Hayek and the Socialist Calculation

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108 Responses

  1. Avatar DensityDuck says:

    This is the kind of thing people pay good money for, and here you are giving it away for free!Report

  2. Avatar MikeSchilling says:

    [JKG wanted to] shift those resources to public amenities (such as cultural venues like art museums and concert halls

    Elitist fascist. The only cultual amentities we need are football stadiums big enough for Britney Spears concert.Report

  3. Avatar Kimmi says:

    re: your ***
    The great depression, the long depression, the cycle of boom and bust that years of economic decency have mostly shielded us from.

    I find myself wondering if a market truly gives the optimal investment in novel ideas. I am skeptical that it does, though I do wholeheartedly understand that a Central Planning Board does worse.Report

  4. Avatar Reformed Republican says:

    I think a lot of current planners do not really care about the most efficient allocation of resources, they just want it done their way. It does not matter about the demand for propane for grilling vs. hot dogs, they will decide how much of each gets done. No calculation required.

    How else can you explain subsidies for solar, ethanol, etc.?Report

    • Avatar Kimmi says:

      Future knowledge?
      How else do you explain subsidies for NASA?Report

    • Avatar Michael Cain says:

      Insurance for unforeseen events, particularly in areas where markets must of necessity react slowly?

      Ethanol is terrible insurance against disruptions in the supply of oil, so I’m going to ignore it. There is a possibility that at some future time, society will decide that neither coal nor nuclear are acceptable sources for electricity. The chances that natural gas can pick up the slack are poor; the chances that anything can pick up the slack in the short term are zero. I note in passing that the huge dependence on coal and nuclear, particularly in the US Eastern Interconnect, is an example of a market failure — incomplete information about the costs related to disposal of the wastes from both. The response time for the market to change to a different fuel is years. It’s something that you would like a running start on. In order to get a market response in advance, you need something — subsidies for wind/solar, taxes on coal/nuclear, something.Report

      • Avatar Michael Cain says:

        Another item worth noting in the power generation world… Cato has published at least one paper that suggests that the excess generating capacity needed to ensure that a market solution works — that is, to avoid the kind of Enron behavior we saw in California a decade ago — appears to be larger than the excess capacity that a vertically-integrated monopoly utility needs to cover various failure modes. Since one of the big gains that markets were going to provide was the elimination of excess generating capacity, the authors concluded that properly done rate-of-return regulation of a monopoly provider might well be the cheaper approach.Report

  5. Avatar DensityDuck says:

    “the private hot dog manufacturer might respond by looking for substitute products (perhaps adding soy to the dogs as a meat substitute), or focusing on higher margin products, such as gourmet hot dogs, for which they can charge prices that will cover the increased meat cost.”

    Ew, soy? Why would consumers want that? You’re suggesting that it’s acceptable for manufacturers to substitute a substandard product to pad their own pockets at the consumer’s expense!

    Gourmet hot dogs? Oh I see, now we have special Rich People Only hot dogs. The people cry “tube steak, tube steak!” and you reply, let them eat bratwurst.

    Meanwhile, the efficient and impersonal Central Planning Board has determined that the appropriate response to excess hot dog production is to divert the L&A resources to other uses.

    Or, rather, to tell people to shut up and eat their hot dogs, because no matter how much people cry about wanting scrapple the CPB has determined that the most economically-beneficial use of the nationally-significant meatpacking industry’s Animal Byproduct is as hotdog filler.

    See, that’s the dirty secret of central planning. The CPB doesn’t care about prices because, in the mind of a CPB advocate, prices don’t exist. If you’re given something you don’t want, and want something you weren’t given, then the problem is not with the giver but with you.Report

  6. Avatar Jason Kuznicki says:

    Great post. Looks like it’s Austrian week here at the League. I’ll have something up soon too, more about Mises than Hayek.

    About this:

    [M]ost liberals today find it odd to think of total economic planning as a liberal idea. Sure, they tend to favor some degree of planning. They may favor Obama’s green jobs initiative, or approve the bailout of General Motors (particularly with the requirement that GM produce a specific product, an electric car), and to some extent the Affordable Care Act (although it is more an effort to constrain total spending than to dictate just how much of each medical service should be provided). But generally they no longer see the government as appropriately determining the overall composition of economic output or of setting prices for the whole economy.

