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I sometimes found it difcult to follow the

authors arguments, as he includes discussions of
Latin American countries in nearly every
chapter. His basic point, however, is striking: that
many low- and middle-income countries had far
lower rates of economic growth between 1980
and 2000 than in the preceding 20 years, and
then enjoyed much higher rates of growth after
2000, when many of them had given up following
the IMFs unsuccessful requirements. As
Weisbrot points out, this naturally had a
knock-on effect in holding back progress on
social indicators, such as life expectancy and
child and infant mortality. He also, as one would
expect, points to the example of China which
has not followed neoliberal policies where
economic growth has been responsible for lifting
hundreds of millions of people out of poverty in
the past 30 or so years.
One of his key points is to note how quickly
and successfully Argentina recovered from a
massive default and devaluation at the end of
2001. He says: There was a deep crisis, but it
only lasted for one quarter, and then the
economy began a robust recovery that saw a 63
per cent jump in GDP, a nearly two-thirds
reduction in poverty, and a rapid expansion of
employment over the next six years (p. 7).
One of the lessons seems to be that markets can
forget remarkably quickly.
I was surprised by his expression of doubt
whether nancial recessions tend to last longer
than normal recessions. I had understood that
this was generally accepted since Irving Fishers
1933 debt deation theory. Certainly that was
the basis for my own prediction in 2009 that the
UK recession would probably last at least
another ten years.
It is hard to disagree with Weisbrots view
that the experts not only failed to see the Great
Recession coming, but, on the whole, also failed
to provide helpful guidance on what to do about
it. (The eurozone is a special case, being a
political rather than an economic construct.)
The exception might be the enormous monetary
2016 Institute of Economic Affairs

expansions combined with very low interest

rates in many countries though it is only fair to
suggest that perhaps we havent yet seen the end
of that story.
Especially if one is inclined to sympathise
with neoliberal policies (whatever precisely
they are), this would be a salutary book to read
and ponder. The author insists that the ability of
so-called experts to impose inappropriate
policies without the possibility of popular
opinion affecting those policies (especially, but
not only, in the eurozone) was a major cause of
the failure of many countries, developed as well
as developing, to grow more quickly, both before
and after the Great Recession.
Im not entirely convinced. Im all for
democratic elections making it possible for
populations to throw the rascals out if and
when their policies prove unsuccessful. But I
suspect that quite often governments need to be
brave and risk even unpopular policies, hoping
that their electorates will be convinced after they
succeed, if not before. (This, after all, is what
happened with most UK privatisations about
as clear an example as one could wish to see of a
successful policy!)

D. R. Myddelton
Emeritus Professor of Finance and Accounting
Craneld School of Management
David@ancastle.f2s.com

In Defense of Deflation
by Philipp Bagus. Springer (2015), 215 pp. ISBN:
9783319134277 (hb, 90.00); 9783319134284
(eBook, 72.00). Springers MyCopy edition of
the eBook is available to library patrons for
/$/24.99.
The world often seems to be scared of deflation
and, arguably, this creates an asymmetric bias
towards inflation. For example, at the beginning

ECONOMIC AFFAIRS VOLUME

of the twenty-rst century, after the dotcom

crash, there was widespread fear of deflation in
the US, for no obvious reason. The response to
this fear was several years of loose monetary
policy which arguably contributed signicantly
to the nancial crash of 2008.
Much of the commentary in the UK in recent
years has avoided deflation phobia and also
managed to distinguish good from so-called
bad deflation. Indeed, the fall in the price level
(or, strictly speaking, the fall of inflation to
below target) that the UK has experienced
recently has been caused by the fall in
commodity prices and so is not really deflation at
all it is an adjustment to supply-side conditions
that only brings benets in terms of lower prices
for consumers and lower costs for businesses.
But Philipp Baguss book In Defense of
Deflation deals mainly with what is widely believed
to be bad deflation. This would involve a
continuing fall in the price level caused by monetary
deflation. The book is excellent and timely.
Bagus, an associate professor at Universidad
Rey Juan Carlos and an associate scholar of the
Mises Institute, begins by noting that there was
very little concern about deflation amongst
economists in past centuries (before the
twentieth century) despite the fact that deflation
happened relatively frequently. In other words,
in the current era we are fearing something that
we have not experienced, whereas, in past eras,
the reality did not seem worth writing about.
Sometimes the issue of sticky prices causing
problems in times of deflation reared its head in
economists writing, but overall they seemed
quite sanguine.
After this discussion of the historical context,
there is an excellent section on the functions of
money balances which is accessible to any
student of economics, though I disagree
profoundly with the author on the apparent
legal privileges of fractional reserve banking.
Indeed, this section could be applied to help our
understanding of fluctuations in the value of
digital monies such as Bitcoin.

