View source for Hayek, Friedman, and the Illusions of Conservative Economics

<!-- you can have any number of categories here -->
[[Category:Robert Solow]]
[[Category:The Great Persuasion: Reinventing Free Markets since the Depression]]
[[Category:Angus Burgin]]
[[Category:Friedrich von Hayek]]
[[Category:Mont Pelerin Society]]
[[Category:Milton Friedman]]
<!-- 1 URL must be followed by >= 0 Other URL and Old URL and 1 End URL.-->
{{URL | url = http://www.newrepublic.com/article/books-and-arts/magazine/110196/hayek-friedman-and-the-illusions-conservative-economics}}
<!-- {{Other URL | url = }} -->
<!-- {{Old URL | url = }} -->
{{End URL}}
{{DES | des = [[Robert Solow]]'s review of "[[The Great Persuasion: Reinventing Free Markets since the Depression]]" By Angus Burgin.  His view of the [[Mont Pelerin Society]]'s transition from the leadership of [[Friedrich von Hayek]] to [[Milton Friedman]]. | show=}}
<!-- insert wiki page text here -->
<!-- DPL has problems with categories that have a single quote in them.  Use these explicit workarounds. -->
<!-- otherwise, we would use {{Links}} and {{Quotes}}  -->
{{List|title=Hayek, Friedman, and the Illusions of Conservative Economics|links=true}}
{{Quotations|title=Hayek, Friedman, and the Illusions of Conservative Economics|quotes=true}}

{{Text |
JUST AS I WAS wondering how to start this review, along came the Sunday New York Times Magazinewith a short article by Adam Davidson with the title “Made in Austria: Will Friedrich von Hayek be the Tea Party’s Karl Marx?” One Tea Party activist reported that his group’s goal is to fill Congress with Hayekians. This project is unlikely to go smoothly if the price of admission includes an extensive reading of Hayek’s writings. As Davidson remarks, some of Hayek’s ideas would not go down well at all with the American far right: among them is a willingness to entertain a national health care program, and even a state-provided basic income for the poor.

The source of confusion here is that there was a Good Hayek and a Bad Hayek. The Good Hayek was a serious scholar who was particularly interested in the role of knowledge in the economy (and in the rest of society). Since knowledge—about technological possibilities, about citizens’ preferences, about the interconnections of these, about still more—is inevitably and thoroughly decentralized, the centralization of decisions is bound to generate errors and then fail to correct them. The consequences for society can be calamitous, as the history of central planning confirms. That is where markets come in. All economists know that a system of competitive markets is a remarkably efficient way to aggregate all that knowledge while preserving decentralization.

But the Good Hayek also knew that unrestricted laissez-faire is unworkable. It has serious defects: successful actors reach for monopoly power, and some of them succeed in grasping it; better-informed actors can exploit the relatively ignorant, creating an inefficiency in the process; the resulting distribution of income may be grossly unequal and widely perceived as intolerably unfair; industrial market economies have been vulnerable to excessively long episodes of unemployment and underutilized capacity, not accidentally but intrinsically; environmental damage is encouraged as a way of reducing private costs—the list is long. Half of Angus Burgin’s book is about the Good Hayek’s attempts to formulate and to propagate a modified version of laissez-faire that would work better and meet his standards for a liberal society. (Hayek and his friends were never able to settle on a name for this kind of society: “liberal” in the European tradition was associated with bad old Manchester liberalism, and neither “neo-liberal” nor “libertarian” seemed to be satisfactory.)

The Bad Hayek emerged when he aimed to convert a wider public. Then, as often happens, he tended to overreach, and to suggest more than he had legitimately argued. The Road to Serfdom was a popular success but was not a good book. Leaving aside the irrelevant extremes, or even including them, it would be perverse to read the history, as of 1944 or as of now, as suggesting that the standard regulatory interventions in the economy have any inherent tendency to snowball into “serfdom.” The correlations often run the other way. Sixty-five years later, Hayek’s implicit prediction is a failure, rather like Marx’s forecast of the coming “immiserization of the working class.”

