Hayek’s neglected truths about credit, capital and the trade cycle

Last night, I caught up with Martin Wolf’s November programmes for Radio 4 Analysis, which you can find here. He offered a predictable blend of commentators calling for more money printing, world central banking and greater global governance. It prompted me to look out Monetary Theory and the Trade Cycle (1933).

Hayek wrote (emphasis mine):

It is a curious fact that the general disinclination to explain the past boom by monetary factors has been quickly replaced by an even greater readiness to hold the present working of our monetary organization exclusively responsible for our present plight. And the same stabilizers who believed that nothing was wrong with the boom and that it might last indefinitely because prices did not rise, now believe that everything could be set right again if only we would use the weapons of monetary policy to prevent prices from falling.The same superficial view,which sees no other harmful effect of a credit expansion but the rise of the price level, now believes that our only difficulty is a fall in the price level, caused by credit contraction.

All eerily familiar. And:

We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.

The truths set out by Hayek in that crucial essay – and in Prices and Production in the same PDF – are ever more relevant today. Yet, despite the evidence of the intervening 80 years, the Keynesians, and indeed the Monetarists, continue to peddle their interventionist policies and monetary statism. Their intellectual bankruptcy is plain but still institutions are regarded as august which hawk their poor ideas about money and bank credit.

The economic truths which Hayek set out in the 1930s are much neglected. It is high time that they were widely read by economists and businessmen and that the impoverishing ideas of Keynes which are now doing so much damage are laid to rest.

The Rule of Law

Please note: this post was written at my request by Michael Dowsett, after yet another European policy which breached the Rule of Law, as classically understood. – Steve

The rule of law is a phrase which is widely used but perhaps little understood. Far from being merely the sum total of all the laws passed by a particular central or local administration plus courts to enforce them, the term ‘the rule of law’ draws on a higher concept of laws and practices which promote equality before the law, general and abstract rules for citizens and an independent judiciary.

So, where did the rule of law originate? What does it mean? And why is it relevant to the conduct of politics today?

‘An unjust law is no law’:

The principle was first seen in Ancient Rome and Ancient Greece that the laws under which citizens live should evolve gradually over time and not merely be decreed by sources of arbitrary power. For this reason, greater trust was put in the hands of the judiciary to develop law, through a process called common law: law developed through ‘case and precedent’ established through various cases. This approach was formed from a number of principles:

Accountability:

All are able to be equally held to account under the law, regardless of power status within the particular jurisdiction. As such, rulers are as liable to be held to account as ‘the ruled.’

Natural justice:

Natural justice implies that all laws are predictable so that an individual can be sure how they will be treated under the law, should they proceed with a particular action. In conjunction with this, the law should be clear and stable. It should also avoid retroactivity; that is judgement on the basis of laws which were only passed after the act in question was committed. As Bastiat states in The Law, the law of the land should be ‘negative,’ and not perpetuate injustice through retroactivity; or indeed the confiscation of liberty or property through regulation or redistribution of wealth.

The rule of law in practice

The application of the rule of law is multifaceted, and ranges from an independent judiciary to the conduct of economic policy. However, the core principle advocates of the rule of law would embrace is the assertion that its principles are incompatible with a planned society. As Hayek said in The Constitution of Liberty, although a person in a planned society “…is not fundamentally deprived of the use of his capacities; he is deprived of the possibility of using his knowledge for his own aims.” Fundamentally, the rule of law and a free society go hand in hand.

Defenders of the rule of law also advocate the adoption of written constitutions, such as the United States Constitution, to formally codify the duties and restrictions on the power of particular parts of government. In the absence of such formal written constitutions, a gradual creep towards an arbitrary use of power can occur, thus undermining the rule of law. The threat of such a development is only increased by the greater power now enjoyed by supra-national organisations, such as the European Union. The lack of democratic legitimacy and accountability the EU has helps to explain why it consistently seeks to acquire new competencies and powers through ‘ratchet clauses’ and similar mechanisms, which undermine the principles of predictability and generality at the heart of natural justice.

