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Why Was Henry Simons Interventionist: The Curious Legacy of a Chicago Economist 1
Sherry Davis Kasper
Maryville College
502 E. Lamar Alexander Parkway
Maryville, Tennessee 37804
(865) 981-8231
E-mail: sherry.kasper@maryvillecollege.edu

Kindly do not quote without permission of the author.

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In 1934 Chicago economist Henry Calvert Simons presented his Positive

Program for Laissez Faire, a group of proposals designed to reconstruct the devastated
American economy in a fashion that would save its organizing principle of classical
liberalism. At the time, the Positive Program became a rallying point for fellow classical
liberals. As his student Don Patinkin described, it united the same qualities that made
Marxism so appealing to many other people at the time: simplicity with apparent logical
completeness: idealism combined with radicalism (1981, 4). And at first glance, the
specific proposals appear congruent with the classical liberal philosophy commonly
associated with the Chicago School of economics. For example, Simons recommended
that the state eliminate private monopoly to restore a competitive industry structure.
Further, the state should institute a legislated rule for monetary policy to ameliorate
business cycles. Additionally, the state should eliminate tariffs to promote free
international trade.
But a closer inspection reveals policies that seem at odds with the free-market
liberalism commonly associated with Chicago economics. For example, Simons
recommended that the state should eliminate private monopoly by making the Federal
Trade Commission (FTC) the most important agency of the state via aggressive
enforcement of anti-trust policy that capped market share at five percent. The state
should also replace regulation of natural monopolies with public ownership and
operation. Further, the state should radically reform the banking system by implementing
a 100% reserve policy. Additionally, the state should adopt a monetary rule that
stabilized the price level rather than the quantity of money, a policy that required much
more discretion on the part of the monetary authority. Moreover, the state should change

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the tax structure to use graduated income and inheritance taxes to create more equal
incomes. Finally, the state should use taxation to restrict advertising and merchandising
and devote the funds collected to social welfare initiatives.
Over the next decades, those influenced by Simons and others explained these
differences with subsequent Chicago policy recommendations in a variety of ways. Early
on Milton Friedman asserted that Simonss recommendation to use the more
discretionary rule of stabilizing the price level rather than the quantity of money rested on
a lack of knowledge of contemporary empirical facts about monetary data (1967, 12-3).
Unfortunately such ignorance does not square with the fact that in 1935 Simons reviewed
Lauchlin Curries The Supply and Control of Money in the United States, a book that
included detailed data about monetary aggregates and policy during the early years of the
Great Depression . 2 In the 1962 Capitalism and Freedom, Friedman altered the
explanation to context: he stated that Simons wrote when the federal government was
smaller and was willing to have the government activities that todays liberals would not
accept now that government has become so overgrown (Friedman 1962 [2002], p. 32).
By 1983, at a law and economics symposium, Ronald Coase inquiringly observed that the
Positive Program was highly interventionist (In Kitch 1983, 178). Friedman agreed
but then argued that scholars should assess it within the historical context of its
development: By comparison with almost everyone else he was very free market
oriented (In Kitch 1983, 178). In 1990 Bradford DeLong attempted to resurrect
Simonss classical liberal credentials by pointing out his ignorance of subsequent
theoretical developments in industrial organization and public choice. DeLong reasoned

David Laidler independently pointed out the lack of validity of Friedmans claim of Simonss ignorance
about empirical data related to money (1993).

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that Simons made his peculiar proposals to strengthen the FTC and to assume public
ownership of natural monopolies, because he did not know the economic theory that
Harold Demsetz, Stigler and Coase drew on to move away from such interventionist
modes of creating a competitive industrial sector (1990, 617). In 2009, Robert Van Horn
and Philip Mirowski refocused the discussion, describing how members of the post-1946
Chicago School converted the classical liberalism of Simons to a neo-liberalism which
had some prospect of challenging the socialist doctrines which were in ascendancy in the
immediate postwar period (2009).
This paper provides a new interpretation of why Henry Simons displayed an
interventionist bent in his policy proposals. Its essential argument is that Simons worked
as an economist from an earlier era, individuals who judged monopoly power dissimilarly
and who operated with a different set of best practices. 3 As a result, his policy
recommendations were not interventionist due to ignorance of current facts or subsequent
theoretical developments. Rather they were interventionist, because they originated in
Simonss conceptions of the task of the economist, organic thinking, and monopoly
power, lingering ideas from the progressive social science that endured due to the
pluralism which characterized the interwar period in American economics. 4 To develop
the argument, the paper will proceed in four stages: a description of the early years of
Simonss career leading up to the creation of the Positive Program, a description of the
elements crucial to his interventionism, an interpretation of the reasons for this
interventionism and, finally, concluding remarks.
3

The interpretation of the two Chicago schools follows a tradition in the literature on its development. See,
for example, Bronfenbenner (1962), Miller (1962), Samuels (1976), Reder (1982 and 1987), Emmett
(1998), Kasper (2002), Van Horn and Mirowski (2009) and Van Horn (2009).
4
This characterization of the development of American economics follows the interpretation of interwar
pluralism described by Mary S. Morgan and Malcolm Rutherford (1998).

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A necessary first step consists of a description of the environment that nurtured

Simonss intellectual development. Like many prominent interwar economists, he was a
student of the first generation of progressive social scientists. As a result, it is not hard to
trace some of the qualities of interwar pluralism back to ideas and professional values of
that cohort of economists. In her history of American social science, Dorothy Ross
offered the following characterization of this group that she dates from 1896 to 1914.
They maintained their concern for the primary problem addressed by economists of the
Gilded Age, that of the concentration of economic wealth and power and the
accompanying inequality it engendered. But they recognized that they needed to address
this problem in a new political context, one in which previous reform had broken down
old political institutions and increased the importance of public opinion in policy debates.
With respect to professional qualities, progressive social scientists aimed to serve as
experts who engaged in discourse primarily in specialized journals and with
policymakers. At the same time, they continued to address respectable members of the
upper class, because the moral and political implications of their analysis were important
to them. As a result, this direct advocacy to the public often left them vulnerable to
attacks on their objectivity. They also continued to conceive of society as organic, one
composed of individuals that co-operated to form a social organ that gradually changed
over time. (See Ross 1991, 158-190).

