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John Gray on Hayek

Current AffairsPosted by David McDonagh Mon, August 24, 2015 20:40:09

On 30 July 2015 in The New Statesman John Gray wrote about “The Friedrich Hayek I knew and what he got right.” He has written many books since he publically announced that he was no longer a libertarian when he got to rather like New Labour in the 1990s. He has since become an admirer of James Lovelock, and so become keen on Green ideas. None of the books he has so far seem to be first rate. Many of them even seem incoherent and rather like rushed hack writing, but the author seemed to find his changes of mind rather productive.

Below, I criticise a recent New Statesman article of his where he, once more, has attempted to assess the liberal idea and why it was so inadequate. What seems to be truly inadequate is the account that Gray has given in his articles and books on pristine or classical liberalism. His latest account reviewed below is no better than what he said on the topic in his many books but seems, nevertheless, to be worthy of comment, as do Gray’s books.

Gray sees Hayek to be of the “New Right” of the 1980s but he called it classical liberalism at the time of his enthusiasm and that was the historic old left. Gray had been a Labourite earlier, which sprung from a tradition that owed a lot to the statist sea-change that began to emerge in the Liberal Party in the 1860s and had almost totally taken over by 1900, before which we might refer to that Party as still largely classical liberal as opposed to statist modern liberalism that was dominant amongst the leadership, as well as amongst the younger members, by the great free trade election victory in 1906, making it something of a swan-song for free trade; though the actual leader, Henry Campbell-Bannerman, was still mainly a pristine liberal. What revived in the 1970s was the pristine classical liberalism.

Gray says that many of those libertarians, called such to distinguish themselves from the statist modern liberals, said that Hayek only valued the state for three things: national defence, law and order and opera. So Hayek was an economist and philosopher that stood for a freer market, if not quite complete free; where freedom was simply freedom from the state. But he was not an anarchist, so Hayek did not see the state as an unnecessary evil. Like the early Tom Paine, Hayek saw it as a necessary evil. Most classical liberals were like that. With Locke, they realised that we could have civil society without the state but they thought that because of crime, the state could be a boon. So reluctantly, they thought that the state was a good thing but only owing to the problem of criminal activity being almost certain to emerge. Since the liberl revival that Gray joined, many have thought that the state is not so good at countering crime. The anarchist contingent is a significant part of the revival.

Gray feels that this pristine liberal paradigm came to power in 1979 but the reality is that it was the Conservative Party that came to power at that time and about half in that organisation did not like pristine liberalism one bit, and the people who liked it, like Mrs Thatcher and her mentor, Keith Joseph, they were flirting with it rather than seeing it as the main thing; but many both in the Conservative Party as well as in the mass media and the rival political parties rather feared they did take it as the main thing. However, pristine liberalism was a factor. It has remained one since.

Gray feels it is important that Hayek was an Austrian, despite him becoming a naturalised British subject. Hayek was born in Vienna, where opera was all-important, in 1899. His father was a medical doctor and his mother came from a wealthy family. Gray seems not to know that liberalism was in decline from about 1860, and that, thereafter, statism was the new fashion. The inter-war years would become nationalistic as a result, for, in practice, socialism was mere statism thus usually more nationalistic. Socialists do not always agree and protest quite the contrary but in 1914 quite a few such socialists, including Prince Peter Kropotkin, largely shed socialism to support the nation state they denied they had owed loyalty to for decades. This was a big shock to those who remained anti-nationalist but they were a minority.

Gray says that Hayek saw the civilisation he grew up in collapse, but it was the war that removed the form of state, and liberalism had been ebbing for over fifty years before 1918. Hayek’s homeland was on the losing side of the war but that is a bit different from a collapse, as Gray imagines, or at least says, as it was not owing to the sort of imaginary perennial fragility that he refers to; which is a major Tory idea and one that looks clearly false to me. I think the Whigs were right that society is far sturdier than the Tory meme has it, such that a great war, like the 1914 war, could cause it to collapse. War does change society but it is not likely to end it.

John Locke was right to hold that civil society was almost perennial being in place long before the rise of the state even if he errs, as David Hume made clear, on social contract theory. The usual respect we show others in society, that we peacefully pass them in the street, do not bother them if they do not bother us, form what the sociologist might call the norms of civil society, and those basic norms are not far off the liberal norms as well as being those of civil society. As Adam Smith said, there is a lot of ruining in a great society. It is not fragile.

Gray says he first became interested in Hayek in the early 1970s. It was owing to his interest in pre-1914 Vienna as much as in the rising paradigm of pristine liberalism in the 1970s UK, he says. He met Hayek at the end of the 1970s and asked him if he knew Karl Kraus, a famous journalist of Vienna before 1914. He was told that Hayek had seen him but that he did not really know Kraus.

Gray says that Hayek had independence of mind and this allowed him to face up to a lot of opposition and criticism including big changes of fashion. Gray feels the paradigm of Woodrow Wilson’s national self-determination imposed by the USA after the war on Europe was one that posed problems for Hayek for the rest of his life. He died in 1992. But he never could see how liberal values got on with tribalism, says Gray.

