Bryan Caplan on Hayek, Richter, and Socialism
Jun 28 2010

Bryan Caplan of George Mason University and blogger at EconLog talks to EconTalk host Russ Roberts about two books: Eugene Richter's Pictures of the Socialistic Future and F. A. Hayek's The Road to Serfdom. Both books warn against the dangers of socialism. Pictures of a Socialistic Future, published in 1891 is a dystopian novel imagining what life would be like after a socialist revolution. The Road to Serfdom, published in 1944, explores the links between economic freedom and political freedom and the inherent similarities between communism and fascism. Both books look at the German roots of centralized planning and the nature of the people who rise to power when the State is powerful. The conversation includes discussion of the these topics as well as the rule of law and the amount of state control of the economy in Nazi Germany.

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Explore audio transcript, further reading that will help you delve deeper into this weekā€™s episode, and vigorous conversations in the form of our comments section below.

READER COMMENTS

Donald Trainer
Jun 28 2010 at 12:02pm

The question was posed as to whether there were any examples of truly benign dictators in history. The name that immediately popped into my head was the Roman emperor Trajan. Antoninus Pius could also fit the description as well. Of course, a few good apples doesn’t make up for Nero, Caligula, and Commodus.

Great episode- I thoroughly enjoyed it.

shawn
Jun 28 2010 at 12:59pm

Another ancient with a lot of power that was used well, cited favorably by Adam Smith, would be Solon, though I don’t think he *quite* qualified as a dictator.

If one wants to see how Nazi parties worked with German industry, PBS and BBC did a documentary on the history of Auschwitz, based on documents taken by the Russians post-war and then released w/in the last 15 years or so. IG Farben, a chemical company looking to produce synthetic rubber and fuel, was instrumental in the growth of Auschwitz from a backwater to a major hub of the future planned Nazi state (there were plans showing a private house for Himmler in the planned future town of auschwitz, and details of his furniture and wall hangings). b/c Auschwitz was near large amounts of coal deposits and water, Farben wanted to build a huge plant there, and they would use slave labor from the prison camp to do it (if not necessarily to run the plant itself, though as we can see from Primo Levi’s account of Auschwitz, the Germans didn’t mind having prisoners “work” in rather technical fields).

I can’t say enough about how amazing that Auschwitz documentary is, and how much they found in those documents.

http://www.pbs.org/auschwitz/

Tracy W
Jun 28 2010 at 2:42pm

Julius Nyerere of Tanzania? Okay, caused a lot of suffering by embracing socialism, but then he resigned and apologised when he realised how badly it all turned out.

Shawn BSC
Jun 28 2010 at 4:27pm

Here’s a good intro to Hayek podcast I found at philosophy bites a few weeks ago. I thought today would be a good day to share it.

http://c3.libsyn.com/media/18828/CKukathasmix.mp3?nvb=20100628201715&nva=20100629202715&sid=a813f46dce7b5dfbafdd93a56a3d3267&t=0ce9de2cced2020b33bfe

[Overview page at http://philosophybites.com/2008/05/chandran-kukath.html –Econlib Ed.]

Fred Giertz
Jun 28 2010 at 4:43pm

In regard to dictators who gave up power, what about Augusto Pinochet of Chile? He is vilified for his excesses in the overthrow of Allende, but be eventually oversaw a transition that returned Chile to an elected regime.

Bradley Calder
Jun 28 2010 at 8:39pm

a pretty good dictator might be the current Sultan of Oman. http://en.wikipedia.org/wiki/Qaboos_of_Oman

wbond
Jun 28 2010 at 10:25pm

Enjoyable podcast.

Since the comments section has become a contest to name enlightened dictators, I’ll note Machiavelli’s reading of Livy, and of history in general, that all of the great ancient founders/lawgivers were in fact feared tyrants whose violence was covered by time. The paradigm being Rome founded on a fratricide. The lesson being that an enlightened dictator in the sense discussed is an impossibility. No one enlightened in this sense could ever act cruelly enough to become a dictator. (Although Machiavelli would argue that the founding prophet or lawgiver could in fact be great and start a great civilization, but that it would always by necessity be a violent and criminal beginning).

America is the modern argument against Machiavelli. The founding is in the open and well-documented, flaws and all. It is, in some real sense, the first new country founded based on deliberate choice and not based on force (although that was required for independence).

And the simple maxim of one of it’s greatest and most ambitious elected leaders is “As I would not be a slave so I would not be a master.”

This sentiment underscores Russ’ point and complements Machiavelli’s: there are also no enlightened dictators since the enlightened would not accept being a dictator. In addition, it points to the immorality – and not just the inefficiency – of socialism, viz. that it is the principle of slavery itself: “You work and I eat.”

Pietro Poggi-Corradini
Jun 28 2010 at 11:12pm

With regards to early predictors, Max Stirner was a friend of Marx and Engels and this is how he describes their project in 1848 (before rejecting it loudly). My German is not good enough, but I’m pretty sure ‘ragamuffin’ is an extremely poor choice of translation:

” Let us then do away with personal property. Let no one have anything any longer, let every one be a – ragamuffin. Let property be impersonal, let it belong to – society.

Before the supreme ruler, the sole commander, we had all become equal, equal persons, that is, nullities.

Before the supreme proprietor we all become equal – ragamuffins. For the present, one is still in another’s estimation a “ragamuffin,” a “have-nothing”; but then this estimation ceases. We are all ragamuffins together, and as the aggregate of Communistic society we might call ourselves a “ragamuffin crew.”

When the proletarian shall really have founded his intended “society” in which the interval between rich and poor is to be removed, then he will be a ragamuffin, for then he will feel that it amounts to something to be a ragamuffin, and might lift “Ragamuffin” to be an honourable form of address, just as the Revolution did with the word “Citizen.” Ragamuffin is his ideal; we are all to become ragamuffins.”

This quote is from Stirner’s only book “Ego and its own” (a messy and easily misinterpreted book). Stirner himself was a mysterious character who’s been dubbed an anarchist as well as a predecessor of Nietzsche.

agnostic
Jun 29 2010 at 12:16am

Returning to the podcast awhile ago with Barry Weingast on the differences among political orders, there is no such thing as an absolute dictator. There is always a group of watchdogs whose consent allows the ruler to continue on — once they are sufficiently upset, the ruler is ruined forever.

In an elective democracy, those watchdogs are the citizenry, or voters. The ruler does something to anger them enough — boom, he’s voted out of office.

But the same is true for all rulers, even so-called absolute ones. If he angers the armed aristocracy — boom, he ignites a civil war and will be lucky to stay alive, and then in exile. Even if a more informal ruler like the leader of a hunter-gatherer tribe gets too big for his breeches, the rest of the band will kill him in his sleep.

Rulers, therefore, will only be as benign as their watchdogs will allow them to be. The change over time in how ruthless rulers are has to do with the changing composition of the watchdog group — from an armed, trigger-happy aristocracy to a de-fanged mass of ballot-casters.

