Simons, Henry C.

views updated

Simons, Henry C.

Henry Calvert Simons (1899-1946), American economist, spent most of his professional career at the University of Chicago, teaching in the department of economics and then becoming the first professor of economics in the law school. He developed a unified and comprehensive set of principles of economic policy for the United States and applied these principles to the changing problems of his times.

Simons called his philosophy libertarian: the essential requirement of a good political and economic order is that it protect, promote, and respond to the free choices of individuals. However, what is distinctive about his philosophy is the combination of this idea with two others: First, a merely negative, “hands-off” policy of government is not sufficient to maintain the free economic order and realize its benefits; the government must undertake certain limited but important affirmative actions. (The title of his first work to gain national attention, “A Positive Program for Laissez-faire,” 1934, already conveyed this idea, and it recurs throughout his writing.) Second, equality is a value only a little below freedom.

Simons’ important writings began to appear in 1933 and 1934, near the bottom of the great depression. The failure of “free enterprise” and laissez-faire had greatly strengthened support for government intervention in economic activity. There were no apparent limits to the character and scope of these interventions, less because of any widespread acceptance of a policy of extensive government control than because of the absence of any principles for distinguishing between controls that were necessary, appropriate, or feasible and those that were not.

Simons proposed a set of principles for making this distinction: It is the responsibility of the government to maintain a framework within which a free economy can successfully operate and to do so by means that are general in their application, impersonal, and based on law rather than administrative discretion. But the government should not intervene in the heart of the economic process– in the determination of relative prices and wages and in production and investment decisions. Specifically, Simons emphasized the government’s responsibility for maintaining appropriate monetary and competitive conditions.

Simons believed that the failure of the government to discharge its responsibility for maintaining reasonable stability in the supply of money had been one of the main causes of the severity of the depression. He was an early leader, among American economists, in advocating monetary expansion, to be achieved by means of budget deficits, as the road to recovery from the depression. But he did not believe that it was sufficient merely to assign to the government the responsibility of using its monetary, fiscal, and debt-management policies to achieve some vaguely defined goal of economic stability. Reform of the banking system was also necessary, and he urged that the money supply be based on a 100 per cent reserve of government obligations. Also, he argued the case for a statutory rule of monetary policy that would govern the conduct of the monetary authorities. Which of several reasonable rules was chosen was less important than the existence of some objective standard known to the public and binding on the authorities.

Simons often argued against what he considered excessively loose, discretionary, and expansionist prescriptions by overenthusiastic advocates of positive fiscal and monetary policy. Yet, the more important fact is that Simons, the champion of free enterprise and nonintervention, did accept and emphasize the responsibility of the government to use its monetary and fiscal policies affirmatively to stabilize the economy. This allowed Simons and his followers to influence policy more than they could have done if they had denied government responsibility. Simons was among the first to stress that if federal tax rates were unchanged, the resulting decline of revenues in recessions and rise of revenues in booms would have a strong stabilizing influence on the economy; that varying the revenue side of the budget might be a more effective fiscal instrument than varying the expenditure side; and that the way in which the government financed its debt would be a significant independent economic factor. These ideas all became important in postwar fiscal thinking and fiscal policy. Thus, Simons’ writings made a major contribution to the emergence of a postwar consensus on fiscal and monetary policy in the United States, not only among economists but also among persons in government and in the private economy whose opinions were influential.

While Simons believed that monetary stability is a necessary background condition for the effective operation of the free economy, he also felt that competition is the active driving force of the economy. He relied upon competition to organize production efficiently; to promote technological advance and economic growth; to permit high employment without inflation; to provide individuals, as consumers and as sellers of productive services, with the real alternatives that are the essence of freedom; to yield “commutative justice,” in the sense of economic rewards proportional to productive contributions; to prevent extreme inequality of power or income; and to minimize the need for government intervention to settle conflicts between private interests.

In his early writings Simons seemed to believe that the degree of competition in the United States was far from adequate to serve these purposes, chiefly because corporations had been permitted to grow to excessive size. Later, Simons’ view of the problem changed. He came to believe that it was the trend toward monopoly, rather than the degree of monopoly already achieved, that was the great danger. Moreover, the natural force of competition was strong, so strong that private arrangements, unaided by government, could only temporarily and partially suppress it. Therefore, the first requirement was to prevent government from supporting monopoly.

In his last writings, including “Some Reflections on Syndicalism” (1944), which became the classic statement of the case against trade unions, Simons argued that unions were the principal threat to the competitive, and therefore free, society. Simons offered no confident remedy, only the hope that awareness of the danger would make it possible to limit the growth of union power before it was too late.

The part of his program that Simons elaborated in greatest detail was the tax system. His two longest (although relatively short) works, Personal Income Taxation (1938) and Federal Tax Reform (written in 1943, published 1950), were on this subject. Simons’ writing on taxation largely spelled out the implications of a few basic ideas, the one most closely identified with his name being the definition of income, for tax purposes, as the sum of consumption plus the change in the value of net assets owned. Other ideas fundamental to his thinking about taxes were (a) that all taxation is taxation of individuals and must be judged by its effects on individuals; (b) that the allocation of income to short periods of time, like a year, is arbitrary and causes injustice and inefficiency; and (c) that in taxation, as in other policies, the government should avoid accidental or deliberate interference with the system of relative prices and wages. Rigorous application of these ideas enabled Simons to cut through a great deal of sophisticated argument about such matters as capital gains, gifts and bequests, corporate profits, and tax-exempt securities. Twenty years after his death, the considerations contained in Simons’ work were still basic to the continuing effort to rationalize the federal income tax system.

It was in his tax proposals that Simons’ stress on equality as a social goal found its most immediate expression. Simons did not believe that policy’ for reducing inequality should be confined to creation of a progressive tax system, but he did believe that correction of the tax system had to come first. As he said, “There are remarkable opportunities for extending the range of socialized consumption (medical services, recreation, education, music, drama, etc.) and especially for extending the range of social welfare activities. The prospects in these directions, however, must remain somewhat unattractive as long as the expenditures involved must be covered by the kinds of taxes on which we have relied in the past–that is, so long as what the government gives to the masses with one hand is largely taken away with the other” ([1934] 1948, pp. 68-69).

Herbert Stein

[See alsoFiscal policy; Monetary policy; Taxation, article onpersonal income taxes; and the biography ofKnight.]

WORKS BY SIMONS

(1934) 1948 A Positive Program for Laissez-faire: Some Proposals for a Liberal Economic Policy. Pages 40-77 in Henry C. Simons, Economic Policy for a Free Society. Univ. of Chicago Press.

1938 Personal Income Taxation: The Definition of Income as a Problem of Fiscal Policy. Univ. of Chicago Press.

(1943) 1950 Federal Tax Reform. Univ. of Chicago Press. → Written in 1943; published posthumously in 1950.

1944 Some Reflections on Syndicalism. Journal of Political Economy 52:1-25.

Economic Policy for a Free Society. Univ. of Chicago Press, 1948. → Contains writings first published between 1934 and 1945 and a complete BIBLIOGRAPHY.