Wednesday, October 28, 2020

Overall remarks on von Mises

Written in 2009

Having read today chunks of his 2 books against  interventionism and against socialism (Gemeinwirtschaft) my general impression is that von Mises is basically an advocate of capitalism come hell or high water (essence of capitalism according to  von Mises is private property, not free competition), and uses every possible argument in favor of the capitalist  system, in a fairly opportunistic way, sometimes contradicting himself. He has no unified theory of why capitalism is good.

On the other hand von Mises admits that certain government interventions would be good if they could be carried out. But they can't!.[1] However his proof of why they can't is not very convincing. And in any case that leaves a door open for state intervention merely by saying that it's a new kind of intervention that really  is effective. And that can be said about many government interventions nowadays! So von Mises was basing his argument on the assumption that nobody had ever proved government intervention was effective. Now 80 years later things have changed.

Accordingly much of von Mises’s arguments are simply “We don't know enough about how economies really work to design effective economic policies.” 80 years later this argument is a dead duck.

But isn’t von Mises’s argument that government measures  are ineffective predicated on the assumption that competitive free market forces counteract them? If so, then ineffectiveness of government policy assertion is only correct when the capitalist system really is competitive!

It's amusing to compare the academic rigour with which von Mises counters critics of monopoly and of concentration[2] with his  sloppiness when marshalling evidence in favor of his own statements!. “First you have got to prove this, then you have got to prove that, you have got to distinguish between concentration of wealth and concentration of firms!” etc. His own assertions don't seem to be backed up by any such heavy-duty empirical evidence or theoretical reasoning. For example: expansive nature of government intervention that market forces assure quick adjustments, etc. Kinda quick on the trigger, old Ludwig.

 Consequently he cannot be taken seriously as a theorist. He is merely an ideologist, albeit a fairly competent one.  

On the other hand I was amazed to find that von Mises wrote his thesis on a subject of economic history! And diachronic at that! (history of serfdom’s final stages in Galitzia). Must read! This seems to contradict my thesis of the ahistoricity of the Austrian School. [I later found out that Mises started out as a disciple of the German Historical School.]

Conclusion: Von Mises’s critique of socialism is multiple. Some of his claims I found convincing from my historical standpoint (2009) (Kornai seems to have  proved von Mises's thesis of impossibility  of rational price determination without a market). On the other hand many of his objections to socialism & Co. are merely challenges, they claim nothing, merely deny cogency of other side’s arguments:

1)     Demands that the other side prove their case with scientific rigor,

2)     Claims that empirical evidence is lacking, inconclusive, etc.

Von Mises’ assertion that every government intervention is fatuous seems to be based only on price controls and suchlike. Nowadays government intervention takes other forms, like channeling finance to certain sectors of the economy, as in Japan. Most likely thanks in large part to von Mises’ critique, price controls have a bad reputation today (except for minimum wage levels). Accordingly nowadays critique of government intervention must be much more diverse, complex, etc. Von Mises simply does not cover the subject any more. He's old hat. Try Kornai instead. Planners have learned from von Mises’ critique! We’re at a new stage of the game.

Historical setting of von Mises. Germany in the  1920s & 30s was extremely radicalized between R and L. In that atmosphere of class struggle, it was inevitable that von Mises focus his arguments on whatever would be politically effective in the specific situation. That would tend to make him opportunistic, talk out of both sides of his mouth. 

When he says that no specific argument has been made against monopolies a such, I think he's ignoring the classical argument against  monopolies, namely excess profit for monopolist and a reduction in consumers’ welfare. That seems to me to be a pretty good general argument! 

Check what von Mises says about Bismarck (if anything).

Does he anywhere go into the conditions of a free market to exist & why a free market is good? He seems to assume that in a lot of places. But I have not found any actual support for this argument yet.