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The Early Years 5

Henry Simons was born on October 9, 1899 in small, midwestern town, Virden,
Illinois. He grew up comfortably as the member of the middle class, the son of a
moderately successful lawyer and an extremely ambitious homemaker. He graduated
second in his high school class by the age of 16, but due to a decline in the familys
financial situation, he could not follow his older sister to an eastern college (Ella Simons
Siple had graduated from Wellesley College). Instead in 1916 he enrolled at the
University of Michigan with the aim of becoming a lawyer. By his junior year, the study
of economic theory captured his interest. Joseph Dorfman has drawn attention to the
pluralism present at Michigan during the time Simons studied there:
The capacity of the American university to encourage and foster diverse views
has seldom been more clearly demonstrated than at the University of Michigan.
Their two first-rate social scientists were influential teachers, Fred M. Taylor and
Charles Horton Cooley. . . . during their long years of service, [they] developed
along almost diametrically opposed lines. Taylor became an expert analyst and
purifier of orthodox economic thought; Cooley emerged as the innovator,
particularly in his beliefs that valuation is a social process (1949:3, 390).
Simons claimed later in his life that Taylor was the key influence in his early education at
Michigan: Taylor gave me an ideal introduction to economics what a tough old drill
sergeant gives to neophytes in the army but little more (1942, 1).

The biographical detail in this section is drawn from information in a biographical sketch completed by
George Stigler (1974), Claire Bowler, the editor of the Henry Simons Papers (Bowler 1973), and an
anonymous interview with an individual who maintained a friendship with Simons from 1911 to 1940
(Anonymous 1972). A more detailed version is presented in Kasper (2010).

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During the time Simons studied with him, Taylor had gained professional acclaim
for his neoclassical principles text, one most certainly used by Simons sometime during
his academic career at Michigan. The 1918 edition of the text reveals that Taylors
neoclasscism was of a different character than modern forms. In agreement, he favored
Marshallian partial-equilibrium analysis and reasoned from a series of formal principles
that ultimately demonstrated the superiority of the existing economic order as a means
social control. In contrast, he agreed with the approach of progressive social scientists to
conceptualize the existing economic order in evolutionary terms as an evolving social
organism. Like many progressive social scientists, this view led him to feel it was his
responsibility to subject the existing order to an ethical critique because the most strictly
scientific study . . . cannot properly omit a consideration of the fitness of several organs
to perform well their respective functions (Taylor 1918, 483). His critique identified
some failings in the price principle of regulating distribution, production and
consumption, but ultimately he was convinced of the superiority of the existing economic
order. Taylors ideal introduction to economics provided Simons with an early model
for justifying the superiority of an economy organized with the principle of classical
liberalism, with the proviso that the economy and the policies necessary to control it were
subject to change.
Simons graduated as an economics major in 1920 and then began graduate
studies, initially taking courses at Michigan. In 1921, upon receiving an offer of a parttime teaching position, he moved to the University of Iowa where he studied with and
became a follower of Frank Knight. He continued his graduate studies, first at Columbia
University in 1922 with Herbert Davenport and subsequently at the University of

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Chicago (in the summers of 1923 and 1924 and the 1925-26 academic year). In 1927, he
followed Frank Knight to the University of Chicago, where he taught in the department
of economics. He later stated: Knight was nearly perfect as an influence at the next
stage (Simons 1942, 1).
Knight had completed his Ph.D. in 1916 at Cornell University, worked at the
University of Chicago for a few years, and then moved to Iowa in 1921. As Ross
Emmett has described, during the 1920s Knight was intimately involved in the pluralistic
discourse of the interwar period, some of it with the students of the 1896-1914 cohort of
progressive social scientists (1999, x-xv). Knight had just published his revised
dissertation Risk, Uncertainty and Profit (1921), which used a method similar to Taylor,
reasoning from formal principles to identify the source of profit. Right after he met
Simons, he published two influential articles Ethics and the Economic Interpretation
(1922) and The Ethics of Competition (1923). Both represented further examples of
using logical analysis to identify the formal principles necessary to insure the optimal
efficiency results of perfect competition. In the second article, Knight subjected
competition to an ethical critique and used the image of competition as a game as the
basis for finding it deficient because it did not provide all individuals with an equal
opportunity to compete. One product of the progressive conception of the organic society
was the intense consciousness during 1920s of change, an awareness manifest in the
discussion between Knight and institutionalists about the possibilities for social control of
an evolving economy using the scientific method (See Ross 1991, Chapter 10). His
influential article The Limitations of the Scientific Method appeared in Rexford
Tugwells edited volume The Trend of Economics describing the new economics;

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Knights was the one voice that argued the institutionalistss program for social control
was not possible (Knight 1924). Finally, near the end of his years at Iowa and into the
early 1930s, Knight began to study the work of Max Weber and other historical
economists of Germany. His reading changed the focus of his research to constructing a
pluralistic approach to economics which combined an appreciation for traditional
economic theory with an investigation of history and the role of social institutions
(Emmett 1999, xiii). Thus, at the next stage of his professional career, Knight provided
Simons with a more multifaceted picture of the debate about social control and one that
subjected orthodox economic theory to comparison with other ways of thinking about
social control of the economic order, including ethical analysis, the new economics of
American institutionalists and German historicism. 6
During the late 1920s, Simons also came under the influence of Frank A. Fetter,
first as a teacher of a six-week course at the University of Chicago and later as a fellow
visitor at the University of Berlin. Simons appreciated Fetter for giving him an example
of (to my mind) what a political economist should be. . . . The identification, of course,
has far more to do with broad economic (political) philosophy and professional ethics
than with technical economic theory (1942, 1). After a career in business, Fetter went to
Germany and earned a graduate degree at Halle. Near the turn of the century, he wrote
an influential orthodox textbook that incorporated an ethical critique of capitalism. In it,
he argued that a capitalist market contributed to the general social welfare by virtue of
matching individual gains to their merits. Since the system changed in response to

No consensus exists on the presence of institutionalism in Knights economics. For example, Hodgson
(2001 and 2004) presents Knight as an institutionalist, while Emmett (2006) and Rutherford (2010) support
this interpretation of Knight as the questioning skeptic who aimed to keep his fellow social scientists aware
of and accountable for the limitations and possibilities of their methods of analysis.

