Chapter Twelve
from Peter Radford
Wow. I never realized I was a chapter twelve kind of guy. Less so a part one guy. Who knew?
I have come to this realization as a result of reading Paul Krugman’s speech at a recent conference commemorating the 75th anniversary of Keynes great General Theory.
In general terms: chapter twelve is where he expounds on uncertainty. Part one is mainly taken up with all the arguments about aggregate demand and the refutation of Say’s Law. Good stuff all round. Great stuff even. But I am absolutely a chapter twelve guy.
This also came to me while I was reading a few articles about Hayek, who, as you all know, didn’t agree with Keynes at all. Their argument was public and long.
Hayek was one of those many people back in the 1930′s who was desperate to create arguments to rebut the legitimacy of socialism. Those were heady days of intellectual debate. The Great Depression cast a very long shadow over the benefits of capitalism, and the Soviet Union and Fascist Germany were very much alive as alternative methods of economic and political life. Hayek was a refugee from repression and discrimination in central Europe and saw Keynesian thinking as opening the door to the evils of government tyranny.
So he, and others, created an alternative. They gave an Austrian twist to classical economics, by injecting it with large doses of libertarian politics. Hayek attacked the viability of centralized planning – socialism – by arguing that a central planner could not possibly have access to all the necessary knowledge needed to elaborate and then execute a plan for an entire economy. In order to defend this position he had to engage in word games – he was a fan of Wittgenstein after all. In particular he tried to differentiate between a meta-system he called the “catallaxy” , and mere “economies” which he regarded as much smaller, and subcomponent, entities. He admitted that economies – things like business firms – could be centrally planned, but he argued that they drew their viability from the catallaxy which could not be. It was too complex and intractable for rational analysis. It was subject to the magic of emergence that created apparent order from the equally apparent chaos below. Firms existed in this larger system, and it could be centrally planned because of their relatively small scale. But nothing could be planned at the higher expansive level. It was all too much. Far better, Hayek argued, to allow the system to works it magic, than run the risk of interference, especially since that interference inevitably would be associated with intrusion into private liberties. The cost of that lost liberty was always going to be more than any gain from central planning of the system.
The problem with this is that Hayek, in his desperation to justify market magic, totally ignores the central subject of chapter twelve: uncertainty. The very reason that firms exist is that the production process is so riddled with uncertainties – time lags, asset specificities, agency issues, and so on – that it is necessary to enclose it within its own space away from the market. In other words knowledge is insufficient within the broader market to accomplish production. Coordination won’t happen out there because uncertainty disrupts and enervates every process. The coordination of most production has to be centrally planned in order to offset this lack of knowledge. So a firm’s strategic plan is a substitute for having complete knowledge. It fills out the gaps created by uncertainty by making a hypothesis about the key unknowns. With those gaps suitably filled in, production can proceed. Of course the plan can go awry. The hypothesis can be falsified. In which case the firm fails to make a profit and either goes bankrupt or makes a new plan. Markets are simply not up to the task of containing our modern production processes without an intermediate layer. That layer is what we call the business firm. Firms exist because of the insufficiency of knowledge in the meta-system. The market can exist because firms take care of the complex stuff. The catallaxy draws its legitimacy from what is centrally planned. Not the other way round.
Either way the existence of this epistemic road block undermines the classical market magic argument. It undoes Hayek. The implication of uncertainty is that a modern economy depends, in large measure, on central planning. To the extent that enough space is enclosed and protected from the incapacity of the market, we can rely on the external market – Hayek’s meta-system – to take care of the easier task of matching supply and demand.
Oh. Wait. Uncertainty intrudes there too.
Which is what Keynes was trying to explain in chapter twelve.
And if that is so, we can toss out the classical dogma of markets, we can ignore the notion that government interference is always bad, and we must acknowledge that markets fail with regularity. Indeed, we should accept that, as modern production becomes ever more complex, markets become ever more brittle. Which is why the modern economic landscape is littered with behemoth centrally planned economies called corporations.
