Every once in a while folks in the political corner of the blogosphere start talking about Hayek’s argument in The Road to Serfdom. As Matt Yglesias said Monday, lots of people, conservatives and liberals alike, say that Hayek believed that any welfare state inevitably leads to totalitarianism. Then some people who have actually read Hayek reply that he always supported social insurance, safety nets, public goods provision and many forms of regulation. Then confusion ensues. In this post I want to address some very recent wrangling on the subject and then try to explain how Hayek could consistently warn against the dangers of the welfare state and simultaneously support one.

I. The Present Discussion

To begin, consider Henry Farrell’s recent post at Crooked Timber following up on a similar discussion a few months prior. He seems prepared to insist that, contra Tyler Cowen, that Tony Judt had not been unfair to Hayek when Judt said:

Hayek is quite explicit on this count: if you begin with welfare policies of any sort — directing individuals, taxing for social ends, engineering the outcomes of market relationships — you will end up with Hitler.

Despite Hayek’s repeated claims that he does not think “welfare states” lead to totalitarianism, and Farrell’s repeated recognition of Hayek’s claims to this effect, Farrell insists that “I don’t think Judt was being unfair at all.” In a follow-up post, after reading a similar (but more academic) discussion between Andrew Farrent & Edward McPhail and Hayek Scholar Bruce Caldwell on the other, Farrell declares:

I’m calling this one unequivocally in favor of Judt – contra Tyler Cowen, he wasn’t being unfair at all.

Obviously Farrell and Judt’s claims are over the top due to their use of various “of any sort” “unequivocally” “at all” and “Hitler” modifiers. But instead of beating up on them, let’s use our collective annoyed-by-someone-on-the-internet energy in a constructive fashion: to see what we can learn about Hayek’s real arguments against socialism and the welfare state.

In his piece, Caldwell sharply distinguishes Hayek’s arguments against socialism and the welfare state (following Hayek’s lead). Hayek thought that the planned economy would lead to totalitarianism. Caldwell concludes, rightly, that Hayek was right about this. But he points out that Hayek’s criticism of the welfare state is subtler and involves two claims. The first problem with the welfare state is that it is a philosophically slippery target. As Hayek says in The Constitution of Liberty,

We cannot argue similarly against the welfare state, for this term does not designate a definite system (259).

But Hayek also argues that the aims of welfare state reformers can gradually lead to socialism because as Caldwell says interpreting Hayek,

The death of liberty is that of a thousand small cuts, each aiming at correcting some apparently flaw in the system. This is a very different argument from the one in The Road to Serfdom, and one should not mix them together (12).

So when Farrell reads this, he concludes that Hayek basically made the same claims about the welfare state and socialism, namely that both institutions will lead, eventually, to totalitarianism, even if the socialism gets us there sooner than the welfare state.

And if you cursorily read Hayek’s later writings, it looks that way.

But wait. In my last post, I pointed out that even the later Hayek defended a universal basic income, a policy considered solidly welfare statist. And he even supported the UBI as a condition of democratic legitimacy, not merely as a pragmatic measure. Thus, Hayek supported what we typically call a welfare state throughout his career.

Farrell thinks that Hayek argued that the welfare state will lead to Hitler and since it obviously doesn’t, that Hayek made a “rather idiotic claim.” But if you’re really itching to say that Hayek said something dumb, this is a poor example. Obviously something strange is afoot.

Of course, we could always follow Matt Yglesias, and throw up our hands:

The answer to this puzzle, I think, is that Hayek was inconsistent.

But that would be a major inconsistency, right? That Hayek would consistently warn against the dangers of the welfare state while simultaneously supporting one on moral grounds? It can’t be Hayek hagiography to wonder if he didn’t have some way of rendering these positions consistent. It seems to me that basic charity requires us to look for a resolution.

II. The Welfare State of Law and Welfare State of Administration

As I claimed in my last post, Hayek criticized social justice only as a claim that we can make specific evaluative judgments about whether certain domains of goods and services are justly distributed. Hayek had no problem evaluating a society’s basic structure and supporting a universal basic income to make that structure more legitimate. He explicitly says so.

In my view, then, Hayek’s target is not “the welfare state” as such, that is, not a social insurance or safety net state, but rather a state based on a robust conception of distributive justice applied to its economic components, not the system as a whole. Specifically, Hayek is concerned only about coercive redistributive institutions that permit constant state tinkering, not all coercive redistributive institutions.

This interpretation makes a lot of sense in light of the fact that Hayek insists, over and over, that law be based on general principles rather than expediency. Expediency is bad because it gives law over to administrators who, through many subtle alterations, will destroy a liberal legal order. Of course it will take time for this to occur, but it’s not hard at all to find insight in Hayek’s argument. A welfare state of bureaucratic tinkerers will lead gradually to socialism simply as part of the logic of their power. If bureaucrats can intervene to set coal miner’s wages, why not grocery store clerks? If they can subsidize corn, why not rice? If they can award patents to software engineers, why not musicians? If bureaucrats are pursuing a particular, patterned goal of, say, fair or equal wages, then we can see how the slide to serfdom might go.

Hayek’s critique of the welfare state simply falls out of his broader conception of the legal order of a free people. If you have a patterned principle of distributive justice, one that would license a welfare state of tinkering, then you’re going to have to constantly interfere with liberty in increasingly objectionable ways to get the distribution right. That is, the problem with certain kinds of welfare states is that they are one of many ways in which the strictures of general rules are relaxed.

So let’s distinguish between two kinds of welfare states: the welfare state of law and the welfare state of administration. Hayek’s preferred welfare state is limited by his insistence that the law be regulated by clear, public, general principles rather than administrative bodies. That’s why his safety nets are so general and uniform: because safety nets should follow these same general principles. In this way, Hayek endorses a welfare state of law.

Hayek opposes the welfare state of administration. First, it’s a vague target because it’s not exactly clear what principles it is based upon. That is, its general principles are insufficiently public. That’s one way (not the only way) that it can get away with tinkering, because the public lacks access to simple, public principles by which to evaluate and restrict the actions of welfare state bureaucrats. This opens the door to increasing social control (in the absence of ideological opposition).

But the second problem with the welfare state of administration is that it contains an internal dynamic that pushes in a socialist direction. Hayek argues in LLLIII, following Mancur Olson, that welfare states generate the accretion of regulations and interest groups. Of course, this is not totalitarianism by any means. For one thing, if citizens affirm even modest economic freedoms (as most members of liberal democracies do), then they will resist this accretion effect before things get too bad. And that’s the pattern we see: even in Scandinavian countries, people resist regulation due to their concerns about efficiency and, yes, concerns about property rights (sometimes more effectively than we supposedly libertarian Americans).

So in my view, Hayek identifies a unique social dynamic, one whose operation can be slowed but that if left unresisted would drag us to serfdom.

Hayek overplayed his hand by arguing that the tinkerer’s welfare state will inevitably lead to totalitarianism, but not by much. The most free and economically successful liberal democracies hybridize welfare states of law and welfare states of administration. They’re hybrids largely due to the fact that most citizens of liberal democracies endorse elements of both liberalism and socialism.

But if citizens of liberal democracies gave up liberalism entirely and stopped minding regulation so much, then I think the dynamic of the administrator’s welfare state would lead to significant authoritarianism that, while not totalitarian, would be uncomfortably close. Just think about India’s license Raj or the ridiculous, strangulating business regulations in many developing nations. Aren’t we serfs if we’re forced to wait fourteen years to start a business? Aren’t we serfs if our setting prices is subject to constant scrutiny? Aren’t we serfs if our medical choices are strictly controlled by the state? Aren’t we serfs if our government can swoop in at any time and nationalize our businesses? One doesn’t have to be a libertarian of any sort to answer yes.

