Hayek in Brief

June 19, 2010

Frederich Hayek (1899-1992) was one of the most profound and influential thinkers of the 20th century. His most famous book is The Road to Serfdom, which though first published in 1944, is currently the #1 bestseller at Amazon.com. That this book is so widely read and so widely ignored by the leaders of the West defines the economic malaise currently disabling the enlightened spaces of the planet. Hayek’s most profound book, the one that looks most analytically at the role of the state versus that of the individual, is The Constitution of Liberty; it first appeared 50 years ago.

Both are virtually compulsory for anyone who wants to understand the end result of the welfare state and who also wishes to find an exit short of catastrophe. If you are too lazy or busy to read Hayek’s books there is a relatively short essay that encapsulates his thinking on the economic structure of society and the tension between liberty and equality. Individualism: True and False was a lecture given in 1945 and published the following year. It was published in a collection of Hayek’s essays as Individualism and Economic Order. It was recently reissued by the Mises Institute.  Individualism: True and False is the first of these essays.

Hayek starts by defining “individualism”. He distinguishes his sense of the word from that used by Rousseau and the Encyclopedists which he feels means or leads to collectivism. Hayek believes that true individualism is a theory of society. “Individualism postulates…the existence of isolated or self contained individuals, instead of starting from men whose whole nature and character is determined by their existence in society.” Nations, in his view, stumble accidentally on systems that may form the very basis of human organization, but which are not the result of design. Free men create things “which are greater than their individual minds can ever comprehend.” Hayek derived this apprehension from Josiah Tucker, Adam Smith, Adam Ferguson, and Edmund Burke. Smith and Burke were particularly important in shaping his thought.

This view contrasts diametrically to those who wrought the French revolution and whose heirs are the social designers of today. “[D]esign theories necessarily lead to the conclusion that social processes can be made to serve human ends only if they are subjected to the control of individual reason, and thus (they) lead directly to socialism, true individualism believes on the contrary that, if left free, men will often achieve more than individual reason could design or foresee.” This statement encapsulates the debate which animates our current politics, no matter how inelegantly framed, over the role of the government in the design and direction society in general and the economy in particular. Along with Adam Smith, Hayek was more concerned with a system under which man could do as little harm when at his worst, rather than what he could do when at his best. This is analogous to primum non nocere in medicine.

Hayek, along with Smith and Burke and unlike their French contemporaries, wants a system that grants freedom to all rather than to just the “good and the wise”. The reason for this preference is that the good and wise, no matter how wise, can never know enough to manage any complex system. Any one man or even a group of men can only know a sliver of the whole of society. This is Hayek’s crucial point; the one he returns to throughout his career.

A man “cannot (italics in the original) know more than a tiny part of the whole of society…all a man’s mind can effectively comprehend are the facts of the narrow circle of which he is the center…nobody can know who knows best…The fundamental assumption…is the unlimited variety of human gifts and skills and the consequent ignorance of any single individual of most of what is known to all the other member of society taken together.” These are the reasons why central planning fails. No matter how earnest or well intentioned the planners, they cannot know more than an infinitesimal of that required to successfully plan any enterprise of consequence.

The presence of 40 “Czars” in the White House and the “success” of their charge is a perfect example of Hayek’s assertion of individual ignorance.

He goes on to say his “argument does not assume that all men are equal in their natural endowments and capacities but only that no man is qualified to pass final judgment on the capacities which another possess or is to be allowed to exercise.” He then remarks that only because men are unequal can we treat them equally. If they were all the same we would have to treat them unequally to successfully organize society. But as they are not equal society can be successfully arranged by letting people freely follow their inclinations. “There is all the difference in the world between treating people equally and attempting to make them equal. While the first is a condition of a free society, the second means as De Tocqueville described it ‘a new form of servitude’.”

If all were equal we would have to coerce people into occupations or tasks for which they were no more qualified than anyone else. As people are unequal we can let their talents dictate their activities.

The tension between liberty and equality (if one means equality of outcomes) is the basis Hayek’s masterpiece The Constitution of Liberty. In more than 400 pages of tightly reasoned prose he scrutinizes individual liberty and the role of the state in its application. He defines liberty as the absence of coercion. Coercion may only be exercised by the state. He examines the condition under which such coercion is justifiable. He shows how liberty and equality of outcome are opposites – the more you have of one the less of the other. Thus the state should be careful in the application of its coercive power. Especially as it never has the knowledge necessary to gracefully manage any complex system.

