Bernstein on Hayek, Friedman, and Prices
A misrepresentation of two Nobel prize-winning economists
Jared Bernstein, the chair of the President’s Council of Economic Advisers, gave a speech this week at the “Anti-Monopoly Summit.”
He said:
there’s this other part of our agenda, one which warmly embraces the power of market forces, one which aims to elevate transparent price signals to boost those forces in ways that classical conservatives, from Hayek to Friedman, would applaud. One which is designed to foster and boost competition, to repeal anti-competitive measures that diminish the freedom of workers or entrepreneurs to pursue their goals and dreams, to create a level playing field on which firms can fairly compete in ways that we know will generate more innovation, fairer prices and wages.
Hayek explicitly repudiated the idea he was a conservative. Friedman rarely, if ever, referred to himself as one.
But, that aside, what is this policy agenda that the classical liberal economists Hayek and Friedman would “applaud”?
Bernstein goes on to extol how the Biden administration is:
judging market power by conceptions of “fairness,” not just economic indicators
imposing a federal ban on non-compete contract clauses
putting higher tariffs on Chinese goods
clamping down on “junk fees”
Seriously? Does Bernstein really think Friedman and Hayek were in favor of highly interventionist competition policy based on whimsical notions of “fairness”? That they’d desire a complete federal ban on a voluntary labor contract provision? Is Bernstein really saying that Friedman and Hayek would support the federal government marauding from market to market, banning, restricting, or limiting various fees and charges based on no apparent underlying principle, except that certain fees can be annoying for some customers?
Yes, it appears so. In fact, Bernstein later intensifies his criticism of junk fees, referencing Hayek again in implying the administration’s assault on them is pro-market:
But even more fundamental is the way junk fees undermine competition by promoting non-transparency in pricing. As I alluded to earlier, one area where economists from all walks of life come together is in the importance of clear price signals. As Hayek correctly argued long ago, there is no more important coordination mechanism in market-based economies. Jam the price signal and you jam the market, you jam consumer choice, and you jam the ability of competition to work its powerful force in enhancing efficiency, innovation, and fairness. As my CEA colleague Evan Gee put it, when noise is needlessly introduced into the price signal, the system stops working. That may sound like a lot to lay at the feet of those little old pesky junk fees, but Evan is right.
I asked some experts on Hayek and Friedman what they thought of Bernstein’s association of these Nobel-prize winning economists with these positions on antitrust and junk fees, and parsed through biographies of them again to refresh my memory.
Tyler Cowen, who recently authored GOAT: Who is the Greatest Economist of all Time, and Why Does it Matter? said:
Hayek did favor some degree of antitrust, though we don't know how much. Friedman wanted to restrict government antitrust to no enforcement of collusion contracts...So this is way off base.
It’s true that Friedman’s views evolved to that position. Edward Nelson’s intellectual biographies conclude that, on “antitrust policy, disillusionment with government regulation made Friedman take a less interventionist posture over time.” In the early 1950s, Friedman implied he’d prefer a world with lots of small firms. But even then, he didn’t think that monopolistic power, while inefficient, could contribute to inflation - the type of narrative that the Biden administration has been pushing. I have no doubt 1950s Friedman would have opposed a competition policy based on “fairness” rather than some economic criterion too.
And by the 1970s, Friedman had completely about-turned on his support for most antitrust provisions anyway and thought that meaningful ongoing monopoly power was associated with government favors or privileges, not free markets. He also saw unilateral free trade as a competition policy that helped avoid monopoly power, so would not have celebrated the recent China tariffs.
On prices, Friedman was extremely critical of price controls. He opposed price controls not only as a means of controlling inflation (see his critique of Nixon’s policies), but also due to their effects in creating shortages and other unintended consequences in individual sectors. Indeed, in 1946 he wrote a damning critique of rent control, which stands up well given the evidence base since. So the idea that he’d have favored the Biden White House’s anti-junk fees agenda, which incorporates direct price controls on credit card late fees, overdraft charges, and more, seems like a real stretch.
Hayek, of course, viewed the system of self-adjusting market prices as a reflection of the competitive discovery process. The structure of prices is part of that process, so the theory he’d today be urging the government to re-bundle airline fees or ban early termination fees for communication services is nonsensical.*
What’s obvious when you look at “junk fees” is that some of them are simply payments for different services (airline fees), some are charges designed to internalize certain risks or behaviors (overdraft charges and late fees), while others arise as companies exploit arbitrage opportunities in the tax system or their contractual relationships with third-parties (hotel resort fees). While we obviously can’t ask Hayek what he’d have thought about the argument that these pricing structures impair competition by shrouding the total price, I am pretty confident that he would oppose the Biden administration usurping their use through government bans and controls.
It’s certainly true to say that Hayek was not “laissez faire.” His 1947 Mont Pelerin Society interventions questioned whether governments had got patent and trademark laws right, while highlighting the limits of a crude “freedom of contract” principle.
Yet, as Cowen says, he was rarely specific about the contours of an appropriate competition policy. He did, though, reject the idea of “ordered competition” from the top down. And Pete Boettke, an Austrian economist at George Mason University, says that when Ludwig von Mises outlined the more classical economic position that almost all real monopolies are government created, Hayek never explicitly repudiated him.
Indeed, over the years, Boettke says, Hayek was “often pushed to condemn Mises for his ‘dogmatic’ stance and Hayek never does. He will admit Mises doesn’t present the argument as persuasively as he could but he also insists ‘the old man is often right’.” Regardless, you don’t have to think Hayek agreed wholly with Mises on this to dismiss the idea that Hayek would support a competition policy predicated on “fairness.”
It is simply a misrepresentation of Hayek and Friedman’s positions to link them with the arbitrary and capricious approach of the Biden administration to competition and prices.
*I’m grateful to Cento Veljanovski for sending me a paper he’s working on with a more complete analysis of Hayek’s disparate views on antitrust. He notes that Hayek was actually hostile to “price discrimination” by monopolists and that he saw a case-by-case approach in preventing a monopolist from offering targeted discounts to certain customers. But nobody would suggest that the industries Joe Biden is clamping down on in regards junk fees, i.e. hotels, airlines, landlords, credit card companies etc, are monopolies in the sense Hayek meant. So this does not change the conclusions above. Nevertheless, Cento rightly notes that this stance from Hayek does seem to conflict with his general preference for rules.
For more on the case for free-market prices, read The War on Prices.
Each of those interventions could be evaluated on their merits is there is something peculiar about these markets might give a positive cost-benefit analysis of the intervention. But to say the Freidman and Hayek would necessarily above is pretty ludicrous. Bernstine is prone to solecisms. :)