Ronald Hamowy: I’m most pleased to welcome you all to this launching of a new edition of Hayek’s Constitution of Liberty first published some fifty years ago. In my mind it is without question Hayek’s most important work in which he attempts to lay bare the foundations of a free and open society. The reception that Hayek’s book originally received, to the extent that it was even acknowledged by the scholarly community, was often hostile and at best lukewarm, and this was a source of some disappointment to Hayek who had invested so much effort and time in writing. However over the years its reputation as an important treatise has grown to the point where today no serious study of the criteria for a free society can avoid dealing with Hayek’s claims.

I first read the Constitution of Liberty when it was originally published in the summer before I entered graduate school at the University of Chicago to study under Hayek. While I was terribly impressed by the enormous erudition that the book displayed, I remember being disappointed with Hayek’s notion of how extensive the actions of government could be and actually remain consistent with our understanding of what a free society is. My view was hardly original and remains consistent, with uh sorry, hardly original and reflected what turned out to be a fairly common criticism of Hayek’s theory. The distinction, perspective, it turns out, was largely the result of the difference in how Hayek conceived the nature of rights. Like Hume, the intellectual whom Hayek most admired, Hayek rejected any conception of natural rights, that is rights that adhere to all men at all times in all circumstances, in favor of the notion that rights are prescriptive and are the result of an evolutionary process that reflects the peculiar history of any society.

While my disappointment in his conception of freedom remains, I’m now far more sympathetic to the reasons why he envisaged rights as taking their form through historical development as one of many instances of spontaneous order. Indeed I regard Hayek’s theory of spontaneous order as his most important contribution to social philosophy, and one of the seminal ideas in social theory, and in none of his writings does he discuss this theory in its political dimensions in more detail than in The Constitution of Liberty.

To discuss this book we are privileged to have with us this afternoon three people who are intimately familiar with Hayek’s work: Professor Bruce Caldwell, Mr. George Soros, and Professor Richard Epstein. Our first speaker is Bruce Caldwell, currently professor of economics at Duke University and director of the center for the history of political economy. He is the general editor of Hayek’s collected works, of which this new edition of The Constitution of Liberty is the latest volume published. Caldwell himself has edited four of Hayek’s most important works in the series. <aside to Caldwell: Did I get that right, four?> <Caldwell: I think that’s right> Uh, among them new editions of The Road to Serfdom and The Counter-revolution of Science. He is also the author of an important study of Hayek’s thought, Hayek’s Challenge: An Intellectual Biography. All of us who appreciate Hayek’s contribution to the economic and the social sciences owe a debt to Professor Caldwell for having undertaken the editorship of the collected works.

Bruce Caldwell: Well Ronald thank for that very kind introduction. I’m going to talk a little bit today about how the, about how Hayek came to write The Constitution of Liberty but I want to first recognize Ronald as the editor of this magnificent volume. I felt that the collected works was very fortunate to be able to get someone who was on the scene when Hayek published the book, and indeed Ronald didn’t mention but he wrote a… he was the book review editor of the New Individualist Review, and volume 1, number 1 in April 1961 contained his critique of Hayek’s views, and Hayek actually wrote a response, and to give you an idea, I mean, Ronald was very modest in his portrayal of his own views, but the response that Hayek wrote was the only to my knowledge review or response to something that someone wrote that he published later in his own collections of works. It was published in Studies in Philosophy, Politics and Economics in 1967. So I found the exact right person for the job. And I will just also for those of you who know The Constitution of Liberty, one of the big differences between this volume and the original volume is that instead of having end notes they are formulated as foot notes so you can actually just look down on the bottom of the page and see everything that Hayek was saying, and believe me you could read the end notes as a volume in itself in the old edition. Well now you have that stuff right down at the bottom of the page. It’s a magnificent volume, and I thank you for your contributions.

So it’s a little hard looking at the archival record to figure out exactly when Hayek decided to write The Constitution of Liberty. There are a few hints, I will mention a few of these, and then offer a conjecture as to how he came to write it. The one hint that we have is a letter to Fritz Machlup in November of 1953 when he says, “I’m beginning to have definite plans for that positive complement to The Road to Serfdom which people have so long been asking me to do.” So I mean the mind reels, who are the people? Maybe it’s people in the Mont Pelerin Society. That’s one possibility. Another possibility would be people like Alvin Hansen and John Maynard Keynes, both of whom wrote… Hansen wrote a review in The Atlantic of The Road to Serfdom where he said that Hayek talks about good planning and bad planning but doesn’t tell us how to distinguish the two. Keynes in his letter… famous letter to Hayek that he wrote on his way to Bretton Woods said, “you admit here and there that it is a question of where to draw the line, you agree that the line has to be drawn somewhere, and that the logical extreme is not possible, but you give us no guidance whatever about where to draw it.” So it may well be that he is responding at least as a proximate cause to some of these criticisms that said, well okay you’ve written a great critique of central planning in The Road to Serfdom, but what is your preferred society? What would be the preferred set up?

If that’s the proximate cause I think though that this actually is a book that is the logical conclusion of a project that Hayek started as long back as 1937. That he started writing in 1939, but never finished. He called this project The Abuse and Decline of Reason project. It was his war effort. He worked on it diligently through about the middle of the war, and it was to be two volumes. In the first volume he was going to trace the spread of two ideas that he thought were bad ideas; socialism and scientism, and how they grew up together, moved from France, to Germany, to England, to the United States. Obviously taking very different forms in each one of these countries; each had its own indigenous form but the enthusiasm for scientific planning of society, the idea of scientism might be called the engineering mentality. The idea that you can socially engineer society in the same way that engineers design and build bridges, was something that was a dangerous set of ideas that grew up through time. The second volume in this two volume work was to show the results of this movement and this was to be based on the sort of ideas that are contained in The Road to Serfdom.

About halfway through the war he said, well I don’t have to write this big two volume book, becoming more concerned about the sort of political set up that we’ll be facing after the war is over so perhaps I should offer my warning in The Road to Serfdom and he worked exclusively on that, never finishing The Abuse of Reason project. However, he did publish bits and pieces of it. One is his famous scientism essay. Another is six chapters from that talking about the French developments in The Counter-revolution of Science. But most importantly an essay called Individualism: True and False. This essay was to have been the very opening essay of The Abuse of Reason project, and the reason why I trace back The Constitution of Liberty to Individualism: True and False is that if you read them, together, you’ll see many of the important themes in the The Constitution of Liberty expressed in Individualism: True and False. 

One of these ideas is the profound difference between the Enlightenment as it took place in Scotland vs. France. The Scottish Enlightenment he saw as embodying individualism true, the French Enlightenment attached particularly to the person of Descartes and the writings of Descartes, as individualism false. The notion of the importance of limiting coercive power of the state to those circumstances in which it is indispensable to reducing coercion by men of other men, people of other people. This is the role of coercion. It’s their individualism true and false.

