The Road To Derpdom

[peristaltor.livejournal.com]

When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.

—Bastiat

I just heard a fascinating interview over at From Alpha 2 Omega with Philip Pilkington. Mr. Pilkington has recently finished a fine debunking of Friedrich Hayek. The problems with Hayek were many, and noted not just by Pilkington but by many, many others. At first, Hayek focused on "pure" economic theory, often exchanging ideas with the biggest name in economics at the time, John Maynard Keynes. The two would exchange ideas in both letters and by publishing articles in economic journals, such as Economica:

Cooler heads than Hayek and Keynes may have spotted the many similarities between their arguments and concentrated on the interesting differences. Instead, in their sharp exchanges in Economica and in their subsequent private correspondence, Keynes and Hayek became deeply entangled in efforts to determine the meaning of the terms they used in an attempt to decipher what the other was saying. Even for a trained economist with the benefit of decades of hindsight, the differences between the two men are often erudite to the point of impenetrability.

(Nicholas Wapshot, Keynes Hayek: The Clash That Defined Modern Economics, W. W. Norton & Co., Inc., 2011, p. 98.)

It's difficult, if not impossible, to craft economic policy based upon esoteric minutia that no one can understand. For that reason, Hayek, who had less of an affinity to vocalize his theories in ways more could understand (largely hampered by his English, heavily distorted through his Austrian accent), Hayek "turned instead to constructing political philosophies and honing a metaphysics rather than engaging in any substantial way with the new economics that was emerging."

Those metaphysical political philosophies became the meat for his later book, The Road to Serfdom, one of the most influential pieces of fiction ever written.

He became concerned with watery terms like “freedom” and “liberty”, which he then set out to impregnate with a meaning that would support his dreams. The most famous result of this period of conversion, which resembled less St. Paul on the road to Damascus and more so an alcoholic who had hit rock bottom, was Hayek’s 1944 work The Road to Serfdom. In a very real way it was this book that marked the close of Hayek’s career as a serious economic thinker and set him on the path of the political propagandist, agitator and organiser.*

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To understand Hayek's argument, it is essential to understand his core, or domain assumption. I covered the three types of assumptions before, but here's a helpful reminder. From Steve Keen, we learn that "[Alan] Musgrave argued [in 1981] that there were three classes of assumptions. . . ." (Steve Keen, Debunking Economics: The Naked Emperor Dethroned?, Palgrave Macmillan, 2011, p. 160.) For the sake of brevity, I'll list them in reverse order of their importance. (More detail can be found in Keen's book, pp. 160-162.)

• Negligibility assumption: state that some aspect of reality has little or no effect on the phenomenon under investigation.
  
  
• Heuristic assumption: one which is known to be false, but which is made as a first step towards a more general theory.
  
  
• Domain assumption: specifies the conditions under which a particular theory will apply. If those conditions do not apply, then neither does the theory.

All these assumptions have their place in rhetorically describing a theory, but only the final two need be grounded in reality. The final assumption, the Domain Assumption, in fact, must be so grounded to be applicable, for again, "If those conditions do not apply, then neither does the theory."

In another essay, Pilkington expands the use of theory and assumption to point out that many assumptions are based not on reality, but on how our psyches respond to reality. A sailor might view unexplored and uncharted areas as filled with monsters. We regular folks might regard certain places or practices as not hygenic, literally as unclean. Pilkington takes these examples and writes,

The function of myth, then, is to structure our world – at both a macro or social and a micro or perceptual level, with one feeding into the other. But against what is it structuring our world? Well, to look again at our two examples should prove instructive. In both of these examples the myths structure the world in such a way that anxiety is avoided. This anxiety may take the form of outright terror, as it does in the case of our sailor, or disgust, as it does in the case of our toilet seat; indeed it could take many other forms, but at the end of the day it is always some form of anxiety that is being avoided through mythic construction.

(I underlined for emphasis.)