 

BURGIN BEGINS his history with a sketch of two groups of economists who wanted to defend and disseminate “free-market” ideology even in the depths of the depression of the 1930s. The source of their alarm was not the danger from Soviet communism or Nazi Germany, but rather the rash of interventionist economic policies everywhere, the New Deal here and the Labor Party there, designed to ameliorate and to reverse the ravages of falling incomes and rising unemployment. One group, at the London School of Economics (LSE), centered on Lionel Robbins (later director of the LSE and a continuing presence in British economic and cultural policy) and Friedrich von Hayek (a recent immigrant from Austria with connections to Europe and the “Austrian School”). The second group, at the University of Chicago, had three leading figures, no two alike. Frank Knight, a skeptical, curmudgeonly philosopher-economist with a very important piece of straight economics to his credit, a book called Risk, Uncertainty and Profit, had a profound influence on colleagues and graduate students. Jacob Viner was very different—an urbane, cultivated scholar-teacher, he was clearly in the Chicago tradition (though later transplanted to Princeton), but nevertheless worked cheerfully as an adviser to the Treasury in the Roosevelt administration. Henry Simons was the most literal-minded of the group, sometimes scary even to his colleagues. If laissez-faire could succeed only under narrow conditions, he proposed to re-create those conditions: ruthlessly suppress monopoly and even bigness, institute a seriously progressive tax system to reduce inequality and poverty, and so on. Like their colleagues in London, with whom they were in occasional contact, the Chicago economists wanted both to propagate ideas and to change the world. (It is worth mentioning that both Knight and Viner were later privately critical of The Road to Serfdom.)

Like thorough, unbiased reporting that challenges your way of thinking? Subscribe to The New Republic for $3.99/month.

What seems off-key (at least now, at least to me) is that they all felt themselves to be in a struggle between free markets and collectivism (or socialism) with no possible intermediate stopping point. That is the meaning of “the road to serfdom.” Even earlier, in 1934, Knight had written that it would be only a “decade or two at the most before we see the end of anything like freedom of inquiry in the United States and all the rest of the liberal European world where it has not already been sunk.” Wilhelm Röpke, a German sociologist-economist of little account, but a friend and ally of Hayek’s, thought that it was time to “recognise that the case of Liberalism and Capitalism is lost strategically even where it is still undefeated tactically.” Simons wrote in 1938 “that the main direction of New Deal policies is toward authoritarian collectivism.”

This apocalyptic tone survived into the period dominated by Milton Friedman, who is the subject of the second half of Burgin’s book. It is the language of the Tea Party Hayekians. In 1976, Friedman told an audience at the University of Pittsburgh that he welcomed the inefficiency of government: “If the government were spending the forty percent of our income that it now spends efficiently, we would long since have lost our freedom.” In 2004, Friedman told The Wall Street Journal that, although the battle of ideas had been won, “currently, opinion is free market while practice is heavily socialist.” The point to keep in mind is that “socialist practice” includes the Food and Drug Administration (FDA), the certification of doctors, and the public schools.

The atmosphere in which Burgin’s narrative takes place is permeated with this kind of rhetoric. But of course for those of us trying to live on this planet, the issue is not between free markets and socialism/collectivism; it is between an extreme version of free markets and effective regulation of the shadow banking system, or between an extreme version of free markets and the level and progressivity of the personal income tax. The metaphor of the slippery slope is largely an invention to scare off pragmatic exploration of the policy landscape.

 

THE GOOD HAYEK was not happy with the reception of The Road to Serfdom. He had not meant to provide a manifesto for the far right. Careless readers ignored his rejection of unqualified laissez-faire, and the fact that he reserved a useful, limited economic role for government. He had not actually claimed that the descent into serfdom was inevitable. There is no reason to doubt Hayek’s sincerity in this (although the Bad Hayek occasionally made other appearances). Perhaps he would be appalled at the thought of a Congress full of Tea Party Hayekians. But it was his book, after all. The fact that natural allies such as Knight and moderates such as Viner thought that he had overreached suggests that the Bad Hayek really was there in the text.

But this is to get a little ahead of Burgin’s story. Even before and during the war, Hayek, Robbins, Röpke, a few like-minded Europeans, and, in a lesser way, the Chicagoans were looking for an organizational or institutional framework that would help them to develop, refine, and circulate a new, modified, and improved version of nineteenth-century (neo)liberalism. There was an interesting intermediate episode. In 1937, Walter Lippmann published An Inquiry into the Principles of the Good Society, a book that embraced a free-market ideology very close to that of the academic circles, who welcomed it with enthusiasm. Röpke wrote that the book gave “masterful expression to ideas which are in the minds ... of thinking Liberals, and you have added new and weighty ideas.” Simons called it “a magnificent contribution to the liberal cause.”