Hayek believes that society must be ordered on general principles which have evolved over time, often unconsciously, that are respected by the state and equally applied to all. These organizational rules must serve for long periods of time. In a dig at Lord Keynes he derides government’s tendency to concentrate on short term problems “because in the long run we’re all dead”. Making up the rules as you go along (even if you’re only 20 years old this must resonate) allows, in fact it demands, that the state become absolute.

So what kind of rules do we want? In this essay Hayek does not examine the subject the way he does in the later Constitution of Liberty. He is, of course, in favor of an effectively competitive market system. He is very much aware that our personal sense of justice frequently revolts against the impersonal decisions of the market. “We must face the fact that the preservation of individual freedom is incompatible with a full satisfaction of our views of distributive justice.” Here is the nub of the contention that animates the politics of all the world’s liberal democracies.

The hard decisions of the marketplace often make the public prefer the imposition of human intelligence as a counter weight, but they soon discover (or they should if sentient) that no matter how hard the market it leave a person with a choice whereas the imposition of the government leaves none. The following paragraph though written almost 70 years ago could be the product of this morning:

“The unwillingness to tolerate or respect any social forces which are not recognizable as the product of intelligent design, which is so important a cause of the present desire for comprehensive economic planning is indeed only one aspect of a more general movement. We meet the same tendency in the field  of morals and conventions, in the desire to substitute an artificial for the existing languages, and in the whole modern attitude toward processes which govern the growth of knowledge. The belief that only a synthetic system of morals, an artificial language, or even an artificial society can be justified in an age of science, as well as the increasing unwillingness to bow before any moral rules whose utility is not rationally demonstrated, or to conform with conventions whose rationale is not known, are all manifestations of the same basic view which wants all social activity to be recognizably part of a single coherent plan. They are the results of the same rationalistic ‘individualism’ which wants to see in everything the product of conscious individual reason. They are certainly not, however, a result of true individualism and may even make the working of a free and truly individualistic system difficult or impossible. Indeed, the great lesson which the individualist philosophy teaches us on this score is that, while it may not be difficult to destroy the spontaneous formations which are the indispensable bases of a free civilization, it may be beyond our power to reconstruct such a civilization once these foundations are destroyed.”

What Hayek teaches us is that the only viable society is one based on individual liberty, a society that enacts general laws which are equally applied, and which resists the almost irresistible compulsion to interfere with the free exercise of individual rights; this interference is almost always excused in the name 0f social justice, a phrase that typically signals the approach of something nefarious. Social justice results from a free society where the government does for the people only that which is necessary for their welfare and which they cannot reasonably be expected to do for themselves. Whether the democratic countries of the world can successfully organize themselves along the principle of individual liberty is the compelling issue of our age. The alternative is submersion under a flood or moral sloth and societal dependence on a fattened bureaucracy.

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Brazil’s Income Tax

May 28, 2010

Secretary of State Hilary Clinton just gave a speech in which she said: The rich are not paying their fair share in any nation that is facing the kind of employment issues (the United States is), whether it’s individual, corporate, whatever the taxation forms are. Brazil has the highest tax-to-GDP rate in the Western Hemisphere and guess what — it’s growing like crazy. And the rich are getting richer, but they’re pulling people out of poverty … There is a certain formula there that used to work for us until we abandoned it, to our regret in my opinion.

Brazil’s income tax rates are presented below. As you can see they are lower than that of the US, Canada, and all of the countries in Western Europe. Corporate taxes are also lower in Brazil than in the US. Brazil does have a VAT which averages 17%.

Thus, Brazil has a tax regime which places a greater burden on the average worker than it does on the rich. If they are pulling themselves out of poverty, as the Secretary says, they are doing so with a low maximal income tax rate which is not what she implies. If we take her at her word Brazil should raise their maximal income tax rate. If the rich are getting richer in Brazil it might be because they are taxed less than in the US. Furthermore, if Brazil’s economy continues to grow its tax to GDP ratio will rapidly fall unless taxes are raised. But there’d be no reason to raise taxes with a rapidly growing economy which is benefiting all the people of the country.

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Our National Fugue State

March 27, 2010

If you opened an umbrella in Times Square you could say you covered New York

A sizable portion of the American political class seems to be mired in a prolonged fugue state (code 300.13). Their confusion has led them to the conviction that our nation’s well being will be served by a complex piece of new health legislation with so many unforeseeable ramifications that more permutations of its implementation are possible than there are elementary particles in the universe.

