By Philip Pilkington, a writer and research assistant at Kingston University in London. You can follow him on Twitter @pilkingtonphil
It is not only by dint of lying to others, but also of lying to ourselves, that we cease to notice that we are lying.
– Marcel Proust
Friedrich Hayek was an unusual character. Although well known to be a libertarian political philosopher, he is also commonly associated with being an economist. And it’s certainly true that at one time Hayek’s focus was solely on economics. In the 1920s Hayek was still within the fold of pure economics, publishing papers and works that were taken seriously by the discipline. However, by the 1930s Hayek’s theories had started to come apart at the seams. Exchanges between Hayek and John Maynard Keynes and Piero Sraffa show Hayek as confused and even somewhat desperate. It was around this time that Hayek discontinued making any substantial contributions to economics. Not coincidentally this overlapped with the time when most economies, mired as in Great Depression, demonstrated that Hayek’s theories were at best impractical, at worst a complete perversion of facts.
So, Hayek turned instead to constructing political philosophies and honing a metaphysics rather than engaging in any substantial way with the new economics that was emerging. When pure logic and empirical reality ceased to support Hayek’s emotionally charged ideology he turned, to the more malleable sphere of meaning and metaphysics. He became concerned with watery terms like “freedom” and “liberty”, which he then set out to impregnate with a meaning that would support his dreams. The most famous result of this period of conversion, which resembled less St. Paul on the road to Damascus and more so an alcoholic who had hit rock bottom, was Hayek’s 1944 work The Road to Serfdom. In a very real way it was this book that marked the close of Hayek’s career as a serious economic thinker and set him on the path of the political propagandist, agitator and organiser.
The over-arching argument of the book is well-known and need not be repeated too extensively here. Hayek thought that all totalitarianisms had their origins in forms of economic planning. Economic planning was the cause of totalitarianism for Hayek, rather than the being just a feature of it. Underneath it all this was a rather crude argument. One may as well make the observation that totalitarianism was often accompanied by arms build-up, therefore arms build-ups “cause” totalitarianism. But Hayek pushed it and most probably believed it anyway, for reasons that we shall soon see.
The implicit argument here was that, Britain for example, which had begun to increasingly plan its economy during the war, was on a slippery slope that would end in totalitarianism. It must be understood that Hayek’s argument had no factual basis. Only a polemicist could argue that the two totalitarianisms that existed in this period – namely, Hitler’s Germany and Stalin’s Soviet Union – had formed because a naïve democratic government had engaged in some economic planning that then got out of hand and resulted in tyranny. But Hayek’s motivations probably lay somewhat deeper – probably so deep that he himself could not properly recognise them.
The Rise of the Third Reich: Hayek’s Historical Repression
To understand Hayek’s “reasoning” a bit better we should consider the political situation that he refused to return to after Austria’s annexation by Hitler in 1938. The broad reasons for Hitler’s rise to power are beyond dispute among serious historians today. The sweeping picture of Germany in this era is that she was not only humiliated after the First World War but was also subject to vicious reparations payments – payments which ultimately set off a hyperinflation in the country. The average German knew that the national humiliation and the economic turmoil were intimately connected and so they became increasingly bitter about the Treaty of Versailles which they thought, quite rightly, had subjected the country to both economic and political bondage. It was into this vacuum that Hitler and his cronies stepped and began, in the early to mid-1920s, to accumulate political support.
However, after the hyperinflation came to an end and thanks to loans from the United States, the reparations troubles eased and the German economy began to return to moderate growth. Hitler’s popularity fell enormously in this period. But the 1929 stock market crash soon came and the loans from the United States promptly dried up. Unemployment soared in Germany and the government, like so many others across the world, engaged in severe austerity in order to attempt to balance the budget. They believed that this would return the country to economic prosperity.
In retrospect it is quite obvious that Hitler’s immediate rise to power was due to the economic downturn and the government’s deflationary policy response. In 1930 the Nazis had become the second largest party, obtaining 18.3% of the votes. When compared with the 2.8% of the vote they received in 1928 during an era of high employment and an economically optimistic outlook it quickly becomes obvious what the underlying forces driving Hitler’s election actually were.
That the economic policies the Weimar government had engaged in had led to the election of Hitler was and is obvious to any unbiased observer. But there were many who actively repressed this fact. The liberals that had supported the government’s austerity measures no doubt felt some burden, whether unconscious or otherwise, of guilt. This is best illustrated by an anecdote that the American economist John Kenneth Galbraith relates regarding the Chancellor who presided over the austerity, Heinrich Brüning, which he published in his book Money: Whence It Came, Where It Went:
In the 30s, Brüning joined the Harvard faculty as Professor of Government. At a welcoming seminar one evening I asked him if his Draconian measures at a time of general deflation had not advanced the cause of Adolf Hitler. He said that they had not. When, unwisely, I pressed the point, he asked me if I disputed the word of the former Chancellor of the German Reich.
This was then, rather unsurprisingly, a touchy subject for Brüning which he preferred to evade. After all, the facts were simply not on his side and there was no way he could rationally argue to the contrary. Likewise too for those liberals like Hayek who firmly believed that the austerity measures were the only road to salvation. Mark Ames at the eXiledonline sums up rather nicely the reaction this provoked in Hayek and the other Austrian school libertarians:
Von Hayek and his fellow Austrian aristocrats who were forced to flee from the fruits of their economic programs, did a complete revision of history and retold that same story as if the very opposite of reality had happened. Once they were safely in England and America, sponsored and funded by oligarch grants, hacks like von Mises and von Hayek started pushing a revisionist history of the collapse of Weimar Germany blaming not their austerity measures, but rather big-spending liberals who were allegedly in charge of Germany’s last government. Somehow, von Hayek looked at Chancellor Bruning’s policies of massive budget cuts combined with pegging the currency to the gold standard, the policies that led to Weimar Germany’s collapse, policies that became the cornerstone of Hayek’s cult—and decided that Bruning hadn’t existed.
An Existential Choice
It is not hard to discern whether Hayek was lying or simply deluded. He was not lying – at least not consciously. For the rest of his life he was driven by a genuine belief in the idea, put forward in The Road to Serfdom, that economic planning was what had led to totalitarianism in Europe. It was not hard to discern if Hayek was lying simply by looking at the zeal with which he pursued the crusade against planning. This was not the cynical enthusiasm of a charlatan, but instead the forward impetus of a man who, as if riding a bicycle, would come crashing down emotionally if lost his momentum.
Hayek’s entire ideology and career had begun to come apart in the 1930s. His theories were shown to be inconsistent in the academic journals of the time and the practical implications of those theories had shown themselves to be both discredited and dangerous. A man in such a position only has two choices: he can either completely re-evaluate his ideas which, if they were held with unshakeable conviction and constituted a core component of his emotional make-up, as seems to have been the case with Hayek, would have likely resulted in a mental collapse; or, alternatively, he can engage in a massive repression, shut out reality and construct around himself a fantasy world.
Hayek opted for the latter. So too did all of what was to become the neo-Austrian school which soon developed into a sealed hermetic cult of True Believers who reinforced each other’s unsubstantiated ideas and defended each other from the threatening world outside the circle. But this cult was largely fringe. Although it did command some respect among neoliberals in the Thatcher and Reagan administrations, it was the respect accorded to the eccentric rather than that accorded to the practical man. Lip service was paid to the doctrines of Hayek and the Austrians, but their extremist and impractical economic policy implications were sterilised and kept out of immediate contact with the levers of power. Milton Friedman’s more pragmatic doctrines of monetarism were preferred so far as economic policies went.
But we should not fool ourselves. Hayek’s delusion did indeed have profound effects on history. Indeed, as we shall see, it was even directly responsible for Friedman’s rise. For Hayek, in his crusade against what he thought the germ from which totalitarianism spread, became a tireless worker and organiser. With the ingenuity of a Leninist, Hayek formed around him a host of like-minded thinkers and politicians. Backed by the funding of right-wing millionaires, Hayek constructed a network of people who he initiated into his delusion and convinced that every manifestation of collective intervention into the free market was just one more stepping stone on the road to serfdom.
Likewise in the popular mind – for Hayek did effectively become a political propagandist rather than a respected intellectual in the 1940s – Hayek’s delusion, with all its emotional overtones, spread quite effectively. Today whenever we encounter an anxiety-ridden Tea Partier or a fearful and paranoid internet Austrian, it is Hayek’s delusion that we are hearing echoed through the chambers of history, albeit in slightly vulgarised form. It is the fear, distrust and paranoia which Hayek’s portrait of a free society descending into barbarism evokes that captures the minds of those it touches. That it is completely deluded and ignorant of history only makes it more effective, like all propaganda, in its role as propaganda. The bigger the lie, the more emotional investment it requires to believe in and so the more it captures the uncritical and the emotionally weak.
The inner sanctum from which Hayek’s delusion emanated was called the Mont Pelerin Society. In the next piece in this series we will turn to how Hayek’s delusion was diluted by those in the Mont Pelerin Society to fit with the American political system; this is what we might call the American version of neoliberalism. While in the final piece we will consider how Hayek’s delusion was gradually converted into the European form of neoliberalism when it was confronted with the problem of trade unions. As we shall see there is much overlap between these two forms of neoliberalism and each borrows from the other – this, of course, being the reason why they are not generally distinguished between – but most importantly, they share a common root in the wall that Hayek erected in his mind in the 1930s and 1940s to block out a world that he himself had played a part in creating.
Have you failed to factor in the Nazis use of MMT and Hayek’s Libertarian dogma failure to recognise this in your full essay?
Germany’s debts were denoted in foreign currency, so in that regard they acted as “currency users” and not as sovereign currency issuers….I’m not seeing the MMT connection here.
They lacked the ability to enforce their will on others who owned the obligations, until they regained it later.
That is the crux of MMT. It is an act of faith, and when faith fails, it becomes an act of will.
You are just pissed the Anglos are managing to inflate without rising asset prices too much.
I know I am.
This MMT goes back a long way – to 1914 in fact & possibly earlier.
They wish to free up external calls on Gold by issuing the modern Version of HMT 10 shilling notes.
This is where the young Keynes cut his teeth.
Enforcing one’s will on foreign countries is politics, not MMT. But I guess we’re in MakeThingsUpLand, which always gets one around the difficulty of making a coherent objection.
Jesse, I love your site, and think you have a deep understanding of markets, but I do feel you have a blind spot when it comes to the gold standard and ideas like “market discipline”. You have a tendency to do things like throw up a chart showing how the dollar has inflated drastically since the 1970s and see that as the final proof in an argument against fiat currency and MMT. Perhaps it doesn’t occur to you, but there are worse things than inflation. And yes, I would agree that our government, but most especially our banks, have abused and misused their currency-creating powers over the past 40 years. That doesn’t mean that those powers are inherently bad. It does mean there needs to be an honest discussion of when and why its good to inflate a currency, and when its good to deflate. As MMT asserts, it is during active economic periods when the currency supply must be reduced to do two things: avoid overheating the economy and take away some of the inflation that necessarily occurred during the recessionary period.
As I state above, there are worse things than inflation, and the problem with the gold standard, or any arbitrary limitation on currency, is that recessions can become depressions quite easily if government is prohibited from creating currency and augmenting demand at those times when there is not enough of it available.
Additionally, the hyperinflation bogeyman gets trotted out to terrify constantly, yet incidents of hyperinflation are extremely rare, and require much more than merely printing lots of new currency.