The notion that limits of human knowledge had an implication for this sort of legal rules that you should embrace. Because of the limits of human knowledge obviously being a key idea in the entire Hayekian work, that it had an implication to use simple rules, general rules, and rules that were perspective in terms of their application. He felt that these would be the best sorts of rules in a world where knowledge was dispersed and imperfect. Another theme is that most successful societies had institutions in which fallible, ignorant or evil people can do the most… the least harm. For him this included democracy to be sure, but also strong constitutional restraints on the power of the government to interfere in a private sphere of individual activity. The importance obviously also of the rule of law, and finally the tension is mentioned in Individualism: True and False between different sorts of equalities. Equality before the law, vs. egalitarian calls for distributive justice, and that in fact these two are often in tension, and in fact necessarily in tension. 

So how did he come about… so these are some of the ideas that are in Individualism: True and False. We know that he started work on this in more… with more vigor in the mid 50’s, and here is an example I think of Hayek’s superb grantsmanship. Okay, he actually convinced the Guggenheim Foundation to give him a grant so that he and his second wife could duplicate 100 years to the day John Stuart Mill’s trip across Italy, Greece, and the Mediterranean. Yes, he got that grant. So, he took this travel… took an extensive travel, but of course he could travel a lot more quickly than John Stuart Mill was able to, so he stopped off in Cairo to give four lectures, and the lectures were ultimately published under the title The Political Ideal of the Rule of Law and this forms the central chapters of the book The Constitution of Liberty. When he returned from this trip he said in some interviews in autumn 1955, the plan for The Constitution of Liberty stood clearly before my mind.

From there he spent a year… there’s three sections in The Constitution of Liberty, so he spent a year on each of the three sections, and then a final year improving his prose for the entire book. He finished his manuscript he reports on May 8th, 1959, which was Hayek’s 60th birthday. It was a happy coincidence, but I guess he was probably aiming to get it done by then, and it was officially published February 9th, 1960. As Ronald said, it did not receive immediate acclamation; its influence I think has grown through time.

For those who don’t know the book, course, and this audience in particular, an interesting chapter is the epilogue, Why I Am Not a Conservative. From all reports, although he never said why he wrote this, in terms of the people who were on the scene, this was an address that he had given at the 1957 Mont Pelerin meetings and apparently the object of his attack, he says, this part in the epilogue: it was directed against the recent attempt to transport to America the European type of conservatism, which he felt would be alien to the American tradition. And apparently Russell Kirk’s book, The Conservative Mind: From Burke to Elliot was his target for this particular chapter, but always one for someone who doesn’t know anything about Hayek, and you hand them the book and it gives them pause to see that title as the epilogue.

Hayek scholars differ as to which of his two grand books that they like best. Constitution of Liberty or Law, Legislation and Liberty — I must say that in terms of the themes that Hayek addresses in terms of his evolutionary theory and emphasis on rules and orders, one would… this is something that I think is extremely important in Hayek’s work, but he said a lot of that stuff in articles in the 1960s and early 1970s and some of those articles in fact I think he put some of the ideas even better, whereas the The Constitution of Liberty is something that is truly a work that is conceived as an organic whole and so my vote would be for The Constitution of Liberty and I’m sure you’ll be happy to hear that. Or maybe not. But, anyway, that’s my vote. So I’ll end there. Thank you.

Ronald Hamowy: Our second speaker is I’m sure known to all of you and needs little introduction, besides being a financier and philanthropist of international repute, George Soros has written extensively on the nature of markets, and the role of government creating and sustaining flourishing economies. Before a successful career in the financial markets, Mr. Soros studied at the LSE under Karl Popper, F. A. Hayek’s close friend, I might actually say closest friend, whose emphasis on the open society is evident in Soros’ funding of dissident movements behind the Iron Curtain. Mr. Soros is also the founder of the Open Society Institute and the author of Underwriting Democracy: Encouraging Free Enterprise and Democratic Reform among the Soviets and in Eastern Europe. While the differences in viewpoint between Mr. Soros and Professor Hayek are extensive and profound, I’m sure that he is among those who appreciate Hayek’s tremendous contribution to establishing a liberal economic order. Mr. Soros.

George Soros: Thank you. Hayek is generally regarded as the apostle of a brand of economics which holds that the market will assure the optimal allocation of resources as long as the government doesn’t interfere. It’s a highly formalized and mathematical theory whose two main pillars are the efficient market hypothesis and the theory of rational expectations. It’s usually called the Chicago School and it has come to dominate the teaching of economics in the United States. I refer to it as market fundamentalism.

I’ve developed an alternative conceptual framework which is diametrically opposed to the efficient market hypotheses and rational expectations. It’s built on the twin pillars of fallibility and reflexivity and I firmly believe that those principals are in accordance with Hayek’s ideas. We can’t both be right. If I’m right, market fundamentalism is wrong and to be right must be able to show some inconsistency in Hayek’s ideas. And that’s what I proposed to do.

Let me start with Hayek’s influence on my thinking. I was a student in the London School of Economics in the late 1940’s and I was reading the great methodological controversy with took place between Popper and Hayek in Economica in the early 1940’s. I considered myself a disciple of Popper but in that controversy I was on Hayek’s side. Hayek inveighed against what he called “scientism”; namely, the slavish imitation of Newtonian physics. Popper argued in favor of what he called the “Doctrine of the Unity of Science” or rather the “Unity of Method.” That is to say that the same methods and criteria apply to all scientific disciplines.

I was drawn to this controversy by my interest in the writings of Karl Popper. I had read his book Open Society and its Enemies, in which he argued that the inconvertible truth is beyond the reach of the human intellect. And ideologies that claim to be in possession of the ultimate truth are bound to be false. Therefore they can be imposed on society only by repressive methods. This helped me to understand the similarity between the Nazi and Communist regimes and having lived through both of them in Hungary it made me a great impression… it made a great impression on me.

This led me to Popper’s theory of scientific method. Popper claimed that scientific theories can never be verified they can only be falsified. That means that the validity must be regarded as provisional and they must forever remain open to falsification by testing. The main merit of this theory in my opinion is it avoids all the problems connected with proving scientific theories beyond any doubt, and it establishes the importance of testing. Only theories that can be falsified by testing qualify as scientific. While I was admiring the elegance of Popper’s theory, I was also studying elementary economics. I was struck by a contradiction between the theory of perfect competition which postulated perfect knowledge with Popper’s theory which asserted that perfect knowledge was unattainable. The contradiction could be resolved by recognizing that economic theory can’t meet the standards of Newtonian physics. That’s why I sided with Hayek, who warned against the slavish imitation of natural science and took issue with Popper who asserted the doctrine of the unity of method.