The academics thought that they had found the popular voice they desperately needed, one heard regularly by ten million Americans. The Europeans organized a colloquium to be held in Paris in August 1938 to celebrate the publication of the French translation of Lippmann’s book. The meeting apparently spent itself on minor differences of opinion among the faithful, and ended rather inconclusively. Whether on account of this experience or out of natural moderation, Lippmann soon distanced himself from this incipient movement. He and his ideas went elsewhere.

But the group continued its efforts to organize something, anything. Money was hard to come by, and the main participants were not of one mind about whether the old liberalism needed to be fundamentally reformed or had never been properly tried. An attempt by Röpke to establish a journal of neoliberal ideas went nowhere. Finally, in the spring of 1947, with a grant from the Volker Fund of Kansas City, who were the Koch Brothers of their time, Hayek was able to bring together a collection of thirty-nine colleagues for ten days in Vevey, Switzerland, to begin the work of transforming nineteenth-century liberalism and converting it into a force in the world. This was the birth of the Mont Pèlerin Society (MPS), around whose later history Burgin organizes the rest of his narrative. It is a useful device; but I fear that it tends to endow the MPS with more significance than it ever really had, whether within the economics profession or in the world at large.

I wish Burgin had included a full list of the original attendees at Vevey. He mentions that the “room was filled with journalists, businessmen, and academics from across the Atlantic world.” So this was not intended as a merely academic discussion, though Hayek and Robbins were pretty clearly the guiding spirits. By now it was possible to identify the Soviet Union and communism as the main source of menace, which was natural enough, given the times and the all-or-nothing predisposition of the group; but the temptation to frame the intellectual issue as Free Markets v. Communism more or less guarantees that all the important practical questions about economic policy and social policy will disappear from view.

According to Burgin, the first attempt by the conferees “produced a list of foundational convictions that assailed the socialist menace, lauded the virtues of the competitive market, and drew connections between economic freedoms and the ‘intellectual freedoms’ that totalitarians sought to erode.” A nod to Hayek’s own moral concerns asserted the necessity of “a widely accepted moral code” governing collective as well as private action. There is not much guidance here for a member of the Interstate Commerce Commission who has to worry about the regulation of imperfectly competitive railroad and trucking industries. Even so, there was grumbling and disagreement about that moral code, about the proper degree of emphasis on private property, about whether such language had an adequately positive and progressive tone. It must have been all too easy to fall back on the defense of capitalism against the encroachments of socialism, on which everyone could agree, to no great purpose.

 

WHAT THEY APPARENTLY could not agree on was an answer to the basic question facing any new version of classical liberalism: what are the permissible, indeed the desirable, deviations fromlaissez-faire? A large part of modern mainstream economics, unmentioned in this book, is about precisely that question. Good answers are available, and many of them involve government intervention. Maurice Allais, the most important French economist of the time, refused to sign the meeting’s statement of aims because “its ‘dogmatic stance’ on private property left it ‘much closer to the laissez-fairism of the nineteenth century than to a genuine revival of liberalism.’”

The inability to agree about this sort of thing, or even to face up to it, seems to have dogged the MPS throughout its early years. This may be one reason why it was never the public force that Hayek had originally hoped to establish. The membership grew from the original thirty-nine to 167 in 1951 and 258 in 1961. There is no way to tell whether this growth reflected the spread of free-market ideas or the willingness of the founding members to tap a supply that was already there. Either way, these numbers guaranteed that Hayek’s ambition—to rebuild a modernized neoliberalism on ethical foundations other than simple individualism—would go nowhere in the MPS. The range of opinions was too wide, even in a handpicked group of this size. Inevitably, serious discussion was replaced by prepared presentations followed by comments consisting largely of station identification. So far as I know, the MPS never produced and distributed an agreed public statement of its program. Outside the economics profession, it was invisible.

The MPS was no more influential inside the economics profession. There were no publications to be discussed. The American membership was apparently limited to economists of the Chicago School and its scattered university outposts, plus a few transplanted Europeans. “Some of my best friends” belonged. There was, of course, continuing research and debate among economists on the good and bad properties of competitive and noncompetitive markets, and the capacities and limitations of corrective regulation. But these would have gone on in the same way had the MPS not existed. It has to be remembered that academic economists were never optimistic about central planning. Even discussion about the economics of some conceivable socialism usually took the form of devising institutions and rules of behavior that would make a socialist economy function like a competitive market economy (perhaps more like one than any real-world market economy does). Maybe the main function of the MPS was to maintain the morale of the free-market fellowship.

