Alexandria

Last year, I read through Keynes’ The General Theory of Employment, Interest, and Money, so this year I decided I’d go for Hayek’s most famous book.

First, some thoughts on the book as a whole, before I go through it chapter by chapter:

1. It was a much easier read than I expected. Unlike The General Theory, which is addressed to professional economists and chock full of equations, this book is a popular presentation of Hayek’s philosophy of government. I zipped through it in a day.
2. Given the way Keynes and Hayek are often presented in opposition to each other, it’s surprising to see how little Keynes/Hayek opposition you get from this book. Keynes is quoted just once, favorably, and there’s a quote on the back of the book from Keynes saying that “Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in deeply moved agreement.” If I looked just at this book, I’d have no idea that Keynes and Hayek ever disagreed much at all. (Of course, there’s other evidence that they actually did disagree about how to get out of a depression.)
3. Since the book is mainly directly criticizing a kind of central planning that no one in the US or Europe advocates any more, it feels to some extent dated. On the other hand, Hayek, who sees a slippery slope toward the kind of central planning that he describes as leading to serfdom, does set forth his views on what kinds of government interference in the economy are acceptable and what aren’t.
4. What’s acceptable to Hayek, in general terms, turns out actually to cover a lot of ground.
5. Hayek is way more appealing than Ayn Rand. (Admittedly, since I can’t stand Ayn Rand, this is damning Hayek with faint praise.)
6. Given that the countries of Western Europe haven’t become totalitarian, and at the same time haven’t made the kind of sharp turnaround on government economic policy that Hayek seems to see as the only alternative to totalitarianism, Hayek’s prophetic skills seem questionable. Like Marx, he seems better at pointing to the problems of a certain system (in this case, full scale central planning) than at predicting what future trends will actually be). *

Chapter 1: Classical liberalism is wonderful, and England shouldn’t abandon these values. This chapter is short, speaks in broad principles, and doesn’t yet say just what limits on government Hayek actually does support. He says that he doesn’t consider classical liberalism the same as laissez faire.

The fundamental principle that in the ordering of our affairs we should make as much use as possible of the spontaneous forces of society, and resort as little as possible to coercion, is capable of an infinite variety of applications. There is, in particular, all the difference between deliberately creating a system in which competition will work as beneficially as possible and passively accepting institutions as they are. Probably nothing has done so much harm to the liberal cause as the wooden insistence of some liberals on certain rough rules of thumb, above all the principle of laissez faire.

Chapter 2: Former liberals are being lured into supposedly democratic socialism, but socialism leads to Stalinism and Nazism. I want to invoke Godwin at this point, but I remind myself that Godwin probably hadn’t been born yet at the time that this book was written.

Chapter 3: This is the point where I start to find the book more interesting, as Hayek moves from broad praise of liberalism and criticism of socialism to defining more specifically what he’s against, and what he accepts. He’s opposed to economic planning. (Given the lousy results of the Soviet Union and the countries once behind the Iron Curtain, this seems a reasonable proposition. Even China, where economic planning survives and has learned to avoid further Great Leaps Forward and Cultural Revolutions, isn’t a country free enough that I’d want to live there.) He accepts certain kinds of government intervention that he doesn’t consider planning or collectivism.

Bad planning that should be rejected: “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.” (I’m reminded here of the chapter in Wild Swans: Three Daughters of China where the author describes Mao’s decision to direct all the country’s resources to making steel, and how that choice led to disastrous famine.) Attempts to control prices or wages. Attempts to restrict the entry into different trades, so that professions aren’t open to all on equal terms.

At the same time, the sentence “And it is essential that the entry into the different trades should be open to all on equal terms and that the law should not tolerate any attempts by individuals or groups to restrict this entry by open or concealed force” is written such that it doesn’t just restrict the government from setting up a system like the “restricted professions” in Greece, but also empowers the government to act with anti-discrimination legislation, when a group (such as black people in the US, or Dalits in India) is being excluded from certain professions (either entirely or by making entry more difficult for one group than for another).

