Why Hayek matters
I was away when Eamonn gave the lecture above on the continuing importance of FA Hayek, but having had a chance to watch the speech I can understand why the room was packed out. It's a fabulous, concise explanation of why people like us at the Adam Smith Institute still revere the old economist born in Vienna a hundred years ago. Eamonn's new primer on Hayek is available from Amazon now in paperback and Kindle editions.
Ten very good things 5: Population
Many people still suppose the world will wallow and drown in over-population, unable, Malthus-style, to keep pace with the footprint they will leave upon it. Population is my fifth good thing.
5. Population
Some people in environmental lobbies seem to treat people as a kind of pollution. Although happy to see plants and other animals proliferate, they seem to regard humans as a kind of blot on an otherwise 'natural' landscape. Human beings affect the planet, and always have done. Our hominid ancestors undoubtedly caused mass extinctions with their efficient hunting techniques, and our predecessors changed the appearance of the planet as agriculture developed. More recently our industry and transport systems have changed it.
We are told by some that the Earth cannot support its projected population, having neither the food, the water, the energy or the space to sustain it. None of this is likely to be true. Just as the Green Revolution transformed agricultural output in the 20th Century, so can genetically modified crops transform food production in the 21st Century. New techniques for water purification are developed almost annually, and the Earth is not short of water to treat. Gas will supply abundant energy for decades, and following close behind it is the steady reduction in the cost of photovoltaic power. And human beings, though they are found in every habitat on the surface of the Earth, occupy only a tiny fraction of its area.
As nations become richer, their people no longer need large families to supplement the family budget and to support them in old age. Population levels off as the world becomes wealthier, and is unlikely even to approach the levels touted by alarmists.
In fact human beings are as asset, not a burden. Their creative intelligence has created opportunities for many people to live more rewarding lives well above the subsistence level that was the lot of their predecessors. Human ingenuity and technical skill have given us wonderful cities in which to interact and co-operate with our fellow humans. Their intellect and creativity have given us buildings that lift the spirit, literature that inspires, music that elevates the soul, and paintings that convey insights into the human condition.
Humankind has faced problems and has used its ingenuity to solve them. It finds ways to make resources go further, fields to produce more crops, engines that are cleaner, and advances in transport and communication that shrink the world and enable us to interact with more of our species. Julian Simon described the human imagination coupled to the human spirit as "The Ultimate Resource."
Ed Miliband and Disraeli: paternalism and interventionism
Ed Miliband seems to have appropriated Disraeli's famous slogan about 'one nation' government. Whether this is merely a meaningless catchphrase, an attempt to out-manoeuvre Cameron or has any real policy implications remains to be seen. Having raised the issue, it is interesting and instructive to reflect on nineteenth century government as well as what the phrase might imply for modern politics.
It is notable that Disraeli coined the phrase in 1844 as the 1840s were a decade which represents the high-water mark of Classical Liberal values in Britain and perhaps throughout the world - contemporary American and French had similar Classical Liberal features. That decade saw the repeal of the Corn Laws and Navigation Acts and the apparent defeat of mercantilism and economic nationalism in the UK. It saw the triumph of the Manchester school led by Richard Cobden and John Bright. It is worth remembering that these great strides for liberty were inspired by, amongst others, Adam Smith in the late eighteenth century.
Similar movements towards freedom were being made in the social sphere with, for instance, the abolition of slavery and Catholic emancipation. Fiscal retrenchment was the hallmark of mid-nineteenth century government, with great strides being made to pay down the national debt. How striking a contrast to today's politicians who fail to eliminate the public deficit and . Although Peel re-introduced the income tax in 1842, he and many other politicians were opposed to its use and aimed at its elimination. Peel's government also introduced the Bank Charter Act (1844) - a high-minded but ultimately misguided attempt to create stable, gold-backed currency. It is notable that both parties - Whigs and moderate Tories - were broadly sympathetic to these policies.
The most famous political slogan of that era is 'peace, retrenchment (cuts in government spending) and reform' - something which our modern politicians would do well to emulate. We cannot characterise the mid-nineteenth century as a period of true laissez faire as there was still a great deal of government intervention and whilst government spending was low, it is important to recognise that government was still very activist. There was much government intervention in social life via the Poor Laws and the education system. Nevertheless, the tone of times was towards liberty and equalitarianism (i.e. equality under the laws and the absence of discrimination by government) in general.
