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Friedman and Hayek

November 23rd, 2006

Brad DeLong gets the distinction between Friedman and Hayek pretty much right in my view.

I think that there is an important difference between Friedman and Hayek. Hayek is an economic (classical) liberal but a social conservative: a believer in respect for throne and altar. Social conservative Hayek can see Pinochet as a good thing: far better to have an authoritarian state that maintains the conservative moral order, if it can be persuaded to adopt laissez-faire economics, than it is to have a democracy that regulates the economy. Friedman, by contrast, hates and fears a government that prohibits use of recreational drugs in your home almost as much as he hates and fears a government that won’t let you undersell your politically-powerful competitors. For Friedman, Pinochet is a bad–an aggressive, powerful military dictator–whose evil the Chicago Boys can curb by persuading him to adopt laissez-faire policies.

Roughly speaking, Friedman’s position was that even a dictatorship (such as Chile or China) would be better off with free-market economic policies. Hayek’s was to prefer a liberal dictator to a democratic government lacking liberalism.

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  1. Sinclair Davidson
    November 23rd, 2006 at 06:50 | #1

    I think that’s right – I’m just wondering why it matters. In the ‘Constitution of Liberty’ published in 1960 Hayek writes ‘Liberalism is a doctrine about what the law ought to be, democracy a doctrine about the manner of determining what will be the law’. He also tells us ‘a democracy may well wield totalitarian powers, and it is conceivable that an authoritarian government may act on liberal principles.’ In Pinochet, Hayek could see an example of the latter – Pinochet could be convinced, and (as you indicate in the link) his regime passed away (peacefully, via the ballot) to a more ‘liberal’ regime. I should add Hayek indicates that ‘democracy is probably the best form of limited government’.

    Aren’t Hayek and Friedman being somewhat pragmatic (even dare I say it, applying the hteory of second-best). In the face of an authoritarian government the application of liberal economic policies will improve the plight of the citizens and enhance the probability of peacefull succession to democracy. This was good advice for Chile in the 1970s and its good advice for China in the naughties.

  2. Nanni
    November 23rd, 2006 at 08:58 | #2

    So many tragedies have been justified in the name of pragmatism. The problem with both Friedman and Hayek’s positions with respect to Pinochet’s dictatorship is that they failed to see that economic rights do not matter if you have no civil rigths. What Chilean people needed was that they both worked for international pressurte to speed the fall of the military junta. Their economicist approach to torture, brutality and mass murder gives economics a bad name.

  3. derrida derider
    November 23rd, 2006 at 09:01 | #3

    It puts you in mind of Schumpeter’s praise of the German Social Democrats – that when in 1919 events forced them to choose between socialism and democracy they, after some angst, betrayed socialism and chose democracy.

    Sinclair, I think you’re letting Hayek off the hook – nobody is denying that Hayek thought democracy a Good Thing, but he thought capitalism an even better thing. So if events forced him to choose between them he wouldn’t choose democracy, unlike Friedman. The former was therefore an untrustworthy friend to democracy, the latter a trustworthy one.

  4. Sinclair Davidson
    November 23rd, 2006 at 09:18 | #4

    DD – I don’t know that I’m letting Hayek off the hook. Hayek makes clear that in the choice between liberalism and totalitarianism he chooses liberalism. I’m sure this is an easy choice in theory. Friedman has said ‘freedom’ is an end, not the means to an end – he didn’t say ‘democracy’. As I first said, does this matter (i.e. they both appear to have made the same choice)? Both Hayek and Friedman are condemned (by some) for their ‘support’ for Pinochet, yet Friedman is not condemned for his ‘support’ for PR China. On the same grounds nobody condemns Médecins Sans Frontières for ‘supporting’ individuals under authoritarian and totalitarian government.

  5. melanie
    November 23rd, 2006 at 10:49 | #5

    almost as much as he hates and fears a government that won’t let you undersell your politically-powerful competitors

    Forgive me, but I thought the problem was initiated by the attempt to nationalize a mine that was owned by one of the ‘politically-powerful’ corporations, rather than a refusal to undersell them. Allende was one of a long line of democratically elected Chilean presidents (120 years already) and my recollection is that he was a good social democrat (perhaps of the 1950s-60s variety rather than ‘New Labour’, but it was only 1972). His problem lay in that the right wing still dominated the legislature and absolutely refused to compromise from the outset (this fact is well-documented). Maybe he was politically foolish not to say to the people who voted for him “look I just can’t do what you elected me to do”, but that is neither a justification for the brutality that followed nor for the deliverance of economic advice designed to aid the Chilean right in their determination to undermine the social democratic program.

