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Hayek v. Krugman – Cyprus’ Capital Controls
Steve H. Hanke
Nobelist Paul Krugman has a propensity to spin and conceal. This allows for deception – the type of thing that hoodwinks some readers of his New York Times column. While deception doesn’t qualify as lying, it also fails to qualify as truth-telling.
Prof. Krugman’s New York Times column, “Hot Money Blues” (25 March 2013) is a case in point. Prof. Krugman sprinkles holy water on the capital controls that will be imposed in Cyprus. He further praises to the sky the post-1980 capital controls that were introduced in a number of other countries.
Prof. Krugman then takes a characteristic whack at all those “idealogues” who might dare to question the desirability of capital controls:
But the truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment.
Fine. But, not once did Prof. Krugman mention that there just might be a significant cost associated with the imposition of capital controls – a cost with which Prof. Krugman is surely familiar.
Before more politicians fall under the spell of capital controls, they should take note of what another Nobelist, Friedrich Hayek, had to say in his 1944 classic, The Road to Serfdom:
The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference. Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape—not merely for the rich but for everybody.
When it comes to capital controls, I think the Cypriots – even the non-ideologues – might be inclined to agree with Hayek over Krugman.
View full post on Cato @ Liberty
Hayek, Regulator?
Alberto Mingardi
Angus Burgin has written a valuable book The Great Persuasion, which accounts for an interesting, political science reading of the development of the Mont Pelerin Society and the progress of free market advocacy in the post WWII period. It is a thoughtful book, coming from a scholar who is definitely not a libertarian but at the same time understands and values the role of ideas in the political debate.
Professor Burgin has more recently published a rather shocking – at least to me – op-ed on Bloomberg.com. His point is aptly summarized by a slightly esoteric title: “As Republican Hail Hayek, Their Plans Advance Friedman”. Personally, I rejoice at seeing history of political thought to progress to the stage of political commentary. Plus, Hayek appears to be the good guy of the story: two cheers for Professor Burgin.
He aims to vindicate Hayek’s subtleties, from an inappropriate use of the Austrian economist as a rallying point. To this end, he goes back to one of the central points of his book. According to Burgin, within the Mont Pelerin Society and the classical liberal movement at large, we havemoved from a Hayek-hegemony to a Friedman-hegemony. Whereas the first was more focused on first principles, the latter was more policy-oriented (see also this EconTalk with Russ Roberts). “The rise of Milton Friedman represents both the realization of Hayek’s dream of inspiring broad popular support for the benefits free markets have to offer, and the failure of his ambition to create a new social philosophy that would moderate the excesses of prior modes of market advocacy”. This is a controversial reading: for one thing, there are differences between Manchester and Chicago but also, quite frankly, the free market movement does not look like that much of a well ordered army, ready to follow his generals, at least to me.
In his column, however, Professor Burgin makes his point by writing that:
Where Hayek perceived a host of areas that might be improved by regulation, Friedman saw almost none.
Well, is that true? Hayek and Friedman wrote very different kind of books. Hayek the-social-scientist is Hayek the-free-market advocate: there is no lack of continuity between the two. Friedman was both a theoretical economist and the most splendid public advocate of free market ideas. The two Friedmans wrote differently, for different audiences. As a free market publicist, Friedman dealt at length with specific policy issues, often pointing out the sheer stupidity of government regulation. But what Hayek did was showing that the stupidity, and in truth the unviability of central planning rested on the very nature of the knowledge upon which social life depends. Such knowledge cannot be concentrated in a single brain, not necessarily because it is knowledge of “complicated” things but because it is diffused throughout society.
As Hayek wrote:
The skipper who earns his living from using otherwise empty or half filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differencies of commodity prices – are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.
Can, in principle, regulation ameliorate the workings of market? Perhaps yes – but consider the opportunity cost. Through the imperfect workings of markets, knowledge is generated and processed and used to allow for the social coordination of individual plans. There are mistakes, for sure: but through someone’s mistake the market feeds others’ opportunities. It might be true that some specific intervention may smoothen this process – who knows? But such a fabric of socially useful knowledge is fragile indeed, and a system based upon external intervention is more likely to jeopardize it all. If knowledge is dispersed, how could a single decision maker have a view wide enough to know how to “better” a complex economy?
This is why Hayek was always stressing the need for general, universally applicable laws – against norms that are tailored to specific circumstances and, at the end of the day, specific economic actors.
