Last week, E.J. Dionne Jr. penned a column in the Washington Post that blamed adherence to the tenets of the Austrian school of economics for gridlock in Washington. Well, sort of. He seemed to say that Austrian economics simultaneously was an obscure set of ideas of which no one has heard (except Ron Paul) and is yet powerful enough to provide the rallying cry for the Republican Party in Washington. More important, he says that Austrian economics is troublesome as a practical matter by blocking activist-government Keynesian-style interventions and deficit spending that would spur the economy and bring about greater wealth redistribution, but Austrian economics is wrong as a theoretical and historical matter. (As an aside, listening to the recording of Ron Paul’s speech, it doesn’t sound like he says “We’re all Austrians now.”  He says, “I’m waiting for the day when we can say ‘We’re all Austrians now.'”).

Dionne’s column is problematic in two ways.  First, he completely misrepresents the central argument of Friedrich Hayek’s Road to Serfdom, which seems to be his central target. Second, he fails to accurately reflect the debate over the historical record of Keynesianism during the Great Depression and in particular the “stagflation” episode of the 1970s, which shattered the Nixon-era consensus on the wisdom of Keynesian economics.

Start with Hayek. Dionne’s attack on Hayek is summarized in this paragraph:

Hayek and Mises perceived little difference between democratic governments that used their power to plan against recessions and dictatorships that did the same thing. In this view, the policies of Franklin Roosevelt led down what Hayek called the “Road to Serfdom” and were thus objectively comparable to those of Hitler or Stalin.

Later on, Dionne conflates this statement with what he represents to be the takeaway from Hayek’s critique of the New Deal and related policies:

Hayek believed, Judt said, that “if you begin with welfare policies of any sort — directing individuals, taxing for social ends, engineering the outcomes of market relationships — you will end up with Hitler.”

This is not an accurate summary of Hayek’s thesis in the book (I observe in passing, it isn’t evident from the column that Dionne has actually read The Road to Serfdom itself, as opposed to just reading commentators on the book who have also fundamentally misunderstood the book). Hayek did not believe that “if you begin with welfare policies of any sort” that you were necessarily on the road to serfdom. In fact, the entire last part of his famed The Constitution of Liberty is dedicated to explaining how many modern welfare-state policies could be implemented in a manner that would not unduly threaten liberty and the rule of law. Hayek never said that the basics of the welfare state were incompatible with individual liberty.

Hayek’s concern was that comprehensive economic planning of the economy by the state was incompatible with individual liberty and the rule of law over the long run. His attack on the New Deal was not about Social Security, but rather the National Recovery Act and other interventions designed to cartelize industries, erect barriers to entry, raise prices for producers at the expense of consumers, fix wages, and divide markets among incumbent producers. Central planning, not the welfare state, is what was incompatible with individual liberty.

Hayek’s argument in The Road to Serfdom is straightforward. There is a reality of existence that can be called the “economic problem” (my term, not his). And anyone who has taken Economics 101 knows what it is–the reality of scarce resources in the world and unlimited wants. “Scarce” in the economic sense–that everything has an opportunity cost attached to it. Right now I can either be writing this blog post or shoveling my walkway, but I can’t be doing both. Unlimited wants in the sense that people generally prefer more to less of most goods.

So why does that matter? Hayek’s point is that given this reality–scarce resources and unlimited wants–there are fundamentally only two ways to allocate scarce resources among unlimited wants. The first is through impersonal processes such as the market process, or more accurately, the market process consists of billions of individuals making billions of decisions every single day on how to spend their time and other resources. In the market process, the guiding principle is the price system–prices are fundamentally amoral in the sense that they simply provide information about what these billions of people believe is the most important allocation of scarce resources. It may be that this means it is children’s vaccines or it may mean Honey Boo Boo marathons. In this sense, the price system is completely bottom-up–it is the aggregation of all these marginal and constantly-changing expressions of preferences of people deciding how to allocate their resources and a signal of how resources are valued by other people. Which individual ends are satisfied and at what cost is thus fundamentally driven by billions of individual decisions. You may wish for a career as a Knight of the Roundtable, but in the modern economy it will be prohibitively expensive to pursue that career. In this world, then, Hayek says the role of the government is provide the rules of the road, i.e., should be organized around the rule of law, which is a set of purpose-independent rules that tell people how to go about pursuing their own freely-chosen ends, but doesn’t tell them what ends they must choose. To put it another way, the rule of law provides traffic rules, but doesn’t tell you which exit you have to get off when you are on the highway.

