Readers of this Blog know that I have a longstanding interest in the debate over the scope of the federal government’s power to regulate the economy under the Constitution. I am also inclined to take the Tea Party Movement seriously as a political phenomenon rather than writing them off as a group of buffoons or extremists, unworthy of attention. For that reason, I read with some interest Kate Zernike’s article in the New York Times on October 2 that discussed the writers whose books are most often said comprise the intellectual foundation of the Tea Party movement.
Taking pride of place among the “long-ago texts” highlighted in the article is Friedrich Hayek’s 1944 book The Road to Serfdom. Hayek is often cited by the movement’s followers for his argument that a government that intervenes in the economy will inevitably intervene in every aspect of its citizen’s lives. If one accepts this premise, it is easy to understand why members of the Tea Party Movement reacted with hostility to the Troubled Asset Recovery Program (TARP), health care reform, and the bailout of the domestic auto industry. For Tea Party followers, these separate policies – when viewed together — comprise a centrally planned economy reminiscent of the Soviet Union’s infamous Five Year Plans.
As I have explained elsewhere, some of Hayek’s devotees even argue that we should interpret the Constitution’s Commerce Clause as if the founders of our nation sought to maximize market competition free from government restraint along the lines of Hayek’s theories.
Defenders of the federal government’s intervention in the economy rely upon their own “long-ago text,” the writings of John Maynard Keynes. Keynes argued that counter cyclical public spending could be used to counteract economic downturns. His theories hold that in times of high unemployment the government can use deficit spending in order to stimulate demand (i.e., through public works projects) and that this spending will increase employment.
While Hayek and Keynes have traditionally been placed at the two ideological extremes of economic theory, the views of both men suffer when their major premises are exaggerated by their followers. Keynes himself admitted that his views evolved over time and that he no longer agreed with some of his writings. It is fair to say that Keynes was something of a slippery target when it came to being pinned down on specifics.
Some evidence that the views of Keynes and Hayek may not be as diametrically opposed as their followers often allege can be seen in the letter that Keynes wrote to Hayek after the publication of the The Road to Serfdom. In the letter, Keynes claims to agree with almost everything that Hayek wrote. In fact, several complimentary sentences from the letter were used as a blurb on the back cover of the paperback edition of Hayek’s book.
Essentially, Keynes agreed with Hayek that a completely centralized economy would be undesirable, while noting that Hayek himself accepted some forms of government regulation as permissible. His main criticism of The Road to Serfdom was that Hayek never explained how much government regulation was too much regulation:
You admit … that it is a question of knowing where to draw the line. You agree that the line has to be drawn somewhere, and that the logical extreme is not possible. But you give us no guidance whatever as to where to draw it…. As soon as you admit that the extreme is not possible … you are, on your own argument done for, since you are trying to persuade us that so soon as one moves an inch in the planned direction you are necessarily launched on the slippery path which will lead you in due course over the precipice.
(This famous portion of Keynes’ letter is quoted in an excellent 2006 essay by Robert Skidelsky which, among other strengths, draws interesting parallels between Hayek and George Orwell).
Hayek attempted to answer Keynes’ question on where to draw the line with his book The Constitution of Liberty published in 1960. It is this book, more than The Road to Serfdom, which strikes me as a major influence on the intellectual arguments of the Tea Party Movement. It is difficult to read The Constitution of Liberty today without observing the many ways in which its arguments have been carefully extracted and used to deny that the federal government has any legitimate authority to regulate health care or the financial markets.
[As someone who teaches Constitutional Law, Securities Regulation, and Immigration Law, I would be greatly pleased if Hayek used his opposition to excessive government regulation of the economy as a basis for criticizing government control over immigration. Had Hayek advocated in favor of open borders, as some of his self-professed followers have subsequently done, then I could critique his theories across all three of my primary teaching areas. Alas, Hayek defended the role of the government to pick and choose among potential immigrants as a means of favoring persons who (government planners believed) would be more likely to acculturate. By waffling on immigration, Hayek deprived me of a consistent theory that would tie all three of my subjects together.]
Perhaps because Hayek is forced to be more specific in outlining his theories in The Constitution of Liberty, rather than relying upon generalities as he did in The Road to Serfdom, I do not believe that the later book has aged as well. Lest anyone be tempted to stop reading immediately on the grounds that any critic of Hayek must be blinded by a “liberal bias,” I will link here to a critical review of The Constitution of Liberty by Jacob Viner, an economist often cited as having helped to inspire “the Chicago School” of economics theory.