The issue central to my research of R-wing economists is what grounds they adduce for free enterprise’s superiority. More specifically whether they claim the advantages set forth by Adam Smith & followers, namely that capitalism is good because it (1) means a free market for goods and services; and because (2) free markets are capable of optimizing social welfare (Pareto-optima), but (3) only if they fulfill certain criteria that are logically required for the market to strive toward a Pareto optimum. (These criteria being no externalities, free competition, no increasing returns, perfect information, no public goods, etc.).

The crucial link is between 2 & 3. To what extent does the desirability of a market system depend on the fulfillment or otherwise of the criteria under (3)?

Intuitively & from experience, I find that the more right-wing an economist is, the fewer demands he places in order to class capitalism as beneficial, and vice versa.  This would seem to imply that it is a leftish position to allege any market imperfection. Although there's no obvious reason for it, R-wing economists seldom go into issues of whether market conditions fulfill or not the technical requirements to be considered Pareto-optimizing. They always assume that everything’s just dandy in that department.

Types of market imperfection:

  1. Monopoly (Cambridge School, 1930s) countered by contestable markets theory
  2. Asymmetrical information (Akerlof, Stiglitz & Co., 1990s)
  3. Herd behavior
  4. Too many speculators (that is too many traders are not basing their decisions on fundamentals but either (1) on what they think will happen to the stock in a short while; or else on (2) what they think other traders are going to  do).
  5. Public goods
  6. Externalities
  7. Increasing returns to scale
  8. Non-convexities
  9. Is the economic decision one that may legitimately be undertaken by a single consumer? If it’s a collective decision, asking the individual opinions of the participants in the decision  making BEFORE they have even begun to discuss the question is extremely misleading (see Perelman).

Their unwillingness to compromise with social democrats is ideologically undergirded by their alleged belief in the absolutely incompatible nature of free market & planning. I think that Hayek’s wishy-washiness about government social welfare policy shows that the incompatibility doctrine is a crucial political dogma which they reaffirm once and again. In other words they don't really believe in the incompatibility. It's just a cover story to justify a hard line. In practice they’re willing to make small concessions.

The vigor with which von Mises stresses the incompatibility doctrine is almost zombie-like. It's not a scientific conclusion. It's obviously a political dogma. It reflects a certain strategy of the part of a segment of the bourgeoisie (financial bourgeoisie? Who knows?)

What link is there between Hayek & co and financial capital?

According to  Duménil & Levy, Hayek’s ideas represent the ideology of the financial capitalists, not the manufacturing capitalists. Was that also true in their time? What were the political activities of Hayek & co? Is financial capital less likely to desire cooperating with the  state than industrial capital? If so, why? Austrian School’s stress on the entrepreneur does not seem very finance-friendly. The concept of entrepreneur can be seen much more clearly in a manufacturer  than a banker. This is clearly not pro-finance capital.

Strangely enough it seems that it was Arrow who created (1954) the model that animates finance capital, namely homogenizing all assets in a "portfolio”. (check)

Austrian School’s ideas do not seem to have been in any way specifically related to finance capital. Read von Mises’s article about Austro-Hungarian financial system. Perhaps the only true link between Austrian School & finance capital is the intransigence toward government intervention (assuming that laissez-faire is intrinsically finance-oriented, see above).

Perhaps state-manufacturing capital link is the protective tariff proposed by F List, import-substituting industrialization.

Certain observations of von Mises show that he had a highly developed feel for history. Quite the opposite of Hayek. See quote of his I framed in notes on Die Gemeinwirtschaft 2009-05-29. That being so, why did he devote his attention exclusively thereafter to methodological  individualism? (Did he?)

 

Von Mises talks a lot about theoretical work needed to explain phenomena. Nowhere does he mention empirical work. Nonetheless he obviously values empirical work, since he lays so much stress on statistics. I suppose “empirical” didn't  have the cachet it has nowadays.

