Explaining Austrians

I ran across this article yesterday and thought it did a nice job of tying the last few posts together and wrapping it in a nice little bow: Making Sense of Friedrich A. von Hayek:

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...

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...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...

 Making Sense of Friedrich A. von Hayek (Brad DeLong WCEG)