayek. Gissurarson, a former IHS Claude R. Lambe Fellow now teaching at the University of Iceland in Reykjavik, presents Hayek’s philosophy as combining the best of conservative insights with liberal ideas, offering a more sophisticated version of liberalism than the straw man often criticized by antiliberal thinkers. Gissurarson’s work, “Hayek’s Conservative Liberalism” (Pembroke College, Oxford University, 1986), explores the foundations of Hayek’s thought in the writings of Carl Menger and defines Hayek’s position in terms of five elements, the most important being coordination without coercion. Gissurarson also gives an account of Hayek’s political philosophy in terms of Hayek’s theory of spontaneous order. A version of Gissurarson’s dissertation will be published by Garland Publishing Company of New York. Chandran Kukathas, the R. C. Hoiles Postdoctoral Fellow at IHS, recently submitted and will soon defend his dissertation, “Hayek and Modern Liberalism: A Study of His Theory of Justice” (Linacre College, Oxford University, 1986). Kukathas, a contributor to this issue of _Humane Studies Review_, argues that the common charge that liberalism lacks a full account of human nature, though applicable to such thinkers as John Rawls, does not apply to Hayek. As Kukathas shows, Hayek’s political philosophy is explicitly grounded in an extensive social theory that draws on both the tradition of liberal sociology beginning in the Scottish Enlightenment and the tradition of moral theory founded by Immanuel Kant. As Hayek sees the matter, the philosophies of Kant and David Hume, far from being incompatible, are complementary. Kukathas argues, however, that Hayek’s attempt to reconcile these two thinkers within the context of an overarching and coherent liberal political theory ultimately fails because of an incompatibility between the Humean arguments in Hayek’s work and the Kantian claims he wishes to defend. ## New Book on Markets _The Market in History_, B. L. Anderson and A. J. H. Latham, eds. (Croom Helm, 1986) This is a collection of papers presented at a Liberty Fund symposium at Windsor Castle in 1984. It is the nature of these sorts of collections to be uneven at best. Nevertheless, given the impressive list of attendees, one would have hoped for more. One very useful paper, however, stands out: B. L. Anderson’s “Entrepreneurship, Market Process and the Industrial Revolution in England.” Here the author explicitly uses the concept of entrepreneurship as perhaps the key analytical tool in rendering the process of economic development understandable. He draws heavily on the work of economist Israel M. Kirzner and historian Neil McKendrick. ## Essay on Marx’s Critics _Critics of Marxism_, David Gordon (Transaction Books, 1986) In this Original Paper No. 6 written for the Social Philosophy and Policy Center, the author presents in bibliographical-essay form a very useful overview of Marx’s critics. These include the following: 1) the anarchists, such as Max Stirner and Mikhail Bakunin; 2) the economists, especially Eugen Böhm-Bawerk and Ludwig von Mises, and 3) the liberals — Karl Popper, Isaiah Berlin, H. B. Acton, and John Plamenetz. The splendid bibliography is particularly helpful to those who wish to pursue the subject further. ## Conference Examines Formalism and Freedom A conference sponsored by the Liberty Fund in New York November 8-10 explored the complex issue of intellectual formalism and freedom. Participants from the fields of sociology, law, economics, history, and philosophy discussed the question of the relationship between highly formalistic models of human behavior and human freedom, with “freedom” denoting both “man’s ability to transcend his environment, that is, his ability to be creative, and . . . the absence of political or legal constraint.” Directed by New York University economics professor Mario Rizzo, the seminar addressed such related issues as the French philosopher Henri Bergson’s idea of “creative evolution” (contrasted with Newtonian-style mechanical models), the limits to the ability of explicit formal models to capture “tacit” knowledge, creativity and the market process, and formalism and the legal order. Readers of _HSR_ can look forward to new ideas about liberty emerging from this seminar.