Monday, March 25, 2013

Hayek, Friedman, Regulation and the GOP

As he undertook an American lecture tour in 1944, Hayek expressed frustration that many of his most ardent acolytes seemed not to have read the book. Although “The Road to Serfdom” expressed deep anxieties about central planning, it was also explicit about the positive role that government could play. “Probably nothing has done so much harm to the liberal cause,” Hayek wrote, as a “wooden insistence” on “laissez-faire.”
Hayek was quick to point out a number of areas where regulations might be beneficial, including the restriction of excessive working hours, the maintenance of sanitary conditions and the control of poisonous substances. And he argued that the price system became “ineffective” when property owners weren’t charged for the damages they caused; hence the need to regulate deforestation, farming, and the smoke and noise produced by factories. “In such instances,” he wrote, “we must find some substitute for the regulation by the price mechanism.”
Hayek’s views were shared by many economists at the time. Frank Knight, of the University of Chicago, provided a classic statement of the justification for regulation in his essay “The Ethics of Competition”: “In a developed social order hardly any ‘free exchange’ between individuals is devoid of either good or bad results for outsiders,” he wrote. He argued that “social action” was necessary to promote exchanges that diffuse benefits and suppress exchanges that diffuse evils that aren’t reflected in market prices.
Economists such as Knight and Hayek worried deeply about the erosion of free markets, but saw their chief antagonist as “central planning” rather than “regulation.” Central planning, as Hayek explained it, involved “direction of all economic activity according to a single plan, laying down how the resources of society should be ‘consciously directed’ to serve particular ends in a definite way.”
Much of the contemporary animus against excessive regulation more closely resembles ideas first brought into general circulation by Milton Friedman. Where Hayek perceived a host of areas that might be improved by regulation, Friedman saw almost none. In the 1960s, although very few among even his closest allies shared such views, Friedman advocated for the abolition of almost every regulatory arm of the federal government. He argued that the agencies with famous abbreviations -- the ICC, FCC, FDA -- should all be shuttered to grant greater discretion to consumers, whose actions Friedman viewed as the most reliable record of public opinion. If doctors and dentists would be allowed to practice without licensing requirements, he said, the cost of care would plunge, yielding benefits that far outweighed any dangers that uncertified practitioners might pose. (If one proved inept with a drill, Friedman reasoned, consumer preferences would soon take that into account.)
The Friedman concept of the evil of all regulation has become gospel in the Republican Party, and it just isn't based in common sense reality.  It is funny that Hayek has become the go-to name among conservatives pretending to know something about economics and trying to secure the gold bug vote, even though they don't seem to realize he offered a defense of socialized medicine.

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