[Nesster]

An interesting book review, showing just how much the political process (of any persuasion) simplifies and cherry-picks from the subtleties and complexities of its intellectual heroes.


Hayek, Friedman, And The Illusions Of Conservative Economics | The New Republic

JUST AS I WAS wondering how to start this review, along came the Sunday New York Times Magazinewith a short article by Adam Davidson with the title “Made in Austria: Will Friedrich von Hayek be the Tea Party’s Karl Marx?” One Tea Party activist reported that his group’s goal is to fill Congress with Hayekians. This project is unlikely to go smoothly if the price of admission includes an extensive reading of Hayek’s writings. As Davidson remarks, some of Hayek’s ideas would not go down well at all with the American far right: among them is a willingness to entertain a national health care program, and even a state-provided basic income for the poor.

The source of confusion here is that there was a Good Hayek and a Bad Hayek. The Good Hayek was a serious scholar who was particularly interested in the role of knowledge in the economy (and in the rest of society). Since knowledge—about technological possibilities, about citizens’ preferences, about the interconnections of these, about still more—is inevitably and thoroughly decentralized, the centralization of decisions is bound to generate errors and then fail to correct them. The consequences for society can be calamitous, as the history of central planning confirms. That is where markets come in. All economists know that a system of competitive markets is a remarkably efficient way to aggregate all that knowledge while preserving decentralization.

But the Good Hayek also knew that unrestricted laissez-faire is unworkable. It has serious defects: successful actors reach for monopoly power, and some of them succeed in grasping it; better-informed actors can exploit the relatively ignorant, creating an inefficiency in the process; the resulting distribution of income may be grossly unequal and widely perceived as intolerably unfair; industrial market economies have been vulnerable to excessively long episodes of unemployment and underutilized capacity, not accidentally but intrinsically; environmental damage is encouraged as a way of reducing private costs—the list is long. Half of Angus Burgin’s book is about the Good Hayek’s attempts to formulate and to propagate a modified version of laissez-faire that would work better and meet his standards for a liberal society. (Hayek and his friends were never able to settle on a name for this kind of society: “liberal” in the European tradition was associated with bad old Manchester liberalism, and neither “neo-liberal” nor “libertarian” seemed to be satisfactory.)

The Bad Hayek emerged when he aimed to convert a wider public. Then, as often happens, he tended to overreach, and to suggest more than he had legitimately argued. The Road to Serfdom was a popular success but was not a good book. Leaving aside the irrelevant extremes, or even including them, it would be perverse to read the history, as of 1944 or as of now, as suggesting that the standard regulatory interventions in the economy have any inherent tendency to snowball into “serfdom.” The correlations often run the other way. Sixty-five years later, Hayek’s implicit prediction is a failure, rather like Marx’s forecast of the coming “immiserization of the working class.”

THESE MATTERS OF personal style actually count for something. One of the great merits of Burgin’s book is to show how the character and the content of the free-market ideology changed when the flag passed from Hayek and Company to Friedman and Company. Despite the efforts of a small band of the faithful, the Tea Party is, and is likely to remain, more Friedman than Hayek: harder-line, more brashly confident, less concerned with getting things quite right, and without sympathy for losers.

...

A more plausible case might be made that Friedman’s prominence on the public stage led to some overestimation of his professional achievement. His most important work, particularly cited by the Swedish Academy, was on the relation between consumer spending and income. He proposed that consumer expenditure responded primarily to long-run income prospects rather than to current income, and he suggested a particular measure of those long-run prospects that he called “permanent income.” This was indeed an important and useful idea. Something like it had been anticipated in much less satisfactory form by James Duesenberry, and Franco Modigliani developed a similar and in some ways more satisfactory theory at almost the same time. Friedman’s A Theory of the Consumption Function, which appeared in 1957, was a major work by any standards; but monetarism, the doctrine that autonomous change in the supply of money is the main actor in the determination of aggregate nominal income, has not proved to be tenable analytically or empirically. His Monetary History of the United States, 1867–1960 (written with the late Anna Schwartz), while highly interesting, is not a towering intellectual achievement.

