in defense of henry simons’ standing as a classical liberal

8/12/2019 IN DEFENSE OF HENRY SIMONs STANDING AS A CLASSICAL LIBERAL

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IN DEFENSE OF HENRY SIMONs STANDING AS

A CLASSICAL LIBERAL

J. BradfordDe Long

Introduction

At a 1981 Los Angeles symposium, subsequently published in theJournal ofLaw and Economics as The Fire ofTruth: A Remem-

brance ofLawand Economics atChicago, 19311970 (Kitch 1983),Ronald Coasechallenged the standing ofearly Chicago schoolmem-

ber Henry Simons as a classical liberal:

I would like to raise a question about Henry Simons.... [His]Positive ProgramforLaissez Faire [1934]. . . strikes me as a highlyinterventionistpamphlet.. . . [I]n antitrust,[Simons] wantedto...restructure American industry. . . , II]nregulation. . . he proposedto reform things by nationalization.... I would be interested ifsomeone could explain.. . 1

Simons former Chicago pupils, his successors as upholders of

classicalliberalismineconomics, did not rise tohis defense. Instead,they responded as follows: First, they acknowledged that Simonswas not a pure liberal, butatbest a mixed breed. You canpaint him

with differentcolors. . . , said Harold Demsetz. Its quite a mixed

picture, said George Stigler.

Second, they admitted that Simons wasan interventionist, that

he did not believe that, in general, economic activity should beorganized through free markets. [H]e was the man who said that

CatoJournal,Vol.9,No.3 (Winter 1990). Copyright CatoInstitute.All rightsreserved.The author is Assistant Professor ofEconomics at Harvard Universityand a Faculty

Research Fellow at the National Bureau of Economic Research, He wishes to thank

Morton Horwitz, David Levine, Stephen Marglin, Mancur Olson, MelvinReder, George

Stigler, RobertWaldmann, and especially Harvey Leibenstein for helpful commentsonan earlier draft ofthis paper.

Kitch (1983), pp. 17879. Subsequentquotes from this symposium arefrom the same

pages. The issues discussedhere arerelated tothe view ofthedecline in thepopuliststrain ofChicago economics presented by Melvin Reder(1982)in hisJournalofEconomic

Literature article on theChicago school.

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theFederalTrade Commission should bethe mostimportantagencyin government, a phrase that surely should be on no ones tomb-

stone,joked Stigler; EverythingRonald [Coase] says isright. And

Milton Friedmanjoined in: Ivegone backand reread the PositiveProgramand beenastounded. . . . TothinkthatIthought atthe time

that itwas strongly pro-free market in orientation!

Third,they argued that Simons should be read in historicalcontext.

Though he was nota consistent liberal, he was much closerto beingonethan the others then at Chicago. [R]elative tothe hectic, excited

days ofthethirtieshe wasleaning [toward classical liberalism],saidStigler. By comparisonwithalmosteverybodyelse hewasvery freemarket oriented, said Friedman; Remember. . .in 1934.. .1would

saythatclose toa majorityofthe social scientists and students. . . at

Chicago were either members ofthe Communist Party or verycloseto it. . . Relative tothat. . .atmosphere, the [Positive Program]

was widely interpreted as being, ifyou want, reactionary.AaronDirector alone spoke indefense ofSimonscredentials as a

classical liberal,but he defended Simonsby trying to separate Simonsown views from those Simons expressed in thePositive Programfor

LaissezFaire:One of[SimonsJ interests inthese interventionist pro-grams was to make . . . private . . . production palatable to hiscolleagues.

The consensus assessment reached is clear. Henry Simons hadsomelibertarian intuitions, but he also had many interventionist

failings. His Positive Program is a piece in which libertarian andinterventionist impulses uneasily coexist. Simons reputation as aclassical liberalis, therefore,basednoton atrueimage ofhis beliefs

butsimply on thefact that he wastheclosest thing to aclassical liberalpresentin theinterventionist intellectual climate ofthe Depression.

