Monday, January 19, 2009

Samuelson, Hayek and the ‘inevitability’ thesis

Historical debate between Hayek and Samuelson about mixed economy and welfare state  revived by two of my econ professors in their new paper (Hayek, Samuelson, and the logic of the mixed economy?).

Professors Farrant and McPhail analyze Hayek’s ‘inevitability’ thesis (“each step away from the market system and towards social reform of the welfare state is inevitably a journey that must end in a totalitarian state”) and argue that the confusion surrounding this thesis is attributable to Hayek himself, despite Hayek’s strong disagreement with the way Samuelson explained this topic in his textbook Economics (11th edition).

...Much of the apparent confusion over the inevitability thesis, we suggest, is largely attributable to Hayek himself (with the water muddied further by the secondary literature on the Hayek–Samuelson exchange), with Samuelson having ready cause to read Hayek as making an ‘inevitability’ claim about the situational logic supposedly inherent to the mixed economy since Hayek often suggested that the logic of the mixed economy and redistributive welfare state ultimately and inevitably resulted in a totalitarian polity.

...Hayek repeatedly appears to consider the mixed economy and welfare state practices to have their own inherent logic, which, once set into play by government policy to redistribute income and attain social justice, apparently necessitates ever-further government intervention, the government perhaps ultimately finding itself inexorably “driven to establish an essentially totalitarian system” (Hayek, 1978, p. 301). Again, the above illustrates the immense importance Hayek placed on his oft-repeated statement that “if you don’t mend your principles you will go to the devil”’(1978, p. 105).

...we note that Hayek repeatedly suggests that attempts to achieve social justice ultimately tend towards full-blown command planning and a totalitarian polity....Samuelson correctly understands Hayek to oppose any welfare state practices that involve income redistribution because they apparently lead, in Hayek’s view, to political serfdom...Many are called as prophets. . . few are chosen as seers by the scorekeeping historian. . . [f]orty years after Friedrich Hayek wrote down his nightmare of the welfare state leading remorselessly to the totalitarian murder of freedom, Scandinavians enjoy freedom second to none that the world has ever seen (Samuelson, 1983b, p. 59).

The journal also has an essay by Samuelson, who argues that he stands by his initial assessment of The Road to Serfdom and the ‘inevitability’ thesis. Samuelson tries to formally settle the unresolved intellectual bicker he and Hayek had back in the 70s and 80s.

...Hayek over-praised the optimality of individualistic spontaneity. Charles Darwin’s genius long earlier had eclectically enumerated both the pluses and minuses of individualistic natural selection...Having spent a lifetime near libertarians, I can confirm that they are an individualistic idiosyncratic bunch. For example, my conservative mentor Gottfried Haberler was defined by Mises to be  “communist.” The number of Mt. Pelerin resignations never quite reached the number of its new members.)..Anthropological experts in “content analysis,” focusing their microscopes on the Hayek text (1944),might score its impact to be traceable to both (1) its version of history and (2) its projection of the future.

…If Hayek believes that the spending of newly printed currency on employment and consumption will worsen our current terrible depression, then Hayek is a nut. Alas, one fatal error eclipses a few elementary true truths รก la Mises and Hayek: Easy money now often does entail tighter money later which will come as a surprise to uncompleted projects and new contingent contemplated investment projects.

...Two-thirds of a century after the book got written, hindsight confirms how inaccurate its innuendo about the future turned out to be. Consider only Sweden’s fig-leaf middle way. As I write in 2007, Sweden and other Scandivanian places have somewhat lowered the fraction of GDP they use to devote through government. But still they are the most “socialistic” by Hayek’s crude definition. Where are their horror camps? Have the vilest elements risen there to absolute power? When reports are compiled on “measurable unhappiness,” do places like Sweden, Denmark, Finland and Norway best epitomize serfdoms?

...No good deeds go unpunished! Never then, or before, or later did I have reason to think or to say: Yes, I have misunderstood you. Yes, I have incorrectly quoted from you. Mea culpa. Exactly what I have written above evaluating The Road to Serfdom is precisely what I believed about it in the 1940s and continued to believe about it up to the present 2007.

Consider this by Hayek (Foreword to the 1956 American paperback edition of The Road to Serfdom, pp44 in the definitive edition of The Road to Serfdom):

The hodgepodge of ill-assembled and often inconsistent ideals which under the name of the Welfare State has largely replaced socialism as the goal of the reformers needs very careful sorting out of its results are not to be very similar to those of full-fledged socialism. This is not to say that some of its aims are not both practicable and laudable. But there are many ways in which we can work toward the same goal, and in the present state of opinion there is some danger that our impatience for quick results may lead us to choose instruments which, though perhaps more efficient for achieving the particular ends, are not compatible with the preservation of a free society. The increasing tendency to rely on administrative coercion and discrimination where a modification of the general rules of law might, perhaps more slowly, achieve the same object, and to resort to direct state controls or to the creation of monopolistic institutions where judicious use of financial inducements might evoke spontaneous efforts, is still a powerful legacy of the socialist period which is likely to influence policy for a long time to come.

Apparently, Hayek overstretched his warnings and considered that economic planning and reforms would lead to (ultimately result in) a totalitarian state. For the sake of justifying freedom, he blinded himself to the possibility of having a managed mixed-economy. See the success of the Nordic countries. Also, it is hard to believe that  the US (and other Western countries) would end up being  totalitarian states, especially after the financial crisis (with all those bail-out interventions and activist government policies).

I remember having these discussions in Professor McPhail’s senior seminar class (History of Economic Thought) in Fall 2007. The original scanned letters between Hayek and Samuelson were pretty interesting! Btw, the first economics book I purchased (while I was doing A levels economics) was written by Samuelson and Nordhaus. Their book is probably the best introductory textbook in economics. Also, every time I read Hayek’s pieces (apart from The Use of Knowledge in Society), I find it hard to believe him (realistically speaking) despite the persuasive arguments he presents.

Here is a popular video about the road to serfdom.

More discussion about the topic here.