In conclusion, the rule of law is crucial to the functioning of a free and prosperous society. It is as relevant today as when the principles at its heart were developed in Ancient Greece and Rome. Governments should be vigilant that their actions and approaches to policy do not undermine the principles of ‘natural justice’ and should avoid the temptation to wield arbitrary power in the pursuit of political gain.

You can read more on these fundamental principles by downloading: Principles for a Free Society by Dr. Nigel Ashford.

Remember, remember, the 5th of November

Occupy London 6 by Nathan Meijer (click for source)

As CNN reports, the V for Vendetta-style Guy Fawkes mask has inspired Occupy protesters around the world. CNN points out:

Ironically Fawkes, far from being the anti-establishment hero he has come to be seen as in the years since his death, was a monarchist who merely wanted to replace the Anglican king with a Catholic queen.

A transcript of his trial with co-conspirators is available here. It’s hard reading for one not accustomed to 17th century English but, in relation to the matter of the conspiracy:

As concerning the second, which is the Matter conspired; it was,

First, To deprive the King of his Crown.
Secondly, To murder the King, the Queen, and the Prince.
Thirdly, To stir Rebellion and Sedition in the Kingdom.
Fourthly, To bring a miserable Destruction amongst the Subjects.
Fifthly, To change, alter, and subvert the Religion here established.
Sixthly, To ruinate the State of the Commonwealth, and to bring in Strangers to invade it.

It’s all far from an answer to the contemporary corporatism which oppresses and impoverishes the majority of us and yet Fawkes inspires those who protest the obvious failures in our present system. Having visited the protest, I believe most protesters are peaceful.  I shouldn’t think they are volunteering for the punishment decreed for Fawkes and his conspirators: it included, amongst other things, having their genitals cut off and burnt before them.

The protesters’ use of Fawkes masks is surely far less to do with Fawkes himself and far more to do with the fantasy of revolution against state tyranny that is V for Vendetta.  The film, like the protestors, errs in eulogising Fawkes, a traitor and terrorist, but it is not without wisdom.

In particular, in his broadcast speech, V says of the dystopian state of Britain:

How did this happen? Who is to blame? Well certainly there are those who are more responsible than others, and they will be held accountable, but again, truth be told, if you are looking for the guilty, you need only look into a mirror.

And so we should. Each of us, over several generations and with the best of intentions, has voted for parties which offered doctrines of state power, not freedom.

If the banks and other large corporations oppress us and manufacture injustice (and they do), it is because they enjoy privileges granted by the state, privileges which – like deposit insurance and bank bailouts – were meant to protect us. Corporations do not have coercive power: states are territorial monopolies on the use of force. The privileges granted to corporations and the consequent injustices are the tragic result of attempts by democracies to provide what people want: security and prosperity.

In the mid-nineteenth century, Alexis de Tocqueville set out the kind of despotism democratic nations have to fear:

Above this race of men stands an immense and tutelary power, which takes upon itself alone to secure their gratifications and to watch over their fate. That power is absolute, minute, regular, provident, and mild. It would be like the authority of a parent if, like that authority, its object was to prepare men for manhood; but it seeks, on the contrary, to keep them in perpetual childhood: it is well content that the people should rejoice, provided they think of nothing but rejoicing. For their happiness such a government willingly labors, but it chooses to be the sole agent and the only arbiter of that happiness; it provides for their security, foresees and supplies their necessities, facilitates their pleasures, manages their principal concerns, directs their industry, regulates the descent of property, and subdivides their inheritances: what remains, but to spare them all the care of thinking and all the trouble of living?

And so the Government worries about wellbeing in a thoroughly technocratic way and brings you Mindspace: Influencing behaviour through public policy. The state today spends over half of GDP: can anyone seriously believe that this is limited government and a free society? Communist China spends less: 2010 GDP was $5.93 trillion and state spending $1.33 trillion – 22% of GDP .

