What should Knightean economists do?

Andrew Farrant trawls the archives to figure out what happened when James Buchanan visited Pinochet's Chile.

Although Milton Friedman and Arnold Harberger became involved with Pinochet's Chile in the mid‐1970s, an increasingly influential body of scholarship argues that James M. Buchanan was similarly eager to provide Pinochet's dictatorship with advice. Buchanan reportedly had a heavy influence on the development of Chile's 1980 Constitution and similarly helped to design Chile's binomial electoral system. Buchanan's seeming willingness to advise Pinochet's dictatorship provides a stark contrast to his longstanding advocacy of Frank Knight's view that democracy is “government by discussion” and Buchanan's oft‐repeated insistence that democratic consensus trumps economic expertise. This article draws upon a wealth of largely ignored archival evidence and Chilean primary source material to engage and evaluate whether Buchanan—a Knightian economist par excellence—abandoned his advocacy of “government by discussion” and provided early 1980s advice that helped Pinochet's regime of “institutionalized terror” (Valdes 1995, p. 30) design a constitution that would chain any subsequent Chilean democracy.

So what happened?

Buchanan was invited by the Dean of Universidad Técnica Federico Santa Maria Business School, Carlos Cáceres, for the school's 25th anniversary.

Although Buchanan subsequently told Cáceres that the “tentative arrangements that you suggest for the visit seem fully satisfactory to me” (February 25, 1980), there is no evidence to indicate whether Buchanan was initially aware that Cáceres was a member of the Council of State—an advisory body created in early 1976—which met between November 1978 and July 1980 to review the earlier Anteproyecto de Constitución Política (Preliminary Draft Political Constitution) that the Ortúzar Commission had submitted to Pinochet in October 1978 (Barros 2005, p. 174).

...

MacLean (2017) suggests that the “wicked genius of Buchanan’s approach to binding popular self-government was that he did it with detailed rules that made most people’s eyes glaze over” (p. 159). By contrast, the relatively brief set of outline notes that Buchanan drafted shortly before he traveled to Chile signify that Buchanan thought it “Difficult to know what to talk about … [but I] Propose to do more or less what I did at a lecture in Lisbon, Portugal in November, 1978 … [i.e., provide a] general summary of ‘An Economic Theory of Political Constitutions’” (Chile Lectures 04/28/80, BHA). Although Buchanan noted that “My own work has been, and is, in this, also relevant to Chile (as to Portugal). … ‘Politics without Romance’ … Stick to constitutional issues” (p. 1), he similarly noted the “Influence and importance of Wicksell (on me, on others) … Top rank … Wicksell’s warning to economists [i.e., not provide policy-advice] … Look instead at institutions. How they work” (BHA).18

According to MacLean (2017), Buchanan provided his Chilean hosts with a wealth of
“detailed advice on how to bind democracy, delivered over the course of five formal lectures [Buchanan only gave four lectures to Chilean audiences] to top representatives of a governing elite [e.g., the undergraduates at UTFSM] that melded the military and the corporate world” (pp. 158). In particular, MacLean’s (2017) narrative places much weight on Buchanan’s May 8 lecture to the approximately 250 “government representatives, business people, university professors, and executives” (Que Pasa, May 1980, p. 17) who attended the “Open Lecture and Panel” on “Economics and Public Choice.”

Buchanan’s draft lecture notes (initially written for his May 5 lecture to UTFSM undergraduates and barely revised before he gave his subsequent lecture at the Hotel Carrera Sheraton) signify that his May 5 and May 8 lectures—both titled “Economics and Public Choice”—provided his UTFSM and Hotel Carrera audiences with a substantively identical and fairly basic overview of public choice and constitutional economics.19 Similarly, Buchanan’s notes for his May 6 lecture at the Chilean Naval Academy show that he provided his audience with a basic outline of public choice theory and welfare economics which included a brief overview of the “History” and “development” of the theory of rent-seeking (“Tullock, Posner, Krueger … Export licenses, import. Turkey, India”) and a basic account of the theory of bureaucracy provided by “Tullock, Downs, Niskanen … Bureaucrats and budgets—government growth” (BHA).20

Farrant goes on to note that while MacLean holds Buchanan responsible for Chile's binomial electoral system, "To my knowledge, Buchanan never wrote anything about the binomial electoral system over the course of his lengthy career, and he similarly appears to have made no mention of binomial representation in any of his May 1980 lectures in Chile."

