PHILOSOPHY OF ECONOMICS & POLITICSjreiss.org/jreiss.org/Teaching_files/CapDem_6.pdfPHILOSOPHY OF ECONOMICS & POLITICS LECTURE 16 Today’s agenda Today’s topic is Hayek, specifically

JULIAN REISSDATE LECTURER21 FEBRUARY 2017

PHILOSOPHY OF ECONOMICS & POLITICSLECTURE 16

Today’s agendaToday’s topic is Hayek, specifically his book The Road to Serfdom

As usual, I will talk a little bit about his life

And, in this case, about the enormous political influence he’s had

Many of the ideas in The Road to Serfdom are direct responses to contemporary socialists – such as Laski

It’s therefore useful to read the two back to back

1899-1992

(Austrian) economist and philosopher (political theory, philosophy of science)

As economist, his main contributions are to:

The theory of business cycles

Investment theory

The economic calculation problem/socialist calculation debate

Monetary theory (advocate of ‘free money’)

As political philosopher, he is best known for his defence of classical liberalism

Taught at the LSE (at the same time as Harold Laski), then Chicago (but not in economics!), then in Freiburg

1974 Nobel Prize for his "pioneering work in the theory of money and economic fluctuations and ... penetrating analysis of the interdependence of economic, social and institutional phenomena.”

Friedrich Hayek

1974 Nobel Prize for his “pioneering work in the theory of money and economic fluctuations and ... penetrating analysis of the interdependence of economic, social and institutional phenomena.”

Tons of further honours:

Appointed a member of the Order of the Companions of Honour by Queen Elizabeth II in 1984

U.S. Presidential Medal of Freedom by Bush senior in 1991

“The Use of Knowledge in Society” was selected as one of the top 20 articles published in American Economic Review during its first 100 years in 2011

Enormous political clout: e.g., directly influenced ‘Reaganomics’, Thatcher, Honorary Chairman of the Centro de Estudios Públicos in Pinochet’s Chile

Friedrich Hayek

The title was inspired by – who else? – Alexis de Tocqueville

Recall that among the dangers of democracy he observed in Democracy in America, were the negative effects centralisation could have for individual liberty

In later work Tocqueville explicitly commented on socialism

The Road to Serfdom can be regarded as a detailed study of the mechanisms through which the desire for equality would lead to the abolishment of individual liberty

The book has received praise across the political spectrum

The Road to Serfdom

Hayek (RtS): Main IdeasWritten close to the end of World War II, Hayek observed that the totalitarian regimes of his time – Stalinist Russia, Hitler’s Nazi-Germany, and Mussolini’s fascist Italy – all had a common enemy: Western liberalism/individualism

He argued that these totalitarian ideas are not opposed to socialism, but in fact a necessary consequence

‘Democratic socialism’, even though he granted that most Western socialists genuinely believed in the idea, to him was an oxymoron

This is because any form of economic planning (whether aimed at equality or at benefits for specific groups) necessarily involves infringements on personal freedoms on a massive scale

Moreover, since individuals won’t agree on ends, political freedoms will eventually be restricted

Economic Planning: Three Sources/Motivations

Socialism has displaced liberalism as the doctrine held by the great majority of progressives; socialism too requires economic planning

The ‘war effort’ made subordination of all economic activities under a general plan necessary; what worked well in times of war, should also work in peacetime, shouldn’t it?

At the time, a large number industries were monopolistically organised, and many believed that this was inevitable for technological reasons; the choice was therefore one between a private monopoly (which was widely held to be bad) and direction by government – which meant economic planning

Hayek rejected all three arguments; let’s see why

But first: what did he mean by ‘economic planning’?

Economic Planning vs Competition

Planning is ‘a central direction of all economic activity according to a single plan, laying down how the resources of society should be “consciously directed” to serve particular ends in a definite way’

The contrast is not generally with ‘laissez-faire’ but the creation of the conditions under which competition can thrive

Thus, Hayek did not advocate abolishment of government altogether (as do some libertarians); rather, the government does have important roles in enabling competition:

Institutions like money, markets, and channels of information—some of which can never be adequately provided by private enterprise

Interventions for social problems that cannot be solved by markets (externalities, monopolies)

Some kind of social insurance

He maintained that competition was superior not only because it is in most circumstances the most efficient method known but even more because it is the only method by which our activities can be adjusted to each other without coercive or arbitrary intervention of authority

Socialism and planningThere are two meanings to the term ‘socialism’:

Social justice, greater equality, security – certain aims of society

Abolition of private enterprise, individual property, and collective planning – the means by which the aims are to be achieved

But the ends cannot really be divorced from the means: we need planning to distribute incomes equally, whether by regulation or by nationalisation

And this is so for all forms of collectivism, not just the ‘good’ ends of socialism: if we want to make sure that all proceeds go to a supreme white race or party members or the members of an aristocracy, we can reach that end only by economic planning

What, apart from its consequences, did he reject about socialism?