The 'one nation' position is one of paternalism and limited egalitarianism. Disraeli used the phrase as a political slogan in a bid to win the support of the new voters enfranchised in the 1867 Reform Act - an Act which created far more voters than its more famous predecessor. In this he was doubtless successful; instead of being destroyed by Reform the Tories successfully adapted. The Whig Party, in Britain (unlike the US) the party of small government and free trade was, by contrast, was consumed by the Liberals. The Tories shifted their position to appeal to the new voters and sought to portray Whiggism as heartless individualism.
The following era saw a gradual shift in political positions of which Disraeli's slogan is a signifier. Whilst Disraeli himself was a showman and a populist, his 'philosophy' such as it is represents an opposition to Manchester values, much as does Bismarck's. Gladstone's Liberals represented a more fiscally conservative, Whiggish position. The 1860s-1880s period should be recognised as witnessing the 'Strange Death of Whig England', the causes of which are contentious but bear a good deal of historical study.
Again, both parties in this period turned to a more interventionist style of government, albeit in a limited fashion. In the sphere of political thought, the 'New Liberals' emerged led by Green and Hobhouse. Herbert Spencer in The Man Versus the State (1884) categorised this shift as the 'New Toryism', a return of paternalist values blended to varying degrees with the contemporary collectivist ideas of socialism, imperialism and nationalism. By 1894 it was possible for the Chancellor WV Harcourt to announce that 'we are all socialists now' as he introduced death duties.
With Gladstone's death the Liberals emerged more strongly as the party of social democracy although the Conservatives, as they became, gradually adopted a more moderate version of this position. This point should not be too greatly over-stated, however; prior to 1914 government spending remained small by contemporary standards, there was little deficit spending and the currency was stable.
This gallop through history leaves much detail out, of course, but it should remind us of one or two very salient points. Ed Miliband is quite within his rights to adopt Disraeli's concept as his own as they both represent paternalism and interventionism. It is worrying, however, that both Miliband and Cameron laud Disraeli whereas very few politicians would adopt a Gladstonian much less a Cobdenite position (including the mis-named Liberal Democrats). It is interesting to observe how political parties tend to adopt slightly moderated versions of essentially the same position and actual ideological divides are rare.
In reality, all three major parties are offering greater or lesser degrees of managerialism. On a more hopeful note, it is also clear that ideas take a long time to become embodied as the prevailing doctrine. The ideas of Smith's generation took 40-50 years or more to become reality. It is our duty, therefore, to generate the ideas and methods to free ourselves from the welfare and regulatory state so that our grandchildren may benefit.
On National Poetry Day...
...here is one of my favourite poems by Ogden Nash, which is as appropriate now as it was when he wrote it in the midst of the US government's measures to prevent 'overproduction' during the Great Depression.
One From One Leaves Two
Higgledy piggledy, my black hen,
She lays eggs for gentlemen.
Gentlemen come every day
To count what my black hen doth lay.
If perchance she lays too many,
They fine my hen a pretty penny;
If perchance she fails to lay,
The gentlemen a bonus pay.
Mumbledy pumbledy, my red cow,
She’s cooperating now.
At first she didn’t understand
That milk production must be planned;
She didn’t understand at first
She either had to plan or burst,
But now the government reports
She’s giving pints instead of quarts.
Fiddle de dee, my next-door neighbors,
They are giggling at their labors.
First they plant the tiny seed,
Then they water, then they weed,
Then they hoe and prune and lop,
They they raise a record crop,
Then they laugh their sides asunder,
And plow the whole caboodle under.
Abracadabra, thus we learn
The more you create, the less you earn.
The less you earn, the more you’re given,
The less you lead, the more you’re driven,
The more destroyed, the more they feed,
The more you pay, the more they need,
The more you earn, the less you keep,
And now I lay me down to sleep.
I pray the Lord my soul to take
If the tax-collector hasn’t got it before I wake.
— Ogden Nash
Ten very good things 2: Bankruptcy
For the second of the very good things that tend to receive a bad press, I highlight bankruptcy.
2. Bankruptcy
When an individual or firm goes bankrupt, a legal process is instigated to discharge debts that cannot be repaid. In former times such debtors might have been put into a debtors' prison and languished there for years. The process weighs assets against liabilities and allows the debts to be discharged at some fraction of their nominal value, leaving the debtor free of the burden, albeit subject to rules of financial behaviour and with a blemish on their credit record which can last for years.
While bankruptcy undoubtedly involves some social stigma that most people would seek to avoid, it does have advantages to society as well as to the individuals it releases from debt. A discharged bankrupt is no longer burdened by the debt, and is free to work again and to earn money without it all being consumed in repayments. If he or she went bankrupt as a result of a failed business enterprise, they become free, after the passage of time, to try again. Some highly successful business people have failed to get it right the first time, and have experienced bankruptcy on the road to eventual success.
