A Vist, Some Talks, and a Bet

| Peter Boettke |

As has been reported by Tyler Cowen, this last week Scott Sumner visited us for a few days.  On Tuesday he spoke on what he terms "neoliberalism" (by which he means the 'third way' and the success of Denmark*), then joined us for a talk by Deirde McCloskey on Bourgeios Dignity as well as dinner with McCloskey, and then he gave another seminar on Wednesday on monetary policy and the current crisis.

Tyler is right, Scott is an excellent visitor --- intellectually curious, listens to criticisms, but also holds his ground.  I mainly listened throughout his visit because to be completely honest, I just don't see how his position can be right about what the Fed did -- either at the time of the crisis or in the subsequent year since the crisis.  I want to try to understand his position.  I am still learning, but it still doesn't seem right to me for a variety of reasons -- both technical and practical political economy questions (if there is no end game for the Fed once it goes down the path, then shouldn't that be taken into account prior to getting on the path).  In fact, I find myself in a state of confusion becauses positions that I think are obviously true are often dismissed or push aside as not of concern, and positions that I think undermine most common-sense economics are in fact endorsed. 

I must say in the debates between Scott and Anna Schwartz, I side with Anna Schwartz (it is one sided debate so I don't believe Anna has defended herself).  On the broader issue of the policy situation we are in, I still would argue that Hayek's Tiger By The Tail captures where Bernanke is at, and Buchanan and Wagner's Democracy in Deficit captures the political economy of Obamanomics.  Put the two together (through monetization of the debt) and one should be able to see the issues that concern me --- the cycle of deficits, debt, and debasement has been unleashed.  In fact, at the McCloskey dinner I even accepted a bet with my friend David Henderson that we will see double-digit inflation before the end of the Obama administration. We bet $100.  To me this economy seems like the 1970s, not the 1930s.

As a guide to understanding the current crisis, I am still persauded by John Taylor's Getting Off Track and for non-monetary factors I look to work that takes Bob Higgs's idea of regime uncertainty seriously.  What happened a year ago was to turn a market correction into an economy wide crisis by public policy errors?  This is not the "greatest victory" as the Fed and Treasury engaged in 'heroic' efforts to stop a Great Depression.  I agree with Scott that policy errors were made, but the opposite ones from what he claims (for the most part).  Those errors weren't only monetary policy errors, but regulatory and fiscal policy errors as well.  Again, a correction was turned into a crisis by the very steps taken to avert a 'crisis' by preventing a correction!  This is  the crux of the microeconomics of the situation.  And nothing since those decisions were made has suggested that policy makers have figured out how to reset expectations.  In a different context, a representative from the insurance companies once said to me that all insurance companies really want to do is price their product according to actuarial science and market conditions --- they are not due to government interference in their market which distorts the pricing process.  I think a similar situation now exists throughout the financial sector (and has for sometime).  Nothing that has been done addresses these distortions in the financial sector and thus the perverse incentives and false informational signals continue to confuse economic actors and steer resources in wrong directions.  Failure and adjustment are omnipresent in a living economy, but systemic failure and preventing adjustment is our situation and a quick route to a stagnating economy.  Remember, the 1970s, not the 1930s.  Tiger by the Tail, and Democracy in Deficit.

Anyway, I agree with Tyler, Scott was a great visitor and the conversations were very spirited and informative.  Very glad he accepted our invitation.

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*Scott admits that he has an idiosyncratic use of words, and that this sometimes leads to communication failures between himself and others.  I think this was very much going on in the paper on neoliberalism and also the talk on the crisis (especially related to his concept of "bubble" and "efficient market").  But I have to say that Scott in response to criticisms was one of the more thoughtful speakers we have had, he was a model to our students actually --- handled the questions, did not get frustrated, and tried to formulate his responses to encourage a meeting of minds.

Comments

[Nicholas Morris]

Professor Boettke,

"In fact, at the McCloskey dinner I even accepted a bet with my friend David Henderson that we will see double-digit inflation before the end of the Obama administration. We bet $100."