The German post-WWI hyperinflation had more to do with the fact that the victors of WWI took control of the most productive regions of the German landscape, creating a massive yet artificial supply shock that sent the price of many goods to the stratosphere. It wasn’t just the fact that debts had to be repaid in a foreign currency, or that the government was printing like mad.
As a thought experiment, imagine what would happen if tomorrow the US government declared it would print money to pay for every American citizen’s healthcare needs. That money would flow directly to healthcare providers based on positive health outcomes, not procedures. This would invariably add hundreds of billions of dollars to the US economy each year, and if we didn’t produce more doctors, nurses, etc., it is likely that demand would outstrip supply and healthcare costs would rise. However, if managed correctly, or even if managed incorrectly, it is hard to argue that those extra hundreds of billions would create inflation in anything other than healthcare (and that only if supply were not augmented adequately).
What I’m asserting is that, while many have an innate fear of adding money to the economy, that fear is largely a phantom as long as the money is handled responsibly. Just look at the housing bubble. Temporarily, tens of millions of Americans had lots of money to spend due to rising housing prices and hence rising equity. Yet we did not experience much inflation outside of housing prices. And since 2008 the government has added massive amounts of currency to the system, and yet inflation has been quite low (the money has been added in stupid ways, and to the wrong parties, but that is another issue). The inflation question is a lot more complex than just “adding money to the economy without an artificial backstop/market discipline is always a terrible idea”. In fact, as I argue above, it is much more important for governments to have that flexibility, or we will simply reenter the awful 1800s, where inflation was almost non-existant, yet depressions and terrible recessions were regular events.
And let’s not forget that forcing governments to issue debt to offset money printing is a time-tested recipe for ensuring that a government by and for the people becomes a government by and for the plutocrats, who bleed the country with debt service while demanding “market discipline” that inhibits government from providing for the needs of the populace.
I know you care greatly about the problems of poverty and oligarchy, and so I find it difficult that you seem so inflexible with regard to the power that money has, if handled properly, to alleviate these problems.
I would up-vote this if I could.
Hitler’s reflation of Germany’s economy shouldn’t be considered a weapon with which to beat MMT-sympathizers. It’s an illustration of Randall Wray’s point that MMT provides a policy toolkit within the constraints one faces (in the case of pre-war Germany’s, externally denominated debt and also the need for foreign exchange to fund imports of essential raw materials). The goals one pursues with the tools are up to the policy-makers. Hitler could have reflated Germany with a peace agenda if he had been so minded, and if that had been politically feasible. As it happens (and as Roosevelt also found), war is a much more politically acceptable justification for reflation than anything else.
A wonderful book:
The Wages of Destruction: the Making and Breaking of the Nazi Economy, by Adam Tooze
Tooze is not an MMT sympathizer, as far as I can tell from this book, but his account fits very nicely within the MMT macro theory framework.
Precisely, thank you.
Have you forgotten Hitler ate soup! If you eat soup you are a Nazi! Causation/correlation/blah blah blah…
Hitler stole it from the Social Democrats anyway (not the soup), then promptly outlawed them. The Christian Democrats picked up on many of the ideas after the war and rebuilt Germany without genocide and war. MMT ≠ genocide anymore than soup does.
IMO having at his father’s suggestion as a teenager, read the genetic and evolutionary works of Hugo de Vries, a fuse was lit in Hayek’s head.
Hugo De Vries book Intracellular Pangenesis and his lack of understanding the mutation theory of evolution, in favor of concept of genes, rediscovering the laws of heredity in the 1890s, well its just more eugenics, better breeding et al crap…eh
Skippy… Was old pop angry about the law against using the Von creeping in the shadows? Ask Ayn Rand methinks.
BTW… The Prime Minister’s fundamentalism is driven in large part by the neo-liberalism of Friedrich Hayek, who argued that the only determinant of human freedom was the market. In fact, Hayek also argued that any form of altruism was dangerous because it distorted the market. To avoid inefficiencies, altruism had to be purged from the human soul. Hayek described altruism as something belonging to primitive societies that had no place in the modern world.
PS. Dialectical materialism… barf~
PSS. Thank again PP.
Haha! That link provides nice confirmation of what I discuss in Part III. Stay tuned. I think it runs on Friday.
Sorry to butt in, but has John Nashe’s game theory equilibrium been considered as a supporting policy proof that pure self-interest lead to market equlibrium?
The Nash equilibrium was named after John Forbes Nash. A version of the Nash equilibrium concept was first used by Antoine Augustin Cournot in his theory of oligopoly (1838). In Cournot’s theory, firms choose how much output to produce to maximize their own profit. However, the best output for one firm depends on the outputs of others. A Cournot equilibrium occurs when each firm’s output maximizes its profits given the output of the other firms, which is a pure strategy Nash Equilibrium.
The modern game-theoretic concept of Nash Equilibrium is instead defined in terms of mixed strategies, where players choose a probability distribution over possible actions. The concept of the mixed strategy Nash Equilibrium was introduced by John von Neumann and Oskar Morgenstern in their 1944 book The Theory of Games and Economic Behavior. However, their analysis was restricted to the special case of zero-sum games. They showed that a mixed-strategy Nash Equilibrium will exist for any zero-sum game with a finite set of actions. The contribution of John Forbes Nash in his 1951 article Non-Cooperative Games was to define a mixed strategy Nash Equilibrium for any game with a finite set of actions and prove that at least one (mixed strategy) Nash Equilibrium must exist in such a game.
Since the development of the Nash equilibrium concept, game theorists have discovered that it makes misleading predictions (or fails to make a unique prediction) in certain circumstances. Therefore they have proposed many related solution concepts (also called ‘refinements’ of Nash equilibrium) designed to overcome perceived flaws in the Nash concept. One particularly important issue is that some Nash equilibria may be based on threats that are not ‘credible’. Therefore, in 1965 Reinhard Selten proposed subgame perfect equilibrium as a refinement that eliminates equilibria which depend on non-credible threats. Other extensions of the Nash equilibrium concept have addressed what happens if a game is repeated, or what happens if a game is played in the absence of perfect information. However, subsequent refinements and extensions of the Nash equilibrium concept share the main insight on which Nash’s concept rests: all equilibrium concepts analyze what choices will be made when each player takes into account the decision-making of others.
Skippy… Until we have a theory of everything that is 99.9% accurate, don’t go pointing game theory at humanity’s – this planets head… please. Maybe they can do a run on a bunch of sociopaths gaming the larger population…
“Hayek also argued that any form of altruism was dangerous because it distorted the market”…I think Nash said something along those lines as well. I guess his models did not account for altruism.
“Until we have a theory of everything that is 99.9% accurate, don’t go pointing game theory at humanity’s – this planets head… please. Maybe they can do a run on a bunch of sociopaths gaming the larger population…”
Agreed…it’s just that I have seen too many people act like psychopaths and they seem to do it consciously with a smirk on their face…like they justify what they do by some behavioral maxim.
Hayek in Neo Liberal economist (cough, hack) mode: “Altruism is Dangerous.”
Hayek the human being with health issues: “Medicare will pay for all my health care needs. I heart Medicare. I think I’ll move to the United States after all.”
(cf. my post further down-thread)
Well, Nash was a paranoid schizophrenic, and Hayek also obviously had some issues.
Let’s remember that Nash and his theories helped give us Mutual Assured Destruction as a “security” strategy during the Cold War.
Math is fun, but as a wise old Greek once told me, “the numbers do not speak for themselves.”
MAD didn’t work?
You’re joking right? Creating enough nukes to destroy the planet numerous times over to protect ourselves from a non-existent threat? I think, oh…I don’t know…DIPLOMACY might have been a better idea. But I’m old fashioned like that.
Thanks to MAD, we narrowly avoided global nuclear holocaust, a possibility which would not have even existed if it wasn’t for MAD. Yeah, thanks Nash…
Excellent commentary on Hayek. But I think that if Hayek was truly delusional as you claim, and I think it very likely he was, then refrring to his campaign for neo-liberalism as “propaganda” and “lies” is not accurate, since creating propaganda and lying are both conscious acts.
Instead, I’d focus on the basis of Hayek’s delusion and why that delusion is so easily shared. From your history, I suspect that Hayek’s best work was done in the heyday of liberal ecnomic theory. When the markets crashed and Weimar Germany came unglued, and Marx’s prediction that capitalism would be the next (and last) phase of “history” looked quite prescient, it appears that Hayek retreated into a fantasy in which, as you note, cause and effect was reversed so that, in his mind, totalitarianism was caused by the economic planning needed to respond to the social chaos caused by the Great Depression instead of the failure of liberal economics. In short, Hayek could not accept the failure of his beloved liberalism and jiggered the facts to avoid his fears.
The question then becomes how did this obvious fantasy become so compelling to so many? First, as you note, the Great Depression shattered many ideas about wealth, virtue, and genetic superiority. In the liberal world, the rich were rich either directly because of their virtuous actions or indirectly becuase of their superior genetic constitutions that passed inhereted virtual along with inhereted wealth. When all came crashing down, everyone is poor and therefore everyone is equal. Second, as John Dean described so well in his book Conseratives Without Conscience a great number of the population are very easily attracted to power. Systems of government and economics that emphasize egalitarian distribitions of power and wealth, like democracry and socialism, inherently limit the accumulation of power and are distrustful of power generally; these social arrangements will be hated by those who crave power and those who fall under the spell of the powerful.
I think both factors are critical to understanding Hayek and the popularity of his ideas, especially in America. Amercians historically have equated wealth with moral virtue, the physical proof of God’s largesse on the blessed. Americans also have come to worship power in the form of the “pioneer” who creates a New Eded from the desert and, again, is justly rewarded for that work. The ’29 crash destroyed the connections between wealth and virtue and hard work; this was too much cultural cognitive dissonance for many, who became the true believers along with Hayek and the useful idiots for the rich who were plotting to unravel the New Deal at the earliest opportunity.
Yes. I think you’re basically right on all points there. Regarding the lies versus propaganda versus delusion. I can sort of see what you’re saying. But for me the line becomes very blurry in this regard. The Nazis, for examples, were masters of propaganda. They even went so far as to call it the Big Lie. But is it true to say that they didn’t believe in many of the vile conspiracies they spread about Jews? I don’t think so.
I think propaganda is always based on a sort of delusion. But those who push it then consciously. However, I think that this act of exagerration then begins to become a Real Truth for those who engage in it for too long. The saying of the priest to the atheist who wants to convert here comes to mind: “Kneel down first, pray, want to believe — and soon you will believe!”
A fair point about discerning delusion from deliberatness in propaganda, although I think Hitler’s coning of the phrase Big Lie was founded in his delusion of blaming the Jews for Germany’s capitulation in WW I.
I wanted to focus more on Hayek anyway. I think many of these insane social-political movements start with a sincere believer who is delusional–a (false) prophet. The delusion feeds into some degree of popular sentiment (or resentment), and resonates with true believers who become acolytes and followers of the prophet. If there is enough momentum, then the exploiters and opportunists move in to further amplify the message and the real trouble starts. Here, we start with the prophet Hayek, who is picked up by reactionary right wing types (to borrow from Dean); these are funded and supported by the wealthy, whether or not they are believers, to build a social-political movement.
How do you view Friedman in all of this? I certainly see delusion in many of his writings and speeches; but I also wonder if he wasn’t more conscious of reality.
