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« Speaking of Keynes -- Lets Talk About the One Person Who Made Keynes a Sensible Economist, Axel Leijonhufvud | Main | A Decade of Debt »

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That's right. And Hayek wasn't the only one at that time making this case. Ordeal by Planning (Jewkes) makes the same case about Britain's potential slide into totalitarianism if the advocates of planning continued to have their way. Luckily they did not for very long.

Much of how you take Road to Serfdom comes back to exactly how you think about central planning. If you take macroeconomic management and the provision of a substantial, but not totalizing collection of public goods as "serfdom", then Hayek was clearly right. If you don't think that, then he was clearly wrong about how robust liberal democracies are.

The argument is that public goods provision doesn't ignore the critique of socialism because it is contingent on precisely the point of what information is internalized in an economic transaction. The public goods argument DEPENDS on a solid understanding of the price mechanism and the critique of socialism. The same with macroeconomic management. But of course if one disagrees with this view of public goods provision and macroeconomic management (or perhaps I should use your words - if one "doesn't get the point about" public goods provision and macroeconomic management) then one would think that the critique of socialism is being ignored.

Right. Keynes didn't get the point -- in several deep dimensions, e.g. didn't get the point anout the rule of law & property rights, didn't get the ppont aboit the signling function of price & profits & losses, etc.

From Hayek's ppint of view, Keynes just didn't understand or know much economics at all -- just Freshman Marshall & an uncheritable version of Pigou.

Daniel,

First, there is a fundamental problem in public goods theory called the demand revelation problem. And if you read the Italian public finance theorist, you will know that there is an issue with parasitic pricing. And finally, there is both the Buchanan and Coase critique of Pigovianism. So there is a lot of discussion outside of the "textbook" presentation.

Second, on macroeconomic planning -- again there is a contested debate here.

But this is besides the point, that is not what the intellectual context of The Road to Serfdom was, it was instead the idea of planning within a democratic society. Also see the interview that Brad DeLong cites about Hayek and Keynes. Keynes thought he was still a British liberal, but he didn't realize how far from that position he was compelled to move. This is what is being argued. Not that Keynes willfully advocated ill-liberal policies, but the argumentative logic of his position.

Also it might be useful to read Knight's Intelligence and Democratic Action on how the progressive position is in fact fundamentally non-democratic.

Right - there are all kinds of problems with public provision which is why we prefer markets. But a proper diagnosis of the potential for public goods provision (and macroeconomic management) does not conflict with a proper understanding of the critique of socialism.

Whether other public choice issues then make public goods provision or macroeconomic management a bad idea is another question, of course.

re: "again there is a contested debate here"

Precisely, and that's all I wanted to note. Many would disagree that the issue is a misunderstanding of the critique of socialism.

I should rephrase that - "which is why our default preference is for markets".

Despite its name, The Road to Serfdom is not about slippery slope or other dynamic processes that lead us from from one intervention to another. Instead, it is about the incompatibility of comprehensive economic planning and democracy with the rule of law. It is also a cautionary story. It does not predict "serfdom" but only a conditional prediction about IF comprehensive planning THEN no democracy-rule of law.

Work on the dynamics of interventionism is to be found in Mises, Sandy Ikeda and Rizzo-Whitman.

Mario - and if I recall Hayek didn't even choose the title, right? Wasn't that the editor's decision?

But Mario it is still an unintended consequence story because the advocates do not know about the incompatibility and thus think they can get one without the other. This is the point about the British individualists who also thought they could remain individualist while pursuing collectivist planning.

Yes, Pete, there is an unintended consequence story of a conditional sort: If you do this, then you will get that.

"As Keynes's letter to Hayek about The Road to Serfdom reveals, he believed that he and Hayek were in essential agreement about the horrors of Soviet and Nazi planning, but in disagreement about the question of whether planning is the problem"

Maybe JMK means something different than H by 'planning.' And maybe H means something different by 'planning' than you think he does.

As the person who both set off the "Keynes planning" debate and also as one of the participants in the EJPE special issue on Hayek some years ago, I suppose I should throw in some comments here. So...

1) Mises clearly was looking at the Soviet model in his critique. Indeed, the amount of time he spends arguing about how one has to have money was directly inspired by the quickly failed attempt by the Soviets to eliminate money in their initial flush of idealistic enthusiasm after the 1917 revolution. They, and all other socialists/communists learned that lesson quickly (except, I gather the Pol Pot regime in its worst extremities). So, to the extent that Hayek's critique of socialist planning was based on the arguments of Mises, which I think is largely correct (Hayek added more, particularly about information), his argument against command socialist planning was ultimately based on a critique of the Soviet model.