We are about to improve Medicare by taking $500 billion out of it. Reducing physician reimbursement by $200 billion dollars will also improve the program. Surely, no believes that these cuts will be implemented. Cynicism and delirium combined.  We are going to extend health insurance to tens of millions of additional people  while proclaiming that we will spend less money. Personal liberty will also increase – 16,000 new IRS agents will make sure of that. Our economy is said to be on the mend, so much so that Berkshire Hathaway’s and Proctor and Gamble’s cost of borrowing is now less than that of the United States government. Bond investors are now viewing Treasuries as riskier than a vast array of corporate debt. They’d rather own bonds backed by sales of toilet paper than the full faith and credit of the United States.

If you want a perspective on what animates many who would “reform” our medical system I recommend you read We Can Reduce US Health Care Costs by James E Dalen, MD, MPH in the current issue of the American Journal of Medicine. In brief, the article argues that central planning will solve all our healthcare problems. The record of central planning over the past century is ignored (or the author is ignorant of this record). He holds the Canadian medical system as an exemplar. The Canadian experience causes him to conclude that we could save  15% of our healthcare expenses by emulating our northern neighbor. I love this sentence: “The ultimate solution to our excessive health care costs is national health insurance: Medicare for all.” He then gives a reference – to whom? Himself. Say something often enough and it must be true. Pirandello wrote a play reminiscent of this thinking.

Dr Dalen wants to focus on preventative care by encouraging more physicians to enter primary care. He would do this by paying of loans for those who behave as he thinks best and by manipulating Medicare reimbursement to favor doctors in primary care specialties.

How many doctors do we need in each specialty? If we possess this knowledge it must be relevant to a decade or two hence because that’s how long it takes to redirect the output of doctors from training programs to practice. Our previous record of getting manpower needs right is not encouraging. You can make just as good a case for needing less doctors in the future as more and just as good a case for needing more specialists rather than less. Which is right? I don’t know, but neither does anyone else. Prediction is very hard, especially about the future – Yogi Berra.

Dr Dalen also thinks the drug companies make too much money. His solution? Price controls. Another tactic with a great track record. His last paragraph says it all: In summary, we must reduce the cost of health care in the US. We can do this by developing a health care system that emphasizes prevention rather than disease management. To do this we must encourage more physicians to be adult generalists and we must provide them with new skills. Furthermore, we must insure that all physicians have cost-effective practice patterns that avoid unnecessary tests and procedures and that all citizens adopt living wills. As a nation, we need to have better control over the cost of prescription drugs. Finally, at some point in the future, we should adopt a policy of national health insurance, Medicare for all.

Let’s look at Medicare – currently covering less than all. The 2009 Social Security and Medicare Trustees Reports show the combined unfunded liability of these two programs has reached nearly $107 trillion in today’s dollars! That is about seven times the size of the U.S. economy and 10 times the size of the outstanding national debt. Why would anyone think that Medicare serves as a good model for restructuring all of American medicine?  Medicare is in far worse shape than Social Security. If Medicare for the elderly is plunging the nation’s finances into a bottomless abyss of debt, throwing the rest of America into it can only improve our condition – at least Dr Dalen thinks so.

The knowledge required to effectively do as Dr Dalen and those who think like him desire is infinite. We can never know in advance the right price for a product independent of any market. We can never know in advance the manpower needs of any complicated endeavor, especially when these needs will be subject to changes in technology and circumstance that are not even imagined now.

Nobel prize winner in economics Gary Becker, succinctly summed up how congress could have acted had they not been driven to insanity by ideology rather than reason: Drafting a good bill would have been easy…. Health savings accounts could have been expanded. Consumers could have been permitted to purchase insurance across state lines, which would have increased competition among insurers. The tax deductibility of health-care spending could have been extended from employers to individuals, giving the same tax treatment to all consumers. And incentives could have been put in place to prompt consumers to pay a larger portion of their health-care costs out of their own pockets.

We cannot spend ourself to wealth or health. Entitlement spending will soon consume 75% of the government’s spending. Inevitably we will have to raise taxes even more than we are already doing and cut spending, but not until financial disaster is palpably upon us and likely irreversible. Where will we start? I’d bet on the Defense Department. Our economy is headed for debtors prison as things stand now. What difference can a score or more trillion in debt make? With the exception of acts of God almost everything bad in human affairs stems from the sometimes heartfelt, but always incompletely reasoned, wish to improve our lot. Going broke in the name of fairness is not a good plan. Those who favor such a plan will never concede its failure not matter how wrong things go. They will continue to argue for more government involvement blaming what’s left of the private sector for the the failure of public programs while begging for more public spending. Get out your wheelbarrows.

If we can’t get JS Bach to write our fugue we’d better wake up. Wachet auf – a fantasia rather than a fugue but equally apt.