Thisassessment is far fromthe oneprevailing in1947, whenDirec-tor wrote thepreface toSimonsEconomic Policyfora Free Society

2

Then Simons wasat the center ofthe nascent Chicago tradition:

ProfessorSimons occupied a uniqueposition inAmericaneconom-ics.Through his writingsand more especiallythrough his teachingat the University ofChicago,he was slowlyestablishing himselfasthe head ofa school. Justas Lord Keynes provided arespectablefoundation for the adherents ofcollectivism, so Simons wasprovid-

ing a respectable foundation for the older faith offreedom andequality [Director 1948, p. v].

2Director (1948) in Sirnons (1948). Simonsmost famous articles inthis collection include

his Political Credo, Positive Programfor LaissezFaire, and Rules versusAuthorities

in Monetary Policy.

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The preface leaves no clue that Simons writingswere corruptedby

interventionist prejudices:

With[thePositive Program] Simonsfound his work, which thereaf-

terconsisted ofanevermore powerful defense ofthe direct relation-ship betweenthe preciousmeasureofpoliticalandeconomic free-dom and the decentralization ofpower inherentin a free-marketsystem and an elaborationof theprogramrequisiteforsurvivalandproper functioning ofsuch a system [Director1948, p. vi].

This shiftin Simons pupils assessment ofhis workbetween 1947and today raises two basic questions. First, which assessment is

the correct one? Second, whyhas Chicagos assessment ofSimonsunderlying economic philosophy changed?

I claim that the early assessment is the more correct one andthat Simons wasindeed a pure, consistent, and thoughtful classicalliberal. The policy prescriptions Coase identifies as intervention-ist are, in fact, derived fromsound liberal principles.And theydo

not indicate any lackoffaith inmarkets or any fallingaway fromapro-free-market orientation.

From Simonsperspective, the proper application offree-marketprinciples required a proper assessment ofthe necessary role the

government must play in laying the foundations ofa free-marketeconomy. No free-market orderis possible without theestablishmentofproperty rights, ofsystems for dispute adjudication, and of rulesfor contract enforcement. Some instrumentality outside the market

itselfwhich we call the statemustlay the foundations ofa free-marketorder.Simonsbelievedthat economists should concernthem-selveswith whatthe rules oftheeconomicgame should be and thatthechoiceofappropriate ruleswasa complex and subtle matter.Thisstrandofanalysis has witheredsince his time.StiglerandFriedman

today do not evenrecognize these concerns as apartofthe Chicagotradition when they see it todayin Simonswork.

This paper tries toreconstruct the logic ofSimons Positive Pro-gramand argues that itisas Simons believedit tobesquarely inthecenter ofthe classicalliberal tradition.

3It then speculates on whythenew Chicagoschool regardsSimonsas more of an interventionist

thana classicalliberalon many parts ofhis original Positive Program

for Laissez Faire. My own viewis that Simons does belong to theliberal traditionand should be confrontedwithinthattraditionnot

dismissed as aliento it.

~Iplace to one side what is probably the mostsignificant difference between Simons

economic philosophy andthe economic philosophy ofChicagotoday. Simons was very

much attachedto theuse ofthe tax system to level the distribution ofincome.

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The answergiven toCoaseshould have beenthat Simons wasas

committedto classical liberalism as hispupils are today,butthat hesawfreedom, authority, intervention, and marketin ways

somewhat different from his successor; Simonsplaceselements fromreal economies into conceptual boxes slightly differently. But the

actualanswer given wasthatSimons wasnot oriented infavor offree

markets. Thisclassification ofSimons as athemanintervention-istrather than as anusafree-marketeerreflects whatI see as

a weaknessin the Chicago tradition. Economistsshould be grappling

withthe issues ofthe appropriate constitution foreconomic lifethatconcerned Simons, not ignoringthem.

