Posts Tagged ‘Hayek’

01

Special mention

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Corey Robin, in a second reply to his critics (of his essay “Nietzsche’s Marginal Children,” on which I commented here), further explores the connection between Friedrich von Hayek and Chilean dictator Augusto Pinochet.

In that context, Robin shows how free-market libertarianism stumbles on the relationship between capitalism and violence:

Whether we call it primitive accumulation or the great transformation, we know that the creation of markets often require or are accompanied by a high degree of coercion. This is especially true of markets in labor. Men and women are not born wage laborers ready to contract with capital. Nor do they simply evolve into these positions over time. Wage laborers are often made—and remade—through violence, coercion, and force. Like the labor wars of the Gilded Age or the enclosure riots, Pinochet’s Chile was about the forcible creation, at lightning speed, of new markets in land and labor.

Hayek’s failure to fully come to terms with this reality—his idea of a good “liberal dictator” shows that he was more than aware of it; the fact that so little in his work on rule formation gives warrant to such an idea demonstrates the theoretical impasse in which he found himself—is why his engagement with Pinochet is so important. Not because it shows him to be a bad person but because it reveals the “steel frame,” as Schumpeter called it, of the market order, the unacknowledged relationship between operatic violence and doux commerce.

The argument, I think, is even more general. Yes, we need to remember the labor wars of the Gilded Age, the enclosure riots, and the Chilean dictatorship’s forcible creation of markets. But we also need to recognize the violence involved in forcing people to have the freedom to sell their ability to work every day, around the world, within the “normally functioning” market order.

It’s that dimension of the relationship between capitalism and violence mainstream economists of all stripes refuse to acknowledge.

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Special mention

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I’m glad that Adam Davidson is drawing attention to one of Paul Ryan’s two economic gurus, Friedrich von Hayek (the other being Ayn Rand). It’s a clear demonstration, as I explained to students yesterday, that ideas that were once quite peripheral have become mainstream.

Back last December, I asked two questions: why the resurgence of interest in Austrian economics, and why now? Here’s my provisional answer:

I certainly don’t have a complete analysis of why this is the case but I can offer a couple of possible reasons. One is that mainstream economics has failed. By mainstream economics I mean the versions of neoclassical theory that students are taught and that serve as the backbone of much of the research that takes place in the leading graduate programs in economics. Austrian economics shares a celebration of free markets with neoclassical theory but it stands somewhat apart, with a different set of methodologies and concepts. In other words, it’s a different way of making the case for free capitalist markets after the failure of existing—Samuelsonian, for short—approaches to neoclassical economics.

A second reason is that the legitimacy of capitalism is currently being called into question, just as it was during the First Great Depression, when Austrian economics had its first heyday. It was then eclipsed by the Golden Age of capitalism in the postwar period but now it seems to be back with a vengeance. So, not only has mainstream economics failed; capitalism itself has failed. And Austrian economics may just be a last, desperate attempt to argue that the 1 percent—with their obscene riches and tremendous power—have a legitimate place in this society.

I would add to that (at the suggestion of one commentator), the role of “careful marketing and loads of money”—not only of the Koch brothers but also of the determined efforts of the Mont Pelerin Society.

It remains to be seen whether the new Hayekians like Paul Ryan actually read the work of their guru, especially on issues like healthcare.

And I do need to pick a bone with Davidson, who really shouldn’t get away with asserting that “For the past century, nearly every economic theory in the world has emerged from a broad tradition known as neoclassical economics.”

Sorry, Adam, but that’s just a poor rendering of the history of economic thought. While neoclassical theory has changed over the course of the past 100 years, there are plenty of economic theories that represent radical criticisms of and departures from neoclassical theory. Yes, it may be true that Austrian economics was part of neoclassical economics at the very beginning and then broke away but many of the other theories in economics that have gained currency in the last century and this one are simply not grounded in neoclassical theory. I’m thinking not only of the Marxian critique of political economy (which of course preceded the emergence of neoclassical theory) but also of many other heterodox approaches to economics: Keynes, classical (especially in the work of Piero Sraffa), Post Keynesian, radical, institutionalist, feminist, postcolonial, ecological, and so on.

None of them “emerged from a broad tradition known as neoclassical economics.” Instead, each of them represents a rejection of neoclassical theory, or at least one or another key assumption of the kind of economics practiced by neoclassical economists. And all of them can take solace from the fact that economic ideas that were once peripheral have, as conditions change, generated renewed interest—even if they never become mainstream.

Jeff Wall, “A Sudden Gust of Wind (after Hokusai)” (1993)

Uncertainty is all the rage right now, with a wide variety of economists and central bankers “discovering” its disturbing effects in the midst of the current crises of capitalism.

But I’ll bet it’s just a passing fad. As soon as things return to normal, uncertainty will be put back on the shelf and, once again, be tamed and domesticated.

As I’ve shown many times over the last few years, the failure of mainstream economics has prompted a rediscovery of uncertainty—not unlike during the First Great Depression when Keynes argued that investors were subject to fundamental uncertainty (as against probabilistic risk) and therefore guided not by rational calculation but by “animal spirits.”*

The latest to announce the relevance of uncertainty is Andy Haldane [ht: sb], Executive Director for Financial Stability at the Bank of England—who, according to Ismail Erturk et al., has become the bank’s “radical house intellectual who, through his interventions after the crisis, has become the darling of the intelligentsia.”

On one hand, there’s something refreshing about Haldane’s critique of mainstream economics.

The notion of not knowing, of imperfect information, of uncertainty (as distinct from risk) got lost from economics and finance for the better part of 20 or 30 years. . .