Is that $100 now or is that in potentially double-digit inflated dollars? And is one side's stake in the bet more advantageous (as in, is one side's bet smaller than the other's)?

[David R. Henderson]

Actually, Pete, here was the exact bet, as witnessed by Noel Johnson and Garett Jones:

Between September 2009 and September 2012, there will be no 12-month period in which the annual rate of inflation will be greater than or equal to 10 percent.

Best,

David

[Taylor]

Peter,

I hope you made your bet in gold.

The 'idiosyncratic' language comment was an observation I found interesting because I have noticed the same thing. My only recommendation is to decide on a shared set of language and definitions BEFORE attempting to debate someone like Sumner, or else you'll continually speak past each other. And if you can't seem to find common ground on language, that might be a good sign that a debate is pointless and should not be pursued at all.

One other suggestion... once language has been agreed on, force everyone involved to state their principles and premises up front. That's the other way I find debates with Sumner turning into a 'talking past one another' fiasco.

But I am sure you know all of this already. I'm just trying to be fatherly in hopes that no one forgets key decorum that might bring about a productive resolution to this debate.

[Taylor]

David R. Henderson,

I forsee one side or the other weaseling out of paying up because of a disagreement over whose definition and/or measure of inflation to use.

[Greg Ransom]

This economy seems like the 1970s PLUS 1930s ...

And with all of the unfunded liabilities and all of the major institutions loaded with honest to god leftists we are going where no man has gone before.

[Greg Ransom]

David Henderson -- what if Obama slaps on wage and price controls? Is the bet off?

I'm guessing the truly massive inflation will come after 2012, in the wake of Obama and Bernanke's re-election manipulations of the economy.

[David R. Henderson]

Taylor,
Good point. I was assuming CPI.
Agreed, Pete?
David

[Barkley Rosser]

A terminological point. I do not think most use the term "neoliberalism" to refer to the sort of system that Denmark has. Arguably when the term first surfaced in the US in the mid-80s it might have been applied to something like that. It seemed to indicate the sort of thing that "New (or "Atari") Democrats were pushing for, and which presumably Bill Clinton somewhat embodied. But there was never any way that what was a "middle way" in the US was even remotely close to the much larger scale welfare state social market economy that one finds in Nordic countries like Denmark, although while the Soviet Union was still around, the Swedes always advertised their system as being "the Middle Way" (and Lavoie identified this "Middle Way" term with fascism, and indeed the fascists sometimes did use such terminology in regard to themselves).

Outside the US the term has come to means something more like Chicago-style laissez-faire, but enforced by international institutions, i.e., the "Washington Consensus." I see almost nobody outside the US looking at it as involving any sort of "Middle Way," much less something much less near the middle in terms of redistribution as one finds in Denmark.

[Greg Ransom]

This is how the term is used by 10s of thousands of leftist academics in America -- it's basically a swear word, linked to Friedman and Hayek and a free market world economy.

Go through any leftist peer-reviewed academic journal and you'll run into the word "neoliberal" time and again. The modern American academic use of this terms comes from the Marxists and leftists in Latin America.

And note well, leftist academics like Philip Mirowski are using the terms in the same way -- as a fear label for the ideas of Friedman and Hayek.

Barkley:

"Outside the US the term has come to means something more like Chicago-style laissez-faire"

[Greg Ransom]

I should have said:

leftist _economists_ like Philip Mirowski are using the terms in the same way -- as a fear label for the ideas of Friedman and Hayek ..

[Peter Boettke]

David,

I agree to CPI, but can we agree that if Obama 'nationalizes' the economy or establishes wage and price controls, that we can agree to some other measure than CPI and look instead at something that captures repressed inflation. OK.

I will not weasel out, but if prices are not allowed to adjust up due to government decree, we will have to adjust. Barring that, lets just go with CPI and the double-digit threshold.