The Economic Philosophy ofSimons

Positive ProgramIn the opening ofthePositive ProgramforLaissez Faire, Simons

sounds two notes. The first note is that expandingthe domain ofthe

market is essential for the preservation ofall kinds of liberty:

[N]one of the preciousfreedomswhich our generationhas inher-ited can be extended, oreven maintained, apart from an essential

freedom ofenterpriseapart from a genuine division oflabor

between competitive andpolitical controls. The existence (andpreservation) of a competitive situation in private industry makes

possible aminimizing of the responsibilities of thesovereignstate.It frees the state from the obligation ofadjudicating endless, bitter

disputes among persons as participants in different industries andamong owners ofdifferent kinds ofproductive services. In a word,

it makes possible a political policy of laissez faire. [Simons 1948,

pp. 4142.].~

Most tobe feared, asSimons saw the worldin 1934, are theinterven-

tionist policies of the left, technocratic wing of the Rooseveltcoalition:

Ifwe dislike extreme inequality ofpower, it is appropriate toview

withespecial misgivingsthe extensionofpolitical(and monopoly)control over relative prices and incomes. Either socialization or

the mongrel system ofnational planning implies and requiresextreme concentration ofpolitical power [Simons 1948, p. 521,

The second note is that the United States in 1934 does indeed face

a crisis requiring governmentaction:

The real enemies ofliberty inthis countryare the naiveadvocates

ofmanaged economy or nationalplanning; but with them we agree

1References toPositive Program (1934) areto the 1948 reprint in SimonsEconomic Policyfora Free Society.

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thatthere is now imperativeneed for asound, positiveprogramofeconomic legislation [Simons1948,p. 41].

Butgovernment action should expand, not contract,the sphere con-

trolled by competitivemarkets. In Simons view,the United Statesin 1934 had been ruined by banking and monopoly, and the

excesses of the New Deal were simply extensions of the policy

mistakes ofCoolidgeand Hoover:

[O]ne must condemn the Democrats mainly for their wholesale

extension ofthe worst policiesofthe past.The N.R.A,is merelyMr.Hoovers trust policy and wage policy writ large. The agricultural

measures and many other planning proposals are the logical coun-

terpart and the natural extensions of Republican protectionism

[Simons 1948, p. 75].

Simons thus rejects Republican, as well as Democratic, policies on

thegrounds that they have shrunk the scope of competitive markets.

He calls instead for policies that will support the expansion ofthe

competitive sphere.

How does Simons reconcile hisbeliefthat the market sphere oughttobe expanded withhis beliefthat apositive programofgovernment

action is needed? By arguing that the maintenance of competitivemarketsrequiresmorethana withdrawalofgovernmentfrom thebusi-

ness ofregulating prices and quantities. The growth ofexploitation,authority,andmonopoly in all spheres mustbe checked:

[T]he great enemy ofdemocracy is monopoly, in all its formscorporations, trade associations ... trade-unionsor, in general,organization and concentration ofpowerin functional classes[Simons1948,p. 43]~5

Monopoliesby definition engage in exploitationthe exchange ofgoods and services at other than competitive free-market prices.

Monopoliescreate situations of personal domination and authority.Inthese situations ones course ofaction is determinednot by onesassessment ofthe objective constraints and incentives imposedthrough competitive equilibriummarketprices bynatural resources

and existing technologies, but by anothers deliberate manipulationof incentives to induce obedience. For Simons the good societyrequires freedom fromcoercion,and coercion cancomefrom either

government decree,union persuasion, or private monopoly.

30fall organizations that threatened to establish private monopoly,Simons hated andfeared labor unions the most (see Simons 1948, p. 60). Nevertheless, his assessment of

unions does containsome hints that unions could play a positive role analogous to thatpresented in Freeman and MedoWs (1984) discussion ofthe voiceface ofunionism.

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not to mention the many social welfare activities [Simons1948,

p.42].

Simons argues that agovernment committed tolaissezfaire should

lay down the rules of the economic game so as to encourage thedevelopment ofacompetitive instead ofamonopolisticmarketecon-omy. Simons then moves into specifics; the restofthe Positive Pro-gram consists of arguments about what laws and policies are most

likely to encourage competitive outcomes.

The Policy Recommendations ofSimonsPositive Program

This assessment ofSimonsthat he did indeed basehis positiononclassicalliberal principlesis identical withhis own self-assess-

ment. Consider his Political Credo:

I hope that [mycomments] are fragmentsofoneintelligiblegeneralposition.... Theunderlying position may be characterized asseverelylibertarian or, in the English-Continental sense, liberal.Theintellectual tradition is intendedto be thatofAdamSmith...

