The Road from Serfdom - an interview with F.A. Hayek
reason.com
reason.com
Considering the increasingly common failures of risk-aggregation systems in a number of contexts (not just economic: look at the cascade of failure that triggered the 2003 East Coast Blackout), we should be increasingly conscious of this as technological improvements allow us to act unilaterally at increasingly large scales.
Nobody thinks it would be efficient to privatize the federal highway system and turn everything into a toll road.
I've been biking recently, but I used to take the subway. That's socialist. Taking a cab would be capitalist. Did I care? Not really.
Normal market goods are almost always better served by private markets. They may need to be regulated if the create significant externalities or pose risk to the economy at large.
The metric should be common sense, not -isms. When picking a software platform, I pick the one best suited to the job at hand. I'd like to see some of these so-called big policy thinkers apply the same principle.
I can say that after Chicago privatized the parking meters the rates (naturally) skyrocketed from their subsidized levels and street parking since then has been used much more efficiently.
You're assuming that regulation solves those problems. It need not. In fact, it can actually make them worse and/or create them.
For example, regulation forced US banks to own lots of fannie and freddie stock as part of their "regulated assets". When that stock tanked, they all took a huge hit.
The power and impact of the bond rating companies is also a product of regulation.
Oh, and the "mortgage pool insurance" - also a product of regulation. Regulators wanted banks to hold more of those securities but needed to make them appear safer - hence "insurance". Oops.
Regulation IS systemic risk.
And that's the best case - the inevitable regulatory capture makes things even worse.
And if you think that any of the big financial institutions approach/exceed "too big to fail", the US govt is way beyond that. (The correct response to "too big to fail" is "too big to exist", not additional regulation.)
Regulation IS systemic risk. -- Always?
The power and impact of the bond rating companies is also a product of regulation. -- 100%? You see no use for these companies in a private market as a selling tool?
* Oh, and the "mortgage pool insurance" - also a product of regulation. Regulators wanted banks to hold more of those securities but needed to make them appear safer* -- Doesn't really look like they needed a lot of encouragement from regulators to me. I don't think you're telling the whole story here.
And finally -- For example, regulation forced US banks to own lots of fannie and freddie stock as part of their "regulated assets". When that stock tanked, they all took a huge hit. -- How huge a hit? "We require a 1 trillion dollar bailout" huge? I don't think so. Red herring.
The question isn't whether they're absolute, it's whether they are wrong....
> Regulation IS systemic risk. -- Always?
Yes, always. Regulation enforces common behavior. If that behavior has bad consequences, its effects will be more widespread than behavior by a company or two.
> Doesn't really look like they needed a lot of encouragement from regulators to me. I don't think you're telling the whole story here.
I'm not telling about all the things that regulators got wrong, but I'm accurate about the things I do mention.
And yes, they needed encouragement. There are lots of things that they could hold, but regulators wanted to increase the demand for mortgage-backed securities (because that lowered the price and made it possible to do more of them) so they came up with a number of financial rewards.
> How huge a hit? "We require a 1 trillion dollar bailout" huge? I don't think so. Red herring.
I didn't say that it was the whole problem, the mortgage backed securities that they held also lost a lot of value (see above), but it was significant. Fannie and Freddie lost $100B in market cap during the first 8 months of 08 and things haven't gotten better.
I find it interesting that you think that one aspect of the problem must be unimportant because it wasn't the whole problem....
Here's a question - what incentives to regulators have to get it right? Note that failures in regulation are typically followed by "we need more regulation", as you've demonstrated....
I'm positing that if you do that, you're going to be wrong. Unregulated markets are the right way to go for 95% of goods and services, like toilet paper, peanut butter and roadside diners. But not for 100%.
You agree with this, unless you're in favor of disbanding the military and hiring personal bodyguards, selling off the highway system to toll roads, allowing your neighbor to build a coal-fired power plant within 6 inches of your property and opposing net neutrality because the market will work things out.
Don't turn your brain off just because it's comfortable -- examine situations with a fresh mind. Follow the incentives -- market failure is a real phenomenon.
That's a question, but it isn't particularly relevant as no one claimed that everything can be boiled down to sentence-sized absolutes.
> You agree with this, unless
Not so fast. The military isn't an example of a regulated market.
Net neutrality is an interesting example for you to bring up. Last-mile bandwidth providers have a govt-granted monopoly. Ford doesn't tell me what I can do with trucks that I buy from it.
> Don't turn your brain off just because it's comfortable -- examine situations with a fresh mind. Follow the incentives -- market failure is a real phenomenon.
Patronize much?
The existence of a problem does not imply that the existence of a solution with desirable properties.
To be more specific - the existence of market failure does not imply the existence of solutions to said failure that are better than said failure.
If you want to argue for regulation, you need more than "market failure". You need to show that regulation costs less. Since your examples of the need for regulation have been caused by regulation....
