Our Friend the State

by
David Gordon
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Economics in America: An Immigrant Economist Explores the Land of Inequality
by Angus Deaton
Princeton University Press, 2023; xiii + 273 pp.

Economics in America disappointed me, but I have only myself to blame. As you would expect from a Nobel laureate, Angus Deaton is very smart and erudite, but what you might not expect is that he is funny as well. The book contains much good sense, but it is quite unsympathetic to the free market. And this is what disappointed me. In his >e,>The Great Escape (Princeton, 2013), Deaton pointed out that the escape from poverty of millions of people in the last 250 years depended on accepting substantial inequality; and he is well-known as a critic of foreign-aid programs, arguing that they usually cause more harm than good. Because of these views, I expected him to be much more critical of government intervention in the American economy than has turned out to be the case. Had I paid more attention to The Depths of Despair (Princeton, 2019), written in collaboration with Anne Case, as well as to his demands to reduce inequalities in The Great Escape, my expectations would have been lower.

Deaton thinks that people in the United States, including academic economists, are much more suspicious of the government than they should be. After he moved from the University of Bristol to Princeton in 1986, he tells us, “I was appalled when one of my new colleagues (publicly) proclaimed that ‘government is theft.’ I had grown up in a country [Scotland] where I, my parents, and our friends saw the government as benevolent, a friend in times of trouble, and I found it hard to believe that a distinguished academic could be so cynical and so libertarian.”

So much for Franz Oppenheimer, Albert Jay Nock, and Murray Rothbard, who argued that the state is inherently predatory. To his credit, Deaton acknowledges “the extent to which state and federal government in the United States often work, not to protect ordinary people but to help rich predators make ordinary people poorer.” Nevertheless, he retains his faith in government; “the system is not entirely rigged.”

Deaton has no use for the Austrian theory of the business cycle either. He says that Friedrich Hayek “had battled Keynes in the 1930s and decisively lost—at least according to what we were taught in Cambridge, England. If asked around 1970, I should have replied that he was probably dead.” The Nobel Prize Hayek received in 1974 “resurrected him, intellectually if not literally,” and Deaton implies that the revival was due to political reasons rather than Hayek’s intrinsic merits as a thinker.

For Deaton, the idea that the government should not respond to bad economic conditions by spending to increase aggregate demand is bizarre: “Robert Barro of Harvard . . . wrote about what he called ‘Voodoo multipliers.’ . . . The multiplier refers to the factor by which stimulus spending will add to national income, a number that the administration’s economists believed was greater than one; after all, the postcrash unemployment of labor and capital left unused resources that could be brought into play. Barro, by contrast, argued that the multiplier is zero, because the government cannot do anything better, and will simply replace private spending that would otherwise have taken place. . . . For most economists, including me, this insanity is an embarrassment, and the fact that Barro is taken seriously—and is a professor at Harvard, rather than a fringe blogger—is a sure indication that, indeed, macroeconomics has regressed, not progressed, since 1936,” when Keynes’s General Theory was published.

So much for intellectual tolerance!

Deacon recognizes that free market economists have valid points about government failures, but, influenced by his narrow concentration on the Chicago School, he wrongly suggests that supporters of the free market are interested only in efficiency and ignore ethics: “Even if you were to worry about inequality, it would be better if you just kept quiet and lived with it, or at least that was the Chicago view. Regulation, taxation, or political action is unlikely to help. Politicians, after all, are just like everyone else, looking after their own interests. Cures for inequality through politics are often, perhaps always, worse than the disease itself. . . . For someone like me, brought up in Cambridge in the shadow of Keynes, these were unfamiliar but clearly important ideas. This is not an endorsement. . . . At its worst, Chicago economics makes money the sole measure of well-being, inequality doesn’t matter, and efficiency is the only thing that counts. The only injustice is to make the economy less efficient than it might be, and, since redistribution inevitably has losses attached—‘deadweight loss’ is the term of art—then redistribution in the name of justice is inherently unjust.”

He contrasts these crass free marketeers with his philosophically sophisticated teachers at Cambridge, who cared about equity as well as efficiency: “When I first became an economist in Cambridge fifty years ago, philosophers talked to economists, and the economics of inequality, of justice, and of well-being was talked about, taught, and taken seriously. Harvard philosopher John Rawls’s 1971 The Theory of Justice was much discussed, and Amartya Sen, Anthony Atkinson, and James Mirrlees, all then in Cambridge, thought and wrote about justice and its relationship to income inequality.” Deaton seems utterly unaware that there are libertarian thinkers who oppose egalitarian policies on principle, not only on efficiency grounds. If he has ever read Robert Nozick or Murray Rothbard, there is no evidence of it in this book. He evidently views philosophical opposition to redistribution as based on Ayn Rand’s defense of selfishness, wrongly taking Rand to be a popular novelist of no consequence rather than a philosopher whose ideas merit serious attention.

Rather than continue to catalog Deacon’s deviations from free market orthodoxy, I shall close on a positive note. Deacon presents an excellent criticism of high taxes on cigarettes. Many of his fellow leftists favor these taxes because smoking is bad for your health: the higher prices resulting from the taxes will lessen consumption, and the money the taxes raise can be used to help smokers with their medical bills. Deacon offers some strong considerations on the other side: “In all this debate, only the tobacco lobby seems interested in defending smokers, a defense that is properly discounted. Yet surely there is much to be said for the economists’ once-standard belief that people know what is good for them, that money and mortality are not the only determinants of welfare, and that smoking brings benefits to many. For people who have few other opportunities for enjoyment, a cigarette break can be a moment of pleasure in a difficult day. And there is little evidence that people are unaware of the risks. We are telling people no, stop it, though we will let you continue if you contribute to lowering our property taxes. If you live in the United States, if you are poor, poorly educated, and enjoy smoking, you must pay better-educated and more fortunate people for the privilege and be grateful to boot. Even if smokers are indeed making poor choices, paternalism is an assault on freedom that is deeply troubling.”

If Deaton had reasoned in a similar way on the whole range of issues he discusses in Economics in America, he would have written a very different and much better book.