Grasping Reality on TypePad, by Brad DeLong

He contrasts his idea of freedom with Ignatius Loyola's of the Jesuit who should be 'as soft wax' in the hands of his superior.... Yet... the Epilogue of the final volume of his last major work, Law, Legislation, and Liberty, includes a fierce denunciation of permissiveness in general and educational permissiveness in particular.... [I]t is remarkable that someone who wishes to reduce the role of coercion in human affairs should express unqualified hostility to those who wish to reduce the role of coercion in the bringing-up of young people.... The most revealing part of Law, Legislation, and Liberty is the Epilogue... 'The Three Sources of Human Values'. The source which Hayek wants to emphasize is evolved social institutions. Not every part of behaviour is either hereditary or the result of deliberate intention. It can also result from traditions, rules, and institutions, which are the product of a social rather than a biological evolution, and are thus the result of human action, but not of conscious human intention.

...Hayek is quite ruthless in saying that the test of evolutionary rules is the simple one of sucess, identified, in turn, with progress...

To those of us brought up on Hayek's definition of freedom as the absence of coercion, his condemnation of permissiveness came as a shock. What he really dislikes about educational or social permissiveness, and frequently condemned in the Bloomsbury of Keynes's day, is the notion that rules which cannot be rationally explained do not have to be observed; or that people of any age should 'reason why' before accepting rules--conventional as well as legal.

Thus while Hayek's ultimate values are those of the radical apostle of human progress his ethical philosophy is high conservative.. with which Edmund Burke would have felt at home.... The interesting question about this blend of radical evolutionary fervour and conservative insistance on rule observance is why someone holding it should regard himself as a libertarian, which Hayek undoubtedly does....

But it is not merely the outside critic who has difficulties with Hayek's rule-bound evolutionism. Hayek has difficulty himself. If there is an inbred wisdom, not apparent to the naked eye, in the evolution of common law or common custom, why deny this hidden wisdom to more interventionist or authoritarian structues? After all, institutions such as rent control, price control, a large nationalized sector, and heavy progressive taxation have existed in many countries for generations and have often evolved gradually. Might they not contain their own wisdom, not obvious to Hayek when writing as an economist?... Are not Hayek's own economic arguments for free markets as superior ways of disseminating information and coordinating activity put into jeopardy by Hayek's philosophial insistence on our invincible ignorance of longer-term consequences? The introduction of a free market--say in the transmission of television programs--can have remote effects on values and tastes, and behavior never suspected by the economist.... Indeed, nothing could smack more of social engineering and be less respectful of slowly emerging rules and practicies than Hayek's... most notable policy suggestions.... for the competitive circulation of privately-issued currencies....

[We should] avoid...artificial reconciliations and... accept that Hayek is attracted to two different political philosophies: classical liberalism (based on limited government, free markets, and the rule of law) and a conservative philosophy which stresses tradition and the hidden wisdom of existing institutions. When in some golden age--say Gladstonian England, as seen through nostalgic spectacles--the prevailing tradition was itself that of classical liberalism the two systems of Hayek might seem in harmony. When prevailing conditions are authoritarian or collectivist, there is tension between the two ideals...

...To publish a set of rules asking the managers of state enterprises to behave as if they were profit-maximising entrepreneurs in competitive private industry ignores the actual personal motivations faced by these men; and this approach becomes badly unstuck in the British nationalized industies. You do not make a donkey into a zebra merely by painting stripes on its back.

Hayek long ago pointed out that 'market socialism' among state enterprises might provide a few mechanical rules such as 'Invest where the expected return exceeds a market rate of interest plus a risk premium'. But it would not tell us whether to believe the estimates of return made by state managers. Nor would it help to decide who should be allowed to bid for available funds, or how new entrants with completely different ideas about techniques, produts, and return were to be accomodated. The benefits of the market system can be combined with a considerable state sector and a good deal of redistribution; but they cannot be as easily divorced from 'capitalism' as some academics... would like.

... Professional economists who favour market forces put the emphasis on the price mechanism and the profitability test (which is also valid for state industry or workers' co-ops). By contrast radical right politicians put the emphasis on reduced taxes and government spending cuts, without too many fine nuances about their exact effects.

We might note that a belief in marketplace economics conflicts much less with conservative political values when it places its emphasis on the carrot-and-stick (especially the latter) than when it is founded primarily on a belief in individual freedom and the realization that there is a strong affinity between 'capitalism' and 'the permissive society'. The carrot-and-stick man will be quite happy to talk of 'the punishment fitting the crime'. The permissive free-market economist feels uneasy about talk of responsibility and punishment; he prefers to say that people should pay for the social costs of their actions, and he would design institutions and laws to that end. These may seem differences of language, but language is important. On crucial, unforseeable occasions the differences between Conservative Gradgrindism and the more libertarian marketeer will come to the surface.