    What liberals fail to realize is that where comprehensive planning makes price signals meaningless, sector-by-sector planning also degrades the quality of the information conveyed. The debate is on the margin now, but I find it impossible to believe that a law like Obamacare improves the quality of the price signal rather than severely degrading, it and in the process compromising the prospects for future improvements in care.Report

    • Avatar MikeSchilling says:

      Now that my insurance has been cancelled, I can’t begin to afford that operation. The good news is how clear that is.Report

    • Avatar Simon K says:

      Healthcare is an incredibly poor example here. The US healthcare system does not have functioning price signals. The participants in the British NHS are more aware of their expenditures and income than American hospitals and doctors. Obamacare does introduce some fairly mild elements of planning, but given the nature of the status quo, its hard to see how this deprives anyone of the information they need to coordinate production.Report

    • Avatar Kimmi says:

      Pay by procedure is better price signaling than Pay by patient?
      Dunno, I guess if you’d rather see more operations/diagnostics…Report

  7. Avatar DensityDuck says:

    “[W]hile not a total planner, [Galbraith] thought government should restrict spending on private consumption and shift those resources to public amenities (such as cultural venues like art museums and concert halls, not simply parks or infrastructure like sewer systems). ”

    In other words, he thought that people shouldn’t be allowed to spend money on Stupid Stuff That Benefits Nobody, but should instead be forced to spend their money on Good Stuff That Benefits Society. And if you’re the sort of person who’s too stupid to find enjoyable the Good Stuff That Benefits Society, then that’s just too darn bad for you.Report

    • Avatar MikeSchilling says:

      Because none of the lower orders can learn to appreciate art or music, given the opportunity. That’s why they’re the lower orders. (Of course, that’s an obsolete sentiment, since all anyone’s expected to care about today is money. The lower orders just care about smaler amounts of it.)Report

  8. Avatar Robert Greer says:

    Excellent post, James. I agree that Hayek won the socialist calculation debate, but I have a few concerns.

    It always bothers me how cavalierly economists throw around the word “efficiency”. I think we can agree that markets can accommodate more information than a central planning body, but that’s not to say markets don’t have blind spots of their own. When governments set up an economy’s rules of the road, this has an effect on the distribution of resources; it is not ideologically neutral. While such a set-up may not be as onerous as attempts at total central planning, it’s still tantamount to a choice between certain distributions of production over others. Demand, after all, is not just the willingness to pay, but also the ability to pay a certain price for a good. If you set up a night watchman state, you can bet you’re gonna get more spending on yachts relative to malaria vaccines than in a state where capital doesn’t exert as much influence, because the people who pine for the former were blessed with a larger initial share of capital than those who need the latter.

    I wish pure capitalists like you were more willing to apply the insights of public choice theory to capitalism’s primary rules. If government choices can be hijacked for the ends of powerful non-governmental actors, then what better way to do it than to convince everyone it’s not even a government choice? If you prefer spending on yachts to spending on malaria vaccines, then you can support the erection of a night watchman state and thereby get your favored distribution while maintaining apparent distributional neutrality. Neat trick, huh?

    I take to heart the libertarian critique that the state’s ever-lurking threat of violence, as wielded by its regulatory apparatus, distorts behavior in tragic ways. But the primary rules of a night watchman state are itself part of a regulatory scheme with an expected range of distributional outcome, which means that even minimalist governments are vulnerable to these libertarian concerns, because there’s still this distortionary violence.

    It’s also essential to point out the libertarians’ ahistoricism. It’s old hat but still true to say that before the current putative equality of opportunity, inequality in capital ownership between racial and class groups was enforced by weaponic superiority. It should be clear by now that these unjustifiable differences in initial conditions have been perpetuated in the supposedly-neutral current system, and that this is in fact its expected outcome. When the government enforces the laws of a night watchman state, it’s choosing to wield violence in support of historical inequality. This violence leads people to make different decisions than would have been made if everyone were a free and equal actor. Therefore capitalism, by its own definitions, distorts economic behavior through violence.

    I admit I don’t have a encompassing regime with which to replace capitalism. But all I’m trying to do is encourage skepticism toward a totalistic capitalism.Report

    • Avatar James Hanley says:

      I wish pure capitalists like you…

      Eh? [Looks over shoulder] Are you talking to me?

      …were more willing to apply the insights of public choice theory to capitalism’s primary rules.

      Nope, definitely not talking to me. 😉

      I considered a long response, but since my post wasn’t really about libertarianism, I’m going to forgo it in an attempt to not make the thread be about that. The only question I’m interested in this thread is whether central planning is feasible.Report

      • Avatar Robert Greer says:

        I was hoping to spur a discussion between leftists and libertarians about the allure of central planning, although I guess I was pretty oblique about it.

        You say you’re only interested in the question of whether central planning is feasible. But the feasibility of central planning’s alternatives is dependent on their political popularity. Think about it this way: Groups with relatively little power in the economic sphere are always going to be tempted to use their political power as a substitute. This is a restrain on the feasibility of central planning’s alternatives.

        I think you’re right that the economic debate over central planning is largely concluded, but I also think you’ve been around the block enough times to realize that your post here is unlikely to change many leftists’ minds. So I’m trying to help you by shifting the discussion to more fertile ground. Maybe we can discuss the extent to which government is a tool of privilege. Maybe we can talk about things libertarians can do to relieve political pressure toward central planning. It’s understandable if you’re not interested in that, but I promise I really am trying to advance the conversation.Report

        • Avatar James Hanley says:

          But I’m not actually trying to change leftists’ minds. I’m trying to show them that what they already believe is in fact not the same as leftists believed 50-80 years ago, but is in line with (one element of) Hayekian thought. Their minds were already changed, across a number of generations.