Note that the success of regulation in one area tells us nothing about whether regulation will succeed in another.
And then there's the small problem that we don't have ideal regulators, we have US regulators. Surely their record is relevant....
None of those activities are inherently socialist or capitalist. Individual actions, responding to one's own preferences, tastes, needs, and incentives, can't really be socialist or capitalist.
Socialism and capitalism are macro-systems about how the fruits of labor should be distributed/exchanged.
I just took the cheaper one.
Not sure it's safe to say that. The usual arguments against making the Interstate system toll-based are practical ones: it would be a pain to operate, you'd have to have tens of thousands of tollbooths, you'd create giant traffic jams, etc. (Anyone who's ever driven down the Jersey Turnpike, pre-EZPass, can understand the horror that a lot of people think this would necessarily entail.)
But from an economists' view it would probably be very efficient. Right now there's not much of a direct linkage between road users -- those who cause wear and tear to the roads -- and those who end up footing the bill. The net effect of this is a huge government subsidy to over-the-road trucking. Trucks get to drive on the roads for free and, due to their high axle loads, do the most damage to the road. The public foots the bill for maintaining and repairing that infrastructure. It's an externalized cost on the part of trucking companies.
Using tolls (based on miles driven and axle weight, perhaps) would force internalization of these costs into the goods being transported, which would be more efficient from a classical economic perspective. You'd be making the price of the widget in the store more accurately reflect the inputs it requires to make it and bring it to market, which is generally regarded as a Good Thing. It might also have the side-effect of making other transportation methods (rail, ship, air) more competitive in certain edge cases.
Such a scheme might be impractical, difficult to implement, or prone to siphoning for purposes other than road maintenance, but it's not inherently less efficient.
[Edit for punctuation.]
"First, we assume the cow is a sphere.."
But daily traffic jams also have a cost and building twice as much road as you really need does too. A massive unmeasured cost.
For example, you imply that a subway is better-managed by a government agency, but in NY at least the subway system was built in rapid order by a few competing private concerns between 1905-1940. In 1940 those competing entities were unified into a government monopoly, and the system has since stagnated for 80 straight years. See this visualization for evidence that expansion essentially halted in 1940: http://www.diametunim.com/shashi/nyc_subways/. The current big expansion being undertaken is the 2nd Avenue line, which was literally on the planning maps in 1929: http://en.wikipedia.org/wiki/Second_Avenue_Subway.
The key word there is "everything." It is efficient to turn some parts of the Interstate Highway system into toll roads, and if you have driven in certain states you have seen that done.
"The Indiana Toll Road is part of the U.S. Interstate Highway System which runs 157 miles through Indiana connecting the Chicago Skyway to the Ohio Turnpike."
http://en.wikipedia.org/wiki/Indiana_Toll_Road
"Historically, the Chicago Skyway was signed as, and was widely considered to be part of, I-90 from the mid-1960s forward. However, around 1999, the city of Chicago realized they had never received official approval to designate the Skyway as I-90. The city subsequently replaced most of the 'I-90' signage with 'TO I-90' signage. However, the Illinois DOT has always and continues to report the Skyway as part of the Interstate system, and the Federal Highway Administration apparently still considers the Chicago Skyway an official part of I-90.[7]
"The Skyway's official name, referring to it as a 'toll bridge' rather than a 'toll road,' is the result of a legal quirk. At the time of its construction, the city charter of Chicago did not provide the authority to construct a toll road. However, the city could build toll bridges, and it was found that there was no limit to the length of the approaches to the bridge. Therefore, the Skyway is technically a toll bridge with a six-mile-long approach. This also is part of the reason that there are no exits available until after one has crossed the bridge and paid the toll."
http://en.wikipedia.org/wiki/Chicago_Skyway
Where it is most economically efficient to operate a road as a toll road rather than as a road supported by general taxation depends much on local geographical factors. Note that Adam Smith has a very thoughtful discussion of the economics of road tolls (he considered them a remarkably fair form of taxation) in his 1776 book The Wealth of Nations. Many of his economic arguments apply well to taxation of gasoline to fund road projects.
David Friedman does. I do. Don't pretend that people you disagree with don't even exist.
> I've been biking recently, but I used to take the subway. That's socialist. Taking a cab would be capitalist. Did I care? Not really.
What are you talking about? Capitalism is capable of producing bikes and subways.
To some people, that is what matters when making the choice. To me, the $2.25 subway beats the $30 cab ride.
BTW, the cab ride is a mixed system too. Many cars are made by union workers who use political pull to be paid above-market salaries. Other cars are imported and face some protectionist regulation. Cab drivers, like everyone, are regulated by minimum wage laws and income tax laws. Cabs drive on roads which the Government built. Immigration quotas lower the number of people in the country interested in being a cab driver, which raises the wages (at the expense of the foreigners who couldn't come here, and the passengers). And so on.