[link added–Econlib Ed.]

Bob Layson
Jun 29 2010 at 7:11am

Do socialists begin bad are they corrupted by power? In Hayek’s words why do ‘the worst get on top’?

The answer is that the immediate failure of socialism, as commands replace private pricing and exchange, to maintain existing output must result in mass privation and consequent attempts by much of the population to deal outside the plan on the black market. This presents the planners with the reality that socialism is a voluntary system until the jobs are handed out and the wage goods don’t impress the workers sufficiently to induce self-motivation. The self interest of the worker has to be reduced by the planner to obey or it’s the work-camp or the bullet.

By a natural, in the contrived circumstances, filter mechanism the worst are recruited to replace those whose bourgois inhibitions, aka natural decency and upbringing, will not permit them to do whatever is necessary to preserve the revolution and crush the wreckers.

The worst perhaps truly belive that the communist future will be so good as to justify the means employed in getting there. The worst of the worst know they enjoy the power and the privileges and don’t think beyond that.

Worser still, the planning cannot succeed even if all orders are obeyed. The planners simply lack the knowledge required to give the right orders. Systematic economising of factors of production and the setting up of opportunity-cost-reducing new combinations of capital goods cannot be done without free prices and capital markets.

Free enterprize needs no tyrant indeed it spontaneously arises whenever tyranny is absent, provided there are mutually recognized private property holdings and a commodity money. But ‘conscious social control’ cannot be for long attempted without either personal or collective dictatorship.

In short, under a regime of revolutionary political control on the ‘road to socialism’ the system selects the personalities necessary for its continuation or lapses into something else. Sadly such persons are usually available.

AHBritton
Jun 29 2010 at 12:02pm

Russ,

comments were closed for the crises sectionā€¦ I hope it’s not in too bad form to post it here. I apologize in advance if it is.

One thing I don’t understand about this explanation of the current crises is its narrow focus. By this I mean that it is a much bigger world than the one inhabited solely by those creditors who had some awareness of their bailout potential.

It is famous now the stories of people such as Peter Schiff, Raghuram Rajan, and others being basically laughed off stage when they predicted a collapse in the housing market, that there was an inflationary bubble, etc. If this is just a matter of incentives wouldn’t these reporters and investors (significantly large portions of the population after all were invested in some way or another) incentives be to uncover the truth? Doesn’t an inflationary bubble of this sort require MANY people, not just large creditors hoping for a bailout, to buy into it in order for it to exist?

Isn’t there something to be said for the old irrational exuberance aspect? People behaving irrationally? After all it seems silly to believe that housing prices won’t go down, yet saying so on CNBC a few years ago resulted in chucklesā€¦ where is the rational action or perverted incentives there? Even if these creditors thought they were protected, why did the rest of the market go along with it? Did EVERYONE expect a bailout? Sure, in a way that is what people might call the Fed’s easy money policy, a universal bailout during hard times (Milton Friedman’s prescription), but why wouldn’t people rationally include this in their calculations? Rates were already low and people should have not expected cheap rate forever, right?

Just I few things I was thinking about since listening to your podcast.

BAM
Jun 29 2010 at 6:03pm

Regarding an example of a benign or benevolent dictatorship, I suggest looking to Singapore. It may be more aptly termed a benevolent oligarchy where the government is controlled by a small group of people in power since the early 1960’s. There are restrictions on free speech but as long as one does not criticize the government, the citizens are treated very well and live prosperous lives. The government does seem to really care for the well bring of the citizens.

Christopher H. Orff
Jun 29 2010 at 8:51pm

Dear Russ:

I very much enjoy many of your shows, but I found this one to be in the category of “60 minutes of ideological yammering”.

This is the type of show that is the least informative, and the least influential on those of us who have not drunk the Koolaid.

I would much prefer a show on practical and realistic market solutions to present day problems.

Thank you for doing the podcast. I find it to be, in the most part, informative and thought provoking.

Chris Orff

muirgeo
Jun 29 2010 at 9:51pm

they realized killing people was bad even if Karl Marx said it would be okay as part of the whole process.

Bryan

I think this was just “off the cuff” but did Marx really say this?

John Scott
Jun 30 2010 at 12:28am

Russ,

One of you asked the question, “Has a dictator ever relinquished power voluntarily?”

Lucius Cornelius Sulla used Roman legions to defeat his rivals in Rome in a civil war. He revived the office of dictator (the office was meant to give absolute power to one person for six months to deal with a military threat) and had the senate proclaim him dictator for life.

Sulla instituted a series of reforms meant to restore the republic to stability, then, to everyone’s surprise, resigned the dictatorship.

http://en.wikipedia.org/wiki/Lucius_Cornelius_Sulla

Ralph Buchanan
Jun 30 2010 at 5:17am

Dostoevsky also demonstrated the immoral nature of socialism in his novels depicting its rise in Russia in the late 1800s, The Possessed particularly. Good read if you have time. He demonstrates that the intellectuals require a “man of action” who is willing to perform immoral acts and force change. The result is leadership by sociopaths who care as little for the socialists as for the prior regime (Socialists and Sociopaths like Bootleggers and Baptists).
Ironically, Dostoevsky believed the best prevention of this problem was the power of the czar, an enlightened dictator.
Historically, Dostoevsky had been arrested as a youth for participation in a socialist group. He was literally standing before a firing squad when the czar stopped the proceedings and his punishment was changed to prison. No doubt this colored his views on the subject!

Ralph Buchanan
Jun 30 2010 at 5:34am

I believe Hayek also makes the point that under an existing socialist regime, the worst rise to the positions of power.
Because of the information problem, socialism can’t work. When the central plan can’t work for the people, the people must work for the plan. Those most able/willing to manipulate and coerce others will be the most successful managers in that environment. It is an inherent characteristic of socialism due to its inadequacy as an economic system.

Great podcast Russ! Thanks.

Ralph Buchanan
Jun 30 2010 at 5:41am

Regarding the benevolent dictator/czar comment above: Dostoevsky considered the czar a religious figure per Russian Orthodoxy, more a “divine right” leader than a political dictator.

VA Classical Liberal
Jun 30 2010 at 10:50am

Regarding the Rule of Law, I think Russ and Bryan missed two important points.

First, they spent a lot of time on the idea that the Rule of Law would allow the government to decree that everyone must wear orange jumpsuits, as long as the rule applies equally to everyone. That may be true, but it misses the important point that the Rule of Law is not the only principle that a just law must conform to.

Rule of Law is only one of a much larger bundle of principles. It’s not intended to cover every possible objection or circumstance. Governments must also respect natural rights, limit their activity to their unique areas of competency and, in general, exist “for the people”, not for itself.

Second, they didn’t mention one of the most important aspects of the Rule of Law. The Law must apply to the government, as well as the governed. When the government exempts itself and its allies from its own rules (e.g. DOD exemptions to environmental regulations that apply to private industry and government health care plans that won’t be sucked into the HRC plans), it violates the Rule of Law no matter how predictable or evenly enforced the rules are.