BING BING BING! Friedman hits on something there, something we all are aware of: our expectation of future earnings determines our level of spending now. In a long term income stagnation situation, we should stop spending and borrowing, which we are now doing... but we substituted real estate (and before that, tech stocks, etc etc) for income, and borrowed/lent happily while it lasted.

Any policy that does not address the overall wage stagnation of a big chunk of people will be relatively ineffective. When the future positive is the prospect of keeping your job, or getting one, there simply isn't much incentive for people to spend.

Here's something along those lines...
Inequality is Killing Capitalism by Robert Skidelsky - Project Syndicate

It is generally agreed that the crisis of 2008-2009 was caused by excessive bank lending, and that the failure to recover adequately from it stems from banks’ refusal to lend, owing to their “broken” balance sheets.

A typical story, much favored by followers of Friedrich von Hayek and the Austrian School of economics, goes like this: In the run up to the crisis, banks lent more money to borrowers than savers would have been prepared to lend otherwise, thanks to excessively cheap money provided by central banks, particularly the United States Federal Reserve. Commercial banks, flush with central banks’ money, advanced credit for many unsound investment projects, with the explosion of financial innovation (particularly of derivative instruments) fueling the lending frenzy.

This inverted pyramid of debt collapsed when the Fed finally put a halt to the spending spree by hiking up interest rates. (The Fed raised its benchmark federal funds rate from 1% in 2004 to 5.25% in 2006 and held it there until August 2007). As a result, house prices collapsed, leaving a trail of zombie banks (whose liabilities far exceeded their assets) and ruined borrowers.

The problem now appears to be one of re-starting bank lending. Impaired banks that do not want to lend must somehow be “made whole.” This has been the purpose of the vast bank bailouts in the US and Europe, followed by several rounds of “quantitative easing,” by which central banks print money and pump it into the banking system through a variety of unorthodox channels. (Hayekians object to this, arguing that, because the crisis was caused by excessive credit, it cannot be overcome with more.)

At the same time, regulatory regimes have been toughened everywhere to prevent banks from jeopardizing the financial system again. For example, in addition to its price-stability mandate, the Bank of England has been given the new task of maintaining “the stability of the financial system.”

This analysis, while seemingly plausible, depends on the belief that it is the supply of credit that is essential to economic health: too much money ruins it, while too little destroys it.

But one can take another view, which is that demand for credit, rather than supply, is the crucial economic driver. After all, banks are bound to lend on adequate collateral; and, in the run-up to the crisis, rising house prices provided it. The supply of credit, in other words, resulted from the demand for credit.

This puts the question of the origins of the crisis in a somewhat different light. It was not so much predatory lenders as it was imprudent, or deluded, borrowers, who bear the blame. So the question arises: Why did people want to borrow so much? Why did the ratio of household debt to income soar to unprecedented heights in the pre-recession days?

Let us agree that people are greedy, and that they always want more than they can afford. Why, then, did this “greed” manifest itself so manically?

To answer that, we must look at what was happening to the distribution of income. The world was getting steadily richer, but the income distribution within countries was becoming steadily more unequal. Median incomes have been stagnant or even falling for the last 30 years, even as per capita GDP has grown. This means that the rich have been creaming off a giant share of productivity growth.

And what did the relatively poor do to “keep up with the Joneses” in this world of rising standards? They did what the poor have always done: got into debt. In an earlier era, they became indebted to the pawnbroker; now they are indebted to banks or credit-card companies. And, because their poverty was only relative and house prices were racing ahead, creditors were happy to let them sink deeper and deeper into debt.

Of course, some worried about the collapse of the household savings rate, but few were overly concerned. In one of his last articles, Milton Friedman wrote that savings nowadays took the form of houses.