Hayek argued that economic agents base their decisions not on reality but their interpretation of reality and the two are never the same. That’s what I called fallibility. Hayek also recognized that decisions based on imperfect understanding are bound to have unintended consequences. But Hayek and I drew diametrically different inferences from this insight. Hayek used it to extol the virtues of the invisible hand, which was the unintended consequence of economic agents perusing their self interest. I used it to demonstrate the inherent instability of financial markets.

In my theory of reflexivity I assert that the thinking of economic agents serves two functions: on the on hand, they try to understand reality that’s the cognitive function. On the other, they try to make an impact on the situation and that’s the participating or manipulative function. The two functions connect reality and the participants’ perception of reality in opposite directions. As long as the two functions work independently they each produced determinate results. But when they operate simultaneous they interfere with each other by introducing an element of uncertainty into both the participants’ understanding and the actual course of events. I call the interplay between the two functions that gives rise to the uncertainty reflexivity.

The two way connection between the cognitive and manipulative functions works as feedback loop; the feedback is either positive or negative. The positive feedback reinforces both the prevailing trend and the prevailing bias and leads to a mispricing of financial assets. Negative feedback corrects the bias. At one extreme lies equilibrium, at the other are the financial bubbles. They occur when the mispricing goes too far and becomes unsustainable and the boom is then followed by a bust. In the real world, positive and negative feedback are intermingled and the two extremes are rarely if ever reached.

Thus the general equilibrium, postulated by the efficient market hypothesis turns out to be to be an extreme case with little relevance to reality. Frank Knight was the first to identify the unquantifiable uncertainty inherent in financial markets, in 1921. Keynes and his followers elaborated his insight, although they still counted their theories in the form of equations in order to make them acceptable to the economics profession. Adherents of classical economics, by contrast, sought to eliminate the uncertainty connected with reflexivity from their subject matter. Hayek was one of them. Lionel Robbins who had brought Hayek to the LSE was another.

How did Hayek do it? According to Bruce Caldwell, Hayek drew a distinction between two types of opinions: constitutive and speculative. Constitutive opinions are those that cause some social phenomena to occur. Speculative options are those that people form in order to explain phenomena. I contend that these are purely artificial distinctions. Speculative ideas can influence the occurrence of phenomena, just as easily as constitutive ones. But it allowed Hayek to ignore reflexivity. Lionel Robbins found another basis for eliminating reflexivity which was more influential. At any rate that’s the way I was taught at LSE.

Robbins defined the subject matter of economics as the allocation of limited resources among alternative uses. He argued that studying the conditions of supply and demand themselves was outside the scope of economics and therefore supply and demand should be taken as independently given. The intersection of the two curves then determines the equilibrium price. By this methodological subterfuge Robbins managed to eliminate the effects that the mispricing of financial assets can have on post-demand and supply curves, in other words he could eliminate reflexivity.

The methodological debate in Economica took place the context of a larger political controversy on the rule of the state in the economy. Hayek and Robbins where on one side, Keynes and socialist planners on the other. I contend that Hayek subordinated his methodological arguments to his political bias. That’s the source of his inconsistency. In the Economica, he attacks scientism. But after the end of Second World War, when the communists’ state became more acute, he overcame his methodical qualms and became the apostle of market fundamentalism — with only a mild rebuke for the excessive use of quantitative methods in his Nobel Prize acceptance speech.

Since he was fighting communism, a scientific theory that proved that market participants pursuing their self-interest assured the optimum allocation of resources was too convenient to reject. But it was also too good to be true. Human beings act on the basis of their imperfect understanding — and their decisions have unintended consequences. That means… that makes human affairs less predictable than natural phenomena, and Hayek was right in opposing scientism. At the time of the Economica articles, Popper was somewhere in between Hayek and the socialist planners. He was just as much opposed to the threat of communism as Hayek, but he advocated what he called piecemeal social engineering rather than laissez-faire. In this dispute, I was on Popper’s side. But Popper and Hayek were not that far from each other, and the methodological discussion between them was very enlightening. I was influenced by both of them and I also found fault with both of them.

I should like to emphasize that by identifying Hayek’s inconsistency and political bias, I do not mean to demean him — but to improve our understanding of financial markets and other social phenomena. We are all biased and inconsistent in one way or another and, with the help of reflexivity, our misconceptions play a major role in shaping the course of history. Exactly because perfection is unattainable, it makes all the difference how close we come to understanding reality. Recognizing that the efficient market hypothesis and the theory of rational expectations are a dead end would constitute a major step forward. That’s what the Institute of New Economic Thinking, INET, is seeking to achieve.

The political controversy on the role of the state in the economy is raging in full force today. But the standards of political discourse have greatly deteriorated since the articles in Economica. At that time, the two sides engaged in illuminating arguments, now they hardly talk to each other. That is why I was so pleased to accept this invitation to the Cato Institute. As I see it, the two sides in the current disputes have each got hold of one half of the truth, which they proclaim to be the whole truth. It was the hard right that took the initiative by arguing that the government is the cause of all our difficulties, and the so-called left, in so far as it exists, has been forced to defend the need for regulating the private sector and providing government services.

Although I am often painted as the representative of the far left, and I am certainly not free of political bias, I readily recognize that the other side is half right in claiming that the government is wasteful and inefficient and ought to function better. But I also continue to cling to the other half of the truth, namely that financial markets are inherently unstable and need to be regulated. Above all, I am profoundly worried that those who proclaim half truths as the whole truth, whether they are from the left or the right, are endangering our open society. I believe that both Hayek and Popper would share that concern. Those of us who concerned with the protection of individual liberty ought to work together to restore the standards of political discourse that used to enable our democracy to function better. Thank you.

Ronald Hamowy: Thank you Mr. Soros. Our final speaker is Richard Epstein, Laurence A. Tisch Professor of Law at New York University and directory of the law and economics program at the University of Chicago. Professor Epstein is a fellow of the Cato Institute and the author of numerous works on freedom and the law. The impact of his writings on legal studies is enormous, and he has been voted as one of the most influential American legal theorists of modern times. It is indeed a pleasure to welcome Professor Epstein to this panel.

Richard Epstein: 

Well thank you, I’m going to try and speak over the fan. Evidently, technology seems to have failed at the Cato Institution, and you know, to try to talk about Hayek in the Hayek Auditorium is a very daunting task. The man went through multiple phases, had all sorts of small inconsistencies in his own writing, and in fact was I do not think of as a dogmatic type of market type, but rather somebody who was trying to figure out how to take his native intuitions as a social democrat from Austria and see how he could apply them to a whole variety of phenomenon, dealing with the creation property rights all the way through to the financial markets.

