Hayek returns to Cambridge

National Review, Jan 11, 1985 by John Chamberlain

HAYEK RETURNS TO CAMBRIDGE

CAMBRIDGE, ENGLAND, was a piquant choice for the general meeting in September of the Mont Pelerin Society. The city was once the celebrated home base of John Maynard Keynes, the King's College economist whose theories about the curative value of public spending have been eagerly embraced by politicians for two generations. But, as is less well known, it was also the city of Friedrich Hayek, Mont Pelerin's founder and honorary president, now 85 years old, who spent the World War II years in Cambridge and came to be Keynes's friendly enemy. Hayek wrote The Road to Serfdom in a Cambridge house when the London School of Economics, where he was teaching, moved northward out of London to get away from Hitler's bombs.

The two Cambridge heritages, which take opposing views of the virtues of government interventionism, have been battling ever since the publication of The Road to Serfdom forty years ago. The Keynesian theories relied on the Phillips Curve, which stipulated a direct connection between public spending and the increase of employment. But the curve no longer works--the more that governments seize, whether by taxation or inflation, the more sluggish the economy seems to be. In spite of this, our governments go on spending even when their heads--Ronald Reagan in America, Margaret Thatcher in England--believe they should be doing the opposite.

The first two days of the Mont Pelerin meeting were confrontation days, with one session given over to discussing "The Road to Serfdom after Forty Years' and a second to "The Keynesian Heritage.' John Gray felt obliged to take note of the fact that "no advanced Western industrial democracy has experienced the hyperinflation which Hayek has claimed to be the inevitable result of postwar policies of economic management.' We have been supremely lucky. But Gray warned his audience that we could "exaggerate the importance of the past five years' in setting up a frame of reference that would be good for the likely future. The postwar welfare state in Britain, Europe, and America, he said, has produced a servile mentality that has led to a pervasive lack of intiative. "When servile manners prevail,' he said, "freedom cannot be safe for long and will soon be lost.'

Into the Black

WHAT GRAY found particularly oppressive is that the achievements neither of Margaret Thatcher nor of Ronald Reagan have included any reductions in the inherited burdens of the long interventionist period. Both Britain and America are staggering under mountains of debt. We still face the alternatives of hyperinflation or deflationary collapse. Hayek's analysis still stands.

Gray raised the point (only to drop it in a single sentence) of "a backlash of phenomena--of which the most notable is the black economy--in which freedom has been recovered by stealth.' As Antonio Martino, an Italian Mont Pelerinian, had made plain at a previous meeting of the society, keeping one's business affairs "off the books,' as is done particularly in Latin countries, is one way of maximizing one's freedom. When governments are perceived as cheats, the inevitable response is to keep no records. The result is that the economists do not really know what they are talking about. We have computers but no trustworthy statistics to feed into them.

This phenomenon was touched upon in the discussion of Orwell's 1984 that followed the session on The Road to Serfdom. Michael Walker of Canada felt that Orwell had been much influenced by Hayek and that in 1984 he had "created a tangible, visceral representation of the concepts which Professor Hayek's works exposed in more measured terms.' But "in the real world of 1984,' said Walker, "people are not succumbing to the system without a reaction. Protest emerges in the form of the underground activity which is identified in every country and is growing in most.' The Swedish government is onto this: It is calling for "tattletale laws' that will require citizens to report payments to others on their tax returns. If the tattletale system ever becomes 100 per cent effective, Sweden will be the first Western nation to make both 1984 and The Road to Serfdom come true. Paul Johnson, in his paper on Orwell, laid much of the trouble to the spread of moral relativism. But, as Antonio Martino remarked, a moral absolutism imposed by Big Brother could be the ultimate in depravity.

Leland B. Yeager, in his opening paper on "The Keynesian Heritage,' concedes the point that Keynesian spending worked for a time. But when expectations became attuned to what was actually happening, price inflation took over in place of real stimulus. The worst effect of the popularity of Keynes's doctrines was that they crowded out alternative theories, such as Clark Warburton's "monetary disequilibrium theory.' An adequate realmoney supply might have been maintained, said Yeager, "if people marked down their prices and wages sufficiently and promptly.' The natural adjustment of prices and wages was prevented when governments went around Robin Hood's barn to bring about full employment by creating massive government deficits.