It is true that Hayek uses, in The Constitution of Liberty in particular, a language which is not inimical to all kind of regulation (“the range and variety of government action that is, at least in principle, reconcilable with a free system is (…) considerable”). However, he approved of the use of government coercive powers only insofar they “serve general and timeless purposes, not specific ends”. What we today call “regulations” are precisely rules with specific ends.
In short, Hayek’s work is certainly less a public policy beacon than Milton Friedman’s is. Was he less or more amicable to regulation than Friedman? He may sound, in The Constitution of Liberty or The Road to Serfdom, friendlier to some general outlines of regulation – but keep in mind he was quite skeptical of antitrust and favored the denationalization of money versus central banking. Neither of these views can be seen as mainstream among mild, middle-of-the-roadish economists.
More importantly, to be fair, no libertarians read Hayek nor Friedman as searching for all answers to all problems. The relevant question is what they teach us, so that we can interpret everydays’ life.
One thing is for sure. Hayek’s constant appeal to humility in front of reality, his stress over understanding the free market as a complex ecosystem and not simply a “machine” that could be easily turned this or that way, is irreconcilable with Dodd-Frank, to name but an egregious example of the fatal conceit in action.
View full post on Cato @ Liberty
Hayek Wasn’t a ‘Free Market Marxist’
By Alberto Mingardi
Why can’t liberals provide a fair portrait of a thinker they disagree with? It was a reasonable prediction that Mitt Romney’s choice of Paul Ryan as his VP appointee would ignite a discussion over the first principles of politics and the role of government in society. So far, however, it hasn’t been much of a discussion: rather, we shall speak of a goofy attempt to graft the practice of smearing the enemy from day-to-day politics to the realm of political thinking.
David Boaz has wisely commented upon Adam Davidson’s piece on Hayek. Even more surprising is a blog post from historian Timothy Snyder in the New York Review of Books. Professor Snyder sees Mr. Ryan as aiming to revive an “outdated ideology”—as “taking some of the worst from the twentieth century and presenting it as a plan for the twenty-first.”
What he finds outdated is, basically, Hayek’s allegiance to the principle of limited government. Revealingly, he maintains that “Austria became a prosperous democracy after World War II because its governments ignored Hayek’s advice and created a welfare state.” Linking the economic performance of Western democracies after WWII to the institutions of the welfare state (a national health care service, compulsory education, unemployment insurance et cetera) is at best naive.
Making “provisions for citizens in need” may be “an effective way to defend democracy” from the temptations of populism and authoritarianism but this doesn’t say much per se. Which provisions? Provided by whom? For the benefit of whom? The answers to questions aren’t trivial.
What is most surprising in Snyder’s piece is how his portrayal of Hayekianism as the opposite of what it is. He writes:
Like Marxism, the Hayekian ideology is a theory of everything, which has an answer for everything. Like Marxism, it allows politicians who accept the theory to predict the future, using their purported total knowledge to create and to justify suffering among those who do not hold power.
You may wish to make a caricature of a thinker. A successful caricature should, however, resemble the subject, at least a little.
A cursory glance at the titles of Friedrich von Hayek’s books should be enough to understand that what he was preoccupied with was precisely the hubris of decision-makers who pretend to predict the future and manage it. Hayek’s best known paper is poignantly entitled “The Use of Knowledge in Society.” His last book was called The Fatal Conceit. His best work in history of ideas bore, as a subtitle, a reference to the “abuse of reason.”
Hayek was convinced that “no human mind can comprehend all the knowledge which guides the actions of society.” What he stressed, over and over and over, are the inherent limitations of our knowledge, that politicians and regulators, being human beings, share with the rest of us. He was skeptical even of the “purported total knowledge” of his own discipline, economics, as he claimed that “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
Hayek defended individual liberty, precisely because the future is unpredictable.
The case for individual freedom rests chiefly on the recognition of the inevitable and universal ignorance of all of us concerning a great many of the factors on which the achievement of our ends and welfare depend. It is because every individual knows so little and, in particular, because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it.
For Hayek,
If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.
Does this sound like a man that had an answer for everything, or wanted to propose a grand plan for society as a whole? Hayek’s worldview does not have much of a following among intellectuals, not least because it doesn’t see “knowledge” as a monolith. For Hayek, knowledge is dispersed in society, it is by and large “know-how” hence it belongs as much to the little guy on the street than to the Yale professor. The free market economy is a process by which these different pieces of knowledge somehow are put together to the good of society. Professor Snyder portrays Hayek as a “reacting” against national socialism and communism. It is an elegant way to dismiss it, by claiming that “precisely because they [Hayek and Rand] were reacting, they flew to extreme interpretations.”
