David Warsh: We continue to live with 'cameralism'

F.A. Hayek (1899-1992), the famed European philosopher and economist, hated what MIT economist Paul Samuelson dubbed the “modern mixed economy.’’

SOMERVILLE, Mass.

From its beginnings, in 1947, the Mont Pelerin Society sensed a problem, which its members understood better than most.  In the aftermath of World War II, amid the smoldering ruins of Europe, it was impossible not to be repelled by the two familiar examples of government planning, Hitler’s National Socialism and Lenin’s Bolshevik Revolution.

But the philosophers, historians, economists and journalists who formed the market advocacy group Mont Pelerin Society knew that the roots of government planning went much deeper than that.

In 1727, The King of Prussia established a chair of “Oeconomie, Policy, and Kammer-Sachen” at the University of Halle, at a time when, across the North Sea, Adam Smith was three years old.  In his address on the occasion, the chancellor of the university noted that the concerns of the new discipline went far beyond what was to be found in Aristotle.

“What happens in the fields, meadows, ponds, woods, gardens or relate to planting; how to treat cattle in their stalls; how to increase manure; how to brew and sell corn; the task of a husbandman on every day of the year what reserves to lay by and how to stock a storeroom; how to properly organize kitchen and cellar; what to keep and what to distribute: not a word of this appears in Aristotle.”

“Kammer-Sachen” means something like legislative and judicial matters, the word Kammer meaning chamber, as in the private office of a judge. The idea of a science of governmental planning – oversight of what today its critics call “the administrative state” – was an Enlightenment project, shaped by the ideals that took hold in the years before the French Revolution. Conceptions of husbandry – of the systematic promotion of good order and happiness within the state – is older than classical economics.

You can follow the development of cameralism – meaning, loosely, government planning and oversight – in Strategies of Economic Order: German economic discourse 1750-1950 (Cambridge, 1995), by Keith Tribe, an independent economic historian  and author of several well-received books. You may need the occasional help of a good German-English dictionary.

Cameralism is, roughly, what Adam Smith labeled mercantilism, or “the commercial system,” in contrast to his own market-based “system of natural liberty,” which he laid out in 1776 in An Inquiry into the Nature and Causes of the Wealth of Nations.  Smith defined mercantilism as an export-oriented and monetary strategy, managed by the state, in cooperation with well-ensconced business interests, in competition with other states.

In Friedrich List’s critique of The Wealth of Nations, published in English in 1846 as The National System of Political Economy, cameralism sounds more like a heavy-handed version of today’s macroeconomics – a true political economy, journalist List wrote, as opposed to Smith’s cosmopolitan economics.

In nine painfully erudite scholarly chapters, Tribe traces the course of the German persuasion from List through Max Weber, Ludwig von Mises and Otto Neurath to F. A. Hayek, organizer of the Mont Pelerin Society. He finishes with an analysis of the Nazis’ grand plans for Europe, noting its similarities to, and differences from, the European integration that eventuated after 1945.

Some of this background, but not much, is to be found in The Great Persuasion: Reinventing Free Markets since the Great Depression (Harvard, 2012), by Angus Burgin, of Johns Hopkins University.  (There is only so much an author can tell in one book.) A chapter on “moral capital” elucidates fears in the 1970s among neoconservatives – Irving Kristol, for example, a socialist in his youth – that libertarian capitalism was eroding “traditionalist” values. This was, in effect, living off the “accumulated moral capital” of social philosophies that it had supplanted, Kristol wrote, in declining an invitation to join the Mont Pelerin Society.

Already in 1935, while living in London, Hayek was sufficiently alarmed by the drift of things to collect several of his essays in Collective Economic Planning (Routledge, 1935). In “The Nature and History of the Problem,” he put his diagnosis most clearly.

“If we are to judge the potentialities aright, it is necessary to realize that the system under which we live choked up with attempts at partial planning and restrictionism is almost as far from any system of capitalism which could be rationally advocated as it is different from any consistent system of planning.  It is important to realize in any important investigation of the possibilities of planning that it is a fallacy to suppose capitalism as it exists today is the alternative. We are certainly as far from capitalism in its pure form as we are from any system of central planning. The world of today is just intervention chaos.”

