While Friedman later became an associate of Professors Knight and Viner on the economics faculty, I have no doubt they would have resisted being categorized as members of the Chicago School in the narrow presentday meaning of the term. They both favored the “invisible hand of the market” over government intervention as the best means to sustain economic growth, but I believe they would have objected to Friedman’s cavalier dismissal of corporate social responsibility.
KNIGHT, VINER, AND LANGE
When I arrived in Chicago in the fall of 1938, I was able to persuade Professors Knight and Viner to become members of my thesis committee. Oskar Lange, a refugee scholar from Poland, also agreed to serve on the committee. I already had a general idea for a dissertation topic—Professor Hayek had suggested the idea of economic waste to me in London—but I sought the help of these distinguished economists to help me formulate a more specific proposal.
Frank Knight occupies a revered position among the world’s economists. His best-known book, Risk, Uncertainty and Profit, is unusual in its insistence that ethical considerations had to be incorporated in the process of economic analysis. His probing questions in books and lectures, testing the moral validity of economic dogma, produced many heated debates.
Knight doubted the claims of New Deal planners that an increase in the coercive powers of government automatically leads to an increase in people’s well-being and happiness. At the same time Knight criticized those who talked only of the efficiencies of capitalism without recognizing the moral issues involved and the obvious failures of the existing system to address important social problems.
Jacob Viner was best known for his theoretical work on international trade. Like Haberler at Harvard, Viner advocated unobstructed trade as a means of generating economic growth. As a teacher Viner was known for his tough and demanding manner in the classroom. Logical and incisive himself, he was intolerant of students who did not meet his standards. He was famous for throwing them out of class if they failed two or three times in a row to come up with the correct response. He’d simply say, “You’re not up to this class. Good-bye,” and that would be it. With me, however, he was always friendly and willing to be helpful when I consulted him on my thesis. Perhaps it was fortunate for me that I was simply his advisee, not in one of his regular graduate seminars.
Oskar Lange was less renowned as an economist than either Knight or Viner, but he added a different and important perspective to my thesis. Lange was a Socialist and a leading exponent of market socialism. His book The Economic Theory of Socialism purported to demonstrate that “market socialism” was not a contradiction in terms and could be much more efficient than laissez-faire capitalism. Clearly, this notion has never been demonstrated in real life, but Lange carried off his argument with elegance.
Lange was one of a large group of émigré scholars who came to the United States with the assistance of the Rockefeller Foundation during the 1930s, fleeing political and religious persecution in Europe. Chicago hired Lange because of his capability in mathematical statistics and knowledge of Keynesian economics, and he became an American citizen in 1942.
After the war Lange resumed his Polish citizenship and became ambassador to the United Nations. He later filled a number of posts in the Polish government, which by then was increasingly dominated by Communists. Lange was a kind, gentle, and eminently likable man, not a demagogue like Laski. I believe he returned to Poland more out of a sense of patriotic duty than because he was a committed Marxist. I saw Lange several times at the U.N. after the war, and it was clear he was a torn and unhappy man.
LIFE ALONG THE MIDWAY
The university contained a fascinating mixture of individuals, many with strong personalities and convictions, beginning with the head of the university. Robert Maynard Hutchins dominated the university and consistently outraged the city’s business establishment. Known as the “boy wonder,” Hutchins had resigned his position as dean of the Yale Law School to accept the presidency of Chicago at the age of twenty-nine. He quickly threw the campus into turmoil by abolishing football and restructuring the undergraduate degree program. Hutchins favored a broad-gauged liberal arts education for undergraduates focused on the “Great Books” program developed by his friend, the Thomist philosopher Mortimer Adler.
Hutchins’s reforms alienated many of the faculty, who were also put off by his arrogance and dictatorial ways. Hutchins also fought an ongoing series of battles with Chicago businessmen and politicians, of whom he was contemptuous, viewing them as limited in their vision and parochial in their interests. Mrs. Hutchins was of little help. An artist with severe psychological problems, she refused to support her husband in any way. She also raised eyebrows and started tongues wagging by sending out as a Christmas card in 1938 her drawing of their nude daughter.
Despite my family’s role in creating the university and sustaining it during its early years, Hutchins never invited me to a function at his home during the year I lived there. However, I suspect Hutchins may have encouraged his vice president, William B. Benton, one of the founding partners of the advertising firm of Benton & Bowles, to spend some time with me. Benton introduced me to a number of interesting people, including Beardsley Ruml, the enormous cigar-smoking Hungarian who had been a close advisor to my father during the years that he ran the Laura Spelman Rockefeller Memorial, the foundation that helped underwrite the development of the social sciences in many American universities. Ruml, like my father, had been a strong supporter of government reform efforts, not just by eliminating corruption and graft but by strengthening the civil service and improving the management of municipal and state governments.
