Robert Solow on Hayek and Friedman and MPS

by on November 24, 2012 at 11:22 am in Uncategorized | Permalink

The TNR essay is here, prompted by the publication of Angus Burgin’s The Great Persuasion: Reinventing Free Markets Since the Great Depression.  Excerpt:

The MPS was no more influential inside the economics profession. There were no publications to be discussed. The American membership was apparently limited to economists of the Chicago School and its scattered university outposts, plus a few transplanted Europeans. “Some of my best friends” belonged. There was, of course, continuing research and debate among economists on the good and bad properties of competitive and noncompetitive markets, and the capacities and limitations of corrective regulation. But these would have gone on in the same way had the MPS not existed. It has to be remembered that academic economists were never optimistic about central planning. Even discussion about the economics of some conceivable socialism usually took the form of devising institutions and rules of behavior that would make a socialist economy function like a competitive market economy (perhaps more like one than any real-world market economy does). Maybe the main function of the MPS was to maintain the morale of the free-market fellowship.

Solow neglects to mention that Milton Friedman turned out to be right on most of the issues he discussed (though targeting money doesn’t work), that MPS economists shaped at least two decades of major and indeed beneficial economic reforms across the world, or that some number of the economists at MIT envied the growth performance of the Soviet Union and that such remarks were found in the most popular economics textbook in the profession.  You can consider this essay a highly selective, error-laden, and disappointing account of a topic which could in fact use more serious scrutiny.

By the way, if you read Solow’s own 1962 review of Maurice Dobb on economic planning (JSTOR gate), it shows very little understanding of Hayek’s central points on these topics, which by then were decades old.  Arguably it shows “negative understanding” of Hayek.

Or to see how important Friedman’s work on money and also expectations was, try comparing it with…um…the Solow and Samuelson 1960 piece on the Phillips Curve (JSTOR), which Friedman pretty much refuted point by point.  Here is the closing two sentences of that piece:

We have not here entered upon the important question of what feasible institutional reforms might be introduced to lessen the degree of disharmony between full employment and price stability.These could of course involve such wide-ranging issues as direct price and wage controls, antiunion and antitrust legislation, and a host of other measures hopefully designed to move the American Phillips’ curves downward and to the left.

And Solow wonders why the Mont Pelerin Society and monetarism were needed.  Solow should have started his piece with a sentence like “Milton Friedman was not right about everything, but most of his criticisms of my earlier views have been upheld by subsequent economic theory and practice….”

Greg Ransom…telephone!

For the pointer I thank Peter Boettke.

lnewt November 24, 2012 at 11:42 am

The link to the 1962 review requires a GMU login, here is the JSTOR link:

http://www.jstor.org/stable/1151914

Orange14 November 24, 2012 at 1:05 pm

This link requires a payment of $14 for the full article! Nice for the free marketeers.

Andrew' November 25, 2012 at 5:42 am

I do not think that means what you think that means.

Andrew' November 25, 2012 at 5:43 am

The government would make us non-subscribers pay $7.50 because at some point everyone needs financial articles.

Micha Elyi November 27, 2012 at 9:45 am

You non-subscribers (taxpaying ones, anyway) are probably already paying. The whiners can visit a government university that has a JSTOR subscription to Economic Development and Cultural Change or a printed copy of its Vol. 10, No. 2, Jan., 1962 issue in the stacks and make a copy for themselves. Of course, being freeloaders, they want someone else to do all the legwork for them and drop a copy in their lazy laps gratis.

tetracycloide November 26, 2012 at 2:12 pm

Yeah, nothing says free market better then the holder of a state-sponsored monopoly right on publishing charging $14 for access.

Shiggah November 24, 2012 at 12:35 pm

When reading Samuelon/Solow (or others in the same camp from the same period) on Friedman/Chicago you have to look at it through the lens of “this person had huge fractions of his life’s work made largely irrelevant by those upstarts from Hyde Park”. There’s always a very obvious undercurrent of bitterness and personal hatred.