...[P]eople may at times derive psychic satisfaction from the humiliation of their enemies. This conclusion brings us to the basic weakness of utilitarianism, whether in its 'happiness' or its 'choice' variety. It arises from the fact that people have desires of a hostile and restrictive kind, for others as well as for themselves.

Amartya Sen is well known for his demonstration that [liberty] free choice in personal matters can easily conflict with utilitarian principles [of achieving the greatest good for the greatest number]. [Note.] His best known illustration is that of two people 'Prude' and 'Lewd', deciding who should read Lady Chatterley's Lover. Clearly the liberal solution is for Lewd to read it and Prude not to. But it so happens that Prude would rather read it himself, however reluctantly, than allow Lewd to indulge his 'depraved tastes'. Lewd on the other hand, given that only one of them can, would like it even more if Prude were forced to read it to shake him out of his stuffiness. Thus Prude reading Lady Chatterley has a higher utlity ranking for both men... in contrast to the libertarian soution of allowing Lewd to get on with his reading himself.

The Sen paradox is but one example of many potential conflicts. A fully-fledged utilitarian would take into account the desires of some mature citizens for compulsory haircuts for long-haired youths.... He would also take into account the desires of other citizens for restrictions on the number of overseas villas or yachts the wealthy can possess.... These linkages of one person's well-being to the behavior of others, whether reflecting envy or aesthetic or 'moral' views, are labelled 'interdependence effects' in the economic literature, and it is their recognition which can make utilitarianism an illiberal doctrine. If negative interdependence effects are taken into account in public policy, people will be penalized for carrying out personal acts which affect others only through thinking making it so.

Anyone with liberal value judgments will therefore have to qualify his utilitarianism by the exclusion of some interdependence effects. Wants arising from interdependence effects are a diguised form of coercion which arise from a desire to regulate the way other people spend their lives or from envy of their well-being or success. Many utilitarian writers are willing to make this qualification.... Once such qualifications are made it is admitted that other principles are being used to qualify utilitarianism, which thus loses its status as a single ultimate guide to moral conduct in favor of a tacit pluralism.

Note: I think the general point is an interesting one--although weaker than Brittan thinks. But Sen's example is simply wrong. The liberal solution is the same as the utilitarian one: Lewd and Prude sign a contract, whereby Prude undertakes to read the book and Lewd undertakes not to read the book. Both are eminently willing to sign and keep such a bargain. So where is the conflict between utility and liberty?

Why is the general point weaker than Brittan thinks? Well, would he object to 'mature' citizens hiring the unkempt young to get their hair cut? I presume he would find nothing objectionable as long as the desire for other people to achieve short hair was reached through carrots rather than sticks, yet such a transaction gives effect to the selfish interdependence effects that Brittan wants to exclude from assessments of social welfare.

My review of James Scott's Seeing Like a State: A (very powerful) post-modernist Hayekian argument

'Even a Panic Is Not Altogether a Bad Thing': Hayekian Business Cycle Theory and the Great Depression

The first instinct of governments and central banks faced with the gathering Depression was to do nothing. Businessmen, economists, and politicians (memorably Secretary of the Treasury Mellon) expected the recession of 1929-1930 to be self-limiting. Earlier recessions had come to an end when the gap between actual and trend production was as large as in 1930. They expected workers with idle hands and capitalists with idle machines to try to undersell their still at-work peers. Prices would fall. When prices fell enough, entrepreneurs would gamble that even with slack demand production would be profitable at the new, lower wages. Production would then resume.

Throughout the decline--which carried production per worker down to a level 40 percent below that which it had attained in 1929, and which saw the unemployment rise to take in more than a quarter of the labor force--the government did not try to prop up aggregate demand. The Federal Reserve did not use open market operations to keep the money supply from falling. Instead the only significant systematic use of open market operations was in the other direction: to raise interest rates and discourage gold outflows after the United Kingdom abandoned the gold standard in the fall of 1931. The Federal Reserve thought it knew what it was doing: it was letting the private sector handle the Depression in its own fashion. It saw the private sector's task as the 'liquidation' of the American economy. And it feared that expansionary monetary policy would impede the necessary private-sector process of readjustment.

  Contemplating the wreck of his country's economy and his own political career, then-president Herbert Hoover wrote bitterly in retrospect about those in his administration who had advised inaction during the downslide:

The 'leave-it-alone liquidationists' headed by Secretary of the Treasury Mellonfelt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate'.He held that even panic was not altogether a bad thing. He said: 'It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people'

But Hoover had been one of the most enthusiastic proponents of 'liquidationism' during the Great Depression himself. And the unwillingness to use policy to prop up the economy during the slide into the Depression was backed by a large chorus, and approved by the most eminent economists--most of them 'Austrian' in the sense of Friedrich Hayek and Josephh Schumpeter.

From Harvard Schumpeter argued that there was a:

presumption against remedial measures which work through money and credit. Policies of this class are particularly apt to produce additional trouble for the future.

From Schumpeter's perspective:

depressions are not simply evils, which we might attempt to suppress, butforms of something which has to be done, namely, adjustment to change.