          Think about it this way: Groups with relatively little power in the economic sphere are always going to be tempted to use their political power as a substitute. This is a restraint on the feasibility of central planning’s alternatives

          Sure. That’s something any libertarian whose head isn’t in the clouds realizes. Or put another way, it’s one of those public choice implications of setting up the rules that you were referencing. And while there’s no doubt that there are constraints on the political feasibility of planning’s alternatives, I think it’s important to recognize how frightening those constraints are, given the necessary failure of central planning, and it’s inevitable rigidifying of politically motivated distributions.Report

        • Avatar Jaybird says:

          I was hoping to spur a discussion between leftists and libertarians about the allure of central planning, although I guess I was pretty oblique about it.

          Dude, for my part, I *SEE* the allure.

          Making decisions on behalf of others? Telling others that if they’re unhappy they need to suck it up? Knowing that other people are doing things within the parameters of what I have set up and knowing that if they go outside of these parameters, I can have them punished?

          I salivate.

          This is why I am a Libertarian.Report

          • Avatar greginak says:

            Try dialing back the strawman just a tad. Down to an 8 or so.Report

          • Avatar Mike Schilling says:

            Telling others that if they’re unhappy they need to suck it up? [,,,] This is why I am a Libertarian.

            Tell me something I don’t know.Report

            • Avatar Jaybird says:

              I suspect that you see less of a difference between these two statements:

              1) Your life is not really any of my business (implied: so if you’re unhappy, I don’t care)

              2) Your life is my business and, if you’re unhappy, you need to suck it up

              than I do.Report

          • Avatar Chris says:

            “Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.”

            I take this to be the essence of libertarianism.Report

          • Avatar James K says:

            I know exactly what you mean.Report

    • Avatar James Hanley says:

      all I’m trying to do is encourage skepticism toward a totalistic capitalism.

      Which is fine by me, since I’ve never advocated any such thing. I’m not even sure I know what “totalistic capitalism” would mean? Would I no longer be able to contribute my labor voluntarily to what I see as socially beneficial causes? Would the government no longer be involved at all in the provision of infrastructure or public goods? Would all common-pool resources be wholly privatized (if so, can I have Lake Huron?)? Would the public defenders’ office be abolished?Report

      • Avatar Robert Greer says:

        When I say totalistic capitalism, I mean one that is immutably skeptical of governmental interference in the economy. I think there’s a point past which opposition to government programs undermines the social stability necessary to legitimize markets. I think libertarians are often in danger of cutting off their nose to spite their face.Report

        • Avatar James Hanley says:

          I think immutable skepticism is a good thing. Will I do your ideas violence if I restate them as immutable opposition?Report

          • Avatar Robert Greer says:

            I’d say immutable skepticism is its own kind of gullibility, but I think “immutable opposition” is an equally accurate (and apparently better-stated) alternative. Thanks.Report

            • Avatar James H. says:

              I can’t see skepticism as gullibility. In general, it’s just a recognition that we can never be really sure of what we think we know. In the specific case, it’s just a recognition that even when government is potentially capable of intervening positively, it’s still deeply fallible humans, not the theoretically assumed wise technicians, who are doing the intervening. Anyone who’s not perpetually skeptical about whether human-designed systems will function well isn’t, I think, looking very closely at any aspect of human history.Report

              • Avatar Robert Greer says:

                So you don’t think capitalism is a human-designed system? Capitalism as natural law, perhaps?Report

              • Avatar James H. says:

                No! Back to Hayek–it is the product of human action, not human design. But indeed it’s human,so of course I maintain skepticism toward it. It seems to me I’ve always been clear about that, but I think our natural tendency to try to classify people works against that message coming through clearly. Because I expect government intervention to screw up more than it fixes, and peopke to use that mechanisn mre for private than public good, it’s easiest to classify me as wholly trusting in the perfection of markets. The only problem is that you’ll never be able to quote me to that effect.Report

              • Avatar Robert Greer says:

                I don’t think you’re a fanatic deep down, James. I’m just trying to pry you from the patina ideology so your soul may be free to shine forth into the universe. 😉Report

              • Avatar James Hanley says:

                My soul is much to dark to shine.

                I do find “patina” ideology amusing, though. Certainly many libertarians are quite superficial, but can any less be said about those who invoke “government” or “regulation” as a magic talisman?Report

    • Avatar Brandon Berg says:

      It should be clear by now that these unjustifiable differences in initial conditions have been perpetuated in the supposedly-neutral current system, and that this is in fact its expected outcome.

      Except it really isn’t. Jews, Northeast Asians, and Indians have historically been discriminated against in the US—the Japanese in particular having had their property confiscated and been rounded up into concentration camps just seventy years ago—yet today they have higher average incomes than gentile whites.