 

THE SCENE GOT more interesting when the de facto leadership of the MPS (and whatever movement it represented) passed from Friedrich von Hayek to Milton Friedman, thirteen years younger and eventually altogether different in style and, to some extent, even in ideology. Friedman (I will refer to him this way, though he was a long-time personal friend and political opponent) attended the meeting of the MPS in April 1947, presumably at the insistence of his brother-in-law Aaron Director, an older Chicago fixture and a rigid right-winger. Friedman was then a junior scholar. His main professional achievement so far was an excellent empirical study, Income from Independent Professional Practice, written with Simon Kuznets, which served as his Ph.D. thesis at Columbia.

But he was also the co-author with George Stigler of a well-written and well-argued pamphlet against rent-control called Roofs or Ceilings?. In it, the authors recognized that allowing rents to respond freely to market forces would automatically give only the affluent access to comfortable housing and confine the less well-off to often miserable living conditions. But, they argued, although this was deplorable, the correct remedy was to choose public policies that would reduce inequality, not to try to offset it by distortion of the market for rental housing. The conservative sponsors of the pamphlet objected to this heresy about inequality. Friedman and Stigler stood their ground. In the end, the sponsors forced the inclusion of an editorial footnote suggesting that those alternative policies would consist mainly of undoing other errors committed by government. There is a lesson to be learned from this episode, but opinions might differ as to what that lesson is.

Friedman found that initial MPS meeting exhilarating. He met the eminent Europeans for the first time, and discovered himself in agreement with those who were aiming to create new foundations for neoliberalism. As his ideas and his career evolved, however, he moved in a different, almost opposite, direction, toward a cruder government-can-do-no-right position, certainly not given to ethical worries or even to economic-theoretical fine points. It is hard to say how much this shift was driven by the wish to have political influence and how much by natural inclination and a kind of flexing of intellectual muscles. He was not alone. As Burgin writes, “economists who supported free markets were not so eager as in former years ... to validate certain modes of government intervention and to emphasize the need for philosophical justifications for free markets that extended beyond the material abundance they ostensibly produced.”

When Friedman became president of the MPS in 1970, the number of members had risen to 330. One of them had remarked privately, a few years earlier, that the sessions had lost their intellectual character and become “a businessmen’s sort of trade association meeting.” Friedman attributed this loss of quality to the Society’s success in spreading its ideas. Yet he convened a meeting of the surviving founders and proposed that the MPS be dissolved after its twenty-fifth anniversary in 1972. This suggestion was rejected by the smaller group; but it is clear that Hayek’s original goal had not been achieved, and the action had passed into Friedman’s hands and therefore with Friedman’s goals and methods. If MPS had ever been a force, it was no longer needed. Burgin thinks that the MPS had served the purpose of providing a sort of institutional home for the cultivation of neoliberal ideology. I am skeptical, except in the sort of clubby sense already mentioned, but of course I was not there.

Under Milton Friedman’s influence, the free-market ideology shifted toward unmitigated laissez-faire. Whereas earlier advocates had worried about the stringent conditions that were needed for unregulated markets to work their magic, Friedman was the master of clever (sometimes too clever) arguments to the effect that those conditions were not really needed, or that they were actually met in real-world markets despite what looked a lot like evidence to the contrary. He was a natural-born debater: single-minded, earnestly persuasive, ingenious, and relentless. My late friend and colleague Paul Samuelson, who was often cast as Friedman’s opponent in such jousts, written and oral, once remarked that he often felt that he had won every argument and lost the debate.

As for relentlessness: Professor Friedman came to my department to give a talk to graduate students in economics. The custom was that, after the seminar, the speaker and a small group of students would have dinner together, and continue discussion. On one such occasion I went along for the dinner. The conversation was lively and predictable. I had a long drive home, so at about ten o’clock I excused myself and left. Next morning I saw one of the students and asked how the rest of the dinner had gone. “Well,” he replied, “Professor Friedman kept arguing and arguing, and after a while I heard myself agreeing to things I knew weren’t true.” I suspect that was not the only such occasion.