On the fall of Wilson, the USA, wisely, went back to political isolationism [with free trade, the liberal meme on international relations].

Hayek’s ideas on evolution and on the ideal liberal constitution were not germane to that main problem, Gray says. Hayek had dropped his early socialist ideas owing to the economic calculation argument [eca] put to him by Mises. This seemed to Hayek and many others to be an effective refutation of socialism so he ceased to be a socialist. He afterwards adopted liberalism, and Gray said he made it into a sort of scientism; this is most ironic as Hayek was a major critic of scientism, Gray openly admits. It was held by Hayek to be the inept attempt to apply science to the human world. It was an example of Hayek often called a mere pretence of knowledge when he was looking at the socialists. However, Gray’s account looks weak there, as it so often does elsewhere.

In what sense did Hayek lose the debate with Keynes? Did Keynes win it? Keynes rejected equilibrium but, as he was a coward, he did it by picking on Say’s Law, which few had heard of, and he gave an inadequate account of it, and Keynes also gave an inadequate account of the orthodox economists in general, calling them “the classsics”.

Ironically, John Hicks, who thought he was going over from Hayek to Keynes and who won the debate by a de facto rejection of both of them, had found fault with the fact that Hayek scotched the meme of a self-adjusting economy by ignoring it with an hypothetical lag owing to malinvestment that Hicks held was unrealistic. The Hicks version of Keynes, adopted by all the textbooks, had the meme that Keynes was out to dump at its heart viz. equilibrium. The equilibrium so obvious to Hicks that he never seems to have realised that Keynes was out to reject it, was, of course, just an account of self-adjustment by the market.

All this is lost on John Gray. It was enough for him that Keynes rather than Hayek or Hicks was the nominal victor. Gray has most likely not read Keynes’ 1936 book anyway. More oddly, it would seem that Hicks never did either.

Hayek was rejected as an economist after leaving the LSE [owing to irrelevant personal reasons, rather than to economics] as a result. At Chicago, he was allowed in only as a moral philosopher. A version of Keynesianism had won, Hicks version, but it was not anywhere near what Keynes had wanted. He wanted to reject market adjustment but Hicks largely retained that. Keynes had wanted it to be the rule that the market did not clear, as had Malthus tries to defend against Ricardo in the first decade of the nineteenth century but Hicks innovated a version that suggested that Keynes should have called his book The Special or Particular Theory rather than his actual title of The General Theory of Employment, Interest and Money (1936).

I see no sign that Hayek ever believed that he had lost a debate, intellectually, to either Keynes or to Hicks. Hayek saw the LSE go over to what was called Keynesianism, of course.

Hayek did go somewhat statist owing to emotional pressure, I suppose, but not ever did he become Hicksian or, still less, Keynesian. Keynes truly remained out on a limb as regards his hated equilibrium, that remained as strong as ever, even if a version of Keynes was adopted, and what was called Keynesianism was granted lots of rather incoherent lip service based on supposed rejection of the still largely unknown Say’s Law. Indeed, Keynes caricature of that was accepted completely by the 1950s.

But Hayek did recommend a safety net and it was the state’s safety net that alone caused the mass unemployment of the 1930s, not the supposed lag that malinvestment caused that somehow suspended Keynes hated equilibrium, as Hayek had held. The unemployed adjusted to the dole rather than to the market. We might say they joined the sinecure section of the state sector, only they did not, as in the late USSR, pretend to work. Indeed, the few who took a black market job pretended they were not working.

Hayek took the economic calculation argument [eca] from Mises but later found it in a few nineteenth century authors like Baggage, so Hayek made no pretensions to being “most original” in the knowledge finding function of the price system, as Gray has it. But Gray knows the eca, if not all its implications. However, he nevertheless is still silly enough to say it also applies to the free market.

Gray incoherently says:

“The trouble is that it also applies to unfettered market capitalism. No doubt markets transmit information in the way that Hayek claimed. But what reason is there to believe that – unlike any other social institution – they have a built-in capacity to correct their mistakes?”

The eca applies to unfettered market, says Gray, yet they do find viable prices as Hayek said too. That is “no” yet also “yes” too; or P&-P too. Gray is being quite absurd here.

Gray then asks how can the market self-adjust, unlike any other institution [is there a tacit “except the state” assumption there?] overlooking that the answer is by the ever adjusting price system. The market is dynamic as it is always adjusting by the price system.

History itself supports no supposition or thesis.

Panic obfuscates prices? How? Gray has adopted mere bluff from backward Keynes. There never was any irrational exuberance but there has been exuberance but it has not stopped the market from clearing. Why should it?

Yet Gray is content to say, to the backward readers of The New Statesman, founded by backward Keynes himself, that:

“History hardly supports the supposition. Moods of irrational exuberance and panic can, and often do, swamp the price-discovery functions of markets.

