we can only not renounce the principles, we need to have learned, and other countries should know it makes a difference to us how they conducted themselves on the human rights issue. the administration is what do you do beyond this how many sanctions do you put on and to what degree do you assert that you can tell of their country's what to domestic institutions they should have and at that point it is a difference of opinion. some people be long and i would be sure nixon and for that matter every american president i have seen that through a policy of engagement, one can move the chinese better dennett

was a confrontation for all of the history and which they have always resisted. when clinton was president in his first years, she adopted a policy of confrontation. and after three years, he gave it up. whenever i am in china and whenever nixon was in china and every president of north, we are aware of individual cases in which human rights have been violated. we often speak to the chinese on the private basis, and so there is no disagreement about the importance of human rights. there's no disagreement about the role of america. there is a disagreement on whether it should be done by public demonstrations by

diplomacy. .. to be very thick, but one knows that the key test of revolutions is not the day on which they occur, but the period in which they are being sorted out. the technical level, what

worries me is the nuclear level in the way of nuclear technology if any of them ever get used, the catastrophe will be so unbelievable that would affect the human sense of security and the political system. so those are the key issues. >> .or kissinger, spent such a joy to talk to you. i personal note, you're one of my personal heroes. i've known you for comic goodness, 18 years now. i think i'm dating myself. it's been such an honor to get to know you and a pleasure to talk to you and a privilege to call you a friend as well as a mentor. >> guest: i obliged. you over the years have been tremendous achievements.

>> host: thank you, sir. again, former secretary of state, henry kissinger. his masterful new book, "on china." and monica crowley. thank you for joining us today.

>> up next on booktv come a panel discussion of philosopher and economist, fa hayek, "the constitution of liberty" published in 1960 and recently republished it can also include george soros, epstein and advise. this is just under an hour and a half. [inaudible conversations] >> we are pleased to welcome you all to this region of hayek's "the constitution of liberty," first published some 50 years ago. in my mind, it is thought question i asked most important work, in which he attempts to bait their the foundations of a

free and open society. the reception hayek's book originally received to the extent he was evenly balanced by this community was often hostile and at best lukewarm. and this is a source of some disappointment to hijack, who it invested so much effort at a time in writing. however, in the years as an important treatise come has grown to the point where no serious study of the criteria for a free society can avoid dealing with hayek's claims. i first read the constitution -- "the constitution of liberty" when it was originally published in the summer before he entered graduate who at the university of chicago to study under hayek. while i was terribly impressed by the book displayed, i

remember being disappointed with hayek's notion of how extensive the actions of government could be and actually remained consistent with our standing up for the free society is. my view is hardly original and remains consistent -- sorry, heard the original reflected what turned out to be a fairly common criticism of hayek's theory. the debate turns out was largely the result of a difference on how hayek and see that the nature of. make the intellectuals who he most admired, i rejected any conception of actual, it here to all men at all times, and all circumstances, in favor of the notion that rates are per script taken are the result of an

evolutionary process that retracts the peculiar history of any society. only disappointment is conception of freedom remains, and how firm are sympathetic to the reasons why the indigenous rights or take uniform to historical development at distances of spontaneous awareness. indeed every card order as his most important contribution to social philosophy and one of the seminal ideas and social theory. in none of his writings does he discuss this eerie in its political dimensions in more detail than in the constitutional redmond. to discuss this book were privileged to have with us this afternoon, three people who are intimately committed with hayek's work. professor bruce caldwell,

mr. george soros and professor richard epstein. our first speaker is recent caldwell, currently professor of economics at duke university and direct her at the center for the history of political economy. he said editor of hayek's works of which this edition of "after words" is the volume published. caldwell himself is edited for hayek's most important works in5 the series among the new additions, he's also the author of an important study of hayek's thought, hayek's challenge an intellectual biography. all of us who appreciate hayek's contributions of the economic and social that to professor caldwell for having undertaken

the editorship of the collective works. >> thank you for the very kind introduction. i'm going to talk a little today about how hayek came to write but i want to first recognize ronald of the editor of this magnificent volume. i felt that the collected works was very fortunate to be able to get someone who is on the scene with hayek published the book and indeed ronald didn't review editor of the new individualist review. volume one, number one in april 1961 contained his critique of hayek's views. hayek actually wrote a response. to give you an idea -- ronald was very modest in his portrayal of his own views, but the response that hayek wrote was the only, to my knowledge, review a response to something

that someone wrote in his own collections of works. it was published in studies of philosophy economics in 1967. so i found the exact right person for the job. i noticed also, for those of you who know the constitution -- "the constitution of liberty," what the big differences between this volume in the original volume is that of having a note, they are formulated as fitness. you can actually look down at the bottom of the page and see everything hayek was saying. believe me, you could read the unit as an embodiment in itself a meal petition. now you have that stuff at they: bottom of the page. the magnificent volume in a thank you for your so, it is a little hard looking at the archival record to figure out exactly when hayek decided to write the comp dictation of liberty. there are a few hints. i will mention a few of these in an offer offer a conjecture as to how he came to write it.