I took Buchanan's Constitutional Political Economy course in 1999 and every graduate course in Public Choice on offer at GMU in the late 1990s and early 2000s. I went to pretty much every seminar at Buchanan House and at the Public Choice Center while there. I don't recall ever having heard the term 'binomial electoral system' before Farrant's article.

Cáceres was certainly no democrat, as Farrant shows. But it looks like Cáceres understood neither Buchanan's work on democracy, nor his constitutional views. And Buchanan's talks had little influence on the constitution then adopted:

Ultimately, the evidence signifies that Buchanan provided his various Chilean audiences with a series of lectures which were substantively similar to the analyses that he provided for any other late 1970s or early 1980s audience. Similarly, the evidence suggests that Buchanan’s May 1980 visit did not particularly influence the subsequent drafting of the Chilean Constitution.

And Buchanan learned a bit about Chile as well:

Ultimately, Cáceres and Ibáñez appear to have had scant grasp of the individualist-constitutionalist-contractarian-democrat—“terms that mean essentially the same thing to me” (Buchanan 1975, p. 7)—tenets of Buchanan’s social philosophy and political economy. As noted earlier, however, Buchanan self-confessedly had little knowledge about the Chilean economy, and he began his May 8 lecture at the Hotel Carrera by providing his audience with a relatively brief summary of his “Week” in Chile. In particular, Buchanan told his audience that he had “Learned more than you have,” and he subsequently told Cáceres that “As I said several times, I learned a great deal” (Buchanan to Cáceres, May 12, 1980). Importantly, Buchanan appears to have learned
much about the anti-democratic views of his Chilean hosts. Indeed, when Buchanan subsequently visited Chile in late 1981, he provided his MPS audience with a steadfast defense of universal suffrage, and publicly upbraided a number of European and South American MPS advocates of the “naïve belief that dictatorships are the only or the best way of establishing a free economy.” Similarly, Buchanan told his MPS colleagues—Cáceres and Ibáñez included—that the MPS had a “moral obligation” to “look for ways of improving democracy” (El Mercurio, November 22, 1981, p. D4).56

The whole article's well worth reading. Here's a Sci-Hub link. Hayek's views on Chile were not admirable, and are discussed.

Farrant concludes:

Consequently, I ask how an advocate of Knight’s view that democracy is fundamentally equivalent to “government by discussion” might best respond when they receive an invitation to visit a country ruled by a dictator. The easy answer is “not go,” but Buchanan accepted Carlos Cáceres’ invitation and subsequently visited Chile in May 1980. Thus I ask what exactly does a self-avowed Knightian economist do when they visit a country ruled by a dictator.62 Do they provide policy advice? Do they meet with the dictator? Do they design a constitution? The available evidence suggests that Buchanan’s answer to the “Frank Knight—dictatorship” question was to do exactly what he would do in a late 1970s classroom in Blacksburg or lecture hall in London.

Guaranteed Income and Living Wages

Chris Dillow lays out the basic problem with living wages mandates. While having more money makes people happier, being unemployed is pretty awful. So whether mandating living wages can make sense will depend on how many people are forced out of work and how unhappy they are relative to the comparably small gains among the greater number of winners.

We can roughly quantify this. A paper by Nattavudh Powdthavee suggests that, in terms of wellbeing, we need a 30% rise in income to offset being unemployed. This means that if the average winner from a living wage gains 3%, we need at least 10 winners for every unemployed*.

You might think this condition is fulfilled. It is, if we consider only the wellbeing of those earning less than the living wage. But their higher wages come at the expense of profits. How much you're troubled by this depends on how you regard those employers. Are they exploitative tax-fiddling mega corporations, or are they small businesses struggling to get by?