In short, we should expect markets to fail and act accordingly. We should shore them up with all sots of structural aids like institutions and so on.
Hayek’s vision, and that of the subsequent neoclassical theorists is simply not relevant in a modern economy. It ignores the complexity of modernity and tries to recapture the workings of a pre-industrial economy and then impose them on us. It doesn’t work. It hasn’t for a hundred years or more. If it ever did.
What it does do well is to buttress a certain kind of political view. It adds legitimacy to a more libertarian ideology. Which was the purpose. As economics it fails.
Anyway: chapter twelve. Who knew?
The Austrian school of economic thought fully incorporates uncertainty. Markets coordinate by locally responding to shortages and surpluses, profits and losses. The Austrian school emphasizes disequilibrium and entrepreneurial responses. Central planning faces uncertainty also, and Hayekian thought is that the knowledge needed to deal with uncertainty is too decentralized, tacit, and ever-changing to be collected by the planners. It is not only unknown, but unknowable.
“It is not only unknown, but unknowable.”
That’s more the way I understand Hayek’s argument against central planning, but an aspect of Peter Radford’s point is still salient: A political ideology is grounded on an epistemic point.
But there is no necessary connection. Central planning might result in redundancy or over-production or fail to deliver the fashion color of choice, but I’ve already shared (been a while) some of my adventures in the “free” market that most observers should fairly describe as “market failure”, e.g., getting simple parts to fix simple problems, when businesses want to sell the whole new unit.
And so similarly, I don’t see the necessary connection between the political abuses that CAN occur if government has a role in market planning, any more than I see the necessary connection between no market planning and political liberty. Company towns have and could again exist. The libertarian premise that people always have options in a “free” market is an article of faith expressed with hubris. Whether I am abused by “government” spies and goons, or employees of Xe Services (or whatever Blackwater is called these days) doesn’t much matter to me, I’d dislike either.
Funny how this relates to what Krugman once wrote about the General Theory:
“In telling people how to read The General Theory, I find it helpful to describe it as a meal that begins with a delectable appetizer and ends with a delightful dessert, but whose main course consists of rather tough meat. It’s tempting for readers to dine only on the easily digestible parts of the book, and skip the argument that lies between. But the main course is where the true value of the book lies.”
Source: http://www.pkarchive.org/economy/GeneralTheoryKeynesIntro.html
So chapter 12 (the one about uncertainty and investment) is right in the middle of the “tough meat”, whereas Book I (refutation of Say’s Law) is the delightful appetizer.
Dave Raithel writes “Whether I am abused by “government” spies and goons, or employees of Xe Services (or whatever Blackwater is called these days) doesn’t much matter to me, I’d dislike either.” Xe is paid for by government from taxes to impose force on foreigners. In what way is this libertarian or free market?
All “libertarian” solutions suffer the same problem that Nozick could not solve, the problem for which Locke argued the State (or, in Nozick’s case, your protective services) exist: To enforce contracts and settle disputes …
And last I heard, Xe will work for anybody who pays them from whatever sources. Weren’t they last seen bringing mercenaries into Bahrain or some such place? (I also recollect, having recently read “Zeitune” that Xe/Blackwater was in New Orleans during the Katrina flood, paid for by taxes but imposing force on citizens and people with green cards…)
I have no more faith (or reason to believe) that the unplanned non-directed “evolution” of social relations that occur between consenting dyads produces a just and fair outcome for third persons than I have faith or reason to believe that a planned economy, even facing uncertainty, is necessarily worse than what we get without central planning.
What is “just” is determined by morality, and if we are to judge objectively, it can only be by a universal ethic. As John Locke wrote, the basic rule of this natural moral law is that it is evil, and only evil, to coercively harm others, and so acts that do not invade others are good or neutral and permitted in a free society. Hence,voluntary acts are inherently just, and involuntary acts are inherently unjust. A centrally planned economy inherently forces people to alter their otherwise peaceful and honest acts, and is thus inherently unjust. This is logic, not faith.
