Hayek vs Keynes

To understand the importance of the famous debate between Hayek and Keynes, you need to take the "meta" view to take the debate in the context of what was happening at the time. As often happens, the real issue was hidden beneath what was ostensibly being debated.

See David Colander.

David Colander: Does "Economics" Have Too Much Influence Over Policy?

The best way to understand an issue is sometimes to follow the debate rather than just one "side." I had bogged down trying to understand Monetary Theory (Modern or otherwise).

This is an introduction to the thinking of David Colander. I tripped over him when reading "Modern Monetary Theory and its Critics." Colander presents himself as a "Historian of Ideas." He is a "big picture" guy who tries to understand ideas in depth but also concerning their real historical consequence.

For example, he points out that if MMT were applied by, say, the Tea Party, the result would be a nightmare (zero tax, no government). This provides a simple example of one assumption behind all economic "recommendations" - that the supporters are in political power - more or less permanently. After plodding through endless economic arguments, I also get a whiff of "motivated reasoning."

Beware of all statements that include other things being equal. "Things" are never equal. No proposed change can be made without effects on other factors, nor can the change be made while other changes are not being made. 

Colander distinguishes between economics as a theory of control (Keynsian and all its variations) and economics that simply provides inputs to decision makers.  "Conservatives" oppose any attempt to "control" the economy. The problem is that "hands off" cedes control to impersonal mechanisms such as the market and powerful politicians. Politicians, after all, are not elected by proposing sensible economic policy. They are elected by being the "last man standing" in a mud wrestling contest. Yet, it is politicians who ultimately control the levers of economic power. As Greenspan pointed out - sometimes, these "levers" don't seem connected to the real economy.

Truly modern economics is based on huge computer models of the economy - not a few simple "all things being equal" relationships like "supply and demand."  In any model, things like assumptions and initial conditions need to be made explicit. For example, "actors" are not assumed to have perfect knowledge or to behave rationally, as all "classic" economic theories assume. Everything is connected to everything else.

It is good to understand some economics, but it needs to be kept in context. Economics places constraints on what is possible. We must never assume that politicians in control or society, in general, will agree with any particular economic theory or act the way economists assume.

To cite the nastiest problem we now face, climate change is a problem that comes from physics, not economics. Solutions, if any, will come by massive changes to human behavior. Economic "incentives" are proving to play little if any useful role, yet the political debate is often couched in the fantasies of obsolete economics, such as growth and GDP.

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P.S. A talk by Colander about complexity theory and its relevance to politics is here. Again the point is that "economics" is just one of many influences in the halls of power. "Government and markets are an odd married couple. Stuck with each other". He talks about placing an economic "frame" in the larger (complex) "meta-frame".

The Conservative Position

This is Milton Friedman on the concepts that are defended in Hayek's "Road to Serfdom." Hayek's thesis is interesting but also dated. He warns against top-down planning in the place of market control of prices, both by Socialists and Fascists of the time. George Bernard Shaw introduced me to Socialism 101  ("A Practical Woman's Guide to Socialism)." It dates from approximately the same period but is concerned with social justice. There is little consideration of how social justice would be achieved. We must assume a major reorganization of the economy according to some master plan. As Hayek pointed out, both Socialists and Fascists assumed this with little pushback. During World War II, economies became "planned" by necessity.

It turns out that "Road to Serfdom" is a free Audiobook. See these videos for discussions.

General Impression: 

Hayek goes to great lengths to defend his thesis that totalitarian "planning" is "more or less" the same thing as "socialism."  He confuses "socialism" with "communism." Modern readers can readily see that there are dictatorships of the left and right, with little or no difference when it comes to the liberty of citizens. Along the way, Hayek more or less concedes virtually all the elements of the modern "progressive" state, even including guaranteed "security of person" in the form of food, shelter, and health care -- those that are routinely denied by his "right-wing" fans. He is in a muddle explaining the workings of modern democracy, lost in his generalizations.

There is an obvious problem that we cannot agree on the ends or means of policy but, on the other hand, an obvious need for policy. Society in general (not just the government) needs "deciders."

His distinction between government and corporate power is fatal to his argument since all arguments against government power also argue against corporate power. In fact, power = the ability to plan. Individual "power" is seen as "freedom" - a different species of power. In fact, the "power" of all societal actors is in constant competition. "Power" of one actor A over another B is the ability of A to coerce B into behaving in a way desired by A. Society is a network of A's and B's - a power structure.  A's can be government, corporations, cultures, parents, or any coherent social structure. 

The marketplace very strongly determines how much power and freedom an actor has. Interventions of any kind (not just government) distort the workings of the market.  Generally, the A's have deeper pockets than the B's in every case.

In the end, Hayek puts his faith in the "efficiency" of markets. "Efficient" for whom? This is the identical objection he raises to "socialism" - who benefits?