And then there's the standard question about utilitarianism: is it legitimate to impose (largeish) costs upon a minority so that the majority enjoy other benefits?

He suggests that a guaranteed annual income - a variant on negative income taxes - may be the better option. When workers' non-work option improves, their bargaining position changes and wages have to go up.

This is true to a point, but it does require that voluntary unemployment (I don't want to work at going wages) makes you a lot less unhappy than involuntary unemployment (I want to work at the mandated minimum living wage, but nobody wants to hire me). And while that's almost certainly the case, if you put any weight on behavioural economics stories around myopia, hyperbolic discounting, or habituation, then you might be worried about schemes that make people indifferent to working.

Dillow writes:

Which raises the question: why is the campaign for a living wage so much more popular than that for a basic income? I suspect the answer has less to do with technocratic or high-brow ethical considerations than an appeal to reciprocity: the living wage demands that hard workers get a "fair" deal. But I wonder whether such appeals - powerful as they are - are a sufficient basis for policy.

I don't expect that Dillow is wrong about this - reciprocity norms are strong, and intuitions about the deserving and undeserving poor go back an awfully long way. But we can give a technocratic objection to guaranteed basic income schemes: if the guaranteed wage is high enough to make it an attractive alternative to working, which it has to do to give workers the kind of bargaining power that Dillow is looking for, then it also risks enticing those who should be entering the job market at low wages and working their way up to instead lock themselves into a permanently lower path.

I'm not opposed to moves to shift from the current welfare framework to a GAI via a negative income tax, combined with lump-sum transfers for specific hardships like severe disability. But I worry about the kinds of things that Senior and Mill worried about rather a while ago.

Here's Andrew Farrant on those debates:

Poor relief and slavery: Senior's conjecture?

As noted earlier, Nassau Senior argued that slavery and socialism had much in common. Similarly, Senior, in an 1841 article appearing in the Edinburgh Review, had scathingly argued that the perverse incentives allegedly inherent to the English Poor Laws (e.g., the provision of outdoor relief to ostensibly indigent but able-bodied laborers) had done much to reduce "able-bodied paupers" to de facto slavery (Senior 1865 [1841]: 45-115); as Senior puts it, the poor laws had supposedly attempted to provide the able-bodied laborer with:

[A] security incompatible with his freedom; to oprovide for him and his family a comfortable subsistence at his own home [outdoor relief], whatever were his conduct, and whatever were the value of his labour ... [This] attempt succeeded in what have been called the pauperized districts, and placed the labourer in the condition, physically and morally, of a slave; - confined to his parish, maintained according to his wants, not to the value of his services, restrained from misconduct by no fear of loss, and therefore stimulated to action and industry by no hope of reward.
(Senior 1865 [1841]: 115, emphasis added)²⁸

Accordingly, outdoor relief had supposedly occasioned various incentive-incompatibilities - supposedly "fatally relaxing the springs of industry and the restraints of prudence" (Mill 1965: 360) - prior to 1834.²⁸ Accordingly, while the desirability of poor law reform was supposedly apparent to all and sundry, the "Commissioners of Inquiry had reported that it was not expedient, or even practicable ... [to [exclude from relief the able-bodied labourer who professed to be unable to earn wages adequate to the support of his family" (Senior 1865 [1841]:91; emphasis added).³⁰ Consequently, an incentive-compatible poor law would supposedly guarantee that only the truly indigent received able-bodied relief. As Senior notes, incentive-compatible poor relief would automatically "test .. the truth of ... [the able-bodied applicant's] representations" (ibid.; emphasis added). The test favored by Senior was relatively simple: make the receipt of poor relief markedly "less eligible than independent labour" per se (ibid.); as Senior explains, this was easily done by conjoining the receipt of poor relief to a "condition which no man not in real want would accept, or would submit to when that want had ceased" (ibid.: 91; emphasis added). Consequently, the 1834 New Poor Law stipulated that any applicant for able-bodied relief

enter a workhouse ... supported there by a diet ample indeed in quantity, but from which the stimulants which habit had endeared to him were excluded - should be subjected to habits of cleanliness and order - should be separated from his former associates, and should be debarred from his former amusements.
(ibid.: 93)³¹

Accordingly, indoor relief - the workhouse test per se - was allegedly incentive-compatible: only the truly indigent would voluntarily accept workhouse discipline. As Senior explained, whenever any able-bodied, and self-professedly, indigent laborer readily "accepted these terms, that acceptance [automatically] tested the reality of his wants (ibid.: 91; emphasis added).