      The historical oppression model of black underachievement doesn’t really specify a clear mechanism, so it lacks a strong theoretical basis, and it’s on weak ground empirically as well, failing even to get the sign right for several other historically oppressed minority groups.Report

      • Avatar Robert Greer says:


        Jews, Indians, and Northeast Asians generally emigrated willingly from areas with extant capitalist/urban cultures. If you look at any group that was treated the way African-Americans were, they exhibit hauntingly similar outcomes. Discrimination is not perfectly synonymous with oppression.Report

  9. Avatar Liberty60 says:

    I wasn’t planning on commenting on this post, since it seems rather inside-baseball stuff.

    But the “Paul Ryan’s guru” caught me like a rusty fishook.

    Lets use Micheal Cain’s comment as a springboard; the argument is not that coal mining results in bad side effects; he is attempting to use the language of economics (incomplete information on externalities). Another is Jason’s comments about “price signals”;

    There is an unspoken asusmption here that I take issue with, which is that the mining of coal or the providing of health care can only be understood in economic terms; that if we could only adjust for signals and externalities and so forth, then the machinery of the market could work its magic without interference. Good things, would of course, spring forth.

    I mentioned once that the Declaration of Independence and Constitution were remarkably quiet on economic matters; they instead frame the governing of communities in terms of power and its distribution throughout society.

    This is why these sorts of posts and debates always seem wierdly chilling; Hayek’s writings on market prices seems innocuous enough, until I realize that it results in Paul Ryan wanting to strip Medicare from people like me.

    I’m not questioning Hayek; its more the assumption that economic theory is superior to moral reasoning in deciding how we allocate power and wealth in society.Report

    • Avatar James Hanley says:

      I think you are operating under the assumption that economic thinking gives credence only to dollars and cents, which I consider to be a fundamental–but regrettably common–misunderstanding. In fact it gives credence to whatever it is we value. And economists fully recognize the difficulty of accounting for some of those values in the market. Hence, we talk about price signals, and how they don’t properly work for some values (a situation that economists call a market failure).

      So when we talk about the mining of coal in economic terms, we not only talk about the value of coal, but about the cost of its effects on the environment and on the health of the people. Only those who have that fundamental misunderstanding don’t realize that; and if I dare say so, you and Ryan have that in common. What differs is how you respond to that misunderstanding–he discounts the value of those things that do not have effective price signals, while you discount economics as a whole. But in fact you both are in error in thinking that economics is only about those things for which price signals function well.Report

      • Avatar DensityDuck says:

        but james


        you said “price”

        price is what the sticker on the thing says it costs

        i learned it in school

        when you say that price is not dollars YOU ARE WRONG BECAUSE MY TEACHER SAID SOOOOOOOOReport

      • Avatar Robert Greer says:

        The problem is that it’s exasperatingly difficult to tell which things have effective price signals and which don’t. Externality analyses are only valuable insofar as we can separate the two, and insofar as economics is used to shut down debate over what should go into the determination, it’s a problem. Thankfully this isn’t always the case, which is why I haven’t chucked economics out the window entirely, but the field displays a worrying tendency nevertheless.Report

      • Avatar greginak says:

        This is true James at least in theory. In practice though it seems like the effects of mining on the enviro and health isn’t talked about by the people talking about the market the most or the strongest proponents. It tends to be evil liberals who talk about the enviro or health or market failures. In general when we talk about those things we get a econ 101 level discussion of Capitalism is the Greatest Thing ever. You are certainly correct that liberals have accepted a lot of market capitalism. The people who would disagree most are not liberals , i think, but conservitives who think liberals are soshulists.

        I agree that econ thinking relates to everything we value, but that also leads to thinking that econ doesn’t have the answer for everything we value. Its part of the answer and the question for that matter, but econ isn’t everything. Home Economus is a not a full description of humans.Report

      • +1.

        One of the things about Hayek, which you try to bring out in your post, is that there’s actually quite a bit of nuance and context in his arguments, which are critical to understanding him properly. Too often, both his acolytes and his critics miss that nuance and wind up with conclusions that miss the point completely.Report

      • Avatar Liberty60 says:

        What I gather from the discussion is there an attempt to get economic theory to become like physics, to describe the political Grand Unified Theory Of Everything. For instance, it sounds like:

        “If only we could find the price signals and account for the externalities of coal mining, a proper valuation of them could be made, and from there a political program of taxes and regulations which maximize liberty and justice and Good Things.”

        Which is why people like me recognize this as Bizarro World Marxism.Report

        • Avatar James H. says:

          Well, so long as you insist on misstating what economists really say, I’m sure it will continue to sound bizarre. I’d take the time to argue more, but I’m pretty convinced you’re indelibly wedded to your misconception as a fundamental attribute of your self-identity.Report

          • Avatar Liberty60 says:

            Well, c’mon now.
            What IS the apropriate way of viewing issues such as coal mining?
            I mean, should the public debate turn on things such as the cost of externality, price signals, and so on?