Die Gemeinwirtschaft, von Mises’s compendium of anti-socialist thought, obviously is a collection of separate brief (journalistic?) writings on various subjects, which he then joined together in a single work. However the fissures and gaps show through. He didn't give it a thorough theoretical elaboration & unification. All the better for me. Thus the various strains of thought will be easier to distinguish.  

I won’t reproach von Mises very harshly with opportunism & contradicting himself, since  Die Gemeinwirtschaft arose in a period of intense class struggle and von Mises necessarily had to address very diverse practical issues. Nonetheless some internal contradictions do show.


Taking the list of market imperfections,

Plot position of each theorist.

Types of market imperfection:

 

Discoverer

von Mises

Hayek

Milton Friedman

Monopoly  countered by contestable markets theory

Cambridge School

 

 

 

Asymmetrical information

Akerlof, Stiglitz

 

 

 

Herd behavior

 

 

 

 

Too many speculators [3]

 

 

 

 

Public goods

Musgrave?

 

 

 

Externalities

Pigou

 

 

 

Increasing returns to scale

 

 

 

 

Non-convexities

 

 

 

 

Is the economic decision one that may legitimately be undertaken by a single consumer? If it’s a collective decision, asking the individual opinions of the participants in the decision  making BEFORE they have even begun too discuss the question is extremely misleading.

Perelman

 

 

 

 

In which chronological order were market imperfections discovered?

How is managerial revolution   (Burnham, Gardiner & Means) related to market imperfections?

Market imperfection scorecard for any economist.



[1] It's like saying. “Hey, it would be great to shoot that zebra! But we don't have a gun!” Only to von Mises the idea of getting a gun to shoot the zebra seems pointless, or hopeless, or both. He does not seem to prove anywhere that government intervention is necessarily ineffective.

[2] Check to see whether the arguments he refutes were really the strong arguments available at the time – or instead they’re mere straw men von Mises invents just to decapitate them.

[3] That is too many traders are not basing their decisions on fundamentals but either (1) on what they think will happen to the stock in a short while; or else on (2) what they think other traders are going to  do. Is this the same as herd behavior?

Wednesday, March 27, 2019

Political measures required to reduce carbon emissions


The owners of fossil fuel deposits and fossil fuel processing industries resist decarbonization measures like those proposed by Ms. Ocasio because they would entail wiping out their investments. The value of fossil fuels in the ground would drop to zero.
Therefore these owners are making every effort to thwart government decarbonization measures, which includes public misinformation campaigns, lobbying and bribes.
All these things cost money, and the money is paid out of the prospective revenue flow from the fossil fuel investments.
Consequently the annihilation of the investments should be done preemptively, instead of waiting for the market to assign a zero value to the investments because their prospective revenue flow has dropped to zero.
The petroleum multinationals discovered 40 years ago that the climate was going to change, but they kept mum about it.  Consequently they have caused incalculable damage to the world economy. We should demand that they be punished for their crimes. The punishment will consist of revoking their corporate charters and seizing their assets.
This way they will have no money to pay lobbyists and deceive the public.

Thursday, August 30, 2018

Ricardo is now irrelevant



The celebrated theory of international trade proposed by the English economist David Ricardo (1772-1823) is logically impeccable.

It has several weaknesses, however. One of them is that it uses the classical comparative static approach and consequently ignores the dynamic aspects, which are decisive and constitute the subject matter of development economics.

The weakness I now address is, on the other hand, not inherent to Ricardo’s methodology, but instead a unique and unforeseeable outcome of the financialization process that has beset world capitalism during the last four decades.

Ricardo’s theory of international trade is based on prices of manufactured goods. Quite naturally, Ricardo based market prices on manufacturing costs. And there's the rub.

Because the self-evident maxim that market prices are based on manufacturing costs is no longer  valid in general terms.