In order to do so I’m going to sort of pick up on some of the themes that have been mentioned here, and I’m going to do so to mainly stress my differences with Hayek rather than my similarities, and to do so for a very simple reason: which is the greatness of his work, which is embodied particularly in such essays such as the “The Use of Knowledge in Society,” I think is indisputable, and what I would like to do therefore is to indicate what I think to be some of the corrections that I would want to make on that theory.

And I’m going to start off with something Ron Hamowy referred to, which is Hayek’s antipathy with respect to natural law, and his view that essentially the only way which you can understand the evolution of legal doctrine and social thought is by taking some kind of an evolutionary and progressive kind of process. And my basic response to that is I do not think Hayek understood the way in which natural law was understood by its most ardent proponents, and thus is guilty to some extent of a mischaracterization of the way in which this thing works. If you go back to the origins of natural law, they start in Roman times, in quite explicit fashion. And what you’re doing is you’re trying to get a group of people to figure out how it is you put a legal system together when all the modern tools of analysis which developed in the 19th and 20th century were not available to them. So what they did in effect was to think of a legal system as one that had kind of two characteristics which indicated something about its viability. One of those was the sense that there seemed to be of an internal coherence to the rules once they were developed, such that if you started with the premises and tried to solve particular problems, you would usually come up with answers that didn’t explode or become frankly absurd. And the other thing was to see if you could find a kind of generality of these principles across all sorts of places, and all places in the world.

And it turns out that Hayek was wrong about the universality of natural law. If you go back and you study Roman law, they are basically two portions of it which have… which you should give somewhat different responses. One of them is the sort of the basic categories of legal analysis, and these have not changed in two thousand years. And if you wanted to summarize as a first approximation the way in which a legal system ought to work it would be, in effect, joint, consensual transactions yes, coercive transactions imposed by the state or indeed by any private party, no. The principles of this sort were widely accepted in virtually every legal system, and the differences between them mainly lay in the level of formality that was given in order to validate those particular consensual transactions which the state or some private agency was going to enforce.

And so the evolution that Hayek spoke was never with the questions to the dominance of the fundamental proposition; that coercive transactions are negative sum, and voluntary transactions are positive sum, as a series of presumptions. Rather, all the evolution takes place in figuring out what the mechanics were for putting these things into place. And in order to do that, you actually need to have a fairly large and complicated state if only to be able to put such things in place such as a statute of fraud, so you have writing to solve evidentiary problems, and recordation systems so you can keep titles in a relatively orderly fashion.

And if Hayek had been a little bit more, I think, respectful of the natural law tradition, he would have found it not as an enemy, but rather as something that could have been used as an ally, and then he could have tried to figure out where it was that this particular broke down… this particular system broke down, why it is that all voluntary transactions are not good, and all coercive transactions are not bad, and in order to do that what you would have to do is have a kind of a comprehensive sense of what a social welfare function looked like, and in fact Hayek’s scientism, his sort of fear of the fact that people are going to put things together, often stood in the way of his ability to figure out how would you be able to integrate general rules on the one hand with specific propositions on the other. So, in some sense, I’m taking exactly the opposite side of George Soros; saying that in effect, if he had been a little bit more systematic, had tried to been a little bit more Newtonian in the way in which he had worked things, he might have been able to come up with a more persuasive presentation of a series of ideas in The Constitution of Liberty which I think are really, enormously instructive on one hand, but in certain kinds of ways are in fact incomplete.

Well, what would this sort of non-scientism science sort of look like? And, in effect, to do this, I would go back to the world of a man who has not been mentioned here today, Vilfredo Pareto, and also to the English variation on this through the Kaldor-Hicks formulas, because what these guys were trying to do is to put together social welfare functions in which the welfare of every individual in society had to be taken into account, and each of them had the following, I think, kind of social observation. If you could find a way in which you could increase the size of the pie, you would satisfy anybody; if it turns out that you decreased the size of the social pie, you should never want to do those kinds of things. And the difference between the two formulations is that one of them, the Pareto formula, has a distributional constraint in which nobody can be left there worse off, and at least one person has to be made better off; and the Kaldor-Hicks has greater flexibility, but essentially doesn’t have that fundamental distributional constraint which most people would defend on various kinds of fairness and so forth.

If you use these kinds of definitions, it turns out that it allows you to solve some of the problems dealing with the definition of liberty, which Hayek frankly did not do all that good a job with. And so What I want to do now is to take this framework and show how it applies to what Hayek regards as one of his fundamental conceptions, which he says: “If you really believe in the protection of liberty, what you have to do is to believe in the way in which you’re going to control coercion.” So that essentially an explication of the notion of what counts as liberty, is going to require you to figure out what counts as a system of coercion. And his original definitions — which I’m not going to read to you — are incredibly muddied, and I looked at this stuff and I said, I don’t understand what this man is talking about, he surely can’t leave it rest here. But later on, when he talks about it, he tries to get the thing right, and he hits it on all the right cylinders, but he never quite gets the engine to work in harmony.

So the basis of the analysis that Hayek understands, is when you’re starting to talk about the notion of coercion, it must bear at least some relationship to the libertarian notions associated with the use of force on the one hand and fraud on the other, but he says you certainly can’t define it in that way, because there are other things that he would regard as coercive, and so the question is it how it is that you integrate this particular element into a larger theory. And what I’m going to do is to do it in parts, rather than to try and figure out how you do it all in one fell swoop, I’m going to start with the coercion case with respect to the use of force, and then turn over to another key part of the Hayekian situation, which has an immense role to play in modern economics, which is what do you do with the refusals to deal with one person with respect to other people. And I think if you try to decompose these things and follow the basic test, it turns out that the common intuitions that Hayek had rest on very powerful formations and then once you understand the way the game theory works, it turns out that his theory allows you to do what Mr. Soros has been trying to do, to explain why it is a single comprehensive theory, which under some circumstances can account for social successes can also explain why it is under certain prisoner dilemma type game-situations you will have social failures without regulation. So I regard the theory as essentially neutral to the question of regulation and the question is then, how does it work?

