On the Missing Macroeconomics of Social Liberalism: From Physiocrats to Pre-war Chicagoans and Freiburg

Put in terms of the two fundamental theorems of welfare economics, social or welfare liberalism is being defined as the tenet criticizing classical liberalism for neglecting the second theorem, having nothing to say about the “liberalism” of macroeconomic policymaking. This note claims that the macroeconomic dimension of social liberalism is the one advanced by pre-war, Old Chicago, which, based on the quantity theory of money, was maintaining (i) that it abides by laissez-faire but against classical liberalism’s laissez faire of “let the cycle run its course”, and given (ii) that Old Chicago was seeing government intervention necessary for income-redistribution reasons, too. Which of the two liberalisms holds the true version of laissez faire? Going back to the Physiocrats who had coined the term, one realizes that they had done so from the welfare liberalist point of view abstracting from the macro-monetary issues raised of Jean Bodin separately. This abstraction continues until today neglecting the “fact” that what Old Chicago had really done was to integrate into social liberalism the quantity-theory-of-money macro-monetary considerations having started with Bodin. The German “experiment” with the Freiburg-School-inspired Soziale Marktwirtschaft - an experiment in social liberalism - attests to the need for “Chicago rules” if social liberalism is to stand out as a different system altogether. In sum, the only microeconomics-cum-macroeconomics consistent with the true, the socio-liberal laissez-faire is the Old Chicago economics. Examples in classical liberalism are Monetarism and Austrian economics whereas Keynesianism and Marxism abandon laissez faire altogether.