With that understood, what anxiety was Hayek avoiding by writing the assumptions that back his argument—his myth—in The Road to Serfdom? Back to Wapshott:

Keynes believed that man had been placed in charge of his own destiny, while Hayek, with some reluctance, believed that man was destined to live by the natural laws of economics as he was obliged to live by all other natural laws. Thus the two men came to represent two alternative views of life and government, Keynes adopting an optimistic view that life need not be as hard as it was if only those in positions of power made the right decisions, and Hayek subscribing to the pessimistic notion that there were strict limits placed on human endeavor and that attempts to alter the laws of nature, however well intended, were bound to lead at best to unintended consequences.

(Wapshott, ibid., p. 44.)

And what were these "natural laws of economics" that motivated him? Hayek based them largely on his experience learning and working in Austria during the post-WWI hyperinflation, the cause of which he interpreted with help from fellow Austrian economist Ludwig Mises:

Mises's principal objection to a communist or socialist society was that it ignored the price mechanism he believed essential for any economy to operate efficiently. . . . He claimed that "every step that takes us away from private ownership of the means of production and from the use of money also takes us away from rational economics." Mises's arguments went to the core of the debate that was to ensue between Keynes and Hayek, and the presaged one of Hayek's eventual contentions, that by ignoring prices socialism deprives individuals of their unique contribution to society—to express, through their willingness to pay a price, their opinion of the worth of an object or service. Central planning, Hayek would argue, deprives individuals of a fundamental freedom.

(Wapshott, ibid., pp. 29-30, I again underlined.)

---

Here is where we get to the "watery terms" Pilkington noted. "Hayek thought that all totalitarianisms had their origins in forms of economic planning. Economic planning was the cause of totalitarianism for Hayek, rather than the being just a feature of it." It's a bit of a flimsy argument, since its core assumption—again, its Domain assumption—it relies on a very narrow reading of history that, once expanded, can be called into question.

It must be understood that Hayek’s argument had no factual basis. Only a polemicist could argue that the two totalitarianisms that existed in this period – namely, Hitler’s Germany and Stalin’s Soviet Union – had formed because a naïve democratic government had engaged in some economic planning that then got out of hand and resulted in tyranny. But Hayek’s motivations probably lay somewhat deeper – probably so deep that he himself could not properly recognise them.

To understand these motivations and the anxiety behind them, we must understand the causes of hyperinflation which is, I doubt, something anyone understands completely. Pilkington at first notes that Germany's economic troubles were leavened by "loans from the United States," something nobody discussing hyperinflation mentions. Those loans, however, ended when the Great Depression struck. "Unemployment soared in Germany and the government, like so many others across the world, engaged in severe austerity in order to attempt to balance the budget. They believed that this would return the country to economic prosperity."

In retrospect it is quite obvious that Hitler’s immediate rise to power was due to the economic downturn and the government’s deflationary policy response. In 1930 the Nazis had become the second largest party, obtaining 18.3% of the votes. When compared with the 2.8% of the vote they received in 1928 during an era of high employment and an economically optimistic outlook it quickly becomes obvious what the underlying forces driving Hitler’s election actually were.

That the economic policies the Weimar government had engaged in had led to the election of Hitler was and is obvious to any unbiased observer. But there were many who actively repressed this fact. The liberals that had supported the government’s austerity measures no doubt felt some burden, whether unconscious or otherwise, of guilt.

(More of my underlining.)

One of those austerity-supporting liberals was Friedrich Hayek.

---

Here, we should backtrack a bit and review key domain assumptions in Hayek's philosophy. A great deal of his theory relies on Mises observation of price signals, and how without price signals the buyers and sellers cannot properly evaluate the cost of goods. Without considering the American loans to the Weimar banks, Hayek likely misses a key manipulation in the monetary system; since this manipulation was fairly brief, the biggest change would have been that of the "Chancellor who presided over the [following] austerity, Heinrich Brüning." As another essayist points out, though:

After just two years of “austerity” measures, Germany’s economy had completely collapsed: unemployment doubled from 15% in 1930 to 30% in 1932, protests spread, and Brüning was finally forced out. Just two years of austerity, and Germany was willing to be ruled by anyone or anything except for the kinds of democratic politicians that administered “austerity” pain. So in 1932’s elections, the Nazis and the Communists came out on top—and by early 1933, with Hitler in charge, Germany’s fledgling democracy was shut down for good.