Friedman, I think, was an entirely different creature. He was more similar to the neoclassicals. He was far more pragmatic and always had an eye to politics and popular sentiment — unlike Hayek, who was dogmatic and closed in upon himself. Friedman hid behind his models and his “as if” epistemology.
Basically, to call a spade a spade, I think that Friedman was a charlatan, as many thought in the 1960s and 1970s.
My suspicions too. Thanks.
Do you plan to write more about Friedman? I’ve often thought he’ll have to be taken down before we can move to a more rational economics.
I did the three-parter on monetarism. (Google: ‘pilkington monetarism’). I think of this series as a sort of prequel to that one.
I recall the monetarism series was very good. I was thinking more about Friedman’s entire career, incluiding (perhaps especially) Capitalism and Freedom.
Part II of the present series is about the emergence of Capitalism and Freedom. Beyond that, I don’t think Friedman was a very interesting character. Hayek and the neo-Austrians were very strange people who had to actively supress a lot of the history they themselves had lived through and even played a minor part in. They had to do this to construct the ideology we live under today.
Friedman, as I hope to show between Part II of this and the monetarism, series, was a populariser and a shill. And that was all. I’d sooner look at some other people involved in the Thatcher and Reagan administrations. Maybe some of those strange flow-chart guys in Britain, or some of the more sensible economists in the US who were involved in the Reagan administration. But most of these people are still alive, so it might be a touchy subject. Bruce Bartlett, for example, is a member of the Roosevelt Institute and goes on panels with MMTers!
Thanks, Philip. I tend to focus on Friedman, because he was such a figurehead for neoliberalism and popularizer in the ’70s and ’80s and was often accorded the sort of unquestioning authority by the press that Greenspan enjoyed. Even today, I’m amazed at how economists like Paul Krugman tiptoe around any critical comments about Friedman’s work and legacy, usually trying extra hard to separate “Friedman the genius technical economist” from “Friedman the wack-job libertarian who did so much to wreck our democracy and economy”. Given the disasters he created, I’d love to see him tossed on the ash heap of history next to Lenin.
Friedman’s PR machine was crazy effective. The mainstream are still enamoured and yet he contributed NOTHING that lasted — because everything he said was consistently proved false. The one thing that the profession still use today that they think originated with Friedman is the NAIRU concept (Non-Accelerating Inflation Rate of Inflation). But Abba Lerner actually invented it back in the 1960s, so it didn’t originate with Friedman at all.
To see the sea change here is incredible. All the old Keynesians — even the shabby American Keynesian school — saw right through Friedman from day one. Samuelson, Tobin, Kaldor, all of them. But he was able to push past criticism that would have destroyed others by sheer force of power — and corporate dollars.
Why is the impact of Leo Strauss’s work, on Friedman and every Rockefeller shill at the University of Standard Oil, never mentioned?
I am not Sigmund Freud and will not attempt to psychoanalyze Hayek (or you either), but IMHO you do Hayek’s book, Road to Serfdom, an injustice. Because everything I write longer than two sentences is monitored, I will need a few more comments (3) to make my point.
Hayek explained (correctly, I think) that a planned economy is incompatible with economic freedom and destructive of political freedom. He imagined government’s proper function as creation of laws of universal applicability, and private economic actors taking actions (and risks) subject to conformity with such laws.
“economic freedom and destructive of political freedom.” Jake
Jake you have to read more than the damn books, you have to study the author from birth and consider the environment they grew up in. Especially who their mentors were, hence my reference to Hugo De Vries.
Economic – political freedom for whom, the market decides, we know how that mechanism works… eh.
Skippy… stop reading your self – into – the narrative.
it has taken me fifty years to read all the damn books. My wife dismisses Marx because he mistreated his maid, or failed to pay her, I forget which. I don’t think that undermines masterpieces like “The Eighteenth Brumaire of Louis Bonaparte” or “The Civil War in France”. But I could be wrong.
Heh, his non-economics books. Agreed.
Jake you’ve done it again “He imagined government’s proper function as creation of laws of universal applicability, and private economic actors taking actions (and risks) subject to conformity with such laws.”
Firstly let it be said they did not have massive chemical plants, nuclear anything, factory trawlers vacuuming the seas, all the built up toxicity since the industrial age began, billions of people, AGW, massive lack of factual data, et al in his time, (include all other armchair social engineers).
In addition, none of these armchair warriors of euro centric wealth from antiquity addresses the cheep inputs accessed via raping 2nd – 3rd world country’s – peoples. Ergo what would they think if they were on the receiving end of their *opines*… eh. As they thought the world would never end, that Mankind would never off its self, save for apocalyptic war.
Secondly from my link above: “In fact, Hayek also argued that any form of altruism was dangerous because it distorted the market.”
Skip here… and there you go… the fook everyone else individualistic neoliberal corner stone and the thunkit covering of let the ambiguous market pick the winners and losers trope. How do you think that game ends, look around.
Skippy… freedom my marsupial back side… just slaves to the Market methinks… those that lament their status are the only cranks… yet still cling to the religion of it.
You make a good point here, “Hayek explained (correctly, I think) that a planned economy is incompatible with economic freedom and destructive of political freedom.”
We can see this by looking at, of all places, Wal-mart. It is, essentially, the worlds largest planned economy and if we look at internal to Wal-mart measures of economic and political freedom, we see exactly that: Subordinate institutions (say, HR or Payroll) have no political freedom – what upper management says, goes. They also have economic freedom – budgets are likewise constrained from the top. Sure, people lower down the ladder will have their input solicited, but this is not freedom in any sense we would appreciate, it’s just idea harvesting – at the end of the day, what upper management says, goes.
However, and this is a big however, it is thoroughly incorrect to claim that planned economies aren’t successful at producing wealth, one only has to look at the Waltons’ bank accounts to dispel that conclusion.
Additionally, and perhaps more importantly, what Hayek missed is that an entirely unplanned economy is equally inhibitive of economic and political freedom. He is dead wrong when he claims that a market must subordinate altruism to ensure maximum freedom and liberty. All that happens in an unplanned economy is that wealth inevitably redistributes upward until very few people have very much liberty and freedom and very many people have very little of either.
We can see that theoretically if we understand that the limit of an efficient market is ‘all goods, in one location, owned by one entity.’ That is a maximally efficent market and it is one that is morally abhorrent. We can see that emprically by just looking at the upward resdistribution of wealth that goes on in virtually all cultures at virtually all times, with the single exception of a few decades in the past century.
I don’t think it’s about markets, but about the use of force to restrain private activity and reward insiders and parasites. Everyone assumes that technological complexity and entrenched wealth require “government intervention” in the economy, but they tend to ignore the capture of government by the biggest pigs and scoundrels, who employ government like jujitsu against the 99%.
Most of today’s economic problems have their genesis in government support of criminal behavior and monopoly power. Big business and big finance work full time (and quite effectively) at coopting government to their own purposes.
“Everyone assumes that technological complexity and entrenched wealth require “government intervention” in the economy, but they tend to ignore the capture of government by the biggest pigs and scoundrels, who employ government like jujitsu against the 99%.”
This is true. It is not, however, inevitable as The Great Boom of the 30’s-70’s showed.
The problem is that without government, then while there’s nothing to capture, there isn’t anything moderating the excesses either! Oligarchs capture government so they can do as they wish. Without government the Oligarchs do as they wish regardless, only this time, they are government! It is clearly a fantasy to believe that the people who are working actively against everyone else’s self interest are going to suddenly moderate their behavior because of a lack of regulation. Ask the clothing manufacturers in Bangladesh how that went.
The answer then, is not to get rid of government by the people, but to firewall it from capture by corporate interests in the same way we firewall it from capture by religious ones.
Is that hard work? Yes, and often bloody. We succeeded marvelously with religion. We can succeed with corporation too.
Roger: “Everyone assumes that technological complexity and entrenched wealth require “government intervention” in the economy, This is true. It is not, however, inevitable as The Great Boom of the 30′s-70′s showed.”
The dichotomy between the market and government is a false one, not descriptive of how the economy works. The government is integrated within the free market. From the 30’s-70’s, just two examples: the Marshall Plan and the overthow of Mossedegh.
jake said “…but they tend to ignore the capture of government by the biggest pigs and scoundrels, who employ government like jujitsu against the 99%. Most of today’s economic problems have their genesis in government support of criminal behavior and monopoly power. Big business and big finance work full time (and quite effectively) at coopting government to their own purposes.”
This line of reasoning always puzzled me…it’s like saying “Well the Mafia has infiltrated the police dept. so obviously we need to abolish the police dept!!”
“We succeeded marvelously with religion. We can succeed with corporation too.”
Hmmm – STM the religion of Market Fundamentalism is alive and well and living in DC ..
I believe the Waltons bank balances demonstrate the effectiveness of the Chinese economic plan.
Even if Sam Walton believed that he found the right partner in China, I think it would be more correct to say that the Chinese found the right partner in Sam Walton.
We had to raise an army and invade Europe to stop German fascism, the Chinese found a way to attack American fascism without firing a shot.
The American people, in this way, are caught between our own MIC, and that of China, and we’re paying them both an immense amount with absolutely no benefit to us.
Both can be true without contradiction.
Jake, he thought much too highly of those “private economic actors” focused on their interests at the exclusion of everything else. But was VON Hayek really so naif? Wasn’t he as much part of the profiteering Reich as Greenspan was? Were we all born yesterday?
Of course, the major reason this doesn’t work is that our entrenched plutocracy owns all the legislators, and also owns the executives charged with enforcement, so we end up with laws (and regulations) stifling ordinary people, and a plutocracy free to do what it wants.
It’s not a bug, it’s a feature.
But, when you abandon law in favor of planning (or, what is euphemistically called administration), what you achieve is just more institutional support for cronyism, socialism for the rich, and you add another layer of parasitic administrators milking the system for their own benefit.
“socialism for the rich”
Mmmm… I deal with these misuses of language in Part II and Part III. Just to anticipate:
=> Socialism means collective ownership of the means of production.
=> Thus, “socialism for the rich” means: collective ownership of the means of production for the rich.
That is either a meaningless or a twisted statement. But as I said, such meaningless uses of language will be explored in II and III.
“In our time, political speech and writing are largely the defence of the indefensible. Thus political language has to consist largely of euphemism, question-begging and sheer cloudy vagueness. A man may take to drink because he feels himself to be a failure, and then fail all the more completely because he drinks English becomes ugly and inaccurate because our thoughts are foolish, but the slovenliness of our language makes it easier for us to have foolish thoughts.” — George Orwell
If you don’t understand what is meant by ‘socialism for the rich’ you haven’t noticed the response to the financial crisis. What do you think TARP was? Or the Fed’s MBS purchases? Or ZIRP? Or even the Defense Budget?
Socialism for the rich means using the force of government to make the rich richer. Among the rich are included our large corporations. I thought economists understood this stuff.
I understand the EUPHEMISM — as Orwell called it — means in today’s political climate. But it is a neoliberal perversion of the English language which blocks thought. I’ll try to show this in II and III. In the meantime, I’ll quote Skippy:
“Skippy… stop reading your self – into – the narrative.”
How about calling it welfare for the rich?
