David R. Henderson  

Russ Roberts on Hayek

PRINT
Caplan on Hayek, Richter, and ... My Question for Larry Summers...

Russ Roberts has a nice op/ed on Hayek's main ideas in today's Wall Street Journal. He highlights four contributions of Hayek. I agree with all four, but he gave a poor example for one of them. The four are:
1. "He and fellow Austrian School economists such as Ludwig Von Mises argued that the economy is more complicated than the simple Keynesian story. Boosting aggregate demand by keeping school teachers employed will do little to help the construction workers and manufacturing workers who have borne the brunt of the current downturn."
2. "Hayek highlighted the Fed's role in the business cycle. Former Fed Chairman Alan Greenspan's artificially low rates of 2002-2004 played a crucial role in inflating the housing bubble and distorting other investment decisions. Current monetary policy postpones the adjustments needed to heal the housing market."
This is the one with the poor example. As Jeff Hummel and I have shown elsewhere (here and here), Greenspan did not have a particularly loose monetary policy.
3. "Third, as Hayek contended in 'The Road to Serfdom,' political freedom and economic freedom are inextricably intertwined. In a centrally planned economy, the state inevitably infringes on what we do, what we enjoy, and where we live. When the state has the final say on the economy, the political opposition needs the permission of the state to act, speak and write. Economic control becomes political control."
Well said.
4. "The fourth timely idea of Hayek's is that order can emerge not just from the top down but from the bottom up."
Russ understates this. Hayek argued, in his article, "The Use of Knowledge in Society," that order can't emerge from the top down.

BTW, see my review of The Road to Serfdom in Regulation, Spring 2009.



COMMENTS (24 to date)
david writes:

re: #1, that's because the structural-shifts story predicts that there should not be across-the-board unemployment to begin with (in which case industries still operating at full capacity obviously won't benefit from AD boosts). Yet that is what is occurring.

david writes:

Non-subscribers to the WSJ should click here, incidentally.

(and #2 has the problem you pointed out yourself, #3 is simply obviously wrong - Sweden, Singapore - and #4 contradicts every country that has ever had a successful industrialization policy: Asian Tigers, etc. Hayek's point about the difficulty of information extraction is well made, but it just means that we have to be more cautious about doing so - for instance, whether or not you support regulation vs. tort, either way someone has to make judgment calls about externalities, invoking information about preferences they cannot possibly know themselves. But the perfect is the enemy of the good.)

Boonton writes:

I agree with your dismisal of #2. Rates were not particularily low from 2002-2004 unless you think that the economy should be centrally planned by the Federal reserve trying to strategically 'pop bubbles' while the overall economy is at low inflation and low unemployment.

#1. Firing a bunch of school teachers is not going to help the construction worker find work sooner. The reason stimulus works is because, ideally, it is simple. You're not trying to target home building construction workers, you're targetting aggregate demand and allowing the market to allocate that demand as it sees fit. The stimulus package, for example, basically consisted of helping states with Medicaid expenses, tax cuts for most people with jobs, and extended unemployment for those without. All the fiddling over construction projects was a small portion of the package.

Clearly when the economy returns to full employment the structure will not be the same. We, for example, will have more nurses and fewer construction workers when all this dust settles. But its ironic that Hayekians bash Keynesians for too much 'planning' when actually there's very little planning. You're just keeping the pool filled with water and letting the waves find their own path.

Snorri Godhi writes:

David:
#3 is simply obviously wrong - Sweden, Singapore

I assume that you mean that Sweden has political but not economic freedom, and the reverse for Singapore. If so, you are not far from the truth about Singapore, but Hayek did not say that you cannot have economic freedom without democracy: he said that you cannot have democracy without economic freedom.

As for Sweden, it seems to me that it has much more economic freedom (except for a couple of lost decades starting in the 1970s) and substantially less democracy (being little more than a one-party state) than most people think. BTW I once said to a Swedish young lady that drugs should be legalized, because people must take responsibility for their own health; she replied that that is a typically European (ie bad, not Swedish) idea.

#4 contradicts every country that has ever had a successful industrialization policy: Asian Tigers, etc.

Except that the most successful Asian tigers, Hong Kong and Singapore, make the USA look socialist.

Boonton writes:

Singapore makes the US economy look socialist huh? From wikipedia's article on Signapore's economy, first sentence:

The economy of Singapore is a developed country and highly developed state capitalist mixed economy. While government intervention in the market is kept at a minimum, the state controls and owns firms that comprise at least 60% of the GDP through government entities such as the sovereign wealth fund Temasek.[1]

Case closed.