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109

The book moves on to knock down the

theoretical arguments for opposing deflation.
Bagus then notes using public choice reasoning
that the gainers from deflation are widely
dispersed (in general, they are households who
benet from falling prices but whose wages may
not fall as fast) while the losers tend to be
powerful interest groups (generally rms for
which the value of debt rises in real terms).
There is no question, in my mind, that Bagus
is right both to raise this issue and also to argue
that there are many myths surrounding the costs
of deflation. Recent experience in the UK
supports Bagus. In recent years, there have been
big falls in real wages and, for many people, falls
in nominal wages. Because of this,
unemployment rose much less and for a shorter
period than people expected in the recession.
The labour market was able to cope with shocks,
which is important in times of deflation.
However, in knocking down the myths,
perhaps the pudding is over-egged. The
impression is sometimes given that monetary
disturbances are part of life that entrepreneurs
and other households have to deal with and can
deal with. If that is so with deflation, then it is
also the case when it comes to inflation. But the
Austrian case against inflation is that the process
distorts investment decisions in a particular way
that is highly damaging. The same must be true
of deflation though the distortions will be
different (and not necessarily as serious).
The book nishes with excellent case studies
which illustrate all the points made earlier in the
book. It examines the US between 1865 and
1896. In fact, this was a growth deflation
whereby economic growth in the context of
stable monetary policy allowed prices to fall in
many ways another type of good deflation. The
German deflation of the 1930s is also
discussed. This is interesting in that it followed
a bout of inflation. Bagus argues that the
problems arising during the deflation were
largely inevitable after the distortions caused
by earlier inflation and, in fact, deflation
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BOOK REVIEW

speeded up adjustment. He does note that

adjustment would have been faster still had
labour markets been much more flexible.
This is an excellent book. To my mind, Bagus
has put together a highly effective defence of
deflation in most circumstances. A second
edition (or perhaps a different book by the same
author) would benet from a discussion of, for
example, present-day Japan and also the
eurozone. In the eurozone, if deflation is not
accepted in some countries at some times, there
will be a very strong bias towards inflation
because the European Central Bank will loosen
monetary policy to avoid deflation anytime,
anywhere. A sequel would also benet from
more explanation of the economic reforms
that would reduce the costs of deflation.
Indeed, the author has the potential to be
something of a deflation guru in the current
economic climate.
Philip Booth
Institute of Economic Affairs and St Marys
University, Twickenham
pbooth@iea.org.uk
This is an extended version of a review that will
appear in EA, to be published by the IEA in
March 2016.

Hayeks Modern Family: Classical

Liberalism and the Evolution of Social
Institutions
by Steven Horwitz. Palgrave Macmillan (2015),
336 pp. ISBN: 978-1137448224 (hb, 78.00; Kindle
edition, 74.10).
The study of institutions their role and how
they evolve has been one of the growth areas
in economics in recent decades. However,
perhaps the most pervasive institution, the
family, has hitherto been among those least
studied by economists. Perhaps the outcry
against economic imperialism from other
2016 Institute of Economic Affairs

social scientists, which greeted early work on

the subject such as that of the late Gary
Becker, warned others off. In this important
new book, Professor Horwitz sets out to
correct that omission.
With a background in the Austrian
tradition, Horwitz is well placed to
accomplish this task. With its notion of
disequilibrium in markets, dispersed
knowledge, and the attempts of individuals
to overcome these, Austrian economics,
particularly the work of Friedrich von
Hayek, allows a dynamic analysis of institutions
which more static, neo-classical models struggle
to match. Too often, that tradition takes
institutions as a given and that misses most of the
story. The Austrian or Hayekian approach taken
here equips Horwitz to examine form and
evolution together.
Horwitz distinguishes between the functions
and the form of the family. The functions are the
ends the family exists as an institution to achieve.
The form is the structure the family takes to
perform its functions. He examines the functions
via Abraham Maslows famous hierarchy of
needs. First and foremost, human beings seek to
satisfy physiological needs, for food and shelter
for example. When these are satiated to an
acceptable degree, people move on to satisfy
safety needs, security of body and property for
instance. It is easy to see how a family unit in a
primitive society could help individuals to meet
these needs, with a division of labour between
men, who hunted and gathered, and women,
who looked after the home. Something like this
persisted until quite recently in human history,
with the family and household being primarily a
unit of economic production. The labour of
wives and husbands complemented each other,
and that of their children frequently augmented
both and provided insurance against old age.
While love and belonging are the next steps on
Maslows hierarchy, and pre-modern families
certainly played a role in meeting those needs,
to a large extent their raisons dtre were the