Well the first thing to do is to start with the narrowest definition of coercion, which can take place in one of two forms: either I beat you over the head in order to take what you have, or I threaten to beat you over the head in order to have you give something to me. And in order to figure out what the social welfare function is going to look like, you have to decompose this thing into two parts. The first thing you have to do is to ask whether or not the transaction between the two parties is one that meets anything even remotely like either the Kaldor-Hicks or the Pareto standard. And at this particular point, it is not a matter of deduction; that is, the key point of any economic and social theory is that in addition to a formal apparatus, it must contain some kind of empirical substrate. And at that point the classical riders from which I think all the classical British empiricists derive, going way back, on self-preservation, says, for the most part if forced to choose you would rather be alive than kill somebody else, so that mutual survival turns out to be our optimal end. And so if you’re trying to figure out how bargains might work in this crazy universe, it’s easy to imagine somebody who’s going to be able to pay a lot of money to somebody else to prevent him from killing them, but on the other hand there are very, very few people who are going to be able to pay a victim enough money in order to get their kind of consent, and what that suggests is you want the baseline in a two-party situation to always defend individual autonomy against those people who are its aggressors. And then when you generalize this from two people to n‑people, having a rule which says that there are going to be mutual abnegation or, a renunciation of the use of force is going to be if you could make it, implement it, a vast improvement of any other kind of system. So at least as a first approximation is between the parties to any of these transactions, the clear social preference is in favor of the basic libertarian norm.

Now, it gets more complicated because you then have to ask about the effects upon third parties. And here again, the arguments are really, extremely powerful. If in fact you’re talking about a voluntary transaction between A and B, which is one that works to their mutual advantage, the first class externalities from this are going to be positive. All individuals will now be in a position where there is somebody else with whom they can trade who will have more resources in virtue of their first transaction, and therefore present greater opportunities through other individuals. So that if you then cycle this by lowering transactions, so as to increase the frequency of these voluntary exchanges, you’re going to get a relentless set of positive sum gains, which will lead to a kind of positive overall social improvement. So that at least under this kind of restrictive model, the sort of optimistic assumptions of the neoclassical competitive equilibrium situation seem to hold very well. Certainly they hold extremely well in comparison to what you think of as the negative externalities with respect to coercion. At that particular point the resources of the two parties, in sum, are sharply diminished, so every time you engage in a threat against two people, you reduce the opportunities of strangers and make them worse off. In addition, you create the kind of instability, where instead of figuring, ‘Hey, you’ll be able to get a kind of business opportunity,’ you’re worried about the hinged hand of fate knocking you for a loop, and so that you engage in much more defensive activities, rather than in much more expansive activities.

So as a first approximation, essentially, the argument in favor of markets relative to sort of coercion is going to be enormously powerful, and when Hayek says ‘Look, we really have to be worrying about the state dictating the terms of conditions of various transactions,’ the reason he’s got really strong point is that you’re going to force losing transactions on some individuals, so even though you’re not going to have violence, you can still have this same kind of downward cycle, which is associated, presumptively, with respect to centralized planning.

But then it is that you come up with the issue of what do you do with respect to refusals to deal. And this becomes extremely important, because it was precisely this particular issue which made Hayek be so nervous about trying to define his definition of coercion, so that only thing that coercion covered was the threat and the use of force. And in order to get his thing right, what you have to do is start making some key distinctions, which Hayek doesn’t quite make explicitly, although he hints at them. And the key distinction you have to make is that there is a vast difference in trying to estimate the way in which you look at refusals to deal in a society which turns out to have open entry and lots of competitive sources of supply, and a situation in which there is either a legal or a natural monopoly. And one of the interesting things is that if you go back to the height of English laissez-faire all the careful judges who wrote about this issue understood this particular distinction and they were aware that the particular arrangements with respect to refusals to deal that might work in competitive markets would not work in the other.

So how does this thing start to break itself out? Now let me see if I can explain, I may take an extra minute or two. In a competitive market, the only way that you can get to an effective equilibrium is to allow people to refuse to deal with other individuals. If in fact you’re going to force transactions then you’re always going to have resources going in a dizzying array to one person after another and you can never figure out whether its the employer who’s entitled to force the employee or visa-versa, so that the system is essentially going to define as coercion ordinary market behavior and everything will collapse. But once you start to have a natural monopoly, a single supplier who can supply the market at lower cost than any two supplies, or even worse, a legal monopolist who was given a thing from the state, now you have asymmetry. He’s the only one to whom all these other people can turn, and so therefore he has this immense kind of power, and the standard tradition with respect to regulation always took the position that regulation was a counterweight with respect to monopoly power. Hayek sort of sees this, but he thinks that the only constraint that you put in place is a nondiscrimination constraint, which is certainly one part of the picture, but the entire history of rate regulation with respect to natural monopolies, as it develops in the late 19th and early 20th century [sic] indicates that you also have to have reasonableness constraints on the rates that can be charged, and you develop a huge literature on exactly how it is that you determine what these rates are going to be.

Now the reason I want to stress this stuff is I think it gives you a very different view of laissez-faire from the one that George Soros presented, because it suggests in effect that what laissez-faire means is not that you leave the unfettered operation of all markets to do whatever they want on price terms, what it says in effect is that what you do is you start when you look at markets with a presumption against regulation, but that you can find certain circumstances where its invocation will in fact lead to general kinds of improvements, and that your regulation is always calibrated to that particular problem. And if we had time, and you went into the specifics of regulation, you could actually show how the pre-1944 reactionary judges actually had a better sense of how to regulate than the modern judges, who have lost the presumption against government regulation.

Now this also applies to financial markets. I would regard it as a caricature to say that you don’t want any form of insurance, or any form of regulation, but the key question to ask in this is not whether you have regulation, it is actually what the kind of techniques that you’re going to use to deal with the regulations that you have. Everybody I think understands that when you’re starting to deal with the banks, which have limited liquidity. It turns out that the run on the bank is something that can clearly happen in an unregulated market, simply if all people form the expectations, rational or otherwise, that the bank is going to be illiquid. Every bank has to have, if its going to engage in transactions, some of its money tied up in long-term assets, so that if all the deposit is demanded, in response instantaneously, things will start to break down. At that particular point, the question is, what is the optimal form of regulation? And it’s at this point, I think, that an immense amount of caution is needed in the way in which you work this system. Because if we know that these prisoner-dilemma games, which is what this turns out to be, can have negative externalities, then the question is what’s the optimal design of the system? And it is simply not sufficient under these circumstances to say that you’re in favor of regulation, you have to talk about the design. And let me give you but one illustration of a point which Hayek understood.

He said, basically, that decentralization has, sort of, static inefficiencies — that you may get redundancies or inefficiencies of one kind or another — but that it had in the long-run, it had a kind of resistance to common-mode failure which would bring everybody down. So if you look at something like Dodd-Frank which contains all sorts of disastrous provisions of one kind or another, which we could talk about in the discussion period, the great mistake of it is, when you want to say that you want to have everybody trade on a clearinghouse so you can get rid of certain kinds of bank errors, what you did is that you substitute in a common-mode error by the single regulator who is now too big to fail, instead of the diffuse kind of regulations that are done by decentralized authorities. So even in financial markets it doesn’t follow that complete centralization by government is going to be the appropriate response.