Robert Kennedy
Jun 30 2010 at 1:44pm

One aspect of this podcast that bugged me a bit was the casual references to “socialism”. Both Russ & Bryan used the term casually in a way that seemed to imply that any listener would assume it was bad, like “cancer” or something. I would have liked to have heard more substance. For example, when Bryan discussed the rise of the Nazis in Germany, he said “When the Nazis took over, they took that large government and added more socialism.” like what? what particular policies?

When socialism is discussed, it feels important to make specific references. My guess is that a majority of folks would say they were against “socialism” but then favor various policies that are socialistic. Someone opposed to socialism might favor government deposit insurance or government managed interest rates or price controls on payday loans or any other policy that promises to “protect” us.

emerich
Jun 30 2010 at 7:12pm

Economists are far more impartial and knowledgeable than journalists, needless to say, but I thought someone might have mentioned in passing that the socialist core of Nazism, and its relationship to other socialisms as well as liberalism, was thoroughly and absorbingly explored in Jonah Goldberg’s book, “Liberal Fascism.”

Dead River
Jul 1 2010 at 9:14am

I’m interested in socialism and free enterprise and motivation. It seems crude that free enterprise relies on private gain (greed) for motivation. What are some other motivators? Religious fervor — It’s no wonder the Soviet system had problems after trying to stamp out both private gain and religion. Social recognition — In the military elite units are motivated more by the pride of being in the unit than by greater pay. Habit — In Cancer Ward by Aleksandr Solzhenitsyn there is a hospital worker who has resigned herself to doing more than her share of the work while co-workers slack off. Fear — I think it is widely recognized that positive motivators work better than negative. Other ideas?

Seth
Jul 1 2010 at 12:52pm

The discussion about how Germans tended to believe in the rules while Russians tended to bend them, reminded of something I heard from a woman who came of age in West Germany in the 70s and 80s.

After taking a recent bike trip Germany, I asked her what the former East Germany was like some 20 years after the wall came down.

She basically said the invisible hand still hasn’t taken root there. She said, “they still follow the rules.”!

Russ Roberts
Jul 1 2010 at 2:17pm

Dead River,

Capitalism does not rely on greed or selfishness. It relies on self-interest. They are not the same thing. Everyone cares about themselves.

No alternative exists for a economy of any size.

In an economy bigger than the family or a small village, there isn’t even a measure of the common good. We are all different. So asking people to be motivated by the common good is not meaningful.

In some settings–family, war, religious communities, other motivations play a role. But even in those settings, self-interest matters a lot. It’s why they have to shoot deserters.

And in capitalism, normal people get satisfaction from producing products that benefit others. You can think of that as altruism or self-interest. But it has nothing to do with greed.

John Berg
Jul 1 2010 at 4:54pm

Russ, you wrote, “Capitalism does not rely on greed or selfishness. It relies on self-interest. They are not the same thing. Everyone cares about themselves.” also includes the store owner who returns the change the last buyer forgot.

Your podcast forget the lab-experiments of side-by-side experiments of Socialism with Capitalism in North-South Korea, North-South VietNam, East-West Germany, and other similar ones.

You two didn’t give sufficient time to the fact that the “rule of law” requires the law to exist prior to the acts judged. Nor did you two give the proper amount of time to the complex and intricate set of rules assembled into the US Constitution which, of course, is lost if the Constitution is changable daily.

John Berg

John Berg
Jul 1 2010 at 10:59pm

More to previous note:
The US Constitution is certainly law but more in that it was a contract among multiple sovereign entities to permit balancing among their various properties. The contract includes a list of enumerated powers that the Federal entity is permitted and all remaining powers are retained by the contracting entities. That is why under no circumstances may one argue that it is more efficient to give a new power beyond those enumerated to the Federal entity.

Particularly dangerous are laws that state a desired consequence without providing specific actions in that law which will elicit that consequence and then leave it to a agent to define the specific actions.

John Berg

Montana Atheist
Jul 2 2010 at 11:10am

This pod cast came very close to Glenn Beck territory. Ideological yammering indeed. The Nazis and the communists at one time shared an ideological orgin, but that is not enough to say that they are one and the same. Just because Nazis shared the attribute of top-down governance doesn’t mean that they are the same. It is very important to note that I do not disagree with Roberts per se, it’s just that Roberts is smarter than this podcast šŸ™‚ .

John Berg
Jul 2 2010 at 2:11pm

More on Russ Robert’s quote:
“Capitalism does not rely on greed or selfishness. It relies on self-interest. They are not the same thing. Everyone cares about themselves.”
And more specifically about the “ideological yammering” in this podcast.

Dave Ramsey, who advises on personal financial planning, describe a person, “with the heart of a teacher” as the correct person from which to seek advice. Ramsey seems to mean a person who seeks to guide the thinking of the advisee with words that compels the listener to arrive at truth comfortably, without the sense of being talked down to by someone smarter than he.

John Berg

John Kurywchak
Jul 2 2010 at 9:31pm

Mr. Caplanā€™s fast-talking enthusiasm for Richter was infectious. His introduction to Richterā€™s book was a surprise considering it was not spoken of in the podcast.

What a pleasure this podcast was for me. I am about half way through ā€œSerfdomā€ and just finished ā€œPictures of the Socialist Future.ā€ I think that reading them together works very well.

Richter certainly gets kudos for his prescient story but Hayekā€™s short, dense warning to England (and America) is far more valuable. Why didnā€™t I ever know that England imposed the Control of Engagement Order of 1947? [ā€œEconomic Dictator Sir Stafford Cripps holds, with all the sincerity of his intense nature, that the net result of state planning is “to increase the liberty of the ordinary citizen.” Churchill holds that the net result is to multiply plan upon plan and control upon control, whether the planner intends to do so or not.ā€ Time Magazine, Nov. 10, 1947]

It is one thing to read Richterā€™s dead-on fiction, quite another to read Hayekā€™s chilling report.

Mr. Caplanā€™s comments that Richter is much more readable than Hayek, provokes a podcast with him and Bruce Caldwell, editor of the most recent edition of ā€œSerfdomā€, and author of its wonderful 32-page introduction. Although I really have to think deeply about every single Hayek paragraph, he wrote each in English, as opposed to the very good translation into English of ā€œPictures of the Socialist Future.ā€ Or am I wrong by making this statement?

It seems to me, from some of the comments to this podcast, that more understanding of socialism, democracy, government planning, and the rule of law must occur. Government with little ability to centrally plan the activities of their citizens does not lead to an unrestricted greedy pursuit by these same citizens.

Ralph Buchanan
Jul 3 2010 at 2:48am

Not greed, but self-interest in the sense of looking out for myself and my loved ones. I want what’s best for my family. I work hard to achieve that, but there are moral boundaries I will not cross under normal circumstances.
In the meantime, I perform a service that others find valuable, and they are willing to pay me. They are also performing reciprocal services that I enjoy. Our individual self-interests are compatible in a free market economy – a non zero-sum game.

