August 03, 2006

Aug. 3, 2006: #7 Hayek and Capitalism, London Sch. of Econ.

This is relevant to understanding how far Trudeau and today's Liberals diverged from classical liberalism and Hayek's explanation of how capitalism works.

Apparently, the London School of Economics professor Friedrich Hayek did not influence the wealthy Trudeau to the degree that Harold Laski did.

Friedrich Hayek and the Future of Liberty The Independent Institute, May 16, 2001, speakers Alan O. Ebenstein and Charles W. Baird

[....] In 1931, after 10 years of working for and with Mises, [Friedrich] Hayek went to the London School of Economics and Political Science, ... gained worldwide renown. Probably the most famous name now associated with the London School of Economics during this period is Harold Lasky, and a considerable part as a result of Lasky’s influence, the LSE, ... gained a reputation as a haven for socialist thought. But there was another tradition at the London School of Economics, which can be traced to its first professor of economics there, Edwin Cannan, one of the greatest scholars of Adam Smith and a classical liberal in his own right.

There was much in Cannan’s thought that [Friedrich] Hayek found congruent with his own: emphasis on the slow gradual, transformation of societies and institutions. Now I think this is one of the really core Hayekian ideas is that institutions and societies are not planned, they cannot be directed and advanced, rather they have to be allowed to emerge. And this was an idea that was in Cannan’s thought, and as well, this process, which Hayek termed spontaneous order,” is also a concept that he found in the work of Carl Menger.

[....] Hayek was brought to the London School primarily as an opponent to John Maynard Keynes [....]

Hayek and the Societal Division of Knowledge

[....] “There are many socialists,” Mises had written, “who have never come to grips in any way with the problems of economics…. They have criticized freely enough the economic structure of a ‘free’ society, but have consistently neglected to apply to the economics of the disputed socialist state the same caustic acumen…. They invariably explain how, in the cloud-cuckoo lands of their fancy, roast pigeons will in some way fly into the mouths of the comrades, but they omit to show how this miracle is to take place.” How would a socialist society practically be organized? It is not enough merely to point to deficiencies under capitalism.

Hayek’s brilliant insight is that there is a division of knowledge among all of the members of a society. Knowledge does not exist anywhere in a compact, complete whole. Rather knowledge is fragmented. It exists in the minds of all of the members of a society. .... how is it the case that you form a society when everyone’s experience is individual? What sort of society is going to be the most effective to accommodate divided knowledge, knowledge that’s divided among the minds of all the people in a society?

Hayek’s idea of the division of knowledge is very simple, but it is an idea that has potentially profound consequences. Hayek thought that the division of knowledge precludes the possibility of classical socialism of the central management and direction of the nation’s economy from one place. The division of knowledge, he thought, requires capitalism. Only under a system, whatever it’s other flaws, in which the reality of divided knowledge is accommodated, is a materially productive society possible, Hayek believed.

... “Economics and Knowledge,”

If knowledge is divided, how is information communicated? .... Hayek believed that the profit and price system, capitalism, is primarily a system that conveys information. Prices and profits are information. Prices reflect the relative supply of and demand for different goods. Mises uses as an excellent example of how a building would be built under a socialist system to demonstrate the importance of prices. What type of wood should be used? Should bricks or concrete or steel be used in construction? What should the relative amounts of labor and capital that go into construction be? Without a price system none of these questions can be answered in the most cost effective and rational manner. Capitalism, through utilizing prices and profits, has been literally the only system that can deliver goods in an advanced technological society.

And I think what’s really the core question is: how is information about the relative amounts of goods and services to be communicated? How do you know whether you should make building out of wood or out of steel or out of concrete? And it’s the price and profits system in capitalism that conveys that information.

Prices are dependent on private property: unless individuals have exclusive control over property and the ability to exchange it on the terms that they see fit, prices are impossible. This is the problem.

This was the problem in the Soviet Union and in other command economies during the 20th century. With no private property there is no price, and without private properties there cannot be rational economic calculation. Moreover, profits are as essential to prices to a capitalist order.