I think one of the great errors we as economists made in pursuing that was that we started believing the assumptions of economics, and saying things that made no intellectual sense. The hope was that, by basing models on mathematics and particular assumptions about ‘optimising’ behaviour, they would become immune to changes in policy. But we forgot the key part, which is that the models are only true if the assumptions that underpin those models are also true. And we started to believe that what were assumptions were actually a description of reality, and therefore that the models were a description of reality, and therefore were dependable for policy analysis.

On the other hand, Haldane’s critique is quite limited, in at least two senses. First, it’s haunted by a nostalgia for a better time, before the neoclassical synthesis, and thus harkens back to the work of Hayek, Keynes, and Friedman, who “were all some hybrid of economist, sociologist, mathematician, political scientist and philosopher” and understood that “our socio-economic knowledge might be deeply imperfect.” Second, it quickly moves beyond the problem of uncertainty, by attempting to replace the physics-inspired certainty of the neoclassical synthesis with the life-sciences certainty of evolution. So, in the end, he really does know what happened:

For example, the notion of ‘too big to fail’ is a form of evolutionary equilibrium founded in a set of self-reinforcing state interventions, each of which individually made sense. Because if a bank goes bust, it may make perfect sense for a government to ride to the rescue, which in turn gives rise to a set of incentives for those running the banks, which makes the next bank failure even bigger, which states then have to deal with. This creates a ‘too big to fail equilibrium’. And therefore to tackle that evolutionary problem you need to break the cycle. In the case of banks, you can fine them, you can regulate their behaviour, but unless and until this structure of incentives is altered, to change this fundamentally, you won’t reverse the cycle.

In the end, Haldane’s critique is really only aimed, looking backward, at the uncertainty concerning the particular set of assumptions of the neoclassical synthesis. Moving forward, it leaves open the door for a new science of economics and a new warrant for certain economic knowledge—to understand and then regulate the banking system—based on evolution and complex systems. In that world, the only role for uncertainty is to create the conditions for a new kind of authority.

Mistakes will be made – that is in the nature of public policy. The important thing is that they are made, when they are made, for the right reasons. That they’re honest mistakes, they’re technical mistakes, that anyone could have made given how uncertain the world is. That’s what protects you. That’s what gives you authority. It sounds perverse that admitting to mistakes can be credibility enhancing, can be authority enhancing. But my very strong view is that that is the only thing which can protect you, can enhance understanding and therefore authority.

In Haldane’s world, uncertainty is a problem that can be explained (with the correct set of models) and then used (e.g., by the Bank of England) to create a new kind of regulatory authority. It is precisely not an issue of “undecidability” or “indeterminacy” that challenges the pretenses and protocols of modern economic knowledge.

Thus, I am quite certain that, once again, it will be put back in the box—once Haldane and others believe that the gust of wind has passed, the regulators’ control has been reasserted, and the banks return to business as usual.

*This is radically different from the current mainstream-economists-for-Team-Republican focus on policy uncertainty, which is just another way of arguing for continuing the Bush-era tax cuts for wealthy individuals and large corporations. Mike Konczal does a good job taking apart the mainstay of their approach, the economic policy uncertainty index.

Keynes vs. Hayek

Posted: 8 November 2011 in Uncategorized
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Doesn’t it indicate how little progress we’ve made in economics that we’re still debating Keynes versus Hayek?

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Stranger than fiction

Posted: 10 June 2010 in Uncategorized
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I finally learned something useful from Greg Mankiw: The Road to Serfdom is the #1 bestseller in books on Amazon.com. Apparently, one of the reasons is Glenn Beck’s program on Hayek’s book on 8 June.

Now, it isn’t hard to make fun of Beck, when he makes statements like the following:

BECK: And the reason why Europe didn’t mind serfdom is because they have come out of slavery. Slavery — serfdom, we will view as slavery. Not hard slavery like early 20th century, early colonial America and rest of the world, not in chains, et cetera, et cetera, but serfdom was slavery-light. It was — you don’t, you work, you do your own hours, whatever. You just give me the bushel of grain.

But, notwithstanding Beck’s convoluted understanding of history, we ignore his influence in the contemporary United States at our peril.

P.S. It’s also possible to watch a cartoon version (from a pamphlet originally published by General Motors) and to read the Reader’s Digest condensed version [pdf].

Financial reform?

Posted: 27 November 2009 in Uncategorized
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The Austrian view, according to Russell Roberts, is more or newer financial regulation won’t solve the crises of capitalism. It’ll just make matters worse.

advocating ‘better’ supervision or ‘more vigorous’ regulation or even something more specific such as larger capital cushions, ignores the empirical record that regulators and politicians either for venal or human reasons, seem unable to maintain these restrictions in the face of pressure from participants.

No surprise there, for a follower of Hayek.

But what is interesting is (1) the relation between the state and civil society (which Roberts addresses, and mainstream economists ignore) and (2) the way that relation currently works:

We are what we repeatedly do. Not what we say we are. Not what we’d like to be. But what we do. What we do as a body politic is rescue rich people from the consequences of their decisions. That is bad for democracy and bad for capitalism. Until we fix that, we as citizens are playing a game of “heads—Wall Street executives win a ridiculously enormous amount, tails—they just win a ridiculous amount, paid for by the rest of us.” Until we fix that, little else matters.

Roberts clearly understands that, in the midst of the current crises, the capitalist state bails out rich people and Wall Street and not the rest of us. His mistake is failing to recognize that such government interventions are not bad for capitalism, just bad for a particular—free-market or private—kind of capitalism. In fact, they’re an attempt to save capitalism, by creating a more regulated form of capitalism.