In The Road to Serfdom, Hayek explained that technocratic government would crush Parliamentary democracy, just as it has done, and lead to tyranny through its own failure. In Capitalism, Socialism and Democracy, Schumpeter made the case that the success of capitalism, in the context of democracy, would lead to corporatism and the fostering of values hostile to entrepreneurship. Capitalism would be replaced by some form of socialism through a tendency, which we have seen, of electorates to return parties of social democracy. Schumpeter believed the intellectual trends of society would destroy the capitalist structure.

And so it has come to pass. In Living with Leviathan, David B Smith writes (as I have blogged before):

New Labour’s so-called ‘third way’, and the prevalent economic paradigm in much of ‘Old Europe’, appears to correspond to none of these categories [free market, socialist and 'Butskellite' mixed]. Instead, it appears to be a system under which the private sector maintains a nominal legal control over its capital and labour, but the returns on these factors of production are so heavily influenced by tax and regulation that the public sector ends up effectively controlling such returns. This sham form of mixed economy, which needs to be distinguished from the British mixed economy of the 1950s, has traditionally been associated with fascist regimes – for example, the gelenkte Wirtschaft (supple or ‘joined-up’ economy) that Goering implemented in Nazi Germany in 1936.

The awful truth for many who protest our present social system, calling for greater democratic control over more extensive state power in the general interest, is that we already live in the system which is the inevitable, predictable consequence of their demands. It is that statist system which is manufacturing injustice, eroding freedom and impoverishing us today.

In the film, V says,

People should not be afraid of their governments. Governments should be afraid of their people.

Indeed, and when people demand liberty over licentiousness and security, their freedom from state power and the dignity to determine their own destiny within a fixed moral framework, no doubt politicians will arise who will give it to them.

I look forward to the day.

Further reading

BBC Radio 4 Programmes – Keynes Vs. Hayek

What caused the financial mess we’re in? And how do we get out of it? Two of the great economic thinkers of the 20th century had sharply contrasting views: John Maynard Keynes believed that government spending could create employment and longer term growth. His contemporary and rival Friedrich Hayek believed that investments have to be based on real savings rather than increased public spending or artificially low interest rates. Keynes’s biographer, Professor Lord Skidelsky, will take on modern day followers of Hayek in a debate at the London School of Economics. Paul Mason, economics editor of Newsnight, is in the chair.

Listen via BBC – BBC Radio 4 Programmes – Keynes Vs. Hayek. Jamie Whyte also appeared on Radio 4 recently to discuss QE: more here. (And I should have blogged it sooner.)

The consequences of the impending national bankruptcies » The Cobden Centre

A fascinating perspective from Robert Thorpe at The Cobden Centre - The consequences of the impending national bankruptcies:

The governments of Portugal and Ireland are waiting for Greece to default. If that happens then it will likely trigger the bankruptcy of several European banks*. This is the “Second Lehmann Brothers” the UK press have been discussing that could cause another financial crisis. I think such a crisis is likely to happen, but for political reasons more than economic ones. If one of the three countries I mention were to default then the ensuing crisis would give the others permission to do so. It would allow them to blame default on outside events. The politicians in the remaining two countries involved would then become heroes rather than villains. It’s quite likely that in this situation default could be popular since it could reduce taxes.

Elsewhere, I was reminded of a relevant saying of Hayek’s in 1932:

[M]onetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.

It’s to be found in the preface to Monetary Theory and the Trade Cycle (PDF, pp. 5-7), from Prices and Production and Other Works, a book I dearly wish more economists and thoughtful people would read.

Parliament, the EU, Keynes and Hayek

Last night in debate, Keynes and his disciples were invoked and rebutted in relation to EU economic surveillance. One Labour MP wanted to print the money we need…

Today, via The Cobden Centre, I find EconStories have followed up their superb Keynes vs Hayek rap, Fear the Boom and Bust, with Fight of the Century. From the video’s introduction:

Fight of the Century

According to the National Bureau of Economic Research, the Great Recession ended almost two years ago, in the summer of 2009. But we’re all uneasy. Job growth has been disappointing. The recovery seems fragile. Where should we head from here? Is that question even meaningful? Can the government steer the economy or have past attempts helped create the mess we’re still in.