[Peter Boettke]

Folks,

I put an * for a reason. Neoliberalism does in mean something other than what Scott means in his paper in the minds of most people, who use it to mean "Washington Consensus".

Pete

[Barkley Rosser]

Pete,

Was that asterisk and footnote there originally? Did not see it if it was.

Greg,

I think you are right that it was in Latin America that its current meaning and usage as identified with pro-laissez faire views began and became entrenched. I know that it is used this way in a variety of foreign language publications in Europe, as well as in some circles in the US, including by Mirowski.

I forget the editor's name, but in the 1980s it was the longtime editor of the Washington Monthly, Peters?, who coined it on his own apparently unaware of its history elsewhere, and used it to describe politicans like Gary Hart. That usage has simply faded away, although it might have gotten used by some of the "Middle Way" theorists in the UK associated with Tony Blair, who would have fit Peters's usage.

Mirowski is down on Wikipedia, but it claims the term was first used by a German economist and sociologist in 1938, Alexander Rustow, at the Colloque Walter Lippmann. Apparently in this case the usage may have resembled more the sort of thing Peters was thinking about and not some pure laissez faire. Rustow was apparently a predecessor of the social market economy view that became predominant after WW II. In that regard, Sumner might have a case for a link with Denmark, although that group tended to be pretty pro-free market, aside from supporting more extended welfare state policies.

Curiously, it appears that the term is never used now anywhere by anybody either as a positive moniker or to describe themselves, near as I can tell. Pro-laissez faire people do not use the term for themselves, and those who do not like them use it to describe them, a curious state of affairs. I am sure nobody in Denmark uses it to describe their policies or positions.

[Barkley Rosser]

A bit more quick googling establishes that it was Charles Peters who gave it this use in the US. As recently as 2007 he was still using it this way and had a debate with David Brooks, with Brooks also using it the same way and saying that it was "dead," on the grounds that all the US liberals had gone back to being the old-fashioned New Deal sort of big government liberals. So, I guess there are still a few in the US using it this way, with at least Peters still viewing it as a positive moniker. But I think he is getting to be pretty lonely on that one by now.

[Barkley Rosser]

This will be it for me on this, but it does seem that the Peters use of the term is alive and well. Big surprise, but it has been used to label Obama. An article last year by one, Lee Cary, in American Thinker, even forecast an "Obama Neoliberal Theocracy," whatever that means. Some other commentators have used it to describe the "tepid liberalism" Obama supposedly incarnates. But, given the old association of "new thinking" and "high tech" liberalism that is not of "the old Big Government" sort, certainly Obama has at leasts rhetorically fit that at times, whatever one may think of his practice. I wonder if he himself thinks the term applies to him, and if so, if he thinks that it is a good thing and something to be proud of?

[Current]

I think that the term "neoliberal" is confusing anyway. So many things are attached to it these days. Since it's used by the enemies of the market they attach to it what they like. It's only recently that it was made to denote "market economy imposed from outside".

Also, Scott Sumner's definition of democracy is quite confusing. When he says he is advocating "more democracy" he means "democracy more like Switzerland".

See:
http://blogsandwikis.bentley.edu/themoneyillusion/?p=2348

[Greg Ransom]

"Neoliberalism" is attacked all the time -- and Hayek is usually directly tied to the idea, although Hayek's actual ideas and works are in most every case completely unknown to the writer -- as far as I can tell almost every one of them merely pretends to know who Hayek is and what his intellectual achievements might be.

[Greg Ransom]

This was published in some Australian paper today:

"Neo-liberalism was far more ideological in temper than social democracy. It had a master theorist, Friedrich Hayek. And it had a faith: the wisdom of the market. Even though nowhere were the ideas of neo-liberalism fully implemented, for 30 years it provided the most important Western policy program and the dominant version of what passed for common sense.

