Not the End of Hayek

by Don Boudreaux on May 8, 2011

in Books, Hayek, Hubris and humility

Here’s a letter to the New York Times Book Review:

Reviewing on the 112th anniversary of the birth of F.A. Hayek that economist’s The Constitution of Liberty: The Definitive Edition, Francis Fukuyama gets much right but also much wrong (“Friedrich A. Hayek, Big-Government Skeptic,” May 8).  Two errors warrant correction.

First, Hayek never argued that (in Mr. Fukuyama’s words) “the smallest move toward the expansion of government would lead to a cascade of bad consequences that would result in full-blown authoritarian socialism.”  (Mr. Fukuyama should have detected the absurdity of this interpretation of Hayek when Mr. Fukuyama himself noted four paragraphs earlier that Hayek didn’t object to government provision of health insurance.)  Rather, Hayek’s famous “road to serfdom” is paved by government efforts to protect everyone against any and all disappointments that might arise as a result of economic change and growth.

Second, it was no “deep contradiction” for Hayek to argue that we cannot predict the future and for him to predict that government efforts to centrally plan the economy will fail.  Precisely because the planning and “muddling through” done by individuals pursuing their own ends in competitive markets are subject to ceaseless, detailed feed-back from other individuals pursuing their own ends – and because no individual plan in decentralized markets requires its maker to know the goo-gah-gillions of details that a central planner must know in order to succeed – it was perfectly consistent of Hayek to predict the failure of central plans made by officials who are oblivious to the impossibility of gathering and processing all the knowledge that must be gathered and processed centrally for central plans to work.

Sincerely,
Donald J. Boudreaux

Other flaws mar Fukuyama’s interpretation of Hayek.  For example, Fuyuyama gets the title of Hayek’s famous 1945 article wrong (forgivable), and (less forgivably) singles out Joseph Schumpeter as the chief proponent of the mid-20th-century belief among many economists that centrally planned socialism can work.  (Oskar Lange and Abba Lerner, among others, were far more insistent proponents of this view than was Schumpeter.  Indeed, Thomas McGraw argues – not entirely convincingly, I concede – that Schumpeter intended his claim that “of course” socialism can work to be a joke.)

Be Sociable, Share!

Comments

comments

54 comments    Share Share    Print    Email

{ 54 comments }

nailheadtom May 8, 2011 at 12:06 pm

Fukuyama says: “In the end, what drove people on the left crazy about Hayek back in the 1950s is the same thing that makes him appealing to a Glenn Beck today. Hayek made the slipperiest of slippery slope arguments: the smallest move toward the expansion of government would lead to a cascade of bad consequences that would result in full-blown authoritarian socialism. If anything, however, the history of the past 50 years shows us that the slippery slope has all sorts of ledges and handholds by which we can brake our descent into serfdom and indeed climb back up. Voters in the United States and Europe took seriously the arguments about the dangers of big government and reversed course after the 1980s. Indeed, the pendulum swung so far backward that financial markets were left dangerously unregulated prior to the financial crisis. President Obama’s return to “big government” didn’t last more than a year before it was met with fierce ­resistance.”
———————————————–
Well, that’s crap. Why should we wait until the arrival of “full-blown authoritarian socialism” to see if Hayek was correct? Aren’t the daily progressing indignities and coercions of creeping socialism enough in themselves to warrant opposition? And then he keeps repeating, ala Goebbels, the canard that lack of government regulation in the financial realm was the proximate cause of the Great Recession. When will that misconception be laid to rest? Of course, the Obama program of more and more intrusive government, hardly a “return to big government” which has never been reduced in size or scope, is meeting fierce resistance. It is, as Hayek said, “The Road to Serfdom”.

Emil May 8, 2011 at 2:27 pm

Every time someone writes that the financial markets were “unregulated” I tend to stop taking any more of their arguments seriously. Seriously, when the hell were the financial markets unregulated? “Deregulation” is not equal to “unregulation”.

Martin Brock May 8, 2011 at 2:42 pm

“Deregulate” is typically code for “regulate to benefit my cronies instead of yours”.

Methinks1776 May 9, 2011 at 10:43 pm

Bingo.

Methinks1776 May 9, 2011 at 10:46 pm

Although, not always. Just, usually. The SEC actually changed some rules in 2007 and those changes had the effect of benefiting the financial markets and retail traders in particular (you know, the guys they’re supposed to protect) . Of course, all that was rs reversed and more idiocy was stacked on top of old idiocy.

Government = negative expectancy.