John Maynard Keynes and F. A. Hayek never agreed on the answers to these questions and they still don’t. Let’s listen to the greats. See Keynes and Hayek throwing down in “Fight of the Century”.

Whether we like it or not, today’s big question is which one of these great economist’s schools is more helpful to society’s flourishing. Parliament’s business shows that Keynes’s ideas are being adopted by ever greater state structures. Unfortunately, the experience of our lives is that they are mistaken.

Here’s the video:

Thatcher: This is what we believe.

This week, I was glad to hear David Cameron say ”I’d rather be a child of Thatcher than a son of Brown” but what does that mean for policy and society?

Famously, Lady Thatcher settled a discussion by taking a book from her handbag and banging it on the table, declaring,

“This is what we believe.”

Read the rest of my article at ConservativeHome’s Platform.

Speech in the budget debate

Steve Baker (Wycombe) (Con): When I came to the House today, I expected to hear a great deal of Keynesian argument and I have not been disappointed. I am sorry that the hon. Member for Great Grimsby (Austin Mitchell) is no longer in the Chamber, as I wanted to congratulate him on his comprehensive grasp of Keynesian arguments. Unfortunately, it was also excruciating.

I am told that Keynes thought that the safe upper limit for the size of the state was 25% of national income. He might have halved the size of Government, so we can applaud the Budget as extremely moderate and thoughtful.

I have to tell those who propose deficit spending that it is inherently unsustainable. When Governments spend with a deficit they are bound to inject funds in a particular location in the economy and that is bound to create a pattern of economic activity that can be sustained only with deficit spending. We all accept that deficit spending cannot go on for ever. As one of my hon. Friends explained earlier this week, last year we were able to borrow only because we created a hole in the market for bonds using quantitative easing. That is so dangerous. In the past the world has seen the effects of printing money to pay off Government deficits, and I would dread to think that this country should live through such a circumstance.

I am reminded of some words published in 1945:

“I see now more clearly than ever before that even our greatest troubles spring from something that is as admirable and sound as it is dangerous-from our impatience to better the lot of our fellows.”

That is a quotation from Karl Popper, who is an interesting philosopher because, like his contemporary, Friedrich Hayek, he was a socialist until he understood where that philosophy went.

I am interested in the general well-being, particularly as Wycombe has not only great wealth but significant poverty and income levels everywhere in between. We must take seriously the realities that we face. I am glad that the Budget has included an announcement that there will be a review of pensions, and I should like to speak on that. I am grateful to my hon. Friend the Member for Stourbridge (Margot James) for having brought up the subject.

Read the rest of the speech here.

Mark Prisk MP, Hayek and Mises

Via Business Minister Mark Prisk wants to strip away the red tape – Telegraph:

Friedrich von Hayek is a controversial choice as a pin-up. But a signed pamphlet that the Austrian-born economist wrote in 1980 entitled “Full employment at any price” is proudly framed on Business Minister Mark Prisk’s wall. In placing it there, the Conservative MP for Hertford and Stortford is following in a line of leading Tories to place their faith in one of the 20th century’s most prominent economic theorists.

Great news, but let’s hope my colleagues are reading Hayek’s much-neglected Prices and Production, which explains the structure of capital and which allows a better grasp of real patterns of economic activity.

Hayek is useful, but I find his work takes for granted Mises, who wrote “Society is cooperation; it is community in action.” Consequently, Hayek can be misunderstood. Mises’ work has as a primary theme “social cooperation”: his theories explain the realities of acting individuals working together to improve their condition, that is, the cooperative relationships which constitute civilized society.

Meanwhile, I am beginning Mises’ Omnipotent Government – The Rise of the Total State and Total War (1944), which can be read online here. Read more

Hayek v Keynes

Via www.zerohedge.com and econstories.tv, the choice in economics explained through the medium of music:

See also