Henry Simons, one of the fathers of Chicago economics, advocated for libertarian policies promoting free markets as well as wealth redistribution through highly progressive income taxation, reflecting his belief that concentrations of private economic power were as threatening to liberty as centralized government power. Daniel Shaviro demonstrates that, for Simons and other early to mid-20th century libertarian thinkers, including Milton Friedman and George Stigler, policies promoting economic equality might be seen as complementary to, rather than conflicting with, support for free market capitalism and limited government intervention.
Editor’s note: Portions of this article are derived from Daniel Shaviro, The Forgotten Henry Simons, 41 Fla. State L. Rev. 1 (2013).
Nearly 80 years after his death, former University of Chicago law professor and economist Henry Simons remains famous in the economic study of income taxation. His two main legacies are defining “personal income” as the market value of one’s consumption plus change in net worth during the relevant period—now known as the Haig-Simons income definition—and his often spirited advocacy for highly progressive federal income taxation.
Simons was hardly just a tax scholar , however. Indeed, far more of his work concerned such issues as monetary policy, the case for a competitive free-market economy, and the economic harm that he thought labor unions were doing (including, in his view, causing the Great Depression). For many years he was Friedrich Hayek’s closest collaborator, and George Stigler subsequently called him the “Crown Prince of … the Chicago School of Economics,” Simons continues to be remembered in this aspect (not always positively) within a separate community of readers who study free enterprise, Chicago-school economic analysis, and libertarianism.
Thus, both libertarians and proponents of progressive taxation may turn to Simons for edification. By his own self-assessment, Simons was “at the same time an extreme libertarian and a believer in massive wealth redistribution.” How could this be? In today’s intellectual world, these positions appear to be wholly incompatible. That, to Simons, both stances made sense together tells us something, not just about his own distinctive views, but also about how self-described libertarians’ thinking about concentrated economic power has changed over time.
Libertarianism today is often defined as a rights- or process-based approach to issues of social justice that rejects consequentialism. Thus, Robert Nozick, in Anarchy, State, and Utopia, disavows “end-result” principles that assess distributive justice in society based on how things come out in favor of the “historical” view that “whether a distribution is just depends upon how it came about.”
But this was not the case for many of the mid-twentieth-century writers who had libertarian affinities. For example, Hayek’s Road to Serfdom—surely, in intellectual history, a canonical and foundational libertarian work—denounces centralized economic planning on the consequentialist ground that it will lead inevitably to tyranny. Likewise, Milton Friedman—a close enough ideological ally of libertarianism to have titled his most famous book Capitalism and Freedom—was not just a consequentialist, but also a proponent of “measures to eliminate poverty,” notwithstanding that he otherwise viewed income redistribution as “a clear case of using coercion … [in] conflict head-on with individual freedom.”
During the period before World War II, self-described libertarians tended to hold very different empirical (no less than philosophical) beliefs than many of their modern successors. For example, Friedman, as late as 1947, resembled Simons in fearing that emergent monopolies would inevitably strangle private business competition unless the government adopted regulatory restrictions to discourage corporate mergers and the rise of large companies.
Private monopoly, as a potential consequence of corporate size and thus perhaps even its cause, was a major concern to Chicago School economists until empirical work in the 1950s persuaded them of two things: The first was that competition in private markets pervasively
undermines monopoly even if it is briefly established. Thus, regulatory intervention is not needed to combat it. Second, they now concluded that the main danger of monopoly “come[s] not from large corporations that exploit purely private economies of scale . . . but from interest groups that enter into a symbiotic relationship with a government that purports to ‘regulate’ them.”
Simons was among the cohort of pre-1950 Chicago economists who viewed regulatory intervention as necessary to preclude monopoly. He published work supporting government regulation to restrict corporate size, as a precondition to maintaining competitive markets – evidently viewing this as merely “a completion of the idea of the night watchman state. The night watchman state enforces contracts and guards against explicit theft. A monopolist is also an implicit thief because his possession of market power leads to the exchange of commodities at prices that do not reflect underlying social scarcities.”
We can now begin to see how Simons’ support for maintaining competitive markets linked up with his arguments for progressive tax policy. He justified progressive taxation on the seemingly very un-libertarian “ethical or aesthetic judgment that the prevailing distribution of wealth and income reveals a degree (and/or kind) of inequality which is distinctly evil or unlovely.” Yet this reflected his view that inequality in both the political and economic realms would alike threaten both competitive markets and liberty. With respect to political power, this meant supporting a limited government that would leave alone relative prices and the allocation of capital between industries. With respect to economic power, it called for government intervention to address both monopolies and wealth inequality. The two distinct policy prescriptions that Simons favored—limited government and a progressive income tax—thus fit seamlessly into his personal version of classical liberalism, which gave “special place to liberty (and nearly coordinate place to equality) as a ‘relatively absolute absolute.’”
This is not exactly libertarianism in the mode of a Nozick – less still, classical liberalism in the mode of a Richard Epstein. Yet, as Stigler noted 50 years ago, its underlying spirit and motivation could hardly have been more libertarian-affiliated than it was:
Simons believed that it was essential to the preservation of personal freedom that a large sector of economic life be organized privately and competitively—this was a fundamental element of the liberal position that many, perhaps even an increasing share of us, still believe… Simons’ central goal is as vital and as irresistible today as it was forty years ago: to devise a decentralized, unpoliticized world in which personal freedom and economic efficiency find wide scope and strong defense.”
For Simons, the virtues of broad-based progressive income taxation were not limited to its countering concentrated private economic power. In addition, broadly taxing as much Haig-Simons income as possible would minimize the pernicious role of interest group politics in determining at the political retail level which individuals and businesses should pay less income tax, while their peers paid more. Whether or not one shares this vision, it ought to be more widely recognized today as a plausible instantiation of consequentialist libertarian sentiments.
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