Deregulation of commodities markets has enabled purchase of commodities – petroleum, for example -- by parties that are unrelated to the  industry in which such commodities are used as inputs in manufacturing processes.  The ensuing and  by now commonplace practice of stockpiling raw materials and other goods for the sole purpose of speculation, i.e. without any intention of ever actually using the wares as inputs in an industrial production process, means that demand is no longer related to the use value of the wares, but is instead largely determined by trends on the financial markets.  

To the  extent that market prices are no longer determined by production costs but by financial market trends or other factors extraneous to the  production process, Ricardo’s theory of international trade has become irrelevant.

To what extent have production costs been trumped by expectations of speculative profits as determinants of market prices?

Deviation of market price from manufacturing cost cannot  exceed certain bounds in the long term.

That is all I can say at this stage without doing serious empirical research, which is a somewhat unlikely prospect.


Wednesday, August 29, 2018

Why Hayek Sucks


A critique of The Road to Serfdom
April 2006


Contents:



Meaning of “planning” in Hayek                ……..
p. 1

Hayek’s import-export theory of socialism       ……  
p. 6

Meaning of “Planning” in Hayek.

Hayek considers only two cases: complete free market and central planning. No intermediate cases. But he then proceeds to posit certain types of situation which are common both to central planning and to mixed economies like present-day European ones.

P.86: “When we have to choose between (A) higher wage for nurses or doctors and (B) more extensive services for the sick, (C) more milk for children and (D) better wages for agricultural workers, or between (E) employment for the unemployed or (F) better wages for those already employed, nothing short of a complete system of values in which every want of every person or group hasa definite place is necessary to provide an answer.” [letters (A) through (F) inserted by CS]

Four of those six magnitudes are today regularly decided by governments, namely A, B, E & F, without having to apply any exhaustive catalogue of values. I don’t know exactly how the Belgian or Austrian governments do it, but it doesn’t seem to give them much trouble. Perhaps an exact catalogue would be necessary if we had to choose between B and D, for example. But not between A & B.

Hayek´s phrase "a complete system of values in which every want of every person or group hasa definite place” is evidently an element which – in Hayek’s view -- would play in a socialist system the same vital role that money and the price system play in a market economy. In effect, the market system of prices assigns to each good and service a monetary value, which determines whether it will be produced or not, and if so in what amounts.

Thus Hayek measures any planned economy against a very demanding standard -- price and amount of every single merchandise and service must be determined down to the last penny, no less. What warrants such an exacting criterion? Not much, it turns out. It is true that in a market economy all prices are determined to the last penny. But Hayek’s assumption that it is the overall equilibrium of the market which imposes the exact price is gratuitous. Otherwise how could we explain so many prices ending in 99 cents? Obviously it is a mere psychological trick played on the consumer by sly shopkeepers, not the iron laws of supply and demand, that dictate the inevitable 99s at the end of every price. So all this precision is mere theater. Supply and demand impose a certain maximum and minimum between which the seller is free to maneuver, that is all.

In practice a government is free to manipulate supply and demand within certain limits. The specter of totally planned economies has receded. 

So Hayek is a very poor tool for analysis of mixed economies. For him a mixed economy is not an object of analysis in itself, but just a way-station on the road to central planning, a mere transitional phase.

In his amateurish attempt to prove that planning is inimical to the rule of law, Hayek writes, “…planning necessarily involves deliberate discrimination between particular needs of different people…” [change the cite to something more apposite] So what about the extensive state planning of economic development in South Korea? Here is a summary of a paper on Korean development planning:

This paper presents Korea's experience through planning, policymaking and budgeting over the past two decades.  First, the characteristics of the planning organizations, including the Economic Planning Board, the Office of Planning and Management under each ministry, and Ad Hoc Committees, and their evolution over time are first dealt with. Second, the process of plan formulation was discussed by specifying the respective roles of each planning organization, and of foreign and domestic exports. Third, the Korean system of annual planning, which serves as a device for effective implementation of a medium-term plan, and its evolution over time are examined. Fourth, the government budgetary process and the role of budgeting in plan implementation are discussed. Fifth, the formulation and implementation of the short-term economic management policy, which may or may not be tied in with the implementation of a medium-term plan, is discussed.[1]

For Hayek, all this frantic activity wasn’t planning at all, because it didn’t involve telling specific people what to do. But it certainly wasn’t just a general guide on how to act in certain formally specified future situations, which is Hayek’s prescription for seemly governmental behavior.

