ABSTRACT
Many years ago, Peter (now Lord) Bauer and I argued (Bauer and Walters 1975) that the great mistakes which have been made in thinking about, as well as applying, economic policy have not been due to the manifest complexities of fashionable economic models; quite the contrary. From our survey we found that the most egregious errors were due to the neglect of the most simple principles of economics. An example: in the late 1940s and early 1950s, the vast majority of the economics profession asserted that there was, and always would be, a ‘dollar problem’. (The only prominent exceptions were Milton Friedman, Gottfried Harberler and Egon Sohnen.) Indeed, Sir John Hicks, Oxford’s most distinguished economist, devoted his inaugural lecture for the Drummond Chair to that proposition. He said that the dollar shortage was basically due to the fact that all countries wanted the goods produced in America but Americans had no need for foreign-produced goods, ergo the dollar problem. Other luminaries, such as Charles Kindleberger, Sir Donald MacDougal and Tomas (later Lord) Balogh, joined in this view of the seeming permanence of the dollar shortage. Formally, the dollar shortage was endorsed in 1944 by the scarce currency clause of Bretton Woods. (I wish I could explain the reasons for the ignoring of simple principles of economics. Much of the neglect was probably due to the fashionable ideas of central economic planning of these years. The widespread condemnation by the economics profession of the now legendary Erhard–Adenauer reforms of 1947 illustrated the hostile attitudes to free markets and their results. This, however, is unfinished business.)