=> Mike Lofgren: That is an interesting question that goes to the heart of a paradoxical aspect of the GOP. Of course people like the Koch brothers or Sheldon Adelson are engaging in a rational exercise to maximize their wealth. Their contributions will come back manifold in the form of tax breaks, subsidies, and exclusive franchises. The primary purpose of the GOP these days is to provide tax breaks and other financial advantages (such as not regulating pollution and other socially costly externalities) to their wealthy donor base. All the rest of their platform, all the culture wars stuff, is simply rube bait.<=
@Philip: “There is a long list of flyblown metaphors which could similarly be got rid of if enough people would interest themselves in the job”. Takes work.
“Socialism for the rich” is an oxymoron, but its centrist (middle class) appeal is obvious and needs no further explanation. This is a middle class blog, so ideological contortions are necessary to avoid reaching the conclusion that the state fundamentally represents the interests of one class over others and that bourgeois democracy is really bourgeois dictatorship. If the state can only represent interests, then it follows that class warfare between the two fundamental classes, the working class and the bourgeoisie, will decide politics in the ultimate instance. Who in the middle class wants to hear that?
@mafer You think, then, that “middle class” is a serious analytical construct?
@ Lambert, like all generalizations, the term “middle class” must be applied prudently. Since the term’s purpose in this context is to predict political behavior, its very generalization necessarily harms its purpose. The alternative is to add ‘layers of complexity’ in the interest of accuracy; however, many people won’t bother to read the comments here unless they are succinct. So, it boils down to “damned if you do, damned if you don’t”
@mafer I’d rather try to get the concept right then hone the words. How are those receieved ideas working out for us?
Mr. Pilkington, thank you for your promised future dealings with the improper use of language, especially the word “socialism.” I don’t know how many times I have defined the word in reply to comments and have asked commenters to please, please, please use the word in its correct context. (I especially dislike its juxtaposition with “the rich.”) I look forward to the rest of your essay to see how you do that very thing.
We have an NDP (New Democratic Party) in Canada that is certainly socialist and practises socialism and we are proud of that party because it gave us Universal Health Care and many other social programs that we enjoy today. Unfortunately, our present Conservative (neo-liberal) government is undermining our socialism in every way it can.
It is very important to know what it means to practice “socialism” or to have socialist policies without conflating it with Communism or the USSR [with the word “socialist” in the middle], or with getting something for nothing (welfare), etc.
I am aware of that definition of socialism. However, in reading the writings of some self-identified socialists of the 19th century, including the Fabians, that does not seem to be how they defined themselves. For instance, Pease, in his history of the Fabian Society, states that unemployment was a major concern of the Fabians, and Annie Besant thought that the ultimate solution was for the gov’t to provide jobs for the unemployed. That approaches the idea of the gov’t ownership of production. But it was apparently not a majority view, even among the Fabians. It seems that from the start there were multiple meanings for socialism.
That is not to disagree with Orwell, however. Capitalism and socialism are among those vague, abstract terms that are used to confuse.
“collective ownership of the means of production for the rich.”
This makes perfect sense, Philip. Read it again.
Consider a gang of rich people (call them the “noblemen”) and suppose they own and control all the means of production. In common. As a collective. They are the voters and the adminstrators and the central committee, and everyone else is disenfranchised peasants. For them, it is socialism. For everyone else, it is serfdom.
Note that the current rich of the US do not actually practice this, because they are really hell-bent on stealing from each other (as Veblen describes in _Theory of the Leisure Class_).
There have probably been instances in history, however, when the noblemen ganged together to form a “socialist commune of noblemen”. It would require a different psychology among the elite; perhaps one closer to the psychology of the Burmese Junta.
jake, The purpose of Reich Principals from Reich III-IV was to have their DNA profit at the top of the food chain in perpetuity, and to establish the “Economic Institution” of a Crony Bureaucracy, including “elite academics”, to protect their interests. Thorstein Veblen comprehended this to perfection, as does Dr. Michael Hudson today. Were we all born yesterday? Can’t we ditch the mythology now?
After having the 99% fund the wealth of the 1% for over 30 years President Obama has decided enough is enough and now it’s time for the 1% to pay their fair share. Close the tax loopholes (which should have never been created in the first place) of the rich and get a well paying job for all Americans and the problem would be solved. No, there is no spending problem. The problem was started by, continued by, and propagandized. by the republinos when they decided to Starve the Beast. Tell the average American that as their disposable income goes down and buys less and less that they have a spending problem, not an income problem. Doesn’t make sense for America and certainly doesn’t make sense for Americans.
“Their fair share?” Good enough, except that all the shouting is about how we define just what that entails. With Obama, watch what he does, not what he says. (True about everyone really.)
My Irony Meter is in the blink today. I just ‘got’ your comment. Apologies.
Accepted. Obama caved on his $250,000 limit and made it $400,000. An old but not too well known by the average American is the concept of deferred compensation but will be as the people with incomes over $400,000 over use it. BTW, what is Obama’s salary?
The, AND he caved GRATUITOUSLY, for nothing in return (that can be seen).
It’s not the earned income numbers which matter.
It’s the rates on unearned income.
Obama extended the abusively low capital gains and dividend rates.
0% for the first ~$33,000 of income
15% for any remaining income up to ~$250000
20% for any remaining income after that
At this point, you’re a sucker if you get your income from working. The tax code tells you that you should gamble on the stock market.
Obama also cut the Hoarder’s Tax (estate tax) from 55% on multibillionaires to 40% on multibillionaires. Because Paris Hilton needs another mansion, I guess.
You cannot act as if the dramatic hyperinflation in postwar Germany did not have a profound effect on German savings (wiped out), pyschology (traumatized) and opinion of democratic government (incompetant). The depression and austerity response (which did not extend to Hindenburg’s karge landowner buddies, who kept getting grain subsidies) were just the last straw. Meanwhile, the Nazis were building support and honing their political skills.
As I said clearly in the piece, the Nazis did make some gains in the hyperinflation era but they lost them when Germany returned to growth. It was the depression and the austerity that allowed them to recapture their support after 1929.
Also remember that, although this is airbrushed by the neo-Austrian lunatics, the hyperinflation was actually coupled with an austerity program in the post-WWI era. The propagandists will have you believe that this was some Big Government initiative. That’s not true. The hyperinflation began in an austerity environment where Germany were printing up marks and using them to buy up foreign reserves to meet reperations payments. It was then finally kicked into high gear after the invasion of the Ruhr Valley by the French in 1923.
This era is subject to so much mythology and lies that people don’t seem to get what really happened. This was not some Big Government run wild. It was more like Europe today: a dominant power imposing extractionary policies on its neighbours. If Ireland still had the punt were being forced to pay massive foreign denominated debt in Deutscharks, they would experience a hyperninflation too.
Austerity-Revenge stripped Germany of the means of production and voila, an exploitable desperation emerges and it is fed by European and American militarists who had been determined since 1917 to destroy Russia. Why no mention of this dynamic? The Nazis didn’t go after France or England (they tried to cut a deal with both of them) – they went after Russia, and oil.
Anyway, this was an interesting piece. I went back to review last July and got another good laugh at Maggie’s denial. Neoliberals are always trying to game the system. It’s genetic. In colonial times the Whigs who got rich became Tories. Merchantilism compromised all politics. And that particular merchanitilism existed solely on the backs of slavery. The neoliberals will never have it so good again! But they will keep trying. So if socialism is the collective ownership of the means of production and socialism for the rich is the perversion of production into productivity for the sole benefit of shareholders, does it follow that what we need are lots of low productivity jobs of high social value? Which creates a practical austerity for the rich. Yes. Austerity rules.
Geo politics and oil. Just like Germany was maneuvered away from oil in 1940, and Japan likewise, we are now very busy containing China’s access to oil. It seems to be our reason for living lately. And if and when China breaks out, we want China to storm across Russia and take Russian oil. Like Rommel. Running out of gas – somewhere in Siberia.
” … socialism for the rich is the perversion of production into productivity for the sole benefit of shareholders,”
+25 and 3/4! The image of “productivity” as a “perversion” and not an “asset” of production” – sweet!
re: lies, propaganda, delusion, the lines are very blurry
Yeah they are.
I was talking with a young couple outside the poolroom late last night. They were trying to convince me that Wolf Blitzer was a journalist, and certainly not, as I claimed, a paid propagandist –or worthless hack, take your pick– who in another era, not so long ago, would’ve been laughed off center stage.
We could have argued for many bitter cold hours about the present state of American journalism, instead (thanks to President Obama), I opted to use my new tactic, which is to reach right through the bullsh-t to the ultimate diamond. How easy is it? Pluck it, then present it. I said:
“So, what does Wolfy think about the assassination of US citizens by the President of the United States. Is he for or against this? Or is he, as he is on all other things, perfectly neutral?”
Who, when, where, how many!
(Always with the who, when, where, how many)
“Sorry, friends. This is the Age of Google. You both have iPhones, you are 30 seconds away from acquiring the truth.”
“Now: who, when, where, and especially how many are completely and totally irrelevant. Obviously, all the necessary questions begin with why. Why are US citizens being assassinated by their President? Why do you not know this? Why is there not revolutionary outrage all across this Greatest of All Democracies and Birthplace of All Freedoms? Is it because, why the f-ck is Wolf Blitzer still on television?”
They are indoctrinated sheep, and probably want to remain so. However, though I like them both, very much, I didn’t let up. The conversation ended with me saying:
“No you guys, not in my experience. Ignorance is not bliss, ignorance in the end, is pain.”
I walked back into the poolroom thinking, I’m 52, I gotta stop getting into time-wasting conversations like this if I want to be the best pool player in the world.
At that moment, the best player that I have ever seen (and I’ve seen all the living), asked me if I wanted to practice. I said, Yeah, let’s go. 10-ball, no Rotation, you’re too good in that game.
For next hour I sat in my seat and watched a half-man half-machine mow down balls and never miss. Not once. In the back of my head that traitorous voice started to rise up like it always does when I’m watching this master of the craft: Given forty lifetimes … one hundred lifetimes … (all right … enough)… GIVEN ONE THOUSAND LIFETIMES, you could never play like this.
When the session ended, I said: Ok D.H., I’ll see you tomorrow. Drive safe.
I started hitting balls by myself. Hitting them good. Real good. Splitting pockets. My true voice came back, the audible one. I said to some railbirds who’d been watching me get slaughtered:
You know, that f-cker don’t play that good.
And after the slightest of pauses to consider this, we all burst into laughter.
“Ignorance is not bliss, ignorance in the end, is pain.”
Ignorance is pain, in the end.
That’s true, but your story also hints at the fact that knowing the true nature of what we’re experiencing is also pain.
The more we help each other understand what’s really going on, the more we understand the true scope of the problem, the more it hurts.
You’re close to my age, and I fear we’ll be feeling this pain for the rest of our lives.
Max, when you say “this Greatest of All Democracies and Birthplace of All Freedoms” you, too, are showing your indoctrination. Do you really believe there is no other democracy that is great (or might even be greater) or that there have been no other birthplaces of all freedoms?
Just think about it.
Sorry JEHR, I should’ve put quotations around them. I was being sarcastic. I have tendency to veritably drip with the stuff –in real life– when I’m on a verbal role.
I may show my indoctrination in other areas, but not when it comes to freedom and democracy and the US.
For instance, I think the Magna Carta Libertatum was just another step in the freedom and democracy process that began when Adam and Eve (wink) first crawled out of the slime.
I thought you were referring to the Iroquois…
Trying to “inform” the “impossible to inform”, is a never ending battle!