When considering how to overcome the Great Depression, Hayek opposed Keynes-style fiscal stimulus for the same reason he opposed monetary expansion of the sort later advocated by his friend the American economist Milton Friedman (1912-2006). In attempting to generate recovery by macroeconomic engineering, both monetarism and Keynesianism required a knowledge of the economy that no one could possess. Unlike monetarism – with which it has sometimes been confused – the Austrian school of economics that Hayek promoted insists that the quantity of money cannot be measured precisely, and that expanding the money supply cannot reflate the economy in a sustainable way.”

Friedman did adopt aspects of Keynes, as did Hicks, but they did not reject what Keynes detested: equilibrium. Gray continues:

“For Hayek, the causes of the Depression lay in earlier central bank policies of cheap money, which resulted in large-scale misallocation of capital. Because no central authority could grasp the shifting pattern of relative scarcities and prices, only the market could determine the right allocation. Accordingly, believing that misguided investments had to be liquidated, Hayek argued in the 1930s for policies that were more contractionary than those that were actually pursued. The task of government was to get out of the way and let the process of adjustment run its course.”

Quite, Hayek was right there but he thought a lag might be created but he erred there as the market is a non-stop process of adjustment; Gray says it yet he also wants to deny it too; again P&-P too.

Gray seems to see how the market adjusts but he still perversely wants, or he writes as if he wants, the state to stop it. Then he, rather stupidly, denies that the market even can adjust.

But he continues:

“If they had been adopted while the crash was under way, Hayek’s prescriptions would have made the Depression even worse than it proved to be – a fact he later admitted.”

He did not admit anything like that, which I can recall. New buyers would have come in and the readjustment would have been fairly rapid.

If Hayek thought the depression would have been worse, if not for the state, why did not Keynes win him over? Anyway, it seems that the state prevents rather than aids market readjustment and that stagnation is alien to it. As Gray says of Hayek:

“But he never accepted Keynes’s core insight that large-scale economic discoordination could be the result of the workings of the market itself. For him it was always government intervention that accounted for market disequilibrium. More sceptical as well as more radical in his turn of mind, Keynes questioned the self-regulating powers of the market. His work on the theory of probability disclosed insuperable gaps in our knowledge of the future; all investment was a gamble, and markets could not be relied on to allocate capital rightly.”

Questioning the market is fine but the price system is clear enough there as a self-adjustment process to fresh conditions, so any serious questioning might have led Keynes to realise that. It might also lead Gray to do so too. He continues:

“There were booms and busts long before the emergence of modern central banking. Left to its own devices, the free market can easily end up in a dead end like that of the 1930s.”

No, the market does not stagnate. The dole was needed for mass unemployment to muster in the mass urban economy, and it is true that Hayek did go statist enough to agree that the masses would need a safety net, the very thing that stops the market from clearing. Freedom or liberty means we all need to be responsible and for us all to have savings, that Keynes repeatedly made a very poor case against, for some savings are vital to tolerate the intrinsic self-adjustment of the market.

But Gray feels that Keynes knew more about markets than did Hayek, as Keynes was a practical and successful investor for his college. Indeed, he claims that Keynes was one of the most successful investors in the twentieth century! So he knew about the uncertainty of markets in a way that Hayek did not, says Gray. He was aware of how the misguided economic policies might upset society in a way that Hayek did not, for Hayek ignored all those hazards. Here Gray seems to have lapsed into imagining that it is Hayek advocating state control by political policy rather than Keynes.

Gray says that Hayek’s blindness on politics was all too clear when he advised Margaret Thatcher to cut the state sector, that Gray calls public services, and to cut inflation so that the state budget might be balanced. This was exactly as he had advised in the 1930s, says Gray. He told Gray, in private conversation, that Trade Union power might be broken if the state made cuts. Gray thought Hayek was indifferent to mass unemployment that then, in the 1980s, stood at over three million. Gray does not realise that cuts might get rid of mass unemployment, as he never seems to have seriously thought much about such problems. Instead, Gray said that cuts would increase unemployment. But it is only the dole, paid for by the state from taxation, which can do that.

Gray says:

“Fortunately Hayek never had any influence on Thatcher’s policies. (Her chief economic adviser in these years was Alan Walters, a Friedman-style monetarist.) Equally, and perhaps also happily, Thatcher had no understanding of Hayek’s ideas.”

Gray says she haply never read the stint at the end of The Constitution of Liberty (1960), where Hayek explains “Why I am not a Conservative” for he rejects because conservativism rejects progress, says Gray. “Unlike Hayek, Thatcher understood and accepted the political limits of market economics” Gray says, but Gray and Margaret Thatcher never saw how damaging the state was to society. The main fault with Hayek is that he too had too much tolerance for backward politics. Politics is perverse wastage that needs rolling back, or cutting out completely, by tax cuts and privatisation.

Liberalism went out of fashion around 1860 but Gray imagines it actually collapsed, a very Romantic idea that is utterly unrealistic, given the nature of civil society. War would not have set liberalism back so much had liberalism remained the fashion, but socialism/collectivism was, by then, the fashion. War did end the empire that Hayek grew up in but nor was that particularly liberal in itself: no empire ever, quite, can be. Civil society, that is the basis of liberty, is not one whit fragile and it is very stupid indeed to imagine that it is fragile. No wonder they called the Tory Party “the stupid party”. This idea that society is fragile is about as unrealistic as one can get about civil society. But Gray simply does not see the pounding the backward state hands over to society every single day, thus showing it to be very durable.