My point isn't that we can't be sensible -- my point is that we should be sensible. Unregulated markets are the solution for 90-95% of goods and services. Some markets are special in that the incentives by themselves lead to something obviously wrong -- unless you're against net neutrality, you agree with me here in at least one case.
My point is "right tool for the job".
The current system doesn't provide incentives for using this resource wisely. Seems there's no restraint on demand when something is given away for free.
If we ran our hotels that way, we'd need to build twice as many hotels, just as we have to overbuild highways now.
And you say blanket statements about this stuff are fundamentally silly? I agree.
Different definitions of "efficiency" notwithstanding ...
A privatized road doesn't have to be paid for by toll, that's merely how we mostly do it. We could easily contract maintenance and operation of a road to a company, and that company is paid by the government from tax funds.
Kadin in another reply to your comment describes the trucks that use the road "for free," paid for by all the other tax paying saps. In reality the receivers of the trucker's goods also benefit from that truck on the road (and the truck company and its employees pay into the same tax funnel as the receiving citizens).
Imagine a village not connected to the main highway. Some of the villagers walk out early one morning to the highway, and flag down a truck full of stuff.
"Mr. Trucker, we sure would like to buy some of your stuff, if you would only drive your truck to our Small Mart."
Mr Trucker replies "I surely can't drive my truck over your unimproved land. I'll be back next year; if you have a proper road, I'll drive my truck over and you can buy some stuff."
The village people delay construction on their YMCA and redirect their efforts to building a beautiful road. The next year they flag down the trucker and say "Mr. Trucker, we now have a road that goes directly to Small Mart. Just $10 to drive your truck over it."
Mr Trucker says "I don't see why I should pay $10. I'm not going to do it, I'll just drive down the highway and find another village."
The village people look at each other, admit that they could really use some more stuff in Small Mart, and agree to let the trucker drive "for free."
While waiting for his truck to be unloaded, Mr. Trucker buys a big soda and a burger, $2.99 plus tax and thus helps pay for the road a little bit at a time. The trucker is happy, and so are the village people.
I wonder to what degree we can use this to explain the PIIGS problems in Europe. Of course, they don't have a gold standard. But for a given nation in the Euro, the value of the currency is fixed: they have no means of manipulating it to take pressure off their fiscal problems.
I think that currency should not be issued by governments at all, the absence of government issued money would mean competing currencies, and in a situation where gold competes with other currencies, gold often wins the confidence of the people.
[1] Language being another item that governments tend to regulate.
many countries have also accepted having the value of their currency set to a standard beyond their control. China's was pegged to the dollar for a long time, despite its long term debasement by the US, which has lost a lot of its value since it became the reserve currency at Bretton Woods.
It turns out that gold doesn't screw you over as much as relying upon the US dollar.
"Reason: Is Britain irrevocably on the road to serfdom?
Hayek: No, not irrevocably. That's one of the misunderstandings. The Road to Selfdom was meant to be a warning: "Unless you mend your ways, you ll go to the devil." And you can always mend your ways.
Reason: What policy measures are currently possible to reverse the trend in Britain?
Hayek: So long as you give one body of organized interests, namely the trade unions, specific powers to use force to get a larger share of the market, then the market will not function. And this is supported by the public because of the historic belief that in past the trade unions have done so much to raise the standard of living of the poor that you must be kind to them. So long as this view is prevalent, I don't believe there is any hope. But you can induce change. We must now put our hope in a change of attitude.
I'm afraid many of my British friends still believe, as Keynes believed, that the existing moral convictions of the English would protect them against such a fate. This is non- sense. The character of a people is as much made by the institutions as the institutions are made by the character of the people. The present British institutions contribute everything to change the British character. You cannot rely on an inherent "British character" saving the British people from their fate. But you must create institutions in which the old kinds of attitudes will be revived which are rapidly disappearing under the present system.",
on the (historically) current effect of unions is priceless.
"" [...] the idea that things ought to be designed in a 'just' manner means, in effect, that we must abandon the market and turn to a planned economy in which somebody decides how much each ought to have, and that means, of course, that we can only have it at the price of the complete abolition of personal liberty. ""
This seems to me to be a false dichotomy. If the state sets artificial prices on some goods, say basic foodstuffs, this does not automatically lead to the complete destruction of market forces, it simply produces an artificial input in the market, leading to an equilibrium that likely to be different from the natural equilibrium.
As an aside, I was really thrilled by his description of meeting Alexander Solzhenitsyn.
"Spain, which has to choose a new constitution. It might be prepared to adopt a sensible one. I don't think its really likely in Spain, but it's an example. And they may prove so successful that after all it is seen that there are better ways of organizing government than we have."
It seems to me he is only referring to Spain's potential new constitution, that they might adopt a sensible one.