To me, this view of things explains much better than the orthodox account why, for all the money-pumping by central banks, commercial banks have not started lending again, and the economic recovery has petered out. Just as lenders did not force money on the public before the crisis, so now they cannot force heavily indebted households to borrow, or businesses to seek loans to expand production when markets are flat or shrinking.

In short, recovery cannot be left to the Fed, the European Central Bank, or the Bank of England. It requires the active involvement of fiscal policymakers. Our current situation requires not a lender of last resort, but a spender of last resort, and that can only be governments.

If governments, with their already-high level of indebtedness, believe that they cannot borrow any more from the public, they should borrow from their central banks and spend the extra money themselves on public works and infrastructure projects. This is the only way to get the big economies of the West moving again.

But, beyond this, we cannot carry on with a system that allows so much of the national income and wealth to pile up in so few hands. Concerted redistribution of wealth and income has frequently been essential to the long-term survival of capitalism. We are about to learn that lesson again.

Makers and Takers of course plugs into these arguments...
Harold Meyerson: What Mitt Romney’s ‘takers’ really want from government - The Washington Post

The Romney-right analysis shouldn’t be dismissed out of hand. Racial minorities, the young, single women — the groups whose share of the electorate is rising — all believe that government has a role to play in increasing opportunity and enlarging the rewards of work. They tend to support a larger government that provides more services than a smaller one with lower tax levels. That doesn’t make them “takers,” however, unless you believe that public spending on schools and on a retirement fund to which American workers contribute constitutes an illegitimate drain on private resources.

Indeed, many of these so-called takers have higher rates of workforce participation than “traditional” Americans. That is, to restate this without using the barely coded terminology of the right, Latinos and Asians have higher rates of labor-force participation than whites. While the level of labor-force participation for non-Hispanic whites was 64.6 percent, as measured by the Bureau of Labor Statistics from 2010 data, the level for Asians was 64.7 percent and for Latinos, 67.5 percent. So which group has more “takers” and which more workers?

But these industrious minorities believe that government can foster even more opportunity. A post-election American Values Survey, conducted for the Public Religion Research Institute, asked voters whether government should promote growth by spending more on education and infrastructure or should lower taxes on businesses and individuals. The groups that constitute the growing elements of the electorate all favored the spending option — 61 percent of Latinos favored it, 62 percent of blacks, 63 percent of voters under 30 and 64 percent of single women. White voters, however, preferred the lower-taxes option 52 percent to 42 percent.

On Election Day, California voters passed a tax-increase initiativeto arrest the decimation of the state’s schools and universities, with a voter breakdown very much like that in the American Values Survey. Ending decades of voter opposition to ballot measures that increased tax rates, Californians raised taxes on incomes above $250,000 and boosted the sales tax by a quarter-cent to provide more funding to K-12 schools and the state’s public colleges and universities. While white voters split evenly on the measure, 67 percent of voters under 30 backed it, 61 percent of Asians favored it and 53 percent of Latinos supported it.

Ever since the passage of Howard Jarvis’s Proposition 13 in 1978 downsized California’s taxes and public sector, a majority of the state’s white voters have rejected this kind of tax-hike initiative. As California’s Latino population grew, so did a rift in the state’s voting patterns: Aging white voters opposed dozens of ballot measures for school bond authorization, while Latino voters, whose children often made up the majority in the school districts, supported them overwhelmingly — and in heavily Latino areas, they prevailed at the polls. This year, the Latino share of California voters was 23 percent, up from 18 percent in 2008; the share of Asians rose to 12 percent from 6 percent; and the share of voters under 30 rose to 27 percent from 20 percent. Confronted with this new electorate, Jarvis’s California was consigned to history’s dustbin.

One reason support for government spending on schools and the safety net is strong within these growing constituencies is that the lot of the “maker” — the hard worker who creates wealth — is declining for most Americans, particularly for young and working-class Americans. Median household income is shrinking as the share of company revenue going to wages descends and the share going to profits increases. If more private-sector workers were able to bargain collectively for wage increases, they would be less dependent on governmental income supplements and the safety net for rudimentary economic security. By all but destroying unions in the private sector, however, the same business executives who applauded Romney’s condemnation of “takers” greatly enlarged the pool of Americans who must “take” to survive. If these self-designated makers feel beleaguered by takers, they have only themselves to blame.