Dan May 9, 2011 at 10:54 pm

Like the corporate tax code in the US, which few companies actually pay top rate, it is set at a high rate to incentivize the begging in DC for special legislation that reduces tax rate for industries and specific special interests. Govt officials are highly unlikely to set a lowered flat rate with no deductions since this would, in turn, limit their overall power and limit the incentive for campaign contributions.
A flat tax rate with no deductions would be a huuuuuge deterrent to corruption and reinstitute SOME limited authority of Federal Govt.

Martin Brock May 8, 2011 at 2:43 pm

And “reregulate” is a synonym for “deregulate”.

muirgeo May 8, 2011 at 3:34 pm

And when someone says that financial deregulation wasn’t significant factor I tend to not take them seriously.

There is just no way this housing markets bubble and collapse could happen with out otc derivatives and CDS’s. NO WAY! It takes a level of denial even greater than what I would credit a creationist with.

Dan May 8, 2011 at 3:41 pm

The financial crash never……NEVER HAPPENS….. Without govt intervening on some dumb ass idea that banks should be making more loans to LMI borrowers and making GSEs Fannie and Freddie leveraging themselves to ratios of 65 to 1 knowing govt will steal taxpayers dollars to bailout.

muirgeo May 8, 2011 at 7:55 pm

Wrong Dan… with out good regulation we saw regular boom and bust cycles that lead to the formation of the fed and then right up to the collapse preceding the Great depression. It’s no coincidence that the two great depressions occurred after too much republican leadership.

tkwelge May 8, 2011 at 10:40 pm

@Muirgeo

We’ve been experiencing boom bust cycles since the industrial revolution, and there has never been a time without them since. You clearly have no understanding of politics or economic policy around the time of and leading up to the great depression. Once again, you’ve really lowered the bar…

Sam Grove May 8, 2011 at 4:26 pm

You confuse vehicles with causes.

Harold Cockerill May 9, 2011 at 7:09 pm

Rationality leaves when hate moves in.

Methinks1776 May 9, 2011 at 10:47 pm

Or when Muirdiot moves in.

Jungman May 8, 2011 at 12:09 pm

Fukuyama’s bias shows pretty clearly when he repeats the left-wing canard that “…financial markets were left dangerously unregulated prior to the financial crisis.”

Up till that point, I think he made some interesting points.

Dan May 8, 2011 at 12:31 pm

Doesn’t take much investigation to learn that the financial crash was more due to federal govt interventionism than lack of regulations. It is tiring to continue to hear the fallatious claim of laissez faire markets for the housing crash and subsequent recession.
It was govt stupid!

Joshua May 10, 2011 at 12:50 am

Congress (I guess obviously? ) disagrees.

muirgeo May 8, 2011 at 3:37 pm

Again … your position is the economic equivalent of creationism… it’s pathetic…. even Russ Roberts has come to admit so. You are a totally unserious thinker.

And the deregulated Wall Street that blew up the global economy blew up market fundamentalism just as darwin blew up the The Garden of Eden.

Sam Grove May 8, 2011 at 4:27 pm

Whatever “deregulation” may have occurred, the financial sector was and has always been the most regulated sector of the economy.

Joshua May 10, 2011 at 12:49 am

It should be. Every other sector depends on a functioning financial sector, and it seems like unlike most other sectors, when a bank goes down you have contagion coupled with bad conditions that threaten all the other banks. Its a risk that has to be managed.

Dan May 10, 2011 at 3:55 am

A risk that govt toys with to try and spread the wealth

Dan May 8, 2011 at 4:28 pm

Wrong! Doesn’t take much thinking to see how govt coerced banks into the scheme. How horribly inept you are. I feel sorry for you.

muirgeo May 8, 2011 at 7:59 pm

That’s bullshit Dan. Wall Street lobbyist made the rules… they got all the policy and rule changes they wanted including low rates from the Fed that they basically owned. There was no coercion by the government or by regulatory agencies…. Wall Street owned them all… And you guys cheered when Elliott Spitzer went down… he was right and you all were wrong.

tkwelge May 8, 2011 at 10:43 pm

I’m sure the Fed was all about raising interest rates until those evil corporate lobbyists showed up… Idiot. When the government shows up at your door with suitcases full of cash, and you use the money for bad investments, I suppose you’ll argue that it was you who orchestrated the whole thing?

Dan May 9, 2011 at 12:29 am

Clinton admin put out to the new regulators that any bank who were not meeting the new quota system in place for LMI borrowers that they would not get approval for diversifying. Janet Reno then hauled them in before an inquiry to infirm them that if the magic stats were not changed more to govt liking that they would find tnmselves being prosecuted for …… Wait for it……. The fallback plan of all democrats…….. Rarely, if ever, with any proof………. Discriminatory practices….. RACISM………… ACORN showed up at BofA picketing about racism….. The magic word…… When anyone is not doing what the high and mighty Dems declare should be done…….. RACISM….. Oppose Obama… Racism…. Against govt intervention into lending… Racism….. Want welfare reformed…. Racism…..opposed to govt healthcare… Racism… Want to open up education to reform… Racism….. Don’t want to join a union… Racism….. Like cheesecake instead of angel food cake… Racism……. Holding tests that is exactly the same for everyone with no exceptions… Racism…… Don’t want govt to bailout companies… Racism….. want tea instead of coffee… Racism…..
Don’t want to make subprime loans… Racism….. Require proof of employment, good credit, downpayment……. Racism……..