2) The case he did talk about more directly was Nazi Germany. Curiously, and here I think you are right, Pete, he did not say all that much about the Nazi experience with command central planning, although they certainly did it. Rather he spent much time analyzing how it was that the Nazis came to power. Part of that analysis involved blaming the social democratic policies of the Weimar Republic, suggesting in more than one place that those policies increased the role of government so much that they paved the way for pushing further towards a much more serious takeover by the state under the Nazis. This is the real foundation of the slippery slope argument, to the extent that there is one.

Having brought up the slippery slope argument, let me be very clear that I accept that Hayek was issuing a warning and not an absolute prediction. Of course, the debate over this has continued since, with a number of people continuing to hold to the view that Hayek really did believe in a more simplistic version of this, one of those being the late Paul Samuelson up to pretty much the day he died (along with Farrant and MacPhail).

I did not agree with him on that matter, but I did feel that it was important that his view be heard, as it was one of the final things he published, and was clearly a matter much on his mind (and I also published the paper by Levy and Peart that criticized Samuelson's treatment of the USSR growth stats in his textbook,), and I also remind people like Greg Ransom who think that Samuelson's paper should not have been published, that he also did give Hayek credit on quite a few points, including, ultimately, on the socialist planning controversy and the role of information.

3) In a book that Pete mostly thinks well of that I am a coauthor of, in the opening chapter the argument is made that the one clear bottom line that can be made regarding arguments over capitalism and freedom and all that is that we have never seen a system that went into a permanent "command socialist" mode and remained politically democratic. We have seen market capitalist economies go temporarily into at least a command planning mode during wartime (US and UK and others in WW II, and to some extent, WW I). But they remained democratic and undid these systems once the wars were over (and part of Hayek's concern in RtS was precisely that the command plannnig mode in the UK in WW II might be continued after the war).

On this point let me add a further comment on a matter brought up in some other places by Larry White, namely about command elements in Indian planning. I will grant that this may be a borderline case, that in its early years there were some strong command elements in the essentially indicative planning system in India, while India remained a democracy. However, the major portion of those stronger elements involved state-owned companies such as in the steel industry, while some elements did go further, only to be gradually shut down later. But, as Larry agrees, that system did not go the whole hog to full-blown Soviet style detailed command planning.

The other country that was mostly market and capitalist that had indicative planning that veered into a borderline command mode for a period of time was South Korea in the 1970s. However, it was not a political democracy, but a military dictatorship under Park Chung-Hee, who was assassinated in 1979. The method of control ran through the state-owned banks who allocated investment capital to selected chaebols in selected sectors. Subsequent studies have argued that there was inefficiency in this with too much investment going into the chemical industry in particular during that period.

4) Maybe this last example was what Keynes meant by his "socialisation of investment," but there remains zero evidence that he wanted such central planning to operate even at this sectoral level, and he pretty clearly and strongly rejected it at the firm level, with the focus being on the aggregate amount of investment to achieve full employment. Pete does focus on the one place that Keynes did not add such a limiting proviso, his letter to Hayek, where he called for "more planning" although of a "moderate" sort. But, he did not use the term "central planning," and indeed remained very vague about just what he did mean. It is not at all unlikely that he meant such things as planning for government-owned and managed infrastructure (and what should be public vs private is obviously a matter of debate), and based on The End of Laissez-Faire, I think he also meant the sort of government gathering of economic data, particularly macroeconomic data, that is now done everywhere, but was not at all being done in 1926, and still not very much even as late as 1944, when, I believe, that letter was written.

This post is OT. But I would be very interested on your opinion on this: On Ideology, economics and the compatibility of Chartalists and Austrians Maybe a blog post? Thanks!

Barkley,

"I think he also meant the sort of government gathering of economic data, particularly macroeconomic data, that is now done everywhere, but was not at all being done in 1926, and still not very much even as late as 1944, when, I believe, that letter was written."

While not directly related to the central planning debate, criticism of this action of collecting macroeconomic data has been made. The critiques I have seen are not the data is useless but rather that it is overvalued in termd what it tells us about the economy when seen through a more Hayekian or Austrian lens. The use of the word "organic" by Hayek in the video comes to mind. They are aggregate data collected for the purpose of aggregation-based policies. This general critique is something that we do see in the video...not to mention classical liberal/Austrian blogs everywhere.

In my reading, the policies that follow from this kind of data...along with the more Austrian questions that are not asked or considered...strike me as the root of the biggest general critique against Keynes's legacy.

Am I off base?

Stephan,

Not sure what "OT" stands for. I am an old guy and not always up on the latest internet acronym.