    There seem to be many people who comment on this blog who think that laissez-faire = the common good. But this is a view that seems to be held by a small minority of any population. Laissez-faire in the Chilean context increased the power of the right and undermined that of the very poor. Laissez-faire is a system that cannot be implemented without repression.

    Fortunately for Chile, it “only” took a couple of decades to return to a more democratic system and another decade for another social democrat (but a chastened one) to get elected.

    It is absurd to compare Pinochet with Mao or Stalin, both of whom came from societies with no democratic traditions whatsoever. The only reason why Pinochet’s dictatorship ended relatively peacefully has nothing to do with ‘liberal authoritarianism’: it was the destruction by murder of any alternative vision to the Friedmanite (or Hayekian for that matter) version of ‘liberalism’. Chile may be a ‘nice’ country today, but don’t forget that its democracy is built on fear and death. Nobody’s going to challenge the ‘politically powerful’ anymore.

  6. stoptherubbish
    November 23rd, 2006 at 14:39 | #6

    Thank you Melanie, you saved me the trouble of correcting the new ‘revisionism’. Allende was democratically elected. He was overthrown by an alliance forged between the chilean military and the economic elite in Chile, and their cheersquad in the US who supplied both logistical and tactical support. It was the first and somewhat crude verison of the ‘economic shock therapy’ that was to rain down on the rest of the world in the next two decades. Pinochet’s rule, complete with state terrorism directed at his political opponents abroad, is conveniently airbrushed from the acccounts of the ways in which a frightened ruling elite managed its way out of the stagflation of the 1970s.

  7. still working it out
    November 23rd, 2006 at 18:53 | #7

    There are very few truly totalitarian dictators. Most dictators are really politicians who have successfully pulled together and led coalitions of the politically powerful in countries where that group does not include the average person. People with wealth almost always have political power. A dictator is actually more constrained in creating real laisse fair economics than a democratic leader. A truly laisse fair economic policy would almost certainly undercut the position of their politically powerful and wealthy supporters. In such a situation all you get is psuedo laisse fair economics. Using laisse fair as a justification to weaken economic policies that inhibit your supporters.

  8. still working it out
    November 23rd, 2006 at 18:59 | #8

    “In the face of an authoritarian government the application of liberal economic policies will improve the plight of the citizens and enhance the probability of peacefull succession to democracy. This was good advice for Chile in the 1970s and its good advice for China in the naughties.”

    I agree with the general sentiment of economic progress leading to democracy. In fact I have come to doubt it can happen any other way. But I doubt that China is following the Chileans. They’re following the Japanese model. And if Japan is laissez faire I’m a Republican.

    (apologies for the atrocious spelling of laissez faire in previous comment)

  9. SJ
    November 23rd, 2006 at 20:20 | #9

    Actually, SWIO, Sinker’s claim that “In the face of an authoritarian government the application of liberal economic policies will improve the plight of the citizens and enhance the probability of peacefull succession to democracy” is ridiculous on its face. The liberal economic policy prescription didn’t prevent Germany, Italy or Argentina switching from an already existing democracy to dictatorship. Ditto for the U.S. turning into the bizarro land it currently is.

  10. Sinclair Davidson
    November 24th, 2006 at 05:27 | #10

    ‘Germany, Italy or Argentina switching from an already existing democracy to dictatorship’

    The price of extreme economic dislocation. But some economies made the switch, others didn’t. Also, I should point out that economic change and political change do not share a mechanical relationship, as I indicated, the probabilities are enhanced.

  11. November 24th, 2006 at 07:15 | #11

    Allende’s democratic credentials are contested by the view that he came to power as the senior partner of a coalition on the undertanding that he would not implement radical policies of nationalisation. He did not have majority support for nationalisation and he violated the terms of the agreement with the coalition partner. So much for Allende as a democrat.

    His economic policies would have beggared the nation. So much for his concern about the people. At least the military returned the nation to democracy and prosperity. How many leftwing dictatorships achieved that?

  12. Bring Back the Currency Lad’s blog
    November 24th, 2006 at 07:30 | #12

    err Rafe that means when Howard is asked directly by the black dwarf if he will implement IR legislation overruling the States and says no then he does then HE is no democrat?
    GST anyone?