I’m 82…..long student of history (world, economic, etc.) and continually use the line of “….what do you think of our Commander in Chief carrying a “kill list” in his back pocket; using excuses like, “militants”…”possible” militants, etc…..(ad nauseum)…..shedding sad comments about the latest gun violence in America where those undortunate victims including so many children…..
The usual response (as you have indicated) is the “thousand yard stare” off into the distance and regarding me as having some kind of vile body odor…….
What about the “unfortunate victims” of our Commander in Chief’s “gun violence” in foreign countries?????
And, with the infamous NDAA includes American citizens????
Our country is mostly politcally, globally, brain dead.
Love your comments about that stooge, Wolf Blitzer!!!
And, there are so many others.
As to the comment so others about government and businesses….
Corpporations (businesses) are dictatorships.
Governments are social contracts between the “governed” and the “governors”…..
There is a huge difference.
Either we make our government responsive to the people’s genuine needs (not particularly “lifestyles”) or we as a “republican democracy” will perish.
We desperately need a firewall (I’ve been talking and writing about this for years) between the unbridled fury of unregulated capitalism and the direction of a truly progressive society……apart from this maniacal, narcissistic consumer society that benefits just the few and crushes the many. (Not to remind all that “consumers” must, MUST, educate themselves as to the function of their economy within which they live, as they do their national political system)
We are no differnet that those that have gone before.
“Either we make our government responsive to the people’s genuine needs (not particularly “lifestyles”) or we as a “republican democracy” will perish.”
I agree completely – the question is, how …
I argue here and everywhere for the use of the electoral system, am met time and again with scoffing and sneers, and reflect on how effective TPTB have been in debasing and undermining its legitimacy in the eyes of the public – understanding quite well that the best way to remove people’s power is to convince them they don’t have any …
And this is proven by the amazing number of folks who are quite clear about why they voted as they did – not to get what they want or need, but to keep those “awful” other guys out …. They don’t believe it possible to use the vote to get what they really want – because they have become convinced by TPTB that folks who really would help them get it “can’t win” , and other nonesuch. And so, if voting is not truly “useful”, it is so much easier to treat it as “sport”….
The only time such destructive memes come up for discussion is right around election time – but they nonetheless remain as powerful enervators of public power all the time …
I really think that somebody, at least in the social sciences, if not political sciences, should really do some “research” on this phenomenon – it is real, it is diabolical, it is devastating – the HIV of politics, perhaps – perpetually undermining the political immune system, making it subject to the devastation of political diseases that would have no purchase in a healthy polity – a virus that, at this point cannot be cured, but must be met with effective Rx to keep this polity A+W ….
Very informative post, thanks for doing the research and historical background on Hayek. Persuasive analysis. I have this post bookmarked for future reference. Looking forward to the upcoming posts.
Great post. I look forward to reading the rest.
My comment is that anytime I take the time to write a somewhat thoughtful (i.e. contains factual data) response to an article that my comments do not get posted. I don’t know if I am doing something wrong in the posting process (if so, my apoligies) or this is an attempt to censor comments so that only those who disagree and don’t make too good of an argument are published.
Read the comments section of the post previous to this one; “Demise of Blogs.” Mz Smith explains succinctly, with references.
There are 2 (two) comments from a reader with your email address: This comment, your first, today, and a second, also today. Both are published. There are no comments from a reader with your email address in the administrative queues.
Re: the causes of the Weimar hyperinflation, this item may be of interest:
It would be interesting to know what was going through the minds of the leaders of the Reichsbank, but it kind of looks like they were simply funding asset grabs by those in a position to borrow at negative real interest rates. Some things never change, perhaps.
“Not coincidentally this overlapped with the time when most economies, mired as in Great Depression, demonstrated that Hayek’s theories were at best impractical, at worst a complete perversion of facts.”
Let me reprint a short but succint article summarizing the facts surrounding Herbert Hoover’s “austerity.” Spoiler alert–he did everything that modern economists perscribe.
The Depression You’ve Never Heard Of: 1920-1921
NOVEMBER 18, 2009 by ROBERT P. MURPHY
When it comes to diagnosing the causes of the Great Depression and prescribing cures for our present recession, the pundits and economists from the biggest schools typically argue about two different types of intervention. Big-government Keynesians, such as Paul Krugman, argue for massive fiscal stimulus—that is, huge budget deficits—to fill the gap in aggregate demand. On the other hand, small-government monetarists, who follow in the laissez-faire tradition of Milton Friedman, believe that the Federal Reserve needs to pump in more money to prevent the economy from falling into deep depression. Yet both sides of the debate agree that it would be utter disaster for the government and Fed to stand back and allow market forces to run their natural course after a major stock market or housing crash.
In contrast, many Austrian economists reject both forms of intervention. They argue that the free market would respond in the most efficient manner possible after a major disruption (such as the 1929 stock market crash or the housing bubble in our own times). As we shall see, the U.S. experience during the 1920–1921 depression—one that the reader has probably never heard of—is almost a laboratory experiment showcasing the flaws of both the Keynesian and monetarist prescriptions.
The 1929–1933 Great Contraction
Despite what many readers undoubtedly “learned” in their history classes as children, Herbert Hoover behaved like a textbook Keynesian following the 1929 stock market crash. In conjunction with Treasury Secretary Andrew Mellon, Hoover achieved an across-the-board one percentage point reduction in income tax rates applicable to the 1929 tax year.
Hoover didn’t stop with tax cuts to bolster “aggregate demand”—though analysts at that time would not have used the term. He also signed into law massive increases in the federal budget, with fiscal year (FY) 1932 spending rising 42 percent above 1930 levels. Hoover ran unprecedented peacetime deficits, which stood in sharp contrast to his predecessor Calvin Coolidge, who had run a budget surplus every year of his presidency. In fact, in the 1932 election FDR campaigned on a balanced budget and excoriated the reckless spending record of the Republican incumbent.
It wasn’t merely that Hoover spent a bunch of money. He spent it on just the types of things that we associate today with Roosevelt’s New Deal. For example, he signed off on numerous public-works projects, including the Hoover Dam. Of particular relevance today is the Reconstruction Finance Corporation (RFC) established under Hoover, which quickly injected more than $1 billion to prop up troubled banks that had made bad loans during the boom years of the late 1920s—and this was when $1 billion really meant something.
It is true that Hoover eventually blinked and raised taxes in 1932, in an effort to reduce the federal budget deficit. Today’s Keynesians point to this move as proof that reducing deficits is a bad idea in the middle of a depression. Yet an equally valid interpretation is that it’s horrible to hike tax rates in the middle of an economic disaster. After the bold tax cuts pushed through by Andrew Mellon in the 1920s, the top marginal income-tax rate in 1932 stood at 25 percent. The next year, because of Hoover’s desire to close the budget hole, the top income tax rate was 63 percent. Given this extraordinary single-year rate hike, it is no wonder that 1933 was the single worst year in U.S. economic history. (For what it’s worth, the FY 1933 budget deficit was still huge, coming in at 4.5 percent of GDP. Despite the huge rate hikes, federal tax revenues only increased 3.8 percent from FY 1932 to FY 1933.)
So we see that the standard Keynesian story, which paints Herbert Hoover as a do-nothing liquidationist, is completely false. Yet Milton Friedman’s explanation for the Great Depression is almost as dubious. Following the stock market crash, the New York Federal Reserve Bank immediately slashed its discount rate—how much it charged on loans—in an attempt to provide relief to the beleaguered financial system. The New York Fed continued to slash its discount rate over the next two years, pushing it down to 1.5 percent by May 1931. At that time, this was the lowest discount rate the New York Fed had ever charged since the establishment of the Federal Reserve System in 1913.
It wasn’t merely that the Fed (along with other central banks around the world) was charging an unusually low rate on loans it advanced from its discount window. The entire mentality of central bankers was different during the early years of the Great Depression. Writing in 1934, Lionel Robbins first noted that during previous crises, the solution had been for central banks to charge a high discount rate to separate the wheat from the chaff. Those firms that were truly solvent but illiquid would be willing to pay the high interest rates on central-bank loans to get them through the storm. Firms that were simply insolvent, on the other hand, would know the jig was up because they couldn’t afford the high rates. Yet this tough love was not administered after the 1929 crash, as Robbins explained: “In the present depression we have changed all that. We eschew the sharp purge. We prefer the lingering disease. Everywhere, in the money market, in the commodity markets and in the broad field of company finance and public indebtedness, the efforts of Central Banks and Governments have been directed to propping up bad business positions.”
We therefore see an eerie pattern. When it came to both fiscal and monetary policy during the early 1930s, the governments and central banks implemented the same strategies that the sophisticated experts recommend today for our present crisis. Of course, today’s Keynesians and monetarists have a ready retort: They will tell us that their prescribed medicines (deficits and monetary injections, respectively) were not administered in large enough doses. It was the timidity of Hoover’s deficits (for the Keynesians) or the Fed’s injections of liquidity (for the monetarists) that caused the Great Depression.
The 1920–1921 Depression
This context highlights the importance of the 1920–1921 depression. Here the government and Fed did the exact opposite of what the experts now recommend. We have just about the closest thing to a controlled experiment in macroeconomics that one could desire. To repeat, it’s not that the government boosted the budget at a slower rate, or that the Fed provided a tad less liquidity. On the contrary, the government slashed its budget tremendously, and the Fed hiked rates to record highs. We thus have a fairly clear-cut experiment to test the efficacy of the Keynesian and monetarist remedies.
At the conclusion of World War I, U.S. officials found themselves in a bleak position. The federal debt had exploded because of wartime expenditures, and annual consumer price inflation rates had jumped well above 20 percent by the end of the war.
To restore fiscal and price sanity, the authorities implemented what today strikes us as incredibly “merciless” policies. From FY 1919 to 1920, federal spending was slashed from $18.5 billion to $6.4 billion—a 65 percent reduction in one year. The budget was pushed down the next two years as well, to $3.3 billion in FY 1922.
On the monetary side, the New York Fed raised its discount rate to a record high 7 percent by June 1920. Now the reader might think that this nominal rate was actually “looser” than the 1.5 percent discount rate charged in 1931 because of the changes in inflation rates. But on the contrary, the price deflation of the 1920–1921 depression was more severe. From its peak in June 1920 the Consumer Price Index fell 15.8 percent over the next 12 months. In contrast, year-over-year price deflation never even reached 11 percent at any point during the Great Depression. Whether we look at nominal interest rates or “real” (inflation-adjusted) interest rates, the Fed was very “tight” during the 1920–1921 depression and very “loose” during the onset of the Great Depression.
Now some modern economists will point out that our story leaves out an important element. Even though the Fed slashed its discount rate to record lows during the onset of the Great Depression, the total stock of money held by the public collapsed by roughly a third from 1929 to 1933. This is why Milton Friedman blamed the Fed for not doing enough to avert the Great Depression. By flooding the banking system with newly created reserves (part of the “monetary base”), the Fed could have offset the massive cash withdrawals of the panicked public and kept the overall money stock constant.
But even this nuanced argument fails to demonstrate why the 1929–1933 downturn should have been more severe than the 1920–1921 depression. The collapse in the monetary base (directly controlled by the Fed) during 1920–1921 was the largest in U.S. history, and it dwarfed the fall during the early Hoover years. So we hit the same problem: The standard monetarist explanation for the Great Depression applies all the more so to the 1920–1921 depression.
If the Keynesians are right about the Great Depression, then the depression of 1920–1921 should have been far worse. The same holds for the monetarists; things should have been awful in the 1920s if their theory of the 1930s is correct.
