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Creative Crisis in Democracy and Economy pp 101–126Cite as

Revival of the Ideas of Classical Democracy

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Abstract

In this chapter we pursue two objectives. First, we show how the thinkers of new classical democracy confronted the ideas and policy recommendations of so-called Keynesians, and second, we highlight the latters’ application in the USA and Great Britain in the early 1980s and assess the results. From our appraisal it turns out that the size of the state did not shrink and that the battle was only half won because, while the ideas of free market economy triumphed, the part of the battle which involved the unwinding of the state was not achieved, at least not significantly. However, the expansion of the state stopped and the experiences gained by politicians and citizens may prove very useful in the current phase in which democracies have entered into a deep crisis of values, institutions and priorities.

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Notes

  1. 1.

    It is worth noting that a few years earlier Hayek (1960, 330–332) predicted these developments with great accuracy. The choices of voters in a state with large public spending on welfare, health, education, etc., he noted, is the main cause of strong inflationary pressures (Hayek 1960, 327–329). Thus, as people learn to plan on the basis of a higher level of expected inflation, he anticipated that the course of inflation would worsen.

  2. 2.

    In essence, this finding reinforced the validity of the related argument made by Friedman (1948) three decades earlier.

  3. 3.

    How can the theory of chaos be used in the field of economics is explained in considerable detail by Parker and Stacey (1994).

  4. 4.

    Drawing on the Swedish case, Tullock (1988) noted that the anticipation of Hayek (1944) and Friedman (1962) that the regimes in Europe would become totalitarian in the twentieth century did not materialise. This is correct. But they had made their prediction in the form of a warning. That is, what would happen if democracies did not change course and the tendency to serfdom, which was evident when they wrote, continued. However, after 1980 democracies appeared to awaken.

  5. 5.

    This is because (a) economic freedom works positively only if people have decided to conform to certain principles voluntarily (Hayek 1960, 35, 62–3) and (b) only the individual can manage his well-being, since every other manager would lead to despotism and lack of freedom (Hayek 1960, 262).

  6. 6.

    The corresponding analyses are in Hayek (1960, 2, 20–21, 67, 81, 133, 140, 164–5).

  7. 7.

    That is, individual freedom has a privilege, i.e. free will, and a burden, i.e. responsibility (Hayek 1960, 77).

  8. 8.

    This would include religious freedom as well (Hayek 1960, 155).

  9. 9.

    In other words, private property should not be in the discretion of the state (Hayek 1960, 213).

  10. 10.

    For these principles, see Friedman (1962, 27, 34) and Friedman and Friedman (1980, 49–53).

  11. 11.

    According to Franco (1990), during the same period democratic and liberal political thought was given a further push by Oakeshott, who, in a number of publications, considered the formation of society on the basis of the principle of self-determination.

  12. 12.

    Laffer (2004) demonstrated analytically and empirically the positive effect of tax cuts on GDP growth and unemployment not only for the period of Reagan and the USA but also for other countries.

  13. 13.

    However, as explained by Moffitt (2003), the proposal of the negative income tax was tested at the state level to reduce poverty and had several promising results.

  14. 14.

    Empirical studies from many countries show that a monetary policy which maintains the value of money stable in the long run is highly conducive to economic growth. For a survey of this literature, see Masson (2008).

  15. 15.

    Ferguson (2008b, 267–9) argues that the financial crisis of 2008 in the USA started from the bursting of the “bubble” in the housing market. In his view, the bubble was created by granting loans to poor people to purchase houses they could not afford in the framework of the “Dream Downpayment Act” that was signed into law in 2003 by President George W. Bush.

  16. 16.

    The use of vouchers was first proposed by Friedman (1962). He distinguishes between education that improves the critical capabilities of individuals and professional training, i.e. using people as a means to acquiring expert knowledge and skills for increasing one’s income. The former type, which can be identified with the primary and secondary education, is viewed as services having significant positive externalities for society whereas the latter type, which can be identified with university and vocational education, is considered as services from two purely private goods. Regarding the former, he proposed a mechanism that could increase the efficiency in their provision and reduce irrational spending on the part of the state. Specifically, he proposed (Friedman 1962, 89–97) to provide the guardian of each child with a coupon of some value, which the guardian might spend to buy education services for the child from any school of his choice. In this way, the market would actually determine the efficiency in the provision of education, since schools would be forced to increase competition in order to attract more students (income) so as to cover the additional costs (salaries of teachers, etc.). By implication, competition among schools, public and private, and among teachers, would increase, putting an end to pay schemes that reduce the efforts of teachers and prevent their remuneration according to their individual abilities. Regarding the latter types of education, which increase the future income of graduates, his suggestion was not to be funded by the state (Friedman 1962, 98–104). For the support of students with low family income, he recommended the provision by the state of vouchers or low interest loans commensurate with their abilities to pay and learn, with which they could “buy” educational services from any university or higher education institution admitted them. In this way, he believed, the system of free market economy would guarantee the best equal opportunities to individuals, since the equality of incomes is both utopian and harmful, because it reduces the incentives of individuals to increase their productive efforts (Friedman and Friedman, 1980, 164–165, 166–167, 176–178).

  17. 17.

    The harmful administrative interventions can be easily identified by looking at the collection of papers in the edited volume by Boaz (2002).

  18. 18.

    From the beginning of 1970, there appeared two structural changes in advanced economies. These were the increasing number of small and medium size enterprises and the increased supply of services from single owner companies. According to Pontusson (1995), these changes contributed significantly to the weakening of social democracy.

  19. 19.

    The book by Temin (1987) traces the history from the first attempt to break the Bell System in 1970 to the final decision in 1984, which determined to a large extent the present structure of the telephone industry in the USA.

  20. 20.

    For a summary and an insightful assessment of Reagan’s economic policies, see Niskanen (1988).

  21. 21.

    Famous in this regard is the battle Reagan gave and won at the beginning of his presidency against the union of air traffic controllers. Since then the power of labour unions in the USA has been in decline.

  22. 22.

    Relevant data to assess the extent to which these expectations were realised can be found in Sinn (1985), McGrattan and Prescott (2005).

  23. 23.

    For further comments, see Friedman (1992).

  24. 24.

    According to Collette and Laybourn (2003), from the period of Thatcher on individual rights, equality in front of the law, and prevention of racial and other discriminations, started to show signs of improvement in the United Kingdom.

  25. 25.

    According to Layard and Nickell (1989) and Bean and Symons (1989), Thatcher’s policies led also to a rise in the average rate of unemployment.

  26. 26.

    According to Griffin and Karayiannis (2002), the danger for society from large joint-stock companies becoming autonomous, and hence uncontrollable, had been noted already in the early twentieth century by the American researcher Veblen. Subsequently it was analysed much more thoroughly by Cyert and March (1963) and Williamson (1964). Since then, the literature on the subject has increased as by avalanche.

  27. 27.

    Using rich sets of data from many countries, Reinhart and Rogoff (2009) documented recently that all major financial crises, from the nineteenth century to our days, have been the product of bad economic policies.

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Authors and Affiliations

  1. Athens University of Economics and Business, Athens, Greece

    George C. Bitros (Professor of Political Economy, Emeritus)

  2. University of Piraeus, Piraeus, Greece

    Anastasios D. Karayiannis (Late Professor of Economics)

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  1. George C. Bitros
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  2. Anastasios D. Karayiannis
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Bitros, G.C., Karayiannis, A.D. (2013). Revival of the Ideas of Classical Democracy. In: Creative Crisis in Democracy and Economy. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-33421-4_5

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