Not much changed in Hayek’s views between then and the time he wrote The Road to Serfdom, in 1944, still living in England.  He had declared firm opposition to what, in 1948, would be described in the United States, in Paul Samuelson’s introductory textbook, Economics, as “the modern mixed economy.”

It doesn’t take more than a high-school diploma to recognize that much of America’s institutional mixture had been borrowed from German culture, some of it recently – from kindergarten to research universities and business schools, from government civil service to industrial safety, from rural electrification to road-building, from social insurance (retirement, medical, disability) to wage-bargaining and bank regulation.

Hayek may have longed for systemic purity, but it was Milton Friedman who put into action plans to purge its elements of cameralism, with two books of his own. Capitalism and Freedom, in 1962, espoused the economics of Barry Goldwater’s 1964 campaign.  Free to Choose, in 1980, set out what Friedman hoped would be Ronald Reagan’s platform for governing.

For example, in 1962, Friedman proposed to dismantle discretionary central banking, fixed exchange rates, public education, conscription, anti-discrimination policies, corporate social responsibilities, trade unions, professional licensing and compulsory social insurance, including the Social Security System.

Friedman had stupendous success as a cultural entrepreneur. Many of the measures he proposed have been adopted.  Final returns are far from in on many of them – the all-volunteer military, for example. But one major strut may have already turned out to be disastrous, at least for one prominent company in the news.

In an influential essay in the New York Times Sunday magazine, in 1970. Friedman argued that “The Social Responsibility of Business Is to Increase Its Profits.” Business leaders who promoted desirable “social” ends – providing employment, eliminating discrimination, avoiding pollution “and whatever else may be the catchwords of the contemporary crop of reformers” – were “preaching pure and unadulterated socialism.”

A publicly owned corporation had only one ‘‘social’’ responsibility, Friedman concluded: “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” That meant increasing share prices, a goal easily measured and properly rewarded by compensating executives who achieve good results.

The doctrine of shareholder sovereignty is mentioned only in passing on page 474 of Jennifer Burns’ biography, Milton Friedman: The Last Conservative. (Farrar, Straus and Giroux), 2023. But from Friedman’s argument to today’s problems at Boeing Co. seems to me a straight line of descent. At Airbus, in Europe, the legacy of cameralism flies on.

David Warsh, a veteran columnist and an economic historian, is proprietor of Somerville-based economicprincipals.com, where this column originated.

David Warsh: Deconstructing Hayek; does market get technology’s direction right?

John Singer Sargent's iconic World War I painting “Gassed”, showing blind casualties on a battlefield after a mustard gas attack. The same chemists’ work had resulted in creating highly useful fertilizers — and poison gas and very powerful explosives.

SOMERVILLE, Mass.

I was looking forward to the session on Hayek at the economic meetings in New Orleans last week. As a soldier of the revolution, I had learned a good deal from Hayek back in the day, when his occasional pieces sometimes appeared in Encounter magazine. (I knew Hayek had been the prime mover behind the founding of the classically liberal pro-markets Mont Pelerin Society in 1947;  knew, too, that Encounter has been partly funded by the Central Intelligence Agency, in 1953, in an effort to counter Cold War ambivalence.

I understood that Hayek was one of a handful of economists who had been especially influential before John Maynard Keynes swept the table in the Thirties.  Others included Irving Fisher, Joseph Schumpeter, A.C. Pigou, Edward Chamberlin, and Wesley Clair Mitchell. What revolution?  We journalists were hoping to glimpse economics whole.  The economists whom we read (and other social scientists, historians, and philosophers) seemed as blind men handling an elephant.  Each described some part of the truth.

The session devoted to Bruce Caldwell’s new biography, Hayek: A Life: 1899-1950 (Chicago, 2022), didn’t disappoint. Presiding was Sandra Peart, of the University of Richmond, an expert on the still-born Virginia school of political economy of the Fifties (as opposed to the Chicago school of economics), with which Hayek was sometimes connected. Cass Sunstein, of the Harvard Law School; Hansjörg Klausinger, of Vienna University of Economics and Business; and Vernon Smith, of Chapman University, zoomed in. Steven N. Durlauf, of the University of Chicago Harris School of Public Policy (and editor if the Journal of Economic Literature); Emily Skarbek, of Brown University, were present discussants; as was, of course, Caldwell himself. The reader-friendly Hayek: A Life was itself the star of the show: a gracefully documented and thoroughly knowledgeable story of Vienna, New York, Berlin, London and Chicago, during those luminous years. I look forward to the second volume, 1950-1992.

Then I walked half a mile down New Orleans’ Canal Street to hear the American Economic Association Distinguished Lecture by Daron Acemoglu, of the Massachusetts Institute of Technology. This was a very different world from that of Hayek.

For one thing, “Distorted Innovation: Does the Market Get the Direction of Technology Right?” wasn’t really a lecture at all. It was a technical paper, presenting a simple mode of directed technology, with which Acemoglu has been working for twenty-five years, followed by discussions of several examples of what Acemoglu described as instances in which technologies have become distorted by shifting incentives: energy, health and medical markets; agriculture; and modern automation technologies.  The paper begins in jaunty fashion,

There is broad agreement that technical change has been a major engine of economic growth and prosperity during the last 250 years, However not all innovations are created equal and the direction of technology matters greatly as well.

What constitutes the “direction of technical change?”  Acemoglu offered a striking example.  Early 20th-century chemists in Germany, led by Fritz Haber and Carl Bosch, developed an industrial process for converting atmospheric nitrogen into ammonia.  Synthetic fertilizers thereby rendered commercial, greatly improved agricultural yields around the world. But the same processes were employed in industrial production of potent explosives and poisonous gases which killed millions of soldiers and civilians during World War I.  Which direction might an effective social planner have preferred?

One view, the one for which Hayek is famous, is that the market is the best judge of which technologies to develop.  There may be insufficient incentives to innovate initially, but once the government provides the requisite research infrastructure and support, it should stand aside. What the market thinks right, meaning profitable, is right, in this view.

Diametrically opposite, Acemoglu said, is the view that the politicians, planners and bureaucrats can decide on these matters as well as or even better than markets, and therefore they should set both the overall level of innovation and seek to influence its direction. This is welfare economics, a style of economic analysis pioneered after 1911 by A.C. Pigou, then the professor of economics at Cambridge University, and, for twenty-five  years, perhaps the most influential economist in the world.

In his paper Acemoglu sought to describe an intermediate position, in which markets exist to experiment in order to determine which innovations are feasible, whereupon planners have a role in applying economic analysis to gauge otherwise unexamined side-effects of various sorts that may arise from a pursuing a particular path.

It was an unusual lecture, pitched to the level of a graduate seminar, and even before Acemoglu finished, individuals began drifting off to dinner engagements.  The good news is that there is a book on its way. Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity (Public Affairs),by Daron Acemoglu and Simon Johnson will appear in May. Still better news is that it tackles head-on questions about automation, artificial intelligence, and income distribution that currently abound.

With three big books behind him — Economic Origins of Dictatorship and Democracy; Why Nations Fail; and The Narrow Corridor, all with James Robinson, of the University of Chicago Harris School – behind him, Acemoglu is among the leading intellectuals of the present day. As heir to the leadership roles played by Paul Samuelson, Robert Solow, and Peter Diamond, he packs intuitional punch as well.  Pay attention! Get ready for a battle royale.

The tectonic plates of scientific economics are shifting — large-scale processes are affecting the structure of the discipline. That revolution I mentioned at the beginning?  The one in whose coverage we economic journalists are engaged?  Its fundamental premise is that, while politics always plays a part in the background, economics makes progress over the years.  In other words, Hayek takes a back seat to Acemoglu.

Philip K. Howard: The administrative state is paralyzing American society

VERNON, Conn.

Philip K. Howard’s powers of concision are remarkable. In a very readable Yale Law Journal piece, “From Progressivism to Paralysis,” Howard, founder of the nonprofit and nonpartisan reform group Common Good (commongood.org), writes:

 "The Progressive Movement succeeded in replacing laissez-faire with public oversight of safety and markets. But its vision of neutral administration, in which officials in lab coats mechanically applied law, never reflected the realities and political tradeoffs in most public choices. The crisis of public trust in the 1960s spawned a radical transformation of government operating systems to finally achieve a neutral public administration, without official bias or error. Laws and regulations would not only set public goals but also dictate precisely how to implement them. The constitutional protections of due process were expanded to allow disappointed citizens, employees, and students to challenge official decisions, even managerial choices, and put officials to the proof. The result, after fifty years, is public paralysis. In an effort to avoid bad public choices, the operating system precludes good public choices. It must be rebuilt to honor human agency and reinvigorate democratic choices.”

The gravamen of the article is that progressive precisionism causes paralysis because laws and regulations must be general and non-specific enough to allow administrative creativity. And, a correlative point, administrators should not be permitted to arrogate to themselves legislative or judicial functions that belong constitutionally to elected representatives.

Why not? Because in doing so the underlying sub-structure of democratic governance is subtly, and sometimes not so subtly, fatally undermined. The authority of governors rests uneasily upon the ability of the governed to vote administrators and representatives in and out of office, a necessary democratic safeguard that is subverted by a permanent, unelected administrative state that, like a meandering stream, has wandered unimpeded over its definitional banks.

Detecting a beneficial change in the fetid political air, Howard warns, “Change is in the air. Americans are starting to take to the streets. But the unquestioned assumption of protesters is that someone is actually in charge and refusing to pull the right levers. While there are certainly forces opposing change, it is more accurate to say that our system of government is organized to prevent fixing anything. At every level of responsibility, from the schoolhouse to the White House, public officials are disempowered from making sensible choices by a bureaucratic and legal apparatus that is beyond their control.”

And then he unleashes this thunderbolt:

“The modern bureaucratic state, too, aims to be protective. But it does this by reaching into the field of freedom and dictating how to do things correctly. Instead of protecting an open field of freedom, modern law replaces freedom.

“The logic is to protect against human fallibility. But the effect, as discussed, is a version of central planning. People no longer have the ability to draw on ‘the knowledge of the particular circumstances of time and place,’ which Nobel economics laureate Friedrich Hayek thought was essential for most human accomplishment. Instead of getting the job done, people focus on compliance with the rules.

“At this point, the complexity of the bureaucratic state far exceeds the human capacity to deal with it. Cognitive scientists have found that an effect of extensive bureaucracy is to overload the conscious brain so that people can no longer draw on their instincts and experience. The modern bureaucratic state not only fails to meet its goals sensibly, but also makes people fail in their own endeavors. That is why it engenders alienation and anger, by removing an individual’s sense of control of daily choices.”

Indeed, as a lawyer (sorry to bring the matter up), Howard probably knows at first hand that complexity, which provides jobs aplenty for lawyers and accountants, is the enemy of creative governance. The way to a just ordered liberty is not by mindlessly following ever more confusing and complex rules – written mostly by those who intend to preserve an iron-fisted status quo – but by leaving open a wide door of liberty in society for those who are best able to provide workable solutions to social and political problems.

Howard, I am told by those who know him well, is not a “conservative’’ in terms of the current American political parlance. For that matter, besieged conservative faculty at highbrow institutions such as Yale are simply exceptions that prove the progressive rule; such has been the case before and since the publication of Yalie William F. Buckley Jr.’s book, God and Man at Yale.

But I am also assured that Howard is an honest and brave man.

In an era in which democracy is being throttled by a weedy and complex series of paralytic regulations produced by the administrative state, any man or woman who can write this – “It is better to take the risk of occasional injustice from passion and prejudice, which no law or regulation can control, than to seal up incompetency, negligence, insubordination, insolence, and every other mischief in the service, by requiring a virtual trial at law before an unfit or incapable clerk can be removed” -- is worth his or her weight in diamonds.

Don Pesci is a Vernon-based columnist.