“Sachs is wrong that Hayek was wrong,” says Easterly

Jason Soon has more on the debate over Nordic social democracy and Friedrich Hayek’s road to serfdom thesis. It began with an article in the Scientific American where Jeffrey Sachs annoyed Hayek fans by saying:

Von Hayek was wrong. In strong and vibrant democracies, a generous social-welfare state is not a road to serfdom but rather to fairness, economic equality and international competitiveness.

In an article for the Wall Street Journal William Easterly responds :

Mr. Sachs disses the great Hayek by repeating the old canard that Hayek thought any attempt at taxpayer-funded social insurance would put us all on the "Road to Serfdom." This is an especially strange charge, since Hayek (while certainly opposed to the social engineering that proponents of a full-blown welfare state usually have in mind) himself calls for some form of taxpayer-funded social insurance against severe physical deprivation on pages 133-34 of "The Road to Serfdom." Mr. Sachs, currently best known for his star-driven campaign to end world poverty, has apparently spent more time studying the economic thinking of Salma Hayek than that of Friedrich.

While Sachs is wrong about Hayek, is he wrong that the Nordic countries do a better a job of preventing poverty than Anglo-Saxon countries? Easterly offers a few remarks about America’s "tortured history of a black underclass" and openness to impoverished immigrants but doesn’t make much of case beyond that.

For many of those on the left, Hayek personifies the nightmare of neoliberalism and unrestrained corporate capitalism. According to Henry Giroux, neoliberalism is fanatical ideology that steals from the poor and gives to rich, undermines democracy, and destroys the welfare state. In the imagination of its enemies, neoliberalism roams the world like a monster — crushing community, devastating the environment, and suppressing free expression. Along with Milton Friedman, Hayek is the monster’s Dr Frankenstein.

With this vision in mind, it might come as a surprise to discover that Easterly is right — Hayek did support some welfare state institutions. I’ve quoted Hayek on this before, but I might as well do it again.

As a number of people have pointed out, Hayek supported social insurance and welfare services in The Road to Serfdom. In the Routledge Classics edition the relevant pages are 124 and 125.

In The Constitution of Liberty he wrote "though a few theorists have demanded that the activities of government should be limited to the maintenance of law and order, such a stand cannot be justified by the principle of liberty" (p 257). He went on to say that:

All modern governments have made provision for the indigent, the unfortunate, and disabled and have concerned themselves with questions of health and the dissemination of knowledge. There is no reason why the volume of these pure service activities should not increase with the general growth of wealth. There are common needs that can be satisfied only by collective action and which can be thus provided for without restricting individual liberty (p 257).

In Law, Legislation and Liberty, Volume 2: The Mirage of Social Justice he supported both government funded education and income support. On education he wrote::

There is also much to be said in favour of the government providing on an equal basis the means for the schooling of minors who are not yet fully responsible citizens, even though there are grave doubts whether we ought to allow government to administer them (p 84).

On income support he wrote:

There is no reason why in a free society government should not assure to all protection against severe deprivation in the form of an assured minimum income, or a floor below which nobody need descend. To enter into such an insurance against extreme misfortune may well be in the interest of all; or it may be felt to be a clear moral duty of all to assist, within the organized community, those who cannot help themselves. So long as such a uniform minimum income is provided outside the market to all those who, for any reason, are unable to earn in the market an adequate maintenance, this need not lead to a restriction of freedom, or conflict with the Rule of Law (p 87).

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Andrew Leigh
15 years ago

>> “While Sachs is wrong about Hayek, is he wrong that the Nordic countries do a better a job of preventing poverty than Anglo-Saxon countries?”