  13. melanie
    November 24th, 2006 at 08:29 | #13

    Rafe, I don’t know what you’re talking about. The Popular Unity coalition? Or the Christian Democrats who obtained 28% of the vote in 1970 and DID favour nationalisation. Between Popular Unity (36%) and CD (28%) that gives Allende and like-minded parties a 64% majority. Allende was re-elected in March 1973 with 46%, actually a reduced majority because the CD no longer supported him!

    The Chilean ruling class was the real problem. It was their earlier governments that beggared the poor and polarized the nation’s politics and they planned from 1970 onwards to get rid of Allende by whatever means necessary. It was they who began the strikes in 1972 that created the chaotic conditions by which Pinochet justified his coup.

    Btw, the US cheer squad (CIA) had tried to organise a coup in 1970 already! Let’s face it people are just now allowed to elect a government that challenges the politically powerful.

  14. melanie
    November 24th, 2006 at 08:31 | #14

    And Rafe, don’t try to tell me that 36% in a first past the post system is not good enough, because that would force you to say that Margaret Thatcher and Tony Blair were not properly elected.

  15. El Poppin
    November 24th, 2006 at 14:30 | #15

    Some additional comments:
    1. Chile did NOT have uninterrupted democratically elected governments for 120 years. Balmaceda was overthrown in 1891 (or thereabouts) in a bloody civil war that was not resolved till 1905, and Carlos Ibanez del Campo staged a coup in 1927. The very first coup happened in 1823 when O’Higgins, the national liberator, was overthrown by the oligarchs.
    2. The instability throughout Chile’s history has been the tension between the poor and the wealthy elites. Indeed one of the charges that was brought against O’Higgins was that he was too predisposed to take the side of the poor and the indigenous. After all he did sign a treaty with the Indiginous nations that he would respect their sovereignty if they assisted the liberation from Spain.
    3. There were attempts to overthrow the democratically elected Allende in 1970 and 1973. But these were by officers working alone. Pinochet built the network over three years.
    4. On the night of the referendum that restored democracy, Pinochet attempted another coup but this time the Air Force and Navy steadfastly opposed him as well as some junior army officers. They effectively threatened civil war. This has been documented in the book “La Historia Oculta de la transicion” by a chilean journalist whose name escapes right now. Additionally Pinochet did quarter the troops when investigators were getting too close to the financial dealings of his sons. This effectively lost Pinochet a lot of support from the military as his son has now been charged with dealing in stolen cars. It is understood that shortly after Pinochets return from the UK, he was officially told by the army that they were not going to support his children in any form.
    5. Pinochet only introduced the lasseiz faire policies in 1976. Nearly three years after the coup. In between he just meandered on economically.
    6. The “Chicago Boys” experiment ended in tears with an official unemployment rate of 27.6% in 1982 and increasing amounts of bankruptcy. He then did an about face and re-introduce Keyneyssian policies. To do so he hired a former economics advisor and member of the comunist party to lead the new economic policies. I am trying to find his name but I do know that he toured Australia in the late 90s. Interestingly many Pinochet supporters claim that he was not biased because he hired a comunist to restore economic order.
    7. The political spectrum in Chile is far to the right compared to Oz. In Chile John Howard would have been fimrly located in the centre left.
    8. To me, the latin american economies resemble more a feudalistic society than a market society.
    9. The nationalisation of the mining sector was not supported by the Christian Democrats. They had a policy of “Chilenasion” which meant that, well I think they have given up trying to explain what that meant.
    10. Allende got nationalisation through the congress and the Senate even though he had a minority. There could have been no constitutional violation if the law was passed by both houses. How did he manage that through a hostile senate? He televised on the national broadcaster the debate and vote. Constituents were able to see who voted for what. I wonder why so many opponents to the bill ended voting for it.
    11. In 1973 Allende was not re-elected. The elections were both houses of congress. The UP achieved nearly 46% of the vote and became the largest bloc. The great fear that at the next round of presidential and congressional elections the UP would get over 50% of the vote and definitely would control both houses.
    12. In the early 1970s the oil shock hit all economies, including Chile. Additionally in 1970 Nixon had decided to make the economy scream and an american embargo was placed. And of course Kissinger had decided to rescue Chileans from themselves. See CIA papers released under Clinton.
    13. Pinochet was very much for privatisation and free market. Curiously, he did not hold the armed forces to the same principle. Thus he always adjusted their wages twice a year to cope with inflation. Additionally, officers would retire on full pay (adjusted twice a year for inflation) and rank and file would retire on 50% pay adjusted twice a year for inflation. He did not privatise the military pension funds as he had with every other pension fund and they are all backed by the government. This is now so burdensome that one of his former ministers and architect of teh privatised pension funds has made very serious statement that the military pension fund will bankrupt the nation if this rort is not stopped. This is proving challenging.
    14. Chile was and is a seriously poor country. This in my view will always provide tension. I remain hopeful that there won’t ever be a break down in civil society again.
    15. The Chilean constitution was seriously flawed as there were no mechanism for resolving constitutional deadlocks. I have the latest constitution but I have yet to read it. I presume that it is better than earlier ones in this respect. First past the Post systems seriosuly suck.
    16. As an aside teh argentinian economic meltdown of 2003 was also in part failure of the constitution.
    17. It is better to treat Hayek, Friedman, Marx, etc. as theorists and never, ever let them come anywhere near holding the reins of power. Let the political process absorb their ideas and use them rather than implement undiluted. Better they serve as a beacon rather than as rocks where nations flounder.