Marshall ... and Knight, and of Locke, Hume, Bentham .. . andHayek. The distinctive feature of this tradition is emphasis uponliberty as both a requisite and means ofprogress [Simons 1948,p. 1].

Simons saw the central plankofthis approach as adistrust ofall large

concentrations ofpower:Acardinal tenet oflibertarians is that no onemay be trusted withmuch powerno leader, no faction, no party,no class, no major-

ity, no government, no church, no corporation, notrade association,

no labor union, no grange, no professional association, no univer-sity, no largeorganization of any kind [Simons 1948, p. 23].

This fearofpower generates a love ofmarkets.Formarkets replace

situations ofauthority, situations where people are clearlyunderthecommand ofand subjectto thepersonalwillofothers, withsituationsofassociation where people are constrained only by the objective

and impersonal workings of competitive equilibrium marketpricesthat reflect social scarcities imposed on society by nature and thelimits of technology. A free society must, Simons thought, beorganized. . .around voluntary,freeexchanges ofgoods andservices

(Simons 1948, p. 5).

Yet Simons interprets classical liberalism as requiring that greatcarebetaken to preventthe reemergence ofauthorityandexploi-tationeither in the form ofan intrusive stateor ofprivatemonopoly.

The replacement of command by market is not spontaneous. The

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initial allocation ofendowments, definition of property rights, and

establishment ofinstitutions ofexchange must be conduciveto com-petitive equilibriumor else the marketsystem will failto realize its

promise:Libertarians would directly regulate or governmentalize only asmall group ofintractable natural monopolies, leaving them

largely to local bodies, and then seek, by innumerable policydevices, partly direct but mainly indirect, to render competition

more andmore effective everywhere else [Simons 1948, p. 30].

The conflict between Simons own self-assessment and Coases as-

sessmentofSimons isgeneratedby Coases beliefthat Simonspol-icy devices . . . to rendercompetitionmore . . . effective are intru-sivestateinterventions in the marketplace. Coase thuslumpsSimons

with those whom Simons feared most, those whostrove toregulatethe heart ofthe contractrelative pricesbecause they did nottrustdecentralized competitive markets.

But takea closer lookatthose ofSimonspolicy recommendations

that Coase calls interventionist: Firstcomes Simons assessment

ofutilityregulation. The heart ofhis argument is that

Public regulation of privatemonopoly would seem to be, at best,an anomalousarrangement,tolerableonlyas a temporary expedient.

Analysis of the problem, and examination ofexperience to date,

would seem to indicate the wisdom ofabandoning the existing

scheme ofthings with respect to the railroads and utilities, rather

thanextending thesystemto incude otherindustriesas well. Politi-calcontrol of utilitychargesis imperative,to be sure, for competi-tion simply cannot function effectively as an agencyofcontrol.In general, however, the state should face the necessity ofactually

taking over, owning, and managing directly, both railroads andthe

utilities, and all other industries in which it is impossible to main-

tain effectively competitive conditions. For industries other than

theutilities, there still remains a real alternative to socialization,namely, the establishment and preservation ofcompetition as the

regulative agency [Simons 1948, p. 51].

Simons believed that government regulation as ithad evolved in

the United States was a disaster, yet his response was not to deregu-lateutilities but to nationalizethem. As such, it appears that Coase

was right. Nevertheless, Simons made his nationalization argument

within the context ofhisbroader liberal perspective on the role ofgovernment.He thought that a primaryfunction ofgovernment ina

free society isto maintain competition. Since itwas commonly heldthat competition could not operate effectivelyincasesofutilitiesandnatural monopolies, Simons held that the second-best solution was

not regulatory pricing butoutright nationalization. In his view, it is

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notdesirableto allowprivatemonopolies (even ifnatural) to remainuncontrolled, and so their power must be controlled by political

democracyimperfect as that may be.