Orange14 November 24, 2012 at 1:03 pm

There was animus (and still is) on both sides. This will not change until the whole field of economics begins to have a good track record of prediction rather than retrospective review of what went wrong.

Brian Donohue November 24, 2012 at 6:05 pm

Don’t hold your breath. It’s…complicated.

Brian Donohue November 24, 2012 at 6:13 pm

+1. Here are Solow’s closing sentences:

“Which of the defects of a “free,” unregulated economy should be repaired by regulation, subsidization, or taxation? Which of them may have to be tolerated (and perhaps compensated), at least in part, because the best available fix would have even more costly side-effects? To the extent that the MPS circle made that kind of policy discussion more difficult to have, it did the market economy a disservice.”

Translation: oh, for the good old days, when Keynesians held the field unchallenged and the answers to these questions were obvious to all thinking people.

Saturos November 24, 2012 at 12:39 pm

Glad to see the old codger is still alive and kicking. At least he wasn’t weighing in on the Recession… now there’s a subject Friedman would definitely be more valuable to explain today.

Ray Lopez November 24, 2012 at 1:04 pm

Ah the economics profession. Stake a claim, without evidence. Wait for the evidence to come in (or not). In the meantime battle your foes who are equally ignorant of any evidence. And if the hard sciences operated that way…we’d call it theoretical physics. Thank god I’m not an economist but earn an honest day’s living as a rent seeker. But I do find economics fascinating. Mont Pelerin society…I imagine a room of hard bitten old men, smoking and with a portrait of Ayn Rand on the wall.

Orange14 November 24, 2012 at 1:05 pm

+1, post of the day!

liberalarts November 24, 2012 at 1:42 pm

Not sure about the smoking anymore, but libertarians and market anarchists are indeed heavily male dominated, so I would guess that current MPS membership breaks that way as well. Does anyone have a sense as to what the current m/f ratios of libertarians is? Three to one? Four to one? Ten to one?

Dismalist November 24, 2012 at 6:43 pm

We seek arguments, whether made by males, females, or others.

Somebody who smokes can’t be all bad. :-)

Dismalist,
Your open-minded smoker, without a hole is his head.

Michael November 25, 2012 at 1:53 am

Through my affiliation with various libertarian organizations, I’d put the under-40 crowd at 2:1 male, over-40 at 3:1 male.

Josh S November 27, 2012 at 8:50 am

Of course most libertarians are male. It’s completely taboo to say men and women are different in our society, except to say that women are superior, but they are. One of these differences is (and feminists will admit this when it can be used to portray women as superior) that women tend to be more driven by empathy (note the word “tend”…see Lady Thatcher for a notable exception). Libertarianism isn’t based on appealing to empathy and compassion, and doesn’t promise to wipe away every tear and heal every wound. It doesn’t promise that a compassionate, soulful government will wrap its big, strong arms around you and protect you from reality.

Bluestocking November 27, 2012 at 8:28 pm

I question this. Not whether women are more driven by empathy (not proven, but arguable), but that this is the reason behind most libertarians being male. For one thing, I don’t see a strong governmental role as being driven by compassion. I don’t even see a desire for a more equitable society as driven by compassion. As for “protection from reality,” I’d argue that it could just as easily be seen as a recognition of reality — the reality that any one of us here could be knocked over by circumstances, regardless of how well-prepared we are. Nature and random chance have no particular interest in us, and any group planning we do to spread risk could be attributed to the simple recognition of that fact.

More interestingly, I wonder if it’s not simply libertarian visionaries who are male. If we went back in time to Marxist meetings in the 1920s, I have to suspect most of the participants there would be male as well. Maybe men just like the idea of being iconoclasts and changers of the status quo. Maybe they like to display their ideas for the admiration of others. (And if true, who’s to say — it could be an evolutionarily desirable trait.) Who knows?

