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David Frum's Cognitive Dissonance

May 30, 2011

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David Frum

David Frum recently accused modern Hayekians of not having a policy response to the recent economic crisis. According to Frum, Keynesians have the solutions that people want: namely, activist policies to restore demand and employment. Hayekians allegedly rail against the straw man of central planning.

There are two problems with Frum's argument. First, J.M. Keynes did advocate central planning. Keynes was smart enough to avoid advocating microplanning of modern industry; he initially advocated macroplanning by central bankers. He originally argued that "the current volume of investment could not safely be left in private hands." Keynes's original solution to the trade cycle was "not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last." He wanted central bankers to steer a course between slumps characterized by deficient spending and booms characterized by excessive optimism, a situation that he described as a "quasi-boom."

In 1943, Keynes accepted Abba Lerner's proposal to offset booms and busts through fiscal surpluses and deficits, respectively. The postwar consensus among Keynesians was that central bankers and legislators could use fiscal and monetary policy to "fine-tune the economy." This sort of planning might appear to be less ambitious than Soviet-style central planning.

However, Milton Friedman debunked the idea that fiscal or monetary authorities can fine-tune the economy. Fiscal and monetary policy work, at the very best, with long and variable time lags. The fact of the matter is that John McCain and Barack Obama were campaigning during the crisis in 2008. Obama's plan for fiscal stimulus was implemented in mid-2009, by which time a weak recovery had begun. Obama's plan could only have had a real impact in 2010, even if Lerner's policy really works. Can Mr. Frum point to statistical evidence of an accelerated recovery in 2010? Have "the people" really gotten what they want from fiscal or monetary stimulus?

Second, and more importantly, Hayek's critique of central planning does pertain to the debate. Frum does not understand that economic booms are the product of large-scale plan discoordination in "the economy." Low interest rates lead businesses to plan for longer-term investment, aimed at satisfying longer-term consumption. Low interest rates lead people in households to increase short-term consumer spending, at the cost of longer-term saving and consumer spending. These sets of business and home plans are obviously inconsistent.

Frum does make a legitimate political point. Most Americans feel troubled by actual and potential unemployment, and many have turned to politicians for solutions. What Frum does not understand is that the Keynesian macro–central planning by politicians he favors seriously impairs the Hayekian decentralized business planning – which he also explicitly favors.

Keynes held an internally consistent view of capitalism. He believed that businesses and households were always getting their signals crossed anyway. Hence, Hayek's claim that macroplanning exacerbated trade cycles appeared to be an irrelevant conclusion to Keynes. Frum simultaneously endorses Hayekian spontaneous order and Keynesian macroplanning. As such, he has misinterpreted Hayek and Keynes. Private economic planning cannot both tend toward greater coordination as envisaged by Hayek and also be inherently prone to periods of large-scale plan discoordination as expected by Keynes.

Frum writes that the objections to Keynes are "mostly having to do with the long run that he shrugged off." Does this refer to mounting concerns over long-term debt burdens? Perhaps; and debt burdens are a real concern. However, the ability to deal with long-term debts depends on our returning to efficient methods of microplanning in the private sector, not on effective macroplanning by politicians or unelected central authorities.

Frum does not interpret the Hayekian approach as a "policy" or a viable solution to discontent over economic conditions. However, businesses' policies toward industrial expansion and capture of market share, though aimed at private profit, do provide goods and gainful employment opportunities to the public, and this approach does work, provided that public officials adopt laissez-faire policies. Frum's insistence that Hayekians have no answers to the recent crisis merely diverts attention from effective solutions — ones that address the root causes of trade cycles.

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