So why is central planning not only unwise, but dangerous to liberty? This is Hayek’s key insight that escapes Dionne (and apparently Judt, although I haven’t read Judt, so I’m relying on that quote at least being accurate). Hayek’s great insight was that moving economic decision-making from individual decision-making through the market to collective decision-making through the state does not eliminate the economic problem. The reality of economics is still present: scarce resources and unlimited wants. The only question is “Who decides?” Do you decide for yourself (through markets) or does someone else decide for you (through politics)?

Hayek observes that the socialists of the time essentially thought that they could have it both ways: that they could simply control the means of production (such as by nationalization of large industry or central planning of prices and wages) but that they could leave unaffected the ends of production. In other words, socialists thought that we could simply respect consumer preferences–i.e., we could continue to respect the preference for Honey Boo Boo instead of children’s vaccines–and then just come up with more efficient ways of meeting those needs by planning the economy, without messy business cycles and the discoordinations of the market process.

What Hayek pointed out though is that this is impossible–you cannot control the means of production without also controlling the ends. In the end, someone has to decide between Honey Boo Boo and children’s vaccines, or more realistically, manufacturing Priuses or Ram trucks. You can’t just say we will manufacture “cars” (well I guess you could, but most people didn’t like that system). So this means that in the end the central planner has to decide who will have their ends met and who will have their ends disappointed. Once you throw out the price system (which basically says that individuals decide according to impersonal market processes) then you have to decide who gets what

At this point Hayek says there are only two choices. The first is to essentially try to reeducate everyone in society to be truly selfless and to weigh the preferences of others as heavily as themselves–i.e., for me to say even though I really want a new Prius I recognize that you have a greater need for a new Ram truck and so I voluntarily allow the importance of my ends to yield to your preferences. In short, we create a uniform system of value for all of society where we all agree to an overall ranking of the importance of all the ways in which social ends could be met. (This leaves aside, of course, the economic calculation problem which is an entirely different, and unsolvable problem, and focuses only on the ethical/social point). This world essentially is more or less the dream of Mao’s cultural revolution or 1984–to basically subordinate every individual to the collective and have us all live in one great comradeship. Hayek doesn’t belabor this option because he is assuming that most people reject this option because of the horrendous, totalitarian implications. Nevertheless, it is an option: in theory the problem could be solved through brain-washing people to abandon their unlimited wants and to freely subordinate them to the collective in some way.

The other alternative is to have the central planner choose which ends are rewarded and which are not. And this is Hayek’s point that the problem of scarce resources raises its head. This means that some people’s ends are going to be disappointed and others are not. It is inherent in the process. It may be, for example, that I would like to save as much money as possible while I am working so I can retire early and then go to Africa and work on humanitarian relief and AIDS projects. If “society” decides that I have to pay more of my income today in taxes though, that means that I will have to work longer in order to save enough to retire, which means postponing my trip to Africa. There is thus implicit in every decision to raise my taxes a moral decision that what the government is going to do with the money–say, give it to ethanol agibusinesses–is more important than what I would do with it–say, use it for AIDS relief or simply so I can spend less time working and more time with my family. (Obviously I’ve stacked the deck in order to illustrate that there is an implicit decision being made there).

Hayek says that given this it is not tenable to argue that central planning can simply control the means of production–it must eventually control the ends too, meaning that the central planner will have to decide whose ends are satisfied in and whose are disappointed. This means, in turn, that the central planner must choose among the moral worth of individual’s competing ends. The central planner must have the authority to decide how many resources to spend on books and how much on movies, how much on breast cancer research vs. prostate cancer research, and how much on bikes v. cars. Those choices are inescapable.