But Gray is right that Hayek badly over-rated the law. It never could be the basis of civil society as so many, with Hayek, imagine. Like the state itself, law is at the periphery of society. Nor can it really protect liberty from the state. Gray is right there. Indeed, statutory law is a tool of despotism and privilege. Liberalism is about repealing illiberal laws rather than establishing new statutory laws.

But liberal values, if fostered amongst the public, can see off war. Private property is a problem solver. The state, by contrast, is a trouble maker. So the less we have of the state, the better.

Why Gray imagines the political entity of the Austro-Hungarian Empire kept politics at bay is not one iota clear. Gray is right that the European Union is not going to aid liberalism as it is a warmongering pact, despite the pretense it has of being for peace. The EU is out to be top dog superstate, but it is taking its time. It is almost as slow as the progress towards full liberalism itself. But all societies, even the backward late USSR, had the liberal civil society in their practical everyday life. In any society most members respect the liberty of others. But also all allow the state to scotch liberty at will; that privilege granted to the backward wasteful state by the people is the main problem. They give up this liberty to form state privilege by suspending normal moral values in its favour. As Edmund Burke said: “The people never give up their liberties but under some delusion.” The delusion here is that the state is a boon. Even John Locke thought so.

Gray fails to reproduce Popper’s attack on Hayek and Michael Oakeshott saying that Hayek’s spontaneous order as “rubbish” is no explanation of its faults whatsoever but Gray says it is exact!

However, Gray witnesses civil society every day in which strangers in the mass urban society freely pass him in the street, which is done as part of what Hayek would say is a spontaneous order. My guess is that Gray has no case against civil society; nor any good case against liberalism.

The change of fashion away from liberalism towards socialism after 1860 seems to have been flimsy, though it was aided by some haziness amongst the liberals as well as some youthful charismatic dash as well as sheer ignorance amongst the rising statist liberals, like Joseph Chamberlain and Charles Dilke in the UK’s Liberal Party. The pristine liberals were aging and pragmatic anyway. That there was a generational difference greatly aided the change of fashion. Gray makes the quip that there is nothing liberal about the mafia, and that is quite right but that is also true of the state too, but despite Chamberlain’s talk of public service it was more like rule than service that the new man management and more state control of the new fashion was to embrace.

Gray has the idea that a mafia would arise spontaneously, even though he also wants to be sceptical about that meme from Hayek, to say it was exactly rubbish in fact. . However, the culture developed over a long process of real full privatisation, designed to shed government and all government policy rather than as a mere new way to further state policy by political use of the market, as that called privatisation has been since the 1980s, would result in security services that would have had lots of time to crowd out the mafia problem.

Herbert Spencer was right that there was a social movement towards liberalism before 1860 but he also saw the fashion change towards socialism later on too. He argued against socialism. But he ironically had a holistic meme that the socialists used to even a greater extent than they used Marx. Just look at almost any Jack London novel to see a socialist in love with Spencer. William Hurrell Mallock saw such faults in Spencer, who later admitted to Mallock that he was too collectivist, though he never met Mallock. But pristine liberalism lost out to the new fashion of statist liberalism; and to socialism generally. It revived a bit in the 1970s when Gray joined it. But Gray always did love pessimism.

Gray simply errs left right and centre in his rather silly ideas about alternative economic systems and choice. The USSR never was non-capitalist, for example. An increase of the state ownership is not an alternative economic system but the enlargement of a sort of quasi-dole or semi-dole; the rise of where, in the late USSR, they said the workers in the state sector pretended to work and the state pretended to pay them. Many thought that in the UK this was “mixed economy” but in reality it was just an over-taxed market economy that supplied some job security. The mixed economy is a mixed up idea. There is only the market economy. The state sector just means higher taxation.

Communism is a myth, not a real rival to the price system, and the late USSR did not even claim to be communist but rather it claimed to be socialist, that Lenin said, a few times, was state capitalism. It would be clearer to just call it capitalism. But it was anti-liberal. Gorbachev tried to reform it but Yeltsin got rid of it. No collapse in sight.

The idea that the Afghan war brought it down is an example of Gray’s inability to judge actual events. There is no choice of economic systems. It is either capitalism or capitalism. But we can always have a bit more of the wasteful state.

Of course, Hayek and Spencer had a lot in common as Gray said. They were both liberals.

Again, China was capitalist, if statist too, under Mao. Deng Xiaoping simply freed it up a bit. Pristine liberalism will free it up yet more.

Letting the banks go under would not have been all that bad from liberal point of view. The fresh banks that would have emerged to replace them would have most likely be in better shape today had the state allowed that to happen back in 2007, as Hayek might well have recommended.

