Hayek vs. the development experts..

I have been  trying to read the superb Hayek lectures by Manhattan Institute (after discovering them recently and also posted 2012 lecture here.

William Easterly got the 2008 award for his superb book The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good. His lecture on the occasion is a decent read.

As we know, Easterly is a huge critique of top down approach of development. In this one has all these development experts who think they know what is in the interest of the poor. Easterly instead vouches for bottom-up approach where people decide what to do. This is also similar to what Hayek also said:

Tonight we find ourselves in a moment similar to that in which Hayek wrote The Road to Serfdom in 1943. Then, as now, a great financial crash was seen as a failure of freedom. Actually, things were even worse then for Hayek’s point of view. In the aftermath of the Depression, many pointed out the apparent success of centrally planned industrialization in the Soviet Union in outperforming markets. As Hayek wrote in 1943, democracy barely existed outside of a few English-speaking societies. Even in the U.S., people noted the apparent success of government top-down planning for wartime production of arms. Under these circumstances, Hayek knew he would be caricatured as a right-wing ideologue, even though his ideas did not fit into the stale partisan debate about markets versus government. He argued that the best system in the long run relied upon the creativity of individuals at the bottom who had both political and economic freedom. In a way I will describe below, Hayek saw both government and markets as functioning better the more they were the outcome of spontaneous development from the bottom up, with nobody in charge. It took courage to criticize top-down control after the scary calamities of the Depression, yet Hayek’s vision would be vindicated by subsequent events. How many of us will show similar intellectual courage in the midst of today’s financial crash?

Hayek did not talk about it at the time, but his warnings about the drift toward top-down planning were perhaps most relevant of all in the so-called Third World. It is the misfortune of the field called development economics that it was born at the moment of maximum doubt about individual liberty. As a result, economists conceived of development from the beginning—and to a frightening extent still do today—as a top-down process run by development experts operating on a blank slate.

The top-down experts would prove wrong time and time again, yet the top-down view in development would prove curiously impervious to failure, for reasons that I will also attempt to describe.

Easterly says this approach has failed each time but never goes out of fashion:

What Hayek correctly called a “marvel” was a bottom-up system that nobody has to direct or even understand in order for it to work. As Hayek said in 1945: “those who clamor for ‘conscious direction’ . . . cannot believe that anything which has evolved without design (and even without our understanding it) should solve problems which we should not be able to solve consciously.”

There were development economists that got it right at the time about individual liberty in development, such as the South African economist Herbert Frankel and the British-Hungarian economist P. T. Bauer. Unfortunately, there are better rewards for bad ideas in development economics than for good ones. Arthur Lewis and Gunnar Myrdal got Nobel prizes. P. T. Bauer was ostracized as a heretic, and poor Herbert Frankel was ignored and then forgotten altogether. I come before you proudly aspiring to be this generation’s Herbert Frankel.

Why this approach remained:

How come the top-down expert approach still dominates development economics despite fifty years of failed predictions from development experts? There are many reasons, but one that I think is particularly interesting is that our brains are hard-wired to believe in top-down planning. We see intentional behavior by someone at the top even in a bottom-up spontaneous order in which the outcomes are not the conscious goals of anyone. Philosopher Daniel Dennett argues that human evolution favored the “intentionality” way of thinking. There was evolutionary payoff in seeing intentional behavior in all living animals. When you saw a lion move, you could get away if you understood that it intended to eat you. When you saw a group of cavemen from the next cave over approaching you with torches and clubs, you could defend yourself more readily if you saw this as a group with a specific agenda, such as killing your men and stealing your women. Cavemen that saw intentional action everywhere survived. Those who didn’t perished.

So now perhaps we can understand statements from those that attribute evil intent to spontaneous processes, such as anti-globalization protesters who said in 2002 that corporate leaders meet at “posh gatherings” in order to “chart the course of corporate globalization in the name of private profits.” Where there is inequality in market economies, people too often believe that somebody intended to make the poorest people poor. Where there is spontaneous entrepreneurship that both creates new jobs and destroys old jobs, the newly unemployed too often believe that somebody conspired to take their job away. With our caveman hard-wiring, it is difficult to understand that nobody intends either the good outcomes or the bad outcomes. Another Nobel laureate, Kenneth Arrow (someone who, unlike Hayek, is not seen as a right-wing ideologue), said: “[T]he notion that through the workings of an entire system effects may be very different from, and even opposed to, intentions is surely the most important intellectual contribution that economic thought has made to the general understanding of social processes.”

Did not understand this fully. Can any of the readers help?

In the end he describes his own story:

We have similar examples of escaping poverty in our own history. In 1927, a baby named Nathan was born in America’s own Third World, West Virginia. His father, a low-paid lumber inspector, died from tuberculosis when the boy was two years old. His mother, named Dora, was left to support two sons in West Virginia during the depths of the Great Depression. If ever there was a poverty trap, this was one. But Dora worked so hard that she was able to send Nathan to West Virginia University. Nathan himself continued to work hard at odd jobs until he could finance a return to West Virginia University to attain a Ph.D. in biology. He left West Virginia for a successful career as a professor of biology up north, so that he could give his own children a middle-class standard of living. I should know because I was one of those children; Nathan is my father. I dedicate this Hayek award tonight to my father, out of gratitude for how he realized the American dream for our family.

With such inspirational examples, we owe it to the poor everywhere to advocate the values of individual liberty that offer the world’s last, best hope for ending poverty. I will close with a paraphrase of my favorite liberty-loving American politician, Abraham Lincoln:

It is for us the living to be dedicated here to the unfinished work which they who came before us have thus far so nobly advanced. It is for us to be here dedicated to the great task remaining before us—that we here highly resolve that our world shall have a new birth of freedom—and that development of the people, by the people, and for the people, shall not perish from the earth.

Well, this is one of the several debated issues in economics. It is likely to continue. One does not see any decline of top-down experts as so many econ graduates are being trained to think on those lines.

However, a very interesting essay..

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