>> new edition of hayek's "constitution of liberty" published 50 years ago. in my mind, it's his most important work in which he attempts to lay a foundation of a free and open society. the reception hayek's book originally received to the extent that even acknowledged by the scholarly community was hostile and at best lukewarm. that was a source of some disappointment to hayek who had invested so much effort in time writing. over the years, the reputation as an important person 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 of liberty" when it was originally published in the summer before i entered graduate school to study under hayek. while i was terribly impressed by the enormous edition that the book displaced, 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. like my view was hardly original. and remains consistent with -- sorry. hardly origin nay -- original and reflected what turned out to be a 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 you, the intellectual that hayek could admired is rights, in all circumstances, in favor of the notion that rights are prescriptive and the result of the peculiar history of any society. while my disappointment is conception of freedom remains, i'm now far more symptom to the reasons why the rights are taking their form through historical developments as one the many instances of spontaneous order. indeed, i regard hayek's theory as his most important contribution to social philosophy and one of the ideas in social theory. and in one of his writings

because he discuss the theory in the political conventions in war, detailed and in the constitutional liberty. to discuss this book, we're privileged to have three people familiar with hayek's work, professor bruce caldwell, george soros, and professor epstein. our first speaker is bruce caldwell. he's the general editor of hayek's collected work of which the new edition is the latest volume published. caldwell himself has edited four of the books in the series. among the new editions the "the

road to surf -- serfdom" and the autobiography. all of us that appreciate the contributions of the economic and social sciences are in debt to professor caldwell of undertaking the edited works. >> thank you for that kind introduction. i'm going to talk a little bit today about high hayek came to write the constitution of liberty. but i want to first recognize ronald as the editor of this magnificent volume. i felt the collective works was fortunate to get someone on the scene. robert didn't mention he was the new editor of the book individualist review volume i,

number i in 1961 contained the critiques. hayek actually wrote a response. and 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 or response to something that someone wrote that he published later in his own collections of works. it was published in studies and philosophy and politics in economics in 1967. so i found the exact right person for the job. i will just also for those of you who know the constitution of liberty, one the big differences between this volume and the other volume, instead of end notes, there's footnotes. you can look down and see everything. believe me, you could read the end notes as a volume in itself. now you have that stuff right

down at the bottom of the page. it's a magnificent volume. i thank you for your contributions. so it's a little hard looking at the archiveal record to figure out when he decided to write "the constitution of liberty." there are a few hints. i will mention and then often a conjecture. the one letter in 1953 when he says i'm beginning to have definite plans for the positive compliment to the road toker serfdom which people have been asking me to do. who are the people? maybe people in the mount pillar. another would be people like aldon hansen, and mccain. hansen wrote a review in the atlantic of "the road to

serfdom" where he talks about good planning and bad planning but doesn't tell us how to distinguish. mccain in his famous letter to hayek that he wrote on his way, you admit here and there it is a question of where to draw the line. you degree it has to be drawn somewhere. the logical extreme is not possible. it was the approximate cause to some of the criticisms and the great critique of central plans. 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 that hayek started in 1937, and started writing in 1939, but never finished. he called the 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 volumed. and in the first volume, he was going to trace the spread of two ideas that he thought were bad ideas, socialism and sciencism. they grew up together, taking very different forms in each one the countries. each had its own indigenous form. but the enthuse natch -- enthusiasm for planning. the idea to engineer -- socially engineer society in the same way that engineers design and bill bridges was something that was a dangerous set of ideas that grew up through time. the second volume in the two volume work was to show the results of the movement and this was to be based on sort of ideas that are contained in the road to serfdom. about halfway through the war,

he said i don't have to write the 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 warning in "the road to serfdom" and worked on that, never finishing the reason project. however, he did publish bits and pieces of it. one is his famous sciencism essay and another is six chapters talking about the french development in the counterrevolution of science. most importantly is an essay called individualism. this essay was to have been the opening essay. and the reason that 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 constitution of liberty expressed into the individualism, true and false. one the ideas is the profound difference between the

enlightment as it took place in scotland versus france. he saw embodying individuals as true, and french enlightment to the writings of de carte. and limiting false. to which it is indispensable to reduces coercion of men of other men, people of other people. this is the role of coercion. is there an individualism? true and false. the notion that limits of human knowledge had implication for the 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's -- it had ab implication to use simple rules, general rules and rules that were perspectives in terms of their application. he felt these would be the best

sords of rules in the world in which knowledge was dispersed and imperfect. and societies had foul, ignorant, and evil people can do 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 our equality. equality before the law, versus e jamtarian for justice. the two are often in tension -- in fact, necessarily in tension. so how did he come about? these are some of the ideas that are individuals true and false. we know that he started work on this in -- with more vigor in the mid '50s.