Hayek erred on the fairness of the market. He thought it was wise to say it is unfair, but few people in the larger society have ever thought that. Most people think it is fair enough, but no end of fools in colleges think they know better; so do schoolteachers but not most students in the colleges or most pupils in the schools, even though they may be usually a silent majority. Hayek thought that the idea that the market was unfair had something to it, but it looks to be merely a perverse idea.

Gray, for all his silly cynicism and pessimism still has not realised how unpopular the college/mass media sacred cow or ideal of democracy has always been, and always will be. The “anarchic energies of global markets” clearly serve the public way better than democracy ever will.

  • Comments(11)

Posted by Lee Waaks Tue, September 08, 2015 14:19:16

Thanks for your reply, David. I look forward to your post.

Just in case it wasn't clear, in my previous replies, I was suggesting that perhaps the market did not (quickly) clear in 1920-21 because, even though there was no unemployment insurance to maintain mass unemployment, there still remained a central bank and the money supply problems that flow from this.

Posted by David McDonagh Sat, September 05, 2015 12:11:42

Well, I do hope to put a stint up here on that 1920 slump, Lee.

Why the market failed to clear is well worth looking at.

Posted by Lee Waaks Sat, September 05, 2015 02:37:47

Thank you for your reply, David.

I agree with all of your comments. However, I'm not sure the 1920-21 depression in the U.S. actually does refute your view. As I say below, this is because there is a difference between market clearing under laissez-faire and market clearing under a hampered market. The U.S. markets during 1920-21 were hampered by a central bank, which is central planning of money. The clearing of labor markets and malinvestments were likely slowed due to the uncertainty generated by a collapsing money supply. This would not likely have happened under a 100% gold-backed dollar or a free banking system, as it would have prevented a collapse of the money supply. In addition, the widespread malinvestments that were precipitated by the pre-war inflation are not likely under free banking because there is no impetus to excessive debt-financed investment in the absence of inflation; on the contrary, there is a slow, secular, decline in prices as productivity increases.

Posted by David McDonagh Fri, September 04, 2015 15:51:34

Thanks for your reply, Lee. Difficulty with my yahoo account delayed this reply and the one via that still frozen account on the trade cycle that might, eventually come from g-mail now.

Yes, the Keynesians do give credit to Keynes for the post war cleared market. However, their schemes seem to amount to no more than fooling the workers into pricing themselves into jobs by the guise of inflation. This rather looks like a rough agreement rather than a disagreement with “the classics”!

I think the war did get the workers to price themselves into full employment in 1945 but they could have done that peacefully simply by realising it needed to be done in the 1930s. No Keynesian tomfoolery seems to have been needed.

I think Simon is right that we have potential infinity on economic growth, possible employment, fresh entrepreneurship and the rest.

I still need to look into the 1920-‘1 recession. I admit that might well refute my view.

Mass immigration certainly does show there are a great many potential jobs out there in the UK economy to be had, even if one hates such immigration, but not the infinite amount that Simon has in his thesis. Simon’s generalisation does go beyond the evidence, as do all generalisations in science, as elsewhere.

Posted by Lee Waaks Mon, August 31, 2015 21:05:14

Thank you for your reply, David. My comments are interspersed.

McD: I do not see the UK cleared market 1945-’71 as a boom but rather only as a normal cleared market. Keynes wants to say it is not usual for the market to clear but that looks to be exactly wrong.

LW: I should have not have said boom, although Keynesians view this period as a golden age for state management of the economy, do they not? However, I believe you are correct that the market clears rapidly and that there is a constant labor shortage as per Simon. Keynes was judging the market based on the results of state monetary/wage interference. He assumed we run out of profitable investment opportunities.

McD: Equilibrium goes into disequilibrium by the minute as prices flux. I think this would soon clear a free market that lacked a safety net. I do not think even a big upset would allow what we could call mass unemployment to gather.

LW: As previously mentioned, the recession of 1920-21 in the U.S. lasted for about 18 months. That could be an empirical refutation of your view assuming there was no state interference that would have prevented market clearing -- and depending on what you consider to be mass unemployment (the unemployment rate peaked at 11.7 million). However, if what you actually mean is a naturally occurring downturn, i.e. one not brought on by state interference, then I agree they would be short-lived. The 1920-21 depression was due to state interference and, therefore, longer in duration due to the collapse of the money supply that occurs under central banking.

McD: If I err there hopefully a good refutation can come from others in the LA, but, based on my 1960s experience, I do now think it would clear very rapidly; in days rather than weeks.

LW: Again, this depends on if the downturn occurs under free banking/laissez-faire or central banking/dole. Amusingly, I have a friend who used to uses examples like the Poles/Indians (in his case it was El Salvadorans) to refute the need for the dole, but now that he hates immigration, he no longer brings it up!

Posted by David McDonagh Mon, August 31, 2015 18:33:15

I thought I was replying to the post the blog usually sends to all on it when someone posts on it, so maybe that part worked in response to your efforts, Lee, despite the blog finally rejecting your post.

I do not see the UK cleared market 1945-’71 as a boom but rather only as a normal cleared market. Keynes wants to say it is not usual for the market to clear but that looks to be exactly wrong.

