Monday, June 28, 2010

Von Hayek's Comeback

In the face of what can only be described as "blatant Keynesianism" (i.e., socialism) now pervasive throughout the world, there may be some glimmerings of hope coming from the Wall Street Journal. At the very least, the venerable financial newspaper is avoiding (too much) name calling . . . unlike a deservedly nameless "economist" who recently published an article in an equally deservedly anonymous journal on "oinkonomics," predictably a rant against all those dirty, greedy, filthy, sinful capitalist pigs who refuse to come around and be good socialists and follow the orders of the author of the article, whether or not the royal commands make any sense. (The author once published an article on all the things he'd do if he were king: raise wages, abolish taxes, make everything cheap, command the tide to stop coming in . . .)

In any event, an article appeared today in the Wall Street Journal written by an economics professor at George Mason University. The article was refreshing if only because it did not seem to take the usual academic acceptance of socialism for granted. There are, of course, things wrong with the economics of Friedrich von Hayek — but you can see the main issue in the following copy of the letter we sent:

Dear Sir:

Thank you for your excellent article in today's Wall Street Journal ("Why Friedrich Hayek Is Making a Comeback," 06/28/10, A21). It highlighted a number of critical points to which we here at the Center for Economic and Social Justice ("CESJ") in Arlington, Virginia, have been trying to draw the attention of policymakers and the Federal Reserve authorities for years. If you are not familiar with CESJ, you may be acquainted with Dr. Norman Bailey, who serves on our Board of Counselors, or with his work as former Chief Economic Advisor for the National Security Council under President Reagan.

We agree completely that it is not simply a question of printing money and throwing it at the problem as Keynes — and even, to a limited extent, Milton Friedman — asserted. We believe, however, that the article did not present a viable solution. To address that, at the suggestion of Dr. Norman Kurland, president of CESJ, I am sending you a link to Dr. Kurland's paper, "A New Look at Prices and Money," published in The Journal of Socio-Economics, Vol. 30, pp. 495-515. Dr. Kurland would welcome your comments on his paper.

First, of course, we agree that neither the State nor the central bank has any business setting interest rates. Only the market can set the interest rate on existing accumulations of savings if a market is to be considered in any way "free." The rate of interest should not be manipulated to achieve political goals or as a result of collusion among private enterprises. These efforts merely raise or maintain barriers against free and full participation in the economy by everyone according to his or her abilities.

There is also the issue of State interference with individual freedom. "Power," as Daniel Webster observed, "naturally and necessarily follows property." By interfering with access to the means of acquiring and possessing private property in the means of production and subordinating economic growth and financing of new capital to political motives, the State effectively determines who can own and on what terms. This is tantamount to the abolition of private property.

Not surprisingly, attempts at State control of the economy, in whole or in part, corroborate the effective abolition of private property under Keynesian assumptions. "Property," as the late lawyer-economist Louis Kelso (best known as the "inventor" of the ESOP) pointed out, "in everyday life, is the right of control." (Louis O. Kelso, "Karl Marx: The Almost Capitalist," American Bar Association Journal, March 1957.)

The problem with von Hayek's solution of just letting the free market operate, however, is that he mis-defined money. Somewhat ironically, he used the same Currency School understanding of money as Keynes. This effectively limits "money" to coin, currency, and (except for some monetary puritans) demand deposits.

Von Hayek correctly diagnosed Keynes's collectivism in his deservedly renowned critique of Keynes's A Treatise on Money (1930). Nevertheless, he failed to take into account the fact that "money" as the medium of exchange is anything that can be used in settlement of a debt. Von Hayek thereby missed the most collectivist and thus the most damning of the Keynesian claims. Consistent with Georg Friedrich Knapp's "chartalism," Keynes declared that "money" is a special creation of the State, and the State has the power (in Keynes's words) to "re-edit the dictionary" and unilaterally change the terms of any contract. Keynesianism thereby makes private property a meaningless concept.

Consistent with the findings of Dr. Harold G. Moulton, first president of the Brookings Institution, CESJ advocates a much more limited role for the State, particularly in the economy. Dr. Moulton presented a counter to the New Deal in 1935 with the publication of The Formation of Capital, the third in a four-volume series setting forth principles of economics and finance that would bring about a sound recovery in place of artificial stimulation by the State.

To Moulton's work we add that of Louis Kelso and Mortimer Adler as found in the two books they co-authored, The Capitalist Manifesto (1958) and The New Capitalists (1961). The subtitle of the latter work is significant: "A Proposal to Free Economic Growth from the Slavery of Savings." Finally, we integrate the "act of social justice," not as a euphemism for the State making up for the failure of individual justice, but as a means of restructuring our institutions to provide a level playing field so that individual virtue will become possible once again — equality of opportunity, not results.

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