This socially productive function of depressions creates 'the chief difficulty' faced by economic policy makers. For:

most of what would be effective in remedying a depression would be equally effective in preventing this adjustment.

From London, Friedrich Hayek found it:

...still more difficult to see what lasting good effects can come from credit expansion. The thing which is most needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production.If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand resources [are] again led into a wrong direction and a definite and lasting adjustment is again postponed.The only way permanently to 'mobilise' all available resources is, thereforeto leave it to time to effect a permanent cure by the slow process of adapting the structure of production...

Hayek believed that enterprises are gambles which sometimes fail: a future comes to pass in which certain investments should not have been made. The best that can be done in such circumstances is to shut down those production processes that turned out to have been based on assumptions about future demands that did not come to pass. The liquidation of such investments and businesses releases factors of production from unprofitable uses; they can then be redeployed in other sectors of the technologically dynamic economy. Without the initial liquidation the redeployment cannot take place. And, said Hayek, depressions are this process of liquidation and preparation for the redeployment of resources.

Policy does not allow a choice between depression and no depression, but between depression now and a worse depression later: 'inflation pushed far enough [would] undoubtedly turn depression into the sham prosperity so familiar from European postwar experience, [and]... would, in the end, lead to a collapse worse than the one it was called in to remedy.' For 'recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another [worse] crisis ahead'

This doctrine--that in the long run the Great Depression would turn out to have been 'good medicine' for the economy, and that proponents of stimulative policies were shortsighted enemies of the public welfare--drew anguished cries of dissent from those less hindered by their theoretical blinders. British economist Ralph Hawtrey scorned those who wrote at the nadir of the Great Depression that the greatest danger the economy faced was inflation. It was, Hawtrey said, the equivalent of 'Crying, 'Fire! Fire!' in Noah's flood.'

John Maynard Keynes also tried to bury the liquidationists in ridicule. Later on Milton Friedman would recall that at the Chicago where he went to graduate school such dangerous nonsense was not taught--but that he understood why at Harvard-where such nonsense was taught-bright young economists might rebel, reject their teachers' macroeconomics, and become followers of Keynes. Friedman thought that Keynesianism was wrong--but not crazy. And that Hayek was a great man, but that his contributions to economics and moral philosophy were not in the area of business cycle analysis.

However, the 'liquidationist' view carried the day. Even governments that had unrestricted international freedom of action--like France and the United States with their massive gold reserves--tended not to pursue expansionary monetary and fiscal policies on the grounds that such would reduce investor 'confidence' and hinder the process of liquidation, reallocation, and the resumption of private investment.

John Maynard Keynes on Friedrich Hayek's The Road to Serfdom:

In my opinion it is a grand book.... Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement, but in a deeply moved agreement.

Hayek on the continued relevance of The Road to Serfdom (written in 1952):

...that organized movement toward a deliberate organization of economic life by the state... is nearly dead in the Western world. The century of socialism in this sense probably came to an end around 1948.... [Y]et some of [socialism's] conceptions have penetrated far too deeply into the whole structure of current thought to justify complacency.... [T]he advocacy of policies which in the long run cannot be reconciled with the preservation of a free society is no longer a party matter... (pp. vii-viii)

Hayek on why the Clement Attlee Labor government in Britain from 1945-1951 did not end in totalitarianism:

Of couse, six years of socialist government in England have not produced anything resembling a totalitarian state. But those who argue that this has disproved the thesis of The Road to Serfdom have really missed one of its main points: that the most important change which extensive gtovernment control produces is a psychological change, an alteration in the character of the people. This is necessarily a slow affair, a process which extends not over a few years but perhaps over one or two generations... (pp. xi-xii)

Hayek on progressive income taxation and social insurance (written in 1976):

[Today]... socialism has come to mean chiefly the extensive redistribution of incomes through taxation and the institutions of the welfare state. In [this] kind of socialism the [totalitarian] effects I discuss in this book are brought about more slowly, indirectly, and imperfectly. I believe that the ultimate outcome tends to be very much the same... (pp. xx-xxi)

Hayek channels Karl Polanyi (p. 39):

It is regrettable, though not difficult to explain, that in the past much less attention has been given to the positive requirements of a successful working of the competitive system.... The functioning of a competition not only requires adequate organization of certain institutions like money, markets, and channels of information--some of which can never be adequatley provided by private enterprise--but it depends, above all, on the existence of an appropriate legal system, a legal system designed both to preserve competition and to make it operate as beneficially as possible. It is by no means sufficient that the law should recognize the principle of private property and freedom of contract; much depends on the precise definition of the right of property as applied to different things. The systematic study of the forms of legal institutions which will make the competitive system work efficiently has been sadly neglected; and strong arguments can be advanced that serious shortcomings here, particularly with regard to the law of corporations and the law of patents, not only have made competition work much less effectively than it might have done but have even led to the destruction of competition in many spheres.

p. 119: What is this with 'Nikolai Lenin'?"