Other contributors to this talk are: Prof Steven Horwitz, Prof Larry White, Prof Robert Higgs, Philip Booth, Steve Baker, MP, John Papola, and Lord Robert Skidelsky, and Tim Congdon.
Radical Economics: Yo Hayek! A BBC Radio interview with Jamie Whyte on Austrian Economics
31 May 2014 Leave a comment
in Austrian economics, F.A. Hayek Tags: FA Hayek, Jamie Whyte
Margaret Thatcher, Hayek & Friedman | Margaret Thatcher Foundation
19 May 2014 Leave a comment
in Austrian economics, F.A. Hayek, macroeconomics, Milton Friedman Tags: credibility, gradualism, Margaret Thatcher, neoliberalism, Thomas Sargent
Thatcher read Hayek’s Road to Serfdom as an undergraduate at Oxford. She took away two key lessons for her life: you cannot compromise with socialism, even the mild social democratic forms; and she saw her own party was doing just that, which put her deeply at odds with its leadership.
After she became Leader of the Opposition, Thatcher cut short a leftish member of her own Conservative Party Research Department by showing him a copy of The Constitution of Liberty, slamming it down on the table declaring “this is what I believe”.
Thatcher’s relationship with Milton Friedman was different to that of Hayek and not as long standing. Friedman met Thatcher for the first time at a dinner in 1978.
After Thatcher came to office in 1979, Friedman was a critic of the monetary regime of the Thatcher government, questioning her monetary policy targets, questioning the raising of the value added tax to finance income tax cuts, and urging deeper spending cuts in the 1979 budget. Friedman was also a strong critic of the monetary policies of the Fed at that time as well, arguing that they lacked credibility, transparency and were very erratic.
In a letter to the Times on 3 March 1980 Friedman stated that he opposed “fine-tuning” and strongly preferred:
a steady monetary and fiscal policy announced long in advance and strictly adhered to
Hayek disagreed with Friedman about the role of gradualism in a letter to the Times on 26 March 1980:
The chief practical issue today is how fast inflation can be and ought to be stopped.
On this, I am afraid, my difference from Friedman makes me take an even more radical position.
The reason is that I believe that the artificial stimulus which inflation gives to business and employment lasts only so long as inflation accelerates, that is, so long as prices turn out to be higher than expected.
Inflation clearly cannot accelerate indefinitely, but as soon as it ceases to accelerate, all the windfalls due to prices turning out higher than expected, which kept unprofitable businesses and employment going, disappear.
Every slowing down of inflation must therefore produce temporary conditions of extensive failures and unemployment.
No inflation has yet been terminated without a “stabilization crisis”.
To advocate that inflation should be slowed down gradually over a period of years is to advocate a long period of protracted misery. No government could stand such a course.
Milton Friedman’s general views on Britain when Thatcher first came to office were clear-cut and were also stated in his letter to the Times on 3 March 1980:
…while monetary restraint is a sufficient condition for controlling inflation, it is a necessary but not sufficient condition for improving Britain’s productivity – the fundamental requirement for restoring Britain to full economic health.
That requires measures on a broader front to restore and improve incentives, promote productive investment, and give a greater scope for private enterprise and initiative.
Both Hayek and Friedman wrote privately about the Thatcher policies of the early 1980s, decrying them as gradualism. So much for the retired professors as the ring masters of neo-liberalism and Thatcher as their pawn.
Friedman and Hayek disagreed with each other, in important respects, about both gradualism in monetary policy and macroeconomics in general.
Thatcher did not follow their conflicting policy advice to her. At best, Thatcher was a wayward disciple of squabbling prophets.
Friedman was a strong critic of Austrian macroeconomics and its supposed role in the 1930s policy response or lack of a response to the Great Depression:
I think the Austrian business-cycle theory has done the world a great deal of harm.
If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world.
You’ve just got to let it cure itself. You can’t do anything about it. You will only make it worse. You have Rothbard saying it was a great mistake not to let the whole banking system collapse.
I think by encouraging that kind of do-nothing policy both in Britain and in the United States, they did harm.
Hayek was equally critical of the macroeconomics of Milton Friedman and his methodology in general:
I do indeed regard the abandonment of the whole macroeconomics nonsense as very important, but it is for me a very delicate matter and I have for some time avoided stating my views too bluntly and would not have time to state them adequately.