And therefore, I will end on just this simple note, is the great insight of “The Use of Knowledge in Society” was the recognition of the fact that centralized information may be awkward and bulky, and that decentralized information that communicates through a price system may in turn be the better operation. Hayek, I think, overestimates the importance of intuition in making this process work, but if you can make markets more efficient, what happens is that it turns out that its not going to be the efficient market hypothesis is always wrong, it can’t explain October whatever it was in 1987 when you get discontinuous jobs, but it can certainly explain that spreads in certain kinds of commodity markets and so forth are consistently reduced over time for the benefit of consumers, or why it is that securitization properly run, allows you to access financial markets that you would never touch.

So I think even on the financial side we don’t want to say that they’re inherently unstable, what we want to say that their instability is certainly something that can emerge from these kind of processes, and that what we ought to do is follow Hayek at least this far, which says that the presumption is generally set against regulation, but it is not irrebuttable. But if you’re first approximation is that you have to regulate, first think less, and then think more. And I think that’s the lesson of Constitution of Liberty at its highest ground; we know we’re fallible, and so we know that when we exercise state monopoly powers, a modicum of caution is surely the appropriate way in which to go. Thank you.

Ronald Hamowy: Thank you Richard.

Epstein: You’re Welcome

Hamowy: I’m going to spend the next month trying to work out the implications of your…

Epstein: Well I went a little fast. I’m sorry.

Hamowy: I want to give the panelists a chance to address the other panelists if they have anything they want to add or say or ask. So.

Caldwell: I’d like to just make a couple of comments on George Soros’ comments. I think that George has a handle on some parts of Hayek but misunderstands other parts of Hayek. And that if he understood those other parts of Hayek he would identify himself, I’ll say it provocatively as a Hayekian, I don’t think that that’s necessarily true, but I spent the morning rereading The Soros Lectures by George Soros and there were just lots and lots of areas where things the he wrote in here I think are certainly consistent with many of Hayek’s insights. I’m just going to mention a couple of things in your talk that I would disagree with and I think that further study of Hayek… you might uh… you might see my point. First of all Hayek and the Austrians in my estimation reject the usefulness of an efficient market hypothesis and a theory of rational expectations for capturing the workings of a market process. So if the acceptance of those two theories is the defining characteristic of being a market fundamentalist then he’s not the sort of market fundamentalist then you’re describing. I think a pithy way of putting this is that there’s definitely a difference methodologically and in other realms between Chicago and Vienna. Secondly, Hayek thought… this is a phrase that you used that the financial sector is inherently unstable… Hayek thought that the financial sector was inherently unstable. His first book after all was Monetary Theory and the Trade Cycle so he’s saying monetary theories, or monetary economies, or credit driven economies are unstable. Vernon Smith has done experiments where he said, as soon as you introduce credit into one of the experiments you’re going to generate cycles and they’re really hard to get rid of. Cato has an annual conference on alternative monetary institutions and I think this is a common endeavor, a truly common endeavor. How do you get the institutions right so that you can make money more stable? Because when money is more stable then the rest of the ability of markets to coordinate dispersed information I think is vastly improved. I’ll go one final one. Hayek also rejected the theory of perfect competition. You said that this was one of the things that got you into an interest… you saw the contradiction between Popper and the theory of perfect competition. Hayek has a 1946 article The Meaning of Competition where he argued for competition as rivalry within a market process, and since the 1930’s was very critical of the ability of static equilibrium theories to shed light on the workings of a market process. So I’ll just simply suggest that that are elements of Hayek’s work that are quite compatible with some of the points you made.

Soros: I’ll entirely agree that there are many elements. He has had a big influence on my thinking and I think that both fallibility and reflexivity are basically in accordance with his thinking. I think he has allowed himself… lets say expropriated by the Chicago School and the extremist view of markets which claims that markets are perfect and that of course he also denied in his Nobel Prize lecture which I thought was a reminder to the Chicago School that they’ve gone too far. So I think actually going back to Hayek is a very good thing because at that time the difference lets say between Hayek and Popper and lets say Hayek and me were not really that great. And we could work on gaining a better understanding I am emphasizing the fact that all our interpretations are bound to be flawed in one way or another. So we have to come to terms with our… with that limitation. And that’s why you can’t have a kind of predictive science that you… that lets say Newtonian physics presented. You have to accept that our ability to predict and to explain and to understand is limited. And we need to reduce the misconceptions if possible. And that you can only do through a debate, a discussion… critical thinking, which is the point that Popper was emphasizing. And unfortunately we now have basically politically two sides that each got hold of one half of the truth. And they can actually-both sides can prove that the other side is wrong because you are all wrong. But that doesn’t mean that by proving that the other side is wrong that you are right. So I think that we should again try to reestablish a common ground for having critical discussion and I think this is an occasion where we can try to do that. So maybe we can find common ground. I think that we would all agree that government regulation is a necessary evil. I don’t know if we could agree with that –

Epstein: Well, but the necessary evil means you set the presumption against it.

Soros: Yeah.

Epstein: That’s all we need. You give me the presumption, I can move the world. I’m Archimedes.

Soros: Look, I happen to agree with you, because while I argue that markets are unstable and this instability has been artificially expurgated from current economic dogma, I also agree that regulations are inherently imperfect. In fact, in my writings I have said that they are more imperfect than markets. Why? Because they are bureaucratic, they are subject to financial interests and very much influenced by political — So if you can avoid regulations you should. So we have actually found common ground.

Epstein: I think Hayek to some extent gets a bad rap for being sort of a Chicago type. I’m sort of a Chicago type but not completely. But I did write an article once and I’m going to refer to it now because I think it was actually an accurate description of much of Hayek. And the article was called Hayekian Socialism. And in this particular argument I argued that Hayek had very powerful socialist instincts in terms of the way in which he conceived the obligation of society to impose, to satisfy minimum standards of needs for all of its members. I’m only going to read one sentence from his chapter on social security to give you a drift of what it is, comment a little bit about it: In the western world Hayek is never talking small. Some provision, we don’t know how much, for those threatened by the extremes of starvation due to circumstances beyond their control as long as it is accepted as a duty of the community. This is not a guy who is sitting there saying I’m a Social Darwinist, what’s left is about and this is what drives me nuts about Hayek is you never know when he as that there is some obligation on the community, whether it is to be done through voluntary organization like churches and schools or whether done through the state whether it should be done on the local level, whatever, but you don’t have to answer those questions to make it very clear that his guy does not believe that all market processes yield good results and all non-market process yield bad results. There was simply no part of what it was that he thought. The second point that I want to make, I do not think that he was a Newtonian in his views. In fact it’s exactly the opposite. If you read passages in F. A. Hayek’s work what they do is they bring to mind the good part, and there are some good parts, obviously. In Robert Nozick’s Anarchy, State, and Utopia – and the key portion that I think was most powerful was his independent reinvention of all the common law rules which said in effect that you cannot run a sensible society by having a serious of patterned principles where you know what the end stakes are and you’re going to try to figure out how you’re going to turn the cranks to get to them. This is the argument of social planning. And what Hayek was in defense of, and what Nozick was in defense of, and I will list myself with respect to them that I am in defense of, is what you do is you give yourself a set of stable basic institutions, you get rules for the acquisition of property, rules for individual autonomy, rules for voluntary exchange, rules for the prohibition against the use of force and then what you did is you let the voluntary exchange run and see what the outcomes will be and at the end if you get these mal-distributions and distributions which you sometimes will get, that’s when this other social safety net kicks in, preferably through voluntary means. But the key feature about this is if you run the system the resource base which you are going to have to work from is going to be far larger, and the number of people who need this system will be far smaller, so that the chances of needing something like a formal social security or Medicare system if you let this happen, will be correspondingly diminished in terms of the way in which this goes.

Now the last point I want to make is a vehement attack on the progressive movement precisely because it refused at least in its current incarnation to consider one viable element which is the deregulation of various markets in which state monopolies have been created. So right now for example we are talking about divisive properties. All one has to do is to look at the situation of labor relations in the United States, where in the 1930’s what we did is we took competitive labor markets, where in effect wages systematically moved up with productivity, and productivity systematically moved up with intervention, all during the period where the progressives denounced these markets as failures, and imposed a bilateral monopoly structure with heavy government regulation over it, such that massive discontinuities in the form of lock outs and strikes would take place, with massive negative third party situations, and then back this thing up with state power. To me, the… I could understand enormous disagreements — between us for example — on how it is you deal with market failures associated with prisoners-dilemma games or the creation of natural monopolies. Those are open to discourse. What I can’t understand, nobody has been able to explain to me, why it is that the resources of the state should be used in order to shrink the total pie or productivity, and to create greater antagonisms across classes. And I want you George to come out on the record now and say that you’re in favor of repeal of the national labor relations act, and then we’ve got something that we can talk about.

I’m serious about this. I can’t think of anything that you said which would indicate that Hayek is wrong when he says, this is the kind of centralized authority that we ought to dread. And it’s a menace, when these guys take after Boeing as they’ve done in the last week, it is just a complete travesty even under the current labor law and politically it’s the worst possible adventurism and so forth.

Hamowy: Perhaps some people in the audience would like to address the panel… I’m not so sure it’s fair to ask –

Epstein: Oh I think it’s fair. This is a global discussion of Hayek

Soros: As I said I’m not really eager to attack Hayek because I would like to go back to the Hayek-Popper discussions. I’d like to address what’s wrong now because I see a real danger, I am genuinely very concerned about the real danger for our political system, for our open society because of this division where two sides have got hold of half truths, and by pointing out the deficiencies on the other side, they think that they’ve proven their point and that is not the case because the fact that there are deficiencies on the other side doesn’t change the fact that there may be deficiencies on your side also.

So I’m ready to recognize the deficiencies in arguing for let’s say financial regulation when I look at the way the Dodd-Frank bill and its failure to address the issues. How it was lobbied into incomprehension and inconsistency by special interests of various kinds. So the fact that the whole issue was extremely well framed by two articles, one was by Greenspan, who said that the genie is out the bottle, the financial markets have become as institutions so complicated that no regulator can anticipate the results of regulation and therefore give up on regulations. And Barney Frank replied, pointing out that leaving markets unregulated can cause financial collapse or horrendous consequences therefore you can’t afford to let the markets unregulated. But when he tried to prove how the Dodd-Frank act dealt with the issues, there he was lacking because effectively it really did not address the fundamental issues. So…

Epstein: One little last comment on the financial…

Hamowy: We really should allow the audience speaks because we are going to have to adjourn fairly soon and I want to give the audience the chance to address questions to the panel. Yes?

Question 1: This will give you a chance to address financial markets again, addressed to professor Epstein and Mr. Soros, because as you pointed out, these failures in Dodd-Frank, but certainly listening to professor Epstein, that runs back to the big question of whether or not one shouldn’t have had structural reforms because that would have dealt with this refusal to deal and would have deal with many of the other problems that have evolved, and I’m curious about the views of the two of you on that subject.

Epstein: A financial stability oversight board strikes me as being exactly the kind of thing we have to worry about that Hayek talked about, because of the incredible discretion as to what people are put on the list as being systematic risks and which ones are not. Already we have very clear evidence that people are constantly trying to put their competitors on the list while keeping themselves off the list and so forth, because they know that when the difference in the capital requirements it’s not going to work. I’ve also heard stories to say that the guys who actually do the models in the private area say that all of the public models are in fact wrong, and so what happens is that if they got the wrong models is to whether the source of risk is in a credit market or in market fluctuations and so forth you’re going to get the wrong results, and the problem as Hayek pointed out is that if you get every bank going under government regulations that are wrong, it all collapses; if you have different banks doing different things one may go down, and the proper response is I think in many cases two things: one is it was a great mistake to have the little banks taken over by the big banks—so you have this massive concentration that we now have in the industry, and secondly I think you have to be extremely cautious of running these kinds of bailouts, particularly when they’re discretionary so that AIG survives and the Lehman Brothers turns out not to do so. I think in effect it’s a disaster and of course we didn’t cover Fannie Mae; when I asked Christopher Dodd about that, he said we didn’t have time. What on earth was this man thinking?

Hamowy: Richard, we have very few minutes left for more questions…George? Perhaps you can hold off and maybe somebody else will…yes?

Question 2: This question for Mr. Soros, mostly. Since you and Professor Epstein have come to an agreement that it’s a good thing to start with the presumption not to regulate. I’m curious what you think about your fellow Democrats‑I guess you’re a Democrat- I’ve never figured you out. I’m a libertarian-Democrat myself, there are about six of us. Maybe you’re one too, I hope. I’d like to know what you think about this thicket of regulation passed by your fellow Democrats, rammed through, health care reform, with all of the corporate welfare that went to the insurance companies…

Hamowy: Excuse me, is it possible to confine our questions to Hayek which is actually the topic of discussion… <brief discussion between questioner and Hamowy>

Soros: Well I think that the idea of reforming health care and providing health care for everyone is the right idea, and unfortunately the… in the process the savings that could have been achieved for instance by getting the… to start with the pharmaceutical companies made a fabulous deal where they bought it off for a peanut any further reduction in costs of medicines. And then the insurance companies destroyed the core of the reform which would have provided a public option. Which would have kept the…

Hamowy: We have time for two or three more questions at the most…Yes? <long pause> It would be helpful if you could address your questions in terms of the subject of the panel.

Question 3: Mr. Soros, I wonder what you think of The Road to Serfdom, which your critic Glenn Beck has helped to make into a national bestseller.

Soros: I would have to frankly re-read to give you my critical assessment. I was certainly on both Hayek and Popper’s side in… regarding the excessive planning and certainly communism as a constraint on freedom and a terrible threat to liberty. But again, I think on planning, I think as long as you realize that your plan is bound to be flawed, I think there is a need for planning as well. In other words, establishing the competitive advantage of individual countries, which industries you should focus on and so on. So there is a lot that can be done by planning, as long as you recognize that it is bound to be flawed and needs to be revised.

Hamowy: Wonderful that Richard Epstein and George Soros agree so completely on this point.

Epstein: Could I make a comment? Look I think the answer about Hayek is that he was fighting against Lady Wootton and so forth about comprehensive allocation and centralized planning. But he threw out the baby with the bathwater. You can’t run a system where you build infrastructure—sewers, public facilities, and so forth unless there’s some degree that you plan. And for that what you have to do is you need to get a real appreciation of the tax structures that you want, the regulatory structures you want, the permit structures you want, the subcontracting structures you want, essentially the way in which you have to think about it is 90- maybe 80 – 80 percent of the world runs quite well on competitive well on competitive markets, and 90 percent of attention has to be given to the other 20 percent, and Hayek’s weakness is that he did not know the techniques of regulation in areas where it was strictly necessary to have it.

Question 4: The implications of Dodd-Frank on Hayek’s concept of the rule of law?

Epstein: The level of discretion given to powerful government officials on both consumer fraud division and with respect to the banking division is terrible. I’ve actually litigated a small piece of this known as the Durban amendment, and what you see there is you’re giving a charge to the federal reserve bank to try to set interchange rates in a market that it simply does not understand, and you see complete paralysis, they’re already late on their deadline a week, this thing is supposed to go in effect on January 21st, there’s a 15 billion dollar a year shift in cash, put together by a Senator whose ignorance with respect to basic economic principles is so sublime that the name Senator Durbin ought never to be uttered again in polite company, and that’s what you talk about as sort of centralized planning; this is a complete gratuitous interest group deal, there is absolutely nothing structural about this industry which has failed, in fact it is one of the great success stories in America, is the rise of the debit card. And you know that’s the kind of self-inflicted wound, and I hope George would agree but I don’t know if you know anything about debit cards, George, but if you do I would like to have your views on the subject as one who from time to time uses one.

Soros: It’s very interesting the Federal Reserve implicitly has arbitrary powers. It has the mission of preserving the financial system from collapse. And when the system is endangered it has to put the preservation of the system first and unfortunately exactly because it is impossible to plan perfectly there is bound to be an unforeseen situation that the fed has to deal with. Now in this case, it has used the arbitrary power in an extremely ineffective way where secretary of treasury Paulson declared that on Friday that there is no bailout, and on Tuesday he had to reverse himself and bail out AIG, and on Thursday he had to save the money market funds. So he… he was totally lacking in understanding financial markets and reacted badly. But actually his excuse was that he didn’t have the power to intervene and to bail out Lehman. That I think is a lame excuse, because if he had done it he could have, ex post facto, gotten legal authority to do it. Because in many, many cases, the fed has used that arbitrary power. And exactly because planning is bound to be imperfect, there has to be an arbitrary element in the regulatory authorities. If you didn’t have any arbitrary powers, that would mean that you were able to devise laws, rules that… that would have been comprehensive to the success of perfect knowledge.

Hamowy: Yes, please.

Question 5: To get back to Hayek; Hayek, I think, all of the panelists made it clear, was dealing with something a lot of libertarians don’t bother with. How do we deal with that boundary line between the areas where most think there has to be some role for government and the area where we’d like to keep it out of? And that boundary line… defining that boundary line, and Hayek doesn’t do very well, and yet both George, Richard, and–well Richard gave us a crude guideline for deciding how to make that divide…

Epstein: Oh I’ve very precise on that.

Question 5: Very precise, but both Bruce and the judge I think said that its important to have that dividing line, and Mr. Soros certainly made the point ideally that, what did Clausewitz say, ‘No ideal piece of legislation survives first encounter with legislature’? You know, the idea that in effect we put ideas into the hopper and god knows what comes out the other end. And yet that is the nature of politics, it is an interest group phenomenon. Do you either–Richard, again, if you refine it–Dr. Bruce and Judge give us an idea, how would they try to do that dividing line so that we didn’t use legislation when it almost certainly goes so far afoul that even its proponents are embarrassed.

Epstein: Okay, well I’m going to give one quick answer; this is going to be in praise of Milton Friedman. I think if you actually look at his academic work, Friedman’s great work is on non-monetary, non-market institutions. It’s the work that he did with respect to the permanent income hypothesis, and it’s the work that he did with respect to the way you run the money supply. And the effort that you try to do is to have nondiscretionary rules on whether you expand or contract money supply in order to keep price levels relatively stable so that there’s one fewer dimension of uncertainty in private transaction. It’s a very good place to start. And in fact, as John Taylor has shown, it was when we started to deviate from that particular kind of situation that we started to create the housing bubbles which then created the boom and the complimentary assets and so forth.

So I think, in effect, that you want to do exactly opposite of what Dodd-Frank did to try and find ways to limit discretion, which means getting rid of Fannie Mae and Freddie Mac and all the rest of that stuff, rather than to give them a pass and to start on the private side. And I mean I’ve heard Chris Dodd speak, it is simply a stunning condemnation of American politics that this man could have been leading the financial reform. He simply does not know enough to do it, period.

Hamowy: Do you want to comment on this? <to Caldwell>

Caldwell: I think there were philosophical as well as pragmatic reasons for why Hayek was so evasive with the details. I think that’s the right word to use. In terms of the philosophical reasons, he recognized that there’s a lot of different societies that had previously established institutions, and in order to keep it at a general philosophical level, you don’t want to offer specific points about the actual policies. Milton Friedman always did. He was perfect for that, and Hayek was his counterpart. I mention Friedman because Hayek founded the Mont Pelerin Society in which he had people who were Ordo-liberals from Germany, he had Milton Friedman and George Stigler from Chicago, and people from all over the spectrum with lots of different visions as to what a free society would look like. He always was trying to articulate general principles, so we can fault him for not getting down to specifics, but I think it was intentional, and it reflected his general views that when dealing with complex phenomena, sometimes as far as you can get is general principles, and then leave the details to people like Friedman.

Epstein: (unintelligible)

Hamowy: I’m afraid our time is now up. Thank you.