It seems to be part of the folk wisdom in macroeconomics that this is in fact how the Great Depression came to an end: the massive one-time fiscal jolt from the war pushed the economy into a more favorable equilibrium. However, Christina Romer contends that most of the output gap created during 1929-33 had been eliminated before there was any significant fiscal stimulus. She argues that the main explanation of that expansion was a sharp decline in real interest rates, which she attributes to monetary policy (although most of the decline in her estimate of the real interest rate is actually due to changes in the inflation rate rather than the nominal interest rate).
— Paul R. Krugman, “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap,” Brookings Papers on Economic Activity 2 (1998), pp. 159–160.
A monitoring theory of efficiency wages,
Consider an efficiency-wage model in which firms economize on monitoring costs by paying above-equilibrium wages. If firms suffer diseconomies of scale in monitoring workers, as James Rebitzer and Lowell Taylor (1995) assume and Guillermo Calvo and Stanislaw Wellisz (1979) derive from a hierarchical model, then when the firm increases employment, it must increase wages to maintain the required penalty for shirking. The result is upward-sloping supply in the long run, implying that the wage must be below marginal revenue product (the difference is the increase in efficiency wages for inframarginal workers) and employment is reduced below the competitive perfect-information level. In contrast to search models, however, imperfect information here increases wages above their competitive level! While this model is intuitively plausible, the empirical evidence for diseconomies of scale in monitoring is only mixed.
— William M. Boal and Michael R. Ransom, “Monopsony in the Labor Market,” Journal of Economic Literature 35, 1 (1997), pp. 95–96.
I have stated my reasons for believing that the extension of state control over national economies would, of itself, not be conducive to peaceful relations between nations, but, on the contrary, would make international economic intercourse, and national restrictions on such intercourse, a breeding ground for deep and dangerous international friction. I have argued that, insofar as, in the past, war has resulted from economic causes, it has been to a very large extent the intervention of the national state into economic process which has made the pattern of international economic relationships a pattern conducive to war. I have given reasons for expecting that socialism on a national basis would not in any way be free from this ominous defect. It may seem, therefore, that I have argued, in effect, that economic factors can be prevented from breeding war if, and only if, private enterprise is freed from extensive state control other than state control intended to keep enterprise private and competitive.
— Jacob Viner, “International Relations Between State-Controlled National Economies,” American Economic Review 34, 1 (1944), p. 328.
The liquidity trap hypothesis states that at low levels of the rate of interest the demand for money becomes perfectly elastic with respect to that variable. It is not possible to fit directly by regression analysis a function that has a negative slope over part of its range and no slope at all over another part, but less direct tests are not hard to devise. If the liquidity trap hypothesis is true, it must be the case that the interest elasticity of demand for money becomes greater as the rate of interest falls, since this is the only way it can pass from a finite to an infinite value. There appears to be little evidence that this is in fact the case.
— David Laidler, The Demand for Money (New York: HarperCollins, 1993), p. 150.
[P]roperty rights develop to internalize externalities when the gains of internalization become larger than the cost of internalization. Increased internalization, in the main, results from changes in economic values, changes which stem from the development of new technology and the opening of new markets, changes to which old property rights are poorly attuned. A proper interpretation of this assertion requires that account be taken of a community’s preferences for private ownership. Some communities will have less well-developed private ownership systems and more highly developed state ownership systems. But, given a community’s tastes in this regard, the emergence of new private or state owned property rights will be in response to changes in technology and relative prices.
I do not mean to assert or to deny that the adjustments in property rights which take place need be the result of a conscious endeavor to cope with new externality problems. These adjustments have arisen in Western societies largely as a result of gradual changes in social mores and in common law precedents. At each step of this adjustment process, it is unlikely that externalities per se were consciously related to the issue being resolved. These legal and moral experiments may be hit-and-miss procedures to some extent but in a society that weights the achievement of efficiency heavily, their viability in the long run will depend on how well they modify behavior to accommodate to the externalities associated with important changes in technology or market values.
— Harold Demsetz, “Toward a Theory of Property Rights,” The American Economic Review 57, 2 (1967), p. 350.
The result is that the Cambridge welfare economists are portrayed as naive in ignoring the constraints on what government can achieve. Given its central place in the history of neoclassical welfare economics, it is no accident that Coase and Buchanan refer back to the Cambridge welfare economists, portraying them as the interventionist counterpart to the
more market-affirming Chicago and Virginia schools. However, while there is indeed plenty of evidence that neoclassical welfare theory was often guilty of the nirvana fallacy, we argue that this is emphatically not true of the Cambridge economists who are taken to represent that tradition—Sidgwick, Marshall and Pigou. We start by showing that they were definitely not guilty of making naive assumptions about state action, as much of the literature from Coase onwards has claimed them to be: the central texts of the Cambridge tradition show a clear sense of the potential limitations and inefficiencies of the political process. Paradoxically, given the way they have been chosen as the target for criticism, their ideas anticipated many of the specific problems with government action to which economists at Chicago and Virginia were to attach great importance and for which they claimed credit. The Cambridge economists we discuss here were aware of the problems that forces such as special interests and rent seeking, imperfect information, and the principal-agent issues that arise in bureaucracies could generate and, as a result, they held a much more realistic view of the possibilities for government intervention than is often believed. In making these points we rely heavily on direct quotation; this may be inelegant, but it is necessary to establish that we are not reading into the Cambridge welfare economists more than they actually said. Our point is that they were explicit in making the points we attribute to them.
— Roger E. Backhouse and Steven G. Madema, “Economists and the Analysis of Government Failure: Fallacies in the Chicago and Virginia Interpretation of Cambridge Welfare Economics,” Cambridge Journal of Economics 36, 4 (2012), p. 982.
Monopoly, then, in a market free of government obstacles to entry, means for us the position of a producer whose exclusive control over necessary inputs blocks competitive entry into the production of his products. Monopoly thus does not refer to the position of a producer who, without any control over resources, happens to be the only producer of a product. This producer is fully subject to the competitive market process, since other entrepreneurs are entirely free to compete with him. It follows, also, that the shape of the demand curve facing the producer does not of itself have bearing on whether he is a monopolist as I have defined the term. That a producer without monopoly control over resources perceives the demand curve facing him as that of the entire market for the particular product merely means that he believes he has discovered the opportunity of selling to this entire market before any one else has.
— Israel M. Kirzner, Competition and Entrepreneurship (Indianapolis: Liberty Fund, 2013 ), pp. 82–83.