When government becomes the provider, my self-interest is in direct conflict with others’ in a zero-sum game. Additionally, when government is the provider, distribution, picking winners/losers, becomes a political decision, and is subject to political corruption and rent-seeking.

Socialism is inherently immoral, while free markets encourage cooperation and responsibility.

John Berg
Jul 3 2010 at 2:13pm

More thoughts after a second hearing and reading earlier comments.

Dennis Praeger, a talk show host, blamed our current political problems on our generation failing to teach this generation the proper appreciation of our “exceptional country.” It made me think of the Kondratieff cycle (http://kondratyev.com/reference/theory_explained.htm) which suggested a recurring cycle of one generation accumulating and the next generation dissipating the accumulation. (This generation can even consume their children’s and grandchildren’s accumulation.)
In the course of the discussion it was noted that large government with heavy regulatory costs made necessary large companies to absorb these costs. Yet the discussants note that Socialism is the avoidance of competition. Of course capitalism also attempts to minimize competition. Remember the days when economists argued for reducing US corporations by merger into three that could compete with Japan? And one could argue that corporations might cooperate with socialists to gain a competitive edge.

Caplan suggests that Germany produced socialism of the right (Nazis) and the left(Marxists). For a closer examination of socialism in the US, see _Liberal Fascism_ by Jonah Goldberg.

A useful discussion of the German military industrialzation from before WW1 into WW2 exists in the form of interesting novels, the Lanny Buddy Series by Upton Sinclair.

I found interesting Caplan’s story of the two 1940s concentration camp victims: one in Russia; the other, in Germany. Which was worse? The Nazis because they believed their ideology and sincerely followed it but the soviets would bend the rules.

Are subsidies to industry from government for “desirable social ends” a form of a priori bailouts? Is there a way to encourage competition among entrepenuers to risk
their capital to clean up the Gulf of Mexico?

John Berg

MikeRINO
Jul 4 2010 at 1:47pm

Thanks for the laugh.
Turning the Capitalist Mantra into a Socialist tenet:
“You Work So I Eat.”

That’s Rich.

Amos
Jul 6 2010 at 6:12pm

The Logic of Annihilation gives a pretty good run-down of the Nazi control over economic life.

The idea of a Collectivist Right is legitimate, it’s just not the Nazis. If what made the Nazis “right wing” was racism and nationalism, I’d love to hear which ostensibly international socialist country did not rely on race and nationalism to further its interests. You’d better pack your lunch, because it will take you a while. The Cambodians were not even willing to cut the Vietnamese or Chinese – they’re benefactors – any slack when it came to implementing the true Communist way.

The Russians did not call WWII the war for international socialism. They called it the Great Patriotic War. They still do.

Comments by round-eyed gringos are welcome. Yes you, you yanqui white men. šŸ˜‰

++

Right-wing collectivism was with us before Smith. Indeed, that’s what the enlightenment was reacting to. You find right-wing collectivism in monarchies and theocracies.

People who want free markets and individual rights and liberties (not individual entitlements) are not right-wing. They’re centrist. They do not want to steal from you, and do not want you to steal from them. If you wish to form a collective of the willing and go starve and shiver in the dark, we will not stop you.

AHBritton
Jul 9 2010 at 1:00am

Russ,

I’ve heard mention of this elsewhere in more conservative circles, but I am not to sure I understand what is so “alarming” about the White House’s deal with BP to set aside billions in compensation for those affected by the oil spill. It would be one thing if BP did not agree to the deal and the White House simply froze the banks assets extra-judicially, but that is not what happened as far as I can tell.

What is alarming? It seems to me the President most likely laid out some idea of what he wanted from BP and they agreed and/or negotiated out an agreement. I am SURE if they wanted to fight it they would not have been forced to pay a penny, and if they were I am not terribly concerned that they would not receive best legal representation available in order to fight it.

Sure they might have felt “pressured” in some way to agree to the White House’s offer do to feelings of possibly bad PR and if they did not, but so what? People make a big deal about (was it the attorney general?), or some other person who could possibly be involved in prosecutions later on being there. Even then so what? Why should BP be protected from feeling pressured by bad PR? Why does it matter if a member of the White House staff is there who might prosecute BP? Sure some form of extra-judicial deal could have been worked out, or something illegal COULD have happenedā€¦ but I have yet to see any evidence that that is the caseā€¦ and again, I’m sure BP has plenty of representation and if anyone would be able to defend themselves through the judicial system it would be them.

Finally, the federal, state, and local governments in the Gulf region have had to expend money and resources in order to clean up and deal with fallout from this oil spillā€¦ money they should rightly be compensated for (I hope you would agree) so that they can bare the full cost of their mishap and leave no externalities for the community to bare on its own (if possible).

Now these people and governments might very well get their compensation in a timely matter, but this isn’t always the case. Exxon’s court case involving compensation to litigants was only settled in 2008, almost 20 years after the spill, many of those who were asking for payment of damages DIED in the process of waiting for their claim to be awarded (somewhere I read ~6,000 people). These people spent the last 20 years of their lives attempting, and never receiving, what the court eventually said was rightfully theirs (after lowering and capping the damages I might add).

I don’t claim to have the answers, a speedier judicial system? tighter regulation? etc. but I think it is brash to off-handedly comment on somethings “alarming” and detrimental nature without seeming (to me at least) to explain why while also ignoring many other “alarming” aspects of incidents such as this.

It seems to me many people are just having knee-jerk reaction, assuming something nefarious took place just because money exchanged hands. If this is not the case Russ, please let me know.

P.S. As a show recommendation I think you should do and episode focusing on the Gulf Oil spill in particular and negative externalities (possibly also tragedy of the commons) in general. I honestly have yet to hear a compelling libertarian take on the issue.

Russ Roberts
Jul 12 2010 at 4:05pm

AHBritton,

The reason it is alarming is found in your attempt to justify it. You are guessing at what options were available to BP and the President and how the negotiation turned out. We, the people on the outside, actually have no idea what happened. We don’t know if because of past BP political contributions, the President cut them some slack, or if he was especially tough on them because he wanted to look tough. There was no transparency. The amount was arbitrary. The distribution of the funds is arbitrary. This is no way to run a democracy. I had the same complaint when Bernanke and Paulson cut a sweetheart deal for JP Morgan in March of 2008, guaranteeing the assets of Bear Stearns so JPM could acquire them on short notice with no other suitors. Both are alarming to me. They involve the use of government power in an ad hoc, arbitrary and non-transparent way. Not good.

SG
Jul 13 2010 at 9:31am

Thank you for the this amazing podcast. There is just one little mistake. His name is Eugen Richter and not Eugene Richter.

http://en.wikipedia.org/wiki/Eugen_Richter

Lauren (Econlib Editor)
Jul 13 2010 at 10:21am

SG cites Wikipedia in noting the following:

His name is Eugen Richter and not Eugene Richter.

Thanks. There are evidently alternate spellings of Richter’s first name, quite likely due to translation changes.