            Isn’t this the standard kind of talk we have here at the League, on nearly every issue ever discussed?

            Heck, you wrote this post BECAUSE Hayekian econimics is contantly invoked on all sorts of issues.

            It DOES seem like economics is being used as a Grand Unified Theory of Everything.Report

            • Avatar James H. says:

              Persuade me you’re actually listening, then I’ll talk. Your latest comment just further persuades me you’re more committed to holding your present view about economists than in trying to understand how economists would see themselves.

              I’m sure it’s morally gratifying, and asking someone to give up that is asking for a helluva big sacrifice.Report

          • Avatar Robert Greer says:

            But there IS something thorny about externalities, right? After all, they require economists to temporarily abandon the price theory of value in favor of things like “social cost,” and neoclassical market models are put in the service of explicitly collectivist planning aims fairly often in this context. I may be wrong, but I doubt you can draw a perfectly clear distinction here.Report

            • Avatar James H. says:

              Externalities don’t require an abandonment of price theory at all. Price theory helps explain why externalities happen. That is, they’re a consequence of the market’s failure to attach proper prices to them. If you can attach a price, the externality problem us solved. And I don’t know that “collectivist planning” is the preferred neoclassical response; rather the ideal is to try to discern and mimic a proper price. Pigouvian taxes rather than actual planning, when possible.

              But “price theory of value” is really a misnomer, isn’t it? Prices send signals about value, but the actual measure of value, as economists see it, is opportunity cost.
              After all, that beer I had tonight had a price of $3, but I would have been willing o pay more for it. So the price sent the message that I would be willing to pay at least that much, but doesn’t indicate what my real value of it was.Report

              • Avatar Robert Greer says:

                I don’t think price theory of value being a technical misnomer gets it out of the woods. Oftentimes the lower bound on a good’s value is still higher than it “should” be without some externality.

                And do you really not see any irony in denigrating central planners while simultaneously talking about “proper prices”?

                I don’t see a reason to not think of Pigouvian taxes as a kind of central planning. Although it’s arguably more laissez-faire than production quotas, it’s still using the machinery of the state to push a certain level of output/consumption for the reason that the free-market solution is somehow wrong. I know there are plenty of right-wing economists who are find externalities dubious for this reason.Report

              • Avatar James H. says:

                Pigouvian pricing is akin to planning, but dramatically more modest. And the more realistic folks realize we can only guesstimate the proper values, and only with hard work, and certainly not in a way that could be extrapolated to the entire economy.

                And keep in mind the effort is not to determine how the resource will be used, but just to get the users to take into account the real costs of using it, then letting them make their own resource use decisions in light of that accounting for cost. In that respect it’s not very akin to planning at all.

                As to your first ‘graf, I don’t understand it. You say the price should be higher, and I assume you mean would be if there was no externality. But there’s no conflict with price theory; you’re just reiterating the point that the price is failing to reflect the proper valuation because it’s not accounting foe the externality. Price theorists wouldn’t disagree. Externalities cause inefficiencies precisely because their prices are bad signals that don’t reflect their real value. That’s why they propose correcting prices. E.g., David Friedman writes,
                If I am polluting the air, charge me an ‘effluent fee’ of so many dollars per cubic foot of pollution emitted, corresponding to the costs that my pollution imposes on others.

                The name of the book that quote comes from is Price Theory. So I really don’t see anything in your argument that price theorists haven’t already comfortably incorporated into the theory.Report

              • Avatar Robert Greer says:

                James, when I talk about the price theory *of value*, I’m talking about the idea that prices are reliable indicators of how to get the highest value out of a good, not the microeconomic mode of analysis known simply as price theory. So for instance when Mises argues that “socialism could not [efficiently allocate resources] because without prices it lacked the information to determine how much of each thing was demanded,” he’s propounding a price theory of value.

                But I still don’t think you can have it both ways with the PTOV and the government intervention in externalities. Remember that your boy Mises didn’t really believe in Pigouvian taxes:

                “It is true that where a considerable part of the costs incurred are external costs from the point of view of the acting individuals or firms, the economic calculation established by them is manifestly defective and their results deceptive. […] But this is [] a consequence of loopholes left in this system. It could be removed by a reform of the laws concerning liability for damages inflicted and by rescinding the institutional barriers preventing the full operation of private ownership.” *

                Austrian theorists have since written voluminously about the perniciousness of government intervention in the name of externalities, claiming that the concept of externality is hopelessly expansive.** In this respect, you (and the rest of the mainstream economic profession) sided with the losers of the economic calculation debate.