Claudia November 24, 2012 at 2:43 pm

Ray, hope you’re a better rent seeker than a judge of the economics profession. I regularly sit (and speak up) in a room with a hundred economists and we are not just blindly staking claims. We sift through tons of economic data and try to understand them through the lens of theories (old and new). We don’t always get it right, but we do our best…progress in any discipline comes haltingly (two steps forward, one step back). And rest assured that times change…there is no smoke, no portraits of Rand, and there are a fair number of women and non-old-white men in our room. No we’re not the MPS, but I suspect we’ve come along way too.

Arnie November 24, 2012 at 2:51 pm

+1

dearieme November 24, 2012 at 5:29 pm

One of the problems with economists is that they refer to as “data” what are, in truth, incomplete sequences of ill-measured anecdotes.

Millian November 24, 2012 at 5:56 pm

You say that as if humans didn’t do that.

Claudia November 24, 2012 at 7:48 pm

dearieme, that’s a very strange definition of a nationally representative surveys (sometimes even censuses) of households and firms. Measurement could always be better but I suspect inference is the bigger stumbling block. There are plenty of problems with economists (and all other professions) don’t make up fake problems please.

Ray Lopez November 25, 2012 at 3:40 am

“You’ve come a long way, baby” (TM). Good on you.

Andrew' November 25, 2012 at 5:46 am

Was just thinking that these fields that have their theories of everything must be either the best or the worst gigs.

Alex Godofsky November 24, 2012 at 1:37 pm

It would be helpful if you explained that MPS means “Mont Pelerin Society” earlier in the post.

Greg Ransom November 24, 2012 at 2:04 pm

Fly, minions, fly!

Harrod tells us via Hicks that the aggregate capital growth model derived from thinking about Hayek’s work. So Hayek -> Harrod -> Solow .

But note well, everything Solow failed to get concerning socialist planning was at core directly concerned with the problem of discovering and imagining the most profitable use of inputs to production as one learned and improved one’s judgment about changing local conditions and the structure of changing relative prices.

Hayek idenifies this as the core ecoomic problem — problem banished even from the imagination by the Max U model of Samuelson & the Socialist neoclassical economists at micro level and the Max U model of ‘K’ at the aggregate level by Solow.

I.e. the mechanism of econoomic wealth production & growth in an extended economy is banished from the imagination by the work of Solow & friends.

THat is the real core — themes sometimes explored by Boettke, Horwitz, and McCloskey.

Derek November 24, 2012 at 3:05 pm

Great comment. This fiction that someone smart somewhere can run things better infects the world of finance as well. We are experts in the allocation of capital so we know best how to build homes or cars. How much of the current malaise in the us is due to finance infecting all aspects of the economy?

Maybe I’m jaded. one of my major suppliers was recently purchased by a large conglomerate, I’m can certain for good economic reasons but seems to not have the faintest of what the business consists of. The difference being that opposed to government business is forced to correct its errors.

Don’t get me going on the catastrophic failures stemming from erp implementations.

Willitts November 24, 2012 at 3:25 pm

The one thing I’ve learned about “experts” is that they’re experts at bugger all.

Roy November 24, 2012 at 4:12 pm

I used to regularily drive behind a truck with a bumpersticker that said:

“Always Remember Expert’s Built the Titanic”

I think that is useful advice, which I try to take seriously in my own role as an expert. I have always thought very highly of the Canadian custom of the “Iron Ring” given to enginnering graduates and the “Oath of the Engineer ” many other professions would greatly benefit fom something similar.

dearieme November 24, 2012 at 7:07 pm

“Always Remember Expert’s Built the Titanic”

Somewhat marred by the feral apostrophe, mind.

dearieme November 24, 2012 at 5:32 pm

Oh balls. I have been expert at several things. You can tell: my theories, my inventions and my mathematical models worked. You can just go to the lab and verify them.