So this is why it is a slippery slope for Hayek–once the central planner (as under the NRA) allows private cartels to fix the price for steel, then you must also fix the wages of steelworkers. And then you have to fix the price of substitute products for steel (aluminum) so that the market doesn’t adjust to the new steel price, which then requires to fix the wages of aluminum workers, and so on. It also requires the central planner to decide who is allowed to become a steelworker, since now the fixed price is above the market price, so this means some people who want to become steelworkers cannot. Which means they have to do something else. So the central planner has to decide who “deserves” to become a steelworker and who doesn’t and so now people cannot freely choose their profession and choose whether to change professions. The government, not the market, has to decide which businesses live and which fail–so, for example, should computers be allowed to exist if they are going to displace typewriter manufacturers, and if so, which typewriter manufacturers live and which die?

As Hayek further notes that in practice this allocation is not made by angels with some perfect sense of “justice” that decides who wins and who loses. In fact, the political process usually metes this out according to public choice-type pressures, in which the ends that are met are those with the most political pull. And those who rise to the top of this system look more like Soviet commissars who are adept at telling people “nyet” to what they want, not making neutral assessments of moral merit.

So the problem is not the welfare state, it is the central planning.

Obamacare provides the illustration of this, as I think many people have intuited. The “economic problem,” of course, is inescapable in health care. The supply of health care is scarce (only so many resources can be dedicated to it relative to other ends in society) and the demand is pretty close to unlimited. Somehow or other we have to decide how to allocate these scarce means among all the different ends–preventive medicine, end-of-life care, primary research, specialists v. generalists, etc.

Now one possibility that–thank goodness–we have historically rejected in the United States is the idea that certain people should just feel a moral obligation to die for the good of society. You do hear this sometimes–that some people should voluntarily forgo life-extending treatment for the “good of society”–and it sends chills down my spine. This is essentially the Maoist approach.

The alternative is to come up with some way of allocating scarce resources among competing wants. The myth of Obamacare is the same problem repeated: it rests on the idea that we can simply change the means of health care delivery (central planning of health insurance) but it will not require determining the ends at some point–i.e., in the end who gets treated and what treatments are covered and which are not. So, for example, the core of Obamacare is the system of cross-subsidies for some treatments (maternal care) and the expense of others (unmarried or infertile people). So infertile people have less money for things that they want to do (such as join a health club) because they now have to pay more money for things that the central planners have decided is more important than whatever they would do with their money.

Now, of course, private insurance faces the same problem–both Obamacare-style central planning and markets must decide which ends are satisfied. So now we are back in the decision of whether we have central planners decide or individuals decide via market mechanisms. In the end, there will be a decision as to whether certain things are treated or not–it is simply inevitable.

The liberal response to this line, I should note, would be that the dichotomy is oversimplified–that “corporations” actually decide (such as health insurers), not individuals. I acknowledge that counterargument and it might attenuate some of the distinction at the margin in terms of real-world analysis, but in my view it doesn’t undercut Hayek’s fundamental dichotomy.

A quick point on Dionne’s second point. Dionne observes that in the 1970s there was a bipartisan consensus on Keynesian economics. What he fails to mention, of course, is that Nixonism is exactly what destroyed the consensus on Keynesian economics. The stagflation of the 1970s–high interest rates and high unemployment–was not supposed to happen under Keynesianism. And it wasn’t just an Austrian backlash, but the Milton Friedman Chicago and monetarist school essentially came to the same conclusion–fiscal policy in the end was an ineffective tool for understanding the economy and what mattered was money. Thus, contrary to Dionne, these guys argued (persuasively in my opinion) that the New Deal did not end the Great Depression and fiscal policy did not start it. Dionne, however, fails to recognize these debates–more important, Dionne fails to acknowledge the cracking of the Keynesian consensus under the weight of the Nixon-Carter economy of the 1970s. As a result, he suggests that those who have rejected Keynesianism are doing so on abstract theory, when in fact the historical record is far more mixed than he acknowledges and, in my view, contrary to what he represents.