In Misunderstanding Financial Crises, Gary Gorton provides a short overview of the U.S. banking experience between, roughly, the 1830s and 1913. Some of it is geared towards building up towards a justification of bank bailouts as a means of maintaining liquidity. His example of bank bailouts prior to the Federal Reserve and activist treasury policy was examples of clearinghouse associations pooling member banks’ assets and using these to back the clearinghouse’s own (temporarily issued) notes, which were used to satisfy interbank adverse clearings. This shored up the member banks’ position towards those who held their debt, meaning that the liquidity of their assets was preserved. Another example of a market solution to temporary illiquidity was temporary suspension of redemption, which usually carried along with it — by terms of contract — the promise to pay additional interest throughout the period of suspension.
Despite these examples, many libertarians — some of them quite erudite — will reject the premises behind certain forms of interventionism. Another example includes monetary disequilibrium: it’s not unusual for a libertarian, although maybe more accurate to say Austrian here, to totally reject any possible credible foundations to an advocacy of Fed countercyclical policy. In fact, to seal the example, many Austrians go as far as to argue that the “correct” “market” solution to an increase in the demand for money is a downward movement in the price level. I recognize that there’s an element of hubris in this discussion so far; I acknowledge that in both examples I could be wrong in implying that the market would offer different solutions. But, take these examples for what they are: illustrations of my broader point.
My argument boils down to the idea that because of certain predispositions that austro-libertarians hold and because of the limited cognitive ability of the human mind, we oftentimes fail to recognize the merits of opposing positions. But, there is evidence that these rejections can be premature. While sometimes it’s difficult to know for sure, some cases (such as the two above) suggest that we ought to treat with greater nuance theories we disagree with. (As a disclaimer, my arguments here have been influenced by my recent reading of Bruce Caldwell’s Hayek’s Challenge — but the idea is mine, and all errors are my own.)
Human society is complex, and it’s complex to several degrees. Its complexity makes it difficult to understand, and if we do understand it is mostly only superficially. Oftentimes what we do understand is from experience, and we don’t understand it well enough to make predictions on how institutions and organizations will develop, or evolve, over time. As a result, there are handicaps to everyones’ ability to know how the market, or privately developed institutions and organizations, would react to different adversities. To make matters worse, we’re oftentimes disallowed from experiencing specific manifestations of market solutions, because market institutions and organizations are oftentimes replaced by public, or quasi-public, features of the same nature. It’s convenient that both of my above examples have to do with banking, because it’s also the perfect example of how private changes have been all-too-often superseded by government alternatives (e.g. frequent prohibition of branch banking, the 10 percent tax on privately issued banknotes after the U.S. Civil War, the Federal Reserve system, deposit insurance, et cetera).
For the sake of argument, let’s assume that public alternatives to private institutions and organizations are inferior in the task they’re trying to accomplish. In banking, for example, public changes in the structure of the industry, and the rules that guide it, have not done a very good job at smoothing cyclical fluctuations. One might even argue that they have made the industry worse, and have exacerbated these fluctuations. This, I think, is a more-or-less universal theme in the libertarian literature. Consequently, there is a developing culture that stimulates an impulse to reject all things classified as interventionism. Some not only oppose the specific interventions, but even the arguments and premises behind them. But, as the clearinghouses and suspension examples above illustrate, this is not always the correct approach.
I’d argue that a good deal of the ideas behind certain theories we may reject, paradoxically, actually a lot of common ground with ideas we hold. Given that human society, including economics and economic relationships, can be incredibly complex, it’s true that none of us have a complete, or specific, explanation for various phenomena. However, I think that oftentimes everyone operates from a similar base — that is, everyone has a substantially broad, or general, idea of how things work —, and that it’s only a movement from that base that produces major differences between thinkers (influenced by a variety of factors, including ideologies). Furthermore, I’d argue that many of the general premises behind interventionist policy, or theories that might suggest interventionist policy recommendations, are true, because all people tend to have some part of the general picture right, even if they may take it in the wrong direction. Finally, social complexities and the fallibility of the human mind apply both to non-libertarians and libertarians, and a failure of some libertarians to see merit in others’ arguments is a product of ubiquitous ignorance (it works in the other direction too, of course).
It may be that an interventionist may recommend a certain policy because he’s unable to fathom how the market, through piecemeal-planned and/or spontaneous order, could accomplish a similar result in a superior way. That being said, the same is absolutely true the other way around. My point is that we should be wary of the possibility that our complete rejection of ideas we disagree with may be a result of the fact that we can’t begin to picture how a free society might ultimately commit to similar solutions to social problems. In other words, the critiques we oftentimes apply to “planners” are also equally as applicable to us. This doesn’t mean we should accept interventionism; I’m mostly writing out of interest in preserving some kind of intellectual march towards scientific improvement. It does mean that we should be careful not to throw the baby out with the bathwater, because we are fallible human beings and we can reject things we still don’t (and may never) fully understand (which, by the way, was more-or-less my initial reaction to Gorton’s discussion of “private” bank bailouts).
If you’re not comfortable with my examples, I’m sure there are many others to choose from. Also, in no way am I suggesting that this is the only cause of disagreement. Neither am I rejecting the possibility that much disagreement is justified. I’m only asking for people to remember that a more refined approach to weighting theses that may not adhere to your current world view is preferable, because there can be things you’ve missed — we all have the propensity of being wrong, as we often are.
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“Keynesian theory is actually too hard for most libertarians to understand”
I responded as follows,
I disagree; as a libertarian, I think there is something of a culture of not making the effort to understand it.
I don’t mean this to be an opportunistic attack on libertarianism (and I think that first response to Noah Smith was borderline ignorant, in the worst possible sense) — after all I’m a libertarian (and I pick on libertarianism only because as a libertarian I want to best for our ideas) —, rather it’s meant to be constructive. Given what I wrote above on the fallibility of the human mind, it doesn’t make sense to me to promote an insular approach to science. Unfortunately, from my experience, these methods are too often advocated. In my opinion, this only increases the opportunity of being wrong. Think of intellectual progress through the metaphor of profit and loss. We abandon ideas that we find out are wrong and we keep those we think are correct. Ideas have to be tested on a trial-and-error basis. By narrowing your exposure to potential trials you’re also limiting your intellectual growth. Those who push for what is tantamount to insularity are doing their readers, and those they influence, a disservice.
This is a perfect opportunity to close by linking to a post by professor Callahan that builds on my discussion of Mises’ treatment of Keynes in yesterday’s post. He points out that by the time The General Theory was published and Mises decided to write on it, he might have been beyond the point of learning new things. He just wasn’t very good at including this as a caveat when he discussed things he might not have known enough about. In a comment to that post, I also point out (and Callahan reinforces in a response) that Mises was notorious for his poor reactions to criticism. Knowing that many of Keynes’ doctrines were misaligned with his own, Mises may have been confident enough in his own knowledge to essentially entirely dismiss whatever Keynes had to say (he doesn’t just dismiss this, but he fails to actually engage them).
Two economists come to mind that, in this sense, were almost complete opposites of Mises: Hayek and Lachmann. Both were economists who, it could almost be said, thrived on criticism. Hayek’s work was positively influenced by his critics throughout his life (and we are better off because of it). I think Lachmann oftentimes took wrong turns in older age (e.g. his apparent acceptance of Hicksian “fixed price” theory), but you also see a drastic evolution in his thought throughout his life work. I don’t intend to disparage Mises — he was a brilliant thinker who contributed positively in more ways that most people can approach —, but when it comes to acknowledging your own fallibility economists like Hayek and Lachmann are truly role models.