The best answer is to look at Tim Smeeding’s paper, Poor People in Rich Nations, which appeared earlier this year in the Journal of Economic Perspectives. Smeeding is pretty scrupulous with the data, and concludes:

“Comparative cross-national poverty rankings suggest that United States poverty rates are at or near the top of the range when compared with poverty rates in other rich countries. The United States child and elderly poverty rates seem particularly troublesome. America’s elders also have poverty rates that are high, particularly on relative grounds. In most rich countries, the relative child poverty rate is 10 percent or less; in the United States, it is 21.9 percent. What seems most distinctive about the American poor, especially poor American single parents, is that they work more hours than do the resident parents of other nations while also receiving less in transfer benefits than in other countries.”

slim
15 years ago

All modern governments have made provision for the indigent, the unfortunate, and disabled and have concerned themselves with questions of health and the dissemination of knowledge. There is no reason why the volume of these pure service activities should not increase with the general growth of wealth. There are common needs that can be satisfied only by collective action and which can be thus provided for without restricting individual liberty (p 257). Emphasis added.

I’ve bandied around some of these issues in libertarian discussions and sometimes it’s like drawing blood from a stone (if you can survive the sometimes hysterical and abusive interference run for obfuscatory purposes).

It’s good to read this quote from Hayek himself. One would like to think that that is the end of the matter, but I guess sometimes other agendas are at play.

Discussions like these recently inspired me to do some research on Who the heck is Hayek? I found him to be a rather endearing character who had the humility to understand his limitations.

murph
murph
15 years ago

Except that socialism leads to cultural suicide. It’s a massive ponzi scheme which weakens the nation’s ability to reproduce. What’s the point in building a socialist paradise for the grandkiddies if nobody can afford to have one.

Case in point: Germany –

Germany’s downward spiral in population is no longer reversible, the country’s federal statistics office said Tuesday. The birthrate has dropped so low that immigration numbers cannot compensate.
“The fall in the population can no longer be stopped,”

Jc
Jc
15 years ago

It’s wrong to look at Amercia as whole for comparison. There are large regional differences in the US.

1 A reasonable comparison would be say Sweden and CT/Mass. (It’s stark).

2 Nowway would closer equate to Texas with its oil.

3 Sweden’s per cap GDP incidently is closer to the poorest region is the US, the Miss Delta.

4 It would also be useful to adjust for the effect of 11 million illegals in the US who are putting enormous pressure on the wages of the less skilled.

5. we also need to get an honest handle and normalize the active/non active looking for work pool in scandinavia because by some accounts it’s running at 20/30%

Jc
Jc
15 years ago

“4 It would also be useful to adjust for the effect of 11 million illegals in the US who are putting enormous pressure on the wages of the less skilled.”

It’s a huge testament to the US it can can actually absorb the illegals which could very well represent 10% of the workforce and close to 50% of its low skilled while still maintaining an unemployment rate of 4.5%.

This the magic we should be looking at, rather than semi-comatose socialist/welfare states which by good accounts are going broke ( norway excluded because of its oil).

Something like 40 million new jobs have been created in America in the past 25 years. Europe nil. Zilch.

As we have a growing population, it would be interesting to see how we create new jobs to absorb the increase if we’re wanting to resemble Scandinavia,which hasn’t created one new job in the same period.

David Rubie
David Rubie
15 years ago

Jc said:

As we have a growing population, it would be interesting to see how we create new jobs to absorb the increase if we’re wanting to resemble Scandinavia,which hasn’t created one new job in the same period.

It’s simple isn’t it? Surely we’d run a massive corporate welfare scheme like the US does. I notice Ian Macfarlane has just made another mercy dash to Japan to ensure Mitsubishi don’t close Tonsley Park in South Australia. The next step will be Mitsubishi proferring the begging bowl again (to be filled with tax breaks, subsidies or protection). The factory hasn’t been regularly profitable for forty years, but we keep handing cash to the overseas parent companies to keep it going.

The US is doing exactly that right now (look at the history of corporate bail outs, and the massive spending on the war on terror). That’s how you create 40 million jobs in 25 years AND import 11 million pool cleaners, bean pickers and maids. Murph’s ponzi scheme has nothing on the Amway economy.

murph
murph
15 years ago

David

I don’t see how corporate welfare can be compared to Amway schemes. Amway IS a ponzi scheme.

Anyhow, the US economy is still growing despite ridiculous levels of corporate welfare. The point is that the detrimental effects of US corporate welfare (inclusive or exclusive of defence spending and, let’s not forget, agricultural subsidies) is still vastly outstripped by the efficiencies in the remainder of the economy. For every Delta airlines there is a Southwest, for every Ford there is a Microsoft.