The source of the difficulty is the constant danger that the Mont Pelerin society might split into a Friedmanite and a Hayekian wing.
I have long regretted my failure to take time to criticise Friedman’s Positive Economics almost as much as my failure to return to the critique of Keynes General Theory after I had dealt with his Treatiese.
It still seems to me paradoxical that Keynes, who was rather contemptuous of econometrics, should have become the main source of the revival of macroeconomics – which incidentally was also the reason why Milton was for a time a Keynesian.
I believe a good and detailed critical analysis of macroeconomics would be very desirable.
Brad Delong pointed out in 2000 that the New Keynesian macroeconomic research program was developed in the 20th century monetarist tradition mostly in the work of Milton Friedman.
Tom Sargent argued in 1981 that Thatcher’s medium term economic strategy was gradualism, and the sustained budget deficits would result in unpleasant monetarist arithmetic:
…In order that the current British plan be viewed as credible it is necessary that the large prospective government deficits over the next several years be counterbalanced by prospective surpluses further down the line.
It is difficult to point to much either in current legislation, or equally importantly, in the general British political climate that could objectively support such an outlook.
…Gradualism invites speculation about future reversals with U-turns in policy.
Large contemporary government deficits unaccompanied by concrete prospects for future government surpluses promote realistic doubts about whether monetary restraint must be abandoned sooner or later to help finance the deficits.
Such doubts not only call into question the likelihood that the plan can successfully permanently reduce inflation, but also can induce high real cost in terms of depressed industry and lengthened unemployment in response to what may be viewed as only temporary downward movements in nominal aggregate demand that the monetary restraint induces.
What did Thatcher actually do?
by discrediting socialism so thoroughly, she prompted in due course the adoption by the Labour Party of free market economics, and so, as she wryly confessed in later years, “helped to make it electable”.
The archives of the Margaret Thatcher foundation has released extensive correspondence and other documents about Thatcher, Hayek and Friedman.
Beyond Efficiency Dr. Israel Kirzner
11 May 2014 Leave a comment
in applied welfare economics, Austrian economics
Entrepreneurship and the Market Process with Israel Kirzner
18 Apr 2014 Leave a comment
in applied welfare economics, Austrian economics, entrepreneurship, industrial organisation, market efficiency
The Austrian Approach to Competition Israel M. Kirzner
14 Apr 2014 Leave a comment
in Austrian economics, industrial organisation, regulation
What Have We Learned from the Collapse of Communism? by Peter Boettke
13 Apr 2014 Leave a comment
in Austrian economics, constitutional political economy, development economics, entrepreneurship, law and economics, liberalism, Public Choice Tags: collapse of communism
the collapse of Communism has taught political economists several things:
first, that economic policy is always nested within a set of institutions—that there are economic/financial, political/legal, and social/cultural issues, which all must be taken into account;
second, that leadership matters throughout the transition process;
and third, that historical contingency can either work in your favour or cut against the successful transition.
And I would add a fourth one: that political power corrupts even the most informed and idealistic of individuals, such that you cannot count on ideological alignment to win the day. You have instead a small window of opportunity in which ideological alignment can be utilized to establish institutions that make it difficult for even bad men to do much harm.
In other words, the goal of our political/legal institutions should not be to ensure that the best and the brightest can govern, but instead that if the worst get in power, they can do little damage. This is the idea of a “robust political economy”.
Hayek’s spotty record as a prophet in The Road to Serfdom – Part 1
10 Apr 2014 Leave a comment
in Austrian economics, constitutional political economy, F.A. Hayek, liberalism, politics Tags: Hayek, Road to Serfdom, Tullock
Gordon Tullock used Sweden to support his argument that the basic problem with The Road to Serfdom was:
“that it offered predictions which turned out to be false. The steady advance of government in places such as Sweden did not lead to any loss of non-economic freedoms.”
Hayek discusses the Road to Serfdom
When looking back longingly at the mixed economies of 1950s and 1960s, people often forget who won elections much of the time back then.
The period that managed to combine a large degree of state ownership and control of the UK economy with a free and diverse media and political pluralism was often under Tory rule (1951 to 1964) with the Labor governments (1964-1970) often with a margin of a few seats.
Then there was the Menzies era in Australia with Liberal party rule from 1949 to 1972; and then 1975 to 1983. Much the same in New Zealand. The Left rarely held power in the mid-20th century.