Acceptable government actions: “measures merely restricting the allowed methods of production, so long as these restrictions affect all potential producers equally and are not used as an indirect way of controlling prices and quantities.” These include limits on working hours, work safety regulations, providing social services, defining how private property and contracts work, and covering cases where competition won’t work because benefits and costs can’t be confined to a property owner. If enjoyment of services can’t be made dependent on a price (as in the case of roads), it may be helpful for the government to supply the service. If costs extend beyond the property owner, as with “certain harmful effects of deforestation, of some methods of farming, or of the smoke and noise of factories,” then the government may need to “find some substitute for the regulation by the price mechanism.”

Regulation is OK, but planning absolutely can’t be taken in small doses; it’s a slippery slope that leads toward collectivism. Despite Hayek’s warnings about how you can’t tolerate even the least little bit of planning, at this point in the book it looks as if you can tolerate a whole lot of things, by the criterion given in The Road to Serfdom, that at this time in the US are controversial. For instance, a revenue neutral carbon tax could be justified as a response to climate change on the grounds that climate change allows one set of property owners to impose costs on other property owners who didn’t share in the benefits of the carbon emissions (making carbon emissions analogous to the “smoke and noise of factories” that Hayek has already listed as subject to regulation because of costs that extend beyond the property owner). (Obviously, this example assumes a set of people who believe that anthropogenic climate change is real and serious but want to stay within Hayekian bounds in determining the government’s response; this set of people may not be particularly large in the US at this time.) Obamacare could be considered part of the government’s function in providing social services. Not only is the Civil Rights Act a response to “attempts by individuals or groups to restrict this entry [into the different trades] by open or concealed force,” but even more controversial affirmative action programs (including the “disparate impact” standard that my co-author JMK has so often criticized) were instituted in a context in which people faced, not just subtle racial bias, but active resistance to compliance with the Civil Rights Act, by people who resented even the end of the open government supported discrimination of the Jim Crow era. (See also this blog post by someone who argues that Hayek’s principles support affirmative action for the Dalits in India.) Sexual harrassment legislation prohibiting “fuck me or you’re fired” falls in the same category with limits on work hours and work safety regulations, and, as far as Chapter 3 is concerned, the “hostile work environment” standard could also fit.

Some of these regulations will fit better than others into Hayek’s scheme as we proceed to later chapters.

Chapter 4: Hayek takes on arguments for the “inevitability” of planning, particularly the Marxist doctrine of “concentration of industry” and the allegedly inevitable growth of monopolies. Perhaps because I’ve worked all my life in IT, with its “IBM is a monopoly, no, wait, now it’s Microsoft that’s a monopoly” changeability in exactly which company is charged with stifling competition, I find Hayek’s argument in this chapter persuasive. I don’t think that technological progress leads so inexorably to lasting monopolies that the government needs to be actually nationalizing said monopolies, hanging onto them, and planning the economy. (It’s not obvious to me at this point that Hayek’s argument rules out antitrust laws, which seem a more competition friendly way than central planning of responding to the rise of monopolies. Chapter 13 will return to the question of monopoly.)

Chapter 5: On the conflict between planning and democracy:

It may be the unanimously expressed will of the people that its parliament should prepare a comprehensive economic plan, yet neither the people nor its representatives need therefore be able to agree on any particular plan. The inability of democratic assemblies to carry out what seems to be a clear mandate of the people will inevitably cause dissatisfaction with democratic institutions. Parliaments come to be regarded as ineffective “talking shops,” unable or incompetent to carry out the tasks for which they have been chosen. The conviction grows that if efficient planning is to be done, the direction must be “taken out of politics” and placed in the hands of experts – permanent officials or independent autonomous bodies.