In any case Hayek’s argument doesn’t hold water, even referring to Soviet central planning, because the objects were not individuals, but sectors, regions, combines & firms. Not a single individual to be seen.

We soon see why. Hayek regularly uses the term “individual” to designate the economic actor. The trouble is that for him, Exxon and General Motors are “individuals". Nowhere in his book does he mention the obvious fact that the private sector is largely composed, not of individuals, but of organizations ranging in size from the middling to the huge. In a scandalous conceptual hat trick he blandly identifies these organizations with, and confers on them, all the attributes of individual human beings.

Friedman aids and abets him, repeating ad nauseam the terms “individual” and “individualism” while evidently referring to such ”individuals” as Dow Chemical, Toshiba and Daimler Chrysler.

This attitude stands in sharp contrast to that of A.V. Dicey, who wrote in 1905:

 “… One trade after another has passed from the management of private persons into the hands of corporate bodies created by the State. This revolution may be traced in every volume of the [English] statute-book which has appeared during the last seventy years [1835-1905] or more … This legislation was favoured and promoted by Liberals, but the revolution of which it is the sign has nevertheless tended to diminish, in appearance at least, the importance of individual action, and has given room, and supplied arguments for State intervention in matters of business with which in England the State used to have little or no concern... The modern development then of corporate trade has in more ways than one fostered the growth of collectivist ideas. It has lessened the importance of the individual trader. .. [it promotes the] principle that all property, and especially property in land, belongs in a sense to the nation... It constantly suggests … that every large business may become a monopoly, … [that] may wisely be brought under the management of the State. The characteristics of modern commerce … make for socialism.”[2]

At the beginning of this passage the modern reader is prompted to anticipate yet another denunciation of government displacing private business, but then in a flash it become clear that Dicey’s target is completely different: for Dicey, business corporations are not “individuals” and champions of private property at all, but absolutely the opposite, bureaucratic creatures of the state that undermine the ideals and attitudes of private property. The “individual” is for Dicey an actual single human being, against whom are ranged both the state and the corporation!

The contrast between Dicey in 1905 and Hayek 40 years later is dramatic. By Hayek’s time the commonly held concept of a business firm had ceased to be based on the idea of[CS1]  a single human owner-manager and had been replaced by the concept of the firm as an impersonal organization. However, presumably for ideological reasons, Hayek chose to conceal this dramatic change. He wished to anchor the idea of private property in the traditional and intuitively appealing concept of personal possession by individual humans. I conjecture that this was intended to prevent a continuation of the phenomenon that Dicey had decried: a drift toward an abstract notion of collective property that would be liable to dissolve into nothingness and oppose but a weak ideological and legal defense against expropriation by the state.

I presume that it was likewise to preserve the illusion of a traditional, seamless personal property that Hayek studiously ignored the seminal work by James Burnham The Managerial Revolution (1938), [insert Gardiner & Means] which announced the conquest of power by employee managers that by then had taken place in the large corporations and in many of the small ones.  Since Burnham we know that managers have wills and interests of their own that are seldom fully congruent with those of the firms’ owners. For their part, organizations themselves have an internal logic that partly escapes both owners’ and managers’ control.

Even if we ignore the matter of the manager’s and the organization’s specific contribution to decision-making and execution, the owner “him”self seldom exists as such any more. “He” is replaced by boards of directors, shareholders’ meetings, etc. A shareholders’ meeting is not the same thing as a sole proprietor. All kinds of factors enter into the decisions of groups which are absent from those of a single person. (elaborate – group dynamics, etc.)