I have already referred to Friedman’s early, detailed empirical study of the incomes earned by doctors, lawyers, and others in independent practice. Burgin emphasizes Friedman’s general empirical orientation. Hayek, at least the Good Hayek, was interested mainly in high principle, while Friedman more often appealed to facts as being decisive in policy choices as well as in analytical matters. It is true that Friedman could be infinitely subtle in criticizing a student’s empirical work; but he could also be rather lax in finding support for his own opinions. To take one example, Friedman proposed abolishing the Food and Drug Administration because the harm done by its excessively cautious delays in approving new drugs outweighed the dangers that would come from simply making drugs freely available on the open market. How could he, or anyone, possibly know that? One can indeed imagine an immensely complicated empirical study, requiring all sorts of assumptions and approximations, the outcome of which would inevitably be clouded by complexity, guesswork, and great uncertainty. But that would win no hearts or minds. Friedman’s confident assertion just sounds like fact-based knowledge. A different sort of person would have looked for ways to speed up the FDA’s approval process.

 

THESE MATTERS OF personal style actually count for something. One of the great merits of Burgin’s book is to show how the character and the content of the free-market ideology changed when the flag passed from Hayek and Company to Friedman and Company. Despite the efforts of a small band of the faithful, the Tea Party is, and is likely to remain, more Friedman than Hayek: harder-line, more brashly confident, less concerned with getting things quite right, and without sympathy for losers.

It seems to me that Friedman’s professional life was more closely entangled with his political activities than was the case with Hayek or any of the other personalities in the story. In that connection, Burgin reports, and seems to credit, a belief among the faithful that Friedman’s Nobel Prize was delayed by elite hostility to his public role as a champion of free markets. I had never heard that story before, but in any case it is absurd. The Nobel Prize in economics is not about advocacy. It is intended to reward important contributions to the discipline of economics. Friedman’s was the eighth to be awarded after the prize was established. A knowledgeable person looking at the list of winners of the seven previous prizes—Hayek was one of them, by the way—would see that their scientific contributions matched or exceeded Friedman’s.

A more plausible case might be made that Friedman’s prominence on the public stage led to some overestimation of his professional achievement. His most important work, particularly cited by the Swedish Academy, was on the relation between consumer spending and income. He proposed that consumer expenditure responded primarily to long-run income prospects rather than to current income, and he suggested a particular measure of those long-run prospects that he called “permanent income.” This was indeed an important and useful idea. Something like it had been anticipated in much less satisfactory form by James Duesenberry, and Franco Modigliani developed a similar and in some ways more satisfactory theory at almost the same time. Friedman’s A Theory of the Consumption Function, which appeared in 1957, was a major work by any standards; but monetarism, the doctrine that autonomous change in the supply of money is the main actor in the determination of aggregate nominal income, has not proved to be tenable analytically or empirically. His Monetary History of the United States, 1867–1960 (written with the late Anna Schwartz), while highly interesting, is not a towering intellectual achievement.

Burgin is interested in a large question: how much did the ideas and the persuasive efforts of the MPS circle and the Friedman succession contribute to the widespread turn to the right in the politics of the Western world after 1970? How much did Ronald Reagan and Margaret Thatcher owe to Friedrich von Hayek and Milton Friedman, and how much did Hayek and Friedman owe to Reagan and Thatcher? Burgin clearly attaches a lot of importance to the respectability conferred on the political right by the ideas of Hayek, Friedman, and the others, and to the rhetorical devices they developed. I would not disagree, but it is of course a much more difficult matter to weigh these effects against more pedestrian facts: Thatcher profited from an ill-judged miners’ strike and, as Lyndon Johnson famously remarked, the passage of the Civil Rights Act lost the Solid South for the Democratic Party for at least a generation.

For a serious modern reader, the rhetoric is irrelevant or, worse, misleading, or, even worse, intentionally misleading. Everyone has known for a long time that a complicated industrial economy is either a market economy or a mess. The real issues are pragmatic. Which of the defects of a “free,” unregulated economy should be repaired by regulation, subsidization, or taxation? Which of them may have to be tolerated (and perhaps compensated), at least in part, because the best available fix would have even more costly side-effects? To the extent that the MPS circle made that kind of policy discussion more difficult to have, it did the market economy a disservice.

Robert M. Solow is Institute Professor of Economics emeritus at MIT. He won the Nobel Prize in Economics in 1987. This article appeared in the December 6, 2012 issue of the magazine under the headline “The Serfdom Scare.”
}}