Regarding your substantive question, I am one of those interested in overlaps between Keynes and Hayek, much as is Leijonhufvud. However, this is the first time I have seen anyone argue that Austrian views are compatible with chartalism. I guess I find that a stretch, and I also note that the link claims Hyman Minsky (who is praised by Leijonhufvud, and whom I admire) was a chartalist. I do not think that is a defensible claim.

John V.,

Well, I suppose you can make that case, although the government also now collects lots of other more micro data, which I suppose can be charged might be used for more detailed central planning. I guess I think it is useful to have these data, even if a really good Hayekian should be satisfied with his or her own tacit knowledge and nothing else.

@Barkley Rosser
Sorry. OT = Off Topic. My question/posting was not related to this blog post. Minsky is not MMT? Well, ask his student Randall Wray. I don't think he will go along with your claim.

Do you have a link for the Keynes letter?

Stephan,

I knew Hyman Minsky and I know Randy Wray. I think that Hy probably was mildly sympathetic to chartalism, but I would challenge you to provide chapter or verse where he clearly supported it. As for Randy, he has become more chartalist in recent years.

Barkley mentioned the dismantling of wartime controls after the war, but there is a ratchet effect because they were not completely dismantled, and that is the case for just about every war, including the introduction of income tax for the Napoleonic wars in Britain!

The desirable features of democracy are also undermined by the vote-buying motive, so there is the danger of a "tipping point" of support for "road to serfdom" policies which the US appears to be approaching.

JRT Hughes chronicled how there is a ractching upwards in the size of government after each war. See his Governmental Habit.

Rafe,

Let me see. Federal tax revenues as a percent of GDP are lower than they have been since somewhere in the 1950s, and you think that we are near some "tipping point" of going down the "road to serfdom"?

Let me see. You are a Jehovah's Witness and the End Of The World and The Return Of Jesus are coming Next Week?

Thanks Barkley, it was the level of debt that I had in mind, and the ratcheting up of government intervention. But I remain optimistic, though without any expectation of divine intervention:)

Good post, Pete. I think it is indeed fair to say that, from a Hayekian angle, Keynes just didn't get it. In "The End of Laissez Faire," he calls for "the collection and dissemination . . . of all business facts which it is useful to know." He has not grasped the significance of dispersed knowledge.

The debate between Keynes and Hayek anticipates a division within complexity theory. Keynes thinks we can master complexity by the exercise of judgment and intuition. Hayek thinks we have to put ourselves in the model and thereby face up to the destructive epistemic implications of complexity. I think complexity theorists today are divided on the same axis. John Holland, for example, wants to master complexity from above, as it were, and David H. Wolpert puts everyone (including himself) in the model to yield some deep non-computability results. Even hypercomputation doesn't get you around Wolpertian noncomputability. Some of us in the economics of experts have made the moral point that one must put oneself in the model. Others make the *epistemic* point that one must put oneself in the model. Analytical egalitarianism has both ethical and epistemic dimensions.

Please forgive the double post, but I neglected to say that in both the epistemic and ethical aspects of analytical egalitarianism, violation of the principle implies that you are not modeling a vital agent. In the moral aspect, you're not modeling the expert's incentives. In the epistemic aspect, you're not modeling the expert's cognition.

Economies that went totally central planning during the war did return to less intervention after the war, but that doesn’t mean the same thing will always happen. There is a ratchet effect in the sense that people are more willing to allow state control of the economy and their lives after a war. There are oscillations around a trend, but do we know that there is no trend, or is the trend toward more government intervention?

Listening to the left in the US, they appear to be more and more frustrated with democracy. I hear a lot of scary talk from them about how stupid the American people are, don’t know what is best for them, and need someone to force them to do the right things. My impression of the left is that many of them would gladly make the right person a dictator.

That was Hitler’s appeal to Germans. He told them to look at the mess their country was in and blame democracy for it. Democracy allows the stupid majority to make all of the decisions. What the country needed he told them was a wise dictator. I get the impression that the left is saying the same thing today.

This is not a criticism of President Obama, but I hear a lot of Democrats say that the country would be much better off if there were no Republicans blocking the President’s proposals, in other words, if Obama were able to rule as a dictator.

And I don’t know that state spending as a percent of gdp is all that good a measure of intervention. Regulation has increased dramatically without an increase in the percentage. Roger Miller’s intro econ text has graphs on regulation spending that show a steady climb until 2000, then a rocketing upwards that hasn’t leveled off.

And he has a graph of pages in the Federal Register that shows an average of 70,000 pages every year since 1970. Miller estimates the cost of regulation at about $1 trillion/yr.

