One way to conceptualize it all is to think of it as the shape of a river:

The first current is the Adam Smith current, which makes the classical liberal bid: Smith claims that the system of natural liberty; with government restricted to the rule of law, infrastructure, defense, and education; is the best of all social arrangements.

This first current is then joined by the Karl Polanyi current: Polanyi says that, empirically, at least in the Industrial Age, the system of natural liberty fails to produce a good-enough society. The system of natural liberty turns land, labor, and finance into commodities. The market then moves them about the board in its typically disruptive fashion: “all that is solid melts into air”, or perhaps “established and inherited social orders are steamed away”. But land, finance, and labor–these three are not real commodities. They are, rather, “fictitious commodities”, for nobody wants their ability to earn a living, or to live where they grew up, or to start a business to be subject to the disruptive wheel of market fortuna.

The social disruption produced by allowing the prices of these “fictitious commodities” to be set by market forces is too great to be sustained. Politics will not allow it. And so a good society needs to regulate: A good society needs to regulate the market for land so that people are not thrown off of what they have good reason to regard as theirs even if they lack the proper pieces of paper. A good society needs to regulate the market for finance in order to maintain full employment and price stability. A good society needs to regulate the market for labor to ensure that everyone has the opportunity to work at a living wage.

Thus we must move forward from classical liberalism to social democracy.

That is Karl Polanyi’s argument. And it is convincing. Classical liberalism supports and justifies economies that produce a great deal of unnecessary human misery: that seems very, very clear indeed by the time of the Great Depression. As John Maynard Keynes wrote in his 1926 essay, “The End of Laissez Faire”, nineteenth and early twentieth-century history teach one big lesson:

It is not true that individuals possess a prescriptive ‘natural liberty’ in their economic activities. There is no ‘compact’ conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately. We cannot therefore settle on abstract grounds, but must handle on its merits in detail… distinguish afresh the Agenda of government from the Non-Agenda; and… devise forms of government within a democracy which shall be capable of accomplishing the Agenda…

Why then was classical liberalism so strong at the end of the nineteenth century? Keynes’s view:

The early nineteenth century… harmonised the conservative individualism of Locke, Hume, Johnson, and Burke with the socialism and democratic egalitarianism of Rousseau, Paley, Bentham, and Godwin…. Nevertheless, that age would have been hard put to it to achieve this harmony of opposites if it had not been for the economists…. To the philosophical doctrine that the government has no right to interfere, and the divine that it has no need to interfere, there is added a scientific proof that its interference is inexpedient…. The corruption and incompetence of eighteenth-century government… material progress between 1750 and 1850 came from individual initiative, and owed almost nothing to the directive influence of organised society… the innovations of Darwin…. The economists were teaching that wealth, commerce, and machinery were the children of free competition–that free competition built London. But the Darwinians could go one better than that–free competition had built man…. Socialist interferences became, in the light of this grander synthesis, not merely inexpedient, but impious….

These reasons and this atmosphere are the explanations… why we feel such a strong bias in favour of laissez-faire…. We have not read these authors…. Nevertheless we should not… think as we do, if Hobbes, Locke, Hume, Rousseau, Paley, Adam Smith, Bentham, and Miss Martineau had not thought and written…. I have said that it was the economists who furnished the scientific doctrine by which the practical man could solve the contradiction between egoism and socialism…. I hasten to qualify…. It is what the popularisers and the vulgarisers said…. The popularity of the doctrine must be laid at the door of the political philosophers of the day, whom it happened to suit, rather than of the political economists…

Classical liberalism–laissez-faire–was a mighty intellectual current. But empirical reality was mightier still, especially in the form of the Great Depression. And so the main channel became social democracy. And so, I think, it remains today.

But as the river entered its delta, it did spread out. There are three other channels in the delta besides Polanyi-style social democracy: call them Leninism, Keynesianism, and Hayekism:

  1. Lenin says the social democracy or democratic socialism is unstable. The bourgeoisie is hegemonic. It will turn the mechanisms of the democratic state to its own purposes. What is needed is aggressive communism to exterminate the bourgeoisie as a class. Only after the aristos and the bourgeoisie and the hep-men and the kulaks and the careerist bureaucrats have been eliminated can a properly-good society be built.

