The Economic History of the 20th Century

It’s not often (actually, only once) that I share a video lasting nearly two hours. But this video – revolving around the intellectual rivalry between pro-market Hayek and pro-intervention Keynes – is an excellent summary of 20th-century economic policy.

We learn about the growth of socialism and communism during and after World War I.

This then led economists from the Austrian school – including Hayek – to explain why that approach (genuine socialism, meaning government ownership, central planning, and price controls) was doomed to failure.

But other forms of intervention and redistribution gained new adherents, especially when Keynes argued that the Great Depression was the fault of capitalism (for what it’s worth, I think the video fails to include analysis on how the New Deal actually lengthened and deepened the downturn).

Unfortunately, the Keynesian narrative dominated and the video informs us that the people of the United Kingdom voted for a socialist government when World War II ended. Which then led to the nationalization of the economy’s “commanding heights” and the enactment of the welfare state.

The United States didn’t veer as sharply to the left after the war, but there was no meaningful challenge to the the statist consensus that arose in the 1930s.

On the bright side, Germany rejected socialism by getting rid of price controls and allowing markets to flourish (the video overstated the degree to which a welfare state was imposed). But that was the exception to the rule. The world was gravitating to statism, including the developing world.

My favorite part of the video is that we learn about the creation of the Mont Pelerin Society and the emergence of Milton Friedman and the Chicago School.

That was the start of the laissez-faire counterrevolution. But it didn’t yield immediate results.

The left was in charge of economic policy from the end of the war through the 1970s in the USA and UK, regardless of which political party held power.

But bad policy sooner or later leads to bad results.

And that changed the political environment.

The latter part of the video tells the very happy story on how the sensible ideas of Hayek and Friedman eventually translated into the historic elections of Ronald Reagan and Margaret Thatcher.

If you watch the entire video, you’ll learn about how Reagan and Thatcher successfully overcame major challenges as they shifted their nations toward economic liberty (most notably, Reagan tamed inflation and Thatcher denationalized state-run companies).

And you’ll see that most of the world then followed – including the collapse of the Soviet Empire.

You even get some sympathetic quotes about capitalism from leftists such as Gordon Brown, Larry Summers, and Jeffrey Sachs at the end of the video.

So it seems like a happy ending. And capitalism indeed was the dominant force in economic policy about 20 years ago when the video was released.

Sadly, the track record of the 21st century (Bush II, Obama, and Trump) has not been overly favorable for believers in economic liberty.

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Three Cheers for “Neoliberalism”?

I don’t know whether I’ll live 3 more years or 30 more years.

But I’m increasingly convinced that my “Never-Answered Question” will still be unanswered when I kick the bucket.

One of the reasons for my confidence is that folks on the left have remarkably shoddy arguments on economic issues.

For instance, in a column for the New York Times, Mehrsa Baradaran condemns the “neoliberal” revolution in the United States.

A law professor from the University of California, Irvine, Ms. Baradaran is unhappy that this modern version of classical liberalism resulted in more economic freedom.

…an ideological coup quietly transformed our society over the last 50 years… The roots of this intellectual takeover can be traced to a backlash against socialism… Austrian School economist Friedrich A. Hayek was perhaps the most influential leader of that movement, decrying governments who chased “the mirage of social justice.” Only free markets can allocate resources fairly and reward individuals based on what they deserve, reasoned Hayek. The ideology — known as neoliberalism — …leapt from economics departments into American politics in the 1960s, where it fused with conservative anti-communist ideas and then quickly spread throughout universities, law schools, legislatures and courts. By the 1980s, neoliberalism was triumphant in policy, leading to tax cuts, deregulation and privatization.

Since I’m a big fan of Prof. Hayek, I like this part of Professor Baradaran’s column.

And it is true that the United States became more “neoliberal” during the Reagan and Clinton years (though it’s definitely a huge exaggeration to think that pro-market ideas were dominant in “universities, law schools, legislatures and courts”).