But contrast this with being forced to pay a modest share of your income to provide a universal basic income, with clear, simple tax rates and clear, simple funds provided to those who fall below, again, a clear, simple, public threshold. That sort of welfare state does not seem to make us serfs or lead to worse forms of serfdom.

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  • http://www.facebook.com/jasonswadley Jason Swadley

    Thanks Kevin – this is a helpful contribution to the ongoing discussion.

    Can you say more about how sharp is the distinction between these two forms of welfare states? Even the welfare state of law will, of course, require administration; one man’s “tinkering” will be another’s “applying general principles to new circumstances.”

    How are we to usefully distinguish the two?

  • RickDiMare

    Hayek, like Milton Friedman, does not seem to understand or distinguish between two very different monetary systems under which a safety net can be provided. And this is why Hayek is inconsistent, in my view.

    Under our existing system of Modern Monetary Theory (MMT) or “chartalism,” which was mainly proposed by German economist Georg Knapp (1842-1926), and later adopted by Keynes, who influenced New Deal policy, taxation creates the demand for the currency, not human labor, and the state has extraordinary discretionary power (the real appeal of MMT to statists) as to how, when and where money gets introduced into the economy. 

    But, to get to the point, under Knapp’s MMT, the system which existed when Hayek was writing, Hayek is quite right that “any welfare state state inevitably leads to totalitarianism.”

    This is because effective taxation requires effective state enforcement techniques (many of which are psychological), and since people are always trying to avoid and evade taxes, while simultaneously welfare states are always striving to expand, the only way the state can keep things from falling apart is to constantly increase fear-instilling tax collection efforts, until, ultimately we have another Hitler on our hands.

    But what Hayek did not realize, as with the vast majority of U.S. lawyers (along with perhaps all the Austrian economists), is that the U.S. Constitution provides opportunity for two monetary systems to co-exist (MMT and the Quantity Theory of Money). 

    In the “Denationalisation of Money” Hayek looks with envy on the American system:

    “Americans may be fortunate in never having experienced a time when everybody in their country regarded some national currency other than their own as safer. But on the European Continent there were many occasions in which, if people had only been permitted, they would have used dollars rather than their national currencies.” pg. 85

    • martinbrock

      … ultimately we have another Hitler on our hands.

      You describe chartalism admirably here, but totalitarianism doesn’t ultimately lead to Hitler.

      An ideally “democratic” (majoritarian) state, in which they majority rules on any question, and every citizen votes on every statute, with a universal franchise and ideal transparency,  so that the state never commits an atrocity with expressed approval of a majority, might never herd an unpopular minority into concentration camps for enslavement and effective extermination. This state could be far more humane than Hitler’s, but it is nonetheless totalitarian.

      Historical totalitarianism is only the antithesis of classically liberal restraints on state power, and many people supported it very openly without supporting Hitlerism. Many people still support it, even if they now reject the label. We shouldn’t tell these people that they the totalitarian state has not arrived until Hitler arrives. The totalitarian state has already arrived.

      And the Constitution does not permit only two monies. It permits any number of monies. It specifies two permissible monies, gold and silver, but it does not prohibit others.

      • RickDiMare

        I’m not sure, Martin. Tax enforcers/collectors can get pretty ruthless, whether they’re in the right or not.

        I once wrote a short essay entitled “Lincoln as the Constitution’s Tax Enforcer: 1787-1861,” which contains links to two excellent papers by Robin Einhorn and Joel Newman: http://www.lockeanliberty.org/2011/05/lincoln-as-the-constitutions-slave-tax-enforcer-1787-1861/

        Regarding your last paragraph, I said the Constitution allows for two kinds of monetary systems (Modern Monetary Theory or chartalism, and the Quantity Theory of Money), not “two monies.” 

        Also, the Gold and Silver Clause contained in Article 1, Section 10 does not apply to the federal government, or restrict the federal government’s choice as to metal type of coinage under Article 1, Section 8, Clause 2.  Rather, the Gold and Silver Clause was a restriction aimed at curbing paper money abuse by pre-Civil War state-incorporated “free banks.”

        Finally, your last sentence is true to some extent. But, except for those who exclusively use current U.S. coin (as absurd as that may sound), users of all currencies, currency substitutes, trade or labor credits, etc. are subject to regulatory income taxation. 

      • billwald

        Seems to me that pragmatically the Constitution requires that taxes be paid in US dollars and that books be kept in US dollars. For example, some merchants in Blaine, WA, accept Canadian dollars at par and I never heard of them being bothered by the IRS. Money changers have been around for 2000 years.

        For those who like a challenge the goal would be to devise a system that the IRS could not identify in court as “money” but could function as money and to convince some merchants and professionals to use it. I think there is a barter system of trading labor for labor that the IRS will ignore but the I don’t know how that could be converted into trading labor for consumer goods.

        • martinbrock

          The Constitution doesn’t require that taxes be paid in U.S. dollars. Statutes do. Statutes can change. I’m not holding my breath.

          I don’t pretend to speak for the IRS or for courts, but I’ll suggest one.

          You do me a favor, so I owe you a favor. We agree that the favor has a value comparable to the value of some commodity, like an ounce of silver or an hour of common labor.

          You now want a favor from Rick, and you and Rick agree that this favor also has a value comparable to the value of an ounce of silver. Rick does you this favor, but you don’t them owe him a favor in return. I do.

          After you do me the favor and before Rick does you a favor, you have a favor in the bank. This favor in the bank is like money. It is mutualist money, after the fashion of Proudhon.

          The IRS wants to tax you on this money.  You say to the judge, “Tax? I did someone a favor, and he hasn’t even returned the favor yet. I owe a tax for doing someone a favor and receiving nothing in return? How am I supposed to pay this tax?”

          I tinker with am online mutualist bank in my spare time, but I’ve lost interest lately. I need something to jump start my interest again.

          http://www.favorati.net

          Rick might not bargain with you this way though. He doesn’t like the idea. We’re old friends from freebanking.org.

          • Guinevere Nell

            I’m still absorbing the favorati system – but I hope my interest might be a spark to help jumpstart your interest again – because I think it’s fabulous – an absolutely fantastic idea! If it has the power I think it does, it’s actually quite revolutionary, even as it’s an incredibly simple idea that is rooted entirely in common social sense – a great combination! That is the reason why it’s so potentially revolutionary.

            Let me know if I am understanding it correctly:

            Not everything is tit-for-tat, we do things for our friends, loved ones, and even strangers very often without expecting anything in return – for love and charity – but we cannot do everything that way, hence trade and the emergence of money and both interest and profit. Yet, what if those things we want to exchange we did as favors – a favour economy? Would it be different than a money economy? By exchanging favors instead of allowing money to directly emerge, would it be more flexible and fair in any way?

            Note that a “gift economy” (http://en.wikipedia.org/wiki/Gift_economy) has many flaws that an exchange economy does not have – but exchange economies have their own flaws (not even re:Marx but by many other analyses which lead people toward market socialism or other “non-capitalist” exchange systems to attempt to correct them). But this “favour economy” seems closer to an exchange economy than a gift economy, but with an extra step or “hinge” in it which may allow greater flexibility than exchange  system using money directly. It is a bank-savings-investment system built into the monetary system, allowing exchange-value and the flexibility (including competition between but also easier time-negotitation and trade of agreements – financial tools – as well as potentially ‘democratic’ social negotitaions – charity-subsidy etc) in means of exchange to offer the store-of-value function more flexibility in its power-allocation. (compared to direct us of money - http://en.wikipedia.org/wiki/Money)Am I on track in what you’re thinking?

          • martinbrock

            Thanks, m’Lady. I don’t meet many Guineveres.