Three thoughts here:

1. Hayek’s first sentiment reminds me strongly of the difficulties of Obamacare. While “unanimous” would be too strong a word to express the level of starting support for health care reform, it is both true that Obama and the Democrats won a strong electoral victory in 2008 with a campaign in which health care reform prominently featured, with polls indicating that a majority favored some sort of reform of the health care system, and that people (including Democrats) strongly disagreed on exactly what proper health care reform would look like. I said that Obamacare fit within the governmental bounds that Hayek sets forth in Chapter 3, and a later chapter will further support my impression that Hayek allows for the acceptability of some form of government action to provide health insurance, but if you want to make a case that Hayek’s principles point against Obamacare, this is your chapter.
2. “Parliaments come to be regarded as ineffective ‘talking shops’” does sound like the kind of attitude that my father (who lived under Metaxas’ rule) describes as leading some to support Metaxas’ dictatorship in Greece.
3. The talk about pressure to take things “out of politics” and bring in experts also has obvious echoes in Europe now, with the calls for technocracy in Italy and Greece, though there the issue isn’t so much a desire for more central planning as a system that requires international coordination in areas where, it turns out, the populace of the countries concerned don’t agree all that well (this issue will come up in a later chapter of Hayek’s book).

Chapter 6 (Planning and the Rule of Law): This chapter is key, according to Hayek’s forward. He sees it as the heart of the book. Hayek describes the Rule of Law as the most important guarantee of a free society. The Rule of Law means that the government must be bound be rules fixed and announced beforehand. They should be determined before it’s known what particular individuals may be affected. Here I’m reminded of John Rawls’ veil of ignorance, but of course Hayek’s conclusions about what sorts of policies are implied differ from those of Rawls. It’s at this point that some of the government policies that I said could be justified under Hayek’s guidelines in Chapter 3 fail to make the grade. Hayek, you see, wants the rules to be laid down by the government such that very little room is left for judgment at the time the rules are applied.

It’s at this point that I suspect that JMK’s least favorite form of affirmative action, the disparate impact standard, would probably fail to meet Hayek’s approval. I also suspect that the “hostile workplace” standard in sexual harassment cases would not make the grade. Each of these standards requires more discretion, on the part of the court hearing the case, than, for example, simply ruling out overt discrimination, or “fuck me or you’re fired” style sexual harassment. While Hayek in Chapter 6 talks mostly about administrative discretion (e.g., the executive branch doing economic planning in which it needs to decide how many pigs should be raised), I get the sense that he prefers laws to be explicit enough in advance that he’d probably want to minimize court discretion as well.

To be clear, I am not saying, here, that “disparate impact” and “hostile workplace” wouldn’t make the grade, in the government envisioned in The Road to Serfdom, because they’d be frivolous standards anyway. I’m saying that they wouldn’t make the grade, as far as Hayek’s concerned, even if they are serious attempts to deal with real problems. Hayek says, in this book, that he’d prefer that a certain amount of actual workplace injustice be left to work itself out more slowly, rather than that the government extend itself too far (unfortunately, I forgot to note in what chapter I read this, and can’t find it again now that I’m writing my post, but I’m pretty sure I remember Hayek saying this explicitly at some point). Hayek also says, in this chapter, that he wants standards to be really clear in advance and leave little room for interpretation. Now, let’s consider the “disparate impact” standard (I won’t do a separate analysis of “hostile workplace,” because I think a similar analysis applies there).

The “disparate impact” standard was established by the Supreme Court in hearing Griggs v. Duke Power Company. Duke Power Company had, prior to the Civil Rights Act, limited black people its Labor Department, which had the lowest paid jobs in the company. It also, in 1955, added the requirement of a high school diploma for its higher paid jobs. After the Civil Rights Act, the company dropped its racial restriction, but kept the high school diploma requirement. Here I want to note certain facts that make the high school diploma requirement sound less reasonable, in the context of the time, than it may sound now, when most people have graduated from high school.