Indeed, the entire world moved in the direction of free markets during the last two decades of the 20th century, thanks is part to the “Washington Consensus” for more economic liberty.

Ms. Baradaran, however, does not approve of these developments.

And she specifically doesn’t like some of the folks on Wall Street.

The private equity industry embodies the neoliberal movement’s values, while exposing its inherent logic. Private equity firms use money provided by institutional investors like pension funds and university endowments to take over and restructure companies or industries. …In the last decade, private equity management has led to approximately 1.3 million job losses due to retail bankruptcies and liquidation.

I have no idea whether there’s any validity to the specific estimate of 1.3 million job losses as a result of private equity investors over the past 10 years (an average of 130,000 jobs per year).

But it certainly is true that lots of jobs are lost every year as a result of “creative destruction.” Indeed, 130,000 jobs are just a tiny fraction of the total losses.

Here’s a chart taken directly from the Bureau of Labor Statistics showing that more than 10 million jobs are lost – on average – every single year.

That’s the bad news.

The good news is that average job gains have been even higher over the past decade, averaging more than 12 million per year.

Call me crazy, but this seems like a ringing endorsement of “neoliberalism.” Especially when you consider that Americans enjoy much higher living standards than their counterparts in European nations with bigger burdens of government.

There are two additional excerpts from her column that merit some attention.

First, she regurgitates the myth that the 2008 financial crisis was caused by free markets and deregulation.

An examination of the recent history of private equity disproves the neoliberal myth that profit incentives produce the best outcomes for society. …Faith in market magic was so entrenched that even the 2008 financial crisis did not fully expose the myth: We witnessed the federal government pick up all the risks that markets could not manage and Congress and the Federal Reserve save the banking sector ostensibly on behalf of the people. Neoliberal deregulation was premised on the theory that the invisible hand of the market would discipline risky banks without the need for government oversight.

At the risk of understatement, the Federal Reserve, along with Fannie Mae and Freddie Mac, deserve the lion’s share of the blame.

Also, she closes her column by embracing genuine socialism (i.e., government owning and operating parts of the economy).

Federal or state agencies can provide essential services like banking, health care, internet access, transportation and housing at cost through a public option. …we can move beyond the myths of neoliberalism…we should choose flourishing communities over profits.

At the risk of understatement, I don’t want more of our economy to be like the Post Office or DMV. I prefer private businesses, which face pressure to please consumers, rather than government-run businesses, which care mostly about pleasing politicians.

And I also think Ms. Baradaran needs a lesson from Walter Williams so she learns that profits make flourishing communities possible.

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Insight from Austrian School Scholars on Federalism

I wrote just yesterday about new evidence showing that decentralized government is more efficient.

Part of the reason is because local governments are easier for voters to monitor and more likely to reflect the actual preferences of residents.

Another reason is tax competition. It’s relatively easy to “vote with your feet” by moving from one community to another, and this makes it difficult for interest groups and politicians to impose excessive tax burdens.

Now we have some serendipity.

I’m in Gdansk, Poland, for a Liberty Fund seminar on “Economic Growth, Entrepreneurship, and the Future of the Welfare State.”

Two of the readings, by great scholars from the Austrian school of economics, had passages about the importance of decentralization.

In 1960, here’s some of what Friedrich Hayek wrote in his classic, The Constitution of Liberty.

While it has always been characteristic of those favoring an increase in governmental powers to support maximum concentration of these powers, those mainly concerned with individual liberty have generally advocated decentralization. There are strong reasons why action by local authorities offers the next-best solution…it has many of the advantages of private enterprise and fewer of the dangers of coercive action by government. Competition between local authorities or between larger units within an area where there is freedom of movement…will secure most of the advantages of free growth. Though the majority of individuals may never contemplate a change of residence, there will usually be enough people, especially among the young and more enterprising, to make it necessary for the local authorities to provide as good services at a reasonable costs as their competitors. It is usually the authoritarian planner who…supports the centralist tendencies.

I should have remembered that quote from my collection of pro-tax competition statements by Nobel laureates.