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modifications in the law, collective action and social institutions, Fetter believed that
gradual alterations in the system were appropriate as dictated by variations in public
opinion. In his case, Fetter worked to influence public opinion in the area of immigration
restriction (See Ross 1991, 183-4 and 189-190.) Important for Simonss story is Fetters
work to influence policy toward monopoly power. He served as the chair of the 1932
Economists Roundtable on Anti-Trust Law Policy, a group which drafted a petition to
the platform committees of the Republican and Democratic conventions calling for a
more vigorous enforcement of the existing anti-trust laws (Barber 1985, pp. 165-6). In
addition, in 1931 he published The Masquerade of Monopoly in which he detailed
numerous case studies in which he described the rise of monopolies in the US economy.
In essence, Fetter provided Simons with another theoretical justification for the classical
liberal state and an example of a progressive economist who combined theoretical
analysis with advocacy.
During the early years of his career, Simons did not make observable progress in
gaining the credentials generally deemed necessary for success as a professional
economist. While at Iowa, he published only one article on taxes (1923). He published
two rather dull book reviews in 1926 and 1929 about the economics of taxation. In his
papers, there is also a copy of a 1925 speech about taxation that he delivered to the
Weatherly Gang in Iowa City, perhaps one of those respectable upper-class groups that
progressive economists sometimes addressed. Thus, no published record exists of his
active participation in the professional discourse, either in specialized journals or at
meetings. In 1928, he made a trip to Germany intended to help him make progress on his

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dissertation on income taxation and learn German. Though he later published his
dissertation as Personal Income Taxation (1938), he never finished his Ph.D. 7
Elements of Simonss Interventionism
In the early 1930s, Simons began a period of intense activity. He published his
Syllabus Materials for Economics 201 (1933a). He wrote two book reviews, one on
T.E. Gregorys The Gold Standard and Its Future (1933b) and another on America Faces
the Future edited by Charles A. Beard (1933d). Both displayed the urgency about current
economic events that went on to permeate the Positive Program. Similar to Fetters
leadership in antitust policy, he also wrote three memoranda about banking and monetary
policy signed by a group of Chicago economists and sent to academic economists and
key policymakers in Washington D.C. The first responded to the March 1933 banking
crisis and called for radical reconstruction of the banking industry using 100% reserves
(Simons 1933c). Simons then wrote two memoranda in November 1933, which called
for greater centralization of monetary policy using the Federal Reserve (1933f). In
March 1934, Simons also went to Washington D.C. to help Senator Bronson Cutting
outline a bill that would bring the money supply and availability of credit under stronger
federal control (Phillips 1995, 81-93). This frenzy of activity culminated in the
publication of the Positive Program in 1934, which included the monetary proposals of
the Chicago memoranda, but added the more wide-ranging calls for social control
described earlier.

A long-time friend believed that Simons never earned his degree, because he did not want to be
examined by inferior minds in oral examinations (Anonymous 1972, 9).

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The impetus to this activity was stimulated by his view of the proper task of the
professional economist. Its output was influenced by a particular set of ideas that he
brought to this work. Their combination became the elements for his interventionism.
The Task of the Economist
Simons set up a twofold task for the professional economist. First, he should
work to solve current problems. The 1933 book review of T.E. Gregorys book about the
gold standard provided an early indication of Simonss belief that the economist served to
solve problems. He admired the book because,
There are in it no brilliant dialectical flights; no concepts loosely defined and
algebraically manipulated; no mystical averages slipped innocently into amazing
equations. One only finds elegant, straightforward exposition of how the gold
standard works . . . The author has rendered a real service in presenting clearly
and concisely a kind of economics which is indispensable to understanding
current problems . . . (Simons 1933b, 137).
But even more critical to explaining his orientation toward problem solving were
the two factors spurring the increase in Simonss professional activity in the early 1930s.
In part, like many of his fellow economists, he was responding to the economic chaos
of the Great Depression (Simons 1934a, 56). It is hard to empathize with the shock and
anxiety accompanying the dizzying decline in the American economy at the beginning of
the Great Depression hundreds of failed banks, a 25% rate of unemployment, and a
25% decline in real output. But, if it were possible to comprehend this situation, it would
not be difficult to imagine any formerly unremarkable economist stirred to action by the
devastating impact of the Great Depression on so many in American society. But

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Simons was galvanized by more than the economic decline; he was responding to the
chaos of political thought he believed underlying early New Deal policies (1934a, 77).
As historian Otis Graham has described: The hundred days were a whirlwind, an
impossibly brief period in which to enact, let alone understand, the mass of legislation
that was made law. These were days of intellectual confusion for both the administration
and onlookers, but the confusion was harder to bear from the outside (1967, 27).
Simonss August 1933 review of the Beard volume provided an early glimpse of his
growing alarm as one of the onlookers that advocates of national planning and a managed
economy had captured the minds of policymakers, spelling doom for classical liberalism:
The operation of a sort of control through competition permits a division of labor
whereby governments may confine themselves to tasks and functions least
incompatible with democracy. To burden the political system heavily with tasks
which competition has performed heretofore (very imperfectly, to be sure) is to
guarantee drastic changes in the fundamental character of the system. Mr. Beard
invites us to contemplate a mongrel system, of democratic government, private
monopoly, and public control of relative prices and relative wages. This has been
tried latterly in Germany. Moreover, it was just this kind of system that gave rise
to the Wealth of Nations (1933e, 550).
By the time Simons wrote the Positive Program, planning advocates, such as Tugwell
had emerged as respected members of Franklin D. Roosevelts Brains Trust and were
working successfully to pass laws like the Agricultural Adjustment Act (AAA) and the
National Industrial Recovery Act (NRA) that legislated the mongrel system Simons