As labour shortage is massive, as Julian Simon suggests on population growth, and as the UK cleared labour market up to 1971 does too, then I would expect any displaced workers to very soon adjust, in days rather than weeks. Even with a million plus on the dole those millions of Poles, and the illegal Indians, also found jobs in the UK around 2006. The shortage of workers is dire. I would say that the potential jobs in the UK are infinite, given a clearing wage level.

Equilibrium goes into disequilibrium by the minute as prices flux. I think this would soon clear a free market that lacked a safety net. I do not think even a big upset would allow what we could call mass unemployment to gather.

If I err there hopefully a good refutation can come from others in the LA, but, based on my 1960s experience, I do now think it would clear very rapidly; in days rather than weeks.

Posted by Lee Waaks Mon, August 31, 2015 15:52:27

Thanks for your reply, David.

I think some might find it odd that your latest reply is a reply to my to reply, which I had to send as an email due to not being able to post it here. On the other hand, I suspect we have a very limited readership.

You wrote:
"However, a cleared market would remove fear of unemployment in practice [though I oddly feared it in the 1960s, but when it happened I got a new job in an hour, or way less; indeed the choice of three] as jobs tend to chase workers in those cleared conditions. This would make it difficult for mass unemployment to muster or gather. Could malinvestment upset that cleared employment much? I doubt it, but I certainly need to give the matter a lot more consideration and maybe better quality consideration than I have over the past few decades."

The employment situation you describe occurred during a boom in the UK, did it not? No need to worry about unemployment during the good times. For example, just prior to the 2007 recession, I was getting calls from headhunters with job offers (I was already employed) because the employment market was very tight for employers. As my resume is none too impressive, it occurred to me after the crash that the next time I get those calls I should short the market!

However, when you speak of "equilibrium", I'm not sure what that means in terms of recovery under laissez-faire. What I stressed before is that there is a market process that occurs in response to depressions triggered by money mischief that moves the market to equilibrium but that doesn't mean instant recovery. I suppose you could compare the correction to "stages" of equilibrium as the market adjusts to the new circumstances.

Posted by David McDonagh Fri, August 28, 2015 19:54:40

Thanks for your reply, Lee.

I had quite a feel [it might well have been a delusion] for trade cycle theory in the late 1970s, but ever since DRS came off advocating Mises/Hayek, after his 1980 reading of “The Hayek Story” in John Hick’s 1967 book, I have been uneasy as to my retort to his challenge.

However, I need to admit that an eighteen month readjustment would seem to be a refutation of anything I have ever had in mind since, or during my 1970s confidence peak. Savings might last 18 months but I would expect most workers not to want to usually spend their savings for that long. What maintained the workers out of work for 18 months? It is a long time without fresh income. I need to study that particular slump.

We do see the price system adjust by the hour. I think this is what Hicks thought of with the meme of equilibrium.

There can be massive dips, as we see this week with China.

Can money fall in value such that the market will not clear [equilibrium] for 18 months? I think I am with Bob Layson’s myth of mass unemployment thesis [one of his LA talks; but Bob has repeatedly expressed his doubts on the idea of equilibrium whilst I depend on it] when I doubt it.

Market equilibrium is a bit like my ideas on belief, in that it tends to vanish to reproduce itself again almost s soon as it appears in its perennial adjustment and re-adjustment. DRS says that his own introspection does not let him see that I am right on the flux or adjustment of belief, but anyone can see the flux of the price system on one of the many price indices, like the FT or the Dow-Jones.

However, a cleared market would remove fear of unemployment in practice [though I oddly feared it in the 1960s, but when it happened I got a new job in an hour, or way less; indeed the choice of three] as jobs tend to chase workers in those cleared conditions. This would make it difficult for mass unemployment to muster or gather. Could malinvestment upset that cleared employment much? I doubt it, but I certainly need to give the matter a lot more consideration and maybe better quality consideration than I have over the past few decades.

The BBC news reported three million from Poland into the UK prior to 2007, on top of many other illegal immigrants from the Indian sub-continent and that shows what can be absorbed when we still have well over a million on the dole. So a cleared market would be even more absorbent, it seems.

Gold might hold up better than paper money. It is way harder for the state to debase. So it is more likely to retain public confidence. But Hayek tended to agree with Keynes that gold was not needed, and DRS as said the same in his College of Complexes talks.

John Hicks seems to be with me on a belief-like rapidity in fresh and ephemeral equilibria. The rapid movement in prices seems to be part of that.

I hope to return with other comments.

Posted by David McDonagh Wed, August 26, 2015 20:36:31

Thank you very much for your criticism, Lee.

I have collected a number of John Gray’s renegade, or post-liberal, books over the years and I now aim to give my next Stevenage talk on them next month.

Yes, my writing seems to remain fairly poor, and there is not much of it either, [a few years ago, I was asked if I was dyslexic, and maybe I am when it comes to writing] but Gray’s seems to be readable enough, even if it is not always coherent.