SJ
SJ
15 years ago

murph Says: “for every Ford there is a Microsoft.”

This would be the Microsoft whose share price has gone nowhere for the last three years, and halved over the three years before that?

murph
murph
15 years ago

SJ

Ok, Mr Pedantic, for every Ford there is a Google.

Don’t be a knobhead all your life.

Peter Whiteford
Peter Whiteford
15 years ago

Murph

Birth rates in Japan, South Korea and Singapore are lower than in Germany – in fact the Japanese population has already started shrinking earlier this year. Is this due to socialism?

murph
murph
15 years ago

Oh God.

Nice logical fallacy there.

I’m not saying that the only cause of declining birth rates is socialism. I’m saying that socialism causes declining birth rates. There is a difference.

Peter Whiteford
Peter Whiteford
15 years ago

What percentage is due to socialism and what to other factors?

Tony Harris
Tony Harris(@tony-harris)
15 years ago

I don’t know about the other nations but Sweden enjoyed free trade which meant that the private sector was in competition with the world, producing dynamic performance in productivity and world leadership with some firms.

Compare that with the British trade union movement that practically strangled the nation until Thatcher came on the scene. And the loss-making nationalised industries post war. That is laissez-faire?

The Scandanavians did not have to contend with a New Deal that delivered zero growth for several years in the 1930s. And that was before the Great Society programs, affirmative action and the EPA.

There were also a number of favourable cultural factors in the Scandanavian states, like the work ethic and (previously) a fairly homogenous population. Not to mention the economic benefits of neutrality in the two world wars. Nice work if you can get it! That probably rescued the US from the New Deal.

Peter Whiteford
Peter Whiteford
15 years ago

More seriously, if you look at studies of fertility you find that as countries grow richer fertility declines. This is true of capitalist countries as well as more social democratic countries.

Over time within countries there is also a negative relationship between fertility and women’s employment, that is as female employment goes up, fertility falls.

However, over the past 20-30 years the cross-country relationship between fertility and female employment has shifted, so that now among the rich countries the countries that have the highest female employment also have the highest fertility – the US, New Zealand, France and the Nordic countries, while the countries with the lowest fertility also tend to have the lowest female employment (Germany, Japan, Korea, Italy, Greece and Spain). Australia is closer to the higher fertility group, but does not have particularly high employment among mothers.

Serious studies of fertility usually find the main reasons for high fertility overall include higher fertility among teenagers (in the USA and NZ – and both countries are trying to reduce the teenage birth rate) and higher fertility among sizeable ethnic minorities (Maori in NZ and Hispanic-Americans in the US – in fact the birth rate among “non Hispanic whites” in the US is about the same as in France), plus more flexible working arrangements for parents (e.g. in NZ, US, Australia and a few other countries.) However, the Nordic countries and France achieve higher fertility and high female employment through more family friendly social policies – highly subsidised child care and relatively generous parental leave provisions. There is a reasonably wide variation but while these countries don’t have as flexible work provisions as in the English-speaking countries, full-time work hours are shorter, and in some cases part-time work is also fairly common (e.g. Sweden).

The countries with the lowest fertility tend to have social policies that are not family-friendly – they spend a lot more on pensions than on support for families, they have tax systems that “discriminate” against second earners, extremely long normal work hours (Japan, Korea) and are less gender equitable overall, or they have economies that have not been particularly good at generating jobs (Southern europe, although Spain is changing here). They also spend relatively little on child care or have care and school arrangements that are not conducive to mothers working – in Germany, the normal school day is from 8.00 to 13.00!

In these countries including Germany the usual argument is that women are in effect forced to choose between being mothers and being workers, and what seems to have happened is that they choose to work rather than having children.

So to say simply that Germany’s low fertility is due to “socialism” is an extreme over-simplification.

Patrick
Patrick
15 years ago

I cannot say about the rest but France achieves high fertility by having lots of northern african, senegalese and lebanese familes, just like America with its non-‘non-hispanic whites’. It is precisely the reason behind the ‘inherited’ in the Front Nationale slogan: ‘Being French: It is inherited, it is merited, it is respected.