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feared would spell the doom for classical liberalism in America. 8 He was also alarmed
that the politicians were ignoring the earlier examples of Italy and Germany where he
perceived that national planning had ultimately resulted in fascism.
In addition to solving problems, Simons believed that the second aspect of the
economists task comprised both the professional and the moral responsibility of
objective-advocate. 9 Advocacy entailed drawing on the analysis of current problems to
convince others of the merits of accompanying policy positions. Objectivity required
seeking to influence fellow experts, rather than the general public, in free discussions.
Morality necessitated advocacy no matter how futile that measured conversation might
appear.
That Simons took this role as objective-advocate seriously is immediately evident
in the Positive Program. In his first widely circulated essay, rather than presenting a
carefully reasoned theoretical analysis about income taxation, the subject of his
dissertation, he chose to write a frankly propagandist tract (Simons 1934a, 40). The
substance of the essay consisted of a twofold scholarly investigation: a general analysis
of the necessary conditions for a system of classical liberalism and a delineation of the
policy proposals designed to move toward those conditions (Simons 1934a, 41).
Following the practice of his mentor Fetter, he ended the essay by moderating his
advocacy via addressing it to a group of fellow experts:
This tract is submitted in the hope of promoting a consensus of opinion within a
group which might now perform an invaluable service in intellectual leadership.
The precious measure of political and economic freedom which has been won
8

See Barber (1996) chapters 2-3.

See Furner (1975) for a general discussion of the objective-advocacy that characterized American
economics during the interwar period.

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through the centuries may soon be lost irreparably; and it falls properly to
economists, as custodians of the great liberal tradition out of which their
discipline arose, to point the escape from the chaos of political thought which
warns of what impends (Simons 1934a, 76-7).
That Simons took on a task that many perceived as abandoned is evident in some
of the comments he received about the Positive Program and its policy
recommendations. For example, Irving Fisher stated: I am greatly interested and
pleased to think that you are courageously reverting to the unpopular laissez faire (1934,
2). Likewise, Fetter said: I am strongly sympathetic with all that you have been writing
along theses lines and feel that you are helping to make amends for the quasi-criminal
neglect of the liberal economists to present their case in recent years (1936, 1).
The Ideas
Several intellectual strands also formed the elements of Simonss interventionism.
First, once he embedded the classical liberal state in an organic society, a larger role for
the government became possible.

Second, his interpretations of the theory of imperfect

competition and monetary theory also added to the interventionist bent of the Positive
Program.
Classical Liberalism
It was in the midst of his concentrated activity of 1933 that Simons first publicly
declared his allegiance to classical liberalism. This announcement occurred in speech on
the New Deal he gave to the Social Workers Discussion Group in June:
Tonight I must talk, I believe for the first time of my life, as an extreme
conservative, as an exponent of that much ridiculed political philosophy,
nineteenth century liberalism as one who believes firmly that the present

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generation, the so-called brain trust, needs nothing as badly as an understanding

of Adam Smith (Simons 1933d, 1).
This commitment to classical liberalism goes on to permeate his subsequent writings, but
the introduction to the posthumously published collection of his major essays about
economic policy provides the most comprehensive discussion of his political-ethical
philosophy. He titled this introduction his political credo and characterized it as a
"display of fragmentary ideas and opinions" about "practical ethics, a political-economic
philosophy, or a clear-cut ideological position" (Simons 1945, 1). What also becomes
clear in this essay is the interrelationship between his political-ethical philosophy and his
organic understanding of society.
As a classical liberal, Simons believed that liberty and equality should serve as the
standards for guiding the conduct of individuals in society. By liberty he meant the
"freedom to associate or disassociate" in a variety of settings, including the economy, the
political realm and social discourse (Simons 1945, 3). By equality, he meant equality of
opportunity to participate in economic, political and social activity.
At the same time, Simons conceived of liberty and equality as merely "relatively
absolute absolute" standards for guiding conduct. This provisional view of liberty and
equality as ethical standards stemmed from his conception of society as organic. Simons
described society not as a static collection of rational individuals or a "mere aggregate of
reified aspects"; rather he viewed society as "a living, functioning organization or
'organism'" that changed over time (1945, 2). He also believed that the classical liberal
society represented a higher level of social development: Liberalism is an optimistic
view of man and society. It surveys recent centuries and calls them mainly good, each

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better than the one before, each achieving greatly and bequeathing enlarged
potentialities (Simons 1945, 3). These potentialities included greater freedom for all,
the growth of knowledge over superstition, and the economic progress that checked
population increases. (See Simons 194, 2-3).
Simons coupled his ethical commitment to classical liberalism with the concept of
the social organism to fashion his vision of the good society. As a classical liberal, the
"aspectual qualities" of his good society consisted of liberty, equality and commutative
justice. At the same time, because Simons conceived of society as organic, classical
liberalism's "good society is not static conception but essentially social process whose
goodness is progress" (1945, 1-2). Liberty took on the prominent role in social process
"as both a requisite and a measure of progress" (1945, 1). As a requisite of progress in
the good society, liberty enabled freedom of association in social discourse, economic
activity, and political action. In social discourse, it allowed the organized, free
discussions that established moral consensus as the social organism changed. In the
economic realm, liberty ensured commutative justice, which in turn, insured the most
efficient production of the largest amount of goods and services. Drawing on the
marginal productivity theory of income distribution developed earlier by John Bates
Clark, Simons stated that commutative justice occurred when individuals enjoyed liberty,
or the freedom to exchange goods and services, in organized markets; the result of this
voluntary exchange was that each would be rewarded "according to the productivity of
his property, capital, or capacity (including personal capacity)" (1945, 5). Simons
acknowledged that commutative justice did take for granted "an existing distribution of
capital, among persons, families, communities, regions, and nations" and often resulted in

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an inequality of income that hindered freedom of association (1945, 5). Thus to level
incomes, Simons's vision of the good society also included equality of opportunity to
level human "capacity, capital, and possessed power" prior to production (S1945, 6). In
the political realm, liberty insured dispersion of private political power.
The one concentration of power Simons sanctioned in the good society was the
"monopoly of violence" given to the central government. This exception stemmed from
his multifaceted view of human nature, which extended the pursuit of self-interest to both
individuals and groups. He assumed that individuals followed their own self-interest in
social activity. He also emphasized that members of organized groups and politicians
followed their own self-interest in political activity. At the same time, this pursuit of
self-interest was colored by humans destructive, fighting propensities (Simons 1937,
3). As a result, in social activity, a conflict, rather than a harmony, of interest could
prevail.
His description of economic activity provides one example of this understanding
of human behavior. He characterized economic activity as petty warfare . . . within
groups (Simons 1934a, 44). As long as economic activity took place within a stable
framework of legal rules . . . [of] competition, limited rights of private property, and free
exchange, the pursuit of self interest resulted in a kind of private warfare which
produced the most output and consequently benefited all members of society (Simons
1937, 3). On the other hand, once economic groups organized, economic warfare loses
all its virtues and becomes destructive and exploitative, like organized fighting generally
(Simons 1937, 3). Thus, in Simons understanding, the pursuit of self-interest resulted in