The edition on which people are commenting in this podcast is the English translation. Richter’s first name is spelled “Eugene,” with a final “e,” throughout that work. (I own a physical copy of the edition and can vouch for that.)

The original cover page for the 1893 edition is online at http://mises.org/books/socialisticfuture_richter.pdf and for the 1907 edition at http://files.libertyfund.org/img/295/0160_TP.jpg. “Eugene Richter” is the spelling used in both.

Since Richter lived until 1906, it seems unlikely that he would have agreed to the 1893 translation unless he approved the spelling of his name as “Eugene Richter.” It’s simply an alternate spelling.

Although “Eugene” may indeed be the Anglicized spelling, it seemed appropriate to use that spelling in conjunction with the podcast because it matches the various online copies of the translated work.

Sam
Jul 16 2010 at 2:57am

I was just reading Orwell’s Homage to Catalonia, parts of it really bring home Caplan’s remarks about arbitrariness; it can be a life saver when the rules are bad. This is why Orwell saw Spanish totalitarianism as hopefully taking a “more loose and bearable form” than totalitarianism elsewhere.

Maybe it is also why we shouldn’t despair so much when we see the ‘rule of law’ being trampled in some misguided attempt to do good; better to have people wanting the government to do silly things that will supposedly stop some perceived injustice (even if, in fact, the gov actions make things worse), than have people willing to overlook injustices. I guess what I’m saying is, don’t worry too much when “our instincts and sentimental yearnings” are doing damage to the economy, better to crush the economy than our sentimental yearnings.

TGGP
Jul 19 2010 at 1:32am

On Nazi economic policy you can freely download from mises.org Gunter Reiman’s “The Vampire Economy” from 1939.

It wasn’t just Jews who were kicked out of business. “Aryanization” included other ethnic minorities like Czechs.

Orwell was among the people who embraced something like a nationalist socialism during the war. Some English libertarians criticize his writings on that grounds here.

Charles Kenny argues that communism was not so bad for economic growth. I have asked Caplan to comment on that, but he hasn’t gotten around to it. Perhaps too ridiculous to take seriously?

Dan Klein supported the “code word” interpretation in the Cato Unbound edition on Hayek. I’ve defended rule-of-law itself, but I’ve added enough links that I won’t direct you to my blog post.

Comments are closed.


DELVE DEEPER

About this week's guest:

About ideas and people mentioned in this podcast:Books:

Articles:

      • Communism, by Bryan Caplan. Concise Encyclopedia of Economics.
      • Socialism, by Robert Heilbroner. Concise Encyclopedia of Economics.
      • Fascism, by Sheldon Richman. Concise Encyclopedia of Economics.
      • Marxism, by David L. Prychitko. Concise Encyclopedia of Economics.
      • Friedrich A. Hayek. Biography. Concise Encyclopedia of Economics.
      • Joseph Alois Schumpeter. Biography. Concise Encyclopedia of Economics.
      • Milton Friedman. Biography. Concise Encyclopedia of Economics.
      • James Buchanan. Biography. Concise Encyclopedia of Economics.

Podcasts and Blogs:


AUDIO TRANSCRIPT

 