            Proudhon’s labor credit bank is the inspiration, and similar systems exist on the web. Ripple (ripple-project.org) is the best known. It preceded Favorati and is similar, but Favorati evolved independently, so the two differ significantly; however, I credit Ryan Fugger with any inventiveness, because he developed Ripple earlier and also rejects software patents.

            I’m not sure which is more like Proudhon’s bank, because I’ve never found many details of the bank. It never got off the ground, but Proudhon had no Internet.

            Ripple is essentially a network of traders exchanging credit default swaps. This network must exist before exchanges occur, so bootstrapping the system is more challenging.

            Favorati is more like a conventional free bank issuing promissory notes (under a gold standard for example), but each individual issues his own notes, and people accepting a particular note, as it circulates, share its default risk. I added limited risk sharing recently, and I’m not sure I’m happy with it yet. Pooling default risk generally is perilous, but people expect it now.

            Though I have implemented a risk premium, I haven’t implemented interest in the sense of time value. I plan to account for longer term credit at some point, permitting either a preference for current consumption over future consumption or the opposite. Conventional accounting essentially assumes a positive time value, but this assumption is presumptuous, particularly in light of the demographic transition.

            … a favour economy? Would it be different than a money economy?

            I say it isn’t, but I have hard time convincing people.

            Favorati adopts a voluntarist principle. Returning a favor is expected but not compulsory. If you don’t return favors, people know it and may stop doing you favors, but someone expecting a favor from you has no legal recourse. I believe this principle very workable for small scale transactions. For larger transactions, I’m not so sure.

            Also, Favorati is like a bank, but it holds no capital, like a gold reserve or the titles to mortgaged houses or other collateral. Individual members hold all of the capital. Favorati is only the accounting function. When a member has “favors in the bank”, this “money” is not a claim on the bank’s capital. It is a claim on other members’ capital. A Favorati member could hold capital in reserve as a service to other members and use Favorati as his accountant, but Favorati itself holds no capital and is not liable for defaults.

            The service doesn’t earn anything from transactions either. A member owes me favors worth two hours of common labor to use the service for a year. I might ask a distant member to do some research or fund raising or polling or marketing, or I might ask him to do another distant member a favor, if this other member has something I want. In principle, I can sell this labor to non-members if I can organize it usefully.

            By exchanging favors instead of allowing money to directly emerge, would it be more flexible and fair in any way?

            Compared to statutory fiat money? Don’t get me started.

            It is a bank-savings-investment system built into the monetary system, …

            That’s right. A (Marxist) central banking system (like the Fed) is supposed operate this way too, but it ends up being a spigot for chartal money forced to circulate by the state for the benefit of state constituencies, including state capitalists.

            … this “favour economy” seems closer to an exchange economy than a gift economy, but with an extra step or “hinge” in it which may allow greater flexibility than exchange system using money directly.

            It only eliminates the middle man in the process of money creation. Everyone with valuable property, like their own labor, has money. You don’t need to exchange your property for money at a bank (borrow with the property as collateral). You just issue a promissory note yourself. With 21st century networking, the related trust issues are managable. We just don’t need conventional banks anymore. They’re technologically obsolete. Ebay is a good analogue. People deal every day with other people they’ve never met and will never meet, but the system works.

          • Guinevere Nell

            Thanks for the reply. I like everything that you say and I think it is different than a money economy, as you say, and I think maybe even more so than you realize. You say:

            It only eliminates the middle man in the process of money creation. 

            But I think it does more than that – because you don’t immediately pay someone for something, but are in a system of favor-exchange, and favors take time, there is a built-in bank-savings-investment system which is different in kind from a central bank. 

            In today’s economy, if I want my house painted and I am willing to work for it, I either work at a job first and then take the money and pay a painter, or I borrow money from a bank (or wherever) and pay the painter, and then work and pay back the bank. In the “favour economy” I can ask for the favor directly from someone, and then wait and see what options I have for returning some kind of favor in order to make good on the painting-favor I have received. 

            This connects a job-bank sort of thing to the system of economic transaction, it includes a bank (and savings and investment) within the system, and it frees up my actions and extends my choices and the choices of the people in the society considerably by connecting all these things – if someone wants to support house-painters, for example, they could offer a charitable subsidy to those transactions within the system; people could vote to do this, allowing easier private economic democracy; people could seek out jobs or look for people to hire within the system while also being able to easily borrow or easily invest or both simultaneously. 

            Much of this is due to the technology, but it is also due to this extra “hinge” within the system, which separates the payment from the parts of the exchange. . 

          • martinbrock

            My reply is below.

          • billwald

            The commodities market, CBOT, for example, was established for trading raw materials with a great volume of trade but a very small unit value and an insignificant unit transportation cost.   A large tanker of crude oil is worth about the same in any port and the money market makes it so. Any major currency will buy the same value of crude in any major port. 

            If there was one  world wide currency the money changers would be eliminated. I propose that one healthy person plying one shovel can do the same value of work world wide on a pile of pea gravel. Thus the international work hour is a natural currency and a natural minimum wage for humans.

            90% of the US “money” in circulation is electronic transfer of data and less than 2% is cash. The rest is bank paper like checks and money orders. Half the cash in circulation is outside the USA, mostly used by tourists, gamblers, dope sellers . . . bribers and tax cheats. Honest people don’t need cash.

            It doesn’t matter which institution keeps the books as long as the system is honest. Almost all major fraud is generated by cooking the books and this includes government waste. That is why I am against capital punishment except for CPAs who intentionally cook the books.  

            Eliminate all cash and replace all income and sales taxes with a single rate electronic transfer tax. If nothing else, it would return the stock and commodities exchanges to their original purpose, not an electronic crap shoot.
             

          • martinbrock

            Thus the international work hour is a natural currency and a natural minimum wage for humans.

            I use the notion of “common labor”, labor that requires only competencies that practically everyone in a population possesses. As a practical matter, random samples of the population (juries) decide what constitutes common labor.

            Men with shovels seem archaic to me. The skills I imagine are things like reading and writing, simple arithmetic, driving a car, using web browser and so on.

            This standard could vary a lot between national populations, and I don’t expect a single, worldwide currency without a single, worldwide state enforcing it. I don’t want a single, worldwide state.

            90% of the US “money” in circulation is electronic transfer of data and less than 2% is cash.

            Right. Electronic money is not science fiction. It is the money we use every day.

            Honest people don’t need cash.

            I get a lot of flak from libertarians for saying it, but I basically agree with you. Favorati is based on the principle of transparency, even radical transparency. If you want anonymity, use silver.

            Eliminate all cash and replace all income and sales taxes with a single rate electronic transfer tax.

            It’s not so important to me, but you’ll eliminate cash over the cold, dead bodies of some friends of mine.

            I favor a progressive consumption tax, but that’s another story.

          • MarlaHughes

            It’s called bartering and quite a few service industry businesses are already doing it and doing it successfully. BUT, the IRS has provisions to cover bartering in that all labor has value and we’re expected to place a value on that labor whether we receive benefit for it or not. 
            For example, I owned a cleaning service and normally I charged an average of $50 an hour.  I could ‘gift’ a travel agency 10 hours a week and they could ‘gift’ me a vacation in Hawaii for 2, but I’d still have to report the estimated earnings I would have received as income.  Yes, even if they were a relative. The only exception is below the current IRS ‘cut off’ limit, which isn’ t required to be reported. 

          • martinbrock

            It’s called bartering and quite a few service industry businesses are already doing it and doing it successfully.

            Favorati is not barter. Barter exchanges a specific good for another specific good of similar value. A monetary transaction exchanges a specific good for a claim on an unspecified good of similar value.

            Money itself is not a specific good. It is a claim on any good (or a commodity that people generally accept for any good). With barter, both goods are specific. With money, one good is non-specific. In a currency exchange, both goods are non-specific.

