The revival of laissez faire in American macroeconomic theory

During the twentieth century, the maxim of laissez faire has remained a contentious issue in the thinking of economists as they construct theories with corollary policy recommendations. Nonetheless, the attitude toward this doctrine had changed markedly. Scholars have advanced three conflicting reasons for this change -- significant theoretical developments, new social problems, and ideological influence. To discriminate among these claims, the study focuses on the evolution of laissez faire in macroeconomic theory. It reviews the writings of seminal scholars associated with the so-called Chicago School, including Frank Knight, Henry Simons, Friedrich von Hayek, Milton Friedman, James Buchanan and Robert Lucas. The study uses a method which isolates the factors that influenced these individuals in setting the direction of their research. The results of the study indicate that Knight, Simons and Hayek developed for laissez faire that relied on the isolation of particular types of imperfect knowledge to argue that economic systems organized with laissez faire best accommodated the fact of uncertainty. Knight's case derived from the theoretical innovation he made in the separation of determinate risk from indeterminate uncertainty; Simons coupled Knight's theoretical innovation with his ideological commitment to freedom as the supreme ethical value; Hayek defined his case within the context of the individualistic presumptions of the Austrian subjective method. Friedman and Buchanan accepted the ideological positions of these individuals. Buchanan accepted and Friedman rejected their theoretical work and developed the theory of public choice and the monetarist model respectively as replacements. Ultimately, the study demonstrates that both cases for laissez faire reflected ideological influence. Lucas uncritically accepted Friedman's theories as a base for the new classical model. The recent revival of laissez faire is attributed tangentially to the social problem of inflation which opened the way for more serious consideration of alternative theories of inflation. Ultimately the bulk of macro economists replaced the Keynesian model with the new classical model in response to the theoretical developments. Yet since Lucas uncritically accepted the ideologically-tainted tools of Friedman it cannot be assumed that ideological influence is absent from the new classical model.