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Failure of Conservative Economics, Part III The Big Economic Lie

February 10th, 2013 · No Comments · Capitalism, Economics, General, Politics, Populism

No discussion of Conservative economics will be complete without a full analysis and review of the theories of Fredrich Hayek. Hayek was an Austrian economist who moved to England in the early 1930s and taught at the London School of Economics. The general tone of his work is that free competition in the marketplace and in other areas of life encourages the best of those competing to rise to the top. Thus, he proposed that less government is better, big government in inherently Socialist and Socialism is inherently inefficient, even when its motives are laudable.

Milton Friedman, who was a colleague of Hayek’s when he moved to the United States to teach economics at the University of Chicago, expanded on Hayek’s theories. Friedman also popularized Hayek’s conservative economic theories. The Conservative, “Chicago School” was so named because of the many Conservative economists from the University of Chicago influenced by Friedman, Hayek and others in that faculty.

There are some economists today who think that the strict adherence to what many feel are outdated and disproved theories of the Chicago School, the “supply side” borders on the inane. The New Keynesian economists look at the Bush Depression and the national debt and the lack of investment and wonder what ever happened to all the policies that took us out of the Depression and served us well through the Second World War and the dynamic post-war period all the way up to Reagan. Where are any policies that will lift the economy for the many Americans who sit on the sidelines, unemployed? In the meantime, so-called Conservatives do nothing, waiting for good times to somehow magically return.

As with so many things, the world of economics has changed. The 20th Century showed that the world of Adam Smith, the elementary economic world of laissez faire and the world of waiting for things to happen is long gone. Yet the Conservatives continue to live in the previous age, where Hayek’s theories might have made some sense, at least in the context in which they were written.

Where to start? Hayek said that in the current crisis of the era about which he wrote, 1900-1944, democratic Socialism, or so he called it, was an illusion.

“that great utopia of the last few generations, is not only unachievable, but that to strive for it—produces something so utterly different that few of those men who now wish it would be prepared to accept the consequences, many will not believe until the connection has been laid bare in all its aspects.”

The “consequences” of what, writing from 1930s Great Britain, he called democratic Socialism was totalitarian government. His logic told him that central government and central “planning” would lead only to greater consolidation of power and less individual choice. And he was right about that. Hayek, the lawyer and doctor of political science, was right. Those governments, however, that Hayek called Socialist, were already turning Fascist. They had long since left off Socialism.

So, Hayek the economist was wrong. He looked at Spain, Italy and Germany, including his native Austria and saw supposedly free societies, that he saw as Socialist, trending towards dictatorships. But he read them incorrectly. These countries were exactly the opposite of Socialist countries. They were already Fascist.

The leading political parties may have called themselves Socialist. Political parties commonly used the term Socialist in those days, when popular support was necessary in a time of wildly fluctuating economic periods of inflation and depression. Concealed from the public, these governments were not seeking Socialistic equilibrium but dictatorial control.

These countries that Hayek saw as Socialist heading in the wrong direction were in fact colluding with the military and the large industrialists to their own political advantage and using propaganda to create the illusion of Socialism. One of the hallmarks of Fascism is to lie to the people about your allegiances and intentions. Hayek was fooled. There was no Socialist motive in any of the programs of the Nazis or the Fascists or the Falangists. It was about raw power.

And the same was true of Communist Russia, certainly post-Lenin and Trotsky. The organizing principle of Communism was socialist, and did follow many Socialist rules of distribution, but it was quickly abandoned under Stalin and motives became militaristic and secretive and totalitarian. But the reasons were no different from those of the Fascist countries. One sinister party took control and ended democratic systems.

It may have been difficult for Hayek to understand this. It was difficult for anyone to understand what was a dynamic, new—if extremely deceptive—political system that would forsake all truth and honor for political power. Hayek was not alone in misunderstanding the Fascist states. Needless to say, few in the British and American governments understood it either.

Hayek’s problem was that he mistook economics for politics. In other words, his very logical mind clung to the idea that if free enterprise rather than government control were allowed to work, the idea of total control would dissipate amidst the natural inclination of people to seek their own personal interests.