To be sure, the 1920–1921 depression was painful. The unemployment rate peaked at 11.7 percent in 1921. But it had dropped to 6.7 percent by the following year, and was down to 2.4 percent by 1923. After the depression the United States proceeded to enjoy the “Roaring Twenties,” arguably the most prosperous decade in the country’s history. Some of this prosperity was illusory—itself the result of subsequent Fed inflation—but nonetheless the 1920–1921 depression “purged the rottenness out of the system” and provided a solid framework for sustainable growth.
As we know, things turned out decidedly differently in the 1930s. Despite the easy fiscal and monetary policies of the Hoover administration and the Federal Reserve—which today’s experts say are necessary to avoid the “mistakes of the Great Depression”—the unemployment rate kept going higher and higher, averaging an astounding 25 percent in 1933. And of course, after the “great contraction” the U.S. proceeded to stagnate in the Great Depression of the 1930s, which was easily the least prosperous decade in the country’s history.
The conclusion seems obvious to anyone whose mind is not firmly locked into the Keynesian or monetarist framework: The free market works. Even in the face of massive shocks requiring large structural adjustments, the best thing the government can do is cut its own budget and return more resources to the private sector. For its part, the Federal Reserve doesn’t help matters by flooding the shell-shocked credit markets with green pieces of paper. Prices can adjust to clear labor and other markets soon enough, in light of the new fundamentals, if only the politicians and central bankers would get out of the way.
Ugh… Bob Murphy. He’s all over the place. He can’t use the national accounts properly, as I’ve pointed out on blogs numerous times before. He also rejects GDP as a measure of economic growth and then uses it in his so-called empirical analyses.
I know the Austrians need someone to make nice, neat narratives of history for them and publish books entitled “The Politically Incorrect Guide to…” and “A Contrarian Handbook for…” and so on, but really, you can do better than Murphy.
Lord Keynes has many articles on Murphy’s, erm, historical analyses over at his great blog. One of them is here:
But look, if you want to believe in what Murphy is saying then you probably will. Neither I nor Lord Keynes is going to change that. But don’t even think for a moment that you’re living in the real world. And, good God, stay away from the history departments!
“Ask, and it shall be given you; seek, and ye shall find.” — Matthew 7:7
Please see my note below: BC and Bob also get their political history wrong (Hoover did not pursue Keynesian policies, but the Congress of 1930 did, largely against Hoover’s wishes); and they fail to actually analyze the difference between the 1930 Congress’s policies and FDR’s New Deal policies.
I believe the key difference is that the 1930 Congress policies were heavily, perhaps entirely, dependent on the existing banking system. Hoover’s Reconstruction Finance Corporation money simply didn’t get to its intended targets. As it says in Wikipedia, “The RFC was bogged down in bureaucracy and failed to disburse much of its funds.” Does this ring a bell, when thinking of the megabank bailouts we’ve had recently?
FDR’s 1932 New Deal policies involved setting up his OWN banks which actually DID disburse funds directly to the people.
Thanks for the responses and links. I read your replies and found them unconvincing because they don’t refute Mr. Murphy’s overall contention which is you have two different responses (1 more Keynesian/Monetarist and 1 more Austrian) to periods of economic weakness from roughly the same time period which allow for a reliable comparison of results. Just because you don’t like the results doesn’t make them any less valid.
I get that the main argument is that Hoover wasn’t Keynesian “enough.” As convenient as that is (because if it doesn’t work you can always claim that the main problem is it was merely not enough), his response was diametrically opposed to Wilson’s response and so were the results, just not in the way conventional/modern/Keynesian economists would have predicted (and much to their chagrin).
If Keynesian economic principles were true, then why wouldn’t we just eliminate the private sector? If sufficient government spending was all that was needed to grow the economy, raise living standards, and reach full employment, why even mess with “free” markets? The government could just spend all the money that it wants and finance this spending by just printing it, right? Oh wait, this has been attempted previously and always to disastrous results.
Moreover, a key difference between the Austrian school and other economic theories is regarding the boom phase. Instead of focusing on just dealing with the bust, Austrian monetary theory correctly understands the role monetary policies (often accompanied by bad fiscal/regulatory policies) play in creating the unsustainable boom. The bust is merely the unfortunate result of bad policies that interfered with the allocation of scarce resources by market forces.
ALL resources are scarce and the essence of economics is how do we use our scarce resources to satisfy our unlimited wants. The best method is through using market forces and prices guiding producers and consumers through the process of achieving the most desirable (i.e. most efficient) outcome.
The manipulation of the money supply and interest rates only sends producers and consumers false information that results in bad/unsustainiable resource allocation. Consequently, the boom turns to bust. If you want to avoid the bust then avoid the unsustainable boom by allowing market forces to operate. No, central planning does not work even in money, credit, and interest rates.
Actually, while I don’t intend on wasting my energy on Murphy, I see that I published a lengthy comment dealing with Murphy’s 1920-1921 comparison that you just posted. So, I’ll reproduce it here. Read it carefully together with Lord Keynes’ post and you’ll see that Murphy really is not a very good analyst at all. But I have a sneaking suspicion that he doesn’t do analysis; he tries to tell little stories that sound nice and neat. There’s a gulf of difference.
“I propose we rename Murphy’s book “The Politically Motivated Guide to the Great Depression”. Because, come on… even he must know what he’s doing… right?
Anyway, a few comments.
(1) Spot on about the 1920-21 depression. It was an uncontrolled post-war adjustment, similar to what we saw in 1945 (except they did a better job with 1945). The recovery was likely made on the backs of the savings that had been forced on people during the war and were provided mainly by government pay packets to returning veterans. Remember guys, government spending = private sector savings — that’s an accounting truism. And where do you think the spending for WWI came from? That’s right: Guv’ment.
(2) Regarding debt deflation in the Great Depression, this was undoubtedly the case:
Note that the blue line is NOMINAL GDP which also reflects prices falling. As the red and the blue lines diverge the pressure on private sector balances sheets becomes more and more intense. So, it’s not surprising that we saw many bankruptcies in the Depression.
Also, as a matter of academic interest I found a passage in the General Theory where Keynes deals with debt deflation. I thought this was interesting because its usually assumed that Keynes ignored it. Here’s the passage:
“On the other hand, the depressing influence on entrepreneurs of their greater burden of debt may partly offset any cheerful reactions from the reduction of wages. Indeed if the fall of wages and prices goes far, the embarrassment of those entrepreneurs who are heavily indebted may soon reach the point of insolvency — with severely adverse effects on investment. Moreover the effect of the lower price-level on the real burden of the National Debt and hence on taxation is likely to prove very adverse to business confidence.” (General Theory, Chapter 19)
(3) Slashing a post-wartime budget ala Wilson is an entirely different action to austerity during a depression. After a major war a country must wind down its spending by necessity (unless they turned communist during said war and wish to take over the means of production!). Everyone recognises that this will result in a recession and price adjustments and Keynesians treated this very delicately in 1945. But to compare Hoover’s and Wilson’s policies in such an ahistorical manner is beyond bizarre.”
Why is the Bob Murphy’s post logical and convincing while your post is gibberish to normal, educated people? If you can’t explain it simple, your understanding is not sufficient. Free to Einstein since quotes seem to rule the day.
If you want to make the point that we should not have free markets but controlled ones instead, you fail to attract at least one supporter.
Maybe because macroeconomic analysis is kind of complicated and that’s why people do it for a living rather than readin Austrian fairy tales? Not to say that people can’t understand it but it takes some effort. Screaming “liquidation!” and “hyperinflation!” in the comments section of every blog, accompanied with juvenile anti-government rhetoric is easy. Actually analysing the economy takes some work and some detachment.
Anyway, I don’t care about “converting” Austrians. They can believe whatever they want. It’s a free country — despite what they say.
The problem is that they’re zealous and seek converts, and then establish websites like zerosludge.
And the U.S. is NOT a free country, not anymore.
On Austrian “stories,” surely this joke has been made, but if not…
“If you want to make the point that we should not have free markets but controlled ones instead, you fail to attract at least one supporter.”
One thing I will say for “the market.” It was the only earthly entity with enough sense to attempt to shove C, JPM, and GS off the face of the planet.
But, thanks to the US “government,” the “market” seems to have gotten over that moment of sanity.
I guess once you miss the libertarian moment, it’s gone for good. More Government Sachs socialism for the rich? What’s not to love about that?
Everything else is ideological smoke, and they’re blowing it on all sides.
Please read my comment to Max.
JTF, how about the “stops” used in the “market” automatically today, even if they can’t prevent disastrous swings in HFT in real time? Ever since “markets” went electronic why was there even a pretense that there were “free markets”? If by “free” is meant “spontaneous” – “free markets” are a fraud.
Should be the first comment, not to Max. Sorry.
“It is very important to know what it means to practice “socialism” or to have socialist policies without conflating it with Communism or the USSR [with the word “socialist” in the middle], or with getting something for nothing (welfare), etc.”
Well, I’m happy to hear you in Canada know what it means to have “real socialism,” as opposed to the kind we have in the US that favors select groups who do what the corporatists’ who’ve run the US government in the 20th century have wanted people to do, whether that was work for large corporations to earn their New Deal “social security dollar” in the 1950s or whether that is work in the financial sector for their “Government Sachs dollars” today.
PS. Pilker is a known red baiter. I am not.
ALL markets are controlled in one way or another. No “markets” or any size have ever been found to exist outside of a controlling, governmental influence. Read some Graeber.
If the market were truly free and uncontrolled, I’d just whack you over the head and take your stuff, see what I mean?
er…No “markets” of any size…
Scare quotes because I don’t think we even have a good conception of what the word “market” means, i.e. markets and governments are always all tied up together, so to talk about them as separate things is misleading. Again, a la Graeber.
I agree that a debt bubble played a huge role in the Great Depression (and the current depression). That begs the question as to how this occurred in the first place.
Only the Austrian school correctly understands that fractional reserve banking is a horrible practice. In effect, it is counterfeiting and is wrong on so many levels whether undertaken by you, me, the Federal Reserve, or Bank of America. Fractional reserve fiat money systems are inherently unstable and damaging as the creation of money out of thin air (i.e. printing money) transfers purchasing power from wealth producers to wealth consumers. This degrades the wealth generating capabilities of an economy and weakens the economy. Moreover, since money is created through the process of creating debt, it also results in ever increasing debt levels. Bad combination.
Please allow me to explain (yes the following is long but don’t worry it didn’t take me long to recreate as I just lifted it from a presentation I did at work five years ago in which I predicted the worst depression since the Great Depression if not including it and no this depression is not even close to being over—thank you Keynesians/Monetarists):
Originally, Congress limited the Fed’s mission to supplement the operations of the gold standard by lending to needy but solvent banks that were suffering a liquidity problem. In fulfilling this function, it was labeled a lender of last resort. Through the decades since the Fed’s creation in 1913, however, Congress has endowed it with numerous additional powers and duties. The Fed’s main occupation is not creating money but facilitating credit. Although the Fed can create new money, its main job is to smooth out the economy by manipulating credit (which tends to be good for political incumbents). Politics being what they are, this manipulation has been almost exclusively in the direction of making credit easy to obtain.
Even the Fed itself claims that part of its job is to keep inflation in check. This is something like the tobacco industry claiming that it is trying to stop smoking. The Fed is in the business of generating inflation. It might attempt to stop the effects of inflation, namely rising prices. But under a traditional definition of inflation — an artificial increase in the supply of money and credit — the entire reason for Fed’s existence is to generate more, not less of it.