Time
Podcast Episode Highlights
0:36Intro. [Recording date: June 22, 2010.] Two books, slightly older than our usual choices: Pictures of the Socialistic Future [PSF], by Eugene Richter, 1893, dystopian novel--opposite of utopian novel--world under socialism; and F. A. Hayek's The Road to Serfdom [RS], in the news recently. Start with PSF. Paints a very bleak and macabre picture, does it in a humorous and ironic way. Heard about the book about 20 years ago from Ralph Raico, historian at SUNY Buffalo. Mentioned book written long before the Berlin Wall about how some guy foretold that the socialists would take over Germany and start shooting anyone who tried to flee the country. Never looked into it too much. Anniversary of the fall of the Berlin Wall, looked up the book; amazingly prescient story. Without spoiling too much of the plot, the author imagines the challenges the state would involve in terms of occupation, savings. Amusing section where the state makes worthless all savings accounts, because if people accumulate savings, then there is the possibility of exploitation--because after all, when you have savings, you have capital, and that's the root of all exploitation. What else? Most gripping part: when the socialists take over, very quickly have the narrator--a rank and file socialist initially very excited about it--very quickly there is an exodus out of Germany. Want to get to Switzerland, England, America--anywhere that socialism has not taken hold--and then, almost immediately the socialist government puts up the border guards and starts shooting people who try to flee. The narrator, very early on, defends this by saying if this were a war, we wouldn't let young men run away and shirk their duties. Now society is being run for the benefit of all, we are not going to let talented and ambitious people run away. Entertaining: descriptions of efficiencies the new socialist state puts in place: cookshops--places you can get your daily meal, everybody eats the same thing because it's efficient. Wealth is supposed to go up with the increase in efficiency. Shorter working hours; quickly find that wealth goes down because of the incentive problems. Who is going to do the hard or unpleasant jobs--why is anyone going to try any harder than anyone else? From the point of view of the narrator, much of this is desirable because the world was previously unequal. He starts off defending it: transition period, people are going to have the old habits. Depressing: the book reminded me most of The Gulag, by Anne Applebaum, talks about the early days of communism in trying to get people to work hard, how frustrated the bosses, bureaucrats, were with people's lethargy. Ironic that as capitalism in some form has returned to the Soviet Union, apologists for capitalism say that it's handicapped by the years of corruption. Richter book: he has his own theory of what would go wrong or what was wrong with socialism. He wrote the book in 1891; translated to English in 1893. Not an era we associate with socialism--1848 was the point where Europe starts getting interested in these ideas. He is writing the book after the repeal of Bismarck's anti-socialist laws after the First Empire, first breakthrough of Social Democratic Party of Germany. Never actually banned by the Kaiser, but were harassed. By 1890, the laws were allowed to lapse, large number in Parliament. Richter offers an alternative view of what went wrong with socialism. In Introduction to book, Lord Acton line that "All power tends to corrupt, and absolute power tends to corrupt absolutely." One story is saying the socialists are nice people, but power is so corrupting that even these noble people turn bad. Another story, owing to Hayek in RS, chapter title "Why the Worst Get on Top": not so much that it makes good people bad, but that the attracts sociopaths, sadists, bad people because they are the kind of people who are freed of moral compulsion. Once you take away financial incentives to do well, then all you've got left is the lash. Richter presents a third story: born bad story. The socialists were never nice people, always on the edge of sociopathy. Very same socialist people, you hand them power and they are eager to go and do terrible things. How does this fit with the idealism?
9:51Richter: they are idealists, but their ideal is totalitarian. Deluded zealots who sincerely believe in their cause but their cause from the outset is one that involves doing terrible things to people. Consistent with Lenin, Castro, people who you could have believed and many did believe were idealists and altruists, but they were quick to destroy and kill. Very often people assume that if you are not corrupt, then you are good. So Stalin, for example, by all accounts lived an extremely modest life, slept on a cot; but he murdered millions of people. Someone who enjoys running other people's lives. Podcast with Bruce Bueno de Mesquita on King Leopold; Bruce raised the observation that Leopold in Belgium, respected leader of his day; given lots of power; in the Congo his agents murdered a lot of people and he is not respected. Who is the real King Leopold? He had no constraints in the Belgian Congo; despot. Is there anyone in history with anything close to absolute power who has not been a despot? We use the phrase "benign dictator"--not gloriously loving, but benign. All the leaders who have had something close to absolute power were corrupt beyond words. Is there an exception? Confirmation bias? Want to think about that. Gordon Tullock: transition from absolute monarchy to parliamentary monarchy in Europe. His story--got in person rather than in writings--because these were hereditary monarchies, eventually just by luck you wound up getting some people who are not so power hungry and who were voluntarily willing to give up some of their power. You might say that probably by then they weren't absolute monarchs anyway: by law they were but in practice probably not. Would look at some of those transitions. In a modern dictatorship where you have to fight to get to the top, those who get to the top have to kill; whereas in a hereditary monarchy, you actually do eventually have a chance of getting lucky. King Leopold situation: one dividing line people make between sociopaths and simple murderers is that sociopath doesn't mind doing horrible things to people who are well known to him. Stalin a sociopath in this sense; Hitler really was not. Stalin enjoyed putting the wives of people he worked with in prison. Hitler, while he was willing to do things to millions of strangers, with people he knew, he really had to work himself up. The decision made to kill Ernst Roehm, he spent several hours trying to convince himself it would be all right. Probably similar for King Leopold--easier to kill people far away.
15:08Back to the Richter: he has a theory of who would be in charge, on top. What is fascinating about both the Richter and the Hayek books is you forget the emphasis on Germany. We think of Germany from 1870 on as Prussian oriented, militaristic world, dominated in the early part by Bismarck. Well known by most folks that Bismarck pushed liberal socialist policy such as social security--accident insurance. Judgment of most historians is that he did that for pragmatism; they often add that it took other civilized societies decades to catch up to what Bismarck did. 1870-1900 period, roughly. Hayek deliberately avoids talking about the Soviet Union. RS written in 1944, in the middle of WWII, when the Soviet Union was ally of Britain and England; he deliberately chose Germany. First, Germany was our enemy; he was worried about this paradoxical result that we were fighting Germany but adopting many of its goals and methods. Second, he argued that the roots of Nazism were of course German; many of the intellectual ideas that paved the way for Nazism were becoming easily adopted and believed in. Easy to forget. Karl Marx German, even though he was writing in England. Social Democratic Party of Germany. Hard to imagine--truth is that before the split of the Russian socialists into the Bolsheviks and Mensheviks, they were the Russian Social Democratic Party. Today we think of social democracy as being the alternative to Marxism, Leninism, communism; but the original name of the party that Lenin belonged to was the Russian Social Democratic Party, a Russian imitator of what they were doing in Germany. Question for Richter and Hayek: both worried about state socialism, not the mixed economy of today. Laissez faire elements, but you don't have the heavy hand, government assigning people to occupations, setting all prices, etc. Did the Nazis do that? Yes, the communists tried to run the whole economy from the top down. The general view of the Nazis is true they were the National Socialists--but did they run the economy? They did. After WWI, the Social Democratic Party of Germany split into two factions: one became the Communist Party, and the other became the ancestor of the Social Democratic Party as we now know it. Both factions were still Marxist parties. When the Nazis took over, they took that large government and added more socialism. Not all the way to socialism, but there had already been a large expansion of the state. The main difference between the German Social Democrats and the Communists was primarily what are you going to do with agriculture? The Social Democrats and the Nazis decided they weren't going to take the peasants' land away from them because it didn't work out very well when Lenin tried it and then when Stalin went ahead and actually did it because there was a tremendous decline in productivity. In terms of industry, not a total takeover, but the Nazis expanded it further. Defense industry; new government industries built up. The way often described--may be apocryphal--interview with Herman Rauschning, book on Hitler Speaks, conversations with Hitler and wrote them up: We don't need to take your cow so long as we own you. Who cares about whether we actually own the firm in name? So long as we have complete control over the people running it, that's good enough.