As Mill, readily subscribing to Senior's logic, later explained, the wholly "pauperized districts ... have been dispauperized by adopting strict rules of poor law administration" (Mill 1965: 961; emphasis added.)

Read Farrant's whole treatment of the debates around incentives and the old British poor laws.

I don't think we can or should return to the poor laws mandating indoor relief. But the incentive problems laid out by Senior and Mill sure have not changed in the last couple of centuries. At the margin, consideration of these issues should move more welfare transfers from cash for poor people to subsidies for early childhood care, and suggests that any GAI that approaches a living wage would not achieve the appropriate separating equilibrium.

Previously:

• Welfare Reform
• Coercion everywhere: welfare edition

Expressive voting

Hamlin and Jennings survey the expressive voting literature. It's a nice piece, and I like how they've brought Kuran's preference falsification arguments. I'll quibble on two points, mostly because I like the word quibble and need excuses to use it. They write:

Caplan is careful to distinguish between [rational irrationality and expressive voting]: 'In expressive voting theory, voters know that feel-good policies are ineffective. Expressive voters do not embrace dubious or absurd beliefs about the world ... In contrast, rationally irrational voters believe that feel-good policies work.'

Therefore, a further condition would need to be fulfilled in order to judge a vote to be expressive of true preferences rather than rationally irrational ones; we would need to check how well informed the voter is. One suspects that this issue may be similar to social pressure. If voting is both expressive and 'rationally irrational', making information available might be expected to result in a rapid and significant shift in the political equilibrium. If, by contrast, voting is an expression of truly-held expressive preferences, the political equilibrium will be much more stable.

I doubt that Caplan would argue that rationally irrational voters need only be provided more information in order to improve outcomes. If information provision were the sole problem, voters wouldn't be openly hostile to the provision of information with which they disagree. And the rise of the Econoblogosphere would have quickly led to substantially better economic policy.

Here would be a rather better test of Caplan's rational irrationality model. I've not seen it conducted, but more experimental economics applications have been melding voting and markets. Here goes. Set up an experimental double-auction environment framed in a salient way - buyers and sellers of labour, for example. Run a few rounds of the experiment as baseline. Then, let folks vote on whether they'd like to make a change to the trading environment: policy changes that either improve or reduce overall efficiency. A price floor, for instance - a minimum wage. Set treatment groups that vary in individual expected decisiveness: the odds that any player's vote will determine the trading structure for the next round, with the sum of all player odds being less than or much less than one. Then run a few rounds with the (potentially) changed trading environment before offering other votes - some which augment and some which attenuate efficiency, with varying expressive framing. If traders make better choices when more decisive, that would be consistent with rational irrationality. It wouldn't distinguish between expressive voting and rational irrationality, but I'm more interested in testing the broader concept anyway.

Hamlin and Jennings later discuss the implications of expressive voting for constitutional choice. Brennan and Hamlin worried that constitutionalism exacerbates expressive voting problems and suggested that constitutional questions be left to small but statistically representative groups in order to avoid the Veil of Insignificance. They write:

Perhaps these proposals should be decided by small (but representative) groups, which might be more likely to take an all-things-considered view. Crampton and Farrant make explicit the potential problem that such a small group might design institutions that enrich themselves if they are not fully representative in a relevant sense. Therefore, a trade-off may exist between the problem of expressiveness, on the one hand, and allowing too much room for the narrow self-interest of unrepresentative groups, on the other.