In that, Hayek completely misunderstood the nature of Fascism. No competitive economics, nor any egalitarian social compact would deter these political fanatics from their goals. This was something new, never seen before in international relations or in sovereign domestic politics.

These were brutal, ruthless men. Economics was handled with personal alliances and personal relationships that had to do with an allegiance to a political philosophy, a distorted idea of society. It is therefore easier from our perspective to see why Hayek, an Austrian, was so concerned with freedom and so worried that the “good intentions” of Socialism would lead (as was happening all over Europe in the 1930s) to dictatorship.

Here’s how Hayek describes his feelings on the best way to organize society from a 1930s perspective.

“The question is whether for this purpose it is better that the holder of coercive power should confine himself in general to creating conditions under which the knowledge and initiative of individuals are given the best scope so that they can plan most successfully; or whether a rational utilization of our resources requires central direction and organization of all our activities according to some consciously constructed ‘blueprint.’”

You see the terms “coercive power” and whether society requires “central direction.” These were all references to the organization of states into dictatorships, where a handful of men consolidated power. He was speaking of countries like Germany, Italy and Spain, not to mention, the “centralized direction and organization” and “blueprint” which was certainly a reference to Communist Russia recently centered power in Moscow under Stalin

And that brings us to the point that Hayek, in the days when he was contributing heavily to international thought on economics, was basically talking about continental Europe, from England. At that point he had far less knowledge of the American economy. His entire life to that point had been lived in Austria and (rapidly becoming Socialist) Great Britain.

So his ideas were formed when Socialism took hold after World War I through the Second World War in Great Britain. He was worried about the concentration of power under a central planning system, as was in full flower peacefully, except for strikes and adjustments among the gentry, in Great Britain and not so peacefully in what was eventually the Soviet Union.

He was looking East, not West.

Hayek was a brilliant man. His ideas on centralized price control quickly proved that market conditions were the most efficient way to determine prices, particularly commodity prices, something that we all accept today.

But, just as the conservative method of the 1980s, with its flawed premises as they related their version of “Classical Liberalism,” became an exaggeration, indeed a caricature of conservative thought, for personal privilege and selfish enrichment, so did Hayek’s notion of society in the 1930s not capture what would become the future of Europe and America in the 1950s, 60s, and 70s.

Despite what the latter day Neocons will tell you, the conservatives of today have given little new impetus to the ideas of Hayek or his chief disciple, Milton Friedman. The fact is that the trend that Hayek foresaw never took place. Both sides of the Atlantic grew into strong Capitalist nations, rejecting Communism and Socialism but maintaining a humanist form of Capitalist government.

Reagan came along in the 1980s, with a smile and a wave and a naïve and fanciful “Morning in America” where that very morning people were tossed out of institutions that sheltered them and literally onto the street. During the latter years of Reagan, one could not walk down any street in midtown Manhattan without what can only be described as a beggar sitting up against a building in a cardboard box.

Suddenly, in America, Ronald Reagan’s facade of confidence and certainty led a troop of con-men to power by telling the tale to Americans that we could cut taxes in half for those paying the most and triple our military expenses and all would be well.

This was most prominently discussed in terms of the “Laffer Curve” a concept that became associated with Dr. Arthur Laffer who was a consultant to the Reagan Administration. The principle of the Laffer Curve is that there is a point between zero taxes and 100% of income in taxes that revenues will be maximized. Too low and not enough. Too high and taxes will choke off private revenue streams and drop.

The problem with the Reagan tax policy and all tax policies since then, except under Bill Clinton, is that they were set too low. Revenues did not meet costs of government. In Clinton’s case, over the objections of the Conservatives, he raised taxes until they created more revenues than costs but at the same time private industry soared.

Three Republican administrations and $16 trillion in debt after the misused “Laffer Curve,” we have nothing to show for it but the debt and a country rapidly breaking down. And the consolidation of power into the hands of Neo-Fascists like the Koch Family and the Murdochs who control the political parties and the media is the first large step into the substrata dustbin of history.