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If It’s Broke Make It Worse – More Healthcare Reform Incoherence

November 25, 2009

I’ll just put up a few items which speak for themselves which won’t stop me from a few comments. Paul B Ginsburg has an article in tomorrow’s NEJM – Getting to the Real issues in Health Care Reform. He describes the bills emerging from the House and Senate which would “reform” the country’s healthcare “system”. His tone is dispassionate and analytical. It’s like a matter of fact description of someone walking down the middle of an interstate highway at a peak traffic hour naked save for a canvas sack over his head. Ginsburg’s concluding paragraph is a gem of nonchalant inadvertence:

If combined House-Senate reform legislation makes it to the President’s desk for signature, enactment would be only a start to the reform process. regulations will need to be written, organizations (such as exchanges) will need to be built, and midcourse corrections will need to be legislated to deal with the unforeseen consequences. And since only tentative steps will have been taken to reform care delivery, policymakers will inevitably have to return to battle on that front.

Doubtless Ginsburg is right. If you are not horrified by the above you don’t understand where we’re headed. Dr Ginsburg (he’s a PhD) works for the center for Studying Health System Change in Washington, DC. The legislation about to emerge from congress is his retirement plan, his children’s education, the educations of his grandchildren and that of his descendants down to the end of recorded time.

MSNBC, which is more left than Warren Spahn, quotes a piece from the NY Times about the ever increasing incidence of medical bankruptcy. If you actually read the article you’ll find this in the 11th paragraph: How many personal bankruptcies might be avoided is unpredictable, as it is not clear how often medical debt plays a back-breaking role. There were 1.1 million personal bankruptcy filings in 2008. In essence the argument is made that we should reform healthcare because it will relive bankruptcy due to overwhelming medical bills though we don’t know whether or not this is a common event.

MSNBC also reports that one in four American mortgage holders are under water – ie, they owe more than their homes are worth. This would seem to be at least as big a problem as medical bankruptcy, probably worse. Why not have mortgage reform which would have the government compete with banks in offering low cost mortgages which would never be allowed to sink beneath the surface of our turbulent economic sea? Come to think of it we already did. Do you remember how that worked out?

Once you realize how much fun it is to reform things there’s no reason to stop spreading the enjoyment to every state, county, precinct, ward, and boulevard of our benighted and largely unreformed land, especially when it really doesn’t cost anything as the Chinese seem willing to pay for it all.

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Ford, the UAW, and the Public Option

November 3, 2009

If you want any further proof that government run health insurance will run private health insurance into the ground look at Ford and the United Auto Workers. The union which along with the federal government owns GM and Chrysler has refused to adjust its contract with Ford to match that which it has with the government owned auto makers. “The deal would have brought the automaker’s labor costs in line with General Motors Co GM.UL and Chrysler Group LLC, both of which won additional concessions as part of their government-financed bankruptcies.” [Quotation from the above link.] The union’s rationale for rejecting contractual readjustments is that Ford is in better economic shape than its American rivals. Not for long if Ford’s labor costs are much greater than its competitors.

The UAW made concessions to GM and Chrysler because the government forced them to. When the government runs a health insurance scheme it will do the same thing. It will adjust its contracts any way it wishes. If these readjustments lose money the tax payers will cover the difference. Private health insurance companies will suffer the Ford Effect. They can only lose.

Ford took no federal money and ran its business better than its bankrupt but bailed out competitors. It’s now going to suffer for doing a better job than its profligate and mendicant competition.   This is the new American way.

And while we’re at it, how does Ford negotiate with the UAW which owns a piece of GM and Chrysler. Is there not some conflict of interest here? It’s not just the camel’s  nose that’s getting into the tent.

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House Healthcare Bill

October 29, 2009

Below is the complete text of the House Healthcare Bill – all 1990 pages. I haven’t read it but a quick search finds “tax” in it about 275 times. I wonder if anyone has read it.

House HCR bill

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New Doctors Poll

September 16, 2009

There’s been some back and forth in the comments section of Medicare’s Overhead about what doctors think of the healthcare reforms bills now before congress. It started when I said that I didn’t think many practicing physicians favored any of these proposals. A new poll commissioned by Investors Business Daily says that two thirds of doctors oppose this legislation and that 45% would consider quitting if it passed.

It’s not hard to find a poll that supports your preconceived notion of anything important, but I still think it unlikely that most doctors would support the kind of “reform” that may be forced on them and their patients. An interesting finding is that More than seven in 10 doctors, or 71% — the most lopsided response in the poll — answered “no” when asked if they believed “the government can cover 47 million more people and that it will cost less money and the quality of care will be better.” The other 29% must have flunked math – a subject that has always bedeviled physicians.

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