It's probably semantics (a lot can be packed into "in a relevant sense"), but our main worry (ungated) was that the perfectly statistically representative group would have, by virtue of being the constitutional committee, a newly granted interest in enriching the members of the committee. If the group is small enough to overcome expressiveness problems, it may also be small enough to solve internal collective action problems and set itself up as effective dictator post the constitutional phase. The only way of breaking past the Veil of Insignificance is by reintroducing the problem that constitutional political economy in the Buchanan sense was meant to solve: separating individuals at the constitutional level from their particular interests in order that the constitution foster the general interest. Absent the Veil of Insignificance, the constitution serves the general interest of those writing the constitution.

Paper gated permalink below:

Expressive Political Behaviour: Foundations, Scope and Implications

Alan Hamlin and Colin Jennings (2011).

British Journal of Political Science,
Volume 41, Issue 03, July 2011 pp 645-670

http://journals.cambridge.org/abstract_S0007123411000020

Caldwell vs Farrant: Round Two

What does "planning" really mean? The latest issue of Challenge has Caldwell again battling with Andrew Farrant and Ed McPhail over whether Hayek intended his argument in Road to Serfdom to apply only to planning in the Soviet/Nazi sense [Caldwell] or to planning as practiced by the Attlee government in Britain [Farrant/McPhail].

Let's recall first the context of the debate. Farrant initially argued that the Road to Serfdom was wrong and insulting: for the mechanism to work, would-be planners in England would have had to have preferred totalitarianism to liberalism. Otherwise, they would have retreated from planning before the Rise of the Demagogue. Further, since none of the European welfare states that started on the road to planning wound up at Serfdom, Hayek was wrong.

When Glen Beck started selling Hayek as a tome for our times against Obama, Farrant & McPhail wrote a piece arguing that Beck's interpretation of Hayek was correct but that Hayek was wrong.

Bruce Caldwell, probably the world's leading Hayek scholar, has replied. He notes the differences between Hayek's critique of the welfare state and his critique of planning and says Farrant & McPhail conflate the two. Hayek said that welfareism would kill liberty through many small cuts intended to patch up the flaws of the welfare system; planning would lead more quickly to jackboots.

Farrant & McPhail argue that Hayek intended his critique to apply to planning in Britain at the time of writing, and that "planning" in Britian at the time referred to the mix of interventionism, planning and welfarism.

Farrant points to a somewhat obscure 1945 Hayek article, "Genius for Compromise", written in response to a Harold Nicholson piece arguing that one can stop on the road to serfdom. Hayek's response there makes very clear that Hayek had in mind the partial planning undertaken under Attlee:

Signs are not wanting that some of those who are largely responsible for the present craze for planning are beginning to be uneasy about the forces they have loosened, and to feel a little like the sorcerer's apprentice who cannot lay the ghosts he has raised. Once prices or incomes are guaranteed to some producers, there is little ground left for refusing the same to any others. If the supply of pig iron or coal cannot be left to the unregulated forces of competition there is no reason why that of tobacco should. If you argue for a particular purpose that "individuals have no machinery for limiting imports to the level of exports" you must not be surprised if your disciples insist that the government should individually match each item of imports with a corresponding item of exports. And if you generally denounce the "humbug of finance" you must not expect the people to respect the particular piece of financial machinery of your own design.
...
Our planners are likely to be equally mistaken when they think they can stop the movement long before any of the horrors are reached which most of the more sensible among them admit that a completely planned society would involve. It takes a long time before such a tendency can be stopped, once the intellectual forces driving it on have got well under way. What I am pleading for is that it is time to stop and reflect if the momentum of the movement is not to produce very unpleasant results.

All three of Farrant, McPhail, and Caldwell know far more about the Hayek literature than I do. My assessment is that Hayek meant Road to Serfdom to apply to Britain in 1945. The planning he then referred to was mostly industrial policy and nationalization. If Beck and Limbaugh hold up American nationalization of car companies as setting us on the road to serfdom, they're not out of line with what Hayek was saying. And while Hayek's mechanism for the welfare state differs a bit from that in RTS, I don't think it would be wrong to say that Hayek's mechanism there leads us to the kind of planning that's consistent with the RTS mechanism: maybe it's the driveway that leads to the Road.