Hong Kong is not, IMO, a very great case study of a macroeconomy.

1. It's basically a city of a much larger economy (China).

2. It has a lot of special circumstances that make it highly unique. For instance, it acts as a bridge to the massive Chinese import-export market pulling talent out of China's overbearing gov't controlled sectors and attracting business talent from the rest of the world that wants to deal with China but deal with a 'lite' version of China's gov't.

Bob Murphy writes:

Just to show that I don't blindly parrot every DRH says, here is my critique of the Hummel/Henderson defense of Greenspan.

Bob Murphy writes:

I agree with your dismisal of #2. Rates were not particularily low from 2002-2004 unless you think that the economy should be centrally planned by the Federal reserve trying to strategically 'pop bubbles' while the overall economy is at low inflation and low unemployment.

Even if it were true that the problem with low interest rates is that they lead to price inflation, didn't Greenspan's moves violate the Taylor Rule? Isn't that what Taylor himself has said?

Snorri Godhi writes:

Boonton: look at page 10:
http://www.freetheworld.com/2009/reports/world/EFW2009_ch1.pdf

Or you can also look up wikipedia:
http://en.wikipedia.org/wiki/Economic_Freedom_of_the_World
http://en.wikipedia.org/wiki/Index_of_Economic_Freedom_historical_rankings

david writes:

Singapore was much less free while it was still developing; it had a nationalized media, bus, port, etc. It has since privatized many of these but as Boonton noted its government retains majority ownership. It remains the case that its government directs its economy to a large degree; it still has a National Wages Council (publishes wage guidelines), National Trades Union Congress (government-union body), and Five Year Plans (and 10, 20, and 50 year equivalents).

Hong Kong is also heavily government-influenced; remember that the government owns all land in Hong Kong. Singapore also actively manages land use and industry at will, albeit by rebuying land at prices its government states to be the fair price.

In both, of course, these are small city-states and are heavily disciplined by international competition. Nonetheless, in both, the majority of people live in government-designed and -built housing, go to government-run schools to learn a government-set curriculum, enjoy government-subsidized and often -run universal healthcare, and then go on to work in a job for a business at least majority-owned by the government (Singapore) or a functional constituent (Hong Kong). You tell me whether the US is more socialist than that.

The Cato and Frasier economic freedom rankings heavily weight "good government" and "low tax" components, well over "no government" components; so Hong Kong and Singapore both score well. It's true, both have lots of economic freedom. But both also have powerful good government. Government planning - the very antithesis of Hayek - is not in short supply.

And Taiwan and South Korea industrialized under extensive planning, of course.

As for Sweden, pardon me if I don't take you seriously when you claim it isn't democratic. It's #1!

Boonton writes:

Snorri,

In this case economic freedom rankings are irrelevant. Gov't owns 60% of the 'forces of production'. Sorry but there's no way that's not socialism. I'm not saying that Signapore doesn't have a clean government, that it isn't easy to open a business there, that their tax rates may be lower. Those things may all be true but nonetheless that is hardly a model market economy and it hardly makes the US 'look socialist'.

The problem with using the 'Asian Tigers' as macroeconomic ideals is that they are generally export driven economies. Their prosperity comes from their abundance of a resource to export to the rest of the world (cheap manufacturing labor). But to do a true apples to apples comparison, one has to distangle the export orientated aspects of their economy from their 'pure free market' aspects. For example, are tax rates really lower because the gov't is more 'free market orientated' or are they simply lower because the gov't happens to own export orientated companies and can use that income to subsidize tax rates? If so how would that apply to a country like the US which can't exactly recast itself as a major exporter?

Or to bring it home, shall we model ourselves on Saudi Arabia's macro-policies since they are exceptionally prosperous?

Snorri Godhi writes:

David and Boonton:
I myself do not take the economic freedom indexes too seriously, because they conflict with my personal experience of economic freedom in different countries. But I still take them much more seriously than the anecdotal evidence that you produce from googling [and I believe that the USA will look socialist compared to even more countries, in a few years' time].

About democracy in Sweden: so the democracy index is The Absolute Truth when the EFW is rubbish? I trust the Cato Institute much more than I trust The Economist. In fact, I no longer trust The Economist about anything to do with democracy or freedom of speech.