(P.S.) Hayek's core point is actually true but I don't know if he saw it. If you regard society as a huge, dynamic, and unstable power network, you can see why the idea of "control" becomes problematic. Hayek understood this at a gut level, especially coming out of the chaos of post-war Austria. Yet, his shouting match with Keynes never quite came to grips with the central issue: can any "control" policy succeed?

Notes:

•  The existing state of Chinese society is a great example of the "planned" economy Hayek fears.  Established for good purposes, the machinery can be used for any purpose.
• The positive vision of a "free society" is tangled with the concept of a "free market."
• Interesting remarks on "liberalism" vs. "conservatism" changed meanings from the British context. "Liberalism" originally is about hands-off individual freedom (gardening). Conservatism defended the privileges of the rich and powerful.
• "Socialism" is a matter of degree, creating unintended consequences.
• Chapter 1: Glowing account of progress is, at least, a correlation but treated as a straight cause and effect. The growth of energy use is relevant. The crushing effects pointed out by Marx were ignored. 
• Explicitly sets aside "externalities," such as nature in general, which cannot, by definition, be "managed" by the marketplace. This is mentioned in Chapter 3.
• Totalitarian tendencies are presented as a part of a "socialist" movement rather than a thing of its own.
• Anti-competitive forces are seen as government, not corporations. He seems to think that monopolies fall apart on their own ...
• "planning against competition" = "planning"
• modern monopolies seem to contradict his understanding of how monopolies work. Specifically, the advantage of the "first mover" (IBM, Microsoft, Apple). His examples of government-supported monopolies and cartels are at least dated.
• At the very least, he admits that monopolies are "bad" because they are anti-competitive (by definition).
• Good to read this with climate change and pandemics in mind. "Liberty" of our current zillionaires is also relevant: assumed to be good in itself. Generally, there is little reflection on the relative power of individuals - assumed to be basically economic power -- i.e., it is fundamentally right and good that the goals of the rich should dominate those of the poor.
• He assumes that democracy is inherently flawed since it implies planning.
• His criticism of "planning" extends to all regulations, such as FDA
• Generally, his treatment of democracy is a bit of a joke
• Open to providing basic food, shelter, and clothing for everyone along with health care - "social insurance." Also, protecting individuals against the ups and downs of the economy. But not insurance against losses.
• He seems to offer some kind of roundabout objection to labor unions - a means of security. Unions interfere with the market system. Similar consideration could be applied to Americans locked into jobs because of "benefits." The asymmetric power relationships between employer and employee are not dealt with. One might ask if filling boxes for Amazon is a worse kind of "serfdom" than any contemplated in the abstract.

"The Conservative Mind" summarizes the conservative position better than Hayek's theories. One might suspect some "motivated reasoning" going on between theory (Hayek) and the "creed":

1. Belief in a transcendent order, or body of natural law, which rules society as well as conscience. Political problems, at bottom, are religious and moral problems. Narrow rationality, what Coleridge called the Understanding, cannot of itself satisfy human needs. “Every Tory is a realist,” says Keith Feiling: “he knows that there are great forces in heaven and earth that man’s philosophy cannot plumb or fathom.” 
2.  True politics is the art of apprehending and applying the Justice which ought to prevail in a community of souls. 
3. Affection for the proliferating variety and mystery of human existence, as opposed to the narrowing uniformity, egalitarianism, and utilitarian aims of most radical systems, conservatives resist what Robert Graves calls “Logicalism” in society. This prejudice has been called “the conservatism of enjoyment”—a sense that life is worth living, according to Walter Bagehot, “the proper source of an animated Conservatism.” 
4.  The conviction that civilized society requires orders and classes as against the notion of a “classless society.” With reason, conservatives often have been called “the party of order.” If natural distinctions are effaced among men, oligarchs fill the vacuum. Ultimate equality in the judgment of God, and equality before courts of law, are recognized by conservatives; but equality of condition, they think, means equality in servitude and boredom. 
5. Persuasion that freedom and property are closely linked: separate property from private possession, and Leviathan becomes master of all. Economic leveling, they maintain, is not economic progress. 
6. Faith in prescription and distrust of “sophisters, calculators, and economists” who would reconstruct society upon abstract designs. Custom, convention, and old prescription are checks both upon man’s anarchic impulse and upon the innovator’s lust for power. 
7.  Recognition that change may not be salutary reform: hasty innovation may be a devouring conflagration, rather than a torch of progress. Society must alter, for prudent change is the means of social preservation. Still, a statesman must take Providence into his calculations, and a statesman’s chief virtue, according to Plato and Burke, is prudence.  

This may be summed up as a preference for the "status quo" -- more than that, a belief that the "status quo" has some supernatural quality: decreed by God or the Market. It is no surprise that this set of beliefs appeals to the rich and powerful. There is no hint that status or power needs to be earned or, to put it another way, the lack of power and status for the great majority of humanity is just "as it should" be.