Do hit the Hayek tag below for the previous posts in this series. While I think the mechanism in RTS is wrong, I'm a fan of Hayek overall. The Use of Knowledge in Society is probably the most important piece of economic writing in the 20th Century. What should we take from Hayek today, as far as welfare and planning are concerned?

First, you can't do full scale planning without totalitarianism. Yeah yeah, you tell me - we all know that. Really? How many on the left cheered the rise of Chavez, thinking it would all work out just swell?

Second, a broad welfare state and social insurance system beget regulations that work to the detriment of liberty. Private actions that otherwise might well be thought left private become regulated, taxed or prohibited because of the socialization of downside costs. I have a hard time believing that regulation of demerit goods like smoking, drinking and "bad" eating would be anywhere near as popular absent the fiscal externality argument. This doesn't lead us to serfdom but to nannydom.

I don't much disagree with Caldwell's assessment of what we should today take from Hayek even if, following Farrant and McPhail, that isn't quite what Hayek had in mind when he was writing.

Cage Match: Caldwell versus Farrant [updated]

Update: text below updated in a couple of spots for accuracy and clarity.

Bruce Caldwell replies to Farrant and McPhail on Hayek's Road to Serfdom; I'm told the reply is coming out in a later issue of Challenge.

For Farrant and McPhail, the resurgent popularity of RTS hinged on a reading of Hayek that, while unpopular among RTS fans, was in fact the right reading of Hayek: any moves towards socialism would lead to serfdom. Consequently, Glenn Beck's using of Road to Serfdom as a rallying call against Obama's policies does no disservice to Hayek. Hayek, however, does disservice to those British socialists who rated liberalism above totalitarianism and who would have stepped back from planning rather than allow the rule of the demagogue.

Caldwell argues that Farrant and McPhail miss essential context. The argument in RTS was addressed only to "hot" socialism: full nationalisation of industries and central command planning. When restricted to that set, Hayek was right: full planning cannot be undertaken without totalitarianism. Caldwell notes that no socialist state achieved totalitarianism through Hayek's mechanism: democratic election leading to failings of planning leading to the rise of the demagogue; he argues that consequently no test of Hayek's mechanism has been undertaken. While the argument in RTS was restricted to "hot socialism", Hayek's later writings provided other warnings of the dangers of the welfare state. The mechanisms and arguments in those later writings were different and oughtn't be conflated with the dangers noted in RTS.

Farrant and McPhail respond to Caldwell [Note: they're there responding to earlier Caldwell arguments, not this particular piece], and others, in the latest issue of Challenge, unfortunately gated. I'll leave to one side F&M's noting that the current talking heads promoting Hayek's argument on Beck's show happily identify Obama's policies as the starting point on the road to serfdom; the more interesting question is whether Hayek meant the argument there to apply.

Intriguingly, Bruce Caldwell — commenting on the Beck-inspired surge in Hayek’s sales—notes that Hayek wrote his “full-fledged attack on socialism and totalitarianism” largely in “response to the British Labour Party platform of the time” (Caldwell, as quoted in Zaitchik 2010, 3). Caldwell’s reference to the policy program of the British Labour Party is particularly noteworthy. Hayek often invoked postwar British experience to illustrate the supposed veracity of The Road to Serfdom. As Hayek explained in 1948, British experience supposedly clearly demonstrates that “the unforeseen but inevitable consequences of socialist planning create a state of affairs in which sooner or later totalitarian forces get the upper hand” (Hayek 1948, as quoted in Farrant and McPhail 2010b). Unsurprisingly, the tenor of Hayek’s remarks is markedly congruent with the logic he laid out in chapter 5 of The Road to Serfdom: Planning and intervention (it is highly revealing that Hayek invokes the interventionist and welfare state policies adopted by Labour as full-blown “socialist planning”) generate pervasive economic inefficiencies and dislocations.8 This pervasive inefficiency supposedly leads to the wholesale replacement of democracy.