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harmony only when the government used its monopoly of violence to control humans
fighting propensities according to predictable rules of law.
Theoretical Analysis
Simons was stirred to create the Positive Program to solve the problem of the
Great Depression. His theoretical analysis of this problem was twofold: The depression
is essentially a problem (1) of relative inflexibility in prices which largely determine
costs and (2) of contraction in the volume and velocity of effective money (1934a, 74).
In line with the pluralism of interwar economics, Simons used several methods in his
analysis: the theoretical deduction of neoclassical economics combined with an
examination of evolving economic institutions, similar to the approach his teacher Knight
had recommended in the late 1920s. This combination resulted in the development of
more realististic theories of imperfect competition and money, a trend of interwar
economics (Morgan and Rutherford 1998, 7).
To study imperfect competition, Simons appeared to take cues from Fetters
Masquerade of Monopoly rather than the focus of his more famous contemporaries, Joan
Robinson in The Theory of Imperfect Competition (1933) and Edward Chamberlin in The
Theory of Monopolistic Competition (1933). He developed a cartel model that described
industry, rather than individual firm, behavior. 10 This choice drew on his observations of
the evolution of the American economy up until the 1930s. In essence, he characterized
the industrial organization of the U.S. economy between the wars as that of an enterprise
economy due to the prevalence of large-scale organizations, or enterprises, that he
associated with the intricate division of labor of an advanced industrial society (Simons

10

His student Patinkin later described this model in graphical and mathematical language drawing
Simonss Economics 201 Syllabus (See Patinkin 1947).

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1936, 164 and 1934a, 45). He attributed this concentration to both economic and
institutional factors.
Simons cited technological change as the economic source of the concentration of
industry. In the last half of the nineteenth century, small enterprises developed new
technologies to reorganize production such that economies of scale lowered costs and
increased profits. Initially these large-scale organizations conferred social benefits due to
their greater efficiency in the utilization of resources. But Simons observed that by the
1930s these organizations had grown so large that diseconomies of scale had started to
occur (1934a, 59). To maintain their profitability, smaller production units had merged
into larger enterprises to achieve economies of scale in merchandising, financing,
research and development (Simons 1934a, 59 and 1945, 34-5). As a result, enterprises
remained profitable, going concerns even though they did not employ efficient
production techniques (Simons 1934a, 71-2 and 1945, 35).
Simons also maintained that trade unions had developed in response to the new
techniques of production as well. Initially, Simons viewed trade unions as socially
useful, because they counteracted the power of enterprises in wage and benefit
negotiations. But, like corporations, some trade unions had evolved such that they were
not longer conferring social benefits. Rather by the 1930s the only effectively organized
groups were craft unions whose members already possessed the unique skills that enabled
them to demand and to receive high wages. As a result, trade unions had consolidated
economic and political power for skilled workers at the expense of the unskilled (Simons
1934a, 49).

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Simons also cited a group of institutional factors the current interpretation and
enforcement of relevant laws as sources of concentration. In relation to enterprises,
examples included, securities laws, the rule of reason interpretation of the Sherman Act,
both the Hoover administrations promotion of trade associations and the Roosevelt
administrations National Industrial Recovery Act of 1933 (NRA), tariffs and agricultural
subsidies, and recent regressive tax reforms (Simons 1934a, 34, 42, 45-6, 49 and 53). In
relation to trade unions, the prime example was section 7a of the NRA which gave
workers the right to join unions and bargain collectively and required industrial codes to
set minimum wages and maximum hours. Simons also stressed the role of interest group
politics as an institutional factor that affected the development of the enterprise economy.
In a democratic, capitalistic system, it was in the best interest of articulate, organized
producer and labor groups to appeal to politicians for legislation that increased their
revenues and wages. It is in the nature of the political process to conciliate such groups
at the expense of consumers who are unorganized and inarticulate, and, representing
merely the interest of the community as a whole (Simons 1934a, 50). As a result, these
groups often used the political process to gain and consolidate monopoly power. 11
Deriving from his observations that economic and institutional changes had led to
a disappearance of competition and an accompanying inflexibility in prices, Simons
analyzed two types of cartels -- producer and labor, because they had emerged as the
organization basis for which the National Recovery Act has sought to establish
everywhere (1934a, 43 and 47). He based the model of producers on four assumptions:
(1) the output and pricing decisions of members of the cartel are interdependent; (2) the
11

While Simons appears to anticipate certain aspects of public choice theory later developed by his student
and Nobel Laureate James M. Buchanan, Simons does not provide a fully fleshed out model of interest
group behavior of his own.

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cartel can set output limits for existing firms; (3) the cartel cannot control the level of
investment made by existing firms or potential entrants; and (4) the cartel cannot prevent
newcomers entering the industry (Simons 1934a, 47). Deriving from these assumptions,
Simons made two predictions. First, because price maintenance allowed existing firms
to earn high returns, eventually new firms were attracted to enter the industry and were
assigned an output quota. The cartel reduced the output quota of the other firms and the
utilization of plant capacity decreased. As a result, a gross wastage of investment
occurred due to an increase in excess capacity because the cartel could control the
investment plans of its current and potential members (Simons 1934a, 48). Second, in
long run equilibrium, the cartel produced until average cost equals price as firms entered
the industry, but that price exceeded marginal cost, thereby negating the allocative
efficiency of perfect competition (Simons 1934a, 48).
Simons also analyzed advertising and merchandising in relation to the cartel
model. He cited the costs of advertising and merchandising as an additional incentive for
a firm to join a trade association or cartel. Firms can increase their profits if they can use
advertising to manipulate favorably the demand for their product. But because the
actions of firms are interdependent, eventually they counter the success of one firms
advertising by advertising of their own. As a result, all of them may end up with about
the same volume of business as if none had advertised at all (Simons 1934a, 71). In
addition, they had to bribe retailers with high mark-ups to sell their products, and they
had to prevent consumers from purchasing from wholesalers. An absurd proliferation of
small retail establishments followed (Simons 1934a, 71). Thus, Simons later argued that
studying imperfect markets by focusing on product differentiation undertaken by