DocMerlin November 24, 2012 at 7:50 pm

Thats why experts in science and engineering actually make sense, as opposed to experts in every other field.

Brian Donohue November 24, 2012 at 6:17 pm

Yeah, the longer I work in finance, the more I wonder if there has been any obviously good innovation since the joint-stock company.

It’s a bunch of smart people fiddling with parameters on complicated models and shuffling the same deck in different ways. Around and around we go. The comparisons with economics are striking.

Brostradamus November 24, 2012 at 3:38 pm

Question for Orange14: Are you a humanities undergrad?

Claudia November 24, 2012 at 8:43 pm

After reading the essay, I think prolific economists need periods (like Picasso’s blue period) to mark their intellectual development. This device would have been much more rhetorically pleasing than ‘Bad Hayek’ and ‘Good Hayek.’ As for the push back here on the essay, I feel like I need to average the comments here and Solow’s arguments to get the balanced view. The essay also got me thinking about who and how one becomes an influential economist and how our clubs play are role.

e November 24, 2012 at 11:09 pm

Anything with more that 7 variables is an art and not a science.

Paul November 24, 2012 at 11:55 pm

”The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive” Paul Samuelson

” It has to be remembered that academic economists were never optimistic about central planning” Robert Solow

huh?

BTW

NARRATOR: Keith Joseph’s search brought him here, where, with Hayek’s encouragement, a group of kindred spirits had set up a think tank called the Institute of Economic Affairs.

RALPH HARRIS: The institute started in 1957, you could say the direct result of the Mont Pelerin Society, of The Road to Serfdom, of Hayek’s ideas of freedom and competitive enterprise.

Brian Donohue November 25, 2012 at 12:11 am

That’s some nice dot-connecting there.

Ray Lopez November 25, 2012 at 3:53 am

”The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive” Paul Samuelson – the key to understanding this riddle is that all private corporations in capitalism are microcosms of the Soviet economy. There is no price signaling mechanisms inside a corporation. So they allocate capital at ‘whim’, according to a central planner’s best guess. Whether these firms survive is determined of course by the marketplace where there is a price signaling mechanism at play, so in this respect it’s different than the USSR. Further you can argue that the fact that the Byzantine empire lasted nearly 1000 years and the USSR lasted over 80 years is some evidence that a command economy is somewhat stable, albeit non-optimal in output and consumer welfare.

derek November 25, 2012 at 8:01 am

The Soviet economy was more than a controlled economy. It was closed. There was no feedback loop to correct any inefficiencies. Throw in the ability to control even the minor details by a powerful bureaucracy. Even a black market had difficulty getting serious traction due to the extraordinary efforts made to make the borders impermeable.

Maybe the US is suffering from a similar ailment. What activity in the economy is not controlled by some bureaucrat somewhere? These things accumulate over time with very little feedback controls. I suspect that if the US lost it’s ability to borrow as well as the reserve currency status the situation would become very late Soviet like. When is the last time a government agency in the US has had to justify it’s existence in economic terms? Are the US department upper echelons of management able to maintain their sinecure as the economy stagnates due to their incompetence? The last decade and a half suggests yes.

When Canada hit the wall fiscally and had to sort out it’s house, one characteristic was the rise of a thriving underground economy. The power of the state diminished as it had less resources for policing and buying interest groups. Estimates were 12-15% of the economy. This isn’t doing jobs for cash; a 2 minute walk from my home there is a manufacturing facility producing industrial type equipment for marijuana grow ops.

A question for those in the US. Has there been a noticeable uptick in underground economy activity since 2008? Be interesting to watch as the tax regime changes.

SJE November 27, 2012 at 5:59 pm

“When is the last time a government agency in the US has had to justify it’s existence in economic terms? Are the US department upper echelons of management able to maintain their sinecure as the economy stagnates due to their incompetence?”