1. In North Carolina, 1960 census statistics show that, while 34% of white males had completed high school, only 12% of black males had done so.
2. Griggs v. Duke Power Co. was heard by the Supreme Court in 1971. It was heard by a district court in 1968.
3. The Supreme Court had only ruled that schools be desegregated in 1954. 14 years later, many black males would have gotten their education prior to that ruling (and North Carolina, where Duke Power Co. operated, was a Jim Crow state).
4. But even 1954 is too early a date for actual compliance with Brown. Due to the Pearsall plan drafted by the Speaker of the House in North Carolina, “between 1956 and 1964, integration in North Carolina would occur gradually and on a volunteer-basis.”

In other words, Duke Power Co. applied a standard that black males would meet less readily than white males because they had been subjected to legally segregated schools of inferior quality. This fact was reflected in Burger’s Supreme Court opinion:

Because they are Negroes, petitioners have long received inferior education in segregated schools, and this Court expressly recognized these differences in Gaston County v. United States, 395 U.S. 285 (1969). There, because of the inferior education received by Negroes in North Carolina, this Court barred the institution of a literacy test for voter registration on the ground that the test would abridge the right to vote indirectly on account of race….

Congress has now provided that tests or criteria for employment or promotion may not provide equality of opportunity merely in the sense of the fabled offer of milk to the stork and the fox. On the contrary, Congress has now required that the posture and condition of the job seeker be taken into account. It has — to resort again to the fable — provided that the vessel in which the milk is proffered be one all seekers can use. The Act proscribes not only overt discrimination, but also practices that are fair in form, but discriminatory in operation….

The reason that I think Hayek would still reject the standard is that a court, in judging whether a given test fails the “disparate impact” test, looks to questions like whether the employer can produce a business justification for the test, and whether the employer could use an alternate practice with lesser impact. Hayek clearly doesn’t want the government making these kinds of judgments, and I think it’s fair to say that he doesn’t want the government making such judgments even if the result of not applying them is slower elimination of real injustice. He sees the government’s threat to freedom as the greater danger. (Obviously, some will see this aspect of Hayek as a feature, and others as a bug.)

I imagine you could preserve some more limited version of the “disparate impact” standard and stay within Hayek’s vision of the Rule of Law. For instance, if a company gets dinged for overt discrimination, in violation of the Civil Rights Act, and then turns around and right away implements some dodgy rule with disparate impact to try to get the same discrimination they wanted all along, you could have a standard that would allow the courts to ding them again. Similarly, you might be able to rule out specific egregious “hostile workplace” type actions (but you’d need to think of how to specify them adequately in advance). I just don’t see Hayek going with a broad version of either of these standards.

A revenue neutral carbon tax to combat climate change, on the other hand, still passes all the tests that Hayek has set forth.

Chapter 7: Hayek argues that we shouldn’t take too lightly restrictions on freedom that apply “only” to economic matters.

… What in ordinary language is misleadingly called the “economic motive” means merely the desire for general opportunity, the desire for power to achieve unspecified ends. If we strive for money, is is because it offers us the widest choice in enjoying the fruits of our efforts….

The question raised by economic planning is, therefore, not merely whether we shall be able to satisfy what we regard as our more or less important needs in the way we prefer. It is whether it shall be we who decide what is more, and what is less, important to us, or whether this is to be decided by the planner. Economic planning would not affect merely those of our marginal needs that we have in mind when we speak contemptuously about the merely economic. It would, in effect, mean that we as individuals should no longer be allowed to decide what we regard as marginal.

This strikes me as a reasonable argument against out and out economic planning, which really does constrain freedom in ways significant enough not to merit an “only.” It doesn’t really address whether the “road to serfdom” is as slippery a slope as Hayek sees (he puts his slippery slope argument elsewhere in the book), but, what struck me more, reading the chapter, was the limits of applying Hayek’s argument in the case where you may be choosing between two different forms of constraint on freedom. Was Allende’s socialism a greater threat to freedom than Pinochet’s torture and disappearances? A recent blog post at Crooked Timber reports that Hayek chose what I’d judge to be the wrong answer to that question.