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individual firms, as described by Robinson and Chamberlin was fundamentally

irrational (1944, 325). 12
Instead, by joining a cartel, theoretically a firm should be able to lower its
advertising costs and eliminate this waste because the members can agree not to use
advertising to compete. But Simons argued that once organized, the cartel tend[ed] to
change the form of advertising rather than necessarily to reduce the total of such outlays;
selling activities become competitive among industries instead of merely within
industries (1934a, 72). Due to these results, Simons viewed advertising and
merchandising as a source of waste and economic inefficiency from both the firm and
societys perspectives.
Simons analyzed trade unions as cartels as well. Like firms in a cartel, he
assumed labor joined trade unions to maintain a standard rate of pay through collective
bargaining. . . . above the competitive level (Simons 1934a, 48). Simons predicted four
results of cartels in labor markets. First, the number of workers within the unionized
industries declined as firms moved to substitute relatively less expensive capital for more
expensive labor. Second, the number of firms within unionized industries declined due to
the higher costs of production. Third, if the trade union allowed labor to join freely and
rationed the hours worked in response, initially the occupation grew as the increase in
wage rates offsets the decline in hours worked. Eventually, free entry and the subsequent
rationing of work hours caused the members to be no better off than they would have
been without any organization at all (Simons 1934a, 48). On the other hand, if the trade

12

In his 1946 The Theory of Price, Stigler included a discussion about the theory of imperfect competition
which also rejected Chamberlins ideas about monopolistic competition, disagreeing with his
abandonment of the industry concept and arguing that combinations are of basic importance
(Hammond and Hammond 2006, 62)

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union can prevent entry, if a seniority system exists, or if the demand for this kind of
labor is highly elastic, labor was diverted into less important less remunerative
occupations (Simons 1934a, 49). Whether entry was free or restricted, the community
suffered from higher output prices and an inefficient allocation of labor.
Simons used orthodox theory -- Irving Fishers version of the quantity theory -- as
a starting point to study the secondary cause of the depression: contraction in the volume
and velocity of effective money (1934a, 74). Fishers had added consideration of
checkable deposits to his form of the quantity theory:
MV + MV = PT
where M was the quantity of money in circulation, V was the velocity of its circulation,
M is the total deposits subject to transfer by check, V is the velocity of their
circulation, P is the price level and T is the volume of trade (Fisher [1911] 1925, 48).
Fisher maintained that the price level varied directly with the quantity of money,
provided that the velocity of circulation and the volume of trade remained unchanged.
Given that these conditions held, by controlling the supply of money, the monetary
authority could normally stabilize the price level. Yet Fisher acknowledged that this
tendency depended on the stability of velocity, the ability of the central government to
control the supply of money in circulation and a fully flexible price structure.
In his extension of Fishers theory, Simons drew on his observations about the
concentrated nature of the enterprise economy and assumed that there existed limited
flexibility in prices and wages (1936, 165). He then focused his investigation on the
other two factors, which prevented the tendency postulated by Fisher from holding:

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changes in velocity, or hoarding and dishoarding, and the central governments ability to
control the supply of money.
In Simonss analysis, neither condition held due to the way in which the financial
structure had evolved up until the 1930s. In essence, he argued that the financial
structure was characterized by a competitive mix of public and private institutions that
supplied the medium of circulation in a fashion that alternately expanded[ed] rapidly
and contracte[ed] precipitously the quantity of paper currency in circulation (Simons
1934a, 54). First, existing financial regulations allowed an indefinite number of
agencies, government and private to supply money (Simons 1936, 174). The principal
issuers were commercial banks, because the government had given special status . . . to
the obligations of banks through laws that provided for special charter, regulation,
supervision, guaranty and bankruptcy protection (Simons 1936, 167 and 333n). They
supplied money and money substitutes in the forms of currency, demand deposits, time
deposits, and treasury certificates. In addition, existing law permitted other institutions to
create money substitutes. Examples included the corporations ability to financ[e] via
the open book account (book credit) and instalment sales (Simons 1936, 171). Second,
existing legal regulations created an elastic medium of circulation, primarily because the
fractional reserve system required deposit banks to retain only a portion of their
creditorss deposits on hand. As a result, the quantity of excess reserves became the basis
for the bankss capacity to create and to destroy money and money substitutes by making
and calling in loans (Simons 1933c and 1934a, 54). The elastic nature of money was
exacerbated by the customary banking procedures of investing primarily in short-term
commercial paper and holding only small cushions of owner equities (Simons 1936,

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167). These practices encouraged bankers to demand repayment of loans and,

consequently, shrink the supply of money and money-substitutes in the face of the
slightest uncertainty (Simons 1936, 167). As a result, bankers possessed both the
incentive and the capacity for precipitating chaotic liquidation and a subsequent
general deflation by forcing businesses to pay back the short-term loans they obtained for
working capital (Simons 1936, 328n).
Why Was Simons Interventionist?
By the mid-1930s, it seemed that some of the chaos of political thought that had
impelled Simons to create the Positive Program had diminished in influence. In May
1935, the Supreme Court decided that the NRA and its system of national planning
unconstitutional. By the end of 1936, proponents of national planning, including
Tugwell, had left the government. Nonetheless, as Graham has described, many of the
surviving members of the first generation of progressive social scientists were still
fighting against the New Deal (1967). And in an April 1937 speech about the relation of
the state to social and economic activity, Simons, one of their students, continued to
emphasize the position of the Positive Program that the state must intervene:
You may have inferred yesterday, that like some economists at the beginning of
the 19th century, I had a very low opinion of the ability of governments to do
anything very useful. Frankly, I do sympathize will [sic] the old notion that
government governs best which governs least. This maxim still contains too much
truth to be discarded outright. But obviously the democratic state must govern in
some directions, of [sic] only remain democratic, to preserve internal peace, and
to provide the framework of rules without which freedom would merely be chaos,