Consequently to call a megacorporation an “individual” is sheer fantasy on several different levels at once. Nonetheless to do so is methodologically acceptable, insofar as a business corporation is vested with the same legal rights and obligations as a private citizen. The socio-economic difference is great, but only at a positive, not a normative level.

In any case, we are now enabled to reinterpret Hayek’s statements about individuals, replacing the term “individual” with the term “firm”. But even under this proviso, South Korea was innocent of planning between 1963 and 1983. Import quotas and export objectives are not orders to specific firms. They are filled by the firms that find it most convenient and profitable to perform the activities required for the attainment of those goals. In fulfillment of the five-year energy plan, the Ministry of Public Works asks for bids to build a hydroelectric plant. The firms that best qualify are then chosen to do the work. The plan doesn’t specify which firms will get the job. On the contrary, every modern government has elaborate rules on how to contract out work to private firms, which are every bit as abstract and impersonal as the rules Hayek espouses. Therefore[CS2]  the condition on which the alleged arbitrariness of planning is predicated, namely discrimination among specific firms, is not fulfilled. Consequently one of Hayek’s principal objections to planning is shown to be fatuous.[3]

Hayek’s words “… the main condition on which the usefulness of the system of private property depends: namely, that the owner benefits from all the useful services rendered by his property and suffers for all the damages caused to others by its use.” (p.44) assume that the “owner” is the decision-maker. But when the decision-maker is not an owner but a manager, who does not “benefit from all the useful services rendered by his property and suffer for all the damages caused to others by its use”... agent problem.

Equally fatuous is Hayek’s argument that planning leads to arbitrary behavior of government: “… as planning becomes more and more extensive [notice the “creeping socialism” assumption] it becomes regularly necessary to qualify legal provisions increasingly by reference to what is “fair” or “reasonable”; this means that it becomes necessary to leave the decision of the concrete case more and more to the discretion of the judge or authority in questions.” From this he concludes a “…decline of the Rule of Law … in terms of progressive introduction of these vague formulas into legislation and jurisdiction .... arbitrariness ... uncertainty ... consequent disrespect for, the law". For proof he resorts to the decline of the Weimar Republic. But the authoritarian decay of the Weimar Republic was hardly impelled by a process of ever greater discretion on the part of the authorities. Rather, the political crisis of Germany [bla bla bla]

Furthermore, to denounce judicial discretion while defending the Anglo-Saxon legal and economic system is a self-contradiction, since traditionally English law is not based on fixed codified rules, but on shifting interpretations that judges make of the decisions  entered by other judges. The dodgy nature of such a system is amply clarified in the following passage, which denounces the legal revolution instigated by judges whereby product liability law in the US became ever stricter after 1960:

The courts proceeded in the usual way, fashioning one exception and then another, then yet another. Evidence of subsequent remedial measures was first admitted to impeach witnesses, then to prove that the defendant con­trolled the premises in question, then to show that conditions had changed since the time of the accident or that changes in design were feasible. The exceptions nibbled away at the rule until some courts were emboldened to sweep the tattered remains aside entirely. An lllinois appellatecourt simply declared  that the rule should not apply in strict liability cases be­cause the focus was on the product itself, not on the defendant's conduct. The Califomia Supreme Court then picked up the idea in a landmark ruling in 1974. New York and other states followed quickly.