Simons fear of private monopoly power andhis proposal for theelimination ofprivate monopoly in all its forms ([19341 1948,

p. 57) must be viewed within the context ofthe times. As Herbert

Stein (1987, p. 334), in his New Palgrave essay on Simons, points

out:

Simonss concern about private monopoly had always been about

its interaction with the state. He feared that government would

support private monopolies and thenhaveto becomemore powerful

to control the warring monopolies it hadcreated. The 1934 pam-phlet was written at the time ofRoosevelts National RecoveryAdministration,whichwaspromotingthe universalcartelizationof

business under governmentaegis.But in 1945 all that was past andthepolitical influence ofbusiness seemedtoo smalltobe a danger.

Simons second heresy, his desire to breakup large corporations,

follows the sameunderlying logic. He begins by describing where

the corporate form oforganization is andis notuseful:

The corporation is a socially useful device for organizing the owner-

ship and control in operating companies of size sufficient to obtain

the real economiesof large-scale production underunifiedmanage-

ment. It shouldnot bemadeavailable, however,for financialconsoli-dation ofoperating enterprises which are (orwhich, withoutserious

loss ofefficiency,might be)essentiallyindependentas toproductionmanagement. Horizontal combination shouldbe prohibited, and verti-cal combinations (integration) should be permitted only so far as

clearly compatiblewithreal competition.Few ofour gigantic corpora-tions canbe defendedonthe groundthat their present size is neces-sary toreasonably full exploitation ofproduction economies [Simons

1948, p. 59].

Thisclaim (that large firmscapture no economies of scalein pro-duction) is subject to attack, for iflarge firms do not capture sucheconomiesofscale,why do they exist?This is a powerful objection.

Onepossibility isthatlargefirmscapture large (althoughhardto pin

down) economies of scale in distribution. Simons agrees that giantfirms do owe their existence to economies ofscalein marketinganddistribution. Buthe claims these economies of scale are notsocialeconomies.

There are grave productional diseconomies in giant enterprises;but these are compensated by largerartificial,privateeconomieswhich wise public policy may and should cut away. Notableare the

economies ofnational advertising andvast sales organizations (a

problem ofconsumer education, consumer-goods standards, and

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technical information),ofdifferential access totechnicalknowledge(patent-poolingand research),and differentialaccess tonew capitalfunds (inordinate centralization of securities markets). All thesemerely private advantagesofgreat,monopolisticsize present chal-

lenges which canbemet. Reasonable access tomarkets, to technol-ogy, and to capital funds, on the part of new and moderate-sizedfirms,would mean an end ofserious enterprise monopoly [Simons

1948, pp. 3435],

Todaymany economists might arguethatsuch information-related

economies ofscalereallyare social economiesthatadecentralized

market finds it difficultto rapidly transfer large amounts of complex

information, and that large organizations are better at avoidingresearch and developmentduplication and at conveyinginformation

about product quality through the development of national brands

and their associated reputations. A firm that expects a substantialamount of repeat business from a consumer has a large incentive totryto establish a reputation as aquality producer. But Simons would

disagree andmight arguethat thelarge firmsreputationaladvantageisdue to thegovernmentsfailureto provide qualityinspections andthus to provide the appropriate underpinnings for a competitive

market.

Henry Simons versus Oliver Williamson

Ibelievethat Simonsargument is best understoodbyconsidering

what was to become the Coase theorem. In the absence oftransac-tions costs inthe broadest possiblesense, the distribution ofprop-erty rightsrights to perform and to prohibit specific concreteactionsis relevant only forthe distribution of wealth and notforwhether the market outcome will attain the Pareto frontier. Theoutcomereached will be Pareto optimal by the definitionofa transac-

tion cost as somethingthat blocks a mutually beneficial exchange.

A naturalstep totake from this starting pointis to argue that, inaworld withtransactioncosts oneought to draw thelines thatseparatecollections ofproperty rights offfrom other rights intothose bundles

of powersand entitlements called commodities in such a wayastomake theresulting equilibrium distribution ofproductiveactivityas close as possible tothe zero-transaction costs outcome. The legalsystem ought to naturally bundle together two rights: where theexercise of one spills over to significantly affect the utility of theother, and where the transactions costs required to strike a bargainwouldbe large ifthe rights were not bundledtogether. Liability foraccidentson anyicy sidewalkshould be bundled withoccupancyofa neighboring single-family house, and notwith possibly absentee

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juridical ownership of property; the liability should especially not

fall on the contractor who laid the sidewalk.