Socialism and planningContemporary socialism was ‘liberal’: it aimed to regulate economic activities but not at the expense of democracy or freedom

Importantly, liberal socialists understood freedom differently from the classical liberals: as economic freedom without which the political freedom was not worth having (cf Laski!)

‘Old’ conception of freedom: freedom from coercion, from the arbitrary power of other men, release from ties to lords etc.

‘New’ conception of freedom: freedom from necessity, release from compulsion of circumstances

According to Hayek, this is a confusion of freedom with power or wealth

But more than, pursuit of freedom in the new sense will in fact lead to

The War Effort and Plans for Peacetime

Mobilisation for war requires a massive reallocation of resources away from the production of peacetime consumer goods and capital toward the production of war materials

With fewer consumer goods being produced, the prospect of inflation looms

To avoid inflation further intervention is necessary, and the standard policy response is to fix prices and institute a system of rationing. This essentially does away with a freely adjusting price system for basic consumer goods (etc.)

Hayek feared that socialists would want to continue these controls in peacetime (a fear that was justified)

The problem: Whereas most of us agree on the goal – to win the war –agreement on other social aims is extremely unlikely

Monopolistic StructuresAt the time, a frequently heard argument was:

Technological changes have made competition impossible in a constantly increasing number of fields and that the only choice left to us is between control of production by private monopolies and direction by the government

This is grounded in Marxist ideas about the accumulation of capital

One reason given: increasing returns to scale; but there’s in fact little evidence for that

The actual causes are often collusive behaviour (that could be prevented) and inadequate policy

Planning Undermines Democracy

A fully nationalised economy in a democracy would require a ‘complete ethical code’ – essentially, a complete preference ranking over every economic contingency in society

Obviously, we don’t have any such thing; we make economic decisions locally, on our knowledge of our specific circumstances

Moreover, we would need to be able to aggregate these individual codes into a social code – but how (cf. Arrow’s theorem)?

Majority vote works for decisions for which there are just a small number of alternatives; here the number of alternatives is vast

As for every decision there are losers, it is impossible to find agreement on most issues

(Politics should be limited to the sphere of decisions about which there is unanimous or near unanimous agreement)

Planning Undermines Democracy

Since there won’t be agreement on most issues, individuals will defer decisions to some political elite that takes over for them

But disagreements among experts/politicians/representatives will continue until one party takes over and imposes their view on everyone else

Even if the social goal is initially a limited one (e.g., equality of incomes), coercion will reach more and more spheres:

Why should I work in a dangerous occupation if I receive the same salary as everyone else?

Why should I work at all or if I do, put in any effort?

Individuals cannot signal that a specific good is highly desired, so the government will have to make decisions about which goods to produce and at what price to sell them – eventually telling people what to consume…

Planning Undermines Political and Personal Freedoms

And the problem does not stop at economic decisions (this is what some socialists made us believe: economic dictatorship which leads to greater freedom elsewhere)

But economic ends cannot be separated from other ends because money and wealth are ‘all-purpose means’ that enable us to do things we want to do and be the persons we want to be

When there is competition and a supplier or employer rejects me, I can turn elsewhere; this is not possible when the state is an all encompassing monopolist

This means that freedom of religion, freedom of press and speech, and all sorts of personal freedoms will have to go

Al this is made worse by the fact that in today’s world, because of the high degree of division of labour, few goods are home made

Hayek on InequalityHayek recognised that in a free-market system chances aren’t equal because they depend on property

He even viewed a reduction of inequality of opportunity through inheritance positively

However, he did not think that inequality was bad as such – as liberty is what matters most and poor person under capitalism is much freer than a relatively better off person in a different system

“Although under competition the probability that a man who starts poor will reach great wealth is much smaller than is true of the man who has inherited property, it is not only possible for the former, but the competitive system is the only one where it depends solely on him and not on the favours of the mighty, and where nobody can prevent a man from attempting to achieve this result”

Hayek on SecurityHayek thus also opposed Laski concerning the idea that freedom entails economic security

He distinguished two kinds of security:

security against severe physical privation, the certainty of a given minimum of sustenance for all;

the security of a given standard of life, or of the relative position which one person or group enjoys compared with others; or, as we may put it briefly, the security of a minimum income and the security of the particular income a person is thought to deserve

He advocated the first kind of society and thus a minimal welfare state

The second kind of security, however he thought was irreconcilable with freedom to choose one’s employment. Certainty of a given income cannot be given to all if any freedom in the choice of one’s occupation is to be allowed

Questions

Is capitalism a prerequisite of democracy?

Hayek rejected economic planning very fundamentally, even more vague goals such as ‘a more equal society’. Did he overshoot his aim?

Is he right in assuming that economic freedoms underlie all other freedoms?

What would he say about contemporary Britain?