The era of neo-liberalism brought great prosperity to many Western and some non-Western countries. But it also brought great instability and, especially in the US, levels of inequality not seen since the 20s. Nor did it offer a plausible solution to the intractable problem of extreme poverty in the Third World."

Note well -- written by a tenured professor. This kind of stuff passes "peer review" and enters the "Republic of Science" every day.

[Barkley Rosser]

Greg,

It is my impression that Hayek never used the term "neoliberalism" at all. Is this correct? Again, he may have been aware of this Rustow fellow, as he was definitely in contact with the postwar German sozialmarktwirtschaft crowd, such as Muller-Armack, as well as the closely related group around Walter Eucken, although I think Rustow like Muller-Armack probably supported more welfare state style policies than did Hayek or the Mont Pelerin group.

Curiously, it would seem to me that the Rustow meaning probably is closer to what Charles Peters thinks of, even though that is not how most (such as the guy you just quoted) think of it, and with me thinking that Peters may be unaware of this earlier usage (if he is even aware of how it is used by so many others, since he thinks he invented the term).

[Greg Ransom]

Barkley -- I've never seen Hayek use the word "neoliberalism", but my German is very weak, and I haven't read Hayek in German.

[Greg Ransom]

Hayek would have been familiar with German "Ordo economics" which looks a lot like Rustow and Charles Peters' "neoliberalism":

http://en.wikipedia.org/wiki/ORDO_%28journal%29

[Barkley Rosser]

Greg,

Well, yes, "Ordo-liberalism" was the label that Walter Eucken bore as well as Muller-Armack. While Hayek had some differences with some of these folks, he was very much in sympathy with them on most things.

[Rafe Champion]

Neo-liberalism is used as a term of abuse by left liberals in Australia. Greg's quote comes from a piece by Robert Manne who signalled his grasp on economics by urging Japanese policies instead of deregulation in Australia just as Japan slipped into recession. He was voted Australia's leading public intellectual by a wide margin. Due to his honourable record during the Cold War he became the editor of Quadrant but then returned to his spiritual home on the left. For an account of his movements from a one-time friend and honourable non-left liberal: http://www.the-rathouse.com/PC_Manne.html

[ivan]

Here are two good studies on the term "neoliberalism".

http://www.cis.org.au/temp/op114_neoliberalism.pdf
http://pages.sbcglobal.net/tboas/neoliberalism.pdf

[Barkley Rosser]

ivan,

Thanks for the links. Very useful and interesting, especially the first one.

The second one does a good job of showing how the term evolved in Latin America, especially Chile. I do find it odd, however, that Boas and Gans-Morse insist on spelling the name of the city as "Freiberg," rather than "Freiburg." Where on earth did they get that awfulness from?

Neither paper mentions the independent use of the term by Charles Peters in Washington, whom I am reasonably convinced had (and may still not have) no awareness of the previous history of the term or that he was in some sense probably reviving something close to its original meaning. The one identification of policy proposals by someone they support as being "neoliberal" in Boas and Gans-Morse may actually reflect the influence of the small group under the influence of Peters, namely Thomas Friedman in 1999, who is a journalist more than a scholar. That Boas and Gans-Morse do not pick up on Peters is probably due to those using his usage appearing mostly in journalistic media in the US rather than in academic journal articles.

[A.J. Sutter]

Milton Friedman wrote an article, described by Mirowski as "an early survey of the efforts of his comrades," entitled “Neo-liberalism and its Prospects,” Farmand, 1951/02/17, pp. 79-83; also in Milton Friedman Papers, Box 42, Folder 8, Hoover Institution Archives. 1951. See also the references cited to in Mirowski's note 15 to his "Postface: Defining Neoliberalism" in Mirowski & Plehwe, eds., The Road from Mount Pélerin (Harvard UP 2009). Mirowski notes that Mount Pélerin Society members stopped using the term "in the later 1950s" (@427). It's striking that the Boas & Gans-Morse paper linked to by Ivan above doesn't mention the Mont Pélerin Society at all.