Simons argumentcanbe understood ascentered aroundthispoint.

Where spillovers are substantial, but narrow,and transactions costsarehigh, rightsshould be bundled together into asinglecommodity.

Whenspilloversare substantialand extendtoan entire industry,the

solution is less obvious. Confronted with the choice ofeither (a)

allowing private internalization of externalities through the forma-tion ofmonopoly, or (b)pulling theexternality-generating activities

into the public sector, Simons chooses (b). He sees transfer ofthe

activity to the public sector as the only way to constrain individual

discretionand monopoly powereven ifsuch aconstraint is weak

and imperfect.

Simons, in short,can be interpreted as seeingthree possible out-comes to the drawing of the lines determining what commoditiesshould be traded onthe market and what commodities should be left

to the public sector. First, the legal order canhelp determine the

proper private-public commodity mix. It can make liabilities fall on

least-cost risk avoiders, tierights that have spillovers together in the

same commodity, and have private provision whenever feasible and

public provision elsewhere. Atomistic markets and a few forms ofcontract will together suffice for an efficient distribution of produc-

tive activity.

Second, the arrangement ofproperty rights can be in some sensewrong. Strategic behavior and transactionscostscan generateposi-tive and negativeexternalities that are not in any decisionmakersprivate calculus. The wedgesbetween private cost and social cost

create inefficiencies anda possible role for governmentprovision.

Third, the arrangement of property rights can be wrong, but can

be partially compensated by private action. Private agencies canexpandto incorporate a wide range of spillovers and externalities.Thus, real costs are incorporated intosome private decisionmakersincentive calculus. But the expansion of the organizations size

implies thateconomic agents are no longer atomisticthatthey havemarket power, and this situation creates another wedge between

private and social cost.

This third arrangement canbe seenas either a success or a failure.

On the one hand, externalities have been internalized; on the other

hand, marketpower has been created.Current fashionis totakethe

emergence oflarge-scale organizations as a signthat the market is

working, that hierarchiesare reaching their optimalsize (Williamson

1986). Simons viewwas, instead, thatthe emergence oflarge-scale

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organizations was asignthat the initial distribution of propertyrights

waswrong.

WhereWilliamson (1986) would celebratethe elimination of inter-

nal transactions costs and dismiss as unimportant the creation ofmarket power, Simons would argue thatwe need not facethe choice

between accepting externalities and accepting monopoly. Rather,

if the initial distribution of property rights had assigned liability

efficiently and those productive activities with large and widely

dispersed spillovers hadbeentransferred to the public sector,thenthe inefficiencies that large organizations are designed to workaroundwould never havearisen. WhereWilliamsonwouldcelebratehow large organizations remove potential market failures, Simonswould mourn that the inappropriate size of the public sector and

the inappropriate distribution

of property rightshavecreated thesepotential market failures inthe first place.

An example maybe helpful here. Consider the standard Pigovianrailroad that sporadically sets fire to the crops alongside its tracks.

Let therebeone railroad line,whichconnectsthe agricultureregion

tothe city it supplies,and 100familyfarms. Each familyfarm suffersanadditional $10worthoffire damage as aresult ofthe introductionoffaster trains that reduce the railroads costs by $600. Whatdo thethreepossible outcomes look like?

First, the rightto farmthe land can bebundled as partofa singletraded commodity withthe righttocollectdamages caused by fires

set by the passinglocomotives. In this case theunderlying legal orderhas gotten the propertyrights correct: The outcomegeneratedbythe market is efficientifthelegal system workscheaply,because the

costs savedby runningfaster locomotivesdo notbalancethe liability

thatthe railroad bear forfiresgeneratedby those faster locomotives.Second, the corporate charter ofthe railroad company can have

attached to itan immunity against damages arising from the normal

operationofthe railroad.In this case it is likelythatthe railroad willrun fastertrains and that the fields will burn, because assembling acoalition offarmers who will paymore than $600 to the railroad to

purchase theright to collectfire indemnificationwill be difficult.The problem isthat farmerswho do notjointhe coalition will, never-theless, gaintheir shareofthebenefits ofthe coalitionsaction. Thiscaseexhibits aclassicPigovian externality: Thesocialcosts offastertrainsthe $1,000 value offarm production forgoneexceed the

private costs tothe railroad.Third, the railroad can threaten to run faster trains, buy up the

farmland ata discount, and then operate as a railroad/agribusinessconglomerate that will internalize thefire externality. Thisapproach