Most lenders who extend loans to business know that risks are higher among 'subprime' candidates, and set their repayment terms sufficiently high to cover the losses from those who go bankrupt. While failure might be devastating and distressing for the individual, however, it has economic and social benefits. Failure enables capital and assets to be redeployed from businesses that have not worked towards new ventures that show more promise. It is the financial equivalent of clearing out the less hardy plants and animals and leaving their ecosphere available for the hardier strains.
The economist Joseph Schumpeter spoke of the "creative destruction" wrought by innovative ideas and businesses that led to the demise of established ones. Bankruptcy is part of the process by which failing firms close down and are replaced by newer and more successful ones. Although governments might try to reduce bankruptcies and failures by propping up firms in trouble, they do the economy and the prospects for future growth no favours by doing so. The failure of some is an important ingredient in the success of others.
Ten very good things: Advertising
Some things that are good and beneficial are frequently disparaged because they are misunderstood. I have selected a few such things to put the case in favour, pointing out the good that they do. These points will be familiar to many of our readers, of course, but they might equip other people with arguments that can defend these ideas against critics.
1. Advertising
Some suggest that advertising is wasteful, diverting resources into promoting goods that might otherwise be used to lower the price. It has even been claimed that advertising is coercive, tricking a gullible public into buying goods and services by bombarding them with positive images instead of trying to sell on the basis of quality.
In fact advertising is informative. It tells the public what goods are available, in what varieties and at what prices. It is a very competitive industry, with creative minds vying with each other to find new and attractive ways of appealing to what the public is looking for, and of emphasizing the merits that people seek in the goods they buy.
Advertising is often used to promote new or improved products by announcing the edge they have over their rivals. It is self-regulated, not permitting ads that try to sell goods by making people feel inadequate or inferior without them. Instead they have to stress the positive aspects of their products.
Some intangible associations add value to products by creating an image for the product that enhances the enjoyment of it. Malt whisky in India is promoted as an aspirational product, so the young Indians who sip it enjoy not only the whisky, but the feeling that they are headed for success. And long after the whisky has gone, the memory of that feeling might endure. When some products are bought, the purchaser buys into a lifestyle linked to them by advertising, and enjoys the intangible associations they bring.
Sports companies are sometimes criticized for promoting expensive brands that young people are encouraged to buy into. But the fact is that many teenagers are still discovering who they are, and the brands help them to assert an identity linked to their associations.
Far from being wasteful, advertising promotes competition, and that keeps prices keen and quality high; and the images created for products enhance the value of those goods to the purchaser.
Individualism is not atomism
A post on ConservativeHome this morning wrote about the differences between individualism and conservatism:
While the concept of personhood is central to philosophical conservatism, so is the connectedness of each person to other people within the organic institutions of family, community and nation, each of which of which stretch out beyond ourselves not only in space, but also in time through the traditions that sustain a living culture.
The post sparked an interesting discussion on Twitter about the differences between conservatism and libertarianism. I think the writer's main point is that small-c conservatism places a lot of emphasis on tradition and community cohesion in a way that libertarianism does not. I think the writer is talking about a sort of atomism ('men are islands') that is rare in most libertarian thought. [Note: I had thought this was a Tim Montgomerie piece, but in fact it's a group blog that's written anonymously. I've changed this post to reflect that — Sam]
Adam Smith may not have been a libertarian by modern standards, but he was one of the first great liberal individualists, and he was certainly not a conservative. Yet his work was all about the power of cooperation and compassion to better the human condition. The great achievement of The Wealth of Nations was to show the productive powers of individuals working in peaceful cooperation with one another, specializing and trading with one another to both people’s benefit. The Theory of Moral Sentiments, similarly, emphasised the social nature of morality and decency. We are good because we see ourselves in others, and empathise with their plight.
Modern libertarian writers carried on this emphasis on cooperation, most notably Ludwig von Mises and FA Hayek. In Human Action, Mises is clear that all the achievements of man that we call civilization have been the result of peaceful cooperation between human beings. The ‘feelings of sympathy and friendship and a sense of belonging together … are the source of man's most delightful and most sublime experiences.They are the most precious adornment of life; they lift the animal species man to the heights of a really human existence.’
Mises’s (and my) individualism lies in his view of individual people as being the most basic unit of analysis in human affairs – only the individual acts:
The individual lives and acts within society. But society is nothing but the combination of individuals for cooperative effort. It exists nowhere else than in the actions of individual men. It is a delusion to search for it outside the actions of individuals. To speak of a society's autonomous and independent existence, of its life, its soul, and its actions is a metaphor which can easily lead to crass errors.