There’s also the case where I might be choosing between two different forms of proposed economic constraints, and have a non-economic motive for preferring one over the other. Perhaps, for example, candidate A wants higher taxes on the rich and more regulation of Wall Street. Let’s assume that I believe that candidate A’s policies will actually cost me; it won’t be practical only to fund A’s policies from the 1%, and, ultimately, “the rich” will wind up including more moderately well off people like myself (I do make more than the median income in Orange County, CA, and that puts me even more above the median income for the US as a whole). But candidate B supports a “conscience” law that forbids pharmacies from firing pharmacists who refuse either emergency or regular contraception to customers. Hayek might disapprove of both candidate A’s and candidate B’s proposals, but from my point of view, candidate B’s proposal is a much more scary intrusion on freedom; by making it difficult for pharmacies to reliably supply birth control to willing customers, candidate B intrudes on women’s ability to decide whether or not to be pregnant, a thing far more intrusive than even a significant tax hike (and likewise a broader and more significant intrusion on freedom than some degree or other of increased regulation of Wall Street).

Chapter 8: I said earlier that I found Hayek much more appealing than Ayn Rand. A big part of the reason is that Ayn Rand condemns altruism in general (I got pushback on that the last time I posted about Rand – yes, she really does, I’ve seen this repeatedly in her essays), while Hayek talks more about freedom vs. economic planning. It’s certainly possible to differ with Hayek’s view of freedom (there’s been a whole series of posts recently at Crooked Timber differing with Hayek’s conception of freedom), but, let’s just say that, while altruism can reach its limit of applicability (put on your oxygen mask before assisting other customers), and economic planning is not devoid of benefits, economic planning hits its limits much sooner than altruism in general does.

Another reason that Hayek’s more palatable than Rand, though, comes through in this chapter. Rand tends to tell fables in which, if left alone, the best always prosper. Hayek addresses the real world, in which success is partly a matter of merit and partly a matter of chance, and argues that in just that world, the poor are still both freer and better off with less economic planning. He has two arguments for this. One is that private property guarantees freedom, by dividing power among more people than government control of the means of production does. The other is that people are more resentful of losing out because of someone’s deliberate choice than of losing out due to random chance.

What about “who benefits” questions regarding how the rules are set up, though? Consider two kinds of arguments that I’ve been reading lately about unions.

Argument A (regarding unions in the US): Income has become more stratified. This is a bad thing, for various reasons. Concentrated wealth means concentrated ability to influence politics, an economy more prone to fluctuations in demand and therefore less stable, and less social mobility. One big reason that income has become more stratified is the weakening power of unions, and unions have grown weaker, in turn, partly due to union-hostile legislation, such as right-to-work laws.

Argument B (regarding unions in Greece): Greece has high unemployment because its labor is overpriced. It has a high deficit because its public sector is bloated. Both of these problems are exacerbated by the power of unions in Greece. Greece needs to trim its public sector and undergo “internal devaluation” (lower salaries for everyone), and part of the structural reform that will make that possible is to change the labor law in ways that weaken the bargaining position of unions.

I’m phrasing these arguments in my own words, and, obviously, some of you may think I got one or both arguments wrong (if so, feel free to set me straight). You may believe that one or the other of these arguments is right; it’s even possible (since Greece and the US are different countries) to believe both (though probably you won’t believe both at once). I’m pretty sure that Hayek would disagree with argument A (since he’s on record, though not explicitly in this particular book, as supporting right to work laws). My point is, is it possible to evaluate labor law independent from a sense of what a fair distribution of wealth actually is?

Chapter 9: Security and Freedom: We often talk about security vs. freedom tradeoffs in terms of physical security, but in this chapter, it’s economic security that’s the issue. Hayek doesn’t want us to trade too much freedom for economic security. However, he does explicitly support government involvement in providing a particular kind of economic security, “security against severe physical privation, the certainty of a given minimum of sustenance for all.” He has no problem with the state insuring against “genuinely insurable risks,” such as illness or accident. (This is likely the part of the book that Ezra Klein had in mind when he argued that Hayek accepted social insurance including government supported health insurance. In fact, I don’t see where Hayek has ruled out either a government supported private system like Switzerland or an out and out single payer system like Canada, though I do think his principles would tend to rule out a British style NHS, where the government’s involved in running the hospitals and not just the insurance.) He also explicitly allows for government involvement in managing economic fluctuations, and, though he prefers that such involvement be through monetary policy (and elsewhere in the book suggests that such monetary policy avoid pushing too hard for full employment, so as not to fuel inflation), he doesn’t even rule out “skilful timing of public works” (presumably public works that he would think the government should already be doing, such as maintaining roads).

