Sunday, October 23, 2011

The Road to Understanding

This is a story about how I learn from my children. I have many opinions, some firmly held, that, when I think about them, I’m not sure why I have them. This is particularly so with economics, everything from fiscal and monetary policy to the responsibility of the state to its citizens. My sons Chris and Nick and Grant and I talk about economics all the time, and now that Chris is a senior at the University of Chicago, studying math and economics in the halls of Milton Friedman, he has been giving me books to read, most recently Friedrich Hayek’s The Road to Serfdom.

This is also a story of how I learned from my father. In his thrall, I grew up a social Darwinist. This is not to say he was not compassionate. He helped the poor face to face, and I learned from him that that was our responsibility. He wasn’t so big on paying taxes so the government could help those he could not, however. I never made any money to speak of in those years, so I didn’t really have an opinion about taxes. I thought we ought to help the poor, or at least give them a fair chance to help themselves, but I didn’t have a very good notion of how to do either. Truthfully, growing up in a white-bread southern suburb, I had no idea what it meant to be poor.
Hayek would have appealed to Dad. Hayek was a fierce libertarian, who feared collectivism because he believed it inevitably led to totalitarianism, an understandable concern in the middle of the fight against Hitler and Mussolini, when The Road to Serfdom was written. John Maynard Keynes is widely regarded as Hayek’s rival in economic theory, and certainly Keynes was more favorably disposed to government intervention in recessions, but even though Hayek vigorously opposed state control of the economy, he did not think the state should abandon its citizens in bad times.

He wrote: “There is no reason why in a society which has reached the general wealth which ours has attained the first kind of security should not be guaranteed to all without endangering general freedom.” (The Road to Serfdom, chapter 9.) The “first kind of security” to which he refers is “the certainty of a given minimum of sustenance for all.” This is a long way from survival of the fittest.

In today’s New York Times, Nancy Koehn reviews a new book titled Keynes Hayek: The Clash That Defined Modern Economics. She points out that Keynes’s support of government spending was developed in desperate response to Britain’s chronic unemployment in the 1920s and 30s. For his part, Hayek learned to fear government spending because of his dread of inflation, which he had watched devastate his native Vienna in the 1920s. Where you stand depends on where you sit, as they say. But Keynes also feared socialism, and Hayek did not think the state should abandon its citizens to the depredations that flow from fluctuations in economic cycles: “[T]he very necessary efforts to secure  protection against these fluctuations do not lead to the kind of planning which constitutes such a threat to our freedom.”

Christopher Sims and Thomas Sargent were just awarded the Nobel Prize in economics for their work in trying to understand how the economy responds to various kinds of government action. This was work done in the 1970s. They still don’t know the answers. The reason: it’s complicated; individuals and markets don’t always perform predictably. There are just too many variables. “If I had a simple answer, I would have been spreading it around the world,” Sims said.

So, what have I learned? I guess the answer is that I have a better understanding of what the questions are, but not much better idea of the answers. I am confused and ambivalent. I know what I would like--greater economic opportunity for the poor and the middle class (the rich seem to be doing fine, thank you) and a social safety net that catches us if we fall too far--but I’m not sure how best to get there. Long term, the answers seem obvious: educate our children better so they can compete in the global economy; repair our infrastructure; and innovate. Short term, all I can hear is the shouting at Tea Party rallies and Occupy Wall Street.

I doubt that many in the Tea Party have waded through Hayek. They might find him too moderate. From that side of the political spectrum today, there is a lot of magical thinking going on: if we just got government out of the way, we’d all be fine. Yes, if you have your own private police force and don’t need to use the roads much. Otherwise, good luck.

And from the school of thought I now feel closer to--the Nancy Pelosi fringe, as some call it--there are also problems. A good heart does not pay off the national debt. A good heart does not eliminate government bloat and corruption. It is almost as big a fallacy to think we can just raise taxes and everything will be fine as it is to want to drown government in the bathtub.

So, when will we listen to one another; when will we sit down and reason together? If you believe John Kenneth Galbraith or Daniel Kahneman, not soon. In The Affluent Society (another book Chris gave me), Galbraith coined the term “Conventional Wisdom.” He said we all have too much invested in what we think at any given time to let pesky facts get in the way. Only when events overcome us (think boarding the rocket ship to leave an over-warmed planet), do we let go of our cherished preconceptions.

Or, as Kahneman put it in “The Surety of Fools,” in this morning’s New York Times Magazine: “The confidence we experience as we make a judgment is not a reasoned evaluation of the probability that it is right. Confidence is a feeling, one determined mostly by the coherence of the story and the ease with which it comes to mind, even when the evidence for the story is sparse and unreliable…Overconfidence arises because people are often blind to their own blindness.”

That’s my story, and I’m sticking with it.


  1. I'm with you Mac. At least we're starting to realize what doesn't work. For me myself; I've usually been at my most creative when by circumstance, my options have been limited. Maybe an annual spending limit, strictly enforced, would spur the kind of fiscal creativity lacking with our current unfettered spending. Necessity is the mother of invention. And budget ain't a four letter word.

  2. > Only when events overcome us (think boarding the rocket ship to leave an over-warmed planet), do we let go of our cherished preconceptions.

    It's sort of amazing that the events now -- U.A. bank bailouts, mortgage foreclosures, a bankrupt Greece -- aren't enough to overcome us.

    Very nicely contemplative piece.