here's an example, i think, of hayek's superb grandsmanship. he convinced the gooken human administration to give himself a cleanup. he took the travel. he can travel more vicly than jon stewart mil was able. the elections were published under the title of the rule of law. this forms the essential chapters in the box of "the constitution of liberty." when we returned, he said 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 in improving for the entire book. he finishes his manuscript, reports on may 8th, which was hayek's 60th birthday. coincidence. i guess he was aiming to get it done. published february 9th, 1960. he did not receive immediate acclamation. the influence has grown through time. for those that don't know the book, and interesting chapter is the epilogue of why i'm not a conservative from all reports although he never said why he wrote this and in terms of the people who were on the scene there was an address that he had given at the 1957 monte pillar meetings.

it was the reason to transport to america the european conservative in which he felt would be alien to the american tradition. apparently russell kirk, "the conservative mind" was his target for this particular chapter. always one when someone doesn't know anything about hayek and you hand them the book, it gives them pause to see that title as the epilogue. hayek's scholars differ as to which of his two books they like best, "constitution of liberty" or "law legislation on liberty." i must say in terms of the themes that hayek addresses in terms of the revolutionary theory and rules in order, 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. some of those articles, in fact, i think he put some of the ideas even better. where as the constitution of liberty is something that is truly a work that is conceived as an organism whole.

my vote would be for the constitution -- for "the constitution of liberty." i'm sure he'll be happy to here that. i'll end it there. thank you. [applause] [applause] >> our second speaker is i'm sure known to all of you in these little introductions besides being a financier and philanthropist, george soros has written extensively on the nature of market and the role of government sustaining flourishing economy. before the successful career as a financial market, mr. soros is studying under carl popper, f.a. hayek i might say closest friend

behind the iron curtain. mr. soros is also the founder of the open society institute and the author of "underwriting democracy: encouraging free enterprise in democratic background with the soviets in eastern europe." while the difference is the view point between mr. soros and professor hayek are extensive and profound i'm sure that he is among those that appreciate hayek's tremendous contribution to establishing a liberty economic order. >> thank you. >> hayek is generally regarded as the apostle of a brand of economics. we are told they will achieve locational resources as long as the government -- and highly in

math ma call theory and the markets have hype -- hypothesis and the theory. it's used called the chicago school and it has come to dominate the teachers of economics in the united states. i refer to it as market fundamentalism. i have developed an alternative which is opposed to the efficient market time emphasis and national expectations. it's built on the two ten pillars of -- and firmly believe that those principals aren't in accordance with hayek's ideas. they can't both be right. if i'm right, market fundamentalism is wrong and to be right, i must be able to show

some inconsistency with hayek's ideas. 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 the great conspiracy which took place between popper and hayek in economics in the early 1940s. i conditioned myself a disciple of popper, but in that conspiracy, i was in hayek's side. hayek invaded against what he called sciencetism. namely ewe donian physics. he argued in favor of what he called the doctrine of the unit of science or rather of the unity of methods. that is to say the same methods

and criteria apply to all scientific decisions. i was drawn to the conspiracy by my interest in the writings of carl popper. i had read his book open society and the enemies and argued that the truth is beyond the reach of the human intellect. and ideologies that cling to be in position of the argument of 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. having lived through both of them in hungary, it made me a great -- it made a great completion -- impression on me. this led me to publish the area of scientific method. popper claimed that scientific

theories can never be verified, only falsified. that means the slidty must be regarded as provisional and must forever remain open to falsification by destination. the main merit of the theory, in my opinion, is that it avoids all of 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 the 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 unobtainable. the contradiction could be resolved by recognizing that economic theory can't meet the standards of physics. that's why i sided with hayek who warned about the imitation of natural science and took issue with popper who has served the doctrine of the unity of method. hayek argued that economic agents base their decisions not on reality but on their interpretation of reality and the two are never the same. that's what i call probability. hayek also recognized that decisions based on imperfect understanding are bound to have unintended consequences. but hayek and i drew different

inferences. the invisible hand which is the economic self-agent. i used to demonstrate the inherit stability of the financial markets. in my theory, i assert that the thinking of economic agents serves two functions. on the one hand, they try to understand reality. that's the proper dysfunction. 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 participates perception of reality in opposite directions. as long as the two functions were independently, they each produce results.