Emil May 9, 2011 at 1:16 am

”Wall Street lobbyist made the rules”

1) You need to make up your mind. Either there were rules (i.e. the market was regulated) or there were no rules (i.e. the market was unregulated)

2) So Wall Street lobbyists made the rules with absolutely no coercion from the regulator? This begs the question of what we have regulators for

Dan May 9, 2011 at 10:41 pm

FDR is dead. His legacy and entitled society need to be laid to rest, also.

John V May 8, 2011 at 6:16 pm

If you knew what you were talking about, you wouldn’t need to stay on perimeters making broad statements, content-free assertions and bad analogies.

Everything that emerges from the financial along the way of CDOs and derivatives occurs under a regulatory framework. In this case, they didn’t happen or function in a climate of “good regulation” (meaning regulations that properly balance the different incentives in play…usually trying to mimic/spell out a free market incentive structure) nor in a regulation-free environment.

That’s something you’re going to have to deal with while you slay your usual strawmen.

muirgeo May 8, 2011 at 8:00 pm

Wow that made NO SENSE…

John V May 9, 2011 at 11:26 pm

Because you can’t understand.

Methinks1776 May 9, 2011 at 10:59 pm

John V,

When you find that environment of “good regulation”, you be sure to let me know. We all rely on derivatives pricing models that we all know are terrible at calculating tail risk. Regulators think “tail risk” is the risk they’ll be caught watching porn at work and anyone will care. So, I don’t see why anyone would even begin to assume that regulators would have some magic formula, unavailable to industry, that adequately informed how to price teeny options (which is what CDS’s are) and the adequate level of capitalization. No “good regulation” was possible – even in a perfect environment. Since I’ve yet to see “good regulation” in even the most mundane, non-derivative products, I think I can safely say that it doesn’t exist.

Also, I’d stop accusing Muirdiot of putting forth a straw man argument. He clearly doesn’t know what it means. I think that after six years of not understanding what that means, it’s time to give up on him. I’m trying to think how I can explain “straw man” in a way a retarded four year old might understand…..

Dan May 9, 2011 at 11:03 pm

Ha! SEC employees who watched and downloaded porn…….. Got to keep jobs with govt……. And anybody wishes to tell me about ‘good’ govt……….

Filip Jolevski May 8, 2011 at 12:11 pm

Happy Birthday Hayek!

Well said professor!

Don Boudreaux May 8, 2011 at 3:52 pm

Thanks Filip!

Marcus May 8, 2011 at 12:17 pm

When is the “Constitution of Liberty” going to be available on the Kindle?

robert_o May 8, 2011 at 12:37 pm

The comments on the Coordination Problem post are gold (well, many of them anyway).

http://www.coordinationproblem.org/2011/05/come-on-frank-you-can-do-better-than-this.html

Eric Hammer May 8, 2011 at 1:19 pm

It always surprises me how many people don’t understand that predicting something won’t work is far simpler than predicting that it will work a particular way. I have been called out on that matter too, people saying essentially “Well, if you can’t make predictions, how can you predict that it won’t work?” There are infinite pathways for things to not work out the way we expect them to, and usually only a very few paths that result in our desired end. This much should be obvious to anyone who had to fix something mechanical, cook a meal, or just about anything where screwing up is possible. Yet still, despite seeing how often their plans fail to pan out as they had hopped, they think that a bigger plan, requiring coordination of many more moving parts acting outside their normal paths, those will work out just as planned.

Sam Grove May 8, 2011 at 1:34 pm

How many things must be right for a car to work?
Only one thing needs to be wrong to make a car not work.

My wife’s car wouldn’t start. After some investigating, I found that a very small amount of goop in the starter solenoid was the cause of this failure.

That’s just one system out of many that must function properly for a car to work.

Eric Hammer May 8, 2011 at 8:25 pm

Exactly! I often wonder just what it is in people that makes them think that political plans and systems somehow work better. Just seems really strange to me.

Stephan May 8, 2011 at 1:29 pm

Good. You acknowledge that Hayek would have supported a “public option” in health care. Now the question is: why are you opposed to a public option in health care? What is wrong with Hayek’s reasoning in “The Road to Serdom”?