Roger,

Very important point about the modeling of the expert within the model. In many ways this move mirrors the methodological stricture that a pre-Keynesian Hayek argued about not assuming that the economist has greater knowledge of the details than the actors (the opposite of the methodological stricture of Lucas that the agents have the same knowledge as the theorist) and the post Keynes argument from Buchanan about behavioral symmetry between the actor in the market and the actor in politics.

We haven't worked out yet the full implications of analytical egalitarianism for the way we do our economics, but it will not be a trivial restructuring.

I think there are some things one can see "from the outside" so to speak -- cities, for example -- for which a Holland-type approach can work. I think for most things involving economics, though, one does have to view it from the inside, which is where we live. One can view a city from the outside, but the economy? Hardly.

More on the growth of regulation. ht Cafe Hayek

http://blogs.forbes.com/waynecrews/2011/05/02/ten-thousand-commandments-how-much-regulation-is-enough/

• The regulatory “hidden tax” stands at an unprecedented 50.7% of the level of federal spending itself.
•The dramatic reality that regulations and deficits now each greatly exceed $1 trillion a year is an unsettling new development for the U.S.
•Regulatory costs exceed all 2008 corporate pretax profits of $1.463 trillion.
•Regulatory costs dwarf corporate income taxes of $157 billion.
•Regulatory costs tower over estimated 2010 individual income taxes of $936 billion by 87% — nearly double the level.

And there is more!

http://phoenix-center.org/PolicyBulletin/PCPB28Final.pdf

In this POLICY BULLETIN, we use fifty years of data and modern econometric methods to provide an estimate of the relationship between government spending on regulatory activity and economic growth and job recovery. We estimate that reducing the size of the regulatory
bureaucracy may grow the economy and invigorate the labor market. Even a small 5% reduction in the regulatory budget (about $2.8 billion) is estimated to result in about $75 billion in expanded private-sector GDP each year, with an
increase in employment by 1.2 million jobs annually. On average, eliminating the job of a single regulator grows the American economy by $6.2 million and nearly 100 private sector jobs annually. Conversely, each million dollar increase in the regulatory budget costs the economy 420 private sector jobs.

Barkley said:

"Mises clearly was looking at the Soviet model in his critique. Indeed, the amount of time he spends arguing about how one has to have money was directly inspired by the quickly failed attempt by the Soviets to eliminate money in their initial flush of idealistic enthusiasm after the 1917 revolution. They, and all other socialists/communists learned that lesson quickly (except, I gather the Pol Pot regime in its worst extremities)."

The Soviets did not "quickly learn that lesson" - they may have learned that they could not eliminate money *right away* but they did not learn that an economy must have a medium of exchange that captures a market-produced exchange value in terms of a currency, which is what Mises argued.

They stepped back from "war communism" and the elimination of money *temporarily* but they always maintained that true communism would mean a moneyless economy, and it remained a real goal that they strove for.

The ABC of Communism, written in 1920 but used for many years afterward as the basic textbook describing socialism and the future society, communism, including sections:
§ 120. The Nationalization of the banks and the unified people's bank. The bank as a central book-keeping establishment
§ 121. Money and the dying-out of the monetary system

In 1932 the Commissar of Finance described the policies they were enacting as preparation for when money would be “handed over to the museums.”

In 1951 Stalin said: "Of course, when instead of the two basic production sectors, the state sector and the collective-farm sector, there will be only one all-embracing production sector, with the right to dispose of all the consumer goods produced in the country, commodity circulation, with its "money economy," will disappear, as being an unnecessary element in the national economy."

The official Party line remained that when socialism underwent its transformation into communism, the state and money would both wither away. This was based on their interpretation of Marx, and was the same interpretation that communist parties all over the world had.

liberty,

I agree that the elimination of money remained an official goal, as did the "withering away of the state." But after the initialy try during War Communism, the Soviets never attempted it again, although one can argue that they did it a bit on the collective farms during the Stalin period with labor hours. But that was very limited.

At least one piece of honesty of the regime was that it never claimed to have achieved "true communism," but officially labeled itself a socialist economy "in transition."

Barkley,

Right, all true. This still leaves me wondering why you would say "Mises clearly was looking at the Soviet model in his critique. Indeed, the amount of time he spends arguing about how one has to have money was directly inspired by the quickly failed attempt by the Soviets to eliminate money in their initial flush of idealistic enthusiasm after the 1917 revolution. They, and all other socialists/communists learned that lesson quickly" -- again, they did not learn the lesson that Mises was making -- they still hoped one day to eliminate money.

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