when they operate simultaneously, they interfere with each other by introduces the element of uncertainty in both the participates understanding and the actual course of events. i call the interplay between the two funks -- functions that gives rise to the uncertainty. the two-way connection between the manipulative functions works as a feedback loop. the feedback is either positive or negative. the positive feedback reenforces both the prevailing trend and the prevailing bias and leaves to a mispricing of financial assets. negative feedback corrects the bias. it's one extreme lies the equilibrium and the other is a 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 turns out to be an extreme case with little relevance to reality. it was the first to identify the unquantifiable uncertainty in the inherit financial markets. in 1921, cains and his followers elaborated inside. although they still counted the theories in the form of equations, in order to make them acceptable to the economics profession. and here is the economics by

contrast sought to eliminate the uncertainty connected with their subject matter. hayek was one of them. lionel robbins brought hayek, another. how did hayek do it? according to bruce caldwell, hayek drew a distinction between two types of opinions, constitutionive and speculative. constitutiontive cause a social anally to occur. speculative are those that people find in order to explain. this was a purely artificial distinction. because speculative ideas can influence the phenomenon just as easy. but it allows hayek to ignore.

lionel robbins found another basis for eliminating which was more informational. robbins defined the 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 section of the two, then determines the equilibrium price. but this method, robbins managed to eliminate the effects that the mispricing of financial essence can have on both the demand and supply curves in other words, it could eliminate

the complextivety. the methodology that we'll debate took place in the context of a larger political controversy on the role of the state in the economy. hayek and robbins were on one side, kings and socialist planners on the others. i content that hayek supported to his political boys. -- bias. that's the source of the inconsistency. he connects science. after the end of the second world war, when the commonnist became more, he over came the methodology and became the opposable of market fundamentalism. with only a mild review for the obsessive use of positive methods in the over priced acceptance speech.

since it was a scientific theory that proved that market participates pursues their self-interest assured they were often allocation resources was too convenient to reject. but it was also too good to be true. human beings act on the bases of their imperfect understanding and their decisions have unintended consequences. that means -- that makes human affairs less predictable than natural phenomenon. and hayek was right in opposing scientists. at the time of the economic article, popper was somewhere in between hayek and the socialism planners. he was just as much opposed to the threat of communism as hayek, but he advocated what he

called the social engineering rather than the safe fair. and in this dispute, i was on popper's side. popper and hayek were not that far from each other. and the methodology discussion between them was very lively. i was interested by both of them and i was so-called fought 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 the understanding of the financial markets and other social phenomenon, we are all bias and inconsistent in one way or another and with the help of activity, they play a major role in shaping the course of history. exactly because perfection is unobtainable, it makes all of

the difference how close they become to understanding reality. recognizing that the efficient market hypothesis and the theory of expectations are a dead end could constitute a major step forward. that's what the constitute of economic thinking is thinking to achieve. :

>> 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'm painted as a representative of the far left and i'm not feel to political bias, i'm ready to 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 attitude, namely, the financial markets are unstable and need to be

regulated. above all, i am profoundly worried that those who proclaim half truths as the whole truths whether they are from the left or the right are encirnlging our -- endangering our open society. i believe hayek would share that concern. individual liberty ought to work together to restore the standards of political discourse that used to enable our democracy to function betterment thank you. [applause] >> thank you, mr. soros. i'll 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 author of freedoms of law. the impact of these studies are e enormous and voted as one of the most influ enissue modern theorists of all times. >> thank you. i'll try to speak over the fan because technology failed at the cato institution, and to try to talk about hayek in the hayek auditorium is hard. in fact, i do not think of him as a dogmatic market type, but something trying to figure out how to take the native initiatives as a social democrat from austria and apply to them

deals with the creation of property rights all the way through the financial markets. in order to do so, i'll pick up on themes mentioned here, and i do so to stress differences rather than similarities for a very simple reason which is the greatness of the work embodied in such ease sates like knowledge in set is induce piewtble, and what i want to do is indicate what i think need to be corrections in the theory. referring to hayek's empathy with respect to natural law and the only way to understand the evolution of social doctrine and social thought by taking an evolutionary and progressive kind of process. my basic response to that is i do not think hayek understood the way natural law was understood by its opponents and therefore is guilty to a mischaracterization of the way

this thing worked. if you go back to the natural law, in roman times, they thought of it in explicit fashion. how do you put a legal system together when all the tools were not available to them? what they did, in effect, was to think of a legal system as one that had kind of two characteristics indicating something about its viability. one is there's an internal coherence to the rules once they were developed such that if you started with the premise and tried to solve a particular problem, you had answers that didn't explode or become frankly absurd. the other i thing was to find a generality of the principles across all sorts of places and all places in the world, and it turns out that hayek was wrong about the yiewnalty of the law. there's two portions of the law to give somewhat different responses. one is the basic categories of

legal analysis. these have not changed in 2,000 years. if you wanted to summarize the way a legal system ought to work, it would be in effect joined transactions or cohearsive transactions and the principles of this sort were accepted in every legal system, and the differences between the namely lay and the level of formality given to validate those consensus transactions that the state or private agency was going to enforce, and so the evolution that hayek spoke was the never with the questions to the dominance of the fundamental proposition that coercive transaction is negative sum as a series of presumptions. evolution takes place to figure the mechanics for putting these things into place, and in order to do that, you have to have a fairly large and complicated