  16. Mike Pepperday
    November 24th, 2006 at 15:12 | #16

    To El Poppin, post 15.

    Thank you.

  17. November 24th, 2006 at 16:02 | #17

    Hayek’s was to prefer a liberal dictator to a democratic government lacking liberalism.

    Calling Hayek pro-Pinochet is on a par with calling Pr Q pro-Saddam. Pr Q’s opposition to the US’s democratic revolution was exactly analgous to Hayeks opposition to Allende’s democratic revolution.

    In Chile there was a swap from a comparatively illiberal democracy to a comparatively liberal dictatorship. Iraq there was a swap from a comparatively liberal dicatatorship to a comparatively illiberal democracy. Ideologically this amounts to the same thing.

    This is exactly the kind of political mess that Hayek’s tactical support of authoritatianism was designed to avoid. One wonders what kind of contorted halo-adjustment makes Pr Q entitled to feel that his (fully vindicated) dictatorship support is any more worthy than Hayek’s?

  18. still working it out
    November 24th, 2006 at 16:31 | #18

    “He did not have majority support for nationalisation and he violated the terms of the agreement with the coalition partner. So much for Allende as a democrat.”

    Lying back stabbing politicians are not Democrats ? Did you think about how absurd that sounds before you posted?

    Great post El Poppin.

  19. November 25th, 2006 at 00:58 | #19

    The major difference between Hayek and Friedman is epistemological rather than ideological.

    In ideology both strongly prefer a society characterised by liberal rule of law – catallactic contracts and democratic constitutions. The record shows that both Hayek and Friedman stood shoulder to shoulder in political causes eg they were both founding members of the Mont Pelerin society.

    Hayek’s democracy is much more conservative than Friedman’s. He was willing to suspend democracy prevent totatlitarians from taking control. Given the history of Latin American revolutionary democrats – Peron, Castro, Sandhinistas, Shining Path – this is a forgiveable error.

    This is should not be a hanging crime. Even Mill was inclined to constrain democracy at certain times and places.

    THe major difference between the two is epistemological. Hayek’s economic philosophy is Kantian rationalism as per Austrian economics. Friedman’s is essentially a Millian empiricism as per Marshallian economics. Thus Hayek lined up with Popper’s “negativist” methodology of science. Whilst Friedman was always a Vienna Circle positivist at heart.

    Ultimately Friedman’s philosophy is more open to correction than Hayek’s. That is why I prefer Friedman to Hayek.

  20. petal
    November 27th, 2006 at 10:41 | #20

    Forced disappearances are a “forgiveable error”, Jack Strocchi? Try saying that to the families of the children of the “Night of the Pencils” in Argentina, some of whom were raped and murdered. Try saying that to the victims of the “Dirty War”. In the midst of the economic crisis a couple of years ago, people were grumbling that at least the streets were “safe” and there was a steady supply of essential items under the military government – yes, said some members of my family, but at what price?

    The era to which you are referring was an utter shambles. No wonder the whole continent is swinging to the left.