The questions whether society or the individual is to be considered as the ultimate end, and whether the interests of society should be subordinated to those of the individuals or the interests of the individuals to those of society are fruitless. Action is always action of individual men.
This does not mean that the fabric woven by individuals acting together is not valuable, but simply that we cannot understand society except as the product of many individuals acting together to achieve their own ends. Those ends might be selfish or they might be altruistic.
FA Hayek is even stronger about the importance of tradition and social cooperation in understanding society and individuals. The latter period of his life – in works such as The Constitution of Liberty, Law, Legislation and Liberty and The Fatal Conceit – was devoted to studying the importance of tradition in society, and the pitfalls of a rationalism that tries to fix or improve on tradition that ain’t broke.
Hayek, again, was an individualist and favoured libertarian or classical liberal institutions. He understood the power and importance of tradition as phenomena that emerged as the result of human action, not of human design – in other words, as ‘organic institutions’ that hold people together and establish very bonds of trust and empathy that allow market institutions to flourish. Hayek was an arch-skeptic of grand plans to improve the human race.
Ayn Rand’s celebration of selfishness is the aberration in the libertarian tradition, not the rule. (Indeed, she didn’t consider herself a libertarian and didn’t like people who did.)
The sort of atomism that ConHome's writer is rejecting is, I think, quite different to the sort of individualism that I and many other libertarians adhere to, and is very rare. Even the most grisly caricature of a selfish libertarian would have to admit that she could only get rich by trading with others.
The core of libertarianism is the belief that people can only prosper by cooperating peacefully with each other, socially, economically and spiritually. Individualism, yes – the interests of individual humans should always be our ultimate concern. But atomism, the idea that men are islands? No.
The organic roots of oaks and free markets
‘David Cameron will announce tomorrow that the oak tree has been dropped and the torch of freedom will once again be the Conservative party logo.’ So wrote Benedict Brogan for a tongue-in-cheek Telegraph blog. Brogan’s mirthful explanation for this ‘back to the future’ change?
The move is being promoted by Downing Street as a “decisive” switch that demonstrates the urgency with which the Prime Minister is advancing the cause of free enterprise and a more robust grip on the economy.
Hold on, Mr Cameron, good news! The cause of free enterprise can still be championed by the Tory party’s venerable cultural symbol. As a traditionalist, for example, you will appreciate these inspiring lyrics from ‘Heart of Oak’ to rouse your industrious compatriots:
’Tis to honour we call you, as freemen not slaves, / For who are so free as the sons of the waves?
Fortunately, too, free market economics is synonymous with the organic principles of generation and growth which should be at the heart of conservatism, modernised or otherwise. For in The Wealth of Nations, Adam Smith praised the ability of entrepreneurs to struggle and triumph against adversity:
The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which publick and national, as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor (II.iii.31).
In his 1974 Nobel Prize lecture, Friedrich von Hayek denoted this undirected, up-from-below phenomenon as ‘spontaneous order’:
...in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority. Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims. We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based—a communications system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed. [emphasis added].
Hayek’s discomfort with the ‘power to coerce other men’—whether for good or ill—and what Smith called ‘the extravagance of government’ and ‘the greatest errors of administration’, is another reason why a return to the Tory torch (factual or otherwise) may be a bad omen, especially if it were meant to signal, in Brogan’s mirthful rendition, ‘a more robust grip on the economy.’
As Smith cautioned, ‘What is the species of domestick industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him.’ If a decision must be made in favour of either the individual or the State, the presumption must always be made for the wisdom of individual entrepreneurs.
The stateman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it (IV.ii.10).
So, oak or torch, modernised or traditional, the Conservative party must always stand for individual initiative in economic endeavours, cognisant of the government’s circumscribed role in supporting such entrepreneurship. And that’s no laughing matter.
One hundred years of Milton Friedman
As former Federal Reserve Chairman Alan Greenspan put it: "There are very few people over the generations who have ideas that are sufficiently original to materially alter the direction of civilization. Milton is one of those very few people."
He was talking about Milton Friedman, Nobel-winning economist, libertarian policy advocate, great communicator and author of the Free to Choose book and TV series – born on this day, exactly a century ago, to Hungarian Jewish immigrant parents in Brooklyn, New York.
And Greenspan was right. For most of Friedman's professional career, from the 1930s to the 1980s, the world was dominated by government planning, economic management and control. But at last a new approach came to dominate – Friedman's approach of free markets, open trade, personal liberty and capitalism. And these things are now part of the everyday life of billions of the world's citizens.