Ruml put me in touch with the Public Administration Clearing House in Chicago, which had received substantial funds from the Spelman Fund (yet another family philanthropic foundation). It was through that organization that I began to understand the important role government at all levels should play and considered government service as a possible career path.
Benton also arranged for me to see Philip La Follette, the governor of Wisconsin, to discuss whether I should enter politics. La Follette’s advice was that I could never get elected to public office with my name—unless I bought a farm in the Midwest and established a new life and image. That ended my thoughts of a political career. I could not imagine being so hypocritical as to pretend to be something I was not. It would be a subterfuge that people would quickly see through.
At the social functions I attended during that year in Chicago, I often felt uncomfortable because many of the other guests were slavish followers of the isolationist line trumpeted daily by Colonel Robert R. McCormick’s Chicago Tribune and were outspoken “America Firsters,” actively hostile to any involvement with the rest of the world. A famous America First rally was held during the summer of 1939 at Soldiers Field, and I recall the roar of approval from the crowd as it cheered the speech of my childhood hero, Charles Lindbergh, who had become the standard-bearer of the isolationist cause.
My year in Chicago was productive intellectually, but I longed to return to a more congenial environment. Since I had completed my required year of residency and passed my general qualifying exams (not an easy task with fifteen economists peppering me for three hours with searching and very technical questions), I decided to write my dissertation back in New York at Kykuit.
I had another and much more important reason to do this: Peggy McGrath. I had been courting her much more seriously since my return from London and wanted to be closer to her, hoping our relationship would continue to grow.
I owe a great intellectual debt to the remarkable economists with whom I studied. My mentors were truth seekers who believed that economics could shed light on an important aspect of human behavior and thereby help improve society. They were all political moderates who were willing to listen to reason regardless of where they found it. I like to think I have followed their example. I am a pragmatist who recognizes the need for sound fiscal and monetary policies
to achieve optimum economic growth. I recognize, however, that otherwise sound policies that ignore real human needs are not acceptable and that safety nets have an essential place in our society. However, my greatest concern is that the pendulum has swung too far in the direction of unaffordable safety nets with too little attention given to sound policies that will stimulate economic growth.
CHAPTER 8
A DISSERTATION, A WIFE, AND A JOB
My return to New York coincided almost exactly with the outbreak of World War II. In the end, the Anglo-French policy of appeasement had failed to mollify Hitler or to deflect him from his goal of creating a Greater Reich and making Germany paramount once again in Europe. I read the newspaper accounts and listened to the radio reports with mounting dread as the irresistible blitzkrieg overwhelmed Poland. It was a new kind of warfare, and I wondered what the future held in store for me and my many friends in Germany, France, and Great Britain.
My primary task that fall was completing my dissertation. I chose to live in Pocantico rather than in my parents’ home on Park Avenue to avoid the wonderful distractions with which New York City abounds. Living at Kykuit worked out well for me on several accounts, not least of which was my proximity to Peggy McGrath. My parents came out for weekends, but otherwise I was alone. I made the sitting room next to what had been Grandfather’s bedroom into my study. During meals I played rolls of music on the pipe organ, which worked just like a player piano. I especially liked the arias from Madame Butterfly and Tristan und Isolde. Whenever I needed a break from the rigors of intellectual inquiry or the “terror of the blank page,” I could play golf, ride horseback, go for a swim in the Playhouse, or walk in the woods overlooking the Hudson. Actually, it was a pleasant existence.
I began work on my dissertation with some trepidation since I had never been involved in a project that required such concentrated research, thinking, and writing. Moreover, I was totally on my own with no professors to turn to for guidance. I was painfully aware that I had to produce a document demonstrating original thinking on a subject of economic significance.
“REFLECTING” ON IDLENESS AND WASTE
My subject, “Unused Resources and Economic Waste,” dealt with one aspect of a much wider issue: whether to rely principally on market forces or governmental intervention to correct the extraordinary levels of unemployment and the underutilization of industrial capacity that had characterized the era of the Great Depression. Hayek and the neoclassical economists placed their faith in market forces, while Keynes and many others argued that only government intervention, including deficit financing or “pump priming,” along with fundamental economic restructuring could return the United States and other advanced economies to full employment and prosperity.
The narrower aspect of the contentious debate that I examined was industrial plant utilization, a question that had received little attention from economists until the 1930s. By then large industrial firms—automobile plants, steel mills, and the like—employing thousands of workers dominated the American economic landscape. As a result of the Depression many of these plants were idle or operating at only a fraction of their capacity. To many this situation was wasteful in the sense that factories were not being used while enormous numbers of people were without jobs and in great personal distress. Many argued that pumping government funds into the economy through the construction of public works or direct relief payments to the unemployed would raise the level of national income and stimulate activity in the private sector, which in turn would utilize idle capacity and increase employment. The specific issue I addressed was whether idle plant capacity was wasteful in the sense that many economists were asserting.