the one hand we have is a letter in november of 1963 when he said, 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, who are the people in this society, that's onepa possibility. another possibility would the people like alfred hanson and whom wrote -- hanson wrote a review in the atlantic of the road to serfdom, worries that hayek talks a good landing impact planning, but doesn't tell us how to distinguish the two. keynes in his famous letter to hayek, that he wrote honestly two britons would said you admit your narrative the question of knowing where to draw the line. you agree the line has to be drawn somewhere in the logical extreme is not possible, but you give us no guidance whatever

proper to drive. it may well be he was responding to this approximate cost to some coming from the great critique of central planning in the right to serfdom, but is your preferred society? what is the preferred to? is that the proximate cause, i think so but this actually is a book that is the logical conclusion of a project that hayek started as far back as 1937. he started writing in 1939, but never finished. he called this project the abuse and define the region project. it was his war effort.q. he worked on it diligently to about the middle of the war and he was to be two volumes. 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, notes from friends 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 thing that society can't he give scientism might be called the engineering mentality, the adjacent to socially engineer in the same way the design of bridges with something that is a dangerous the debate is that grew up through time. the second volume in the two volume work was to show the results of this movement anda% this was to be based on assertive ideas contained in the road to serfdom. halfway through the war he said i don't have to rate this big two volume book. i'm becoming more concerned about the sort of political setup that will be facing after the war is over. so perhaps i should offer my warnings in the road to serfdom anywhere exclusively on that, never finishing the reason project. however, he did publish bits and pieces of it.

when assisting the scientism assay. another is six chapters from that, talking about the french developments in the counterrevolution of science. most most importantly come an essay called individualism: true and false. this essay was to the new paint a of the abuse of reason project. the reason i chased back to "the constitution of liberty" is that if you read them together, you'll see many important things in the constitution of liberty expressed in individualism: true and false. one of the ideas is a profound difference of the enlightenment as it took place in scotland versus france. scott enlightenment and the french enlightenment attached particularly to the writings of individualism faults. the notion -- the importance of limiting coercive power of the state to the circumstances in which it is indispensable to

reducing coercion by men of other men, people of other people. this is the role of coercion is their individualism true and false. the notion that limits of human knowledge have an application for this sort of legal rules you should embrace. because of the limits of human knowledge been a key idea in the work, but it has an application to use simple rules, general rules and rules that were perspective in terms of their application. he felt these would be the best acknowledgments to be perfect. another theme is the most stressful societies of institutions in which fallible ignorance are evil people can be the most -- the least harm. and for him, this included democracy to be sure, but also strong constitutional restraints on the power of the government

to interfere with individual activity. the importance obviously also the rule of law. and finally, the tension is mentioned in individualism true and false over different qualities good quality for distributed justice and in fact these two are often -- necessarily attention. so how did he come about -- these are the ideas of individualism true and false. he started work on this with more vigor in the mid-50s. and here is an example of hayek's brinksmanship. he actually convinced the guggenheim foundation to give him a grant so he and his second wife could duplicate 100 years to the day the trip across italy, greece and the mediterranean. so, he took this travel, but of

course he could travel a lot more quickly than jon stewart was able to travel so he stopped in cairo to give lectures. the lectures were ultimately published under the title political ideal of the rule of law. and this forms essential chapters in the book of the constitution of liberty. when he returned from the trip, he said in an interview in 1955, the plan for the cause edition$p of liberty stood clearly before my mind. from there, he spent a year -- there's three sections in thep7 constitution of liberty. he spent a year and each then a final year and proving his prose for the entire book. he finished his manuscript on may 8, 1959, which was hayek's 60th earth day. a happy coincidence, but if it is hardly a need to get it done. it was officially published in 1960. as arnold said, did not receive

immediate acclamation. its influence they think has grown through time. for those who don't own the book, of course this out as particularly an interesting chapter is the epilogue, why am can serve it as from all reports, although he never said what he wrote this in terms of the people who were on the scene, this is an address he given at the 1957 montpelier meetings. apparently the object he says this part in the epilogue: it is directed against the recent attempt to transport to america at the european type of conservatism in which he felt would be alien to the american tradition and apparently russell curt's, the conservative mind was his target for this particular chapter. but always one and then someone who doesn't know anything about hayek and you have the book, gives them pause to see that

title. hayek scholars different as to which it is too green books that they liked best. "the constitution of liberty" or law legislation and liberty. an essay in terms of the teamsn> he addresses is in evolutionary theory, this is something i think is extremely important in hayek's work. he said a lot of the stuff in articles in the 1960s and early 1970s. some of those articles in fact he puts even better, with "the constitution of liberty" is truly a work he does in organic holds a semi-view would be for sub to. anyway, that's my vote clap clap mac >> our second speaker is known

to all of you in this introduction besides being a financier and philanthropist of international repute, george soros has written extensively on markets and the rule of government creating and sustaining flourishing economists. before his successful collier in the financial markets, mr. soros starboard sealless eat under popper, f.a. hayek's close friend, possibly the closest friend who is open in soros descendents behind the iron curtain. mr. soros is also the founder of the open society institute and the author of underwriting democracy: encouraging for enterprise and democratic reform in eastern europe. of the differences in viewpoints of this between mr. soros and

professor hayek are extensive and profound, i am sure he is among those who appreciate hayek's tremendous contribution to establishing liberal economic order. >> thank you. kayak is generally regarded as the possible a grant economics, which hold that the markets ensure the optimal resources as long as the government doesn't interfere. it's a highly formalized and not magical theory, whose two main pillars of the efficient market hypothesis and the national expectations. it is usually called the chicago school and is come to dominate the teaching of economics in the united states. i prefer to it as market

fundamentalism. i have developed an alternative perception framework, which is opposed to the efficient market hypothesis and national expectations is still on the twin pillars of compatibility. my firm belief whose principles are in accordance with hayek's ideas. they can't both the right. if i am right, market fundamentalism is wrong. and to be right, and must be able to show some inconsistency in hayek's ideas and that's what i propose 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 1940s and i was reading come at the methodologist will culture which took place between popper and hayek in the early

