------------ EH.NET BOOK REVIEW -------------- 
Published by EH.NET (February 2005) 
 
David Laidler, _Macroeconomics in Retrospect: The Selected Essays of  
David Laidler_. Cheltenham, UK: Edward Elgar, 2004. xxii + 433 pp.  
$135 (hardcover), ISBN: 1-84376-384-2. 
 
Reviewed for EH.NET by John H. Wood, Department of Economics, Wake  
Forest University 
 
 
"Its own history is an integral part of macroeconomics, and I have  
not always found it helpful to distinguish sharply between my work on  
current issues and on historical topics." David Laidler's  
introductory statement is well-illustrated by the nineteen papers  
reprinted in this book. All deal with issues that were interesting,  
relevant, and controversial when they first arose and remain so  
today. This review consists of brief highlights of most of the papers  
followed by questions that some of them have raised. The numbers in  
parentheses refer to the papers as listed in the contents. Laidler's  
current affiliation is the University of Western Ontario, but his  
introduction gives an interesting account of the academic journey  
(beginning with undergraduate at the London School of Economics and  
Ph.D. at Chicago) and associations that led to these papers (a small  
sample being Bernard Corry, Earl Hamilton, Don Patinkin, Harry  
Johnson, and Richard Lipsey). 
 
Laidler argues that Adam Smith (1) and Alfred Marshall (5) were  
better monetary economists than they have been given credit for.  
Smith's recommendation for real bills as a guide to monetary policy  
was not a recipe for indeterminate inflation because money was in the  
end limited by gold. Marshall's innovative analysis of money demand  
should not be underestimated, and he was sympathetic to discretionary  
monetary policy. In the "shifting political affiliation of the  
quantity theory" (6), Laidler suggests that in Marshall's period the  
quantity theory was used by the political left and in the next  
century by critics of government action, both in the interests of  
price stability. 
 
When it comes to credit for the recovery of the quantity theory in  
the second half of the twentieth century, Laidler builds on Don  
Patinkin's point that the Chicago School of the 1930s was a figment  
of Milton Friedman's imagination (10, 11). Laidler argues that the  
so-called Chicago School's belief in the power of monetary policy  
came to Chicago by way of Ralph Hawtrey and Harvard (Allyn Young and  
Lauchlin Currie). The distinctive Chicago contribution was Henry  
Simons' advocacy of rules. Laidler "challenged two important myths:  
the American monetarist myth that Chicago had been home to a  
distinctive and _scientifically_ based approach to monetary economics  
that had protected it from Keynesian ideology; and second, the  
American Keynesian myth that Harvard had been lost in darkness until  
the arrival of good news from the other side of the Atlantic." 
 
This reviewer is inclined to allow Friedman the extenuation that he  
was caught up in the general myth-making atmosphere that originated  
with Keynesian (not Keynes) contentions that concerns for  
macroeconomic problems had originated in 1936. Laidler points out  
that the stickiness of wages and prices was well known and analyzed  
by the classics (Keynes himself knew this and downplayed them), and  
that the New Keynesian consideration of stickiness is in fact a  
continuation of an old line of research (12). 
 
Laidler is right to point out that the Radcliffe Commission had no  
interest in new ideas and that its report was influenced by the  
testimony of the government's chief economic adviser, Robert Hall,  
that inflation was unaffected by demand (14). I wish he had gone a  
little further to explain the Commission's purpose, which was to  
support the government's policy of controls against murmurings from  
the Bank of England that the way to control inflation was to control  
money by means of Bank Rate. This could also have been linked to J.R.  
Hicks' admission that monetary policy was impotent in a world  
committed to full employment, which to Hall and many others meant the  
need for controls (15). 
 
Such an interesting and controversial collection is bound to raise  
disagreements, but that will not displease Laidler because he likes a  
good argument. Mine are as follows. 
 
I think that on occasion Laidler was drawn into the majority that  
interprets nineteenth-century writings and events in terms of the  
institutions and attitudes of today even though he recognized the  
danger when he noted the failure of some of the bullion debates to  
appreciate the differences between monetary (fiat or convertible  
money) arrangements. I wish that his sympathy for Smith extended to  
Thomas Tooke. Tooke's currency rule was admittedly inadequate but it  
was buttressed by gold (4). Laidler recognizes the cost of production  
theory of the value of money in a commodity standard, but I think he  
underestimates its importance, even in the fairly short run.  
Certainly the great price movements between 1820 and 1914 were  
dominated by gold discoveries and technological advances in its  
extraction. 
 
I also think that Laidler's very modern preference for official  
controls has led him to skip over some of the arguments and their  
institutional bases of nineteenth-century classical positions. For  
example, his opinion that the legal commitment of the convertibility  
of the currency on fixed terms was inferior to government discretion  
fails to appreciate the importance of contracts to which even  
governments were presumed to be subject in that less enlightened age  
(2). His easy dismissal of the possibility of competitive money also  
fails to appreciate either the arguments of the day or later analyses  
(3). He was more interested in finding antecedents of official  
monetary discretion, particularly in Thornton. His contentions that  
the Bank of England followed Bagehot's lender-of-last recommendations  
and that the Federal Reserve rejected them in the Great Depression  
overlook the work of Fred Hirsch ("The Bagehot Problem," _The  
Manchester School_, 1977), Elmus Wicker (_The Banking Panics of the  
Great Depression_) and others. The Bank of England never admitted in  
word or deed that it should hold the non-interest-bearing reserves  
necessary to bail out irresponsible bankers whose own reserves, the  
Bank pointed out, varied inversely with its own. They fully  
appreciated the principle of time inconsistency. A major force behind  
the formation of the Federal Reserve was the desire of bankers to get  
someone else to bear the burden of their reserve. A task that the Fed  
did not fail to perform was the provision of liquidity to the New  
York money market in the Great Depression, which did not experience  
the panic interest rates of earlier crises. 
 
I have never understood how Keynesian-monetarist differences could be  
analyzed in terms of elasticities of IS-LM diagrams that have nothing  
to say about the fundamental differences between the two approaches,  
which concern expectations and the effectiveness of free markets. I  
am also surprised that Laidler does not see rational expectations as  
a supporter of monetarism (17, 18). 
 
Finally, while sharing Laidler's regret that the history of economic  
thought is not as important to current economists as it should be,  
and that courses in the area have been on the decline, the current  
relative neglect does not approach that of the general atmosphere  
following the appearance of the _General Theory_, which was thought  
by many as having rendered obsolete (even erased) previous  
macroeconomics. On the other hand, Laidler had a privileged view. The  
curtains on the window of history were not drawn as tightly at the  
LSE and Chicago as elsewhere. 
 
The subjects of all these papers continue to reward study and  
argument, and I recommend this book to anyone who is interested in  
current monetary problems, which cannot be sharply distinguished from  
those of earlier times and about which we are still arguing. 
 
 
John H. Wood is the author of "Bagehot's Lender of Last Resort,"  
_Independent Review_, (2003); and _A History of Central Banking in  
Great Britain and the United States_, forthcoming from the Cambridge  
University Press. 
 
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