21:22From 1933 on when Hitler took power, the proportion of the economy devoted to the military grew dramatically. Germany in a wartime economy, with a lot of top-down control. Soviet Union, too--so much industrialization was geared toward the military that a better term might be militarization. Building a modern army. How many blue hats, cars of this size, secondary to the guns. A lot of corporate capitalism going on there, probably--large industrial families of Germany--not a highly competitive industry. If you wanted to stay in business, had to stay friends with the Nazis. Price controls: extensive. Book, Hitler's Social Revolution: social programs, price controls, other regulations. Social Democrats took Germany quite far into socialism; Nazis then extended it further. Irony: People think the Nazis are right wing, think they are going to be free market; but in fact they were not. Wasn't so much about the role of government, but about the role of the nation: What upset the Nazis about the socialists wasn't the socialism but the internationalism, saying workers of all nations are brothers and should rise up. The Nazis: No, Germans of all classes are brothers and we should band together against other nations. And don't tell me we fought WWI for nothing. Which they did--we all did. Distressing thing. Entrepreneurship: ability to start a business. Schumpeter, idea of creative destruction, opposite of top down approach; bottom up. In communist Russia, starting a business had to be a black market, underground activity. What was it like in Nazi Germany? As long as you were not a Jew--and Jews were one of the most entrepreneurial groups before Nazism--you could start a business. There was still bankruptcy. A lot of the Nazi program was protecting failed business models from competition. If you read the original Nazi platform, there were planks against department stores, chain stores. The Nazis were the original anti-Wal-Mart, if you want to be provocative. They didn't shut them down unless they were Jewish stores, but there were a number of penalties and taxes to try to keep your old Mom-and-Pop stores afloat.
26:00Turn to Hayek. One of the themes of RS is competition. Hayek's view of the alternatives. Friedman is "free to choose" but Hayek would point out that if there are not a lot of choices the power of choice is not as important. For Hayek, alternative to socialism was very much freedom to choose: freedom to choose who you bought from, competition among people trying to make you happy, setting prices, places to work. Saw socialism as a monopoly: state control over who you work for, how you get paid. Hayek also concerned about political competition as well--one-party state, great way to make sure you get bad policies and keep them. RS often gets parodied--and Hayek very upset about this--as well, if you take the first step toward socialism, it's inevitable that you will turn toward a totalitarian state. That was not what he said. Sometimes in Hayek there are sentences that contradict the main thesis; he is not someone who tries to make sure that every sentence is perfectly consistent with every other sentence in the book. Overall, he tries to avoid making hyperbolic claims. He is concerned about a moderately slippery slope--once you get going, if you don't make an effort to stop, then you may indeed eventually fall off the roof. A lot of people say he was wrong--we haven't gone to socialism. Forewords, 1976 edition: Well, yeah, I was right because people listened, not necessarily to him, and we drew back. Assessment of England and the United States? After WWII, England went very socialist; United States never quite so far. Death of 1000 cuts. By 1945, mankind was up to the edge of the abyss. World of 1984. Mankind pulled back from the abyss, managed to avoid mutual nuclear annihilation, avoid going down totalitarian route. While the official ideology seemed like socialism was the way to go, common sense got in the way. History of German socialism: when was the moderate faction of the Social Democrats--what happened to them? In the 1950s, wrote a new platform renouncing Marxism, saying they favored a free market economy. Communism in East Germany--want to make sure we don't go there, put fences around the idea. The most awful things behind the iron curtain, collapse. Jim Buchanan, colleague at George Mason: when I look to the future, I'm a pessimist; when I look to the past, I'm an optimist. Look at the past, a lot of times you would have been scared; 1945. Franklin D. Roosevelt more state controlled; legislative time bombs. Original impact of social security trivial; but 60 years later, enormous effects; add Fannie Mae to that, established 1938; he was against that as governor--said it was a bad idea, against FDIC. But he put in Fannie Mae because the housing market was struggling so much. Upcoming podcast with Arnold Kling. Put in Fannie Mae, 7 years later it blows up. Podcast with Scott Sumner--argues world became more liberal, private property, lower tax rates. In Scott's world, the glass is half full. Outside the United States, the world looked at the data; they saw what happened in East Germany. No regression you could run. Not only was socialism not delivering the goods, it was an appalling experiment. Could argue that from the 1980s on, as the wall fell, the whole debate is over. We won--freedom. Richter's worries; Friedman's first chapter, very Hayekian, in Capitalism and Freedom, on inability of economic freedom to exist with political non-freedom. Could argue that the world of 1950 looked at this and it's over. History lasts a long time. For generations that actually lived through it, it's very unlikely you'll persuade or change their minds that what they saw was terrible is actually good. Eventually, those people die; next generation only hears about this in books. Don't see it with their own eyes. A lot of people in the United States now who vote now have no memory of what it was like. Some other place, some other time, we'll run it better.
35:48Ask the question differently. Could think about different ways to think about top-down government. Could think about the size of government; the regulatory influence of the government, nanny state; could think about social welfare, things people spend money on that reduce risk or variance in life. Scandinavia--Sumner argues and a lot of people agree--they have a lot of welfare spending, but they have a lot of free market enterprise opportunities there. High tax rates--hard to generate venture capital industry. All these different ways to measure how free a country is. Using those measures, how would you assess the trend line in the United States or the rest of the world? In America, way up for demographic reasons. New programs adopted. In terms of social welfare spending, way up that government is going to get bigger unless there is some major effort made to stop it from getting bigger. Changes in legislation right now are amplifying rather than dampening these demographic effects. Government ownership--don't see much change. Short run change--government owning in auto and financial industries. Don't see that as long run change, but it hasn't gone away yet. As a percentage of GDP, probably isn't going to be enormous. Implicit ownership by government--may end up acting like state industry, government an active partner: in the past you've come running to me, so now you have to do as I say. Total spending going to go up. In terms of regulatory: deregulation, price of entry of industries, environmental industry; labor market more about lawsuits than regulation per se, making it easier for workers to sue, more likely lawsuit will succeed. Amount of paperwork--impression is that it's harder to start a business now that has employees than 30-40 years ago. Easier to start your own business--for technological reasons, not so much for regulation reasons. Internet and nature of economy changed; opportunities for self-employment now available. Regulation; plus, as soon as you hire employees you have to worry about getting sued. More the second. Paperwork you keep in human relations division is about making sure you can defend yourself if you get sued. Also about compliance. Compliance--specialization. A lot of consultants who will do your Sarbanes-Oxley compliance for you. Over the last 20 years, easier for large companies to avoid competition because they can outsource these costs and see it as overhead, whereas smaller companies can't do that. Industrial organization: if you want to have a lot of small firms, the worst thing you can do is impose a fixed regulatory cost. Increases the size and reduces the number of firms that can stay in the market. Certainly that's true of pharmaceutical regulation--if you want to be in business you have to be a very large firm. Small firms, but they are not in the manufacturing business--they are in the idea business. Get purchased by the larger firms. Hayek was very worried about competition. He's not an anarchist, but in the RS, willing to see government in anti-pollution, public externalities; willing to stomach government in policy and regulation to increase competition--if it could do so. RS is a theoretical treatise--we could imagine the government could do this. What's striking about the book--even though state socialism not very attractive to most people, backlash recently, the romance of socialism is very much alive. At one point, Hayek says we're all socialists now. Politically very much the case. Capitalism, free markets: Difficult for a politician to avoid the idea they can make it better. Probably are a lot of politicians who do think that, but hard to make a good case. One of the most effective ways to argue against doing something about global warming is to say other countries aren't doing as much. More rhetorically effective to say China isn't doing its fair share than to say it's not effective and won't do very much. For the politician who doesn't want to do anything, blame the nations that aren't doing anything. Fairness argument. Dodging the main issue, raising a distractor issue. Sophist. Obvious that's what the guy is doing, but do I want to go and call him on it? May be the only way he can go and prevent worse things from happening. Happens on both sides of the political fence. Fan of truth. Often willing to say let's do it anyway, even when the consequences are not good; but when see other people trying to achieve good consequences but not as forthright--does honesty require me to say something now, or are there other areas where I could be more fruitful?