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ficationofthe more staple goods on the basis ofBureau ofStandards

specifications, so thatconsumers may know (and insiston knowing)

whichbrands of goodsmeet requirements for government purchase

[Simons 1948, p. 73].

Simons (1948, p. 57) alsocalls for alimitation uponthe squandering

ofour resources in advertising and selling activities. Itis notclearwhat Simons is aiming at here. He himselfagrees that his positionmust beleft somewhatimprecise, but argues that the possibilityofprofitably utilizing resources tomanipulate demand is, perhaps,the greatest source ofdiseconomy under the existing system(Simons1948, p. 71).Possiblyhe means that somewidespreadadver-

tising expenditures are intended to greatly degrade the quality ofinformation that consumers obtain. Possibly he rejects consumer

sovereignty on thegroundsthat advertising pushes peoplesmarketchoices awayfrom their true interests, Simons alsopresses forthecompulsory licensing oftechnology. Andhe argues thatthepeculiar

centralizationofAmerican financein New Yorkhascreated asociallywasteful large-firmadvantage in obtainingaccesstocapitalmarkets.

ConclusionIn retrospect, given the developments in industrial organization

and public choice, Simons now appears to have been wrong in be-lieving that (1)government ownership ofutilities may bebetterthan

government regulation,and (2)largecorporations do notreflectgenuineeconomics and should bebroken up. This fact,however,is nota suf-ficient basis forconcluding that he was nota consistentclassical liberal

in termsofhisownunderstanding ofthe issuesofhis time. Subsequentdevelopments in theory and evidence arc nota basis for concluding

thattheperceptionsof Simons (or Smith) were not consistentor liberal.

Simonsclearly opposed thetype ofdetailedintervention inthe econ-

omy initiated by Hoover and Roosevelt. He believed, maybe incor-rectly, that somerestructuringofproperty rightswas necessarytoavoid

this type ofintervention, butthis does not seema sufficientbasis forlabeling him as an interventionist, as that term was then or is now

interpreted.We should not retroactively condemn Simons (amongothers) as a

hereticfromthe true doctrineofclassical liberalismbecause later evi-dence suggests that he was empirically wrong. Classical liberalism is

a way ofthinking about the government andthe economy,notaperfect

guideto understandingall political and economicphenomena. By this

standard,Simonswas aconsistent classical liberalofhistimes,evenif,inretrospect, hemay now appearto have been wrongin hisjudgment

on specific issues.

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which is that governmentmust beactive in layingthe foundations ofa marketeconomy and that the dangers ofgovernment arcbest provided

against by restraining government with a higher constitutionallaw that

commits it to maintaining competition and prohibits it fromcommittingrandomacts ofintervention, Or such a considerationcould leadto aposition like Stiglers. Both positions come out ofthe classical liberal

tradition.Simonsbeliefthat the proper constitution ofeconomic policycanbe an effective check to government failure does not seemgrounds for revokinghis classicalliberalcredentials.

The secondpotential explanationis that research during thepast40

years has shownthat economiesofscale (and scope) in distribution andresearch aresocial economies. Largefirmsare thusoptimal in thesenseofCoase (1937), notinefficient in the sense ofSimons.

The third possible explanationis thatthe underlying conceptionofliberty tobe guarded has changed.Old-styleChicagoSimons, Knight,

and Hayektendedto feareveryexerciseofauthority, everysituation

where onepersontoldanother whattodo. Chicago todayworries lessaboutthe exerciseofauthority within privateorganizations. Aslong astheorganizationitselfis subject, atsome pointandsome level, tothe

disciplineofthe market, theyare satisfied.