We never did quite meet but he did expressed within my earshot at a Cambridge meeting he spoke to, his disapproval of my recent speech in a University of Warwick debate of a few days before called “Marxism in its last throes” [that he seems to have heard a recording of] back in the early 1980s, where I said that the denouement of Marxism will soon be as clearly overdue as is the Second Coming of Jesus, and that it already showed as little true promise, for most of the 2000 years lead that Christianity has been overdue in that respect is quite superfluous, a century would have been enough in both cases.

Gray is about a month younger than I am, so he will be the first younger person that I have spoken on by this time next month.

Maybe it is sheer bias that makes me think that the books Gray wrote as a liberal seem better than his renegade ones.

But a renegade from any creed, or position, is always very interesting. Why anyone changes from one general position to another seems intrinsically interesting to me. I tend to think Gray’s abandonment of the rather optimistic pristine liberal creed never did fit his innate personality all that well as he seems to be innately pessimistic so he is more at home in what is today called “cynicism” [quite distinct from the philosophical school of Diogenes Dog, for that seemed to reject the world, but the vulgar meaning tends to reject mere theory, especially if it looks optimistic].

Keynes wanted to go back to Malthus, who held that the market often would not clear, and Malthus had a long debate with Ricardo, by correspondence, on this topic, that J.B. Say write m any letters to Malthus to join in. Most historians of economics held that Malthus lost that but Keynes seems to have held that it was Ricardo that ought to have lost.

The idea that the market tends to clear or goes from one equilibrium via a temporary disequilibrium to another fresh one in a process that later James Lovelock would say could be seen as also biological process on Mars, such that from Earth if there was life on that planet, was so in supply and demand matching, and then slightly un-matching, only to soon match again.

This could be seen in the flux of the price system every hour.

It was the sign that the market self-adjusted, anarchically. Keynes liked the idea that the elites and the , with the civilised [as he seemed to see it] civil service it needed was vital to modern society. He set out to say that, generally, markets could not clear free of a regular state stimulus and that the market had so often had seemed to do so in the nineteenth century was simply a curious fluke of recent history, such that orthodox economics up to 1936 was a special case that needed to be explained by his new general theory.

John Hicks thought he was going over from Hayek to Keynes when he unwittingly pioneered the version of “Keynesianism” that has what Keynes was most against, i.e. equilibrium, at its heart and so it was Hicks that really won the debate by a de facto rejection of both of Hayek and Keynes.

Hicks had openly found fault with the fact that Hayek scotched the meme of a self-adjusting economy, or equilibrium, by ignoring it with an hypothetical lag, that Hayek held resulted from earlier malinvestment, but the lag was a thing that Hicks held was unrealistic owing to the rapid process of equilibrium.

That Hayek disagreed with rapid equilibrium might have been a factor in why they all rejected him as an economist at the University of Chicago when he later, after the war, saw fit to leave the LSE owing to his desire to marry his first love, that involved dumping his wife and family, a move that many of their common friends reacted to by criticising Hayek for being so rash.

Yes, Hicks was not denying malinvestment so much [odd how many of his later books remained on Austrian economics] as that such a lag could result in a lag. I still need to find that 1967 book to give his full exposition.

My own [maybe inadequate idea] is that Keynes got his oxymoronic “unemployment equilibrium” rather as Bob Layson, says in his LA talk on “The Myth of Unemployment”, as the state cleared the market by paying people to pretend to look for work at wages levels high enough to effectively ensure that they remained on the dole; or “unemployed”. The dole was basically like a new type of job, except it obfuscated the reality of the perennial shortage of labour.

The latter fact is what seems to separate Malthus and the rest of his peers in economics after 1800. It is not clear that Keynes denied it, though, for all along he tends to agree that wage cuts are needed to clear the market, after which he seems to expect real wages to, once more, shoot up; much as most economists that he “disagreed” with did. Thus his inflation ploy looks like a mere trick to fool the workers into a pay cut. If so, all this looks like he actually thinks that mass employment is special case, not general one, and this may be the reason the 1936 book makes no real attempt to provide the supposed needed new general theory.

With a “right” to the dole we do get a mass unemployment that seems to go on indefinitely, as the old USSR largely semi-dole might have too, but with either charity or savings we have an incentive to return to work, as we do not like being openly on charity or running our own savings down, compared to getting a new job. The lack of elementary knowledge of economics, especially being ignorant of the perennial shortage of labour, amongst the wider public seems to be the chief cause of mass unemployment for it accepts a supposed need for “the safety net” of the dole; as did Hayek.

It seems to be the case that profits [the return for entrepreneurship] is not immediately germane to unemployment so much, so Reisman seems to err there, as the dole being enough to outpace the market clearing rate seems to be [along with widespread public ignorance of its results that leads many to support it] the whole problem.

I am not sure the malinvestments can be undone, but only that it seems to me bloated investment owing to inflation is not what musters mass unemployment, though it may well upset the market, and give rise to a need to adjust.

DRS, Bob Layson, and others, may well put me right on all this. It would be very good if they did. Or you might continue on to do so, Lee.

