Friday, 6 December 2013

Henry Simons and laissez faire

For those not up on these things Henry C. Simons was an economist at the University of Chicago - he started teaching in the department of economics and later become the first professor of economics in the law school - and author of a pamphlet, A Positive Program for Laissez Faire: Some Proposals for a Liberal Economic Policy. This work was discussed by Ronald Coase when he gave the 1992 Henry C. Simons Memorial Lecture at the University of Chicago Law School.

Coase notes that the pamphlet was more an essay in political philosophy than economics and
[...] when it did touch on economics, or at any rate on those parts of economics in which I was interested, his views were such as to provoke serious reservations. He thought that the regulation of railroads and public utilities generally had been a dismal failure. And what was his solution for this problem? He argued that "the state should face the necessity of actually taking over, owning, and managing directly, both the railroads and the utilities, and all other industries in which it is impossible to maintain effectively competitive conditions." Carrying out Simons's proposals would have involved the nationalization of a large part of American industry, perhaps the greater part. It is a strange route to laissez-faire and brings to mind the proposals of Oskar Lange and Abba Lerner for market socialism.
Strange indeed. But what of industries other than railways and utilities?
For other industries, those not candidates for nationalization, Simons said that "there still remains a real alternative to socialization, namely, the establishment and preservation of competition as the regulative agency." But how was this to be accomplished? He thought that the antitrust laws should be used to bring about a drastic restructuring of American industry. "The Federal Trade Commission must become perhaps the most powerful of our governmental agencies." I can give the flavor of Simons's approach by describing some of his proposals regarding the corporation:
There must be an outright dismantling of our gigantic corporations. . . . Few of our gigantic corporations can be defended on the ground that their present size is necessary to reasonably full exploitation of production economies: their existence is to be explained in terms of opportunities for promoter profits, personal ambitions of industrial and financial "Napoleons", and advantages of monopoly power. We should look forward to a situation in which the size of ownership units in every industry is limited to the minimum size of operating plant requisite to efficient, but highly specialized production—and even more narrowly limited, if ever necessary to the maintenance of freedom of enterprise.
What Simons had in mind is made clearer in a footnote: "It will be necessary to revise notions commonly accepted (especially by courts) as to the maximum size of firm compatible with effective competition. The general rule and ultimate objective should be that of fixing in each industry a maximum size of firm such that the results of perfect competition would be approximated even if all firms attained the maximum size. One may suggest, tentatively, that in major industries no ownership unit should produce or control more than 5 percent of the total output."
It is interesting to see that the attempt to limit the size of firms in this way is driven by desire to apply the idea of  "perfect competition" to the real world. Competition is seen in terms of an 'end state' rather than a process, as it is for the Austrian school, and so to achieve a 'competitive' outcome the real world must be forced to meet the requirements of that end state. This without considering what the actual results of such an policy would be.

If this was his approach to the structure of industries, what were his views on other areas of industrial economics such as advertising,
"It is a commonplace that our vaunted efficiency in production is dissipated extravagantly in the wastes of merchandising. ... If present tendencies continue, we may soon reach a situation where most of our resources are utilized in persuading people to buy one thing rather than another, and only a minor fraction actually employed in creating things to be bought."
Coase continues by noting,
In making such statements and generally in dealing with industrial organization, Simons provides no empirical backing for his contentions, makes no serious investigation of what the effects of his proposals would be on the efficiency with which the economic system would operate, nor does he consider whether the Federal Trade Commission would be likely to do what he wanted or whether, even if it wanted to do so, it would be possible for it to acquire the information necessary to implement his proposals.
If this is a positive program for laissez faire, I hate to think what a negative one would be like!

I guess economics thinking at the University of Chicago has changed over the years. Coase notes,
Simons's approach is the very antithesis of that which was to become dominant as a result of the emergence of that new subject, law and economics. Stigler's description of Simons is eminently just: Simons was a Utopian.
While Simons's arguments may be rejected by economists today its interesting to ask how many Utopians there are outside of economics still.

Ref.: The quotes from Coase come from:
  • Coase, R.H. (1993). 'Law and Economics at Chicago', Journal of Law and Economics, 36(1, Part 2) April: 239-54.

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