Reagan did not spread Hayek’s ideas himself. He merely gave cover and visibility and concordance to those in the intellectual community who wished to become noticed. But whereas anyone reading Hayek today understands that his arguments were based on a false and temporary economic reality, the prominence of post-Reagan economics was based on some pretty shaky assumptions as it would turn out.

By the time Hayek’s theories gained prominence through people like Dr. Friedman in the 1980s, those ideas, based on 1930s economic conditions, were outdated by the successes of modern European society. With hugely better, if not always perfect, universal services for workers the modern European economies maintained successfully competitive capitalist systems that favored manufacturing, trade and targeted education over central planning and control of production.

Not only did Capitalist countries after World War II encompass the same kinds of social programs that Bismarck had established for Germany by the end of the 19th Century, but they flourished with free enterprise, including a geometrically greater number of millionaires and eventually billionaires from the merchant class than had existed at any time in history.

The problem with Hayek, Friedman and the current crop of their disciples is that they must twist and compress their evidence into knots of nonsense to try to make it fit current society.

For example, the latest mantra is “austerity.” Austerity is a name for simply cutting government in those areas where these economists and their masters believe there is the least amount of opposition. In other words, the millionaire/billionaire class espouses cuts in social services as the solution to fiscal problems. They maintain that this is what you do in business and what you do if you are someone dedicated to decentralized control. It is more efficient.

Both ideas are wrong on and can be proved so from simple evidence. Austerity in Europe after the crash of 2009 has failed miserably to restore economic growth. The crash, let us not forget, was caused by the worldwide sale of fraudulent securities by U.S. financial companies to governments around the world.

So we set up countries for failure. Initiated the crash that caused the failure and then proposed and supported exactly the wrong kind of restorative remedies. Some economists we are!!

So who were these economists who led the way into backward-looking economics? They were the cocksure economists. Those who rose up under the shelter of the big corporations who saw that this was very, very good for them. These big corporate giants founded organizations like the Cato Institute, the Heritage Foundation, and the Manhattan Institute and dozens of others.

On every issue, from Social Security to Medicare, even on guns and abortion, they took a position. It was always and invariably the Right Wing position. And it was often justified by economics that belonged in the waste basket, not in serious public discussion. And when they fell back, besieged by facts and statistics, they dropped the “H” word: Hayek. “Hayek said…”

Well Hayek was right in his day. But his day was so different from 2013 that Hayek is totally wrong today. Small, diverse entities at the turn of the 20th Century are huge, monopolistic industries at the beginning of the 21st Century. Agriculture is an integrated, corporate industry. Communications, energy, even medicine are highly concentrated industries with monopolistic pricing systems.

Whatever the national service today in the U.S., if the price is $100 per month, no matter what the introductory price of competitors, no matter what company it is, you will eventually end up paying $100 per month. There are only a handful of corporations controlling every industry. Figure it out for yourself. The pricing is locked. They don’t need to collude. All they need to do is read the newspapers.

You see, Hayek thought that competition would lead to diversity and innovation. He thought that economics could overturn the greed and myopia of political systems. He did not know or even in later life understand that weak political systems would allow unequal competition, leading to concentrated power and the eventual oligarchic corporate society.

Our society bears no resemblance to the societies that Hayek knew and it is antithetical to the principles that say free and open competition will create the most efficient society. We do not have free and open competition in the United States in 2013. Products and services for the largest categories…food, energy, communications, transportation, others….all controlled by a handful of giant corporations.

In political or economic terms, Hayek could never recognize his principles in this country today. Friedman said that neither he nor Hayek were Conservatives but Liberals in the classical sense. Friedman believed that he and Hayek would be considered radicals, libertarians…not today’s conservatives.

Hayek’s his ideas were created in a time of concern for huge, totalitarian governments, bent on doing good for the masses, but co-opted by evil men, bent on realizing only the unintended consequences that led to dominating central governments.

The irony is that today, American Conservatives, actually Neo-Conservatives (Neocons) apply his name to their pronouncements that merely rubber stamp the kind of large corporate and government spending that Hayek disputed, while at the same time applying his name to their mistaken judgments.

