‘Again, trade is a social act. Whoever undertakes to sell any description of goods to the public, does what affects the interests of other persons, and of society in general; and thus his conduct, in principle, comes within the jurisdiction of society’ … . The ‘so-called doctrine of Free Trade … rests on grounds different from, though equally solid with, the principle of liberty … . Restrictions on trade, or on production for purposes of trade, are indeed restraints; and all restraints qua restraint, is an evil: but the restraints in question affect only that part of conduct which society is competent to restrain, and are wrong solely because they do not really produce the results which it is desired to produce by them.’ J S Mill, ‘On Liberty’, 1859, Ch. 5
This passage has puzzled me since I was a young man. It seems to me that individual liberty is obviously violated when governments intervene in trade. If a government imposes a tax on a good for the purposes of assisting the producers of a close substitute, this must be just as much an infringement of the liberty of consumers as when it imposes a sin tax on a good to discourage consumers from purchasing that good.
However, it is now clearer to me what Mill was trying to say. The first key to the puzzle is that Mill refers to ‘the principle of individual liberty’ rather than just ‘individual liberty’. What Mill means by the principle of individual liberty is explained a couple of paragraphs earlier as the maxim ‘that the individual is not accountable to society for his actions, in so far as these concern the interests of no person but himself’. According to that view, the individual should be accountable to society for ‘actions that are prejudicial to the interests of others’.
Friedrich Hayek and others have noted that the distinction that Mill sought to make between actions that affect the acting person and actions that affect others is not very useful because there is hardly any action that may not conceivably affect others in some way. According to Hayek the relevant issue is whether it is reasonable for the affected persons to expect legal protection from the action concerned (‘Constitution of Liberty’, 1960, p 145).
Now, in the paragraph immediately prior to his discussion of international trade, Mill acknowledges that damage to the interests of others does not necessarily justify the interference of society. In this context he discussed the views of society toward various forms of contest in which people who succeed benefit ‘from the loss of others’. He notes: ‘society admits no right, either legal or moral, in the disappointed competitors to immunity from this kind of suffering’.
The second key to the puzzle is that in the passage quoted above Mill suggests that all restraints are evil. If Mill is referring to coercion, as seems likely, then it seems to me that at this point he is close to recognizing the merits of the definition of liberty that Hayek later adopted. Hayek defined liberty as ‘a state in which coercion of some by others is reduced as much as possible in society’ (‘Constitution of Liberty’, p 11). This definition meets Mill’s desire to acknowledge that restraints are necessary to protect citizens from force and fraud, and may be appropriate under some other circumstances where individual conduct adversely affects the interests of others.
Mill seems to have been attempting to establish that the attitude of society toward individual conduct should depend on where it lies on a spectrum. At one end of the spectrum, where conduct affects only the individual actor, other people have no right to intervene. At the other end, force and fraud should obviously be illegal. At other points on the spectrum the effects of individual conduct on the welfare of society are ‘open to discussion’. (Mill uses these words are used in the introductory paragraphs of Ch. IV.)
In asserting that the ‘doctrine’ of free trade rests on equally solid ground to ‘the principle of liberty’ Mill is clearly implying that in our discussion of trade there should be a strong presumption that free trade enhances the general welfare of society. It follows that he must believe that government intervention in trade is generally an unwarranted form of coercion. That seems to me to be just another way of saying that such intervention is generally an unwarranted interference with individual liberty.
Freidrich Hayek and the Austrian school of economic policy argue for a laissez faire approach to the economy – emphasizing individual actions and criticizing government intervention. John Maynard Keynes acknowledged that economies could, over time, correct themselves, but argued that government had a responsibility to intervene and stimulate demand when the economy is in a slump. This video is a sequel to Fear the Boom and Bust, also produced by Econstories.tv
For my students, see how many of today’s economic issues you can find in this video and compare them to our look at the Great Depression.
In the Times of India I hear is all about “infotainment”, with more information less entertainment in economic times. So as far ET columnists go hardly can one hold them the standards of an academic debate, loose ends are quite natural. But what about sheer inconsistency, or gross error?