Both Hoover and Roosevelt had inadvertently pumped money into the economy through annual budgetary deficits. Even though conditions slowly improved over the course of the 1930s, there remained a large and seemingly permanent body of unemployed in the country, and a significant percentage of the industrial plants remained idle. Economists sought the cause for this situation and offered a wide array of remedies. I felt that many of the studies had failed to define their terms accurately, and their conclusions might be used to justify inappropriate and unwise fiscal and regulatory policies.
For instance, the Brookings Institution published a series of analytical studies in the mid-1930s that supported the case for permanent government intervention. One volume argued that “underconsumption is a permanent malady, inherent in the present form of industrial organization,” and that the failure to fully employ all resources was not only wasteful but an inevitable part of our economic system. The solution proposed was a permanent program of public works, the easing of restrictions on lending and credit, and a greater role for government in the planning of economic production.
More telling, I thought, was the explanation for the failure to achieve the ideal of full and continuous use of plants—the “stupidity and lack of foresight of entrepreneurs.” Thus, if businessmen could not be trusted to plan intelligently, others had to assume the role.
Statements like this led me to delve into the economic and moral meaning of waste and under what circumstances unused plants are in fact wasteful. I found that at the heart of these arguments was an unsound and fallacious premise that considered idleness and waste synonymous. In fact, they are not. For instance, it would be wasteful to reopen a factory if changes in taste and technology rather than insufficient demand had forced its closing. More important, most of these studies assumed that the primary reason for unused capacity or idle resources—and therefore of high unemployment and low income in both good times and bad—was the selfish decision of entrepreneurs and corporate managers to keep production low in order to obtain high prices and large profits.
I found this argument preposterous. There are many reasons that a businessman decides not to use a portion of his available capacity: difficulty in purchasing materials, seasonal fluctuations, high taxes, excessive regulation, or even a failure to correctly read the market itself. If a factory is closed because of changed technology or consumer taste, it might be more wasteful to keep it running than to scrap it and build a new factory.
I concluded that the failure to use an economic resource per se is not evidence of waste. In practical policy terms this means that citing the existence of idle factories as justification for interventionist government policies can lead to inappropriate actions and counterproductive results. On the other hand I also made it clear that in an extreme circumstance, such as an economic recession that severely reduced aggregate demand, pump priming was not only defensible but necessary.
At the time my thinking about how and why businessmen made decisions had been molded to a large extent by the economists I had studied with, but in rereading my thesis today, it is clear that I was strongly influenced not only by Schumpeter, Hayek, and Knight, but also by my grandfather.
In discussing the behavior of businessmen like him, I pointed out that those who believe the entrepreneur is motivated solely by the desire to “maximize profit” are mistaken. Clearly, the desire to make money is one important motivation, but there are others, often just as important. As I wrote in my dissertation: “Entrepreneurship offers at once an opportunity to satisfy man’s creative, his power-seeking, and his gambling instincts. . . . It would be misleadingly simple to ignore the fact that interest in the process of achievement is itself a goal to many who regard profit as a more-or-less worthwhile by-product.”
In other words, part of the joy of business is achieving what one has set out to do, accomplishing goals that are important, and building something that has permanence and value beyond oneself. In addition to the profit motive and personal fulfillment, I argued that businessmen make decisions based on their assessment of their impact not only on their balance sheets and income statements but also on the needs of their workers and the broader community.
Grandfather would have agreed with these propositions. The profit motive provides the discipline for achievement, but ind
ividual goals are formed by the larger society and only have meaning and value if they embrace and mirror the needs and objectives of the broader society. I have tried to put these principles into action during my own business career.
I devoted about six months of nearly full-time effort to the project and finished the dissertation in April 1940. I can still remember placing the finished manuscript in envelopes and mailing them off to Professors Knight, Viner, and Lange. I was anxious, as every author is, about my readers’ reactions, but I was convinced that I had done a good and thorough job. My committee agreed, and four months later I received my doctorate.
PEGGY
That fall and winter were not devoted solely to intellectual hard labor. Courting Peggy McGrath provided me with a very pleasant diversion and eventually with the most important relationship of my life.
Peggy and I had known each other for years, but we had started to see one another more frequently and seriously only after I returned from London. Her father, Sims McGrath, was a partner with Cadwallader, Wickersham and Taft, a prominent Wall Street law firm. Her mother, Neva van Zandt Smith, was the daughter of a former president of the Pennsylvania Railroad. The McGraths had suffered financial losses during the Depression but lived comfortably in an attractive, white colonial-style house on “The Narrows” Road in Mount Kisco, exactly twenty-two minutes’ drive from Kykuit. That route became well worn during the winter of 1939–40.
Peggy preferred the quieter life in Westchester County. She adored her horse, Soldier, whom she cared for herself and trained to jump and foxhunt. She had many friends in and around Mount Kisco and enjoyed dropping in on them unexpectedly during her rides, often staying for dinner. Peggy was full of fun and adventure, and was always the first to join in with something new and unconventional.
Memoirs Page 12