45:54RS: Rule of Law. Somewhat elastic concept. How are we doing in terms of the trend? Hayek talks about it. Critics in New Individualist Review--if you listen literally to what Hayek says, it seems like if you had a rule that says you have to wear a long jumpsuit every day and all men have to serve in the military from the ages of 12-80, that would satisfy the rule of law because it's general, there are no exceptions. Not arbitrary. On the one hand, if you read Hayek literally--and he does say things that imply this--sounds terrible. Why would anyone be interested in it? Think what he is getting at is not so much what he said but what he meant to say: the rule of law is this code word for not only do we have regular laws but the laws have to be reasonable ones that don't persecute people and that give people a reasonable amount of respect and latitude to live their lives. This is what law professors have in mind: the law has to be reasonable. Hard to define. Ideally we'd be more precise. What reasonable Englishmen would have gone along with for the last 100 years. The other direction is that just the reasonable is unreasonable. Hayek worried about predictability. But Nazi Germany was a fairly predictable society in terms of the rules. They really did follow them. Interesting lunch with elderly Polish man sent to slave labor camp when Poland invaded by the Russians. His brother was captured by the Germans, suffering in a German slave labor factory. All six family members amazingly survived the war. Which was worse? The Germans definitely worse. Why? Because they believed it and they followed the rules. The Soviet people--when they got off their train in Siberia, the Russian women wept for the children, poor Polish children; ordinary Russians felt like they were in the same boat in some sense. Terrible rules, but willing to bend them. The Germans believed in their government, and even when they didn't believe in their government, they believed in the rules. When the rules are terrible, you need some arbitrariness to stay alive. We pretended to work and they pretended to pay us--that was post Stalin. Under Stalin, the actual amount of work people did was tremendous. Long hours, even if the output wasn't good. Only after Stalin died, largely emptied out the Gulag--95% of prisoners were sent home--but basically the Gulag was for terrorizing critics of the government rather than for terrorizing workers who showed up a few minutes late. Under Stalin it really was to put the fear of God--or the fear of Stalin--into every person in the Soviet Union. Stalin was God.
50:52The reason Hayek was interested in planning--and a terrible misunderstanding of him to think he wasn't into planning; in RS what he means is government planning, state, top-down planning. Of course, individuals plan constantly. When he talks about the rule of law, he is talking about an environment of contracts, property rights, expectations that allow individuals to use their knowledge, skills, circumstances of time and place to plan for the future--for their business, education, economic activity, travel, whatever. Emphasizes the importance of the rule of law, worried about the unpredictable side of it. Everybody wearing an orange jumpsuit would reduce your ability to wear the green outfit you planned. Extremely important point, though there are reductio ad absurdums on each side. Bad or evil laws. But to take risks, to innovate, requires certainty--no certainty, but certainty about the political, regulatory environment. If you think there marginal tax rate will double, or there will be a Value-Added Tax (VAT), or the government will decide you are not doing a good job. Interesting case right now--the oil spill in the Gulf, where British Petroleum (BP) pledges a $20 fund for restitution. Why $20 billion? Why administered by Kenneth Feinberg--fine human being as far as we can tell--but nothing to do with the rule of law. Alarming. Not so much the lack of absolute certainty, but the increase in the probability that something like this will happen. Anti-Austrian point. Austrians sometimes have some philosophical objection to talking about probabilities. But in the real world, probabilities are all we have and all that we need. It's not that businesses need certainty about the rules, but a reasonable amount of certainty. The concern is not that we've gone from zero chance of these things to some positive probability, but that we've gone from some lower probability to some higher probability. The more likely it is for some strange decision to be made that is unprecedented, the worse it is for businesses to be able to make plans. Don't undersell businesses; but there comes a point where it gets a lot harder. Consumers pay the price. The business itself, if it's no longer profitable, will just go away. Happens on the other side of the government equation. Clean energy program, where its duration is uncertain--might last for two years and then drops out of the budget certainly discourages people from undertaking those programs. That's one reason you want to let prices take their normal path. But uncertainty about that, too. Is the finite nature of fossil fuel going to encourage innovation today to find alternatives, the answer is it depends on how fast we use it up and what the price path is. Very uncertain. What is more important to think about is government creating a precedent that is very hard to take back. Around 1980, the government of Iran under the Ayatollah confiscated property of people who fled the country; then 20 years later they said, sorry, and they could have it back. You can imagine how many people got on the first plane back to Iran and reopened their business--not very many. In many cases, if you set a precedent, it changes the way people think about things, and even if you bend over backwards, many things are hard to take back. Like threat to kill yourself hard to take back--people around you say you said that once--will you ever do it? Don't know; can't go back to the place where he never said it. In the United States, some examples of things that were unimaginable that are now imaginable? Troubled Asset Relief Program (TARP) and the bailouts--really hard to take back, so much bigger than anything that happened before; very different from FDIC. For FDIC, first they set up some rules. For TARP, something happened and then there was a big bailout, which the government in no way promised or suggested they would to that. Now, if something like this happens, it may happen again. Pretty hard to go back. As long as I live, if the stock market goes down by 20% over the course of a few weeks, I'm going to be thinking that a bailout is coming. Recent podcast on the crisis--past rescue of creditors certainly set expectations leading up to this crisis. Relentless bailout, other than Lehman Brothers; Bear Sterns, AIG. Before was as part of government program? No. Avoid losses to lenders. In 1995, Mexico was trying to roll over its debt; couldn't, trying to raise the money; U.S. government put in a $50 billion loan guarantee, rescuing not Mexico, though that's what it was called, but rescuing the people Mexico owed money to. They got it all back. No taxpayer money was used; but it sent a signal to the large financial institutions that they would not have to go bankrupt if they lent money to a risky enterprise. Terrible failure. We've done it writ large in 2008. Will be extremely difficult. Gary Stern podcast, early 2000s, entering a world where people will behave recklessly: asked Stern if you were in charge would you have rescued those firms? Probably; it was a political problem. Need new mechanisms so you can avoid having to do that. Not clear we have those mechanisms or have the political institutions or forces that will help politicians do the right thing. Tragedy is, we have in many ways destroyed the financial system that is the source of our productivity. Supposed to be that capital is allocated to its highest valued use. We are not doing that. We are going to pay a price for it.
1:02:01Mexican bailout at the time--critics were saying there would be this big moral hazard. There's a problem here right now and you are telling us to worry about some ephemeral thing. Always worth going back and seeing that people were dismissed for worrying about certain things. Maybe we should go back and give them credit. Is there any way to get back to where we started? For the government of Iran, first step is saying, "Sorry." Here's your worthless building back in case you want it; do you care to come back and restart your lives after you've probably done very well in whatever country you've landed in? To close: the two books we've been talking about: PSF and RS. Both interested in ideas, history of socialism and capitalism, communism. Should a modern reader read these books? Yes; would tell people to read the Richter first. Much easier to read. More impressive--he said stuff before it happened that actually happened. Hayek on the other hand is talking about things he saw. Useful, but not as impressive. Hayek's predictions: can either say Hayek is wrong because we didn't end up like that, or he's right because people listened to me or people like me. RS favorite one of his books. Not a huge Hayek fan! Russ a fair host. RS is Hayek's most famous book. Reader's Digest condensed version; cartoon version. Not my favorite book of Hayek's. Hayek's The Fatal Conceit favorite. In RS, he doesn't give a lot of examples, doesn't give a lot of metaphors; writes fairly well but not concretely. If you want to go and blame Hayek's origins in the German world, remember that Richter also is in the German world, and writes extremely well. Lively. If only Hayek had written a novel. For the economic incentives in RS, they don't jump out at you. Recognition that communism and fascism are the same and have common intellectual roots. In Germany. Also English roots--a little dig at the British. Picks on Carlyle. W. H. Chamberlin. History of socialism: the really bad things didn't happen because a really bad group of people happened to be corrupted or replaced or their movement was taken away from them. The true believers were the true monsters. The people we now think of as the social democrats are the descendents of the sell-outs. They are the descendents of the ones that the founders of the party would be horrified by because they compromised, admitted that capitalism was better than the founders of the movement could have tolerated. Made peace with their system. In 1960, who are the true descendents of the 19th century Social Democratic Party, are they the people ruling East Germany or are they the people trying to reinvent themselves and gain power in West Germany? It was the East Germans who were the legitimate children. They were the ones who continued to believe in the state economy and were willing to do whatever it took to keep that alive. In the West, they realized it would involve killing a lot of people, they realized killing people was bad even if Karl Marx said it would be okay as part of the whole process.