Milton Friedman was a colleague of Hayek’s at the University of Chicago in the 1950s when Hayek came to America to teach. One of the arguments that Friedman wrote about consistently outside of technical economics was the issue of redistribution of income.

In Hayek’s and Friedman’s world, any tax that one person pays that is then used in some way to increase the income of another is redistribution. The basic (implied) argument is that the rich and successful should not be taxed to give money to the poor and unsuccessful. In simply economic terms–they would say–this is inefficient. It is counter-motivating to both parties.

But let us suppose that the former’s money goes into the Treasury and then goes out to a military contractor who employs someone. Money would have been redistributed. The employee of the military contractor would have been given an income. Bombs are hardly economically efficient. You make them. They blow up. You have to make more. They did not earn anything of value for the taxpayer while they were being used and the result was simply that more were needed.

Friedman and Hayek would argue that military is necessary to their minimalist ideas of government, as is a police force. In distribution, they keep their argument simple. One person has money taken away, reducing his incentive to work, while another person gets some of that money, reducing his incentive to work. It is a simplistic argument, an equation. One gives and the other takes. If it were that simple, then it would be easy and we could all sleep easier, except perhaps for those sleeping on the streets.

Another big issue is that of central government planning. In the Hayek/Friedman theory central government equates roughly with Socialism. And in their system of thought, Socialism, because it intends good works but results in equal distribution of unequal effort, is bad. Pure capitalistic competition is what drives the economy and “socialist” attempts to level the playing field only result in bad outcomes for all.

But once again, that is not true. We tamper around the edges of capitalism every day. Tariffs, guaranteed contracts, residual payments after the work has long been done, health care traded for income….numerous adjustments to income and distribution of the results of income. Oil depletion allowances. Business expense deductions. Many things.

Friedman himself said that he would do away with welfare and provide a minimum wage, a negative income tax. This is the same thing that Senator George McGovern, a popular Left Wing Liberal suggested in his Presidential campaign of 1972.

In general, Friedman called anyone a Socialist, like the economist John Galbraith, a Socialist if they believed in even the most innocuous ways that government had an important place in dealing with issues that involve the welfare, that is, the well being, of the common man.

Friedman said, “Everyone agrees that Socialism has been a failure but we keep moving down that road.” Now, that depends on your definition of Socialism and as we have seen, Friedman called anyone who believes in Social Security or Medicaid or food stamps….a Socialist.

But let’s say that I am the President of AT&T. I pay my workers well, and I compensate them with health insurance. I am competitive (if that were true) with other communications companies. But I believe that those who are out of work, have for one reason or another no skills, are low intelligence or are disabled, should have some form of government assistance. Am I a Socialist?

Friedman would probably say that this person is not working at maximum efficiency for his corporate stockholders in that he should be lobbying to reduce government costs and thereby corporate taxes. It is unfair to take money from stockholders unless absolutely necessary. They need that money. It is owed to them.

The mistake Friedman makes is that large organizations, both public and private, do have the potential for greater efficiencies. You cannot say that government would be more efficient if smaller, yet large corporations would be more efficient if merged. The justification for mergers in anti-trust terms is efficiency, better service.

So centralized government is no more Socialistic than is AT&T. If it does not work efficiently, it simple needs to be re-managed as we do any large corporation that becomes less efficient. What the followers of Friedman/Hayek have proved since 2001 is that they do not really believe in those principles. George W. Bush and Dick Cheney spent more and borrowed more money than any federal government in history.

On the other hand, Bill Clinton, a believer in government, trimmed offices, merged departments, cut waste and at the same time, raised taxes modestly on those who could afford it. The result was a balanced budget and a surplus which could have gone on indefinitely. But the Republicans not only squandered it, they created a disastrous economy, a nightmare of debt, which we are still living through.

Friedman was against regulation and licensing for creating “limitations” on growth. But in his example of licensing, he says that we limit cab drivers, for example, by licensing them. Now that sounds good. But the fact is that society does not license occupations to create fees.