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and free enterprise simply brigandage. The scheme of policy for which I plead
may be called laissez-faire, for historical reasons; but a modern program of laissez
faire cannot be a do-nothing program by any means (1937, 1).
For a while, Simons seemingly became reassured by the antitrust investigations
led by Thurman Arnold under the auspices of the Temporary National Economic
Committee (TNEC) from 1938 to 1941. 13 But he also became increasingly alarmed by
the growing power of industrial unions and the inability to talk about this power in public
discourse, ultimately expressing his distress in the controversial 1941 article Some
Reflections on Syndicalism. Nonetheless, despite these changes, his 1944
recommendations for a postwar economic policy continued similar themes from the
Positive Program: dismantling of tariff barriers, organizing for united action in
matters of monetary and fiscal policy, and undertaking effective antimonopoly policies
to deal with cartels and merely private economics of size in selling and advertising
(Simons 1944, 244 and 247). He also consistently advocated for tax policies that
promoted income equality. Thus Simons remained highly interventionist for someone
Aaron Director characterized as the head of [the] school of what would become
Chicago economics (1948, v).
Earlier explanations of Simonss interventionism have focused on two main
factors ignorance about contemporary facts and subsequent theory and the historical
context in which he lived and wrote. That Simons did not know about contemporary
facts is just wrong. That he would have become less interventionist if he knew about
later theoretical developments stands as pure conjecture. What remains as correct is that
the historical context is crucial in explaining his interventionism, but in a different way
13

See Simons 1941 for his review of Arnolds The Bottlenecks of Industry (1940).

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than described by earlier interpreters. Simply stated, Simons worked in the climate of
interwar pluralism. As a result, he looked through the world with a different set of
lenses, colored primarily by elements of progressive social science that the pluralism of
interwar economics allowed to linger. First, he persisted with the outlook that it was
proper for the professional economist to serve as an objective-advocate, that is, to
contribute actively to free discussion that changed social standards. Second, he worked
from an organic conception of social development in which evolving institutions featured
prominently, that, in turn, altered his understanding of classical liberalism. Finally, he
carried on with a greater emphasis on the evil of private monopoly and on equality and
distributive justice.
A 1934 exchange of letters with Friedrich von Hayek about the Positive Program
reveals that one of Simonss interventionist policies served in part as a means to build
that a consensus of opinion against the increasing power of the early New Dealers as
advocates of national planning. In an earlier letter, Hayek had expressed doubts about the
recommendation to socialize natural monopolies. Simons responded:
As regards public ownership of the railroads, I may confess privately to having
used a low, debating trick. Most of our so-called liberals and New-Dealers are
really asking us to adopt for industry a scheme of things closely comparable in
essentials to that which we have been practicing in the case of the railroads. I am
willing to prostitute my judgment somewhat, in advocating government
ownership, in order to vent my spleen fully as to the merits of a grand system of
private monopoly with government regulation of prices and wages. (1934b, 2).

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Thus while attempting to build a consensus of opinion among his fellow economists in a
context in which those that had the ear of politicians were attempting full-scale national
planning, Simons was not above offering some limited policy sops to his fellow
academic-experts.
But beyond his desire to influence particulars in the current debate about
economic policy, his interventionism stemmed from his acceptance of the economists
task to solve problems and advocate. As he wrote to Hayek in 1934 in language with
religious overtones: If my proposals seem, as a whole, too drastic, let me explain that
both the religion of freedom, and intellectual interests along liberal lines, seem deader
here than in England. One must struggle as hard with friends as with enemies; the
competent people are mainly, like Frank Knight, ready to abandon all their hope and
faith, and to occupy themselves largely with explanations of why the deluge is both
imminent and inevitable (1934b, 2). 14 Thus, unlike Knight, who by 1932 had decided
with great dejection that demagogy had overtaken intelligent conversation, Simons
remained true both to the classical liberal ideal of free discussion and the reform impulse
of his progressive roots to the end of his life. 15 By the end of the 1930s, he was giving
speeches, such as the one cited above, to numerous respectable upper-class groups, such
as the League of Woman Voters. In the 1940s, he began to advocate his views in the
popular press, including Fortune and Time. He continued to advocate unpopular

14

In 1942, Simons made a similar statement to Fetter: Knights usefulness was ultimately limited, partly,
because of a kind of political diffidence, defeatism, and irresponsibleness (1942, 1). Knights 1932 lecture
The Case for Communism: From the Standpoint of an Ex-Liberal most certainly added to Simonss
despair about Knight (Knight 1991).
15
See Knight (1932) for a discussion about the impossibility of reform via free discussion. Emmett
(1998b) describes Knights rejection of this aspect of progressive social science.

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positions in specialized journals, such as a critique of organized labor in the Journal of

Political Economy in 1944.
In the 1940s Simons also continued the work to build a consensus of opinion
within a group . . . [that] could perform an invaluable service in intellectual leadership
by doing the groundwork for an international organization that would keep alive the
discussion about classical liberalism during the years of the Keynesian consensus (1934a,
p. 76). He made a proposal to set up an Institute of Political Economy at the University
of Chicago that would preserve and promote the traditional-liberal political
philosophy of Chicago economics (Bowler 1974, p. 9). At the time of his death in
1946, Hayek carried Simonss idea forward. First, Hayek with financial backing from the
Volker Fund organized the Free Market Study led by Aaron Director to write An
America Road to Serfdom and to develop a description of an effective, liberal system
(Van Horn and Mirowski 2009). Later Hayek founded the Mont Pelerin Society as a
sympathetic forum for individuals interested in the traditional-liberal political
philosophy. 16
The second aspect of Simonss interventionism brought the ideas of organicism
and institutional change to bear on classical liberalism. First, Simons worked from an

