Thursday, July 17, 2014

Hayek and Benevolent Dictators

Perhaps the biggest problem with libertarianism (and I'm talking about the more extreme minarchist and anarchist range of the spectrum, not Greg Mankiw saying he's largely a libertarian) is that it is a political philosophy which probably more than any other fails to engage its own unintended consequences and robustness. When problems do emerge the true Scotsmen close ranks and don't see it as an opportunity to reflect. What is even more fascinating about this is that these sorts of issues are regularly raised in criticisms of other viewpoints by libertarians.

An important example of this problem is, of course, Hayek and Pinochet. The Review of Political Economy has recently published a symposium on Hayek's relationship with Pinochet, featuring articles by Guinevere Nell and Andrew Farrant, among others. In the same issue, but not in the symposium, there is also an article by Jon Wisman, a professor at American University. Here are the abstracts:

Can a Dictator Turn a Constitution into a Can-opener? F.A. Hayek and the Alchemy of Transitional Dictatorship in Chile

Andrew Farrant & Edward McPhail

Commenting on the Pinochet regime, Friedrich Hayek famously claimed in 1981 that he would prefer a ‘liberal’ dictator to ‘democratic government lacking liberalism.’ Hayek's defense of a transitional dictatorship in Chile was not an impromptu response. In late 1960, in a little known BBC radio broadcast, Hayek suggested that a dictatorial regime may be able to facilitate a transition to stable limited democracy. While Hayek's comments about Pinochet have generated much controversy, this paper neither provides a blanket condemnation of his views (he did not advocate dictatorship as a first-best ‘state of the world’) nor tries to excuse his failure to condemn the Pinochet junta's human rights abuses, but instead provides a critical assessment of Hayek's implicit model of transitional dictatorship.


Hayek, Friedman, and Buchanan: On Public Life, Chile, and the Relationship between Liberty and Democracy 

John Meadowcroft & William Ruger

This article places recent evidence of Hayek's public defense of the Pinochet regime in the context of the work of the other great twentieth-century classical liberal economists, Milton Friedman and James M. Buchanan. Hayek's view that liberty was only instrumentally valuable is contrasted with Buchanan's account of liberty situated in the notion of the inviolable individual. It is argued that Hayek's theory left him with no basis on which to demarcate the legitimate actions of the state, so that conceivably any government action could be justified on consequentialist grounds. Furthermore, Friedman's account of freedom and discretionary power undermines Hayek's proposal that a transitional dictatorship could pave the way for a genuinely free society. It is contended that Hayek's defense of Pinochet follows from pathologies of his theories of liberty and democracy.


 Dictating Liberty 

Theodore Burczak

Andrew Farrant and Edward McPhail demonstrate Hayek's willingness to support, under certain circumstances, a transitional dictator who seeks to implement an institutional structure conducive to liberty, understood to mean economic freedom. This comment links this support to Hayek's mistaken rejection of democracy as a constitutive component of freedom, which is the result of his overestimation of the epistemological abilities of judges.


The Alchemy of the Can Opener: How an Austrian Economist Found Himself Supporting Dictatorial Imposition of a Liberal Order 

Guinevere Nell

Why would Hayek, the great critic of ‘rational constructivism’ and defender of spontaneous orders, think a transitional dictatorship could work? Here I attempt to dissect the alchemy of ‘turning a constitution into a can opener’ as Farrant & McPhail (2014) put it. Hayek argues against the imposition by an external source of order upon a society. He stresses the importance of an evolving culture and tradition, noting that they should be spontaneous orders not command systems, and that the culture of a society must be accepting and supportive of its institutions. Sometimes the culture is more important than the formal institutions of a society for efficiency. So why would Hayek argue that a transitional dictator could impose a constitution upon the people? It will be argued here that if Hayek had pursued the theoretical line set out in his Constitution of Liberty, he might have responded to the situation in Chile differently.

Wednesday, July 9, 2014

Some links

- Norm Matloff, a regular voice in the high skill immigration debate (but not an economist) is now blogging.

- Think tanks discussed on the Diane Rehm show recently.

- Suzanne Konzelmann takes a crack at the political economy of austerity in the Cambridge Journal of Economics. I have said for a while now that public choice theory is likely to be judged negatively in the future for its inability or unwillingness to rise to the occasion of explaining one of the most important facets of public life today - austerity. Often, perhaps due to libertarian priors, self-identified public choice theorists deny there is even anything there to study. Lots of other people are on the job of course. One nice thing about public choice theory is that it's a cohesive set of tools.

- Home production is primarily substitutable for market goods, which has implications for the relative taxation of goods and services.

Those Austrian brain worms on income and capital again!!!!

Just kidding... Robert Murphy's recent Econlib article on income and capital was quite good. The title is just a reference to a recent Noah Smith article*. This is not to say I am 100% convinced by Murphy.

Bob starts off by explaining the value of capital as the capitalized value of a stream of income generated from that capital, and then also introduces Hayek's alternative view from Pure Theory of Capital. I had a little trouble with the sharp distinction Bob was trying to draw here, with the former as being "static" and the latter as being "dynamic", united only when capital gains are considered. Capital gains follow so fundamentally and naturally from a basic capitalization approach that I think this treatment of capitalization as "static" is pretty weak. I think of the real contribution of Pure Theory of Capital as being the development of the idea of roundaboutness, but in fairness I've only read parts of the book.

