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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Hayek vs. Friedman



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Angus Burgin, author of The Great Persuasion, a history of the postwar revival of market-centered economic thinking, argues that while many contemporary U.S. conservatives invoke Friedrich Hayek to make the case against regulation, they are better described as the heirs of Milton Friedman:

Economists such as Knight and Hayek worried deeply about the erosion of free markets, but saw their chief antagonist as “central planning” rather than “regulation.” Central planning, as Hayek explained it, involved “direction of all economic activity according to a single plan, laying down how the resources of society should be ‘consciously directed’ to serve particular ends in a definite way.”

Much of the contemporary animus against excessive regulation more closely resembles ideas first brought into general circulation by Milton Friedman. Where Hayek perceived a host of areas that might be improved by regulation, Friedman saw almost none.

In the 1960s, although very few among even his closest allies shared such views, Friedman advocated for the abolition of almost every regulatory arm of the federal government. He argued that the agencies with famous abbreviations — the ICC, FCC, FDA — should all be shuttered to grant greater discretion to consumers, whose actions Friedman viewed as the most reliable record of public opinion. If doctors and dentists would be allowed to practice without licensing requirements, he said, the cost of care would plunge, yielding benefits that far outweighed any dangers that uncertified practitioners might pose. (If one proved inept with a drill, Friedman reasoned, consumer preferences would soon take that into account.)

Hayek, in contrast, often defended regulation:“Probably nothing has done so much harm to the liberal cause,” Hayek wrote, as a “wooden insistence” on “laissez-faire.”

Hayek was quick to point out a number of areas where regulations might be beneficial, including the restriction of excessive working hours, the maintenance of sanitary conditions and the control of poisonous substances. And he argued that the price system became “ineffective” when property owners weren’t charged for the damages they caused; hence the need to regulate deforestation, farming, and the smoke and noise produced by factories. “In such instances,” he wrote, “we must find some substitute for the regulation by the price mechanism.”

One is reminded of Northwestern University sociologist Monica Prasad’s distinction between “economic deregulation” and “social deregulation”:

To call Breyer and Kennedy’s participation in deregulation an indication of their underlying conservatism or eclecticism is a misreading of history, in light of what deregulation became. In the early to mid 1970s, deregulation was not a conservative idea, but a liberal populist one, against big business and in the interest of consumers. That Breyer himself saw the issue in these terms — and not in conservative terms of getting the government out of industry — is apparent in two memos that he wrote for Kennedy in 1974, urging Kennedy to push deregulation of the airlines. …

Although it has emerged on the Left as a pro-consumer issue, by the end of the 1970s deregulation had become a free-market issue pushed most heavily by the Right. In particular, the meaning of deregulation had changed: instead of economic deregulation (deregulation involving agencies that regulate one industry in the interest of preventing monopoly but have become “captured” and are giving unfair advantages to that industry) deregulation now referred to social deregulation (deregulation involving agencies such as the EPA and OSHA that regulate all industries in the interest of consumers, workers, and the environment). 

This isn’t to say that there is no case for social deregulation — far from it. The kind of social regulations Prasad describes can prove formidable barriers to new entrants, and thus beneficial to large incumbent firms. But her distinction is nevertheless an important one. 



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