[boriscleto]

Daily Kos: Surprise! Report says income inequality still getting worse in most states

[jeffkrol]

“Made in Austria: Will Friedrich von Hayek be the Tea Party’s Karl Marx?” One Tea Party activist reported that his group’s goal is to fill Congress with Hayekians. This project is unlikely to go smoothly if the price of admission includes an extensive reading of Hayek’s writings. As Davidson remarks, some of Hayek’s ideas would not go down well at all with the American far right: among them is a willingness to entertain a national health care program, and even a state-provided basic income for the poor.

IRONIC isn't it....................and smart people w/ stupid ideas........

To take one example, Friedman proposed abolishing the Food and Drug Administration because the harm done by its excessively cautious delays in approving new drugs outweighed the dangers that would come from simply making drugs freely available on the open market. How could he, or anyone, possibly know that? One can indeed imagine an immensely complicated empirical study, requiring all sorts of assumptions and approximations, the outcome of which would inevitably be clouded by complexity, guesswork, and great uncertainty. But that would win no hearts or minds. Friedman’s confident assertion just sounds like fact-based knowledge. A different sort of person would have looked for ways to speed up the FDA’s approval process.

THESE MATTERS OF personal style actually count for something. One of the great merits of Burgin’s book is to show how the character and the content of the free-market ideology changed when the flag passed from Hayek and Company to Friedman and Company. Despite the efforts of a small band of the faithful, the Tea Party is, and is likely to remain, more Friedman than Hayek: harder-line, more brashly confident, less concerned with getting things quite right, and without sympathy for losers.

bottom line:

For a serious modern reader, the rhetoric is irrelevant or, worse, misleading, or, even worse, intentionally misleading. Everyone has known for a long time that a complicated industrial economy is either a market economy or a mess. The real issues are pragmatic. Which of the defects of a “free,” unregulated economy should be repaired by regulation, subsidization, or taxation? Which of them may have to be tolerated (and perhaps compensated), at least in part, because the best available fix would have even more costly side-effects? To the extent that the MPS circle made that kind of policy discussion more difficult to have, it did the market economy a disservice.

Robert M. Solow is Institute Professor of Economics emeritus at MIT. He won the Nobel Prize in Economics in 1987. This article appeared in the December 6, 2012 issue of the magazine under the headline “The Serfdom Scare.”

[Winder]

If you read Hayek's biography you will see he was a self-described socialist in his youth and wrote about his opposition to the gold standard in the 1970's. He was working in Austria on the economic reconstruction after WWI under Mises. He got to see first hand as the rising socialist parties in Germany and Italy turned into fascist governments and it played a major role in his views and the writing of "Road to Serfdom".

But even in "Road to Serfdom" he writes in support of social safety nets and public healthcare. I doubt many Tea Party members have read "Road to Serfdom", or know enough about Hayek to have an informed opinion.

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Last edited by Winder; 11-23-2012 at 02:30 PM.

[jeffkrol]

, or know enough about Hayek to have an informed opinion.

Unfortunately that may be more of a global attribute.....

[seacapt]

Damn , when I clikcked on this I thought I'd see some pics of Selma.

[Nesster]

Damn , when I clikcked on this I thought I'd see some pics of Selma.

Salma Hayek vs. Friedrich Hayek Scorecard

Salma Hayek in Defense of Clear Thinking

I think there are some words in this second link but I have no idea what it said.

[lammie200]

Salma Hayek in Defense of Clear Thinking

I think there are some words in this second link but I have no idea what it said.

Very nice.

[GeneV]

Good points. The words "maker" and "taker" are truly misapplied in a world where hard work gets you much less than gambling or manipulation in the financial sphere.