Easterly on Hayek

by Don Boudreaux on January 6, 2009

in Complexity & Emergence, Foreign Aid, Growth, History, Hubris and humility, Law, Myths and Fallacies, Standard of Living

Today’s Dean of development economists, William Easterly, won the inaugural Hayek Prize, offered by the Manhattan Institute, for his splendid book The White Man’s Burden.  Congratulations Bill!

Here’s the Hayek Lecture that Bill delivered this past October when he was awarded the prize formally.  Like all of Bill’s work, it is written in a lively, engaging, fast-flowing style, filled with humor and important facts and insights.  I whet your appetite with the opening paragraph:

Tonight we find ourselves in a moment similar to that in which Hayek wrote The Road to Serfdom in 1943. Then, as now, a great financial crash was seen as a failure of freedom. Actually, things were even worse then for Hayek’s point of view. In the aftermath of the Depression, many pointed out the apparent success of centrally planned industrialization in the Soviet Union in outperforming markets. As Hayek wrote in 1943, democracy barely existed outside of a few English-speaking societies. Even in the U.S., people noted the apparent success of government top-down planning for wartime production of arms. Under these circumstances, Hayek knew he would be caricatured as a right-wing ideologue, even though his ideas did not fit into the stale partisan debate about markets versus government. He argued that the best system in the long run relied upon the creativity of individuals at the bottom who had both political and economic freedom. In a way I will describe below, Hayek saw both government and markets as functioning better the more they were the outcome of spontaneous development from the bottom up, with nobody in charge. It took courage to criticize top-down control after the scary calamities of the Depression, yet Hayek’s vision would be vindicated by subsequent events. How many of us will show similar intellectual courage in the midst of today’s financial crash?

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Zachary Kurtz January 6, 2009 at 4:04 pm

That's pretty inspiring.. thanks!

Jeremy January 6, 2009 at 4:30 pm

I work for a city government that is populated by leftist-elites who chalk the current economic climate up to "greed." A simplistic answer for those who are supposed to be our educated class. They are the political middle; our politicians spend large sums of money courting their favor and the best they can do is shrug their shoulders and say "greed is the problem here." That only makes me worry about how far of a solution they would go for.

A few weeks ago, my boss was hailing the return of stiff federal regulation as the savior of the economy. I am also a part-time MBA student, and even in the halls of the business school, I hear an awful lot about corporate social responsibility, and how greed is killing the market.

Talking to these people is like talking to a wall; it seems as if we speak different languages.

I also have a master's degree in political science. Most of the people I stay in touch with from the elite institution I attended are very angry at the market for "trampling on the common man." They see government as the only solution to what ails the country and the world.

I just worry sometimes that the divide that Hayek had to cross with mainstream thought was less than the divide that those who believe in freedom today have to cross. The mentality that I see is "you had your shot and the market failed."

I also see a failure to grasp the basic tenants of how the market works and why it works. Instead of seeing a market clearing price of $5, they see the guy who left the market who wanted the good at $4 and now can't have it. When I toss up a Von Hayek quote of "'Emergencies' have always been the pretext on which the safeguards of individual liberty have been eroded." I get an African proverb in response: "When a poor man goes to the market, often he comes home with only tears."

I feel terribly discouraged sometimes…

vidyohs January 6, 2009 at 5:37 pm

Haven't read the entire speech yet.


"I get an African proverb in response: "When a poor man goes to the market, often he comes home with only tears."
I feel terribly discouraged sometimes…
Posted by: Jeremy | Jan 6, 2009 4:30:42 PM"

My response to such would be to quote vidyohs in the future.
Vidyohs said, "Only a fool or a thief goes to the market with nothing in his wallet. So, are we to form our economic policy based on a sympathetic respopnse to what fools and thieves do?"

The fool could have stayed home and spared himself the tears. The thief can be caught and hung. Neither is worthy of guiding or dictating economic policy.

Mr. Econotarian January 6, 2009 at 11:11 pm

' I get an African proverb in response: "When a poor man goes to the market, often he comes home with only tears."'

Perhaps if the poor African wasn't living in a country with low levels of economic freedom, he wouldn't be crying so much.

Moreover, chances are good the poor African doesn't even have access to a market, because he doesn't have enough money to bribe the corrupt official to work around the strict labor and import regulations.

David P. Graf January 7, 2009 at 8:55 am

Just a quick post since I still come to Cafe Hayek every so often to see what's going on. As I've said numerous times in this forum, any enterprise based solely upon self interest carries the seeds of its own destruction. The "greed" that Milton Friedman and other apostles of economic "freedom" celebrated eventually led to business leaders engaging in risky behavior with few checks which led to the conomic collapse. Like it or not, "Freedom" is now associated in the public's mind with being free to lose your job, home, health insurance and your kids' prospects in order to satisfy the demands of a market based upon greed. And by insisting that the only alternative to "freedom" as you define it was the idea that "government knows best", you set the stage for the resurgence of the government in the economy. You succeeded in bringing about your own worst nightmare.

One could hope that this crisis could cause some of you to rethink your positions, but evidently not. That's a shame because it seems to confirm that many of you live in a world divorced from reality. Fortunately, some of you have tenure and so you won't have to bear the consequnces like the rest of us.

Jeremy – friendmanism did have its shot and failed. I would not necessarily say the same thing about Hayek. Having read the works of both men, I am sorry that Hayek may end up being as tarnished as Friedman in history's judgment. I find it ironic that Cafe Hayek espouses positions that Hayek would never have accepted. In one sense, this forum was hijacked by friedmanites in much the same way the GOP was hijacked by libertarians.