  21. Jimmythespiv
    November 27th, 2006 at 15:02 | #21

    I am sort of bemused at attempts to link Friedman with Pinochet’s human rights abuses. After all, Raul Prebisch is not blamed for the (much larger) excesses of the Argentine military government- and his dependencia theory and closed economy prescriptions turned out to be utterly wrong – and are the ongoing cause of economic misery in many Latin countries. Unless an economist becomes a minister or senior official, she/he is not culpable in human rights abuses committed without their knowledge. I think the reaction to Friedman’s death really has more to do with his closer intellectual associations with Thatcher and Reagan’s policies (although I am sure Reagan’s budget deficits horrified him).

  22. Tam o’Shanter
    December 4th, 2006 at 19:48 | #22

    A letter in the Financial Times (30 Nov 06) from Larry A Sjaastad (Emeritus Professor of Economics, Uni Chicago) makes it clear that Friedman had no direct influence on Pinochet, whom he met only once. The Friedmanite reforms came later, instituted by the non-Chicago Jorge Cauas, although later Chilean “Chicago boys” did have an impact. As Larry notes, “if students are not to be influenced by the teachings of their professors, higher education would seem to be pointless”. That depends! – Richard Tol has expressed reservations here about UQ.

  23. December 4th, 2006 at 20:41 | #23

    petal Says: November 27th, 2006 at 10:41 am

    Forced disappearances are a “forgiveable error�, Jack Strocchi? Try saying that to the families of the children of the “Night of the Pencils� in Argentina, some of whom were raped and murdered. Try saying that to the victims of the “Dirty War�.

    Murdering people for political reasons is not right. But an ivory tower intellectual rationalising such crimes is not a hanging offence. HOw many left wing intellectuals would pass that test during the period of the USSR’s revolution?

    I dont believe that Hayek was directly involved with carting off people to dungeons or pushing them out of helicopters. His position is analagous to that of various leftists who have rationalised the crimes and misdemeanours of socialist governments without being directly implicated in them. This is a pretty large gallery of rogues for example quite a few Melb Uni academics still hankered after the USSR well into the seventies.

    THe main difference between Friedman and Hayek is that Friedman supported libertarian economics whilst Hayek supported authoritarian politics. Obviously the former is preferable to the latter.

    But ALlende was wrong to implement radical socialism on the strength of a mere plurality. He had no mandate to plunge Chile into class war and possible civil war. He was a nice enough man but his reckless nationalisation policies were sending the Chilean economy into the toilet.

    And Allende’s political path was not leading to stable democracy. His militant allies were not much interested in parliamentary democracy. In recent history Latin America has seen plenty of militant populists who have left chaos and misery in their wake (Castro, Shining Path).

    The era to which you are referring was an utter shambles. No wonder the whole continent is swinging to the left.

    Except Chile, to a certain extent. The Centre Leftist coalition has pledged to retain Pinochet’s libertarian economic reforms even as it has spurned Pinochet’s authoritarian political structures. So Pinochet’s legacy is not all bad.

    Chile would have been better for all if Frei had won in 1970.

  24. melanie
    December 5th, 2006 at 23:38 | #24

    Something on Friedman’s heroic efforts in Chile, from Walden Bello in the Asia Times:

    “Free-market policies subjected the country to two major depressions in one decade, first in 1974-75, when gross domestic product (GDP) fell by 12%, then again in 1982-83, when it dropped by 15%. Contrary to ideological expectations about free markets and robust growth, average GDP growth in the period 1974-89 – the radical Jacobin phase of the Friedman-Pinochet revolution – was only 2.6%. By comparison, with a much greater role of the state in the economy during the period 1951-71, Chile’s economy grew 4% a year.

    “By the end of the radical free-market period, both poverty and inequality had increased significantly. The proportion of families living below the “line of destitution” had risen from 12% to 15% between 1980 and 1990, and the percentage living below the poverty line, but above the line of destitution, had increased from 24% to 26%. By the end of the Pinochet regime, some 40% of Chile’s population, or 5.2 million of a population of 13 million, was poor.

    “In terms of income distribution, the share of the national income going to the poorest 50% of the population declined from 20.4% to 16.8%, while the share going to the richest 10% rose dramatically from 36.5% to 46.8%.”

  25. Jimmythespiv
    December 6th, 2006 at 12:54 | #25

    …keep droning on, Melanie…

  26. melanie
    December 6th, 2006 at 20:55 | #26

    Well, Jimmy, since you are a self-confessed spiv, what point in trying to persuade you?

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