Fred: If I may intrude into your dialog with Dave. My impression is that libertarians make no distinction between a democratically elected government and an dictatorship. Is this true? If so why not?
Libertarian minarchists seek a government limited to the prohibition and punishment of invasive harm such as murder, theft, and fraud. If this could be done perfectly by a benevolent dictator, that would be better than a messy democracy, but policy has to generalize, and the general process of the empowerment of dictators would usually result in, as Hayek pointed out in The Road to Serfdom, the worst rising to the top. Thus libertarians prefer a messy democracy to a random dictator, and they prefer a decentralized democracy to mass or centralized democracy.
Fred: Where does this leave a state like the US? It appears that any large scale government fails to meet your criteria. Is the Federal government a “random dictator”? How do you describe “invasive”? Also: a decentralized democracy would seem to preclude a federal system, since the act of federalization is essentially centralization. I assume therefore that you advocate secession under some circumstances. If not, how and why not? How do you resolve disagreements between those localities without inflicting “invasive harm” on at least one party? More to the point how do we agree what the proper extent of government is?Already it looks as if you and Dave Rathiel couldn’t agree. What hope is there for the libertarian project if even two people are at odds?
It seems to me, that reduced to its essence, that libertarianism as you advocate it, is simply an objection to most actions of the modern state. As a result it describes a democratically elected government in the same terms as it describes Attila the Hun or Lenin. Is this due to its modern roots? Hayek was reacting to fascism and socialism and was driven to extreme ideas as a result. His central European upbringing may have had something to do with his inability to distinguish between modern democracy – as expressed in the US and other Western nations – and the Austro-Hungarian Empire which deeply influenced him and the other Austrian school thinkers. This is, of course, just speculation on my part.
Be that as it may: libertarians appear to seek to undo the modern state and replace it with “messy” democracy. According to your rules all this achieves is to reduce the scale of the dictatorship. This is the problem with Hayek. Ultimately he is reduced to advocating extreme individualism: any form of combination of collective action introduces exactly the same source of potential evil that he seeks to eradicate at the larger scale. In view of this how do you set up a “messy” democracy immune to evil? Is it possible?
Or is libertarianism simply another version of the utopianism that bedevils neoclassical economics amongst other theories?
The U.S. federal government is not a dictator, as the President and Congress are selected by the people, but by a highly flawed voting system. “Invasive” policy includes 1) taxation that imposes costs and creates deadweight losses; 2) legal restrictions on peaceful and honest actions; 3) subsidies on consumption and production other than to alleviate poverty. A decentralized democracy is based on small-scale voting, whereby neighborhood councils elect the next higher level council, and so on up to the Congress or Parliament, which then elects the chief of government (http://publicchoice.info/Buchanan/files/foldvary.htm). Yes, libertarian governance permits secession, but that has to be consistent, with no person forced to be part of the secession (e.g. Indians in Quebec could remain in Canada if Quebec secedes).
Revolving disagreements among libertarian jurisdictions would involve compromises based on the criterion of equal moral rights, such as limiting the noise one could generate. There is general agreement among libertarians on confining government to protecting property rights, but a disagreement on proper land tenure, since nobody produces land, and the ownership of land does not derive from self-ownership.
Libertarian objections to the coercive actions of states is based on moral philosophy, which has roots going back centuries such as in the Second Treatise of John Locke. It is not clear to me why an elected government that murders American Indians and enforces slavery is any better than a dictator that does the same thing. Libertarians reject today’s messy democracy of rent seeking, and the tyrannies both of majorities and minorities. No, we do not seek dictatorship, but rather individual liberty. Contractual governance can provide for collective goods, and that is not utopian, but in fact is practiced to some degree already (as explained in my book Public Goods and Private Communities).