Reality fascinates profound thinkers, as it may either ignite or terrify people. But the economic calculation debate, in which Hayek and his mentor Ludwig von Mises were the main actors, was not a mere “reaction:” it was, as brainy socialists at the time acknowledged, a discussion over the possibility of economic planning. Hayek stumbled upon a more refined understanding of the role of knowledge in society, while participating in that debate—this is certainly true. But he was not a political copywriter, as Professor Snyder seems to believe.
As an Italian, I envy the fact that until next November Americans will be having a discussion over the fundamental pillars of their political state. Neither Obama-Biden nor Romney-Ryan are political thinkers: they are politicians, and the very fact they have (some) convictions is rare enough to be praised. But it is good and exciting that the electoral contest will bring people to go back to basics and, perhaps, try to make sense of what this Hayek guy or that Rawls guy actually meant.
It is, however, rather depressing to see such a systematic misrepresentation of Hayek’s ideas. Let’s assume it is due to genuine ignorance. We shall then recommend some links to liberal chastisers of Mr. Ryan, so that they may know better what they disagree with.
- The Universitad Francisco Marroquin has made available online this collection of interviews with Hayek.
- This 1984 Cato Policy Report provides a quick introduction to some of the core themes in Hayek’s thinking.
- Hayek’s Nobel lecture is a short but intriguing introduction to his thought.
- Arch-liberal George Soros has a short appreciation of Hayek’s ideas, that was initially delivered in a conference at the Cato Institute.
I (and many others) would have quarrels with some of Soros’s points, but perhaps his article may suggest that critics of Hayek’s “free market Marxism” pause for a moment before rushing to their keyboard.
Hayek Wasn’t a ‘Free Market Marxist’ is a post from Cato @ Liberty – Cato Institute Blog
View full post on Cato @ Liberty
Hayek in the New York Times
By David Boaz
Sunday’s New York Times magazine included an article by Adam Davidson of NPR, “Prime Time for Paul Ryan’s Guru (the One Who’s Not Ayn Rand).” I thought when I read it that if you’re going to call an economist “largely ignored,” you should at least mention that he won a Nobel Prize so readers could judge your claim. But incredibly, Davidson left that fact out.
Now Richard Epstein has taken him to task at greater length and explains how much more sophisticated Hayek’s understanding of markets was than those of his contemporaries. Epstein writes:
But it is utterly inexcusable to overlook, as Davidson does, Hayek’s enduring influence. A year after the Road to Serfdom came out, Hayek published his 1945 masterpiece in the American Economics Review, “The Use of Knowledge in Society,” which has been cited over 8,600 times. In this short essay, Hayek explained how the price system allows widely dispersed individuals with different agendas and preferences to coordinate their behaviors in ways that move various goods and services to higher value uses.
Alas, Davidson’s dismissive account of Hayek does not mention even one of Hayek’s major contributions to weaning the United States and Great Britain from the vices of centralized planning. Thus Hayek’s 1940 contribution to the “Socialist Calculation” debate debunked the then-fashionable notion that master planners could achieve the economic nirvana of running a centralized economy in which they obtain whatever distribution of income they choose while simultaneously making sound allocations of both labor and capital, just like in Soviet Russia.
Hayek exposed this fool’s mission by stressing how no given individual or group could obtain and organize the needed information about supply and demand conditions throughout the economy.
Epstein goes on to examine the contributions that Hayek made to economists’ — and policymakers’ — understanding of planning, contracts, and competition. Too bad his article didn’t appear in the New York Times.
More on the Times‘s misunderstandings of Hayek here and here. More on Epstein — plus George Soros and Bruce Caldwell — on Hayek here.
Hayek in the New York Times is a post from Cato @ Liberty – Cato Institute Blog
View full post on Cato @ Liberty
Mario Rizzo on Hayek and the Common Law
Mario Rizzo is currently an associate professor of economics at New York University and the director of the Program on the Foundations of the Market Economy. Rizzo is co-author (with Gerald O’Driscoll) of The Economics of Time and Ignorance (1985).
In this lecture from 1999, Rizzo addresses aspects of the common law in an attempt to answer the question “How can the common law adapt to novel circumstances and still promote the coordination of plans?” Rizzo answers the question by drawing on much of F. A. Hayek’s work regarding the law while emphasizing the importance of balancing consistent legal expectations with a slight degree of circumstantial adaptability.
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