IncredibIy, the logic offered in these rulings was exactIy what had been used earlier to exc/ude evidence of the plaintiff's contributory negligence before the accident. The product was on trial, the courts argued, not the people. So the pIaintiff's personal conduct before the accident was irrele­vant. But somehow the defendant's conduct aflerward was perfectly rele­vant …[4]

Curiously, this process described by Huber parallels precisely the evolution of the English legal system in the 19th century which Dicey so criticized, and which was impelled by the Liberals through parliamentary legislation. The area allotted to free contracting became smaller and smaller, while the state (in the American case the courts, independently and without any legislative warrant) dictated more and more mandatory conditions that were binding on the parties although the contract failed to specify them. There appears to be a blind automaticity in the progress of government intervention, which chooses as its agent now one branch of government, now another, to strive toward the same goal of restricting individual freedom to contract.[5]


Hayek’s import-export theory of socialism

“For over two hundred years English ideas had been spreading eastward. The rule of freedom which had been achieved in England seemed destined to spread throughout the world. By about 1870 the reign of these ideas had probably reached its easternmost expansion. From then onward it began to retreat, and a different set of ideas … began to advance from the East. England … became an importer of ideas. For the next sixty years Germany became the centre from which the ideas destined to govern the world in the twentieth century spread east and west.” (p. 25) The upshot of all this is that Hayek presents socialism as a German import to Britain and elsewhere. Now there is no doubt that, as Hayek explains, German ideas exerted great influence in the 19th and 20th centuries -- sometimes for good and sometimes to the great detriment of humanity -- and that those ideas often entered into conflict with traditional British liberal ideas. Nonetheless it goes too far to claim that the idea of socialism was merely a German import into Britain and that it had no domestic roots.

A.V. Dicey goes into this matter in considerable detail in his Law and Public Opinion. He presents and illustrates five factors that in his opinion led to the spread of socialist/collectivist ideas in Britain starting about 1865. At no point does he mention German influence or any foreign influence at all, thus flatly contradicting Hayek. There follow some excerpts from his lecture on the subject.

My purpose in this lecture is to explain a revolution of social or political belief which forms a remarkable phenomenon in the annals of opinion. This explanation in reality is nothing else than an attempted analysis of the conditions or causes which have favoured the growth of collectivism [defined much more broadly than by Hayek] …

A current explanation lies ready to hand. Under the Parliamentary Reform Acts 1867-1884 the constitution of England has been transformed into a democracy, and this revolution, it is argued, completely explains the increasing influence of socialism. The many must always be the poor, and the poor are by nature socialists. Where you have democracy there you will find socialism.

This reasoning, as already pointed out is essentially fallacious. Democracy cannot be identified with any one kind of legislative opinion. The government of England is far less democratic than is the government of the United States, but the legislation of Congress is less socialistic than the legislation of the Imperial Parliament. Nor in England are laws tending towards socialism due to the political downfall of the wealthy classes. Under a democratic constitution they retain much substantial power-they determine in many ways the policy of the country. The rich have but feebly resisted, even if they have not furthered, collectivist legislation. The advance of democracy cannot afford the main explanation of the predominance of legislative collectivism.

The true explanation is to be found, not in the changed form of the constitution, but in conditions of which the advance of democracy is indeed one, but whereof the most important had been in operation before the Reform Act of 1867 came into force.

These conditions, which constantly cooperated, may be conveniently brought under the following heads:

·       Tory Philanthropy and the Factory Movement
·       the Changed Attitude after 1848 of the Working Classes
·       the Modification of Economic Beliefs
·       the Characteristics of Modern Commerce
·       the Introduction of Household Suffrage.[6]

Now I shall comment these factors:

1.                Tory philanthropy denotes a humanitarian movement in favor of protecting children from overwork and brutal conditions in the factories that were spreading throughout the land. It was similar in spirit and social compositing to the contemporary anti-slavery movement. (more detail)
2.               The changed attitude of the working classes was a trend away from revolutionary politics and into reformist trade-unionism that marked the 1848-1870 period. The trade-unionist ideology favored social legislation, etc. leading to  greater state involvement with and regulation of business.
3.               The modification of economic beliefs is rather sketchy. Dicey cites a few novels that display sympathy toward trade unionists.
4.               Characteristics of modern commerce. Cited above in connection with the definition of “individual”.  Dicey mentions no technological factor impelling the larger and more bureaucratic organization of capitalist firms with the exception of the railroads, which explain only one sector of the economy, although a crucial one. See Marx.
5.               Introduction of household suffrage is the factor previously rejected as sole explanation but now accepted as a partial one.