The Christian democrats usually ran both Italy and Germany in coalitions, as I recall, up until the late 1960 or the early 1970s. Gaullist France? The LDP in Japan?
That is where Hayek got it wrong. The left-wing parties were not the face of the future.
Power rotated in Schumpeterian sense. Governments were voted out when they disappointed voters with the replacement not necessarily having very different policies.
The right-wing parties won many western European elections by that well-proven old trick of being slightly to the right of the left-wing parties. Hayek failed to predict this.
Hayek was himself a major critic of detailed predictions:
“We can build up beautiful theories which would explain everything, if we could fit into the blanks of the formulae the specific information; but we never have all the specific information.
Therefore, all we can explain is what I like to call “pattern prediction.”
You can predict what sort of pattern will form itself, but the specific manifestation of it depends on the number of specific data, which you can never completely ascertain. Therefore, in that intermediate field — intermediate between the fields where you can ascertain all the data and the fields where you can substitute probabilities for the data–you are very limited in your predictive capacities.”
“Our capacity of prediction in a scientific sense is very seriously limited. We must put up with this.
We can only understand the principle on which things operate, but these explanations of the principle, as I sometimes call them, do not enable us to make specific predictions on what will happen tomorrow.”
Hayek’s warnings in The Road to Serfdom was against a background where democracy was still young and insecure in Europe and peacetime democratic governments were, up until then, not much bigger than a post office and a military. The big governments of his day were not democratic.
As Popper and Kuhn understood it, bold, risky hypotheses are at the heart of great advances in the sciences and scholarship generally.
Why are there so few workers’ co-ops?
19 Mar 2014 6 Comments
in Austrian economics, industrial organisation, labour economics, managerial economics, organisational economics, theory of the firm Tags: adverse selection, cooperative ownership, Jon Elster, kibbutzim, moral hazard, Ran Abramitzky, Robert Nozick, worker ownership
If workers’ cooperatives are so efficient, why are there so few cooperatives? Workers’ cooperatives should be able to slowly undercut other firms on price because they do not have to pay a profit to the capitalists.
Building societies, credit unions and some life insurance companies were mutually owned by their customers for a long time, but recently fell out of favour because of a growing lack of competitiveness and under-capitalisation.
Cooperatives are not economically viable because of intrinsic difficulties of entrepreneurship and management. And most workers prefer to work in firms for a wage rather than wait for the co-op to start up and hopefully break even before they get their first pay cheque. That could be a slow train coming.
The kibbutzim are Israeli agricultural communities initially organized on socialist lines, mostly between the 1910s and 1950s. The kibbutz is an example of voluntary socialism. The founders of kibbutzim were socialist idealists wanting to create a new human being.
Robert Nozick pointed out that few people actually join a kibbutz. Six per cent is the maximum proportion of any population who would voluntarily choose to live in these socialist communities. More recently, 2.6% of the Israeli population live on a kibbutz.
Originally, most kibbutzim followed strict socialist policies forbidding private property; they also required near-total equality of income regardless of differences in productivity, and in some cases, even abandoned the specialisation of labour. Kibbutzim are communities whose aim is equal sharing.
Kibbutzim were expected to fail because of moral hazard and adverse selection. Other organisations subject to adverse selection and moral hazard are professional partnerships, co-operatives, and labour-managed firms because they are all based on revenue sharing.
Kibbutzim have persisted for most of the twentieth century and are one of the largest communal movements in history. About 40% are still run on communist principles. Why is this so?
The kibbutz movement was founded by individuals who can be regarded as ex-ante homogeneous in their ability and potential income, and who came to a new land full of uncertainties. They were young unattached individuals who share a comparatively long period of social, ideological, and vocational training.
An even more durable example of voluntary collectivist living is Catholic monasteries and convents, but notice that these too were founded on a realization that close family ties are inimical to communal order.
Kibbutz founders wanted insurance, but their founders realised that members who would turn out to have high abilities might leave the Kibbutz.
- The founders of the kibbutzim decided to abolish all private property and to own all wealth commonly, which served as a lock-in device.
- Like monasteries and convents, kibbutzim deter members from fleeing through this communal ownership of property. You leave with the shirt on your back!
Kibbutzim also put prospective members through lengthy trial periods to make sure they are made of the right stuff. Those raised on a kibbutz tend to have learned kibbutz-specific skills, such as agronomy, which also makes exit to the outside world even more difficult.