Troy Camplin writes:

No natural order emerges from the top down. That wouldn't even make any sense as a claim for any other natural system. Unless you're a creationist. Creationists all believe in top down order.

david writes:

It's good thing we're not talking about natural orders, then, eh?

david writes:

@Snorri Godhi: well, you were the one who invoked the indexes, I'm not sure why you're surprised when I invoked it myself. I did provide some reasons why the EFW might have odd results; please note that I stated that it does manage to capture economic freedom with Singapore and Hong Kong. But both also have powerful government.

As for not trusting The Economist, I'm sure that you have some wonderfully valid reasons which you're not telling us about. I must say that you're giving every impression of having decided on a theory before even looking at the data.

Boonton writes:

I still take them much more seriously than the anecdotal evidence ...

60% gov't ownership is ancedotal evidence? Sounds like the ancedotes are the only thing the gov't doesn't own!!!

Snorri Godhi writes:

David and Boonton: I apologize for my dismissive tone yesterday; it was late at night for me. Let's get back to the topic of this post, shall we?

How much economic freedom there is in HK+S (Hong Kong and Singapore) is irrelevant to Hayek's idea #3 (as I said, Hayek did not exclude the possibility of a free-market non-democracy); it is relevant only to idea #4. Saying that HK+S make the US look socialist was an extravagant hyperbole, but already Milton Friedman compared HK favorably to the US in economic freedom. Most important, look at the rankings by GDP: HK+S are at US levels, Taiwan and S. Korea are at European levels (and have European levels of economic freedom). Catching up was relatively easy, but to get on top you have to liberalize more than the others.

Boonton:
60% gov't ownership is ancedotal evidence?

It is, when it comes from wikipedia. Besides, the sentence you quote says "controls and owns", not just "owns"; but one could make a case that every government (except Somalia, Afghanistan, etc) controls close to 100% of GDP through regulation.

Snorri Godhi writes:

...Now to go back to Hayek's idea #3: it was my mistake to focus on democracy in Sweden without pointing out something else first. Hayek said that central economic planning is incompatible with democracy because there can be no majority agreement on a concrete plan: if the majority vote for planning, they are then faced with either giving up on planning, or giving up on democracy to achieve a concrete plan. But that holds only in countries that have a diverse population: if everybody shares the same values, then there is no problem in achieving a consensus on a concrete plan. That, I suspect, is the real reason why democratic socialism survived in Sweden and collapsed in Britain (in 1979).

Following Popper, I take "democracy" to mean that governments can be replaced without violence. Sweden has had 23 elections since 1932, and the social democratic party won 19 of them: that means that either there is less than full democracy, or else there is a strong consensus on social democratic policies. In either case, Hayek's thesis is confirmed.

As for The Economist, I have a personal grudge: when people wanted to kill me because I happened to be living in Denmark, The Economist basically blamed the Danish PM for upholding the rule of law.

Tracy W writes:

You tell me whether the US is more socialist than that.

David, on the other hand, Singapore and Hong Kong have no minimum wage and far lower trade barriers than the USA. The US government spends far more as a percentage of GDP than the Hong Kong or Singaporean governments - see http://www.ncpa.org/pub/st232?pg=4

The US government subsidises home ownership through a mortage deduction and the Fannie Maes, and provides tax incentives for health insurance (by allowing employers to deduct them).

So the US doesn't strike me as remarkably less socialist than Hong Kong or Singapore.

Boonton writes:

It is, when it comes from wikipedia. Besides, the sentence you quote says "controls and owns", not just "owns"; but one could make a case that every government (except Somalia, Afghanistan, etc) controls close to 100% of GDP through regulation.

Actually you can also say the gov't is a kind of invisible preferred shareholder in every enterprise as it has the power to tax. But constitutionally there's a huge difference between control through regulation and ownership. Private ownership is supposed to work because private owners have private incentives to push enterprises towards efficient and profitable production. The gov't owning 60% of GPD stands that idea on its head. Sure the gov't may not be an 'active controller' but that doesn't solve the issue.

Yes its fair to note that wikipedia is not always a reliable source but I'll note you have denied the figure or offered an alternative that is different in an important way.

Following Popper, I take "democracy" to mean that governments can be replaced without violence. Sweden has had 23 elections since 1932, and the social democratic party won 19 of them: that means that either there is less than full democracy, or else there is a strong consensus on social democratic policies.