              • Avatar James H. says:

                Robert, see James K below. I’m not arguing that Pigouvian taxation can be done particularly well. But keep in mind what we’re comparing here. Central planning per se attempts to do better than markets with functioning price signals. Pigouvian taxation only tries to do better than markets without functioning price signals. That’s a much lower hurdle, and even there I don’t expect it to necessarily approach real efficiency, but believe there is at least a fighting chance to reduce the degree of inefficiency.Report

              • Avatar Tom Van Dyke says:

                RG, pls run the converse, the “value theory of price,” through the grist mill and advise accordingly.Report

              • Avatar James H. says:

                Off the top of my head (and getting sleepy and unwiling to think very deeply), I think that’s a better formulation.Report

              • Avatar Robert Greer says:

                So stipulated. Thanks, TVD.Report

            • Avatar James K says:

              Yes, externalities can be tricky. There’s a body of economics called “Shadow Pricing” which is a set of techniques for estimating the price of something for which there is no market. They work, to a point, but they have serious limitation so you shouldn’t use them more than necessary.Report

  10. Avatar BlaiseP says:

    A really fine exposition. Now, if only we could get the Libertarians to take Hayek to heart, that is to say, give ol’ Ludwig von Mises the old heave-ho.

    If Liberals, as you say, have abandoned all this Statist Central Planning nonsense, perhaps in time the Libertarians will come to their senses about how Risk and Regulation work. If profit arises from risk, and I believe this is so, and if the markets are our only hope of exposing the true value of goods and services, then by definition, we must have highly regulated risk markets, not to prohibit contracts in risk, but to enforce these contracts in a context where winners can be separated from losers. But I fear we’ll never get there, Hanley, not with this current crop of Libertarians. They really must re-read their Hayek. He told us all this years ago.Report

    • Avatar James H. says:

      If you highly regulate risk, is it still risk?

      My general objection to your claims is that you treat regulation wholly generically. You repeat the claim of its necessity, but you never make an argument for what form it should take, do there’s really nothing in your argument to evaluate. In some ways all markets are regulated, even in most free marketers’ ideal. But the wrong regulations can do more harm than good. So if you can’t specify better, you’re not doing anything better than the person who blindly calls for no regulations. You’re calling for treatment for a sick patient, but it’s unclear if you want penicillin, mercury, bloodletting, or amputation.Report

      • Avatar BlaiseP says:

        Yes, it is still risk. There’s a difference between risk and dangerous betting. Risk can be quantified. Furthermore I have repeatedly said what form it should take: a standard contract on an open outcry market or the electronic versions thereof, such as EUREX, MERC or NYMEX.

        The over-the-counter markets are dangerous. Risk cannot be effectively quantified in such markets, reducing them to Merely Dangerous because prices and speculator margins are not effectively exposed. Hayek laid out how inflation and by extension speculation can create a profit streak leading to ever more risk-taking. This, to show I am paying attention. Quantifying risk isn’t so hard. Nor is speculation all that hard to control. Speculation arises when demand is overestimated.

        In a regulated risk market, such as the futures markets, long a staple of the world economy, little booms and busts happens all the time. The classic mini-bubble happens in the octagonal pits of CBOT: four markets are trading in each pit, buy facing sell. Smaller traders work the lower rungs of each side but the big guys work the upper rungs. When a Big Guy appears on the upper rungs to trade a hundred lot, the pit will erupt, every trader on the opposite side clamouring to fill his orders. Such markets have limit up and limit down to prevent meltdowns. Trades are cleared through the exchange. Everyone should know these things but seemingly I must repeat the obvious. Well, as I’ve said before, anything worth saying is worth repeating: perhaps I won’t have to face this obtuse question again. The Deregulatory Debacle of 2008 was entirely preventable and current legislation has not done much to keep it from happening again.

        The very idea that you’d ask if regulated risk is still risk tells me all I need to know about how you’re thinking. There are worse things than wrong regulations. The complete absence of regulation in the credit risk markets, an increasingly important sector of the post-industrial world, combined with the lunacy of remarks such as yours tells me the Libertarians do not understand markets. That I should be obliged to tell a “Free Market” crowd how actual markets operate and have evolved to ensure winners and losers can be separated, well, it’s very sad.Report

        • Avatar James H. says:

          The very idea that you’d ask if regulated risk is still risk tells me all I need to know about how you’re thinking

          No, it really doesn’t, but as usual you love to jump to a conclusion.Report

          • Avatar BlaiseP says:

            Flap yer wrists and run in little circles, squealing like a piglet and make this about me, if you wish. I’ll keep you running all day. Anything but admit the obvious: that risk markets have evolved beyond your precious Mises and deregulation created exactly what Mises had predicted.

            It’s hard to argue with someone’s theology, James, but the more you avoid the facts, the more amusing you become.Report

            • Avatar James Hanley says:

              Ah, classic Blaise. You write a couple of beautiful posts, then in your comments you return to this kind of classless ranting.

              It would be nice if, for once, you could actually explain an actual regulation you would like to see enacted, instead of either just repeating the word “regulation” like a mantra without any further detail or retreating to yet another stock description of the trading floor instead of actually talking about, you know, an actual regulation you’d like to see enacted, with explanation of its design and what you expect it would do.