In my opinion, Hayek’s weakness is that he sees the world he lives in very clearly, but that he errs in deriving eternal principles from what is in essence a transitory stage in the evolution of global markets (of course, one could criticize Karl Marx on the same basis).
For example, he argues that an economy that develops free of government control will naturally come to incorporate beneficial social arrangements, through the free choices of its participants. These naturally occurring arrangements will of necessity be preferable to state-planned social arrangements, he argues, because state planners will never have information regarding the wants and needs of the public that is comparable to the information available to market participants.
Of course, we now appreciate the fact that the economy of the United States during the 1950s blithely supported tobacco companies and industrial polluters who were imposing unseen and long-term health costs on the population (call this the “Mad Men” economy). The regulation of tobacco products by the federal government, and the passage of the Clean Water Act and the Clean Air Act, constituted significant restrictions upon the free choices of market participants. We are all better off because of these government interventions. Would a similar result have occurred without government intervention?
Similarly, Hayek argues that the economic progress of the masses is only possible if we allow an elite minority to amass significant material and financial wealth. He argues that economic progress occurs when a small vanguard stimulates demand for material goods among the broader population, who naturally desire the comforts that they observe the elite enjoying. The increased demand will lead to a greater production of material goods and more jobs for the masses, which will allow an increase in wealth to expand throughout the society. Hayek’s economic “story” only works, however, if the increased production jobs stay in the United States. When companies ship production jobs overseas, it is the living condition of foreign workers that gets raised and not domestic workers (call this the “Outsourced” economy).
Most importantly, Hayek’s argument that optimal social benefits can result from an evolutionary process of free competition amongst firms, rather than through central government planning, elevates gradualism over decisive government action. This leaves us with no options when financial markets seize up, short-term credit becomes unavailable, and, in the memorable words of John McCain, “the economy is about to crater.” It may be true that the existing system of financial regulation has failed to keep pace with changes in the marketplace and with a growing element of systemic risk among inter-connected markets. I believe that regulation needs to change and evolve in response to changes in the industry that it oversees. However, even conceding the inadequacy of current law, it is difficult to see how the complete absence of financial regulation would have prevented the Financial Meltdown of 2007.
Hayek’s observations on the risk of centralized government planning were timely in the face of the rising influence of the Soviet Union and China as viable economic models. His focus on the expansion of material wealth in the United States as an example of the benefits of mildly regulated competition is, in retrospect, an example that reflects the post-World War II boom domestically and the shambles of Europe’s post-war economy. Hayek made important contributions to our understanding of economics, of course, but many of the arguments that his followers have adopted as undeniable truths seem to me to be inextricably linked to their particular time and place.
By the end of The Constitution of Liberty, Hayek reveals himself to be much less of an absolutist in defense of unregulated competition than his followers. This should come as no surprise. In the Road to Serfdom Hayek telegraphed his acceptance of a state role in regulating the economy. Far from advocating a laissez faire approach to regulation, Hayek actually justifies a role for the state as the enforcer of a legal framework designed to control competition – he defends laws that mandate safe work environments and minimum wages, defends laws that prevent polluters from externalizing their costs onto their neighbor, and defends laws that penalize fraud and deception. He argues that state regulation is legitimate if it promotes competition, and illegitimate if is it is designed to stifle competition. It turns out that there is some middle ground between Hayek and Keynes after all.
One of the arguments in favor of health care reform and financial markets reform is that the prior legal regimes did not prevent market participants from externalizing their costs onto others. We can argue over whether that is true or not, and over whether the legislative reforms enacted under the Obama administration do a better or worse job of forcing competitors to internalize their costs, but it is a misreading of Hayek to argue that the very attempt to regulate the market is mistaken.
In fact, as I read The Constitution of Liberty, Hayek would likely have agreed with Theodore Roosevelt, who wrote the following about the industrial age in his Autobiography:
[A] few men recognized that corporations and combinations had become indispensable in the business world, that it was folly to try to prohibit them, but that it was folly to leave them without thorough-going control . . . They realized that the government must now interfere to protect labor, to subordinate the big corporation to the public welfare, and to shackle cunning and fraud . . .
Yet somehow Friedrich Hayek has come to symbolize an extreme form of hostility towards government economic regulation. As often happens (see, e.g., Adam Smith), Friedrich Hayek has become more important for the principles that he supposedly stands for than for what he actually said.