Saturday, November 14, 2009

... But Hayek was Wrong...

When I think about the hyperbolic claims about welfare and tyranny, it reminds me of Hayek's predictions about social welfare states. As Bruce Bartlett (pal of Art Laffer among other supply-siders, and guru of the Reagan tax cuts) points out in an article which partially debunks Hayek's claims:
In 1944, the Austrian economist F.A. Hayek published an extraordinarily influential book, The Road to Serfdom. In it, he argued that liberalism eventually leads to totalitarianism; that is, once a nation has embarked on the creation of a welfare state, there is no natural limit to the size of government until it controls everything, socialism becomes pervasive and political freedom evaporates.

I have my doubts about the extent to which the rank-and-file member of the recent conservative backlash is familiar with the economic philosophy of Hayek, but these are the ideas from which they have taken their intellectual cues. Hayek made a lot of significant contributions to the field of economics, and his ideas about Creative Destruction were revolutionary in their time. However, his argument about social welfare is both a logical fallacy and inconsistent with the empirical evidence of the last 20 years.
Logically, the argument rests on a flimsy and fallacious "slippery slope" argument. As Bartlett notes:
Since Hayek's book appeared, it has been an article of faith among American conservatives and libertarians that every expansion of government is a step on the slippery slope to totalitarianism. National health insurance today, the gulag tomorrow, many of those on the right genuinely believe, often citing Hayek in support.
Consequently, it is axiomatic that Europe, which is much further along the road to a welfare state than the U.S., is also further along the road to socialism and totalitarianism.

But this turns out to be false, both when it comes to Europe, and when it is compared with evidence from the rest of the world. Economies (many of which developed and still have sizable social welfare programs) have been liberalizing the industrial sectors of their economies at a tremendous pace, political and economic freedoms have been extended to more people than ever before, poverty has fallen dramatically, the number and intensity of violent conflicts have subsided considerably, and more countries' political systems are based on democratic institutions than ever before. Empirically, much of this progress on economic, political and social fronts has been credited to globalization and the retreat of government from industry. But even as economists laud these sorts of liberalizations, the mainstream view (advocated by, for example, Bhagwati, Stiglitz, and others) continues to stress the importance of the social safety net to avoid a socialist backlash.
Also, with respect to the "Europeanization" of the US, it is false to assert that European countries are less politically free because of their higher taxes and more pervasive welfare states. Conservative think tanks such as Freedom House and the Heritage Foundation, Consistently rank countries like Denmark, which has an average tax rate of 49% compared with 28% in the US, on a par with the US.
The bottom liine is that the intellectual argument that the 9/12 and teaparty activists have founded their protests on has a number of holes in it.

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