If austerity caused the rise of Hitler, as it seemingly did under Chancellor Heinrich Brüning, then nothing a "free" market did bettered the lives of Germans. Hitler, though, took a very active hand in regulating the economy, which helped it recover. That made him very popular just two years later with the German voters.

And here we find the first fruits of denial. Earlier in his essay on myth, Pilkington notes that the toilet seat "is generally the cleanest place in the bathroom and yet it is viewed as a space that arouses disgust and caution in most." For Hitler to have done any right through regulation must have, given later events in history, filled Hayek with outright disgust. Which led, seemingly, to what psychologists call cognitive dissonance. Back to the Ames essay, we read:

That should have sealed the coffin on “austerity” and “Austrian Economics,” but somehow von Hayek and his fellow Austrian aristocrats who were forced to flee from the fruits of their economic programs, did a complete revision of history and retold that same story as if the very opposite of reality had happened. Once they were safely in England and America, sponsored and funded by oligarch grants, hacks like von Mises and von Hayek started pushing a revisionist history of the collapse of Weimar Germany blaming not their austerity measures, but rather big-spending liberals who were allegedly in charge of Germany’s last government.

The "big-spending liberals" who caused the hyperinflation became the pain, not the US loans or the subsequent post-Great Depression loss of that money, nor of course the austerity that followed. The austerity ended the hyperinflation in this confused view of history, rather than bring the biggest and most disastrous dictator in recent history directly to power.

---

That his fringe ideology kept Hayek in the fringes for decades should cause no one any surprise. As Pilkington noted, Hayek's "cult was largely fringe."

Although it did command some respect among neoliberals in the Thatcher and Reagan administrations, it was the respect accorded to the eccentric rather than that accorded to the practical man. Lip service was paid to the doctrines of Hayek and the Austrians, but their extremist and impractical economic policy implications were sterilised and kept out of immediate contact with the levers of power.

As all of us know, however, this fringe nuttery, completely unhinged from either history or empirical reality, did not stay fringe. How Hayek's cognitive dissonance became mainstream I hope to tackle in a later piece.

*I've decided to keep Mr. Pilkington's European spelling intact.

Comments

[gunslnger.livejournal.com]

Economic planning was the cause of totalitarianism for Hayek, rather than the being just a feature of it.

I would need a citation for this, as I haven't seen this be an argument that Hayek makes.

It's also not really a core piece of the argument against central planning, in my opinion.

That the economic policies the Weimar government had engaged in had led to the election of Hitler was and is obvious to any unbiased observer.

It was more the Great Depression that let to his election more than any particular economic policies of the Weimar government. http://www.germanculture.com.ua/library/history/bl_hitler_rise_of_nazi.htm And you're painting with a wide brush to try and implicate Hayek in the rise of Hitler in order to discredit his economic theories.

Pilkington notes that the toilet seat "is generally the cleanest place in the bathroom and yet it is viewed as a space that arouses disgust and caution in most."

He's missing that it's the cleanest because it arouses disgust and caution and thus is cleaned more often and regularly.

And ascribing the economic success of Germany after Hitler's election solely to Hitler's economic policies is basically crap logic and making the same errors that you're ascribing to Hayek.

You haven't shown any cognitive dissonance here.

[underlankers.livejournal.com]

The Great Depression was also a major boost for the KPD, so it was more of a general spur for totalitarianism in Germany. The specific rise of Hitler had to do with his anti-Communist leanings and his greater willingness to gamble than most of his rivals. In fact the Nazi share of the vote was actually declining during the period where Hitler was offered the Vice-Chancellorship and refused, as he wanted the Chancellorship or bust. The people who made that NSDAP-DVNP coalition government did so under the impression that the Bohemian Corporal was a buffoonish clown with a stupid mustache that they could control. This of course was a major misreading of who Hitler was.