When the Berlin Wall fell, tiny Estonia took Friedman's ideas wholesale – and reversed 1,000% inflation, a 30% drop in the economy and 35% unemployment as a result, becoming the 'Baltic Tiger'. Its young prime minister, Mart Laar, explained that Free to Choose was about the only Western economics book he could get his hands on in the Soviet times, and he did not have, as the West had, hordes of mainstream economists around to gainsay it.
After Mao's death, China opened up to Friedman's economic thinking too. The reformist Deng Xiaoping invited him to lecture there on the use of market mechanisms. Today, China's adoption of market principles is improving the lives of hundreds of millions of its citizens. India too, after decades of socialist failure, liberalised its economy in 1991, ending price controls, cutting taxes, scrapping regulations and abolishing public monopolies. Again, hundreds of millions there now enjoy rising literacy, life expectancy, and economic prospects. The people of India and China may not realize it, commented Nobel economist Gary Becker, but “the person they are most indebted to for the improvement of their situation is Milton Friedman.”
In South America too, Friedman's influence can be seen in Chile. Though he was no supporter of the dictator Augusto Pinochet, young economists who had learned under him at the University of Chicago came to dominate Chile's economic policy during those years. They cut import tariffs, replaced the ailing state pension system with one based on personal accounts, privatized farms, stabilized the currency and liberalised the financial sector. Chile became Latin America's most successful, open and competitive economy.
Ever the optimist, Friedman was confident that his ideas would, in the end, win – as they did. But for decades he was in a very small minority. From the New Deal, through the Keynesian intervention, exchange controls, nationalization and planning of the postwar years, most Western economists and politicians simply assumed that government economic management was both essential and inevitable. Meanwhile, the Soviet Union dominated Eastern Europe and exported international socialism to Asia, Africa and Latin America. It often seemed hopeless to resist. But Friedman relished the argument, winning over even his sternest opponents with his cheerful, commonsense, optimistic approach. A naturally brilliant teacher and communicator, he spoke to the wider public in his popular books, magazine columns and interviews, and of course through his hugely influential Free to Choose TV series.
Friedman addressed all the great public issues of the day – the importance of sound money, the damage done by trade barriers, the baleful effect of regulation, the folly of wage and price controls, the need for competition in the provision of education, the benefits of flat taxes, the poverty of state pension systems, the advantages of a negative income tax, and how the greatest harm done by drugs is the result of their being illegal.
He became, in fact, the world's leading exponent of personal and economic freedom – ideas that were once scorned and dismissed, but which now shape the lives of billions. Milton Friedman was the economist who changed everything.
Eamonn Butler is author of Milton Friedman: A Concise Guide.
New at AdamSmith.org: In Praise of Consumerism
We generally hear the term ‘Consumerism’ used as a term of abuse, usually by religious movements, pro-state economists, environmentalists and so on. I would argue that, properly constituted, a ‘consumerist’ society is exactly the type of society that we should be striving for.
However, part of the pejorative use of the term comes from a particular meaning attached to it. As the brief but surprisingly illuminating Wikipedia article observes, there are at least four possible meanings of the term:
i) The common use of the term giving an "emphasis on or preoccupation with the acquisition of consumer goods" (Oxford English Dictionary) – which is exactly the meaning which attracts much opprobrium
ii) The original coinage (1915) which referred to the "advocacy of the rights and interests of consumers" (Oxford English Dictionary)
iii) The economic use of the term referring to “economic policies placing emphasis on consumption”
iv) And finally “In an abstract sense, it is the belief that the free choice of consumers should dictate the economic structure of a society”.
Clearly, as Classical Liberals or Libertarians, we will see that (iv) is exactly the kind of economic order that we would like to prevail. This is the argument of von Mises in Liberalism that:
The social order created by the philosophy of the Enlightenment assigned supremacy to the common man. In his capacity as a consumer, the “regular fellow” was called upon to determine ultimately what should be produced, in what quantity and of what quality, by whom, how, and where... The much decried “mechanism” of the free market leaves only one way open to the acquisition of wealth, viz., to succeed in serving the consumers in the best possible and cheapest way.
This must be contrasted to an economic order in which producers are able to dictate to consumers what quantity of quality and of goods they should receive and at what prices, rather than having that determined by, in the long-run, the subjective desires of consumers. In a free market*, producers will be unable to dictate to consumers except in a very few cases, as Hayek and von Mises pointed out. However, armed with the power of governmental intervention, producers will be able to create cartels and monopolies and exploit consumers. This is what Deirdre McCloskey recently pointed out as have many others.