I think you're equating a single party winning an election with a single party really being a single party. The Republican Party of 1975 is nothing like the Republican Party of 2010 and likewise for the Democrats. I don't know enough about Sweden to comment more but I'm not sure we can say a series of continuous wins by a particular party means that a country is less democratic.

Tracy
So the US doesn't strike me as remarkably less socialist than Hong Kong or Singapore.

So if Obama proposed taking 60% ownership stakes of the S&P 500 but also proposed eliminating the min. wage and abolished the mortgage interest deduction that would be just about an even swap of policies in your mind?

Snorri Godhi writes:

Boonton:
The gov't owning 60% of GPD stands that idea on its head.

Once more, the Singapore government, by your own quote, does NOT own 60% of GDP.

I think you're equating a single party winning an election with a single party really being a single party. The Republican Party of 1975 is nothing like the Republican Party of 2010 and likewise for the Democrats.

The last observation is correct, but it is also correct that the Chinese Communist Party now is very different from the Communist Party under Mao. Does that mean that China is a democracy?
And anyway, what does that have to do with the Hayek thesis [#3]?

Boonton writes:

Once more, the Singapore government, by your own quote, does NOT own 60% of GDP.

It controls and owns companies that produce 60% of the GDP. In other words, the 'means of production' are more often than not owned by the Singaporian government.

It's one thing to start including things under the category of socialism that were never part of socialism's theory like min. wages, unemployment insurance and so on. It's crossing the line to tell us that gov't owning the 'means of production' on a scale that makes up more than half the income of the economy isn't socialism.

The last observation is correct, but it is also correct that the Chinese Communist Party now is very different from the Communist Party under Mao. Does that mean that China is a democracy?

I would agree that the Communist Party of China has dramatically changed. I disagree that change was driven by democratic action so I don't think China compares favorably to Sweden in terms of democracy.

In terms of Hayek's thesis #3, I don't think China disproves it. China has more political freedom now than under Mao, that is undeniable. It's economic situation has dramatically improved. It's current lack of freedom, though, relative to other developed nations will act as a ceiling capping its development until such time as it expands its freedom more.

I recently read an interesting piece that said Chinese papers have classified reporting. In other words, their equilivant of the New York Times prints gov't cleared news for the masses but the 'elites' can read an expanded version which tells the 'real news' more. That means unlike Stalinist Russia or North Korea, there is at least a class of people in China with a relatively open amount of political freedom. Its possible that China may yet become economically fully developed if it continues expanding on this policy.

I think that other Asian Tigers should be viewed with caution because exports allow a country to short circuit Hayek's 'rules'. If a country can tap a rich export market, it can bring in revenue that masks the onerous nature of its government. Using city states as economic models for larger nations are problematic because tricks like this cannot work on a huge scale. The US is not going to find an export partner who it can sell to on the scale that places like Saudi Ariba, Hong Kong or Singapore have.

Greg Ransom writes:

As Jeff Hummel acknowledged in an email exchange with me, your alternative "China money did it" story is 100% Hayek -- as a reading of Hayek's _Monetary Theory and the Trade Cycle_ would confirm.

Russ Roberts' account of the facts may be challenged, but your own paper with Hummel would give us equal reason to go to Hayek's economics for understanding of the artificial boom and inevitable bust.

David writes:

"This is the one with the poor example. As Jeff Hummel and I have shown elsewhere (here and here), Greenspan did not have a particularly loose monetary policy."

Troy Camplin writes:

Social systems are all natural systems. Unless you believe 1) humans aren't natural, and 2) what humans do aren't natural. In which case, I have to ask you 1) why aren't humans natural and, if they are natural, 2) why aren't human actions natural? Free human actions give rise to societies, cultures, and economies which are spontaneous orders -- self-organizing from the bottom-up. Those who believe in evolutionary sytems believe the order found in complex systems emerged through bottom-up processes. Creationists believe complex systems were ordered by an Orderer (whether it be God, with natural systems, or whatever human they chose to deify in social/economic systems). Then there are of course the mixed(-up) theorists who believe that such sytems evolve, but you have to have an Intervener to intelligently design the order of the system. Those are your choices. You are either a believer in the evolution of complex systems through natural processes, a Creationist, or an Intelligent Deisgner.

Tracy W writes:

Boonton - toss in lowering the trade barriers, tax rates and health insurance deduction as well and that sounds fair enough to me.
Admittedly I'm neither American or Singaporean.

Comments for this entry have been closed
Return to top