What Hayek does rule out is “economic security” of the kind “designed to protect individuals or groups against diminutions of their income, which although in no way deserved yet in a competitive society occur daily, against losses imposing severe hardships yet inseparable from the competitive system.” He doesn’t want the government protecting particular trades. (I conclude that Hayek would agree with Merkel that Greece should get rid of its “protected professions” and remove as many restrictions as it can on people entering particular jobs.)

Chapter 10: Why the Worst Get on Top: Hayek examines this from several sides; he thinks that the worst sort of socialism will prevail because a mass movement has to appeal to the lowest common denominator, and that a planned economy will attract the worst sorts of planners.

Shorter Chapter 11: “He loved the Big Brother.” Still, if Orwell gives a more compelling and engaging account of totalitarian’s assault on truth than Hayek, Hayek can’t be faulted. Orwell gives a more compelling and engaging account of totalitarian’s assault on truth than just about anyone. Read Orwell over Hayek, if you have to choose, but basically, Hayek’s right on this one.

Chapter 12: Shorter Hayek: Nazis are socialists, not capitalists!

Chapter 13: Shorter Hayek: We, too, are on a slippery slope to something like Nazism. We, now, are where Germany was twenty or thirty years ago. (Since it’s been well over twenty or thirty years since “now,” this chapter seems to have been proven wrong by events.)

This is also the chapter where Hayek returns to the question of monopolies and what government should do about them. First, he sees monopolies as the result of government intervention, rather than a natural tendency of capitalism. Second, he partly blames unions. Third, he thinks that, if government must intervene in the case of monopolies, it should do it by “the plan that used to be preferred by Americans,” of controlling what monopolies can do, rather than taking them over and making them state-owned. (I think most people on the left in the US today would buy the third point, and disagree with the other two points.)

Chapter 14: This is the chapter where Hayek warns against aiming for full employment, and the dangers of unions too successfully resisting lower wages when wages need to be lowered. Evidently, of the two labor related arguments I gave above, he’d be more sympathetic to argument B.

Chapter 15: It appears that all dead economists would have warned against the creation of the European Union as it currently stands. In Keynes’ case, it would have been his chapter on the problems of the gold standard that would have suggested that having countries with very different economic conditions adopt the same currency might not be a good idea. In Hayek’s case, the relevant passage is:

Who imagines that there exist any common ideals of distributive justice such as will make the Norwegian fisherman consent to forego the prospect of economic improvement in order to help his Portuguese fellow, or the Dutch worker to pay more for his bicycle to help the Coventry mechanic, or the French peasant to pay more taxes to assist the industrialization of Italy.

But, if Hayek gave some cautions about how much any international organization should undertake, he was very much in favor of some sort of international organization, in Europe in particular. I’ll leave it to others to judge which aspects of the EU are Hayekian and which aspects are anti-Hayekian, since if I try to take on that task I’ll never finish this post (I’ve been writing it for too long as it is).

Chapter 16: Hayek summarizes his argument. He doesn’t have any aphorisms in this final chapter as Keynes’ “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist,” in his final chapter, but on the other hand, you have to look at a lot more equations to get to Keynes’ snappy aphorism than you do in Hayek’s book, so I suppose it balances out.

* How can I say that both Marx and Hayek are good at pointing out the problems in particular systems, when they totally disagree? Well, because it’s both true that workers often find themselves in situations of unequal power in which they get exploited, and that strong central planning sucks in various ways as a system.

Tags: Friedrich Hayek, Hayek