The Fed makes more credit available to the banking system by monetizing debt, i.e. creating money. Under our fractional reserve system, banks are authorized to employ the new money as reserves against which they could make new loans, i.e. create money out of thin air themselves. Thus, new money = new credit (in theory, at least).
Because of competition from money market funds, which are exempt from regulation, banks began using financial manipulation to get around reserve requirements. In the early 1990s, during the “jobless recovery” that was frustrating U.S. central planners, Fed Chairman Alan Greenspan took a controversial step and removed banks’ reserve requirements almost entirely. The Fed first lowered the reserve requirement on all accounts other than checking accounts to zero. Then it let banks pretend that they have almost no checking account balances by allowing them to “sweep” those deposits into various savings accounts and money market funds at the end of each business day. Magically, when monitors check the banks’ balances at night, they find the value of checking accounts artificially understated by trillions of dollars. The net result is that banks today conveniently meet their nominally required reserves (currently about $65 billion) with the cash in their vaults that they need to hold for everyday transactions anyway.
By this change in regulation, the Fed essentially removed itself from its duties of requiring banks to hold reserves and has permitted an almost infinite money multiplier. We still have a fractional reserve system on the books, but not one in actuality. Now banks can lend out virtually all of their deposits. In fact, they can lend out more than all of their deposits, because banks’ parent companies can issue stock, bonds, or any financial instrument and lend the proceeds to their subsidiary banks, upon which assets the banks can make new loans. It is no coincidence that after this move in the early 1990s financial bubbles have proliferated across all markets in the following decades, starting in equity and then rolling into real estate, commodities, precious metals, etc. Moreover, this follows the closing of the gold window in 1971 which was when the multi-decade credit bubble began as seen in charts of the debt/GDP ratio.
Each new Fed account denominated in dollars is new money, but not new value. The new account has value, but that value comes from a reduction in the value of all other outstanding accounts denominated in dollars. That reduction takes place as the favored institution spends and/or lends the newly credited dollars, driving up dollar-denominated prices. Since all other dollar holders still hold the same number of dollars, but now there are more dollars in circulation, each one purchases less in terms of goods and services.
The old dollars lose value to the extent that the new dollars gain value. It is important to understand exactly what the Fed has the power to do: It has legal permission to transfer wealth from dollar savers to certain debtors without the permission of the savers. The effect on the money supply is exactly the same as if the money had been counterfeited and slipped into circulation (but is deemed legal if not outright celebrated by current mainstream economists). This reallocation/transfer of wealth from wealth producers and savers to debtors and wealth consumers has grave economic consequences in the long-run.
But in doing all of this, it is toying with the signals that the banking industry is sending to borrowers. Businesses are fooled into taking out longer-term loans and starting projects that cannot be sustained. Investors flush with new cash put the money in stocks or buy homes, activities that spread a kind of buying-and-selling fever among the general population.
The problem is that all of this activity creates an illusory prosperity, a false boom. When lower interest rates result from real saving, the banking system is signaling that the necessary sacrifice of present consumption has taken place in order to fund long-term investment. But when central banks push down rates on a whim, the impression is created that the savings are there when they are in fact completely absent. The resulting bust becomes inevitable as goods that come to production can’t be purchased, and reality sets in by waves. Businesses fail, homes are foreclosed upon, and people bail out of stocks or whatever the fashionable investment is of the day.
Since it is prices that are the market signal upon which supply and demand forces make their decisions, any distortion of prices results in bad (read harmful) decision-making. Money and credit are ABSOLUTELY NO DIFFERENT than any other good, such as shoes, butter or automobiles. Since interest rates are the “price” of money and credit, distorting this signal results in bad decisions by entrepreneurs who can’t determine the difference between real savings and that which was “printed” into existence.
The ultimate effect is a misallocation of resources (remember that economics is essentially the determination of how a society allocates its limited resources in order to satisfy its unlimited wants/needs) that results in LESS wealth. That phony money creates a false boom is completely supported by history.
Our fiat money is essentially a Ponzi scheme! In a fiat world, money is printed into existence by the central bank – in the United States the Fed. Given there is nothing backing up this money, it is inherently worthless. However, one can think of it as real. It was printed (even if only electronically), therefore it exists. In addition to the previously mentioned money supply, fractional reserve lending allows credit to be extended by banks and financial institutions on top of that inherently worthless money. Indeed, banks and financial institutions have leveraged credit to base money at ratios of 30-1 or even higher. It’s pretty amazing if you think about it: Credit is extended with 30+ times leverage on inherently worthless paper.
Borrowers have to pay interest on the amount borrowed. However, the interest and the debt cannot possibly be paid back except by an ever expanding Ponzi scheme of lending. That scheme can last only as long as everyone believes the debt can be paid back and the market value of that debt keeps rising.
It’s a faith based system in which banks extend loans and hold the credit on the books (or in many cases off the books in various structured instruments). The banks are thought of as being well capitalized as long as the value of credit on the books in relation to their reserves meets some ridiculously low minimum set by the Fed. The day of reckoning comes when asset prices start falling, defaults soar, and the value of credit on the books starts plunging.
Folks, that day of reckoning has arrived.
“Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist,” economist Kenneth Boulding.
Wanted to throw in one last point. If Keynesian economics is right then the worst of the most recession/depression is over. The U.S. (along with the rest of the world) responded with substantial monetary and fiscal stimulus. In the U.S., we continue to run substantial fiscal deficits and stimulative monetary policies and so is Europe (although they are trying to remove the fiscal stimulus).
Since all of the major world central banks are now in official ZIRP mode and expanding the balance sheet without any constraints, monetary stimulus is unprecdented. Even if fiscal stimulus is receding, it will be back in full force if economies weaken. Consequently, true disaster is off the table as policy makers and economists have “figured it out.”
However, if the Austrian theory of business cycles is correct then monetary/fiscal/regulatory policies of recent years/decades has distorted the infamous “structure of production” (which is merely stating that the configuration of our limited resources in order to satisfy our unlimited wants/needs is out of whack–i.e. unsustainable).
Consequently, all the actions undertaken since 2008 have only exacerbated the previous unsustainable economy and impaired capital formation upon which the foundation of a society’s wealth is created. Therefore, the biggest part of the crash/depression is yet to occur and ultimately cannot be contained by even more government intervention.
We now have a scorecard in which we can judge these economic theories over the next several years.
I actually hope the Austrians are wrong because the one thing that I think everyone can agree on is that extreme economics (at least on the downside) always leads to extreme politics, which is never good.
“After the depression the United States proceeded to enjoy the “Roaring Twenties,” arguably the most prosperous decade in the country’s history. Some of this prosperity was illusory.”
I stopped reading after “Some of this prosperity was illusory.”
I am reading William Greider’s “Secrets of the Temple, How the Federal Reserve Runs the country” an account of the the events leading to the creation of Federal Reserve and the FR’s actions and policies thereafter. This book, heavily footnoted, includes a lot of well-researched historical information about exactly what the Fed, the President and the bankers did and did not do in response to the crashes that occurred from the 1880s right through the 1930s.
I highly recommend it for its historical (factual) usefulness.
Seconded…although I only got to page 467…
William Greider’s “Secrets of the Temple” is truly needed for a “beginner’s tour of the economic galaxy”!
Have read it more than once and it has so many “sticky tags” within that it leterally bulges!!
BC: your description of Hoover’s policies is simply wrong; revisionist in a dishonest way. I followed _News from 1930_ assiduously while the blog was running. It paints a pretty clear picture of Hoover’s policies; he was anti-stimulus.
News from 1930 also makes it clear what the *Congressional* policies were, which were quite different from Hoover’s and *much* more Keynesian than Hoover’s personal policies. Big Hoover-Congress fights.
Now, this does raise the question, what was wrong with the 1930 Congress’s policies? My answer: They nearly all depended on the banking system. The banking “transmission channel” was broken, so dependency on the banking system caused failure.
FDR’s New Deal did not depend on the banking system. FDR set up his own banks.
An important and oft overlooked question that comes to the fore in this discussion is, ‘how is it that a totalitarian system that’s run by an elite group characterized by inherited, privately held wealth is somehow less a tyranny than one run by petite bourgeois or pseudo intellectuals in the name of ‘the masses’, or ‘the volk’?
It seems that The Austrians felt miffed that their country missed out on the glories of liberal capitalism experienced in the west and simply went from rickety agrarian relic of the Metternich era to part of the Greater German Reich.
Also, while the NSDAP meddled with the conduct of business in many ways that liberal Britains government could or would not, you have only to look at German newspapers and magazines from the Hitler era to see that private enterprise was very much alive and thriving.
I intend to do a book about the origins of libertarianism, and already my research leads me toward a much more sinister picture than Pilkington seems to be describing (though the sample chapter does also cover von Hayek, and not much like Pilkington does). I am seeking feedback on the book proposal with sample chapter. Anyone who is interested in possibly provideng input on it can reach me at email@example.com and I shall be happy to send it to you in the body of an email, for your feedback.
Pardon, that email address is firstname.lastname@example.org.
I’ll look at it if you want. Honestly, I don’t know much of the institutional history. And I wouldn’t be surprised if it was pretty dirty. From what I’ve seen the Austrians were tied to some pretty nasty right-wing organisations in the US. But I know the economics and the philosophy well, if that helps.
For some reason, I haven’t received your email at email@example.com. Will you therefore please post here your email address, so that I can reach you?
Slug it out boys!
(This site gets funnier with each passing day)
Wow…wtf…who makes this stuff?…it’s awesome but…I don’t know…I’m awestruck…economics, hip hop, production values…strange world we live in…
Ok, not awesome in the content, now that I watch the whole thing. Spoiler alert, it’s Austrian! Catchy though…
Hayek in his thinking probably knew very well that his preference for a system of particular values, in his case a market order, cannot be logically grounded. This is why he conceals his choice behind evolutionary considerations which confer upon his reasoning an air of objectivity.
I would submit that all of us, in our economic/political thinking (whether it be the doctrine of market liberalism, socialism, capitalism, MMT, MMR or heterodox Keynesianism) tend to conceal our choice for a system of particular values behind some type reasoning that attempts to create an air of objectivity.
The issue which must be faced by all ideologies, including my own, is that there is always a choice on where to conceptually cut one’s focus in order to situate a problem to begin with and this suggests that the language of problem identification is metaphorical—it does not transparently reflect a situation that exists independent of our formulation.
What this means, especially for such schools of thinking like market liberalism, MMT or even MMR is that there is an inescapable normative dimension to every descriptive formulation
There is no purely descriptive reading of any situation or event–if we dare to look closely enough at the role of conceptualization and categorization in our thinking.
Doesn’t anyone wonder why the “Ludwig Von Mises Institute” found its home in Mobile, Alabama? Alabama. Tons of Hapag LLoyd and Maersk containers in that neocon U.S. Port of Mobile. Alabama. Check out the Huntsville website, even today. Mind-blowing.
The original arsenal combined two adjoining arsenals into one post in 1941 to make conventional ammunition and toxic chemicals during World War II. First designated the home of Army missiles in 1948, Redstone dropped from a peak WW II employment of more than 19,000 to a little-used post of a few hundred workers.
Because of the large available space, empty buildings, and ease of access to rail, highway, and water traffic, the Army chose Redstone as the place to consolidate its newly formed rocket program. Redstone Arsenal has served for more than 50 years as the Army’s center for missile and rocket programs.
