Leiden school of economics
The Leiden School (Dutch: Leidse school) is an economic framework and school of thought that was developed at the Netherlands' University of Leiden in the early 20th century. Spreading across Europe in the early 20th century, it focuses on non-interventionism, laissez-faire, the abolition of central banks, and self-regulation within the market system. It was the dominant school of economic thought in the United Kingdom and the vast majority of the members of the Organization of Democratic Nations in the mid-to-late 20th century.
Theory
The Leiden School's macroeconomic framework is rooted in its staunch advocacy for a laissez-faire approach, where market dynamics, rather than centralized interventions, determine the ebb and flow of economies. Arguing for the inherent efficiency of free markets, Leiden economists believe that economies are best equipped to correct themselves over time without sustained governmental meddling.
This perspective leads to the belief that organic growth, driven by individual choices and entrepreneurial spirit, is more sustainable and resilient than growth prompted by state-driven initiatives. They argue that inflation, unemployment, and business cycles, though potentially volatile in the short term, will self-correct in a naturally free market.
Core principles
In his book The Free Market Equilibria, Dutch economist H. van der Molen outlines the fundamental principles of the contemporary Leiden school as follows:
- Role of government: The primary purpose of government, according to the Leiden school, is twofold:
- Addressing societal issues of scarcity, ignorance, and uncertainty.
- Ensuring that individuals possess sufficient resources to effectively participate in the market
- Minimal role or outright nonexistence of central banks: Leiden theorists contend that monetary intervention often yields unintended consequences that disrupt natural market equilibriums.
- Trade policy: Tariffs are largely discouraged. Instead, the emphasis is on forging multinational agreements, setting quotas, implementing subsidies, and drafting fair trade laws to ensure balanced international trade.
- Price regulation: While Leiden economists do not completely rule out government-driven price regulations, they view these as measures of last resort, to be employed only under extenuating circumstances.
- Government failure: is defined as when government intervention fails to produce the desired outcome
- The inherent subjectivity of consumers
- The discreet rapport between capitalists and bureaucracy: The Leiden model sees mutual benefits arising from the collaboration between governmental bodies and large corporations.
- Monopolization and Entrepreneurship: The Leiden model argues that monopolization is detrimental only when it stifles entrepreneurship, most notable in tendency of capitalists to establish multiple entities, creating an illusion of competition where entities are under common ownership.
Minimal Bureaucratic Overhead
In addition to these fundamental principles, British economist George Edmund Walsh also introduced the idea that for markets to function at their optimal level, bureaucratic structures should be designed to be as lightweight and efficient as possible. Instead of broad, sweeping regulations, targeted and precise rules should be crafted to mitigate specific and identified risks. This reduces bureaucratic overhead on businesses and promotes entrepreneurship and innovation, while still providing essential consumer and environmental protections.
Origins and foundation
European Economic Crisis (1922-1928)
The origins of the Leiden School trace back to the aftermath of the European Economic Crisis (1922-1928). The deflationary nature of the crisis, that started in the Rhineland and later spread to the rest of Europe, led Britain to initiate a vast expansion of gold mining operations within its colonial territories, notably in Georgia. This move was aimed at bolstering the British economy and offering aid to struggling European neighbors. However, as the Leiden School's principles began to gain traction, proponents vehemently critiqued Britain's interventionist policy.
Leiden economists such as George Edmund Walsh (b. 1884) argued that the sudden influx of gold provided only short-term relief and failed to address the deeper issues of European economies. They argued that such artificial boosts were "unnatural" and would eventually lead to a distortion of the economic order, making future crises inevitable. He argued that the rapid increase in the money supply, without a corresponding rise in goods and services, could erode purchasing power and undermine the stability the policy aimed to achieve. However, despite these critiques, the Leiden School had yet to gain mainstream acceptance, and Britain continued in its course, maintaining limited economic intervention.
The Great War and the suspension of gold convertibility
Britain temporarily suspended the convertibility of the British pound to gold in 1937, during the Great War (1935-1939). This was done in an attempt to allow the expansion of the money supply in order to fund the war effort against the Tripartite Coalition (France, Austria, and the Ottoman Empire). However, this policy led to rampant inflation after the war, creating a surge in commodity prices, which began to create public distrust for government intervention in the economy.
The Cavendish Affair of 1944-45, revealing questionable practices among banking and political elites in Britain, further eroded public confidence in centralized banking and governmental intervention.
Popularization and policies
Silent War rivalry with Russia
The rise of centralized economic control in Russia during the early 20th century also significantly influenced economic discourses in Britain, especially in the context of the brewing geopolitical rivalry between the two nations. As Russia pursued its path of state-driven industrialization, amassing control over production and distribution, British observers began drawing parallels between Russia's political authoritarianism and its centralized economic practices.
Return to the gold standard in Britain
The growing discontent in economic policy led to the rise of Sir Gordon Howell, MP for Radnorshire and a critic of interventionism, to the position of Prime Minister. Under Howell's leadership, the British government underwent a shift in its economic policies, abandoning the interventionist policies of his predecessors. Howell embraced the core principles of the Leiden School, returning to orthodox and classical monetary policies, decreasing state involvement in market dynamics, and emphasizing laissez-faire capitalism. By 1946, the British pound was set to a fixed rate in gold, restoring the currency's convertibility to gold.
Criticism
The Leiden school, while influential, has faced substantial criticism. Most notably, proponents of National Republican thought oppose Leiden thought's hands-off approach. They contend that minimal government intervention can lead to pronounced income disparities, heightened economic volatility, and an erosion of national sovereignty. The emphasis on free markets, they argue, exposes economies to risks from global market fluctuations and might compromise cultural and national values, and the overall well-being of populations. Detractors also argue that it could lead to an overreliance on market mechanisms at the cost of long-term stability and societal welfare.