16

Irony abounds in the respective positions taken by Simons and Knight regarding the possibility of free
discussion. For the determination of Simons to serve as an advocate for classical liberalism repeatedly left
him in a vulnerable position professionally, and it was often through Knights protection that he was able to
maintain employment at the University of Chicago. For example, in the early 1930s Paul Douglas did not
want to give Simons tenure, because he had no publications and students reported that he could not teach
well. When the Positive Program was published Douglas said: I like that report. Its skillful
propaganda. But it isnt basic scholarship and we shouldnt be giving our few jobs on that basis (Stigler
in Kitch 1983, 177). Knight responded: Any discussions of his imperfections is a personal attack on me
(Stigler in Kitch 1983, 177). Knights stand insured that Simons retained his position at Chicago, but at the
cost of great divisiveness in the economics department. This tension was ultimately resolved by sending
Simons to teach in the law school in 1939. And despite the protection of Knight, Simons paid a price for
meeting his moral responsibility to advocate. According to Stigler: The further delay in reaching his
professorship (1945) was due to the opposition of dean who was incensed by Simons attack on labor in his
famous essay, Some Reflections on Syndicalism (Stigler 1974, 167).

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organic conception of social development, a holdover from progressive social scientists,

such as his teacher Taylor. Second, he followed the 1920s call of Knight to including
analysis of evolving institutions elements of his theoretical analysis. As a result, he
recast laissez faire to become a positive, rather than negative, guide to state action.
Organic thinking first influenced the theoretical analysis that Simons completed to
support the proposals of the Positive Program. His examination of what he identified as
causes of the depression -- price inflexibility and monetary contraction -- were
conditioned by his observations of the evolution of the American economy up until the
1930s. He did not employ the model of perfect competition to describe the ideal of a
competitive equilibrium, when the economy had evolved to the point where the real
problem was inflexible prices. Rather he used a more realistic model of the cartel. Based
on that analysis, he recommended that to disperse the concentrated economic and
political power of the enterprise economy, the state had to intervene to break up
monopolies, even at the cost of economic efficiency. Likewise, in his adaptation of the
quantity theory, his observations of the actual financial system persuaded him that he
could not assume that the monetary authority could control the supply of money. As a
result, to save the organizing principle of classical liberalism, he recommended the more
radical reform of 100% reserves and the more discretionary policy of stabilizing the price
level, rather than the quantity of money.
Organic thinking also influenced his vision of the good society, when Simons
modified the ethics of classical liberalism to take into account the concept of a social
organism. In essence, individuals cooperate to make up an evolving social organism. As
knowledge and external conditions alter, the social organism gradually changed, ideally

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on the basis of organized, free discussion by those individuals. An ethical society would
be one that insures that a maximum number of individuals possess the maximum amount
of freedom to participate in the process of organized, free discussion. Thus, it was on
that basis of its potential to create maximum freedom for the social process of discussion
that Simons opted for the ethical system of classical liberalism over other principles of
economic control.
By the 1930s, due the failure of previous economic policy, Simons believed that
the social organism had evolved such that great concentrations of power existed,
seriously impeding the ability of individuals to participate in the social process of free
discussion. In response, the character of laissez faire also had to change to activist
planning to sustain freedom (Simons 1945, 3). In the economic realm, the focus of
planning consisted of seek[ing] to establish and maintain conditions such that it may
avoid the necessity of regulation of the heart of the contract that is to say the necessity
of regulating relative prices (Simons 1934a, 42). These conditions included: the
maintenance of competition via strong enforcement of antitrust, free trade and taxation of
advertising; the control of the currency through the radical change of 100% reserves and
implementation of the more discretionary rule of stabilizing the price level; and
equalization of opportunity via the institution of more progressive taxation and increase
of social welfare activities. By recasting laissez faire to planning to sustain freedom,
Simons ultimately expanded the role of the central government to intervene in economic
activity, primarily to insure greater equality in the opportunity to participate in the great
conversation that set the ethical standards guiding the evolution of the social organism.

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Concluding Remarks
When Henry Simons died in 1946, he left a galvanizing blueprint for saving the
classical liberal state, one that included both policy recommendations and a plan for
garnering the public opinion necessary to put them into action. Unfortunately for his
followers, many of the particular recommendations called for increasing the power of the
central government, a direction they later considered an anathema. As such, it was not
surprising that they faced a dilemma. In the early years, while members of the Chicago
School were working to gain influence for their free market principles, the members of
his school explained away the awkward interventionist elements by appealing to his lack
of knowledge of contemporary facts, his unawareness of the later growth in government,
his ignorance of subsequent theoretical developments, and the interventionist climate of
the 1930s and 1940s. When they began to win influence after the failure of Keynesian
economics to deal with the stagflation in the 1970s, it is not surprising that they gave up
trying to rescue the classical liberal reputation of Henry Simons. Likewise, it is not
unexpected that Van Horn and Mirowski discovered that the classical liberal Simons and
the neoliberal post-1946 Chicago School diverged regarding their conceptions of the
presence and importance of monopoly power. Classical liberals, like Simons, abhorred
all accretions of power, whether by private firms or by labor unions, because they
diminished equality and the concurrent ability of individuals to compete in the economy
and to participate meaningfully in the conversations about political change. In fact, one
wonders if Simons would have supported the theoretical and policy directions the
Chicago School took after his death.

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It is also significant of that while these individuals renounced and then rebuilt the
theoretical and policy underpinnings of his analysis, they employed, with much greater
success, Simonss legacy of advocacy first demonstrated in the Positive Program. After
his death, Hayek and Director successfully created the Mont Pelerin Society as a means
for neoliberals to build the consensus of opinion essential to counteracting Keynesian
economics. Later, Friedman emerged as an effective advocate to both his fellow
economists, winning the 1976 Nobel Prize for his economic research, and policymakers
and the wider public, with the publication of Capitalism and Freedom (1962) and Free to
Choose (1980). His work and that of other Chicago economists has gone on to play a
crucial role in guiding the functioning of the economy over the next decades. Likewise,
Hayeks The Road to Serfdom (1944) continues to inspire modern-day libertarians. Thus,
a peculiar legacy emerges from the work of Henry Simons: that while his disciples
rejected crucial aspects of his policies to save classical liberalism, they employed with
greater success, the task to advocate that he learned from progressive social scientists and
continued during the pluralist environment of interwar economics.

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