I would not worry so much about the capitalization/Hayek distinction though. Indeed it seemed like just a nice excuse to get Hayek and Mises in there. The important thing is that Bob explains capitalization and capital gains to his readers because these are critical for understanding the new Saez-Zucman work and the potential trouble with using tax data.

So in a nutshell the Saez-Zucman study: (1.) uses the capitalization method to estimate wealth distributions from income data, and (2.) diverges from direct tax measures of wealth:

Bob argues that income tax changes in 1986 reducing top marginal income tax rates incentivized many people to reorganize their businesses as S corporations that would show up in the income tax data. Several years ago Scott Winship shared a chart that I think originally came from Alan Reynolds illustrating the point:

Notice, though that, the big jump you see in Winship's series happens between 1986 and 1988, for obvious reasons. After that there seems to be low, steady growth in the contribution of "entrepreneurial income" but the major contribution to personal incomes reported for tax purposes has already been made. That does not seem to explain the trend increase in the S-Z IRS data or the SCF (unless I'm misunderstanding something about how business income is reported and whether some of that comes under the wage increase - which is entirely possible). In other words, the big pre-1986/post-1986 change seems to be a level change and a composition change, but what Bob is trying to explain here is a trend change.

It's also worth noting the big differences between the rich and the super-rich (or more like the super-rich and the super-duper-rich). Most of the changes have happened at the very top, so it's important to think about whether Winship's income numbers, Saez-Zucman's wealth numbers, the SCF's wealth numbers, and Kopczuk-Saez's wealth numbers are all dealing with the same population. The sampling frames are quite different, and given the small share of the population we're talking about small differences in the population can make the difference between a stark U-shape and a flat line. In other words, the contradiction here may or may not even be contradictory.

Ultimately, something that the Zucman-Saez number has in its favor is that it lines up with the increase in the SCF over time. The SCF is designed to really get at the top earners and it's direct survey data that does not require the substantial imputations necessary for using estate tax data. The SCF is also nice because it reports both income and wealth (and it even counts the tax-deferred wealth that Bob raises as a problem for income tax measures). In theory, you could apply the Saez-Zucman capitalization method to the SCF and compare the SCF capitalization estimate of the top 1% share to the SCF reported wealth estimate of the top 1% share. Maybe someone has already done this (maybe Saez-Zucman have already done this and I haven't looked closely enough!) but that would be a very nice test of the validity of all this.

So we still have the estate tax data to explain. Needless to say I am neither old nor rich (although I am feeling a little more of both every year) so I don't feel like I have a good grasp of what goes into estate planning that might be relevant here. But it is worth noting that in the last thirty years estate tax rates and exemptions haven't exactly been stable either. The best explanation I can come up with is that a person's estate is going to be a lagging indicator of wealth changes for the obvious reason that dead people amass their wealth over several decades. Short-term effects like financial crises may have big immediate impacts on estates, but a legitimate increase in wealth inequality starting in the mid-1980s might take some time to show up.

Those are my thoughts - I have no strong answers but my prior is that personal income tax and SCF data are more direct measures and estate tax data is less direct, so when the former two agree with each other we ought to take note. I also think that Bob's explanation is more of a level effect than a trend effect (unless I'm misunderstanding something), so I'm not sure how much it really explains. But the article is a really nice introduction to the issues and to the Saez-Zucman controversy. 

* - Which, in case you care about my opinion on these things, mirrored quite closely the criticisms that the GMU Austrians have made of the exact same people that Noah was criticizing. For some reason, though, even the GMU Austrians didn't seem happy with his article. I guess it's an "only we are allowed to criticize our own" thing.

Sunday, July 6, 2014

Quick thoughts on "How to Pay for the War"

Sorry for the slow posting - here's something that might be interesting though. I've recently been leafing through a first edition of Keynes's "How to Pay for the War" (1940) that Evan picked up for me at a U Chicago library book sale. It's a really fascinating read and an often overlooked gem I think - I will have to read it properly once I'm done with Piketty. This, along with the Treatise on Money, for some reason does not get reprinted as often as Keynes's other books and so the treatment from people is often more casual. But I like it a lot for a couple reasons:

1. First it highlights quite explicitly the mission that is animating Keynes pretty much from the beginning, which is how a free society works in the modern economy. He sees one group of people who embrace a free society that pretend there is nothing really different about a modern economy (what he refers to elsewhere as "laissez faire", and then he sees another group that understands there is something different but addresses it by abandoning the free society (communists and fascists). He thinks that neither are a viable option. This understanding of his role is there throughout his life, but it comes out very clearly in How to Pay for the War.

2. The General Theory is detailed on investment theory but not as detailed on consumption theory - particularly the microfoundations of consumption theory. This is what gets developed in the 50s and 60s and this is really the foundation of New Keynesian economics. In How to Pay for the War Keynes seems to really deal a lot more with micro consumption behavior, which is understandable since he's talking about intertemporal public finance and tax issues.

3. He is talking about slowing growth and fighting inflation. A lot of people act like Kenyes forgot to address this, sometimes based on nothing more than a well circulated Hayek Youtube video claiming he forgot it.

4. He talks about expectations for post-war slumps, and as anyone that knows about his exchange at the Fed in '43 I believe (maybe '42) he is not pessimistic about it like Samuelson was at the time.

5. He carries over critiques of price controls and rationing that echo insights into consumer theory that he was making as far back as Economic Consequences of the Peace.

There are so many common threads here that just leafing through it makes me want to read his major works again (and in some cases for the first time), and take notes/outlines of it all to do something with... who knows.