Well – I won't be posting again for awhile because it appears that this forum is still dominated by true believers and I already know what you have to say from what you've said already in the past. Plus, the increased bitterness appearing in the posts isn't particularly appealing to read. However, I can understand your dismay at becoming just as irrelevant as the marxists.

Liz January 7, 2009 at 9:15 am

"In one sense, this forum was hijacked by friedmanites in much the same way the GOP was hijacked by libertarians."

What? Did I miss something?

Dave January 7, 2009 at 10:46 am

re: Mr. Econotarian

quote: "The "greed" that Milton Friedman and other apostles of economic "freedom" celebrated eventually led to business leaders engaging in risky behavior with few checks which led to the conomic collapse."
Actually, the behavior was the direct result of government policy — e.g., the government provided incentives for businesses to give out bad loans, and little disincentive for people to lie on their loan applications or for lending institutions to check them out. It wasn't greed per se that caused this problem — the government neither provokes nor qualms greed, it can only change the incentive structure.

quote: "friendmanism did have its shot and failed. …

To my knowledge, Friedman never advocated tax incentives favoring real estate investment versus other forms of capital investment, nor did he ever advocate loose money policy by the Fed, nor did he ever advocate government incentivization of subprime mortgage lending.

quote: "the GOP was hijacked by libertarians."
How I wish it were so. Quite the opposite, actually. Even the supply-side tax rate reductions enacted by the GOP were sold in Keynesian terms — "putting more money in peoples' pockets", "priming the pump", etc. Tax rebate checks (really direct payment to current citizens by future citizens, facilitated by the government) are certainly not a libertarian-esque idea. And unfortunately, the GOP loves government incentives for home ownership just as much as the Democratic Party.

Oh, and witness the response to the financial "crisis" executed by a Republican President: massive government spending and intrusion on the economy.

Just because Republicans like to TALK like free market capitalists doesn't make it so.

Dave January 7, 2009 at 10:47 am

Woops, I mis-read — I was responding to David P. Graf's post, not Mr. Econotarian's. My mistake.

Jeremy January 7, 2009 at 11:26 am

Of course, the interpretation of scholarly material is always debatable; that's the nature of discourse.

As for my interpretation, I don't think that Friedman was, nor did he ever, argue for "greed." Let's not confuse Friedman or Hayek with Gordon Gecko (spelling?).

Friedman argued explicitly for the right to pursue what makes you happy. Not what makes you rich and not what makes you famous. It is this element of "choice" (anybody remember Friedman's "Free to choose"?) that embodies the essential elements of the market economy. I remember a television series that Friedman produced along with some organization (I don't recall exactly which) but it was based on the principle of allowing people the freedom to choose their own paths based on what makes them happy. There was an interview with some African guy whose children go to a top school and learn, because it was privatized. This guy wasn't interested in buying a Lamborghini. All he wanted was for his child to have a better life than he did.

For me, Hayek's more accessible writings were about demonstrating the folly of managing an economy. Friedman was more about exalting the virtues of the freedom to choose. Really, two sides of the same coin.

I do not write these comments to diminish the guy who goes to market with $4 and can't buy the good that is going for $5. This is actually a valid point. The problem is that the solution, in this case, making the good available for $4 with a price ceiling, leads to a reduction in everybody's welfare because the producers of such goods face production costs. The producers who face the highest costs are not willing to supply the market with a certain proportion of the goods that they previously brought to the market.

Now the government, who has dictated that the good goes for $4, faces a dilemma. So you also impose price ceilings on the inputs that the company uses to meet the target price of $4? If you do this, then you face the same dilemma with their suppliers and then their suppliers. It is not hard to see the path this leads to; eventually the government controls all aspects of an economy.

Another route the government could take is to subsidize the company with the extra dollar it needs to bring the goods to market. But now the producer gets sloppy, and instead of getting 10 units of X for $10, now maybe they are getting 5 units for $10. The government finds itself having to subsidize more and more (anybody say "Detroit"?) This is the very same problem that led to the demise of the planned economies in the first place.

At the end of the day, the government could have done much better just letting the guy go home without the good for $4. Everybody could have done better.

The whole thing is an exercise rooted in intellectual hubris. It's "we can't let that guy go without a unit of X." It's "we are smart so we know what to do, and what you need." It's all bull$.

Sam Grove January 7, 2009 at 12:43 pm

As I've said numerous times in this forum, any enterprise based solely upon self interest carries the seeds of its own destruction.

But EVERY human enterprise is based solely on self-interest, ESPECIALLY government, even when cloaked in altruistic garb.

Marcus January 7, 2009 at 5:12 pm

GOP was hijacked by libertarians.

It was? I guess I missed that. Damn.

Sam Grove January 7, 2009 at 5:38 pm

The progressive fabrications about libertarians get even wilder.

The GOP was hijacked by libertarians?

In 1976, the National Review published an article proving that libertarians were communist. Liberals claim that libertarians are right wingers, and for a time, it was "known" that libertarians were associated with Lyndon LaRouche.

And libertarians are accused of living in a fantasy world.

Crusader January 8, 2009 at 3:36 am

Sam – you have to understand. To the nitwits, even cutting one measly tax rate is the equivalent of the GOP becoming full-on libertarians.

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