  2. Keynes says that we really need much less social democracy (or democratic socialism) than the main Polanyi current believes. Simply stabilize aggregate demand at a high level via clever central bank financial engineering, and people will not mind that the market treats the “fictitious commodities” like commodities. Moreover, the taste-making and the thrift-promoting virtues of the bourgeoisie sitting at the top of a fairly-steep socioeconomic pyramid are a feature, not a bug, for a good society.

  3. Hayek says that the problem with classical liberalism was that it was not pure enough. The government needed to restrict itself to establishing the rule of law and to using antitrust to break up monopolies. It was the overreach of the government beyond those limits, via central banking and social democracy, that caused all the trouble. A democratic government needs to limit itself to rule of law and antitrust–and perhaps soup kitchens and shelters. And what if democracy turns out not to produce a government that limits itself to those activities? Then, Hayek says, so much the worse for democracy. A Pinochet is then called for to, in a Lykourgan moment, minimalize the state. After social democracy has been leveled and the rubble cleared away, then–perhaps–a limited range of issues can be discussed and debated by a–limited–restored democracy, with some kind of group of right-wing army officers descended from latifundistas Council of Guardians in the background to ensure that property remains sacred and protected, and the government small enough to fit in a bathtub.

And as you study the thought of Hayek, recognized that there are three very different and distinct subcurrents reinforcing, opposing, and confusing each other:

The Good Economist Hayek is the thinker who has mind-blowing insights into just why the competitive market system is such a marvelous societal device for coordinating our by now 7.2 billion-wide global division of labor. Few other economists imagined that Lenin’s centrally-planned economy behind the Iron Curtain was doomed to settle at a level of productivity 1/5 that of the capitalist industrial market economies outside. Hayek did so imagine. And Hayek had dazzling insights as to why. Explaining the thought of this Hayek requires not sociology or history of thought but rather appreciation, admiration, and respect for pure genius.

The Bad Economist Hayek is the thinker who was certain that Keynes had to be wrong, and that the mass unemployment of the Great Depression had to have in some mysterious way been the fault of some excessively-profligate government entity (or perhaps of those people excessively clever with money–fractional-reserve bankers, and those who claim not the natural increase of flocks but rather the interest on barren gold). Why Hayek could not see with everybody else–including Milton Friedman–that the Great Depression proved that Say’s Law was false in theory, and that aggregate demand needed to be properly and delicately managed in order to make Say’s Law true in practice is largely a mystery. Nearly everyone else did: the Lionel Robbinses and the Arthur Burnses quickly marked their beliefs to market after the Great Depression and figured out how to translate what they thought into acceptable post-World War II Keynesian language. Hayek never did.

My hypothesis is that the explanation is theology: For Hayek, the market could never fail. For Hayek, the market could only be failed. And the only way it could be failed was if its apostles were not pure enough.

The structure of the argument is familiar: We first see it in the syllogism:

  1. YHWH had promised victory to his people Israel if they were faithful.
  2. We tried to be faithful.
  3. Here we are captive in Babylon.
  4. Clearly we were not faithful enough to YHWH.
  5. We need to strive much harder to be more faithful to YHWH in the future.

But that the argument is familiar to us all does not make it right.

And, indeed, right now as I am opening my mail I find, from the President of the Cato Institute:

Scan Aug 6 2014 1 20 PM pdf 1 page

“Pure capitalism”. Impure capitalism, you see, doesn’t work. The blurb from Charles Koch–which did not scan–is: “Required reading…. Shows how our economic crisis was a failure, not of the free market, but of government.”

Enough said?

The Political Economist Hayek is the founder of the Mont Pelerin Society, who sets as his post-World War II lifetime task the rollback of social democracy. That is the Hayek who, we think, urges Margaret Thatcher in the 1980s to pull a Pinochet in Britain on the Labour Party and the United Mine Workers. She answers him thus:

The progression from Allende’s Socialism to the free enterprise capitalist economy of the 1980s is a striking example of economic reform from which we can learn many lessons. However, I am sure you will agree that, in Britain with our democratic institutions and the need for a high degree of consent, some of the measures adopted in Chile are quite unacceptable. Our reform must be in line with our traditions and our Constitution. At times the process may seem painfully slow. But I am certain we shall achieve our reforms in our own way and in our own time…

The original letter from Hayek appears to be missing from the places it should be. I suspect it was a real doozy.