Leonova, this is where the German rocket scientists went to after coming over to the Americans, during the end of WWII. Check out the site, The Von Braun Concert Hall has some wonderful cultural performances.
Socialists openly state their bias and argue that can be no ‘impartial’ social science in a society based on class struggle. To expect social science to be impartial in a wage-slave society is as foolishly naïve as to expect impartiality from manufacturers on the question of whether workers’ wages ought to be increased by decreasing the profits of capital.
The bourgeoisie, whose interests conflict with those of the majority, is forced to hide its self-seeking aspirations, to pretend that its economic and political aims are those of society as a whole, and to wrap itself in the toga of nonpartisanship. This prompts the ideologists and politicians of the bourgeoisie to try to establish in the minds of the masses the idea that public life is apolitical and should be free of ideology. It is not apolitical and never has been.
“The issue which must be faced by all ideologies, including my own, is that there is always a choice on where to conceptually cut one’s focus in order to situate a problem to begin with and this suggests that the language of problem identification is metaphorical—it does not transparently reflect a situation that exists independent of our formulation.”
Hmmm – ISTM that when you consider that, as i understand, the laws of physics indicate that we cannot even observe something without thereby influencing that which is being observed – i.e. cannot “know” something as it is in the absence of the “knower” – how could we expect to describe, let alone constuct, a system that is not influenced by the describer, let alone by the constructor ….
The one issue left out of most economic discussions is human psychology which along with history explains economics better than any theory.
Central planning, no matter what the label, avoids accepting feedback because the planners are always right.
A free market is always dangerous to an empire because it requires rule of law, and the emperor never accepts restraints on his/her power.
Our US empire started to go down this path with the election of 1912: Creation of Federal Reserve (not Federal and never had any reserves); Income taxes (The US Gov’t supported itself with duties and tariffs. Income tax was supposed to be a tax on the “rentier” class that Adam Smith said made money while sleeping); US no longer avoided foreign entanglements but became involved in a European war (All previous presidents had listened to George Washington’s warning to “avoid foreign entanglements); Before the Federal Reserve US $ was not fiat currency and was a means to store wealth.
Does this article suggest that Central Planning actually works, that now central planners are no longer connected to some special interest group and in general “This time is different”? This time is NEVER different and the phrase is a bad answer created to releive cognitive dissonance.
The world needs a resource based system that is not based on continuous growth. Money could be tied to grain which cannot increase exponentially like interest.
Anselm Meyer Rothschild said “Give control over issuing a nations currency and I care not who makes the laws”. This sums up the result of creating the Federal Reserve, a private bank that issues our currency as a debt.
Does anyone know if this member of the Rothschild banking empire said this in secret or was this said publicly as a warning.
Paul, that’s right: “Central Planning” – come what may, whichever way the wind blows, use any label you like.
Central planning: like Goldman Sachs does? like Bank of America does? Like Wells Fargo does? Like Citibank does?
Yeah, I agree, central planning can lead to some really huge disasters due to the arrogance of the central planners (CEOs).
As you may have guessed, my main point is that central planning is (a) unavoidable, and (b) a central feature of capitalism.
It seems that neoliberalism has bastardized the old republican (As in French republic, not US Republican party!) idea of freedom from coercion, be it economic or force, via the protection of a strong state, into freedom from interference.
The real insanity comes in that the interference they focus on is that of government regulation. Regulation often in place because of the older notion of freedom from coercion. Never mind that in this day and age, corporations have as much a power to interfere. But supposedly you can just walk away from that interference by choosing to not commercially interact with said corporations. Err, yea right…
digi_owl, It’s all propaganda all the time. The object is for the Reich’s BIS “Governance” to USURP U.S. Constitutional Government of/by/for the People. That’s all. It’s called Fourth Reich Privatarianism, or Global Dynastic Despotis, call it what you will. It’s Rigged Market Totalitarianism by any name.
Discussing free markets is a snipe hunt. There has never been nor will there ever be a free market. It is always about who controls the market and for whose benefit. The reason why this sort of terminology is attractive to the rich and elites (our kleptocratic classes) is that it allows them to minimize or remove completely the idea of the social good. Such excision does not create a free market. It merely allows them greater latitude in their looting.
This is not to say that the rich and elites do not invoke the social good when it suits their purposes. As Niebuhr observed a long time ago, they simply substitute their good for the social good. Their good becomes the social good. Do they really believe this? Of course, they do because it is so useful, convenient, and profitable for them to.
Oh, thank you, Hugh. “Bless you, boy.”
“There has never been nor will there ever be a free market. It is always about who controls the market and for whose benefit.”
Precisely, and as a matter of historical (factual) record. Which is why I immediately (mentally) call “B.S./Propaganda — read accordingly,” any time I come across a text that refers to “the free market” as anything except a construct propagated by the elites to blind their victims to the fact that they are being looted.
What a miserable bunch…(the central planning type)
How true. LIBOR, the “Open Markets Committee”…
Though not covered in this scholarly article about delusions in Hayek’s economics,
the first thing that jumped into my mind when I read “Hayek’s Delusion” was the mind-boggling truth about Hayek and Medicare. That’s the story about how Hayek initially declined Koch’s invitation to emigrate from Austria to the US to become a “distinguished scholar” for Koch’s “Humane Society Institute” (my paraphrase) because he’d had gallbladder surgery in Austria (which had full-on single payer fabulous health care) and was concerned about the costs of private health insurance in the US. Koch then tipped him off to the wonders of Social Security and Medicare … and voila, the great New Deal program caused Hayek to change his mind and come to the US after all (to preach the wonders of “laissez faire”, of course.)
When a fellow, scholar or not, embodies such shocking cognitive dissonance (actually, hypocrisy) in his real life, how can anything he thinks, writes or says about any subject (other than himself) be considered in the least bit legitimate?
From the Nation: http://www.thenation.com/article/163672/charles-koch-friedrich-hayek-use-social-security
And also previously noted here at NC: http://www.nakedcapitalism.com/2011/09/friedrich-hayek-joins-ayn-rand-as-a-hypocritical-user-of-medicare.html
Here’s excerpts from the Nation article — they were just too good not to post:
“Hayek initially declined Koch’s offer [to come to the US as a Koch-funded scholar on Austrian economics]. In a letter to IHS secretary Kenneth Templeton Jr., dated June 16, 1973, Hayek explains that he underwent gall bladder surgery in Austria earlier that year, which only heightened his fear of “the problems (and costs) of falling ill away from home.” (Thanks to waves of progressive reforms, postwar Austria had near universal healthcare and robust social insurance plans that Hayek would have been eligible for.)
IHS vice president George Pearson (who later became a top Koch Industries executive) responded three weeks later, conceding that it was all but impossible to arrange affordable private medical insurance for Hayek in the United States. However, thanks to research by Yale Brozen, a libertarian economist at the University of Chicago, Pearson happily reported that “social security was passed at the University of Chicago while you [Hayek] were there in 1951. You had an option of being in the program. If you so elected at that time, you may be entitled to coverage now.”
A few weeks later, the institute reported the good news: Professor Hayek had indeed opted into Social Security while he was teaching at Chicago and had paid into the program for ten years. He was eligible for benefits. On August 10, 1973, Koch wrote a letter appealing to Hayek to accept a shorter stay at the IHS, hard-selling Hayek on Social Security’s retirement benefits, which Koch encouraged Hayek to draw on even outside America. He also assured Hayek that Medicare, which had been created in 1965 by the Social Security amendments as part of Lyndon Johnson’s Great Society programs, would cover his medical needs.
Koch writes: “You may be interested in the information that we uncovered on the insurance and other benefits that would be available to you in this country. Since you have paid into the United States Social Security Program for a full forty quarters, you are entitled to Social Security payments while living anywhere in the Free World. Also, at any time you are in the United States, you are automatically entitled to hospital coverage.”
It took far too long in this thread of comments for this truth to rise to the surface. The whole concept of “free markets” has been pushed to benefit those in control of the mechanisms of society. The method for controlling the mechanisms of society always and everywhere involve the use of government. As said, markets, at least in the sense which we know them, cannot exist in the absence of government regulation — without it they are inherently self-eviscerating in that they will always eat their young and then themselves.
This, however, is not an argument for libertarianism since if it could exist at all, it would always evolve almost at once into some form of totalitarianism. These is no such thing as “doctrinaire freedom” and that is what libertarianism proposes as its model of society. Total personal freedom is nothing more than anarchy — another utopian concept.
Ah, yes, the “science” of economics. Less competent than astrology as a predictive tool, but perhaps marginally more competent than phrenology.
the reason why hayek/mises/”austrians” is not that they are correct – rather they are clearly able to show the economics establishment emperor has no clothes.
also the deductive approach to economics by the austrians is far more intuitively appealing than unnecessary but sufficient math on mainstream economics where math is used to confuse and deceive rather than to enlighten.
austrians show clearly that economics is humanities, not some engineering or physics type of discipline.
since (macro) economics is primarily about public policy it is inseparable from politics, and that is why (convenient) monetary economists are darlings of the establishment. they provide (math based) cover for deception in the political economy.
i would venture so far to say that after keynes there has been no futher advancement in economics. to understand economics is to understand classical political economy, and that the last practitioner of that was keynes… what we have now are political hacks who can spin some math based lies.
Oh, there has been plenty real economic work — social science research — since Keynes. But it hasn’t been “mainstream” (or “Austrian”), it’s been in weird little fields like “experimental economics”.
Sorry kids, I’m sick as a dog … my balloon head spews foul-smelling greenish slime instead of entertaining word-play.
I hope to be feeling better next week … In the meantime I’m reading Keynes’ “Economic Consequences of Peace”, where he relates his time in Paris after World War One and the (insufficient, short-sighted) efforts that led to the Treaty of Versailles.
I read it once a long time ago, of all Keynes’ work it is the most accessible, has the least ‘economic jargon’ to it. Keynes is horrified by the politicians, particularly Clemenceau and Wilson.
Believe it or not, many of the resource/population/real-capital/real-output issues we discuss here (and avoid discussing elsewhere) are Keynes’ peripheral subject. He wasn’t ‘rigorous’ in the sense of MIT/Club of Rome and their ‘Limits to Growth’ but the seed was there. He was observing the period of massive economic (and population) growth that occurred during the last of the 19th century and the beginning of the 20th.
I wanted to read it after making my way through Philip Pilkingon’s (well-deserved) hit job on hack-ish Friedrich Hayek. For some reason, reading about Hayek pushed me to read Keynes instead … and take note of his ‘sensible humanity’ …
Institutionalized cruelty is both the foundation of modernity and our fatal flaw.
Clemenceau and his use of economics as a “….weapon of mass destruction”!
The Treaty of Versaille is a good instructive to the use of economics as that terrible weapon which in part led to the mass murders of WW2 (by all sides).
Given your trashing of The Road to Serfdom, I’m curious as to why Keynes would then say he was in complete agreement with it?
EXCELLENT article and most of the comments were informative as well.
If anyone is still reading the thread, where does Von Mises fit into this? I thought he was the MORE propagandistic / less academic of the two…
I used to send articles to a conservative friend and he recommended “Human Action,” so I tried to read it out of reciprocity. Proved impossible.
Also, thoughts about the “anti-militarism” aspects of the Austrian School and the fault lines (or lack thereof) that causes with the rightwing mainstream?