It's also worth pointing out that Germany was not succeeding under Hitler, not according to scholars like Adam Tooze and Richard Overy who took a hard look at what Nazi policies actually did. In practice Hitler's reckless rearmament was overheating the German economy to a point that circa 1940 or 1941 the bottom would have fallen out into a complete collapse even worse than that of the early 1920s. This in fact was one of the motivating factors for that German expansionism of the late 1930s: Germany expanded or it collapsed, Hitler had removed all other options from it, and compounded with a systematic creation of redundant, chaotic bureaucracies feuding where only he could arbitrate. As a system for a power-hungry thug, it's brilliant. As the basis for building a continental empire, well.........we saw how well *that* worked in 1945 when it was the springboard to the Soviet-US power games in Europe.

[gunslnger.livejournal.com]

Yes, there's that too.

[peristaltor.livejournal.com]

And you're painting with a wide brush to try and implicate Hayek in the rise of Hitler in order to discredit his economic theories.

No, I'm not, because that isn't the argument I presented. I noted that Hayek saw Hitler's economic regulation as the first sign of a tyranny, and that he extrapolated this regulation/tyranny cause/effect as interfering with the operation of a "natural" economy and noted, in his Road to Serfdom that any regulation was the first step to an inevitable loss of freedom.

He's missing that it's the cleanest because it arouses disgust and caution and thus is cleaned more often and regularly.

He's not missing anything. Even with constant seat scrubbing, the seat is generally less germ-free than, say, the faucet handles or the door knob. Why? The worst area to get germs is on the hands, where everyday contact spreads germs to our face and thus our bodies. Toilet seats remain (for most) well out of facial contact.

His point is more to the main area of disgust, in that few would hesitate to lick a doorknob, while few would deign to lick a toilet seat. The amygdalic disgust is irrational.

And ascribing the economic success of Germany after Hitler's election solely to Hitler's economic policies is basically crap logic. . . .

I discussed Hitler's econ policies elsewhere, and didn't bother to repeat them in an already over-long piece.

You haven't shown any cognitive dissonance here.

That's because I try to be aware of it. ;-)

[gunslnger.livejournal.com]

One of those austerity-supporting liberals was Friedrich Hayek.

You claim that austerity measures led to the situation where Hitler was able to take advantage and take power, and then you state the above. That's implicating Hayek in setting the stage for Hitler.

noted, in his Road to Serfdom that any regulation was the first step to an inevitable loss of freedom.

You haven't shown how he was wrong though. And I don't believe he said it was inevitable from the first step, he just described what the progression was like in general. You could always stop at any of the steps and change direction, it just hadn't happened historically.

The amygdalic disgust is irrational.

It's not irrational, as the subconscious brain isn't accounting for your cleaning regimen. The toilet seat would be the worst place if it wasn't cleaned.

You haven't shown that Hayek had any cognitive dissonance.

[peristaltor.livejournal.com]

That's implicating Hayek in setting the stage for Hitler.

He had no policy power, so no, that job would likely go to Chancellor Heinrich Brüning. But Hayek supported Brüning's policy, which in hindsight must have been a bitch. Which led to the cognitive dissonance.

You haven't shown that Hayek had any cognitive dissonance.

I haven't? You summed it up nicely:

• Hayek supports austerity measures;
  
• Austerity causes two years of hardship;
  
• Hitler rises to power based on this hardship; and
  
• Hayek still supports the idea of austerity.

The cognitive dissonance he develops conveniently places the hardship not on the austerity but on the hyperinflation that preceded it, thus blaming the hardship on the hyperinflation, instead of the Versailles reparations that caused it.

And I don't believe he said it was inevitable from the first step. . . .

His book was entitled The Road to Serfdom, as in the first step along that road is to tinker with the economy through regulations, taxation, monetarism, what have you. I haven't read the book yet, no, but I could dredge some more excerpts if you really wish to be pedantic.

It's not irrational. . . .

Actually, it is the very definition of irrational, in that the reasoning process the amygdala does to reach its state of disgust cannot be rationally explained. Rationality comes from the pre-frontal cortex. The amygdala takes care of the irrational. That is its job.

[regis servant (from livejournal.com)]

gunsInger wrote :
"'Economic planning was the cause of totalitarianism for Hayek, rather than the being just a feature of it.'

I would need a citation for this, as I haven't seen this be an argument that Hayek makes."

It is indeed correct to say that for Hayek economic planning was the primary cause of totalitarianism.
For example, consider these two citations from The Road to Serfdom:

"But it would be a mistake to believe that the specific German rather than the socialist element produced totalitarianism. It was the prevalence of socialist views and not Prussianism that Germany had in common with Italy and Russia - and it was from the masses and not from the classes steeped in the Prussian tradition, and favoured by it, that National-Socialism arose." (Introduction)

"It is important to point out once more in this connection that this process of the decline of the Rule of Law had been going on steadily in Germany for some time before Hitler came into power, and that a policy well advanced towards totalitarian planning had already done a great deal of the work which Hitler completed." (Chapter 6).

Regards,
Regis Servant.

[montecristo.livejournal.com]

This is one of the first LJ entries I've read in months and I find that it doesn't disappoint. This comment actually made me "laugh out loud" for real. It's hillarious understatement, like calling Ghengis Khan a very naughty boy. We should smile though, to see posts like this one. This is what they've got? Smears? Psychologizing? Perhaps it's all they've ever had. At least they can't comfortably ignore Hayek to death anymore. That's got to stick in the crawls of those instinctive statists. They have to say something about him. What I find refreshing about the Austrians is that most of them take ideas seriiously enough to quote their opposition in context and then logically dismantle them. They don't deal in snide aspersions and denigrations of their opponents mental states. I think it would be interesting to compare Pilkington's "debunking" with say, Juan Ramon Rallo's demolition of Keynes's work. (http://www.mises.org/daily/6346/The-Errors-of-Keynes)

[peristaltor.livejournal.com]

Welcome back, Monty! You haven't lost your touch for dismissive bombast!

Oh, and it's the "craw" that things stick into.

[montecristo.livejournal.com]

Dismissive bombast? The pot calls the kettle black! Did you even read the smears and psychologizing you coppied and pasted? Too funny.

[peristaltor.livejournal.com]

Dismissive bombast is required in this community. What should be more encouraged, though, would be more specific take-downs. On that note, I sidled over to your link and found, to my eye-rolling dismay, that you had quoted silliness to support your bombast.

I've read neither Keynes nor Rallo, but Keen, him I've read, and Yves Smith. Smith was the first to point out that Keynes' TGT was complex enough that far too many economists read nothing more than the crib notes on the book and called themselves experts. Some of these experts later took their very, very abridged and even bastardized versions of Keynes and got jobs in government. Not a good mix, as it turned out, and as I think we would agree. What's been called "statist" is largely policy named for Keynes, but which has very little relationship with what Keynes actually wrote or discussed.

Keen pointed out one very troubling re-reading (bastardization) of Keynes; Hicks' IS-LM. It isn't Keynesian at frickin' all. It is, rather, a micro-economic tool banged with a mallet until it kinda sorta fit into Keynes' work, but only that portion of Keynes that the bastardizers created. It simply doesn't work as a macro-econ tool, according to Keen.

So what do I read in your linked review? "As a plus, at the end of the book, Rallo also provides a critique of the IS-LM model developed by John Hicks and Franco Modigliani which formalized Keynes's theory and is still taught at universities around the world."

So, to Austrians, is the word "formalize" synonymous with "bastardize" and "corrupt?" I call bullshit. Hicks is as truly Keynesian as Hayek is Marxist.

Rallo's criticism of Keynes further falls flat on his discussion defending Say's Law. Yes, according once again to Keen, ". . . in several ways Keynes obscured what Say actually meant." (Keen, p. 210.) Keen therefore quotes Say's Law directly and demonstrates in Debunking Economics why Keynes was more right than Say. Both Say and (later) Walras missed a key ingredient that Keynes noticed, but sadly did not develop explicitly enough for others to understand before his death:

The Say's Law/Walras's Law fallacy of ignoring the role of credit is the foundation of the neoclassical (and Austrian) argument that 'general gluts' and depressions are impossible, and that all crises are really sectoral imbalances which can be corrected by price adjustments alone. Once this fallacy is removed, depressions or 'general gluts' (and general booms) are possible, and the contraction of credit plays a key role in them.

(Steve Keen, Debunking Economics: The Naked Emperor Dethroned?, Palgrave Macmillan, 2011, p. 220, I underlined.)

Thus the entire discussion of "hoarding" is misappropriated, and using it becomes a Straw Man argument against Keynes. The focus should instead be on how the monetary system actually works, and forgetting what the pure theorist would declare.

Seriously, dude, you should start reading stuff that reaches beyond (or even challenges) your political identity. Once I started doing this myself, the world actually has started to make more sense.

Start with Keen's book.

[peristaltor.livejournal.com]

From your link: "Now, Keynesianism is mainstream."

I call bullshit. Keynes was about as clear as mud, meaning few waded into his work deep enough to glean what he was really saying. He also changed his mind (as people who receive new information always should), which could make it hard to discern which point he was trying to make at any given time. As a result, what is called Keynesian today is about as far from Keynes' words as talk of evolution is from Darwin. The problem here is that nobody writes economic and monetary policy based on Darwin.

Do pick up a book that isn't off the Austerian fear press one day. I recommend Steve Keen's Debunking Economics. Keen wades pretty far into Keynes' reeds and dissects not just John Maynard but many of the silly tools that mangled his work. People like Krugman, in fact.

[the-rukh.livejournal.com]

The problem here is that nobody writes economic and monetary policy based on Darwin.

However social policy....


Actually I think a lot of economic policy seems to be based on natural selection.


As many more individuals of each species are born than can possibly survive; and as, consequently, there is a frequently recurring struggle for existence, it follows that any being, if it vary however slightly in any manner profitable to itself, under the complex and sometimes varying conditions of life, will have a better chance of surviving, and thus be naturally selected. From the strong principle of inheritance, any selected variety will tend to propagate its new and modified form

[peristaltor.livejournal.com]

Absolutely! Darwin, however, defined "profitable to itself" very broadly, while Victorian gentlemen, like Darwin's friend Herbert Spencer, took a very narrow definition to heart.

Therein lies the rub. Spencer coined the terms "evolution" (which Darwin thought inaccurate but catchy) and "survival of the fittest" (which Darwin didn't like). Why didn't Chuck like the latter? Because in common vernacular, "fittest" refers to physically and mentally fit, not fit to a new ecological niche.

So, for Darwin, a barnacle that invades a crab, sheds its limbs, and does nothing more than sponge the nutrients off his host while simultaneously neutering the crab and forcing it to breed more parasite crabs is a "fit" specimen. To guys like Spencer, the barnacle's action too much resembled a poor person sponging off the rich. Oh, did I mention Spencer likely coined the term "social Darwinism," which Charles really, really didn't like?

Worse, Darwin's own cousin Galton (he had a bunch, even married one) even coined the term "eugenics," thankfully after Darwin had died.

[the-rukh.livejournal.com]

It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change.
-Not Actually Darwin

[peristaltor.livejournal.com]

It's a problem. (http://www.cosmosmagazine.com/news/famous-darwin-quotes-are-wrong-says-scholar/)

The weird thing is the amount of really quotable stuff that he did say. The last line of his book on natural selection is a doozy, for example. Why would anyone need to invent other stuff?

[the-rukh.livejournal.com]

For the one I quoted I think it was more an accident. I think it went from a very concise paraphrasing of his point of view that got quoted and requoted and at some point then misattibuted.