I take your point that economics does not have as nearly as important role as it should, but it is disingenuous to act as if it has no role. Government agencies are supposed to evaluate the cost of regulations and those that exceed certain amounts require additional review. In my own area, patents, the US patent office (under the Bush appointee) had several proposed regulations challenged and withdrawn because of their economic costs.

Ultimately, however, the fault lies in the elected representatives who tax and spend largely based on the interests of their constituents and donors to re-election, rather than proper long term economic management. We may complain about the IRS, but the bureaucrats are applying the byzantine laws passed by the Congress.

Dismalist November 25, 2012 at 9:30 am

That “…the USSR lasted over 80 years is some evidence that a command economy is somewhat stable”.

Interesting notion of stability.

Rich Berger November 25, 2012 at 10:28 am

Sure if you kill off a few tens of millions of your subjects and terrorize the rest, you can purchase some “stability”. How do you feel about North Korea – 60 years of stability and no sign of failure!

maguro November 25, 2012 at 12:27 pm

I thought the idea that the Byzantine Empire was a socialist command economy was even more interesting.

Micha Elyi November 27, 2012 at 9:54 am

I laughed too.

Still, what’s a straw for if one can’t grasp at it?

Tim Smith November 28, 2012 at 1:15 am

There may be no *price* signaling mechanisms inside a corporation, but there certainly are proxies for them. I have spent over 30 years at the same corporation and most of my career has been spent developing, interpreting and reporting on those signaling mechanisms. Our objective has always been to get resources to the most effective or efficient producer, even if that includes an outside vendor. This has always been aligned with the ultimate objective of ensuring that the market price of our products were able to provide a healthy return on our costs.

Not once did we use “whim” to allocate capital. My firm is 96 years old this year.

Greg Ransom November 26, 2012 at 3:00 pm

Surprised that no MPS member has pointed out that the official policies and purposes of the MPS were designed in a fashion that prohibited any publicity or publication or ‘propaganda’ activities by the organization of the type Solow identifies as a mark of the organizations ‘failure’. Or that no one has pointed out what the organizations well-known purposes — unknown to Solow — actually were.

Solow shows himself to be multiply incompetent & uninformed in a myriad of dimensions in the article. It tells us a lot about ‘epistemic closure’ on the left that so many left center economists and public intellectuals find Solow’s dim-bulb hit piece to be ‘great’, ‘brilliant’, ‘genius’ and ‘enlightening’.

TDB December 2, 2012 at 1:33 am

Care to give the uninitiated a hint “what the organizations well-known purposes — unknown to Solow — actually were?”

TM November 27, 2012 at 5:02 pm

I had Solow’s son John teach Macro Econ at U of Iowa in the early 90’s. Pronounced who his father was in the first 2 minutes of the first class (nobody cared) also later promoted his friend for Iowa City City Council a registered Socialist.

Josh Broder November 27, 2012 at 8:10 pm

It’s interesting to see what “science” has become among the economics professors in the wake of Robert Solow, Paul Samuelson. Explaining the big things, selected papers by John Solow:

A Nash Bargaining Model of the Salaries of Elite Free Agents, John L. Solow, Anthony C. Krautmann, Journal of Sports Economics, 2011
Moving on Up: The Rooney Rule and Minority Hiring in the NFL, Benjamin L. Solow, John L. Solow, Todd B. Walker, Labour Economics, vol 18, 2011, 332-337
The Dynamics of Performance over the Duration of Major League Baseball Long-Term Contracts, John L. Solow, Anthony Krautmann , Journal of Sports Economics, vol 10, 2009, 6-22

TGGP November 28, 2012 at 7:51 pm

Solow dismisses the political influence of MPS by saying Thatcher & Reagan came to power by happenstance. And maybe MPS was unimportant, but as Scott Sumner can tell you the neoliberal turn was a worldwide phenomena which is hard to attribute to a cluster of coincidences.

Comments on this entry are closed.

Previous post:

Next post: