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Samuel Brittan's Liberal Mistake
January 2010 The article runs as follows: It is far too early to pick up the pieces and reconstruct mainstream economics after the debacle of the past two years. It is not, however, too early to restate some liberal values that need to be preserved whatever technical changes are made in the conduct of economic policy. I am using the word “liberal” in the classical European sense of someone who attaches especial importance to personal freedoms... Defining liberal policy is complex but... Here are three starkly anti-liberal examples: 1. Some people advocate compulsory national service as a way of improving the character of young people. 2. Rigid foreign exchange restrictions. 3. A smoking ban in public places which is secretly designed to stop people smoking for their own health rather than the health of anyone around them. So Samuel Brittan believes that a degree of personal freedom needs to be preserved in our economic model no matter what the lessons of the credit crisis may be. For example, Brittan would reject any economic model which takes away from an individual the right to smoke. He would also reject any economic model which set out to improve the character of young people by forcing them to undertake national service. In both cases he is rejecting excessive government interference in the life of its people. Many would agree - but is this economic science or moral ideology? Suppose we asked a scientist to compute whether or not to prohibit cigarette smoking by calculating the net benefit to society. Here are some of the factors he might consider: (1) The damage smoking inflicts on health. (2) The low or negative increase in personal happiness even healthy smokers generally report. (3) The inability of smokers to quit cigarettes even when their rational mind is set against the habit. (4) The diversion of capital away from standard of living boosting goods to cigarette manufacturer, sale and associated medical expenses. Given all this, it is obvious that the scientist is very likely to conclude the net benefit to society is deeply negative. Is this über rational maximization of net benefit missing something, or does it properly define the essence of intelligent economic policy making? Lionel Robbins' 1932 "Essay on the Nature and Significance of Economic Science" sought to distinguish between the empirical rationality of modern economics and the more ideological assumptions of the past. The British mathematician turned economist John Maynard Keynes was spearheading the revolution in economic thinking at this time, today we think of him as the father of modern macroeconomics. Keynes revolutionised macroeconomics by introducing new levels of mathematical rigour. In the 1920s and 1930s his analysis of data and new methods overturned many long held assumptions. The arrival of the great depression further enhanced his reputation. One of the key ideas in Robbins' 1932 essay defining economic science is the concept of neutrality between ends except as pertains to utility. For example, the popular prevailing theories at that time mostly held that free markets would automatically provide full employment as long as workers were flexible in their wage demands. Keynes overturned this and demonstrated how inefficiencies could develop within free markets which only government interventions could correct. Economic scientists were forced to embrace these new Keynesian ends, because of their proven higher utility, and regardless of their controversial conflict with prevailing political ideology. The "Austrian School Of Economics" was one of the prevailing theories at that time, and the one most closely associated with the laissez-faire macroeconomics which Keynes questioned. The Austrian School was a relatively new movement which had broken away from the conventional neoclassical economic models pioneered by the British economist Alfred Marshall. The Austrian School, also known as the Psychological School, believed neoclassical economics placed far too much emphasis on deductive logic and overlooked psychological factors. They also believed that the distributed opinions of the marketplace are the closest we can come to objective knowledge. Taking this principle to an extreme, Austrian School economists insisted on laissez-faire, because the objective maximization of utility which might drive interventionist governmental policy, and which is at the heart of neoclassical economics, is impossible. In the same way individual liberties should be sacrosanct, because the objectivity required by a government to justifiably curtail them is impossible. In the 1920s, under pressure from the new economic spirit of mathematical empiricism which Keynes had imparted, the Austrian School split. Friedrich Hayek integrated the importance of distributed opinion into modern macroeconomic science. His ideas partly inspired the Thatcher and Regan revolutions which emphasised, for example, privatisation of state owned enterprise and competitive tender for government initiated infrastructure projects. Hayek believed the ability of the government to judge utility is limited, so he advocated "small government" and "light touch regulation". For example, Regan stimulated the economy with simple tax cuts rather than trying to decide on specific growth boosting projects to pump money into. Even then, heavy handed fiscal policy which ran deficits in bad year and surpluses in good years, was generally discouraged, instead independent central banks fine tuned interest rates to contain inflation and smooth the economic cycle. Some diehard Austrian economists, led by Ludwig von Mises, could not let go of their ideological attachment to libertarianism, instead they rejected scientific empiricism and became increasingly radical. Murray Rothbard described "Anarcho-Capitalism" as the complete elimination of the state under total libertarian capitalism including even private sector law enforcement. Every empirical example of failed libertarian policy was rejected by Rothbard, because he argued that the presence of any government at all makes it impossible to conclude how a perfectly libertarian system would respond. This is like someone attempting to argue that not watering a plant will result in the fastest growth. And when you point out to him that there is a correlation between the amount of water given to a plant and its rate of growth, he dismisses these experiments on the basis that they all used water. Hayek famously denounced the school by saying "probably nothing has done so much harm to the liberal cause as the wooden insistence of some liberals on certain rules of thumb, above all of the principle of laissez-faire capitalism". Austrian Economics faded into obscurity and now finds an outlet only in the world of blog. Coming back to the debate in question, is Samuel Brittan's instance that our economic models must not prohibit smoking scientific or ideological? Is he telling us something that can be supported by rational argument, or is he lapsing into the sort unjustifiable morality normally associated with the popular press? Is his contribution reasoned, or it the reaction of a closed mind which constructs irrational arguments to justify its position? Is Brittan another Ludwig von Mises? Hayek's integration of individual freedoms in order to promote creative destruction, and his argument that the ability of government to measure utility is limited, has nothing to do with such a specific policy which may be unequivocally damaging to the greater good. It is patently absurd to argue that: it is impossible for a government to have the objectivity required to prove smoking to have negative utility. As absurd, perhaps, as the Anarcho-Capitalists claim that law enforcement should not be provided by the state. What rational argument might save Brittan from being labelled a von Mises? Perhaps the principle of precedent, ie the difficulty of legislation against smoking without dragging in a whole host of more dubious peripheral policies. Perhaps also the problems prohibition can create- eg the black market in illicit drugs. But these issues do not obscure that the fact that: liberal values are not economic axiomatic truisms. An infinitely better article about the lessons of this crisis is Martin Wolf's Keynes offers us the best way to think about the financial crisis. In this article he explains the most important lesson is that "one should not treat the economy as a morality tale". The words morality, ideology, attachment, dogma, religion, populism, emotion, opinion and subjectivity all come to the same thing in this context - the rejection of rationality. This concept of rational thinking goes back to Plato, for him it was synonymous with enlightenment. Learning from the credit crisis involves: (i) carefully separating our economic models from worthless ideological assumptions (ii) analysing the consistency of our economic models with the new data. Dealing with the first of these issues: it is clear that the success of Hayek's 1980s style liberalism up until the turn of the century has helped to engender in Western consciousness a Ludwig von Mises style ideological attachment to liberty. In Plato's dialogues the noble opponents of Socrates acquiesce under pressure, but the average man radicalises as his ideology is torn apart by the cold light of reason. Just as Austrian Economists turned to Anarcho-Capitalism in response to Keynes attack, since the credit crisis we have seen a recent passionate revival of Austrian Economics on blogs. We have David Cameron's irrational ideological position that the credit crisis is the result of too much, not too little, regulation. We have the increasingly violent debate sweeping American politics and the bizarre angry outpourings seeking to justify the abject failure of libertarian US healthcare policy. Emotional baggage must be put aside before one begins on the analytical process. Dealing with the second issue, the analysis of the technical economic challenges posed by the credit crisis, we have the types of issue raised by my article Rent Seeking & Laisser-Faire. We also have to analyse the enormous success of the deeply illiberal economic policy being made in China. The prevailing opinion in Western society is that government interference and state owned enterprise is deeply inefficient. Comparing the UK and the US in the libertarian 1980s with the statist 1970s would appear to bear that out. But what role did democracy play in this story? Is is possible that 1970s policy was so deeply inefficient because it was guided by populist democratic decision making, not because, as Hayek claimed, objective knowledge is really so difficult for government to achieve? What if the distributed opinions of the emotional marketplace suffer from the infectious irrationality of "groupthink", or the dangerous madness of "crowd psychology"? 'I relied on the self interest of bankers' belatedly explained Alan Greenspan after they had leapt, lemming like, off the cliffs. Perhaps Hayek was completely wrong, and our distributed economic model is built on sand. Finally, it is important to add that this article adds flesh to the vital concept of ideology free policy intrinsic to my definition of Enlightened Authoritarianism. At the heart of this definition is the idea that politics and justice must be absorbed into economic science. The popular values judgements of democracy need to be abandoned, policy making is a engineering project, government is a dehumanised machine. Wisdom is dehumanized intelligence, justice is pragmatism. This is precisely the message of Plato's Republic. I included the long example of Hayek and Ludwig von Mises partly to illustrate the contrast between wisdom and opinion. For all our modern technology most of us are still as blinkered as the Priests who excommunicated Galileo. The idea of scientific government is as shocking to man today as it was to the Athenians alive at the time of Socrates.
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From Nick, London, 12 Jan 2010 Nick, sorry it is not so easy to grasp what I am saying. The selflessness or otherwise of an individual scientist makes no difference to the outcome of physics, nor to the type of government I am suggesting. Newton, for example, was tyrant, but his physics worked. Plato later moved away from the "philosopher king" concept. In his Laws he talks about down to earth individuals devoting themselves to the scientific study of government and making good policy despite their human failings. In fact this concept is not just limited to science, it works in art too. Now if you can imagine Eric Gill as a useful watchman we will be making progress! Really- so could Hitler be a Watchman? Great question Nick! I hope you will agree that Hitler's genocide of the Jews would not pass the rational policy test! His theories on eugenics have more scientific credibility, but I doubt they are "broadly compatible with the level of idealism prevailing in society". Elsewhere, I have defined the ethical limits of governmental power in this way. Rational policy has to have irrational despotic power boundaries. Humans have an aversion to pain, and this has to be reflected in policy. In the UK today we really don't like being pushed at all, and government would have to reflect that. If it didn't we would be slaves not citizens, or at best children instead of adults. Also, I think Hitler would be wedded out in any Watchman job interview. He was hated by the establishment, he was a street fighting democratic politician. In terms of his technical skills we have Albert Speer's classic book "Inside the Third Reich" to enlighten us. Speer describes him as a sociopathic megalomaniacal bohemian, not intelligent, indecisive, lazy, incompetent, unprofessional, etc. How did such a feckless character take almost all of Europe? I guess he had some pretty amazing people working for him. Can you imagine putting a machine like that under benevolent rational authority?
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