They then cite the foreword to the 1976 edition of RTS:

In the preface, Hayek notes that if any reader asked whether he would still “defend all the main conclusions of ... [the] book ... the answer ... is on the whole affirmative” (xxiii). Importantly, Hayek notes that “terminology has changed” between 1944 and 1976, and

for this reason what I say in the book may be misunderstood.... At the time I wrote, socialism meant ... nationalization ... [and] central economic planning.... [Hence] Sweden ... is today very much less socialistically organized than ... Britain or Austria, though Sweden is commonly regarded as much more socialistic. This is due to the fact that socialism has come to mean chiefly the extensive redistribution of incomes through taxation and the institutions of the welfare state. In [this] ... latter kind of socialism the [totalitarian] effects I discuss in this book [Road to Serfdom] are brought about more slowly, indirectly, and imperfectly ... the ultimate outcome tends to be very much the same, although the process by which it is brought about is not quite the same as that described in this book. (Hayek 1976/1994, xxiii–xxiv, emphasis added)

Hayek intended the argument to apply to the British Labour Party. British socialists would then had to have preferred totalitarianism to liberalism for the RTS mechanism to run its course; otherwise, they'd have retreated from planning before going too far down that path. It's of course possible that their retreat came only because Hayek showed them the inevitable outcome of pushing through with planning. But that we can't point to an example of a democratic country turning totalitarian using the RTS mechanism suggests that the RTS mechanism isn't a particularly important one in explaining any real world totalitarianism; totalitarianism tends to come in with planning rather than as later consequence of it.

So, I'll disagree with Caldwell that Hayek's mechanism hasn't been tested. Caldwell writes:

Next, there are no examples of democratically elected governments that tried to put such a system into place.10 So we cannot directly test to see if he was right or wrong. We do, however, have examples of such systems that were not democratically elected. And Hayek’s description of life under such regimes is spot on.

Planning cannot be done without totalitarianism. But the RTS argument isn't just that; it's that steps toward planning push us to totalitarianism. And that many western European democracies turned back from planning rather than continuing on the road to serfdom suggests Hayek's mechanism was wrong, even if he was right that planning cannot be done without totalitarianism.

But I will have to re-read Constitution of Liberty and Law, Legislation and Liberty to contrast the mechanisms there with those in Road to Serfdom.

Note also that John Quiggin reviews Farrant and McPhail's argument at Crooked Timber:

Until the right went completely crazy, the most common claim in support of Hayek was that his predictions had somehow been vindicated by Thatcher’s reaction against the welfare state. Leaving aside the fact that Thatcher’s remodelling of the British economy in the image of the City of London looks a lot less appealing today than it did only a few years ago, this totally misses the point of Hayek’s book. If he had wanted to argue that social democratic policies would reduce the rate of economic growth, and to throw in a bit of hyperbole, he could have called it “The Road to Destitution” or something similar. Hayek wanted to make the much stronger claim that the attempt to implement Labor’s policies would necessarily lead to a loss of personal and political freedom.

Stopping points on the Road to Serfdom [updated]

Update: see also here and here.

Andrew Farrant and Ed McPhail nicely contrast divergent readings of The Road to Serfdom in the July-August issue of Challenge.

Where some recent scholars, like Bruce Caldwell, reading Hayek's Road to Serfdom see his argument as simply being that full-blown command and planning socialism is incompatible with freedom, the book's resurgent popularity among the likes of Limbaugh and Beck rests on the inevitability reading of its argument: that the slope to full command planning is very slippery, and small pushes in that direction risk a cannonball run to serfdom. In that reading, unless we change our ways and that right soon, very bad things await. Which is the correct reading of what Hayek meant?

Farrant and McPhail nicely show that Hayek intended his thesis to apply not only to full command planning but also to the welfare state.

As Caldwell rightly points out, the crux of Hayek’s thesis had initially appeared in a 1938 article. Caldwell explains that Hayek—in 1939—“came out with an expanded version in the form of a public policy pamphlet. . . . If one compares the two articles one can trace an accretion of ideas that would later appear in The Road to Serfdom” (Caldwell 2007, 6). Tellingly, in the 1939 pamphlet Hayek wrote:

It is not necessary to review the familiar economic arguments which show why mere “interventionism” is self-defeating and self-contradictory, and how, if the central purpose of intervention is to be achieved, intervention must expand until it becomes a comprehensive system of planning. (Hayek [1939] 1997, 199–200, emphasis added)13

The tenor of the above remarks is readily apparent in The Road to Serfdom itself and throughout Hayek’s later commentary on the thesis of the book. As Hayek had explained in The Road to Serfdom: “[T]he close interdependence of all economic phenomena makes it difficult to stop planning just where we wish . . . once the free working of the market is impeded beyond a certain degree, the planner will be forced to extend his controls until they become all comprehensive” (Hayek [1944] 1994, 117, emphasis added). Importantly, Hayek—alluding to the negative consequences that welfare state policies have on the development of law, morals, education policy, and the organization of science—argues that

the general tendency towards a paternalistic welfare state, which is the result of a misunderstood rationalism . . . is constantly producing results which are only too similar to those produced by economic planning and which also had shown themselves clearly in Germany long before they became visible elsewhere. They contribute almost as much as the economic factors to that profound transformation of society which follows from increasing governmental regulation and leads towards another direction not in the least intended by those who advocated these regulations. (Hayek 1948, 14–15, quoted in Farrant and McPhail 2009; emphasis added)

Though Caldwell argues that Hayek’s reasoning is inapplicable to the welfare state (2007, 31), any such view is rather hard to square with Hayek’s suggestion that

[today] . . . socialism has come to mean chiefly the extensive redistribution of incomes through taxation and the institutions of the welfare state. In [this] . . . latter kind of socialism the [totalitarian] effects I discuss in [Road to Serfdom] are brought about more slowly, indirectly, and imperfectly . . . the ultimate outcome tends to be very much the same, although the process by which it is brought about is not quite the same as that described in this book. (Hayek [1976] 1994, xxiii–xxiv, emphasis added)

Similarly, Hayek remarks that while many socialists have “turned to a redistribution/fair-taxation idea—welfare . . . I believe this indirect control of the economic world ultimately leads to the same result [totalitarianism], with a very much slower process” (Hayek 1994, 108, emphasis added).

In short, Limbaugh has the accurate reading of Hayek, but the one that fails in the real world; Caldwell has the charitable reading of Hayek that's more consistent with ex post outcomes.

As noted above, Limbaugh et al. readily invoke Obama and Stalin as ideological soulmates. Similarly, one noted “Hayekian”—Glenn Beck—has suggested that Obama’s policies could lead to concentration camps. Lionel Robbins—a Hayekian fellow traveler and academic colleague of Hayek’s in the 1930s and 1940s—has noted that Hayek

is somewhat too apt to . . . assume that deviations from his norm lead cumulatively to disaster. . . . For instance, in my judgment Professor Hayek is justifiably critical of some contemporary arrangements regarding old age pensions and apprehensive of the difficulties which may arise should the burden be greatly increased. But why should he argue as if these were at all likely to lead us to social disintegration and the concentration camp. (Robbins 1961, 80, emphasis added)

Is Robbins engaging in mere hyperbole? Robbins, of course, unlike a right-wing fanatic such as Beck, is a serious scholar. We refer the reader to Hayek himself: “[T]he fact that the young supply the police and the army will decide the issue: concentration camps for the aged unable to maintain themselves are likely to be the fate of an old generation
whose income is entirely dependent on coercing the young” (Hayek 1960, 297, emphasis added).

I really like Hayek's "The Use of Knowledge in Society". The Road to Serfdom provides a nice explanation of why central planning is incompatible with personal liberty. But reading beyond that, following what Hayek seems to have intended, in reckoning that every divergence from market liberalism runs great risk of totalitarianism, is simply wrong. It's the right reading of Hayek, but the wrong reading of the world.