In any event, I’m glad my memory was refreshed.

And here’s some of what Ludwig von Mises wrote in his 1944 book, Omnipotent Government. He approached the issue from the opposite direction, explaining that proponents of redistribution needed centralization so their intended victims couldn’t escape by moving across city borders.

Every step toward more government interference and toward more planning means at the same time an expansion of the jurisdiction of the central government. …It is a very significant fact that the adversaries of this trend toward more government control describe their opposition as a fight against Washington…against centralization. …This evolution is not accidental. It is the inevitable outcome of policies of interference and planning. …There can be no question of adopting these measure for only one state. It is impossible to raise production costs within a territory not sheltered by trade walls.

And remember that there’s academic evidence showing that decentralization limits redistribution.

So the statists were smart to oppose welfare reform, since that meant decentralization and less wasteful and counterproductive spending.

Just as the statists are smart to push for a nationwide sales tax cartel. And just as the statists are wise to push for an end to international tax competition.

All of which means, of course, that the rest of us (at least those of us who value liberty) should follow the wisdom of Hayek and Mises.

P.S. Hayek even has groupies.

P.P.S. And Hayek even came back to life for Part I and Part II of the Hayek v Keynes rap videos.

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A Perfect Holiday Album for the Keynesians on Your Christmas List

I’m understandably partial to my video debunking Keynesian economics, and I think this Econ 101 video from the Center for Freedom and Prosperity does a great job of showing why consumer spending is a consequence of growth, not the driver.

But for entertainment value, this very funny video from EconStories.tv puts them to shame while also making important points about what causes economic growth.

The video was produced by John Papola, who was one of the creators of the famous Hayek v Keynes rap video, as well as its equally clever sequel.

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Richard Epstein vs. George Soros, at the Cato Institute

George Soros participated in a forum on Hayek at the Cato Institute this past week, and the really fascinating part is watching him cross swords with University of Chicago Law Professor Richard Epstein.

The video is more than one-hour long, so if you just want to see Soros and Epstein, you can skip forward to about the 16:00 mark.

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The Long-Awaited Second Installment of the Hayek v Keynes Rap Video

The first entry in this series was an Internet sensation. Now you can enjoy Part II.

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If You Want to Understand Why Keynesianism Is Wrong and How Government Mistakes Caused the Great Depression, Learn about Austrian Economics

I’ve written several times about Hoover and Roosevelt causing/deepening/lengthening the Great Depression with their tax-and-spend, interventionist policies (see here, here, here, here, here, here, and here). But I’ve only once waded into the deeper economic issues. But a new column by Robert Higgs (h/t, Don Boudreaux) has motivated me to give some well-deserved attention to Austrian economic theory.

As you can see in the excerpt below, Higgs succinctly explains that understanding the works of scholars such as Hayek and Mises is necessary if we want people to truly understand why Keynesianism doesn’t work. Higgs also cites two excellent articles (here and here) by my former grad school colleague, Steve Horwitz, for those who want a head start on grasping these issues.

Misunderstanding the Great Depression has caused much mischief in modern macroeconomics and, more important, in government fiscal and monetary policies based on or influenced by this faulty understanding. If we are ever to arrive at a sound understanding of the Depression, we will have to persuade the economics profession to take Austrian economics seriously, as most economists did before the publication of Keynes’s magnum opus in 1936. Keynesianism in particular has proven itself to be a fundamentally flawed mode of analysis, yet one that has survived, evolved, and—like the zombies in the film “Night of the Living Dead”—keeps coming back, no matter how many times anti-Keynesians credit themselves with having dealt it a fatal blow. Monetarist, New Classical, and other recent critiques have themselves been inadequate or indefensible in various ways, as well.

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Why Does Friedrich Hayek Get all the Girls Instead of Me?

This doesn’t have the production quality of the Hayek-Keynes rap video, and it presumably won’t get as many views, but this young lady has a very clever love song for Friedrich Hayek.

