Sunday, September 9, 2012

Republican Worship of Hayek’s The Road to Serfdom: Part 3. Hayek vs. the Mystery Economist

Note: This is the 3rd part of a four-part commentary that makes the most sense when read in order. For the first two parts see:

           Let’s stick with our friend Hayek and his book, The Road to Serfdom. It turns out that quite a different program was proposed by an economist at just about the same that Hayek was publishing his book in 1944. The contrasts between this alternative program and my summary of Hayek’s views in Part 2 are striking and suggestive. I’m going to have a little fun with this alternative author and call him the Mystery Economist for now, and invite you to guess his identity. (No fair peeking ahead to Part 4 where all will be revealed.)

The Mystery Economist’s Program
One way to approach the Mystery Economist’s program is to contrast it with a list of things that true believers in economism tend to accept without question:
  • “The best outcome for society” is synonymous with “the end result of free market exchanges.” To live in a world governed by an unregulated free market is to live in Utopia.
  • Markets are self-regulating. The best thing government can do for the market is simply to get out of the way.
  • Any social problem can be solved through market principles; government intervention is never called for.
  • If a corporation grows so large that it can control markets, that is simply the way the market (and God) wanted it to be.
The Mystery Economist, it turns out, disagreed with each of these statements. Let’s see how and why.
            Markets define social good. The Mystery Economist attacks this idea head-on:
Where, for example, it is impracticable to make the enjoyment of certain services dependent on the payment of a price, competition will not produce the services; and the price system becomes similarly ineffective when the damage caused to others by certain uses of property cannot be effectively charged to the owner of that property. In all these instances there is a divergence between the items which enter into private calculation and those which affect social welfare; and, whenever this divergence becomes important, some method other than competition may have to be found to supply the services in question.
The Mystery Economist is saying that there are certain things that are important for society that simply won’t emerge from market competition, since no individual can manage to produce those things in a way that yields a satisfactory profit. Economism states that those things are simply not wanted or needed. But the Mystery Economist disagrees. He claims that “items which enter into private calculation” (that is, what figures in the marketplace) and “social welfare” may be two different things. By making this simple statement he pulls the rug out from under one of economism’s main tenets.
            The Mystery Economist goes on to provide examples of what he has in mind. He does not think that private-enterprise competition will get most roads built or prevent the worst sorts of pollution.
            Self-regulating markets. The Mystery Economist is quite consistent in rejecting the notion that marketplace forces actually can manage the market. He refers repeatedly to the intricate system of legal regulations that is needed for markets to be able to function, and that these laws must come from outside and cannot be generated through market activity itself. He also offered the observation that in his own time, many of these laws were poorly developed: “In no system that could be rationally defended would the state just do nothing. An effective competition system needs an intelligently designed and continuously adjusted legal framework as much as any other. Even the most essential prerequisite of its proper functioning, the prevention of fraud and deception (including exploitation of ignorance), provides a great and by no means yet fully accomplished object of legislative activity.”
In short, the Mystery Economist thinks that economism’s “unregulated free market” is an illusion. Markets, he argues, simply won’t work without a heavy dose of government regulation.
            Government’s role in solving social problems. Besides building roads and avoiding pollution, the Mystery Economist lists a number of functions that he assigns to good government because he believes that market competition alone will never achieve the desired results:
  • Providing a decent minimum of food, clothing and shelter for everyone in society
  • Regulating working hours
  • Requiring workplaces to be reasonably safe and sanitary
  • Limiting the concentration of wealth due to inheritance
You might imagine by now that the Mystery Economist is a raving socialist, but he’s careful to deny this charge. He always hedges his recommendations for government action with the proviso that government should be involved only insofar as market competition fails; as soon as a market mechanism is available to reach the desired social goals, the government should back off. For instance, he is quite careful to stipulate government social programs should promise every citizen the security of a decent minimum of the necessities of life, but should never promise prosperity or any given level of wealth. He nevertheless insists, “Nor is the preservation of competition incompatible with an extensive system of social services—so long as the organization of these services is not designed in such a way as to make competition ineffective over wide fields.”
            Opposing monopolies. Traditionally, economics has viewed a monopoly as a threat to the free market. The Mystery Economist agrees and is especially forceful in denouncing monopolies, since he thinks they are the entering edge of the wedge that will start the slide down the slope to central planning. But he thinks that the prime force behind the creation of economies in the first place comes not from government but from the capitalists who own the corporations, and fears that they will use their political pull to hijack government power toward maintaining their monopoly status. In short, the Mystery Economist is very suspicious (along with his predecessor, Adam Smith, if you actually read what he wrote) of too great a concentration of corporate power in a few hands.
            As you can see, the Mystery Economist seems to be no fan of much of what today’s defenders of economism like to think. So who is this masked man? We’ll find out in Part 4 of this discussion:


For the source of all the direct quotes above for the Mystery Economist, see Part 4.

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