              As long as you continue to avoid explaining any proposed regulations in detail, I struggle to believe that you have the expertise you claim. Nothing you’ve said about the trading floor couldn’t be learned from Hollywood and Wikipedia. If you truly have the expertise you claim, then you could actually describe a regulation in detail.

              Impress me. Like you did with your post about the Man Without a Name and Obama’s speech. Impress me–for once–with something substantive about regulation.Report

    • Avatar Stillwater says:

      But I fear we’ll never get there, Hanley, not with this current crop of Libertarians.

      Do you mean James K, Jason K, Hanley, JB, Mark Thompson, Roger …? Those guys? I think they’re doing a pretty good job getting us there, myself.Report

      • Avatar James Hanley says:

        I suspect he means all those unnamed libertarians. They’re the bad guys–it’s always the ones who have no identity other than a label who are the bad guy. Libertarians are just niggers, kikes and spicks, but we’re the ones who have an individual identity, so we’re the few who allow him to say, “but some of my best friends are libertarians.”

        (Note: I’m not implying Blaise would talk of niggers, kikes and spicks, just that he talks of libertarians the way others would use those terms.)Report

        • Avatar BlaiseP says:

          Heh. When I confront any one self-described Libertarian — well, let’s just try this for a start, I’ll just single you out and see what your reaction is to this proposition:

          Resolved: that markets in risk must be regulated as varies that risk, to wit, that such instruments must be traded on regulated exchanges.

          Let’s see how it goes. And I want a meaningful answer, not more output from the Rant-o-matic.Report

          • Avatar James K says:

            Your proposition is excessively vague. The term regulation can mean practically anything. What kind of regulation do you think is necessary?Report

            • Avatar James H. says:

              I keep asking this question, and never have gotten an answer. He seems to think asking the question indicates antipathy to any type of regulation.Report

              • Avatar BlaiseP says:

                Run away! You know perfectly well what’s implied by market regulation in this case. I’ve already laid it out.Report

              • Avatar James Hanley says:

                Blaise, as James K says, it’s too vague. The most mysterious thing about you is that by the nature of your job you have to be detail oriented. You could not possibly do your job without knowing that every bit of software you create must be precisely specified. The same is true when we are talking about regulation. If you do not specify the regulations, there is nothing to be discussed. Let’s shift the subject for a moment to, Resolved: Public roadways must be regulated. Well, yes, but that’s an entirely trivial answer.

                The “yes” answer to your resolution is just as trivial. At a minimum, all markets are regulated to the extent that contracts are enforceable, so of course trades should be regulated…at least to that minimum extent. But at a maximum no trade that involves more than a minimum level of risk is allowed (hence my question above). If you answer your own resolution with a “yes,” what type of regulations are you agreeing to? Do you think my “yes” answer will refer to the same type of regulations?

                Call it running away if you wish, but when you ask an overly vague question, don’t be surprised if others don’t find it worth addressing.Report

              • Avatar BlaiseP says:

                Stop being obtuse. There’s nothing vague about what I’ve proposed. I’ve said we should confine risk markets to NYMEX, EUREX, MERC and the like. Consult their regs if you want more information, I’m not here to teach you the basics of futures markets and exchanges. Want more info? Open a trading account and learn.

                You simply don’t understand the difference between an over-the-counter market in risk, which isn’t regulated, and a regulated market, which would Enforce the Contracts, as you say. The reason you won’t stipulate to the regulation of risk markets, dancing around with all this nonsense about Enforceable Contracts is because to admit such is to pull the rug out from under every Libertarian assertion about self-regulating markets.

                Don’t play dumb, James. If you don’t know how a futures market works, don’t tell me you understand the Free Market.Report

              • Avatar James H. says:

                As I said elsewhere, Blaise, I asked myself why I waste my time with an ignorant [expletive deleted] like you. After a good night’s sleep I still don’t have an answer, and this comment, where you once again try to make the issue about understanding of the futures markets* instead of about the vagueness of your policy proposals, further reinforces my belief that you’re not worth talking to.
                * For those who aren’t Blaise, while having a good understanding of something is a necessary condition for making good policy proposals, understanding something doesn’t necessarily lead to agreement about policy proposals. Consider football rules and regs–two very knowledgeable people can disagree about what should constitute a sack, or whether the rules should allow two men in motion, or how much practice time colleges should be allowed to require of their players. Blaise’s assumption that my questioning of what regulations he thinks should be enacted shows that he thinks anyone who understands football…er, futures markets will agree on a common set of regulations. There’s hubris there–that’s the most polite term I can think of for it.Report

              • Avatar James K says:

                So your proposed regulatory intervention is to ban OTC trading of derivatives?Report

        • Avatar Mike Schilling says:

          Libertarians are just […] kikes

          Other than the selection for intelligence part.Report

      • Avatar BlaiseP says:

        When I see any of them cured of their Mises Mania, then we can talk about progress on the Sanity Front. Markets are not self-regulating and never have been.Report

        • Avatar James H. says:

          See, here’s why I can’t take your pretense of superior knowledge seriously. If you think the idea of self-regulating markets is a peculiarly Misean, or even peculiarly Austrian, idea, you know…perhaps not nothing, but not as much as you believe you know.Report

          • Avatar BlaiseP says:

            I grow tired of this bullshit. Here we go.. Now it’s your job to convince me that Mises had any concept of regulated markets or proposed any method to regulate them.Report

            • Avatar James Hanley says:

              Why are you asking me to talk about Mises? You’re not seriously operating under the delusion that I have much interest in him, are you?