Society charges fees to pay for the administration of some occupations that need to be licensed for safety or for control of potentially dangerous issues. Nurses and doctors are licensed. But we had a shortage of nurses because they are both underpaid and overworked not because they need a license. We have a shortage of doctors not because they need to be registered but because the American Medical Association, a non-governmental organization, controls the number of doctors who can be educated every year to assure that doctors’ incomes stay high. As a result, we import half of all our resident requirements every year from countries like India and China.

Here is how convoluted Friedman’s arguments can be…and consequently the even more confused arguments of his “followers.” He argues against tenure for professors. He argues that the reason professors do not speak out on certain issues (mostly anti-socialist issues) is that they fear being fired. Tenure helps to prevent this.

So Friedman, who is implying that teachers should speak out, i.e., should have more freedom of movement within academia as a result but is against the very thing…tenure…that would protect them when and if they do speak out!

An example of the problem with Hayek/Friedman principles is the idea of increased national income and quality of life. Friedman maintained that life was better in 1928, when government took only about 10-15% of national income to run government. We were, he was fond of saying, “safer, more secure and freer than in current times (1993-1994.) But is that true?

Disregarding things like monopolistic capitalism and unregulated finance and even things like Segregation, was life better? Friedman admits that we have more material things but says that our lives were better when government took less from our paychecks.

Not so. In 1941 we were attacked by the Japanese. We spent several times our GDP to save this country from despotic tyranny from Fascists and then spent large amounts of money in a stand-off internationally with the Russians that lasted 40 years.

In addition, by 1993, our food was safer, highways better, education better and more available, corporations less likely to damage the environment resulting in better air and water. So, despite things like faster and safer air travel, television, the Internet, much longer life expectancy…our lives are safer, more secure (now that Bush and Cheney are gone from government) and freer than we ever were.

At the very time that Friedman was talking about our lives being worse because of regulations that “limited” our growth, companies like Microsoft, Yahoo, Google, Amazon, Ebay and thousands of smaller start-up corporations were finding their way into the marketplace, with good, high-paying long-term jobs for employees. Neither regulations nor taxes nor big government in any phase of operations impeded these companies.

Friedman was wrong. His disciples are wrong. And they are not even his disciples if you sort out the truth. Friedman and Hayek would have been the last to agree, if pressed without any affiliations or obligations to Republians, to deficit spending as a result of cutting taxes while spending more. First Bush cut taxes. Then he spent more. Then he cut taxes again. Then his Treasury secretary, arguably the most successful businessman in the country, resigned in protest. Then he started another war. Then we went $12 trillion into debt.

It has to be said at this point that any economist who was still a Republican by 2006 or 2007 was a shill and a phony. The likelihood is that they are all biased for one reason or another. This has nothing to do with economics. It has to do with intellectual honesty and integrity. It has to do with what even educated people will do for personal bias, sometimes for pure bigotry, for arrogance, for greed or simply for a paycheck.

Ask yourself why someone who is supposedly fiscally concerned, as these Conservative economists now say that they are, would tolerate $12 trillion in excess spending, annual deficits, unpaid wars, and a $600 billion giveaway to pharmaceutical companies? Is it likely, or even possible that a true fiscally conservative economist…one who, like Friedman and Hayek, would not tolerate budget deficits at all…could legitimately be a Republican?

They are Republicans. Which means that they are not legitimate. Let’s put it more matter-of-factly. They are liars, either to us or to themselves. There is no Republican conservative agenda. There is only the agenda for the rich. In other words, talk about cutting the national budget and use the excuse of Conservative principles.

The Republican economists are paid to look the other way, to justify obviously erroneous data. Why? It is not more complicated than this: the rich do not want to pay their taxes. The real economic solutions are not austere measures. Those measures are touted merely to save the incomes of the rich and the incomes of giant corporations.

The Republican Party spent like drunken sailors during the 2001-2008 period. Now the remedy is not—as these Neo-Fascists would have us do—cut Social Security and Medicare…which belong to the People, because the People paid for them….but to raise taxes on the rich and their corporations and find other readily available revenue solutions.

Next….Part IV– Real Solutions to America’s Economic Disaster

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