            For example, I owned a cleaning service and normally I charged an average of $50 an hour. I could ‘gift’ a travel agency 10 hours a week and they could ‘gift’ me a vacation in Hawaii for 2, …

            I describe a different transaction above.

            You clean a travel agent’s office. You and the agent agree that the service is as valuable as ten ounces of silver. You could also agree on a price in dollars, but let’s leave dollars out of the story.

            The travel agent does not give you a vacation to Hawaii in return. He doesn’t give you anything specifically. He only agrees that he owes you something as valuable as ten ounces of silver. He owes you this favor in return. That’s all. You haven’t agreed on a specific favor, and he hasn’t done you the favor.

            At this point, before you receive a favor in return, you have “a favor in the bank”. At Favorati, a record of this favor exists, but the record only specifies the value of a favor. Neither you nor the travel agent know specifically what this favor is.

            At this point, the IRS wants to tax you, claiming that your favor in the bank constitutes income. The IRS does not want to tax the travel agent at this point. It wants to tax you. At this point, you have the argument described above.

            Later, the travel agent gives me a trip to Hawaii worth ten ounces of silver. The same argument applies. The travel agent hasn’t received anything valuable from me. He has given me something valuable. I owe him a favor in return, because I feel this sense of obligation and acknowledge it at Favorati, but I haven’t returned the favor yet. Somehow, the IRS doesn’t want to tax me at this point. It wants to tax the travel agent.

            Finally, I do a favor for you. I develop a web site for you, and we agree that the development is worth ten ounces of silver. The circle is now complete. You and I and travel agent all have received a favor worth ten ounces of silver, so we agree that all debts are paid. At this point, the IRS presumably taxes all of us.

          • MarlaHughes

            The point is that we all still get taxed on services rendered, either now or later. The amount doesn’t change unless you can find someone willing to give you more than you give them in return. *Then* it’s a gift.  :-)

          • martinbrock

            I understand your point about income taxes. Favorati is not a scheme to avoid income taxes; however, the timing of taxation is significant. If I can accumulate “favor money” without paying income taxes until my favors are returned, I effectively have a tax-deferred investment account with unlimited contributions. This sort of accounting is the foundation of a progressive consumption tax.

            Suppose Favorati attracts a million members. Each member owes me a favor as valuable as two hours of common labor, say $20. If I collect $20, I owe income tax immediately, but if I only record the favors, I avoid this tax until members return favors to me, and I may never receive these favors, so I may never pay the tax. My favor account has a $20,000,000 balance, but I’ve never paid income tax and may never pay it. Paying the tax is my choice.

            Favors owed to me need not remain outstanding for long periods in this scenario. If you have owed me a favor for a few months, I may ask you to return the favor by doing Guinevere a favor. Thereafter, Gwen owes me a favor instead of you. A few months later, I ask Gwen to do a favor for Rick, and so on. This way, I accumulate a fortune in favors from people with a recent record of trust.

          • RickDiMare

            Martin, I’m almost certain you’re going to have problems with the IRS, who will likely argue that you’ve constructively received income when you received your “favor money.”

            My understanding of the employEE portion of the Social Security “special income tax” on wages authorized in Helvering v. Davis (1937) is that it Constitutionalized an income tax on all wage-based incoming transfers which are not receipts of current U.S. coinage. (Again, I know this doesn’t seem to make sense, but that’s the way law is sometimes.)

          • martinbrock

            So if I mow your lawn today and you don’t pay me until next year, I owe income tax this year, and I owe the tax even if you never pay me? I’d like to see that case law.

          • RickDiMare

            Well, I assume to have a workable system that uses “favor money,” you’re going to keep numeric records of some sort, quantified by what you once referred to as  “dohns.” 

            But whatever you call it, it’s a form of substitute money that must be regulated by income taxation under Helvering v. Davis (1937).

          • martinbrock

            See below.

    • http://www.facebook.com/people/Dan-Kervick/100000673155327 Dan Kervick

      Rick, I don’t think Knapp was “proposing” anything.   He was a legal scholar who was describing the evolution of the legal and social institution of money.  Chartal money, or the chartal stage in the evolution of state monetary systems, is a form of money which actually exists, and which Knapp simply described as a characteristic of the modern systems that prevailed in the world he surveyed around him.

      Democratic governments have proven perfectly capable of maintaining tax codes and enforcing those codes through a democratic rule of law, without turning into totalitarian monstrosities.   Most people pay their taxes without fuss, since they are citizens in a self-governing polity and regard themselves as active participants in the political institutions that created the revenue system that supplies the public treasury.   Coercive measures, just as in the case of the enforcement of other types of law, are required only for that minority of people who refuse to subordinate their behavior to the established legislative  procedures and enactments of the community.   Preserving a chartal monetary system, or other similarly-based publicly organized monetary systems, does not require thumbscrews and draconian tax enforcers.   Of course, since a lot of libertarians are alienated and anti-social radical individualists who dislike even the democratic form of government, the fact that a substantial majority of people  probably doesn’t impress them that much.

      You are mixing apples with regard to neo-chartalism and the quantity theory of money.  The quantity theory of money is usually associated with the equation of exchange, which under its most plausible interpretation is a logical truth with the “velocity” term defined in terms of the others.   The variants of the the theory then typically adds some assertions about the causal dependency of certain kinds of changes in some of the variables on certain kinds of changes in other variables.   There are criticisms to be made of the quantity theory of money, but they cut across the differences between chartal and non-chartal monetary systems.  If the quantity theory is incorrect, it is incorrect in both the chartal, fiat money institutional framework and in conventional or informal monetary frameworks.  If it it is correct, it is not inconsistent with chartalism.

      • RickDiMare

        Dan, here’s a Wikipedia link to something about Georg Knapp (1842-1926): http://en.wikipedia.org/wiki/Georg_Knapp

        Near the bottom of the page there’s a link to a full copy of Knapp’s “State Theory of Money” (1924 English translation).

        Maybe “advocating” or “professing” are better words than “proposing,” but it seems to me that Knapp is doing much more than simply “describing” characteristics of various monetary systems.

        Also, I agree that not all income tax regulated currencies will necessarily lead to “totalitarian monstrosities,” but there’s a right and wrong way to operate this kind of monetary system.

        Lincoln and Treasury Secretary Chase did it the right way by issuing Greenbacks directly from the Treasury Department. And when the Greenbacks became irredeemable, they were supported by a temporary 10-year income tax. But when the dust settled after the Civil War, the coinage was revalued, the currency regulatory income tax repealed, and Greenback redeemability restored.

        Contrast this with the way the privately-owned rent-seeking Federal Reserve has been operating our chartalist monetary system, beginning with the 1963 series permanently irredeemable Federal Reserve note. There is no collar on this beast!

        • http://www.facebook.com/people/Dan-Kervick/100000673155327 Dan Kervick

          Rick, I have Knapp’s book.   He claimed to be giving a theory of the history and nature of modern state money systems, and made no recommendations for economic policy.

          I don’t understand why I should care whether the money I use is “redeemable” into another form of money.

          • RickDiMare

            “I don’t understand why I should care whether the money I use is “redeemable” into another form of money.”

            Because money is strictly a legal construct, fiction or convention; only what a country’s constitution declares it to be, which means all other forms of money are substitutes which are incapable of discharging debt. So, it matters a great deal what the numbers represent. For example, if a country’s constitution states that chicken feathers are money, and I hand you a note stating that it promises to pay you chicken feathers at some undetermined time in the future, I have not really paid you (even though the note may be legal tender).