          Especially noteworthy in point 4 is Dicey’s identification of the prime movers of these changes: “This legislation was favoured and promoted by Liberals, … [who] … supplied arguments for State intervention in matters of business with which in England the State used to have little or no concern...” The “Liberals” to whom Dicey referred were the champions of private enterprise, industrialization, free trade, etc. In other words, the very class with which Hayek identifies himself, the business class, was primarily responsible for the growth of collectivism. The socialistic inclinations of the working class played second fiddle to those of the business class in the trend toward state intervention in the economy. Indeed, the trend toward big government started long before the first Labour M.P.s trod the halls of Parliament.

Now whom should we believe: Hayek, an Austrian economist ignorant of English political history – although he had lived in Britain since 1931 – who presents his theory in conclusory fashion, failing to mention a single historical fact that would tend to back his version, or Dicey, a celebrated legal scholar intimately familiar with the doings of Parliament in the 19th century, who explains his grounds in considerable detail? It is obvious that Dicey is right and Hayek wrong.

In other words Hayek committed the very mistake that Dicey had cleared up four decades earlier – attributing the spread of socialist ideas exclusively or principally to the working class. Furthermore Hayek compounded the error by also claiming that socialism was lock, stock and barrel a foreign import to Britain.

Thus we see that Hayek plays a vital role in the care and feeding of capitalist ideology in the late 20th and the 21st centuries by providing two of the stock items of present-day free-market propaganda -- firstly his humbug about “individual” property and secondly in obscuring the historical truth regarding the origin of “big government”, the great bugaboo of the free-market crowd. It is more convenient to dismiss big government (“BG”) as the insidious work of left-wing zealots than to acknowledge that it is a response to internal needs of the capitalist system in the course of its development.

Unlike Hayek, his great contemporary Karl Polanyi read Dicey’s work and cited it in his book on the Industrial Revolution The Great Transformation, written and published about the same time as TRTS. It is, indeed, thanks to this work of Polanyi’s that the author became aware of Dicey in the first place.


[1] Kwang Suk Kim: Korea's Experience in Managing Development through Planning, Policymaking, and Budgeting, WORLD BANK STAFF WORKING PAPERS Number 574, 1983
[2] A.V. Dicey: Lectures on the Relation between Law and Public Opinion in England during the Nineteenth Century, MacMillan & Company, London 1948, pp 245-248 (1st ed. 1905). Dicey was the most eminent constitutional theorist of hi time in Britain. He was the originator of the concept “rule of law” and the term that denotes it.
[3] It is widely rumored that Korea is the cradle of “crony capitalism”, in other words, that contracts really are assigned on the basis of the personal preferences of bureaucrats, just what Hayek denounces. Knowledge of this fact probably prompted Friedman to omit Korea from his list of “thriving” East Asian capitalist states (p. xiv). However, there is no causal link between the “planning” aspect and the “crony” aspect, as Hayek claims. Other East Asian states (e.g. Taiwan) have advanced to the status of industrial powers thanks to extensive government planning but with a far smaller component of corruption (see Governing the Market, …)
[4] "Liability", The legal revolution and its consequences" by Peter W. Huber - Basic Books, Inc.,Publishers, 1990, pp 159-160.
[5] Of course such freedom was and is often a pious fiction, since the specific conditions of each market (labour, housing, various merchandises, etc.) frequently give one or the other contracting party a monopoly or quasi-monopoly position that it can exploit to dictate often onerous terms which the other party can only accept or reject, but not negotiate.
[6] Dicey, ibid. pp. 217-219.

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 [CS2]Cite Austrian Code of Adm. Procedure