Later in his career, Hayek further explored the concept of order without orderers or “spontaneous order.” The role of the businessperson who makes profits is essential to the capitalist order. Who’s the best person to be entrusted with resources? In capitalism, this question is ideally answered by the individuals who make the most [profits]. That is, the individuals who use resources most effectively. Profits and prices convey information. They are essential, Hayek thought, to a free market order.

Along these lines, I think what’s crucial in evaluating the role of the entrepreneur is that the ability to make prices, [the] ability to make profits is not necessarily something that people can tell you how they did it. All you know is that somehow they’re able to conduct effective enterprises, and conduct effective businesses. And that’s one of the great strengths of capitalism. It’s not the case that in advance, in the same way of trying to plan out a society or to try to plan out an economy, that you can verbally say before how you’re going to make the profit. All you know is that in a capitalist system the people who are the most effective in making profits through experience are the individuals who will have more resources. Whereas in a command system there is no other information-conveying device like that. Who is the most effective with resources is as much a question as anything else.

The Road to Serfdom

World War II of course affected events in England and the rest of the world greatly, and it focused Hayek’s attention on the political ramifications of socialism. In his most well-know work, The Road to Serfdom, published during World War II in England, he now argued not only that socialism is unproductive, he argued that socialism is necessarily undemocratic and dictatorial. Unless there’s economic freedom, there cannot be political freedom. “This is really the crux of the matter,” he wrote in The Road to Serfdom. “Whoever controls all economic activity controls the means for all our ends. Economic control is not merely control of a sector of human life, which can be separated from the rest, the control of the production of wealth is the control of human life itself.” [....]

Hayek’s Economics and the Future of Freedom

[....] Israel Kirzner .... [retired from] New York University ...

One of the best pieces that Kirzner wrote was a piece called, The Perils of Regulation: A Market-Process Approach, ....essentially there were four sections to that paper. One is what he called “undiscovered discovery.” That’s based upon Hayek’s competition as a discovery procedure, on simulated discovery, stifled discovery, superfluous discovery. ....

[....] But every politician ... should have to prove that they have read and understand the following pieces, “Economics and Knowledge” .... This is where the idea of the vision of knowledge was first introduced, followed up by, “The Use of Knowledge in Society,” which was in 1945, and that was published in The American Economic Review, actually, and I think it was the September issue in 1945.

... “The Confusion of Language in Political Thought,” which was written or published in 1967, and then “Competition as a Discovery Procedure” in 1968. “The Pretense of Knowledge” in 1974 that was his Nobel lecture [....New Studies in Philosophy, Politics, Economics and the History of Ideas.]

Charles Baird [Professor of Economics at California State University at Hayward ... director of the Smith Center this The Independent Institute program of speakers -- quarterly journal called The Independent Review]
New Studies in Philosophy, Politics, Economics and the History of Ideas. Thank you. And after “The Pretense of Knowledge,” they should read his last book, The Fatal Conceit. I think all of these people should have to read these and demonstrate that they understand them. They don’t have to agree with it, just demonstrate that they understand what is said in there before they can take their oath of office. ....

Now I would recommend that these same pieces—this is just an indication of how important I think Hayek is—I think these same pieces should be required reading in every school of journalism and every school of law. [Laughter.] At the very least, with respect to journalism, an understanding of Hayek would permit these journalists to understand perhaps the right questions to ask of those “madmen in authority,” who know nothing of economics and seem to be proud of their ignorance.

The Fatal Conceit, I think, which is more about—rather than economics and how markets work—it’s more about the evolution of societies. I think that gives great pause to all of those who would seek to redesign society in their own image. [....]

Consider that last part--redesigning society--in relation to the changes brought about by Trudeau, the replacement of what had worked in Canada by something designed by Trudeau and his government and further entrenched by governments since. Think of the Charter, multiculturalism, bilingualism (gradually, it has become the essential first requirement before a Canadian may be considered to work for his own government, even before other and what would seem to be requisite qualifications), the rise and growth of power of unelected Human Rights Commissions, the growing power of the court system, despite what the citizens might wish (think house arrest for severe crimes by youth criminals), particularly the activism of the Supreme Court, even taking over from Parliament in advancing their leftist views (though it will not be phrased as such), and more.


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