          • http://www.facebook.com/people/Dan-Kervick/100000673155327 Dan Kervick

            No court in the country would say that a person who has discharged a debt with Federal Reserve Notes has left the debt unpaid.  These notes, and electronic reserve balances in banks’ reserve accounts at the Fed, are generally accepted media of exchange, are the legally recognized form of final payment for the discharge of all private and public debts, and are accepted by all branches of the government for the discharge of tax obligations.   There is nothing more you can reasonably want out of a form of money, other than its supply be managed in such a way as to promote price stability.   Unfortunately, the  latter goal is not entirely possible in a system with private sector banking, since banks drive the endogenous creation of money in the economy, whether by issuing their own notes or by being chartered to create deposit claims on government notes in response to credit demand.  Insisting that the most fundamental form of monetary instrument in an economy be redeemable in some other form of monetary instrument, for example gold, just pushes the inherent challenge of monetary management into another epicycle in search of a foundation that doesn’t and can’t exist.

          • RickDiMare

            No, I’m not saying the money (or electronic numbers) has to be in gold, but for those of us who care about the economic devolution that’s happening, the electronic numbers in our bank accounts do need to represent current Constitutional (metallic) coin under the Coining Clause in order “to promote price stability.”

            Also, Federal Reserve notes are the “generally accepted media of exchange,” as you say, but they are not the “final payment for the discharge of all private and public debts.”

            It is no accident that the wording on the Federal Reserve note changed when it became irredeemable.  Redeemable-on-demand notes are acceptable “in payment of all debts public and private,” but irredeemable notes only effect payment “for all debts public and private,” i.e., perpetual debt-for-debt that is never paid, and always incurring interest expense payable by the taxpayer. That’s why we’re feeling cornered and choked by the system. We are always beholden to the Fed no matter what we do.

          • http://www.facebook.com/people/Dan-Kervick/100000673155327 Dan Kervick

            I really don’t know what you mean Rick.  I don’t think out economic problems have anything to do with the Coinage Clause, or with the existence or non-existence of redeemability.

            And your second paragraph loses me entirely.

          • RickDiMare

            My short answer is that all non-coin money is substitute money under the U.S. Constitution, as absurd and simplistic as that may sound.  

            This means that non-coined money can’t adequately hold or represent property rights (because substitute currencies must be taxed as income under the Indirect Tax Clause, not property under the Direct Tax Clauses).

            Author Bill Still doesn’t understand the Constitution’s tax or monetary clauses, but I think he can explain the overall concept better in this summary to his new book “No More National Debt:”

            http://www.positivemoney.org.uk/2012/05/no-more-national-debt/

          • http://www.facebook.com/people/Dan-Kervick/100000673155327 Dan Kervick

            We could go to an interest-free monetary system by turning the banking system into a non-for-profit public utility, but I don’t think this has anything to do with gold or the constititution.

          • RickDiMare

            Yes, we (i.e., the Congress) could issue money that is not debt-based (which does not incur interest liability payable by the public on issuance),  but that’s unlikely to happen politically.

            Unfortunately, I think things have to get so bad and unfair that people will, as individuals, need to make claims for Treasury-Direct-only bank accounts when dealing at the local bank. In other words, individuals will need to reach the point at which they are willing to sue the bank (all the way to the Supreme Court, if necessary) for their monetary rights.

          • RickDiMare

            Knapp “claimed to be giving a theory of the history and nature of modern state money systems, and made no recommendations for economic policy.”

            Fair enough, but would you concede that Knapp affected Keynes, who (either consciously or unconsciously) may have advanced Knapp’s ideas?

          • http://www.facebook.com/people/Dan-Kervick/100000673155327 Dan Kervick

            Yes, Knapp was certainly an influence on Keynes’s monetary theories.

          • martinbrock

            I don’t understand why I should care whether the money I use is “redeemable” into another form of money.

            You labor for me for an hour, and we agree that your service is worth as much as an ounce of silver. An ounce of silver is not what you want for the service. It is only the price of your service. We value your labor relative to the value of silver.

            Instead of an ounce of silver, I give you a note promising an ounce of silver. If the promise is credible, others will accept the note for anything worth as much as an ounce of silver.

            The note promises silver to ensure that you receive the agreed upon value for your service, not because anyone will ever exchange the note for an ounce of silver.

  • Woj

    Thanks for 
    offering clarity in understanding how Hayek could both oppose a welfare state and favor a policy of universal basic income. Milton Friedman similarly supported a measure of basic income despite arguing for limited government. The left, right and libertarians are therefore actually in relative agreement over this policy goal. Stark differences regarding how to administer the program unfortunately remain and likely prevent any action for the foreseeable future.

    http://bubblesandbusts.blogspot.com/2012/05/kevin-vallier-hayek-on-serfdom-and.html 

    • Greg Ransom

      It’s worth noting that Hayek & Friedman advocated a “minimum income” position without the benefit of the sort of empirical experience we have all learned from over the last 30-40 years, e.g. the Seattle-Denver-Gary minimum income studies, the results of the Clinton era welfare reform, and the results of LBJ’s “war on poverty”, etc.

      • 3cantuna

        Or is it that Hayek and Friedman rejected economics as an aprioristic discipline so were victims of these last 30-40 years and more of empiricism; i.e. the assumption that society is a natural science experiment that government policy should effect and studies can measure? 

        • good_in_theory

          As opposed to the assumption that it isn’t? 

          In any case this phrase, “the assumption that society is a natural science experiment that government policy should effect and studies can measure? ”  is a joke.

          The one ‘big’ assumption includes three small assumptions

          1. Society is a ‘natural science experiment’.
          2. Government policy ‘should effect’ [sic] society
          3. Studies can measure society

          1. Is obviously true.  Society is a ‘natural science experiment’ just as much as rainfall or plant growth or evolution or apples falling from trees or a wildfire is a natural science experiment.  Shit happens and we can observe it happening and draw connections (good or bad, valid or invalid).
          2. Is irrelevant to the point as phrased.  Should has nothing to do with it.  As long as it exists, government does and will and must necessarily affect society.  People assume government does affect things.  That’s obviously true as well.  Whether it should affect things is an entirely different question, and is not assumed at all as part of ‘empiricism’.  All ‘empiricism’ assumes is that the answer to the should question can be informed by observation.  The answer could be ‘should not’ or ‘can’t tell.’
          3. Is obviously true.  The measurements may be poor or useless, but the possibility of measurement is trivial.

          The question is whether we can measure the effects of government policy in order to say what government should do.  In order to get that question off the ground, (1) shit has to happen, (2) governments have to make shit happen, and (3) we have to be able to measure shit.  Check, check, and check.  Your problem is (one infers and presumes) with empirical (causal) inference, not empirical measurement (redundant?) and empirical reality.  Unless you actually have a problem with assumptions (1), (2), and (3)?

          • 3cantuna

            What, no Descarte innate knowledge v. Lockean sensory empiricism jokes this time? 

            The question pertains to economics– so you missed the context.  The apriorists contend that social facts are different from physical facts. Observation takes on a new meaning. Social facts are theory laden. Physical facts can be of yet undetermined causes. Applying lab techniques to chemicals is one thing; human interaction is meaningless without a pre-understanding of human intentional and conscious action.  Shit doesn’t just happen. Humans are not apples. They make choices, use scarce means to attain scarce ends. The ideas of cost, risk, time, preference, profit/loss are deduced from this basic aprioristic knowledge. Even causal inference must accept this. Economic reasoning cannot be derived from testing data. There are no conceivable situations in which a singular social fact may be isolated in ceteris paribus. The human mind changes all the time, for one.

            One of the big problems with government- never mind its  experiments- is that it cannot rationalize its own existence in economic terms in key areas. The conventions (price system, entrepreneurship, profit/loss accounting) discovered for reasonable evaluation, although crude and imperfect, are damaged and destroyed by entities that tax.

          • good_in_theory

            Actually, the question pertains to the assumption(s) you imply should be rejected, which I quoted.

            I didn’t miss the context.  The context just doesn’t do any of the work you want it to.  There is no difference between social facts and physical facts qua their observability.  Those social facts which I can see (like humans doing things) can be observed, and almost everything we observe can be measured in some way.

            Shit doesn’t just happen with either physical or social facts.  And yet in either case you can observe it as shit just happening and then measure it.  That’s all it takes.

  • martinbrock

    The first problem with the welfare state is that it is a philosophically slippery target.

    Right. Enforcing Lockean property rights protects welfare, so a state enforcing these rights is already a welfare state.

    Farrell thinks that Hayek argued that the welfare state will lead to Hitler …

    The problem here is confusing “totalitarianism” with “Hitler”. All Hitlers are totalitarians, but all totalitarians are not Hitlers. I doubt that Hayek ever claimed even that a totalitarian economy inevitably leads to Hitler. In Hayek’s day, plenty of people were totalitarians while opposing Hitler. There’s Stalin, and there’s William Buckley …

    If bureaucrats can intervene to set coal miner’s wages, why not grocery store clerks?

    Mises’ argument is different. He doesn’t say that socialism creeps because bureaucrats always want more power. He says that socialism creeps because it destroys information and that without this information, central planners have no alternative to shaping all sorts of relationships by their whims, even if they’d rather not.

    That sort of welfare state does not seem to make us serfs or lead to worse forms of serfdom.

    I agree in principle, but I’m not sure I agree that a UBI is useful. “Universal Basic Income” is already vague. Do children receive this income?

    If children do not receive the income but do grow up to pay the tax, the UBI redistributes the yield of huge investments by parents to others who do not invest similarly, and parents often are already poorer than these other people.

    Never mind the parents. Let’s just think of them as everyone’s common property and ignore the tragedy of commons. why does this redistribution not harm children by impoverishing their parents?

    • Guinevere Nell

      We are all first children, and we all get the income and pay the tax (if we have the money to) when we reach adulthood. Now, yes, parents have to support their children, and will have less income out of their BIG+other-income for themselves if they choose to have children. People can choose to have children or not, and may make this choice if they can afford to, just like any other choice.

      Now, if we are looking to make society more just, one might argue that it is more just to ensure that a basic income extends to children in some way in order that the poorer citizens are not unable to choose to have children. If so, then the basic income can be offered to children, or a smaller one, or if you prefer the “traditional” framework, the BIG can be seen as having a “dependent-adjustment” such that, if done through the tax code, single filers get X, joint filers get 2X and filers with dependents get X or 2X plus Y times the number of dependents. The income might also be adjusted for age (to replace social security) and disability (to replace Medicaid / help with pre-existing conditions). Yes it’s more complex than the simplest Basic Income Guarantee, but it’s still vastly simpler and more defensible than the current mish-mash of targeted programs and tax benefits.

      • martinbrock

        People can choose to have children or not, and may make this choice if they can afford to, just like any other choice.

        People can choose to build houses or not, but if you want to live in the houses they build, you compensate them for their labor; otherwise, they stop building houses. If you pay them too little, they build shoddy houses.

        If parents can’t afford to support their children, I don’t have a problem with public assistance, but I don’t want states to pay people with children through the tax code or otherwise. I rather want children to support aging parents that supported them. Parents then may invest less otherwise during their children’s dependency to provide for themselves in old age.

        This reciprocity seems both just and economically rational to me. Parents may also pool their children’s support obligation through insurance schemes, so it need not leave parents unduly vulnerable to their children’s misfortune.

        I was interested in Social Security reform in the nineties.

        http://www.favorati.net/psupp.htm

        A BIG is a separate issue, but children are the livestock that the state must harvest to distribute this income, and I have a problem with ignoring the contributions of the livestock producers.

  • http://twitter.com/dL_1337 dL

    Simply use Hayek’s own terminology regarding this:  Planning for Competition vs Planning Against Competition. I wrote post on this  topic 2 years ago: 

    Hayek, Social Insurance and Serfdom

    http://rulingclass.wordpress.com/2010/07/13/hayek-social-insurance-and-serfdom/

  • http://frankhecker.com/ Frank Hecker

    I think a UBI or similar measures have much to recommend them, and I too don’t think much of “bureaucratic tinkering”. However such tinkering is not always self-generated by bureaucrats; in many cases (perhaps most cases?) it is in response to external pressures generated by politicians and (ultimately) their constituents. Not to pick on Mark Friedman, but some earlier comments of his point to a particular problem along those lines:  if I recall correctly he was offended at the idea of people taking a UBI and then in essence lying around the house doing nothing.  He’s far from being alone in this; most of us have well-developed “cheater detection” circuits that sound alarms at the idea of people free-riding on the work of others or otherwise getting seemingly undeserved rewards, and apparently there are good evolutionary reasons why this is the case (mainly because there are also good evolutionary reasons for cheaters to exist in the first place).

    So naturally there would be political pressures to move any UBI-like measures away from being a relatively straightforward “no strings attached” income grant program and impose various conditions on it, conditions which would require an increased bureaucracy to administer, and the burden of which would primarily fall on the poorer people who were the original justification for instituting the program in the first place. (Because of course middle class people wouldn’t countenance themselves being imposed on in such a manner, preferring their benefits to be provided without all that bureaucratic hassle — which I gather is the argument Suzanne Mettler makes in “The Submerged State”.) I think that’s as much of a slippery slope to worry about as any set of unelected bureaucrats deciding on their own to implement a “social justice” agenda.

    If I recall correctly, in earlier comments people also mentioned programs like that in Alaska that pay all residents a certain amount per year based on oil royalties or whatever. Such programs I suspect are much less controversial because the states (or countries) in question have basically externalized the costs of such programs, instead of paying for them themselves through taxes: We’re all indirectly subsidizing handing out cash checks to Alaskans through the higher prices we pay for gasoline, etc., but we don’t notice and they don’t care.

  • Greg Ransom

    Good luck getting folks like Henry Farrell or Brad DeLong to engage this material with the littlest bit of honesty or scholarly integrity.

    That is _not_ what the game is about for these guys.

    I know that no-one wants to look the thing in the face and see things as they are.

    We want to imagine something that isn’t true about folks like Farrell and DeLong.  It’s time to get over it.

    They are what they are.

  • MARK_D_FRIEDMAN

    Kevin,
    Thanks for the intresting post. Perhaps you could help me out and discuss a little bit more what Hayek had in mind by a “UBI.” This could mean either that the state ensures that all people get a certain minimum, either through their own efforst or, if they are unable to work, by means of temporary state assistance. Alternatively, it could mean that everyone gets a certain (permanent) minimum from the state, regardless of whether they are able to provide for themselves. Based on the following quote that you provided from LLL, I believe that Hayek intended the former, but I am not sure:

    “The assurance of a certain minimum income for everyone, or a sort of floor below which nobody need fall even when he is unable to provide for himself, appears not only to be wholly legitimate protection against a risk common to all, but a necessary part of the Great Society in which the individual no longer has specific claims on the members of the particular small group into which he was born (55).” (my emphasis)

    • martinbrock

      Children are not able to provide for themselves, so I’d still like to know if children receive Hayek’s UBI.

      Is having “specific claims on the members of a particular small group into which [one] is born” is a bad thing? Does “specific claims” refer to claims on parents?

  • Kyle Hampton

    I think Frank nails it.  Surprised the point was not raised in the post.

    • martinbrock

      I think you’re right, but a needs test makes little difference. If I need the income, you give it to me. If I don’t need it, you take a bit from me to provide it to others.

      If you instead give me the income and then take it all back, plus a bit more, what difference does it make? The tax covers the benefit in either case. The income without a needs test seems simpler to administer.

  • martinbrock

    If a UBI provides adequate food, clothing and shelter, however spartan, plus access to the internet, would’t people stop working in droves? I don’t need much clothing for that matter …

  • http://twitter.com/VelizCF CFV

    Well, some people proposes something like UBI in order to replace the welfare state:  http://www.amazon.com/In-Our-Hands-Replace-Welfare/dp/0844742236?tag=bleedheartlib-20

    I must admit I never fully understood this Hayekian argument that a planned economy would lead to totalitarianism.  Is it supposed to be a conceptual argument? Or is it supposed to be an empirical argument? 
    There is, at least, one example of economic planning that did not end up in totalitarianism: post-war Japan (See http://en.wikipedia.org/wiki/Saburo_Okita).

  • martinbrock

    Planning not to plan so much is a different sort of planning.

    The best brief statement of the argument I know is Mises’ Economic Calculation in the Socialist Commonwealth, and the argument is not against planning per se. It’s against central planning without market prices.

    • http://twitter.com/VelizCF CFV

      How do you know that Japan did not plan “so much”?

      Of course I did read that Mises’ essay. However, it is a different critique of economic planning and it does not address my question concerning Hayek’s argument, which is often cited and repeated but it is not, to my knowledge, well crafted.

      • martinbrock

        I’m not an authority on Japanese planning following W. W. II, but I know that the Japanese economy was less planned than other Asian economies, like China’s before the eighties and North Korea’s.

        The example of Japanese planning most familiar to me is the Fifth Generation Computing project in the eighties. I was in college studying computer science at the time. The project was all over the news then, and I bought all of the hype, but in retrospect, the project’s goals were incredibly short-sighted, emphasizing many trends in computing then thought significant but omitting trends that ultimately were far more decisive over the next few decades.

        Fifth Generation Computing emphasized super computing, massive parallelism, robotics, expert systems, natural language processing and artificial intelligence more generally. It focused on central processing and intelligent algorithms.

        In all the hype, I don’t recall anything about laptop computers or tablets, the merger of computers and communications, mobile devices, hypertext, the web and the internet more generally, electronic commerce, social networking, computer animation and interactive gaming, automated mapping and the GPS, digital music and video, podcasting.

        Looking back on this “planning”, one could gloss over the details and say that Japan’s visionary planners anticipated the importance of “computing” and organized Japanese resources accordingly, but this hindsight is fallacious.  Practically everyone expected computers to become more ubiquitous and to alter human societies at the time, but the Fifth Generation project got almost every detail wrong. So did most everyone else for that matter.

        Eventually, the market got it all right. If you now review the history selectively, you can find people in the early eighties discussing all of the sorts of information technology that eventually had the greatest impact, and some of them were state planners, but these people did not plan what ultimately happened.

        • http://twitter.com/VelizCF CFV

          I’m sorry, but I do not consider anecdotal evidence is a reliable source of knowledge. If you want to know more about Japan’s economic planning, Okita is a good place to start. 

          Cheers.

        • david3368

          Japanese economic miracle dates to the 1960s under aegis of the Ministry of International Trade and Industry, not the 1980s.

          Planning doesn’t have a simple relationship to success. Singapore had extensive five-, ten-, twenty-year plans like all of its socialist-dominated postwar postcolonial states had, whilst Hong Kong did not; by any measure their eventual outcome was roughly identical.

          Conversely, Japan and the South Korea “planned” a lot more than the Republic of China (Taiwan) did – Chiang Kai-Shek, much like South Korea before its miracle (under Rhee; the Korean miracle began under Park), was too busy solidifying his government to dedicate any real attention to economic policy. Taiwan still underwent an economic boom but it was much smaller in magnitude and today it is still poorer than Korea and Japan.

          Remember that in the absence of “planning”, one doesn’t magically have a perfectly functional minimal state with efficient courts to enforce private contracts. One merely has the same humanly corrupt state as before, albeit the state’s leadership doesn’t buy into any private-sector plans for profitable development and pursues its own non-planned agenda.

  • martinbrock

    @google-2c792dc0621198cb5875384b967d93e9:disqus 

    In the “favour economy” I can ask for the favor directly from someone, and then wait and see what options I have for returning some kind of favor in order to make good on the painting-favor I have received.

    Right. You still “borrow money” in a sense. You borrow it from the painter. Then you pay him for the painting with the money you borrowed. You return the money to him, but you haven’t repaid the loan. You still owe him the money you borrowed.

    In this scenario, the painter might as well print the money himself. We all have money to lend this way. We only need to realize it again.

    In the more conventional arrangement, you borrow money from a bank and pay the painter. The painter then deposits the money in the bank. You owe the bank, and the bank owes the painter. What’s the point? You might as well owe the painter directly.

    This connects a job-bank sort of thing to the system of economic transaction, it includes a bank (and savings and investment) within the system, …

    That’s true too, and “job” is very scalable here. Favorati is a social network, so I’m in D.C. but don’t know anyone in D.C. directly; however, through a sequence of relationships, someone in D.C. owes me a favor, like picking me up at the airport and driving me to a hotel. If a friend of a friend picks me up at the airport and drives me to a hotel, can this service violate a taxi licensing law?

    … they could offer a charitable subsidy to those transactions within the system …

    Rather than doing volunteer work for a charity myself, I can do you a favor and then ask you to do the volunteer work in lieu of returning my favor. I donate my “favor in the bank” to the charity, and they call you when they need you.

  • http://www.facebook.com/people/Dan-Kervick/100000673155327 Dan Kervick

    Isn’t all of this hand-wringing about the proper interpretation of the Great Hayek just the usual wrangle about slippery slope arguments of all kinds?  People sometimes say you should be careful about doing actions of kind K because an accumulation of such actions can create a self-sustaining momentum that leads you down the slippery slop to dreaded outcome Z.   It doesn’t follow that you should never do an action of kind K.

    • martinbrock

      If K is barely (or dubiously) justifiable anyway, the slippery slope argument seems compelling to me.

      • http://www.facebook.com/people/Dan-Kervick/100000673155327 Dan Kervick

        Maybe, but it doesn’t follow that a person who warns about the slippery slope but also recommends a few useful but careful steps out on the slope is being inconsistent.  Hayek wasn’t an absolutist.

  • Guest

    Kevin writes:  “Despite Hayek’s repeated claims that he does not think “welfare states” lead to totalitarianism”

    How to square with Hayek’s 1976 statement that: “socialism has come to mean chiefly the extensive redistribution extensive redistribution of incomes through taxation and the institutions of the welfare state. In [this] . . . latter kind of socialism the effects I discuss in [RTS] are brought about more slowly, indirectly,
    and imperfectly . . . the ultimate outcome tends to be very much the
    same, although the process by which it is brought about is not quite
    the same as that described in this book. (Hayek preface to 1976 edition of Serfdom)

    That quibble aside it is very good to read this post.

  • http://www.facebook.com/curt.doolittle Curt Doolittle

    A rare intelligent article that accurately portrays Hayek’s position.  Thank you.

    RE: “But wait. In my last post, I pointed out that even the later Hayek defended a universal basic income, a policy considered solidly welfare statist.”

    If we were to give everyone 10K a year in direct redistribution in cash it would not violate any of Hayek’s warning about the impact of administrative bureaucracy on production processes and the evolutionary adaptation of rules and norms.   (But it is incompatible with open borders.)

  • martinbrock

    @RickDiMare:disqus 

    … what you once referred to as  “dohns.”

    A “dohn” was an hour of common labor, but I decided the name was too geeky and too offensive to “right libertarians”, so I dropped it.

    … it’s a form of substitute money that must be regulated by income taxation under Helvering v. Davis (1937).

    The recipient of a valuable good presumably is subject to the income tax, as in a barter transaction, but a Favorati only records the fact that I’ve done you a favor and you may expect me to return the favor but I’m not legally obligated to return it. My question to the IRS would be “how can I deliver a portion of a valuable good to you before I receive one myself?”

    • RickDiMare

      Martin, if you look up the word “favor” in the dictionary, it’s more akin to a gift or donation, and I would agree that a gift/donation favor you might extend to someone is not income. I would also agree that receiving a return of principle from a loan you extended to someone is not income (but the interest you may receive is).  

      But, regarding your favor trading ideas, if you’re expecting something in return at some future date, that’s what makes your Favorati recording transactions valuable (and taxable as income).The IRS will look at the substance of your transactions, no matter what you call them, and likely conclude that you’re trying to create a new kind of monetary system (which competes with the Treasury Department’s Constitutional monopoly … and therefore must be taxed/controlled/regulated under the 1937 Helvering v. Davis case I mentioned earlier). 

      • martinbrock

        The Federal government has nuclear weapons and may order me to surrender wealth at any time for any reason or no reason; however, if I mow your lawn and you don’t pay me for a year, I suppose I receive the income when you pay me, not when I record the price in my accounts receivable. Even with nuclear weapons at their disposal, I’m skeptical that courts have ruled otherwise.

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  • The Keystone Garter

    The Canadian bayonet charge into German machnine gunners in a WWI battle seems impossible given 75% casualties.  What sacrifice.
    Good intentions but this thread seems almost meaningless.  Yep, institutionalized laws are better than ad hoc administration of such, because of Soviet and lesser USA alphabet agency bureaucracy.  You guys had 9-11 warning but couldn’t do a thing about it; one of the terrorists was even in the phonebook.  At least a million pot heads and non-violent dealers in slavery though, WTG.

    You use the thousand cuts if there are a thousand market failures.  Corn causes diabetes and heart disease so probably better off finding a healthier sugar.  The GAI also can mean services; kids need good schools and crazy people need rooms with thick insulation; probably eat money.
    I like a good dictator.  Chretein faked appendicitis to escape a boarding school and had to have the surgery.  He came from a working poor family and served in almost every Cabinet Ministry before leading the nation (in Canada a majority gov has only one non-wartime check on power, the Queen, though party does mutiny and leader does give up this power often to judge public or party loyalty).
    R.Murdoch was a dictator in Australia.  Now one who agrees with the politics of this blog even understands how that can happen.  Then he tried to get political power illegally:  oops.
    Hitler came to power because of racist/political-hatred Germans and lack of any European 1930s Keynesian knowledge.  You guys are partway there formenting neocon idiots.  Germans started off in Spain and Norway very weak.  B.Clinton over GWB obviously; another downside of too many checks on power.  In Weimer Germany there were elections and political deadlock and elections.  It wasn’t until Hitler got the schools that he got the military.  Commies fought him and social democrats made the bravest political choice ever.  You basically want your powerful people to be humanists with an empirical mindset and as much non-WMD science as possible.  Inheriting wealth gives you little incentive to create wealth, a fatal flaw to your politics.

  • The Keystone Garter

    …Chicago forced Walmart to give a living wage to clerks of $10.25/hr.  Their F/T employees were the only ones in the nations not stuck in a deadend job.  Chicago offered their 1st responders freely to Hurrican Katrina victims.  Turned down by GOPers.  You guys are morons.  In Canada our very best leader could theoretically serve forever and our media like yours, gets bored with idiots after a decade or so.  The human capital of actors is more important than what the law says.  The Queen is our dictator but very rarely uses her power and when she does it is to side with the Prime Minister.  In your system rich people exercise enormous influence and in secret.  That is a much greater risk than Crown subsidies.  Doesn’t it bug you that you need an 8-figure net worth to be leader in USA?
    Rich families force specialization of occupation.  And brains are genetics and time to learn.  Very few of your best will make it to Presidency.  Most Candians have that opportunity.

  • The Keystone Garter

    I used to want to be a hedge fund manager in Toronto or NYC, with the goal of inventing an ethical hedge fund.  I wonder what my influence would’ve been in the parallel universe where I highlight subprime mortgages and the ability to leverage SRI.  Would NYC’s banksters have cared?  I learned I didn’t want to be rich or raised by the rich in Jr High.  They had the best math contest private teachers and I broke even with their Chinese (and Jewish I assume) students despite strict time controls.  My math tests (skipped class for weeks at a time) were often a few pages of scribbles:  my HS math teacher loved me and hated me.  In Canada you need maybe a million to run for office.  Even a minimum wage worker can get that now that minimum wage of clerks in raised to $8/hr+.  That isn’t true for many States.  You had potential geniuses, they are in dead end jobs or specialized careers their wives love them for earning.
    Being a serf was good.  You were protects from the invaders that killed Romans.  C.Martel set up the system after he brilliantly crushed maurading invaders from South, from North, and IDK if he was needed to crush NE germanic tribes or not…the technologies of the future will be invented out of a multi-dsciplinary knowledge base.  Stopping WMDs will involve taking over our minds or taking over our education (NSA already does this).  We need to find good dictators to at least start this process and make the right choice.  Is USA game?  Thx for fighting commies and partial WWs anyway.

    • The Keystone Garter

      …if I smoke a spliff or look like I’m hispanic without carrying my papers, are you guys for giving me a good lawyer or do you self-destruct?  All the N.European countries live longer.  When Indian Reserves in Canada and our oiley province wanted self government, they got it.  And they reply the same mistakes feds made half a century.  What is the virtue of liberty?  Canada is a country that isn’t racist and (GOP hits a wall at 40%) isn’t classist.  Is your Declaration of Independace like a Bible?
      Dictator Chretein advised to the Indian Reserves:  you need private property rights.  Chew on that one.

      • http://classicalvalues.com TallDave

        Surprisingly few people have ever looked at U.S. LE broken down by state or ethnicity.  Interestingly, the U.S. Plains states and Hispanics live longest, respectively — the former have the highest LEs in the world.

  • Counsellor

    “But contrast this with being    forced    to pay a   modest share    of your income to provide a   universal basic     income, with clear, simple tax rates and clear, simple funds provided to those who fall below, again, a clear, simple, public threshold. That sort of welfare state does not seem to make us serfs or lead to worse forms of serfdom”
     
    As I have raised with Andrew Cohen, the objectives of these doctrines all seem to require the imposition of obligations not voluntarily assumed. (see, “forced”)
     
    In the above equation even the mode of performance of the obligations is to be imposed. 
     
    Like the “Manifesto’s” objectives (to according to need; from according to ability) we are left with questions that empirical evidence to date does not offer tasty responses.
     
    How and by whom are “modest share” (please note adj. requires judgment); and what constitutes “universal basic;” and “public threshold,”  to be determined in our social orders?
     
    It is in the means necessary and sufficient to the ends of those determinations that take a social order onto the path to serfdom.

    Given the reference to Mancur Olsen’s Distributive Coalitions (and their effects), it is surprising that empirical experience might support the likelihood that the objectives sought can be attained through the uses of the mechanisms of governments is even suggested – without some argument as to how or why.
     
     
     
     
     

  • good_in_theory
  • Counsellor

    Wow! what happened to the comments?

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  • Steven Horwitz

    I haven’t read all the comments, but Kevin’s argument here seems right to me and consistent with a point Hayek makes in LLL II where he talks about UBI or something similar has providing for people “outside” of the game of catallaxy. That is, we ensure a minimal income for those who, for reasons he tries to specify, are unable to be participants in the market. What he objects to is trying to redistribute income by manipulating prices, wages, and income. I think this corresponds to Kevin’s distinction between “welfare state of law” and “welfare state of administration.” Something like UBI is also consistent with Hayek’s commitment to the generality norm, where the welfare state of administration is not.

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