1940s. i considered myself a decide all of popper, but in that controversy, i was on hayek site. hayek conveyed what he called scientism, namely newtonian physics. popper argued in favor of what he called the doctrine of the unity of science or rather the unity method. that is to say that the same methods and criteria applied to all scientific dissonance. i was drawn to this controversy and interest in the writings of karl popper. i had read his book, open society, in which he argued that the incontrovertible truth is beyond the reach of the human intellect is.

and ideologies that claim to be in possession of the argument truths are found to be false. therefore, they can be imposed on society only by repressive methods. this helped me to understand the similarity between communist regimes. and how they lived through both of them in hungry, it made me -- and made a great impression on me. this led me to the popular theory of scientific method. popper claimed that scientific theories can never be verified. they can only be falsified. that means that their validity must be regarded as provisional and they must forever remain open to falsification. the main variant of this theory is that it involves all the problems in improving scientific

theories beyond any doubt and it establishes the importance. only theories that can be falsified qualify as scientific. while he 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 that the perfect knowledge is unattainable. to contradict them could be resolved by recognizing that economic theory can't meet the standards of newtonian physics. that's why i cited with hayek with the imitation of natural science and took issue with popper, who asserted the top

turn of the unity of method. hayek argues that economic agents makes the decisions not on reality, but on their interpretation of reality in the two are never the same. that's what i called her up ability. hayek wants to recognize that decisions based on imperfect understanding are found to have unintended consequences. but hayek and i grew diametrically differences from this insight. hayek used it to restore the perfect hand, which was the unintended consequence of economic agents pursuing their self interest. i used it to demonstrate the inherent stability of financial market. and my theory of retro activity, i assert that the thinking of

economic agents serves two functions. on the one hand, they try to understand reality. and the other, they tried to make an imprint on the situation and that's the participating or manipulative function. the two functions connect reality and the participants perception of reality ino opposite directions. as long as the two functions are independent, they each reduce determinant. but when they operate simultaneously, they interfere with each other by introducing an element of uncertainty into the participants understanding and the actual course of events. i called interplay between the two functions that gives us uncertainty right activity.

the two-way connection between the positive and manipulative functions works as the feedback. the feedback is positive or negative. the positive feedback we source is both the prevailing trend in virus and leads to financial assets. negative feed back corrects the biases. at one extreme bias equilibrium and the other are the financial bubbles. the occur whether pricing goes too far and becomes unsustainable and is then followed by a vast. in the real world, positive and negative feed back or intermingled and the two extremes are rarely, if ever reached. thus, the general you postulated by the efficient market

hypocrisies turns out to be an extreme case of little relevance to reality. night was the first to identify the unquantifiable uncertainty inherent in financial markets. in 1831, keynes and his followers elaborated the night, although they still can't theories into former equations in order to make an acceptable to the economics profession. but the years of economics by contrast sought to eliminate the uncertainty connected with activity from their subject matter. hayek was one of them. ..

just as easily but if they are out how actively ignore that activity. they found another basis for a eliminating which was more influential. that's the way that i was taught at the receipt. rather than define the subject matter of economics as the allocation of limited resources among alternative uses. we argued that studying the

conditions of the supply and demand themselves was outside the scope of economics and therefore supply and demand growth should be taken as independent. the intersection then determines the price. by this methodological subterfuge rather in the lead to managed to eliminate the facts that the mass uprising of the financial assets can have on both the demand and supply curve. in other words, it could eliminate. the debate in the economic took place in the context of a larger political controversy in the role of the state of the economy. it came in socialist planners on the ever. i have subordinated the

methodological arguments to his political bias. that is the source of his inconsistency. he attacked science and but after the end of the second world war when the communists had become more accused, he overcame these methodological qualms and became the market fundamentalism. with only a mild rebuke for the excessive use of the positive methods in his acceptance speech. since the communists and the scientific theory that proved market participants pursue their self-interest and assure the allocation reese worse was to 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 of the consequences. that means that makes human affairs less predictable than the natural phenomenon and hyatt was right in opposing the scientism. at the time of the economic reticles, he was somewhere in between high act and the socialist planners. he was just as much opposed to communism as high hayek that allocated the piecemeal engineering. in this dispute, i was on his side but popper and hayek were not that far from each other, and the methodological discussion between them was very enlightening. i was interested by both of them and i also found faults with

both of them. i would like to emphasize that by identifying hayek's inconsistency and political bias, i don't mean to demean him, but to improve our understanding of financial markets and other, we are all by yes and the inconsistency in one way or another and the misconceptions play a major role in shaping the course of history. exactly because the perfection it makes all the difference to come to understanding reality recognizing the the market hypothesis and the fury of the rational expectations constitute a major step forward. that is with the institute of the economic thinking is seeking

to achieve. it is raising in full force today that the standards of the political discourse have rated the deteriorated since the articles of the economic. that's why i was pleased to accept this invitation to the cato institute. the two sides have each gotten a hold which a program to be the whole truth. they took the initiative by arguing that the government is a cause of all of our difficulties and the so-called left in so far as it exists has been forced to defend the need for the

government services. of that and i'm certainly seeing political bias i recognize 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 claim the other half of the true meaning of the financial markets are inherently unstable and need to be regulated. and above all, i am worried that those who proclaim half truths as the whole truth whether they are from the left for the right. i believe that they would share this concern.