Swami ET article today is titled “Beware: Recession maybe Hayekian”. My faint smile on reading the title soon disappeared when I read this
“The current recession looks more Hayekian than Keynesian. A Keynesian recession represents a sudden fall in demand, and can be remedied within six months by pumping enough purchasing power into the economy. A Hayekian recession, however, is caused by misallocation of resources over a long period, driven by unrealistic interest rates, ending in a bust that requires years of structural adjustment. Such a recession can last a decade (as in Japan in the 1990s)”.
Swami goes on to argue that many a crises have been Keynesian and successfully solved by government spending. My contention here is not that Keynesians are wrong, that point I have already made. But that one cannot argue that some recessions are Keynesian others Hayekian!
The Hayekian method involves a complete reject of the aggregate demand and supply framework. Hayek rejects and warns us against the very idea of “capital” as a homogenous commodity at the very beginning of “Pure Theory of Capital”, turning our attention to the structure of capital in a system of production.
Moreover Swami makes no mention of why there might be a fall in aggregate demand in the first place to cause a Keynesian recession. And since we are talking about a Keynesian syndrome, the cause must be independent of central bank policies. For people like Krugman, Stiglitz the cause may lie in “animal spirits”, which is consistent with their political philosophy. But what about Swamy who won the Bastiat Prize.
Also note that though he says this recession is Hayekian, there is no mention of “central banking”, “centrally determined price of capital”, etcetera.
Infotainment is all good, but an article with absolutely no academic grounding is a real pity. And I am not entirely sure whether such writing does Austrian economics and libertarian politics any good. Your call.
Also read my earlier critique of a Swami ET piece here.
And another incorrect portrayal of Hayek by Meghnad Desai (he offered a Marx-Hayek solution to US crisis) here.
To partisans of the Austrian theory of the business cycle, the cause of the current financial crisis is as plain as day — and that’s why we’ve been predicting it for years. You would think that the neo-Keynesians, monetarists, and Marxists who made fun of us Austrians in 2006 and 2007, and said we’d never have a housing meltdown and financial crisis exactly like the one we’re having now, would come over to our way of thinking — or at least acknowledge that we were right in this one case. But instead, they continue to make fun of us and deride the gold standard as “quackery.” Have they no shame?
Apparently not. And it shouldn’t be surprising. After all, followers of non-Austrian schools are practitioners of non-reality based economics. To them, economics is a religious faith. Since everything is make-believe, they can just pretend that the Austrian school didn’t predict this crisis years ago and that they weren’t poo-pooing those predictions. They can pretend that the Phillips Curve has validity and that stagflation is impossible. They can even delude themselves into thinking that Herbert Hoover was a laissez-faire “do-nothing” and FDR’s New Deal “got us out of the Depression” — or worse yet, that war is good for the economy!
Believing in any of these bogus ideas is akin to medieval doctors practicing the humoural theory of medicine. It was the official doctrine of the church, and therefore, it was accepted even when it was clearly false. Today, the state has replaced the church and Keynesianism is the official state religion.
Why don’t more economists recognize the reality staring them in the face? Well, for one, they’re educated in government-controlled schools. Only two universities in the entire United States do not accept federal money, and as central banking and fiat money are vital tools of Big Government, little else is going to be taught. What’s more, over 50 percent of professional economists in the United States work for the government, with 32 percent working directly for the feds. How can we expect economists to be objective on the question of central banking when their paychecks are monetized by the Federal Reserve? Heck, a huge share of the world’s economists are employed directly by central banks!
So it’s no surprise that “respected” economists — propagandists, really — are pro-Fed. Only one central-banking critic has ever won the Nobel prize: F.A. Hayek of the Austrian school. The greatest economists of the 20th century — Ludwig von Mises and Murray Rothbard — never got the recognition they deserved. But as the predictions they made continue to come true, one has to wonder how long the general public will maintain its faith in the high-priests of economic voodoo that dominate the economics profession.