(h/t Instapundit)

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Are Humans Genetically Disposed to Be Statists?

One of the fascinating discussions at the Mont Pelerin Society conference has been about the role of evolutionary psychology and its role in shaping public thinking about economic issues. Paul Rubin of Emory University spoke on this issue at the conference and, coincidentally, also had a column about the topic last week in the Wall Street Journal. As seen in the excerpt below, he discusses Hayek’s insight about our “biological constitution” and then proceeds to discuss the unfortunate tendency of many people to think that the economy is a fixed pie. This point resonates with me. If asked to identify one common characteristic of the leftists I know,  my response would be that they incorrectly think one person must become poor for another person to become rich. Even when I show them data proving that this is false, their brains are hard-wired to think that total wealth is limited and that redistribution is the only way to improve the living standards of the less fortunate.

While Hayek is perhaps best known for his 1944 critique of government economic planning, “The Road to Serfdom,” he also was a pioneer in realizing that the evolutionary history of the human species was a factor for understanding current political and economic beliefs. In “The Fatal Conceit” (1988), Hayek wrote that “man’s instincts . . . were not made for the kinds of surroundings, and for the numbers, in which he now lives. They were adapted to life in the small roving bands or troops in which the human race and its immediate ancestors evolved during the few million years while the biological constitution of homo sapiens was being formed.” His insight anticipated the modern field of study called evolutionary psychology, which explains current belief systems as being based in part on our evolutionary history. …humans tend towards zero-sum thinking. That is, we do not intuitively understand the possibilities of economic growth or the benefits of trade in achieving it. Our ancestors lived in a static world with little intertribal trade and virtually no technological advance. That is the world our minds understand. This doesn’t mean that we can’t grasp the crucial concept that trade benefits both parties to a transaction—but it does mean that we must learn it. Positive-sum thinking doesn’t come naturally. By analogy, we learn to speak with no teaching, but we must be taught to read. Understanding the mutual benefits of exchange is like reading, not speech.

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Another Video for Me to Envy

Nobody would ever want me to sing, so I won’t be appearing in any videos like this very clever production about John Maynard Keynes and Friedrich Hayek.

The video is entertaining, for sure, but it also includes some very good economic analyis.

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Brains and Common Sense Are Not the Same Thing

Thomas Sowell makes a very good point about the ostensibly brilliant advisers working for President Obama. If these smart people think that a high IQ somehow entitles them to “plan” the economy, then history shows the results will not be pretty. This is the difference between intellect and wisdom. Unfortunately, Obama’s people have very little of the latter. The late Nobel Laureate, Friedrich Hayek, referred to this trait among certain intellectuals as the “fatal conceit” and it is an especially common affliction in Washington as Sowell opines:

Many people, including some conservatives, have been very impressed with how brainy the president and his advisers are. But that is not quite as reassuring as it might seem. It was, after all, Franklin D. Roosevelt’s brilliant “brains trust” advisers whose policies are now increasingly recognized as having prolonged the Great Depression of the 1930s, while claiming credit for ending it. …Brainy folks were also present in Lyndon Johnson’s administration, especially in the Pentagon, where Secretary of Defense Robert McNamara’s brilliant “whiz kids” tried to micro-manage the Vietnam war, with disastrous results. There is usually only a limited amount of damage that can be done by dull or stupid people. For creating a truly monumental disaster, you need people with high IQs. Such people have been told all their lives how brilliant they are, until finally they feel forced to admit it, with all due modesty. But they not only tend to over-estimate their own brilliance, more fundamentally they tend to over-estimate how important brilliance itself is when dealing with real world problems. …Argentina began that century as one of the 10 richest nations in the world– ahead of France and Germany– and ended it as such an economic disaster that no one would even compare it to France or Germany. Politically brilliant and charismatic leaders, promoting reckless government spending– of whom Juan Peron was the most prominent, but by no means alone– managed to create an economic disaster in a country with an abundance of natural resources and a country that was spared the stresses that wars inflicted on other nations in the 20th century.

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