Presumably, we do lose out owing to the damage that inflation does but long term mass unemployment, or what people think of as the slump need never result owing exactly to the phenomenon that Malthus, Keynes and John Gray want to deny, viz. that the market is a continuous process of anarchic self-adjustment by the normal working of the price system.

This denial of market self-adjustment seems to me to be as certainly wrong as denying the nose on their faces would be. The price system of adjustment to fresh supply and demand can, nowadays, be seen in operation well within any hour of the day.

Is capitalism the market, or not?

I think in rough broad basic terms, as Thomas Hobbes seemed to have done. He was accused of missing out many details in his translations of Homer and Thucydides.

For me the market is capitalism, so full self-employment would be too, but Marx would feel it would need wages, so it could accommodate his imaginary surplus value.

As DRS is giving a talk on Popper in December, he ought to note that Popper badly errs in thinking the Marxist account to be zero sum [in his The World of Parmenides (1998) p200]. Marx’s account is positive sum but it is still quite false. For Marx, capitalism would be ended if wage labour was ended, but note we had wage labour completely from 1917 onwards in the late USSR. So he might think it still to be “bourgeois”!

I think the Bolsheviks did rule over hampered markets. So why not call them capitalist? They seem to fit Marx’s bogus assumptions as well as the west did, even if he wanted many things both lacked to fit his ideas of what capitalism had to be.

As Marx thought that capitalism demanded the state, I always thought that Lenin’s term of “state capitalism” was pleonastic. I also thought that choice of economic systems was not very realistic; much as I do any choice in belief. It is, maybe, an overuse of Occam’s razor by me.

The late USSR clearly used prices, even if they hampered them a lot. I think the black market has to be a market, thus capitalist in my broad usage but not in Marx’s more detailed, but mythical, account.

Stalin knew that everyone, including all on the Politburo, used the black market. As it was against the law, any Politburo member could be arrested for that at any time by Stalin. This was handy for his power base.

If current common sense got places like the USSR factually right then we would be nearer to complete liberalism, I think. It is partly the myth of choice in economic systems that tend to aid dysfunctional politics today. It gives the state a supposed job to do.

Yes, I am holding that malinvestment alone would not allow mass unemployment to muster. It has to be both mustered and later maintained by the dole, thus by taxation, I think. With personal savings I doubt if it ever could go as far as to form large numbers.

I think a cleared market would show up perennial shortage of labour, that authors like Julian Simon show is clearly the case, and such a cleared market could take on any amount of fresh workers before the end of any day, let alone overnight. New firms might arise but a cleared market starves nearly all existing firms of workers.

Well, I hope we have got debate underway that draws in others who might correct us both, Lee.

Posted by Lee Waaks Tue, August 25, 2015 14:51:18

It occurs to me now that I may have missed an your point on Hayek vs. Gray on price adjustments/market clearing. Austrian economists like Hayek argue that malinvestments -- and the unemployment/depression that follows -- are caused by inflation. Are you arguing that that in the absence of the dole there would be no depression in spite of any malinvestments? I would argue that if many firms collapse or cut back on production when inflation slows or ends, the hundreds of thousands of sacked workers will not likely be employed overnight. It will take time for new firms to sop up these workers even at bargain prices due to the time it takes to get a new firm up and running. But I believe without the dole this time would be far shorter than what many think. Your comments are very welcome.

Posted by Lee Waaks Tue, August 25, 2015 14:35:27

I always enjoy reading your posts, David. They always sound fresh, interesting and informed. This one is no exception. You are likely a better thinker than Gray in spite of his fame and fortune. If you could write as well as Gray you could really have a go at him! I think substantial number of notable professed free-market economists could do well to read you too! However, I did not quite follow what you were saying in the following paragraph:

"Ironically, John Hicks, who thought he was going over from Hayek to Keynes and who won the debate by a de facto rejection of both of them, had found fault with the fact that Hayek scotched the meme of a self-adjusting economy by ignoring it with an hypothetical lag owing to malinvestment that Hicks held was unrealistic."

As I discussed in my talk, I think the lag Hicks spoke of (as reported in other sources-- I haven't read Hicks) has to do with Hayek's view that the public's time preferences in terms of their saving/spending ratio could be thwarted for a few years (decades?), but Hicks believed it could only last a few months at most due to the public spending their new paychecks right away, so no malinvestment could get off the ground. I think Reisman answers this objection when he argues that profit rates can be artificially maintained with inflation for many years so long as inflation doesn't become runaway inflation. It's when the inflation is slowed (or stopped) that the malinvestments are revealed. But the market can rapidly adjust to clear away these malinvestments so long as the dole is not there, as you have convinced me to be the case.

Also, I don't follow you on the alleged capitalist nature of the USSR/Mao's China. It seems to me that if the state owns nearly all the factors of production, and there are no prices for these factors of production, as well as the absence of a stock exchange, that even the existence of black markets does not make these societies capitalist. On the other hand, if socialism/communism cannot work, then we would have to ask what kind of societies were they? Extremely hampered market economies, I would argue. If that is your point, I accept your argument. However, it is confusing for the average person who is accustomed to the capitalism he sees in, e.g. the UK, to hear the USSR called "capitalist".