the individual liberty of to work together for the standard of the political discourse that used to enable our democracy to function better. thank you. [applause] >> the final speaker is richard epstein professor of law at new york university and director 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 the 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 in modern times.

it is indeed a pleasure to welcome professor epstein. >> i'm going to try to speaker for the fan. technology seems to have failed the capito institution. and to try to talk about high-tech in the auditorium is a daunting task. we have all sorts of small and inconsistencies in his own life and in fact or as i do not think of as a dogmatic kind of market type but rather somebody who is trying to figure out how he could take his native to bush and as a social democrat and see how he could apply them to a whole variety phenomena dealing with the creation of property rights of the way through the financial markets. in order to do so i will pick up on some of the things mentioned here, and i'm going to do so mainly to stress my differences rather than by similarities and to do so for a very simple reason which is the greatness of the work which is embodied particularly such as the use of knowledge and the society i think is indisputable, and what

i would like to do therefore is to indicate what i think would be some of the corrections i would want to make on that theory. i'm going to start with something that rahm referred to which is the antipathy respect to the natural law and his view that is essentially the only way which would understand the evolution of the legal doctrine and the socialists by taking some kind of an evolutionary progress of kind of process. and my basic response to that is i do not think that hayek understood the way that the natural law was understood by its ardent proponent and therefore is guilty to some extent on the mischaracterization of the way in which this works. if you go back to the origins of the natural law distorts in roman times and quite explicit fashion and when you are doing is trying to get a group of people to figure out how it is you put the legal system to get their. one of the tools that developed in the 19th and 20th century were not available to them. so they did in effect to think of a legal system as one that kind of two characteristics

which indicated something about its viability. one of those was the sense that there seems to be an internal coherence to the rule once they were developed. it started with the premise to try to solve particular problems you come up with answers that don't explode or become frankly absurd. and to find a generality of the principals across all sorts of places and all places in the world, and it turns out that he was wrong about the anniversary of the of the natural law. there are basically to portions of that which we should get somewhat different responses. one of them is the sort of basic category of the legal analysis and these have not changed in 2,000 years and the first approximation, the way in which a legal system onto work is a would be in effect joint consentual transactions, yes, coercive transactions imposed by the state or indeed by any private party, no. the principles of this sort would be accepted in virtually

every legal system and the differences between the main hallway and level of the for devotee given in all of those to validate those particular conceptual transactions which the state or some private agency was going to enforce. and so the evolution that hayek spoke was with the question to the dominance of the fundamental proposition that the course of transactions and the - some and voluntary transactions of the positives on is a series of presumptions rattle the evolution takes place and figuring out the mechanics were putting these to place. to have a fairly large complicated state and see the handwriting is to solve them and the systems seek to keep titles in a relatively fashion and if hayek had been more respectful something which would have been used as an ally of the way the

system broke down, why all voluntary transactions are not good and in order to do that what you have to do is have a kind of a comprehensive sense of what a social welfare function would like and the science sort of fears the fact people are going to put them together often stood in the way of his ability to figure out how would you able to integrate general rules of the one hand what specific positions on the other getting along with george soros sitting in effect he had been a little bit more systematic would be more on the way that he had worked things he would come up with a more persuasive piece of presentation of a series of ideas and the constitution of liberty which are enormously instructed on the one hand but in certain kinds of ways are in fact incomplete but what would this long science sort of look

like but to do this i would go back to the will of the man who's not been mentioned here today bill frito and also because with these guys we are trying to put together social welfare functions in which the welfare of any individual and society had to be taken into account and each of the following social observations. if you could find a way in which you could increase the size of the pride of satisfy anybody and if you increase the size of the social pot he would never want to do those kind of things and the difference between the two formulations is one it has a distributional constrained in which nobody can be left out and at least one person has to be made better and the call is the greater flexibility but essentially doesn't have that fundamental distribution of constraint which most people on the various kinds of the fairness and so forth. if you use these kind of definitions it turns out that

allows you to solve some of the problems dealing with the definition of liberty which he frankly didn't do all that good a job with. so what i want to do now is to take this remark and show how it applies hayek regards fundamental conception that says if you really believe and the protection of liberty, what you have to do is believe in the way in which you are going to control conversion. so easily an explication of the nation of what counts as liberty is going to require you to figure out what counts as a and the definition i'm not going to read to you are incredibly monday i looked at this and said i don't understand what this man is talking about he surely can't leave it here but when he talks about it he tries to get it right and hits it all the right cylinders but never gets the engine to work in harmony cities of the novices is as understands when you're starting to talk about the notion of conversion it would bear some relationship

to the libertarian notions as a seat with the use of force on the one hand as from the other what is he certainly can't define it in that way because there are other things he would regard as coercive and how you integrate this into a larger theory and to do it in parts rather than figure out how to do it in one fellows will i'm going to start with a conversion case with respect to the use of force and then turn over to another key part of the situation which has a role to play modern economics which is what you do with the refusal to deal with one person with respect to other people and to try to decompose these things and follow the basic test it turns out the common solutions hayek have rest on powerful formulations and unless you understand the way the game pherae works it turns out his theory allows you to do what mr. soros has tried to do which is to explain why a single comprehensive theory which under some circumstances can account

for the social success can also explain why it is under certain president games situations you'd have the social barriers without regulation. so i regard this as a central natural for the question of regulation and the question has been how does it work? the first thing to do is to start with the narrow definition of coercion which can take place in one of two firms. either i beat you over the head in order to take what you have, or i threatened to beat you over the head to have you give something to me. but to figure out what the social welfare function is going to look at, you have to decompose this into two parts. the first to have to do is ask whether or not the transaction is between the two parties is one that needs anything remotely like either the call or the standard. ind at this particula that is th about any economic and social theory is that in addition to a formal apparatus it must contain some kind of an empirical subject and

at that point the apparatus official of the british derive the way that on self preservation for the most part is forced to choose you rather be alive than kill somebody else so that mutual survival turns out to be so if you try to figure out how gardens might work in this crazy university is easy to imagine somebody who is going to be able to pay a lot of money to somebody else to prevent them from killing him but on the other hand very few people will pay it in enough money to get their kind of consent and what that suggests is when the baseline in a two-party situation to always defend individual economies against those who are aggressive and when you generalize this for two people having a law that says they are going to be mutual annunciations of the use of force is going to be if you can make it implemented a vast improvement of any other kind of system. so the first approximation as

between the parties to the transactions, the clear social preference is in favor of the basic libertarian norms. it gets more complicated because you then have to ask about a third party. and here again, the arguments if in fact you're talking about the voluntary transaction between a and b which is one that works to the mutual advantage, of third class externalities' from this are going to be positive to read all the individuals will now be in a position there is somebody else with whom they can treat to have more resources and virtue of the first transaction and therefore present greater opportunities to other individuals. so if you then cycle this by the transactions was to increase the frequency of these voluntary exchanges you are going to get a relentless set of positive gains which will lead to a kind of positive overall social and professor that at least in this kind of a respective model was the sort of optimistic consumption of the neoclassical competitive equilibrium situation, really sees it very

well. certainly they hold extremely well in comparison to what you think of as a negative externalities with respect to the conversion. at that particular point the resources of the two parties are diminished so every time you engage in a threat against to people, you reduce the opportunity to make them worse off. in addition, you create the kind of instability where instead of thinking you may be able to get a business opportunity, you are worried about the fate knocking you for a loop so do we engage in much more defensive activities rather than more expensive activities. so as a first approximation essentially, the argument is in favor of market's relative to the sort of coercion is going to be enormously plausible and when hayek says we have to be wrong that the state dictating the terms of conditions of the various transactions, the reason that he has a small point about it is that you're going to force losing transactions on some individuals so even though you are not going to have violence you can still have the same kind

of downward cycle which is associated presumptively with respect of the centralized planning. but then what you do with respect to the refusal to deal and this becomes extremely important because it was precisely this particular issue which made hayek so nervous about defining his definition of coercion that it's the only thing that coercion covers is the threat and the use of force. in order to get this thing right but you have to do is start making some very key distinctions which hayek doesn't make explicitly although he does hint at them and the key distinction you have to make is that there is a vast difference in trying to estimate the we did you look at refusals to deal in a society which turns out to have open entry and competitive sources of supply and a situation in which there is a legal or natural monopoly. and one of the interesting things is if you go back to the height of the english laissez-faire all of the judges that wrote about this issue

understood this particular distinction, and they were aware that the particular arrangements with respect to the refusals to deal that might work in the competitive markets would not work in the effort. so how does this start to break itself of? of me see what can explain, i might take an extra minute or two. in the competitive law it is the only way 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 the transactions you have the resources going in a dizzying array one person after another and can never figure out the dirt is the employee and the vice versa so that is a system is essentially going to define his conversion ordinary market behavior and everything will collapse but once you start to have a natural monopoly that is a single supply of the market of lower-cost and a legal monopoly given from the states. now you have an asymmetry. the only one to move these other people can turn and so therefore

he has this immense kind of power and the standard tradition of respect to regulation always took the position that regulation was a counterweight with respect to monopoly power. hayek sees this but he thinks the only country to put in place is an nondiscrimination constraint which is certainly one part of the picture with the entire history of the regulations with respect to the natural monopoly as it develops in the late 19th and early 20th to have reasonable limit constraints on the rates charged holidays that to determine what these rates are going to be reasonable to stress this stuff is i think it gives you a very different view of laissez-faire from the one soros presented because with laissez-faire it means it's not that you leave the unfettered operation of all the markets to do whatever they want on the price terms what it says in effect is that what you do is you start to look at a

presumption against regulation but that you can find certain circumstances where it is indication will lead to general kinds of improvements and that your regulation is always calibrated to that particular problem. and if we have time and run into the specifics of regulation, you can actually show how the pre-1944 reactionary judgment actually had a better sense of how to regulate the and the modern judges who lost a presumption against government regulation. this also applies to financial markets. i would regard it as a character to say that you don't want any form of insurance or any form of regulation. but this isn't whether you have regulation it is with the kind of techniques that you are going to use to deal with the regulations you have. everybody at think understands when you're starting to deal with the banks that have limited liquidity it turns out to run on the bank is something that can

clearly happen in an unregulated market if people from the expectations rational or otherwise the bank is going to deal with it. the to to have a transaction some of the money title and long-term assets so that all of the deposit demand things will start to break down. the question is what is the optimal form of regulation and it is this that an immense amount of caution is needed in the way in which you work the system because if we know that these games which is what this turns out to be can have negative externalities, then the question is what is the optimal design of the system and it's to say that you're in favor of regulation you have to talk about the design and let me give you one illustration of a point at which hayek understood. he said basically the these centralizations have sort of static inefficiencies that he make a redundancy and inefficiency of one kind or

another. but that it had in the long run it kind of resistance against common failure which would bring everybody down. all sorts of disasters provisions of one kind or another which we can talk about in the discussions the great mistake is if you want to have everybody trade on the clearing house so that you get rid of certain kind of bank errors what to do is substitute a common mode error by the regulator who is now too big to fail instead of having a diffuse regulations on by the decentralized authority so even in the financial markets it doesn't follow that complete centralization by government is going to be the appropriate response and i would end on a simple note the great insight is the use the knowledge and society was the recognition of the fact that centralized information may be awkward and a balky and that the centralized information that communicates through the system may in turn

be the better operation. hayek underestimates the importance in making this process work. but if you can make the markets more efficient it turns out that it's not going to be fair and efficient market hypothesis is always wrong and what ever it was in 1987 when you get discontinuous jobs, but it can certainly explain why it is that spreads to different kind of community markets and so forth are consistently reduced overtime for the benefit of consumers or why it is that the securitization 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 are inherently unstable. what we want to say is the stability is certainly something that can emerge from these kinds of process and what we want to do is follow hayek this far with the presumption that is generally set against regulation but it isn't rebuttable but if you're a first approximation is that you have to regulate and

think less and then think more. we know we are fallible and so we know that when we emphasize the state monopoly power a mode cautioned it shows the procrit way in which to go. thank you. [applause] >> thank you. >> i'm going to spend the next month trillion to work out the implications. [laughter] >> c2 >> no, no, no. [laughter] >> i want to give the panelists the chance to address the other panelists if they have anything they would like to add or say or ask predilection a couple of

comments on george soros' comments. i think that george has a handle on some parts but misunderstands other parts of hayek and that if he understood those other parts of hayek, he would identify himself, i will say it hayekian. i don't think that is necessarily true but i spent the morning reading of the soros lectures by george soros and where things that he wrote in here that inconsistent with many of hayek's insights. things in your talk that i would disagree with, and i think that further study of hayek you might see my point. so, first of all, hayek and the austrians to my estimation reject the usefulness on an efficient market hypothesis and the rational expectation for

capturing the workings of a market process, so the acceptance of those fees is the defining characteristic of being a market fundamentalist, then he's not the sort of market fundamentalist that you are describing. i think it is definitely a difference methodologically and others between chicago and vienna.

>> i think it's vastly improved. one final one. hayek rejected the theory of perfect competition. you said it's one of the things that got you interested and saw the contradiction between the theory of perfect competition. because of the 1946 article, the meaning of competition, arguing for competition as rivalry within a market process, and since the 1930s was very critical of the status of theories to shed lite on the workings of a market process. simply suggest that there are elements of hayek's work that are quite compatible with the points you made. >> there are many elements, and

he has had -- i think that both viability and flexibility are basically in accordance with your thinking. i think he's allowed himself to be, let's say exappropriated by the chicago school and extreme view of markets which claims that markets are perfect, and that, of course, he also denied in his price and i thought it 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, a very good thing because at that time, the difference let's see between

hayek and popper and something like me are not all that great, and there's really -- 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 let's say you presented. you have to accept that our ability to predict and to explain as to understand is limited, and we need to reduce

the misconceptions if possible, and that we can only do through a debate, a discussion, critical thinking with the point that popper was emphasizing, and unfortunately, we now have basically politically two sides that each got hold of one-half of the tooth, 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 we should again trying to reestablish a commonground for having critical discussion, and i think this is an occasion where we could try to do that so

maybe we can find a commonground. i think that we would all agree that the government's regulation is a necessary evil. i don't know if you could agree with that. >> well, a necessary evil needs a presumption against it. >> yeah. >> that's all we need. [laughter] in a presumption, i can move the world. [laughter] >> look, i happen to agree with you because while i argue that markets are unstable and this instability has been artificial ly excavated from current economic dogma, i also agree that regulations, and, in fact,

this my writings they are more imperfect in markets. why? because they are bureaucratic? they are subject to special interests, and very much interests by political so if you can avoid that regulations, you should. we have actually found commonground. thank you. >> okay. i mean, i think hayek to some extent gets a bad wrap for being 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 an accurate description, and the article was called hayek and socialism, and in this particular argument, he had very powerful socialist instings the in conceiving the obligation of society to satisfy

minimum standards of needs for all its members. i'm just going to read one sentence from his chapter in social security to give you a drift of what it is and comment about him and make other points. one, in the western world hayek is never talking small. some provision, we don't know how much, by those threatened due to circumstances beyond their control has long been accepted as a duty of the community. this is not a guy who is sitting there saying i'm a social doll, let the devil take it and so forth. what's left about this, and this is what drives me nuts about hayek is you never know when he says there's an obligation on the community that should be done by voluntary organizations like churches and schools, whether the state, or the local level or whatever, but you don't have to answer those questions to make it very, very clear that this guy does not believe all market processes yield good results, and all nonmarket processes yield bad results.

it's no part of what it was he thought. the second part i want to make is i do not think he was a newtonian in his views. in fact, exactly the opposite. if you read passages on hayek's work, they bring to mind the good part, and there are good parts obviously. robert knows the utopia in the states, and the key portion that was most powerful was his -- and it was, reinvention of the common rules. we said, in effect, you cannot run a sensible society by having a series of patterned principles where you know what the end states are and they try to figure out how it is you turn the cranks to get to them. this was the argument against social planning, and what hayek was in defense of is what you do is give yourself a set of basic stable institutions, you get rules for the acquisition of property, rules for individual atonmy, rules for voluntary

exchange, rules for the prohibition against force, and let the voluntary straps run and see what the outcome will be. at the end if you have maldistributions and contributions which you sometimes will get, that's when the other social safety net kicks in through voluntary means, but the key feature about this is if you run the system, the resource-base which you're going to have to work from is going to be far larger, and the number of people who will need the system will be far smaller so that the chances of needing something like a former social security or medicare system if you let this happen will be diminished in terms of the way in which this goes. now, the last point i want to make is an attack on the progressive movement precisely because it refuses at least in its current incarnation to consider one viable element, the deregulation of various markets in which state monopolies have

been created. right now, for example, we talk about devissive properties. look at the situation of labor relations in the united states. where in the 1930s we took competitive labor markets where wages moved up with productivity and productivity systematically moved up with intervention all during the period when the progressives denounced them as failures and proposed a bilateral monopoly with heavy regulation over such that massive discontinue newties with lockouts and strikes would take place with massive negative third party situations and back it up with state power. to me, i could understand enormous disagreements between us, for example, on how it is you deal with market failures associated with prisoners, dilemma games, or natural monopolies. what i can't understand why it is the resources of the state should be used in order to

shrink the entire productivity and create greater antagonisms across classes. if you want george to come out on the record now that you're in favor of the repeal of the national labor relegal conclusions act, and then we got something we can talk about. [laughter] [applause] i'm serious about this. i can't think of anything you said that indicates hayek is wrong that this is the centralized authority that we ought to bring, and it's a man nays. when they take after boeing, it's a complete travesty, and it's the worst possible adventurism. [laughter] >> perhaps some people in the audience would like to address the panel? let me see -- >> i'm not so sure it's fair to ask. >> it's fair. this is a global discussion of

hayek. >> i'm not really eager to attack hayek because i'd like to go back to the hayek proper discussion. i'd like to address what's wrong now because i see a real danger genuinely really 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 they've proven their point, and that is not the case because the fact there are deficiencies on the other side, it 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 the two address on the issues, how it was lobbied into incomprehension and inconsistency of special interests of various kinds so the facts that -- the fact the whole issue was extremely well framed by two articles. one was by greenspan who said that the genie is out of the bottle, the financial markets

have become and the institutions have become so complicated that no regular -- no regulator can predict the results of regulation, and therefore, give up on regulation, and frank replied pointing out that leaving markets unregulated can cause financial collapse or render consequences, and therefore you can't afford to let the markets be unregulateed, but when we try to prove how the dodd-frank act doubted issues, there he was lacking because effectively it really did not address the fundmental issues so -- >> one last comment.

>> we really should allow the audience because we have to adjourn fairly soon, and i want the audience to have a chance to address questions to the panel. [laughter] yes? >> [inaudible] >> wait for the mic. >> this will be your chance to address financial markets again dressed to professor epstein and mr. soros because as you best pointed out the failures in dodd-frank, but some listening to professor epstein that leads to the question one whether or not should have had descrur reforms because that is with the refusal to deal and the other issues that evolved. i'm curious the views of the two of you on that subject. >> one, financial oversight

board strikes me as being the 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 risks and what ones are not. we have clear evidence that people are constantly trying to put their competitors on the list and keeping themselves off the list because the difference in the capital requirements it's not going to work and stories of the guys who do the model in the private areas that the public models are wrong and so what happens if they got the wrong model as to whether it's a credit market or market fluxuations and so forth, you get the wrong result, and the problem as hayek pointed out is if you get every bank going under regulations that are wrong, it all captions. if one goes down -- one it's a great mistake to have the little banks taken over by the big banks with the massive

concentration, and secondly, you have to be cautious about running bailouts particularly when they are discretionary so aig survives and lehman brothers turns out nod to do so. it's a disaster, and, in fact, we department cover fannie mae. dodd said we didn't have time. what on earth was this man thinking? >> richard, we have few minutes left for more questions -- >> george. >> perhaps you can hold off and somebody else can ask -- [laughter] >> this question for mr. soros mostly. since you and professor epstein came to an agreement it's a good thing to start with a presumption not to regulate, what do you think of your fellow democrat, your democrat never figures you out. i'm a libertarian democrat myself, there's six of us. maybe you're one too i hope. what do you think of the spigot

of regulation passed by your democrats in health care reform jammed through -- >> is it possible to confine our questions to hayek which is actually the topic of discussion -- >> well, they referred the remarks of agreeing on the subject with regulation. do you mind quickly answering, mr. soros? >> health care? >> yeah, was that a good regulation? >> really, that's extremely complex question and answer. >> i'll give a one sentence answer. >> we know your answer, richard. [laughter] >> i think the idea of reforming health care and providing health care for everyone is the right idea, and unfortunately, 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 and actually the cost of medicines and then the insurance companies destroyed the core of the forum which would have provided a public option. that, alone -- >> oh, okay, because we have time for two or three more questions at the most. you will get your -- [laughter] yes? yeah.

it would be helpful if you could address your questions in terms of the subject of the panel. >> mr. soros, i wonder what you think about the road to serfdom which your critic, glenn beck helped make into a national best seller. [laughter] >> what do i think of it? i have to reread it to give you my critical assessment. i was certainly on both hayek and popper's side in regarding the excessive planning and cull -- culminate on freedom as a threat to liberty, but, again i think

on planning, i think as long as you realize that your plan is bopped 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 on so, so there's a lot that can be done by planning as long as you recognize it is bound to be flawed and needs to be revised. >> it's wonderful they agree so completely on this point. [laughter] >> can i make a comment? look, i think the answer about hayek is that he was fighting against comprehensive

allocations and centralized planning, but he threw out the baby with the bad water. you can't build a system where there's poor infrastructure unless to some degree that you plan, and for that what you have to do is get a real appreciation of the tax structures you want, the regulatory structures you want, the permit structure you want, the subcontracting structures you want, essentially, the way in which you think about it is about 80% of the rules are bent on competitive markets and 90% of the attention is given to the other 20%, and the great weakness is not knowing the intent of regulation in areas where it was strictly necessary to have it. >> the concept of the rule of law -- >> the level of discretion given to powerful government officials both on the consumer fraud division and with respect to the

banking division is terrible. i actually litigated a small part of this known as the durbin amendment, and you see there they give a charge to the banks and it simply does not understand and there's complete paralysis, late on their deadline by a week. there's a $15 billion 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 dubin should never be uttered in polite company. [laughter] that's what you talk about with centralized planning. this is a complete interest group deal, there's absolutely nothing structural about the industry. in fact, it's one of the great success stories in america is the rise of the debit card, and that's the self-inflicted wound which i hope george agrees, but i don't know if you know much about debit cards, george, but if you do, i want your thoughts on the subject.

>> in the corner. >> the federal reserve inclusively has powers. it has division of preserving the financial system from collapse, and when the system is endangered, it has to put preservation of the system first, and up fortunately exactly because it is impossible to plan per felgtly, that's bound to be an unforeseen situation that the fed has to deal with. now, in this case, it has used its arbitrary power in an extremely ineffective way where secretary of treasury paulson declared that on friday that there is no beer allowed, and on

tuesday, he had to reverse himself, and bailout aig, and on thursday have to save the money market funds, so he had lacking in understanding the financial markets, and reacted badly, but actually his excuse was that he didn't have the power to intervene and to bailout lehman. that, i think, is a lame excuse because if he had done it, he could have expo facto and got p 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 will cover -- that would have been comprehensive success of perfect knowledge. >> yes, please. >> to get back to hayek, hayek, i think, all of the power submitted clear was doing something with what libertarians don't bother with. how do we deal with the boundary line in fact area where people think there's some role for government and in the area we want to keep it out of, and the

boundary line defining on how he doesn't do well, and yet both george, richard -- richard gave us a crude guideline for deciding how to make the lines. >> i'm very precise on that. [laughter] >> mr. soros made the point what would say no piece of adeal legislation survives first encounter with the legislature, the idea that we put things in the hopper and who knows what comes out the other end, and that's the nature of politics and interest groups. do either richard, bruce, and george, give us an idea, how would they try to do that dividing line so we didn't use legislation when it's going to almost certainlily go so far south that its proponents are embarrassed. >> this is a praise of milton

friedman. he has work is on nonmarket institutions, the work he did with the income hi pot sis with respect the way you run the money supply, and the effort that you try to do is have nondiscretionary rules whether you expand or contract money supply to keep price levels relatively stable so there's fewer dimensions of uncertainty in private transaction. it's a good place to start. in fact, as john taylor showed as we start to deviate from that particular situation that we started to create the housing bubbles which created the boom and the assets and so forth. i think in effect you want to do exactly the opposite of what dodd-frank did to limit discretion which means getting red of fannie mae and freddy mac rather than give them a path to star on the private side. i heard chris dodd speak. it's a condemnation of american politics that this man could have been leading the financial reform.

he does not know enough to do it, period. >> want to comment on this? >> i think there are philosophical as well as pragmatic reasons hayek was evasive in terms of the details. i think that would be the right word to use, and in terms of the philosophical reasons, he recognized that there was 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, you know, the actual policies. milton friedman always did, he was perfect for that, and hayek was the counterpart. i mention friedman because hayek founded the society in which there were people from liberals from germany, and friedman from chicago and people all over the spectrum with lots of different visions as to what a free ci