With respect to this Hayek, I believe that three important questions naturally suggest themselves: Why the urgency of the task? Why the certainty of the aim? WTF with democracy and Pinochet?

Why the urgency of the task? The post-World War II world outside of the Iron Curtain sees remarkable prosperity: rapid growth, the egalitarian distribution, an increase in the human freedoms along nearly every dimension. The post-World War II social democracies are neither bureaucracies that stifle enterprise and produce economic stagnation nor murderous Jacobins. To the east across the Iron Curtain remains the great grave threat of Stalin. Why not declare a domestic political truce in the west and focus on the Cold War?

The answer, I think, is that how you really believe that social democracy was The Road to Serfdom–that German social democracy had led to Weimar which led to Hitler by sapping the love of liberty and independence of the people, and that the same process was already well into train in the Anglo-Saxon democracies. Why Hayek thought this as decade after decade went by with no great upward leaps in the degree of central planning after Attlee’s prime Minister ship is not at all clear. What is clear is that he greeted the stagflation of the 1970s as evidence that he had been completely right all along.

Perhaps it was Hayek’s social conservatism allowed him to be confident that he was right even during the days of prosperity in the 1950s and 1960s. Uppity Negroes, uppity women, uppity hippies–all, to him, signs of deep moral and spiritual decay that by the logic of The Road to Serfdom had to bring economic and then political catastrophe in their train. But this is speculation.

Why the certainty of the aim? this, I think, is clear. Hayek was not a believer in technocracy. For Hayek, the government would always be the tool of the ruling class. The ruling class might, briefly, be the envious poor who would destroy the economy by confiscating entrepreneurial wealth and then sharing it out. The ruling class might be the monopolists. The ruling class might be the “New Class” of anti-entrepreneurial do-gooder social-worker types. In any case, the results of giving the government more power would be bad. Much better to limit the government to establishing the rule of law and breaking up private monopolies via antitrust. (And Hayek’s students would quickly ditch that last part.)

But in addition there is a fourth possible ruling class: one modeled after the Habsburg aristocracy that ruled the land in which Hayek was born.

WTF with democracy and Pinochet? it is very clear that Hayek was very comfortable saying that he would much rather have an authoritarian classical-liberal government then a democratic government that followed “illiberal” economic policies. But where are these authoritarians respect the rule of law supposed to come from? Why should governments that do not respect the lives of their people–that throw people out of helicopters into the South Pacific–or the liberty of their people–that “disappear” critics who cross the line and are too strident–respect the property of their people? Both theoretical and empirical considerations would tend to teach the lesson respect for the rule of law is a seamless garment: governments committed to respecting free speech and free elections would seem to be much more likely to commit themselves to respecting property than those that did not. Yet Hayek does not see it in the way I would regard as natural. Why not?

The natural place to look is, I think, to recognize that Hayek was not born on the shores of the North Atlantic. The North Atlantic’s dictators–Adolf Hitler, Francisco Franco, Vidkun Quisling, Philippe Petain, Antonio Salazar–are none of them prizes. But Hayek was formed in Austria. From his perspective the property and enterprise respecting Imperial Habsburg government of Franz Josef eager to make no waves, to hold what it has, and to keep the lid off the pressure cooker appears not unattractive. This is especially so when you contrasted would be really existing authoritarian alternatives: anti-Semitic populist demagogue mayors of Vienna; nationalist Serbian or Croatian politicians interested in maintaining popular legitimacy by waging class war or ethnic war; separatists who seek independence and then one man, one vote, one time. An “authoritarian” after the manner of Franz Josef looks quite attractive in this context–and if you convince yourself but they are as dedicated to small government neoliberalism as you are, and that the Lykourgan moment of the form will be followed by soft rule and popular assent, so much the better. And if the popular assent is not forthcoming? Then Hayek can blame the socialists, and say it is their fault for not understanding how good a deal they are offered.


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