              Really, if you’re tired of the bullshit, then you might want to stop shoveling it out.

              Is there some theorist you’re only vaguely acquainted with that I can demand that you explain to me? At least that would put us on an even footing.Report

  11. Avatar Stillwater says:

    Excellent post James.Report

  12. Avatar Régis says:

    Very interesting and… informative post, James.

    I know Hayek rather well, but I have one question about Lange’s proposal, which I do not know in detail: Does Lange’s model leave room for the liberty of producers? Or do the entrepreneurs in each factory, and also the employees, have to be chosen, according to Lange, by the Central Planning Board?
    You made some very clear points about the information and knowledge of local conditions (particular circumstances of time and place) that concern the production of the different commodities and services.
    Hayek also talked about the information about people: WHO are the best entrepreneurs and workers, WHO have the best skills in the different economic activities, WHO will find an adequate solution to such or such unexpected economic problem…?
    And his point was that no one can know in advance WHO will be the best.

    Furthermore, Hayek also speaks about information and knowledge that are less dispersed: the scientific one. But here also, he thinks that academic freedom and freedom of research are the best solution to develop scientific knowledge (although this knowledge is more easily accessible to a Central Planning Board; in the long run, decentralization of scientific research is better).

    So I would say that there are various arguments in Hayek’s case against central planning: one about the particular circumstances of time and place (where economic freedom is better even “in the short run”), one about the people (who do possess the best skills), and one in the long run, about scientific progress (even if in the short run scientific knowledge can be possessed by a few expert).

    Thank you for your answer and sorry if there are mistakes in my english.Report

    • Avatar James Hanley says:

      I’m not an expert in Lange, but in socialism generally the factory managers had little liberty, so I assume that would hold. He would allow them to set the prices of their products, but only to equal cost of the resources, whose prices were centrally set. I don’t think freedom to scope out different materials as substitutes (aluminum for tin in making beverage cans, for instance) was part of his model. And that, from my perspective, is perhaps the most crucial flaw.

      But if others are more familiar with Lange than I, I am ready to be corrected.Report

  13. Nob Akimoto Nob Akimoto says:

    So while I do agree with the general gist of your post (essentially that “central planning” as a concept as known during Hayek’s day is dead), I’m not entirely sure if the Austrian conception of market signalling has actually worked out in practice, particularly with the advent of enormous commodities markets and international financial markets.

    In this I think George Soros has something interesting to say with the concept of reflexology, where in fact, there’s something of a feedback loop system where perceptions (and imperfect information) on the part of potential price-setters (traders) feeds into making bad bets that then end up being self-fulfilling as a consequence. The market power of say commodities traders as a species vis-a-vis the greater market, I think is something that’s not nearly as explored as fully when we conceptualize market price signals.

    But I digress. Well done, Dr. Hanley, for bringing the historical context to light.Report

    • Avatar James Hanley says:


      That’s an important question. I think it’s clear that there are cases where price signalling works very very well. Gasoline prices for example. They change quickly, with little lag time, and the changes are immediately visible to every potential customer. But surely there’s variance across different markets, and so surely there are some where the price signal is fuzzier and works more imperfectly. Of course the proper solution to that is not to make them even more imperfect via central planning, but there are probably policy responses (OK, regulation; there, I said it) that can make them work better. After all, our institutions that help structure markets do matter–on that you and I agree.

      To turn this full circle to my original example, I believe gas stations are generally required by state law to post their prices visibly. This might be a case of policy lagging practice–the market might have innovated that practice first, as a means of competition–but either way, it’s a positive outcome as it makes price signalling effective in that market.Report

  14. Libertarians over state the value of the price signal. Hayek’s incite was not that all information and value can be reflected in the price. It was that he had little regard for the models and tools of modern economics. It wasn’t that price was every thing it was that compared to the sophistry of econometrics he thought that price actually reliably delivered real information. He was really just questioning the worth of economic methods.Report

  15. Avatar Ramblin' Rod says:

    I know this is late, but I wanted to say great post, James. I am sadly under-read on some of the people we discuss the most around here. I appreciate the edumacation.

    And, btw, I don’t disagree with your assessment that liberals have largely accepted what Hayek said. Actually it’s conservatives and libertarians who seem to think we’re all about Soviet-style central planning.Report