If as you say non-hispanic whites in America have equivalent fertility to France globally, then they are streets ahead of the same cohort in France.

David Rubie
David Rubie
15 years ago

murph said:

David

I don’t see how corporate welfare can be compared to Amway schemes. Amway IS a ponzi scheme.

Well, duh! Amway is the best organised and slickest ponzi scheme we have, which makes it an appropriate comparison since you compared a social welfare heavy state to the US.

Don Arthur
Don Arthur
15 years ago

Getting back to Andrew Leigh’s comment. Perhaps the most interesting question is not whether there is less poverty in the US than there is in Norway or Sweden. Instead, the question is about the effectiveness of Nordic policy outside of the Nordic nations. If the US government(s) adopted Nordic-style policies, would they get Nordic levels of poverty?

That’s why America’s defenders keep bringing up immigration and the legacy of slavery. They argue that Nordic policies work in Nordic countries but wouldn’t work in the US.

Peter Whiteford
Peter Whiteford
15 years ago

This seems to be the most comprehensive and up-to-date study of French fertility patterns by country of birth: http://paa2006.princeton.edu/download.aspx?submissionId=61103

It concludes: “During the sixties and seventies, both immigrants’ and natives’ fertility declined, but the decline was larger for natives (the end of the baby boom) and the difference between immigrants and natives did increase. Among the eighties and nineties, at the contrary, fertility remained stable in France, while the decrease went on for immigrants, leading to a decline of the difference between immigrants and natives. … The total fertility rate (sum of age-specific fertility rates) for the same period calculated using standard methods is 2.50 for immigrant women and 1.65 for women born in France, leading to the false impression of excess fertility of 0.85 children per women for immigrants, while with our more accurate method the difference is 0.46 child per woman.”

As I read this it estimates that the total fertility over the 1991-98 period for women born in France was 1.70. There is also evidence that as in other countries, immigrant fertility patterns converge with those of native born over time.

Peter Whiteford
Peter Whiteford
15 years ago

On the question of differences in poverty rates between the US and Sweden, there are additional complications as well as those of ethnicity, immigration and slavery. That is that the composition of poverty differs.

We have done some work on child poverty, for example. Around 2000 the child poverty rate in Sweden was 3.6% (and lower in Finland and Denmark), while in the US it was 21.7% (using a 50% of median income poverty line).

There are actually more single parent households in Sweden than the US, but more of them are working. Among 2 adult households, there are more two-earner households in Sweden, but the number of zero earner couples is about the same in both countries, so there are more single earner couple families in the US. About one third of the small number of poor in Sweden are not working, but less than one in six in the US are not employed. What this means is that child poverty in the US is overwhelmingly among households where at least one adult is employed.

The US problem – in terms of poverty – is that they have a low minimum wage and while the EITC is very redistributive it is simply too low to move people over this poverty line (the official US poverty line is well below this, of course). For example, a single earner couple with two children reciving all their EITC and Food Stamp entitlements would still only have an income of 35% of median equivalent income (i.e. 70% of the poverty line). Sweden doesn’t have a statutory minimum wage (because collective bargaining delivers supra-minimum wages), but in the case of Australia, for example, a similar family on the minimum wage receiving all their family payments would have an income of 73% of the Australian median – about twice as much in relative terms as in the US. (But obviously there are more Australians close to the minimum wage than there are Americans close to their lower minimum wage.)

So if the US wanted to reduce child poverty they would have to massively ramp up the EITC, which is not the lesson you would draw from looking at Swedish poverty rates.

What many people don’t appreciate about Sweden and other Nordic countries is that it is not simply that they have high welfare state spending, but they also have high employment. There are arguments that Sweden artificially inflates their employment levels, of course, but it is clear that a lot more of their welfare state spending is oriented to supporting employment than is the case in a lot of other countries, even including the US.

Mike Pepperday
Mike Pepperday
8 years ago

Peter Whiteford

Re fertility. Maybe not just economics and working hours but culture. Maybe Scandinavian men are more willing to care for children than macho Mediterranean men.