Kibbutzim are similar to law firms, medical and business partnerships that pool income for risk sharing purposes.
Mutual monitoring and peer pressure replace direct monetary incentives in mitigating moral hazard in a kibbutz (and in monasteries and convents) in the same way as in professional partnerships, cooperatives, and labour-managed firms with pooled assets and the option of exit.
The trade-off between insurance and adverse selection determines the level of equality within a kibbutz and its size, as with any other professional partnership:
- Kibbutz vary in size from less than a hundred to over a thousand, but most have between 400 and 600 members, with an average of 441 members.
- Kibbutz size is limited by the savings on income insurance no longer offsetting the costs of moral hazard and other transaction costs as the Coasian firm grows in size.
Ran Abramitzky writes with great insight on the economics of the kibbutzim. He is writing a book The Mystery of the Kibbutz: How Socialism Succeeded. He found that high-ability individuals are more likely to leave a kibbutz. The brain drain would be worse if kibbutzim didn’t make it so costly to exit. Is this a familiar theme of socialism?
Many hybrid organisations exist in the market, ranging from joint ventures and agricultural seller and supermarket buyer co-ops to labour-owned firms such as in most of the professions.
But rarely do we find real life existing cooperatives with all workers and only workers having equal ownership rights. As Jon Elster noted, there are often non-working owners, non-owning workers and unequal distribution of shares in real life workers’ co-ops. All other types of co-ops and professional partnership share this feature.
An Austrian school economist visits Tacloban
12 Mar 2014 Leave a comment
in Austrian economics, development economics, economics of natural disasters, liberalism Tags: capitalism, development economics, economics of natural disasters, Liberalism, Philippines, Tacloban
When we landed at Tacloban airport just before New Year’s Day, the devastation from Typhoon Haiyan (Yolanda to the locals) was everywhere. Most of the walls of the airport were missing but the supporting beams survived and there was a make-shift roof. We drove for an hour before the damage was no more than lost roofs.
At the airport, there were no barriers between the departure area and the tarmac.
A little known use of those lost walls was stopping the jet engines blasting into the waiting lounge. No photo because I was too busy running.
The Tacloban airport is named after an uncle of Imelda Marcos. The city mayor is her nephew; you may have seen him on CNN. Other relatives of Imelda on the island of Leyte have been congressmen, provincial governors or town mayors in a dynasty that rotates between offices because of term limits.
The café next to the airport where I had breakfast when I was last in Tacloban in January 2012 was washed away, sadly along with its owner.
I remember reading the local newspapers in that café in January 2012. A feature story was about the private armies employed by local politicians. These private armies could be 40 strong. Cronyism and a lack of a rule of law could explain why Leyte is among the poorest islands in the Philippines.
All the surrounding restaurants were wiped out. But the food vendors are back at the airport – the entrepreneurial spirit is very resilient! Tacloban airport was one of the few places where I could get diet coke in all of Leyte.
The only upside of the typhoon was Imelda’s large sea-side walled compound was washed away. There is a god: a vengeful god!?
We dropped in on a friend on the way to my parents-in-law. He had lost power. He said that straight after the typhoon, entrepreneurs were going door to door selling bottled water.
By the time we had arrived, everyone on the island of Leyte had received five-weekly rations of five kilos of rice and other essentials from the town hall. My mother-in-law had no need for this ration so she gave it to less well-off neighbours. Her town was not damaged much at all by the typhoon. They are on the other side of the mountain from Tacloban.
My in-laws living on an island further north of Leyte lost their roof and a wall. Terrifying.
Local merchants must find it hard to rebuild their businesses when everyone is getting food for free from the town hall many weeks after the disaster. This includes areas that suffered little damage.
The consular travel warning for all of Leyte was very ‘high risk’ – one below ‘avoid all travel’. Advised to be self-sufficient and be on guard for bandits, etc.
The owners of a very nice 5-room chalet at the other end of Leyte where my sister-in-law and her family stayed were most unimpressed by the over-inclusive consular travel warnings.There were many cancellations so their business was just ticking over rather than in a profit. Little wonder that the girl behind the makeshift car rental desk in the arrivals lounge at Tacloban airport did not seem to get much business when we arrived.
Utopia, you are standing in it! 
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