Noneofthese possible explanations seems tojustifytheanswer thatCoase received inLos Angeles.The conflict between Chicago then and

Chicagotoday isabout what the necessary foundationsfora competitive

free-market economy are, and not about the desirability ofsuch aneconomic order.Andtheexistenceofsuch aconflict within the commu-

nity of libertarians is denied when Simons is labeled aninterventionist.

This failure to recognize that Chicagos conception ofthe necessary

public foundation ofa competitive free-market economy has shiftedis regrettable, for there is an ambiguity at the heart of economistsconceptions of the state that should be debated and that is thrown into

reliefby a comparison between Simons then and Stiglernow. State

action is to be feared: The state is easily corrupted by rent-seeking

interest groups.But the establishmentofproperty rightsandofcontract

enforcement procedures fundamental for the existence of a marketeconomy isitselfstate actionofa sort.There aredifferent waysin whichproperty rightscould be defined;there aremanypossiblesets ofrules

ofthe game for a market economy. The government acts when wecitizens useit tochoose one ofthesesets.If,as Sirnonsargues followinga long tradition that includes FrankKnight, Joseph Schumpetcr, and

AdamSmith, competitive markets are fragile in thesense that they oftencontainthe seeds oftheircollapse into monopoly, then the particular

foundations chosen for the market are ofprime importance. One

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would hope to find that set ofrules ofthe game most hostile tothedevelopment ofprivate monopoly andtothecaptureofthe government

by interests that pushfor publiclysupported monopoly. Fearofgovern-

mentactionthatinterferes withrelative pricesthus leadsan econo-mist toembracegovernment action that provides proper foundations

forthe marketplace. This dilemma may be important, but it remains

unrecognizedifclassical liberals who holdpositions like Simons aremislabeledas interventionists.

Perhaps Simons work is best understood as Stein (1987, p. 334)

described it:

Theresponse of a free societyliberalor, ashe preferred, libertar-ianto the rise oftotalitarianism in Europe, totheworldwidedepres-sionand to the attempt in the democracies, including the United

States,to cope withthe depression inwaysthat Simons regarded asthreats tofreedom.

The failureto acknowledge that Simons isbyhis ownadmission, at

leasta consistentclassical liberalhindersour understandingofwhat

the real answer toCoasesquestionshouldhave been,and hinders our

understanding ofthe shiftinthe application ofliberal principles that

has taken place between Simons day and ourown.

References

Coase, Ronald H.The NatureoftheFirm. Economica,n.s. 4(1937): 386405.

Coase, Ronald H. The Problem o fSocialCostJournal ofLaw and Economics

3 (October 1960): 144.

Director, Aaron, Introduction, In HensyC. Simons, EconomicPolicyfor aFree Society, pp. vvu. Chicago: University ofChicago Press, 1948.

Freeman, Richard, and Medoff, James. WhatDoUnions Do? New York: Basic

Books, 1984.

Kitch, EdmundW,, ed. The Fire o fTruth: A Remembrance ofLaw and Eco-nomics at Chicago, 19321970. Journal ofLaw and Economics 26 (April

1983): 163234.

Knight, FrankH. TheEthicsofCompetition andOtherEssays.London: Allenand Unwin, 1935.

Reder, MelvinW. Chicago Economics: Permanence andChange.JournalofEconomic Literature20 (March 1982): 138.

Simons,HenryC.A Positive ProgramforLaissez Faire: SomeProposalsforaLiberal EconomicPolicy. Public Policy Pamphlet, no. 15. Edited by Harry

D. Gideonse. Chicago: University ofChicago Press, 1934. Reprinted asChap-

ter 2 in EconomicPolicyfora Free Society, pp. 4077.

Simons, Henry C. EconomicPolicyfora Free Society. Chicago: Universityo f

Chicago Press, 1948.

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Stein, Herbert. Simons, Henry Christopher (18991946). InThe New Pal-grave, Vol. 4, pp. 33335. Edited by J.Eatwell, M. Milgate,and P. Newman.New York: The Stockton Press, 1987.

Williamson, Oliver. TheEconomicInstitutions ofCapitalism.New York: The

Free Press, 1986.

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in defense of henry simons’ standing as a classical liberal

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