Don Boudreaux May 8, 2011 at 1:33 pm

I’ve never denied that Hayek once supported government-supplied health insurance (although he did become more radically anti-government as he aged). But (1) I think for myself and don’t follow Hayek (or anyone else, for that matter) on every point; and (2) I am quite confident – regardless of what Hayek thought or might today think – that a competitively supplied, market-driven, private health-care market would be far superior to health-care insurance supplied by government. We have much more evidence today than Hayek had access to in 1944 or even in 1960 that entrepreneurs competing for consumer dollars in competitive markets are far more creative at meeting consumer demands than the typical economist (and even Hayek) believed them to be a generation or two or three ago.

Stephan May 8, 2011 at 1:50 pm

Thanks for the reply. Your argument is good for me. I do not harbor any hope to convince you otherwise. Although any statistical evidence gathered by the OECD on health care points exactly in the opposite direction you will certainly find some niche cancer example where the US private health care system outperforms the rest of the world. (I hope we can agree that the OECD is not an organization known for its socialist bias and associated with the Internationale.)

muirgeo May 8, 2011 at 3:48 pm

“We have much more evidence today than Hayek had access to in 1944 or even in 1960 that entrepreneurs ”

Really… which country has has a private health care market that provides you your evidence?

Every single other developed country specifically forbids for profit health insurance for basic needs and every one of them has comparable or better outcomes for far far less of their GDP.

I mean it’s really ridiculous to claim you have ANY evidence… you don’t. And it is even more absurd to deny the success of all the rest of the developed worlds publicly funded health care. Further the only reason any of these countries are having funding issues is because the let loose financial markets of the US of A blew up the global economy.

John V May 8, 2011 at 6:18 pm

“Really… which country has has a private health care market that provides you your evidence?”

Meaningless, argumentative question that avoids the point while pretending to address it.

Dan May 9, 2011 at 12:32 am

I prefer America’s 92% success rate of prostate cancer to Britains 52% rate, thank you.

Joshua May 9, 2011 at 6:03 pm

Thing is, we have new expensive drugs and treatments all the time. These seem to grow faster than the econony or wages. Eventually we will have to face the fact that every person cant be entitled to every treatment or drug, life saving or not.

Methinks1776 May 9, 2011 at 10:41 pm

Nobody will disagree with you (except Muirdiot, but he’s operating on one brain cell).

The question is who decides your consumption of health care and who pays for it. Do you really trust me to decide for you (hint: I wouldn’t if I were you. Like all such panelists, I’ll advocate for my buddies instead of some faceless dude called “Joshua”).

Dan May 9, 2011 at 10:46 pm

Indeed, self-interest will be the rule of the day. I will have a job with company X, or Party X, should I advocate in a particular direction for over 300million people to follow direct govt mandated medical care.

Sam Grove May 8, 2011 at 1:50 pm

A downside to crowning someone with accolades such as Nobel prizes for coming up with great ideas is that people then tend to rely on arguments from authority rather than exercising their critical faculties regarding other ideas from that someone.

Even Friedman eventually retreated from a long-held position after observing that reality had little regard for the beauty of his theory:
http://www.fff.org/freedom/0299b.asp

indianajim May 8, 2011 at 9:32 pm

Fukuyama is too clever by half, a spinning sophist. Thank you Don for putting a Bastiat up side the head of foolish Fukuyamaisms.

Joshua May 9, 2011 at 5:59 pm

We have over 300 folks in Washington whos 200 000 dollar/year job it is to come up with new laws or tinker with existing ones. If I didn’t come up with or lend support to at least a few new laws, I doubt I’d feel like I was earning my keep. Clearly there are excess laws, rules, regulations and regulating bodies, and these are the same people who decide which.

Jacob Oost May 9, 2011 at 10:38 pm

Is it possible that people non-libertarian economists *deliberately* misrepresent Hayek so that people won’t read him and convert to libertarian economics? When I think of economists who are routinely misquoted or misrepresented, Hayek springs to the top of my mental list, followed by Adam Smith, Milton Friedman, Marx, and Keynes.

Dan May 9, 2011 at 10:43 pm

But there is no mistaken where those gentleman would align themselves in the question of political lefts or rights .

Mitch May 10, 2011 at 11:37 pm

It seems to me the most important error in Fukiyama’s review to answer is this: “Hayek provides a very minimalist definition of freedom as freedom from coercion, and particularly coercion by a central government. But as the economist Amartya Sen has argued, the ability to actually take advantage of freedom depends on other things like resources, health and education that many people in a typical society do not possess.” Sen may be correct that lack of “resources” may limit the ability to “take advantage of freedom”. However, lack of freedom absolutely precludes the ability to “access resources”. In other words, a poor person has the opportunity to become less poor in a free society but will never be free or less poor in an unfree society.

Previous post:

Next post: