Amartya Sen on Hayek's The Road To Serfdom

For record, I reproduce the full review article by Professor Amartya Sen on Professor F A Hayek's one of the greatest book The Road To Serfdom. This article was first published in The Financial Times on September 20, 2004.

"An insight into the purpose of prosperity" By Amartya Sen

Friedrich Hayek's combative monograph The Road to Serfdom had a profound impact on political, economic and social thinking in the decades that followed its publication 60 years ago, serving as an intellectual manifesto against socialist planning and state intervention. But are Hayek's ideas and arguments of any interest today, after the downfall of communism and the emergence of neo-liberalism as the dominant ideology of contemporary capitalism? I would argue that they remain extremely important.

Consider Hayek's insistence that any institution, including the market, be judged by the extent to which it promotes human liberty and freedom. This is different from the more common praise of the market as a promoter of economic prosperity. A huge part of economic theory is concerned with the prosperity argument, going back to Adam Smith and David Ricardo. That connection is indeed important, and it is not surprising that so much attention has been devoted to seeing the market mechanism from this perspective - defending its achievements as well as disputing particular claims and proposing qualified endorsements. Yet Hayek was surely right to insist on clarity regarding the purpose of seeking prosperity. Markets have to be judged, he argued, by their role in advancing freedoms, not just in generating more income (as Hayek once said: making money can be of interest only to the miser). This integrative perspective demands that we be concerned both with the outcome of market processes (including the economic prosperity it may generate and the extent to which that would advance human freedom) and with the processes through which these results are brought about (including the liberty of action that people have in an institutional system).

It is the perspective of seeing markets and other institutions in terms of their role in advancing freedoms and liberties of individuals that Hayek brought into singular prominence. It may be pointed out, in contrast, that despite the title of Milton Friedman's famous book (with Rose Friedman), Free to Choose, the criteria by which Friedman tends to defend the market mechanism are not liberty and freedom, but prosperity and utility ("being free to choose" is seen as a good means - a fine instrument - rather than being valuable in itself). Even though a few other economists, James Buchanan in particular (and, to some extent, John Hicks), have presented insightful ideas on a freedom-centred line of reasoning, it is to Hayek we have to turn for the classic articulation of this way of seeing the merits of the market mechanism and what it gives to society.

I am not persuaded that Hayek got the substantive connections entirely right. He was too captivated by the enabling effects of the market system on human freedoms and tended to downplay - though he never fully ignored - the lack of freedom for some that may result from a complete reliance on the market system, with its exclusions and imperfections, and the social effects of big disparities in the ownership of assets. But it would be hard to deny Hayek's immense contribution to our understanding of the importance of judging institutions by the criterion of freedom.

A second contribution of Hayek is of particular relevance to thinkers on the right of the political spectrum. In The Road to Serfdom, he gave powerful reason to indicate why explicit provision has to be made by the state and the society for the deprived and the dispossessed. While Hayek is often taken to be uncompromisingly hostile to any economic role of the state (other than what is needed to support the market mechanism), and certainly late in his life he gave grounds for thinking that this could indeed be his view, nevertheless in The Road to Serfdom Hayek's position is much broader and inclusive than that. Now that the welfare state is often under such attack, it is worth recollecting that the pioneering manifesto that championed the market mechanism on grounds of freedom did not reject the need for a welfare state and provided a reasoned defence of it as an institutional necessity.

A third contribution of Hayek is of particular interest to those on the left of the political spectrum. Hayek's critique of state planning is mainly based on a subtle psychological argument. He was particularly concerned with the way centralised state planning and the huge asymmetry of power that tends to accompany it may generate a psychology of indifference to individual liberty. As Hayek put it: "I have never accused the socialist parties of deliberately aiming at a totalitarian regime or even suspected that the leaders of the old socialist movements might ever show such inclination." One of Hayek's central points was that "socialism can be put into practice only by methods of which most socialists disapprove".

We can hardly ignore the massive accumulation of evidence - before and after publication of The Road to Serfdom - of tyrannical use of bureaucratic power and privilege, and the political and economic corruption that tends to go with it. Hayek's central point here was to note that even though socialism has a strongly ethical quality, that is not in itself adequate to guarantee that the results of trying to implement it will be in line with its ethics, rather than being deflected and debased by the psychology of power and the influence of administrative arbitrariness.

Hayek was insightful in drawing attention to a basic vulnerability that goes with unrestrained administrative authority, and in explaining why social psychology and institutional incentives are extraordinarily important. To take the massive evidence in socialist practice of departures from expected behaviour to be no more than easily avoided individual aberrations would be comparable to blaming the "few bad apples" to whom the leaders of the coalition forces point in Iraq when they refuse to consider the systematic corruptibility underlying the torture and brutality of an unrestrained system of imprisonment. Incidentally, Hayek's psychological insights into administration also tell us something about the genesis of those terrible contemporary events.

Our debt to Hayek is very substantial. He helped to establish a freedom-based approach of evaluation through which economic systems can be judged (no matter what substantive judgments we arrive at). He pointed to the importance of identifying those services that the state can perform well and has a social duty to undertake. Finally, he showed why administrative psychology and propensities to corruptibility have to be considered in determining how states can, or cannot, work and how the world can, or cannot, be run.

As someone whose economics (as well as politics) is very different from Hayek's, I would like to use the 60th anniversary of The Road to Serfdom to say how greatly indebted we are to his writings in general and to this book in particular. Dialectics is critically important for the pursuit of understanding, and Hayek made outstanding contributions to the dialectics of contemporary economics.

The writer, Lamont university professor at Harvard University, was awarded the Nobel prize for economics in 1998.

Socialist MMS and others

"But did MMS have firm convictions about market-based systems? He never did, at least before he took the FM’s job in 1991. There is evidence in his PhD thesis (published as a book in 1964), the South Commission report he effectively authored just before becoming FM and his role during Indira Gandhi days, including coining the slogan Garibi Hatao."

"Since the Congress still honours the convention of not naming things after living people, Sonia and Rahul are disqualified. That leaves Motilal and Jawaharlal Nehru and Indira and Rajiv Gandhi. Roughly 90 per cent of the objects are named after Rajiv Gandhi, 9 per cent after Indira Gandhi, 1 per cent after Jawaharlal Nehru and none after Motilal Nehru. And yes, the manual employment scheme is named after Mohandas Karamchand Gandhi, and the foodgrain distribution scheme awaits the death of another Gandhi"

Some Good articles

Prof Jagdish Bhagwati writes "In fact, Indians may be surprised to note that, while the enhanced US economic and poli-tical interest in India has been the policy preference of Clinton, Bush and Obama, the intensity with which that preference was held is generally considered to have been the greatest under Bush. Perhaps an anecdote will illustrate this most effectively."

"when it comes to corruption, there is no political party with only Kauravas and no party with only Pandavas"

"Fine, but let’s hope Sen will also estimate deaths caused by faulty policies that historically kept India’s GDP growth slow, and have once again slowed growth today."

"For instance, a 2005 study by Timothy Besley, Rohini Pande and Vijayendra Rao finds that gram sabha meetings are positively correlated with better targeting of BPL cards to the poorer villagers."

"shake off the looming institutional crisis"

"The prime minister is honest, we will hear. But never before has someone been so thoroughly compromised through abdication. Sonia Gandhi stands for the poor. Never before have the poor been so brazenly used to cover a multitude of sins; and never before has so much emphasis been on policy that will condemn the poor to poverty." More here.

"a country with the oldest stock exchange in Asia but at the earlier stages of economic reform; perhaps the only nation to grant complete political freedom to its citizens but little economic freedom"

"Keynes himself was to a large extent responsible for giving this criticism of his work currency"

"So long as the central government continues to rely on mutually insulated bureaucratic silos, which prevent the convergence of more than 150 centrally sponsored schemes, and the Planning Commission fails to enforce its own circulars and manuals for planning, there can be no participation of people in programmes meant for their welfare development."

Professor Amartya Sen is wrong, again

10 reasons why Amartya Sen is wrong about food security bill

Stuck record: Why Amartya Sen is wrong on food security again

"A report by lined to a very senior journalist said that on August 31, Manmohan met UPA chairperson Sonia Gandhi and told her that his office had cleared the questionable coal allotments on the recommendation of her political secretary Ahmed Patel, thus washing his hands of the tainted allotments and telling Sonia  that he had no role or interest in determining who the  beneficiaries should be. And laying the blame close at the party’s door, the PM said that his then principal secretary T K A Nair had merely coordinated  the allotments as desired by Patel. No Pundit is needed to say that Patel means Sonia herself. But who will investigate Manmohan  when he is the Prime Minister? And who will investigate Patel when Sonia is the president of the party which runs the government." More here.

Some links

Same old story about B R Ambedkar and his social and political life.

Impossibility theorem for 2014

Economists and economics vs policy making

Imported  Economics Teaching

"Economic reforms are very important for creation of wealth"

The below is a bit from the interview of Mr.Chandrababu Naidu, former Chief Minister of Andhra Pradesh:

After losing two elections, are you regretting the economic reforms you initiated ? 
No. I have no regrets. In hindsight, I think I should have gone with reforms carefully, in phases. Had I done so, the state would have been on a different footing altogether by now. Today both people are suffering and I am also suffering. I am now making extra efforts to educate the public about my policies. 

So you are not going to give up on economic reforms, right? 
Economic reforms are very important for creation of wealth. I am conscious now of the importance of taking the benefits of such economic reforms to the common man. We have to balance between reforms and their benefits. Otherwise there is no meaning for economic reforms. 

Interesting reading

Why Indian economy slowed? 

Dr. Bhim Rao Ambedkar had cautioned us in his speech on November 4, 1948, delivered in the Constituent Assembly that: “The form of the administration must be appropriate to and in the same sense as the form of the Constitution ... [It] is perfectly possible to pervert the Constitution, without changing its form by merely changing the form of the administration and to make it inconsistent and opposed to the spirit of the Constitution … Constitutional morality is not a natural sentiment. It has to be cultivated. We must realise that our people have yet to learn it.” More here.

"No one from Gujarat’s eastern counterpart — Bengal — has given either the chief minister of Gujarat or the chairman of Reliance Industries Limited any epithet of respect."

"A laissez faire economy is characterized by the absence of non-market pressures such as taxes, subsidies, tariffs, though the very definition of a free market economy has been the subject of vociferous debate. In a free market/economy, individuals are free to contract, where the only regulations, in theory, would be to safeguard against coercion and theft. Certain economists have postulated that competition would thrive in a free market economy, perhaps even through a praxeological approach. However, given the different theoretical models of free-market economies and the opposing practical reality(ies); class differences, income inequities and the resultant dominating powers do allow for a powerful class to emerge and skew market conditions through monopolies and the abuse of dominant positions." More here.

Skilling all

Here is my latest work on "All bucks stops at skilling". This is a second piece for the CPPR. I conclude with the following para:

• On the flip side, the PM’s National Council, NSDC and some select State Governments have done reasonably good work except the NSDCB! The NSDCB had constituted five Sub-Committees on various aspects of vocational education and training for undertaking systemic reforms in the country. All the five Committees Reports have also been submitted. Some of these Committees have made really great recommendations but the tragedy is that Reports of Committees/Commissions constituted by Government are not time bound for implementation of recommendations/suggestions. Secondly, there is more confusion in the projection of target of skilling 50 million during the 12th Plan period. The Economic Survey 2012-13 mentions target skilling of 8 Crore persons in the 12th Plan. The 12th Plan Document of Planning Commission mentions both 50 million as well as 8 Crore! The basis on which these projections arrived is not clear. Thirdly, the annual capacity of skill training of various Ministries/Departments is around 4 million persons only. Hence, the annual target of skilling 90 lakh persons for 2013-14 is also looks unfeasible. The above skill training numbers includes all the major Central Ministries/Departments/Organisations involved in skill development and training in the country. Fourthly, despite the best of efforts of many new institutional setups with inclusion of industry experts and civil society activists, the Central government is still finding difficulty in bringing out a comprehensive amendment’s to the filthy Apprenticeship Act, 1961. However, the future is filled with a lot of positive energy. Let’s face it boldly.

Some links

"India is a vibrant democracy, and as the economic system failed the economically weak, the political system tried to compensate."

Why we still need to read Hayek: Hayek Lecture at Duck by Professor John B Taylor

"He doesn’t want the odium of polarized votes to overshadow his development and governance agenda. At best it should be a collateral benefit. He is smart enough, certainly, to know that young Indians, while deeply religious themselves, have moved beyond wanting to see religion used as a political tool."

"Learned Hand once wrote something that seems like an apt description of the wider context: "A community is already in the process of dissolution where each man begins to eye his neighbour as a possible enemy, where non-conformity is a mark of disaffection, where denunciation, without specification or backing takes place of evidence, where orthodoxy chokes freedom of dissent, and where faith in the eventual supremacy of reason has become so timid that we dare not enter our convictions in open lists." More here.

“He must be prepared to speak about everything, and often about nothing. He is expected to preserve temples, to keep the currency steady, to satisfy third-class passengers, to patronise race meetings, to make Bombay and Calcutta each think that it is the Capital city of India, and to purify the police… If he does not reform everything that is wrong, he is told that he is doing too little, if he reforms anything at all, that he is doing too much.

Interesting reading

I have been travelling a bit for some time and will be back soon!

Meanwhile, you may like to read the following articles:

• "What do you call an Indian economist who keeps attacking Indo-US economic ties? A US diplomat posted in India in the 1970s called professor B R Shenoy of the Delhi-based The Economics Research Centre, "a decent but a crackpot economist" whose "pearls of wisdom" have often been sent to various US political figures." More here.

"Among many thing that Dr Ambedkar’s party promised, the following were key issues that it would deal with on a priority basis if it came to power:

1. Agriculture must be mechanised. Agriculture in India can never prosper so long as the method of cultivation remained primitive
2. To mechanise farming, cultivation on small holdings must be replaced by large farms
3. To increase the yield, there must be provision for adequate manure and for the supply of healthy seeds But here is a contradiction which is monumental in nature. The Communist movement opposed mechanisation of agriculture. In fact, opposing mechanisation of agriculture has been a big issue for them." More here.

"The bloated and suffocating socialist model"

Interesting book review:

• "Joseph Stiglitz, Belgian-born Jean Drèze and Harvard's Amartya Sen, for being "intellectually lazy and unwilling to learn from the ruin they had visited on India and its poor."

• "Between 1965 and 1975, per capita income in India rose by a minuscule 0.3% annually. If you were to draw up a list of post-colonial leaders responsible for economic crimes against their people, Indira Gandhi's name would figure near the top. By one Cato Institute estimate, India would have had 175 million fewer poor people by 2008 had it embarked upon reforms in 1971 instead of 1991."

Early Indian economists

Last Friday I attended a talk delivered by Mr.J Krishnamurty on "The Rise of the Indian Economist Before Independence" at IIC, New Delhi. The talk was based on his book published recently.

Though, I had healthy discussion with him after the talk. But the talk was not very interesting. Mr Krishnamurty was not very sure about many of the economists (listed in his book) works in totality. He is also more confused on taking position about works of economists like B. R. Ambedkar, B.R.Shenoy, S.V.Doraiswmi, C.N Vakil, etc. His conclusion about early Indian economists is disaster. In fact, some of them are factually incorrect. He says that almost all the early (since 1930) Indian economists were "Keynesians" which is not true at all.

I simply ask why should the retired people take pleasure in the History of Indian Economic Thoughts, let alone the subject remain in infant?

Some links

"The question is why don’t these leaders do something about it then, starting with eradicating the red tape that stifles educational institutions in India?"

"The Institute of Economic Affairs, a think-tank in London, established by a follower of F. A. Hayek, had an immense impact on the thinking of the young Thatcher. India now has Hayekian think-tanks, but it awaits her own Iron Lady."

"Today, as I rewind to my childhood four decades ago, I realise why the void in me is so full of gratitude to my guru."

"A humane alternative to the current state of affairs is to recognize the property rights of tribals and allow businesses to access tribal resources only through the market, rather than through political force. Such an arrangement will improve the economic status of tribal communities and achieve better economic efficiency by directing scarce resources towards their most urgent economic ends."

Some Links

"Ambedkar himself has been accorded quasi-divine status by his followers"

"This less serious comment calls for serious response. Otherwise illiteracy about India will continue to persist for lack of literacy among Indians who speak for India. But, it calls for a peep into the world and the Indian economic history which most Indian academics, particularly economists, seem to be least interested in and therefore less aware of."