state if only to be able to put things into state to have writings to solve problems and systems to keep titles in a relatively orderly fashion. if hayek had. a little bit more, i think, respectful of the natural law tradition, he would have found it not as an enemy, but something used as an ally to try to figure out where it was that 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 have to do is have a comprehensive sense of what a social welfare function looked like, and hayek's scientist is fear of the fact that people are going to put things together often stood in his ability to figure out how to integrate general rules on the one hand with specific propositions on the other. taking the opposite side of george soros saying if he was

systematic, more newtonian in the way he worked things, he may have come up with a more persuasive presentation of a series of ideas in the constitution of liberty that are instructive on one hand, but in certain kinds of way are incomplete. well, what would this nonscience look like? i go back to the world of a man not mentioned here today, and also to the english variation on this through the call of the hicks formula. they tried to put together a social welfare function in which the welfare of every individual in the society had to be taken intoing the and each had the following social observations. if you can find a way in which you can increase the size of the pie to satisfy anybody, if it turns out you decrease the size of the social pie, you shall never do those things, and the

difference between the formulations is one had a distribution constraint on which nobody is left out, and at least one person is made better ave, and the hick's is greater flexibility, but doesn't have the fundamental distribution constraint that most people defend on various kinds of fairness and so forth. if you use these kinds of definitions, turns out it way lows you to solve problems deals with the definition of liberty. what i want to do now is to take this framework and show how it applies to what hayek regards as one of the fundamental conceptions saying if you really believe in the protection of liberty, what you have to do is to believe in the way in which you are going to control coercion so a notion of what counts as liberty is going to require you to figure out what counts as a system of coercion. his original definitions are muddy, and i looked at this

stuff and said i don't understand what he's talking about. he can't leave it rest here. later on when he talks about it, he tries to get the thing right, and he hits at all the right cylinders, but doesn't work in harmony. the basis of the analysis is when you talk about the notion of coercion, it must bear at least some relationship to the libertarian notion associated with the use of force on the one hand and fraud on the other hand, but you can't define it that way so the question is how it is that you integrate this particular element into a larger theory. what i'm going to do is do it in parts rather than figure out how you do all why one fell swoop. i'll start with the case with respect to the use of force and turn it over to another key part of the hayek situation with an immense role to play in modern economics which is what you do with the refusals to deal with

one person with respect to other people, and i think if you try to decompos these things and follow the basic tests, it turns out the common intuitions that hayek had rests on powerful formations, and then once you understand the way the game theory works, it turns out his theory allows you to do what george soros has been trying to do to explain why it's a single theory which under some circumstances count for social successes and also explain why it is under certain sefntions there's social failures without regulation. i regard the theory as 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 narrowist definition of coercion taking place in one of two firms. either i beat you over the head to take what you have or threaten to beat you over the head in order to have you give something to me. in order to figure out what the social welfare function looks like, you have to decompos this into two parts.

the first thing to do is scw whether or not the transaction is between the two parties is one that needs the call to hicks or the standard, and at this particular point, it is not a matter of deduction. that is, the key point about any economic and social near ri is that an -- theory is an addition to a formal apparatus, there needs to be a substrait. this goes back on self-preservation saying for the most part if forced to choose, you want to be alive rather than kill somebody else so survival is the optimum win. if you want to figure out how bargains work in this crazy universe, it's easy to imagine somebody able to pay a lot of money to somebody else to prevent him from killing him, but on the other hand there's few people able to pay a victim enough money to get the concept, and what that suggests it you want the baseline in a two-party

situation to defend individual atonmy against those who are aggressing, and the end people having a war saying they are mutual and announcuation of the use is force is going to be if you make it implemented a vast improvement to any other system. st first is between the parties of the transactions. the clear social preference is in favor of the basic libertarian norm. now, it gets more complicated because you have to ask about effects upon third parties, and here again, the arguments have really extremely powerful. if you are talking about the voluntary transaction between a and b, one that works to their advantage, the first class extraalties are going to be positive. all individuals are now in a position where there's somebody else whom they can trade with more resources than virtue of the first transaction and therefore present greater opportunities to other individuals so that if you then

cycle this by lowering transactions as to increase the frequency of these voluntary exchanges, you are going to get a relentless set of changes of a positive-sum game leading to a positive overall social improvement so at least under this restrictive model, the optimistic assumptions of the exe teff situation holds very well. certainly they hold extremely well in comparison to what you think of as the negative extras with respect to coercion of the at that point, the resources of the two parties in some is 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 instability where instead of, hey, you have a business opportunity, you're worried about the hinged hand of fate knocking you for a loop so you engage in defensive activities rather than in expansion activities. as the first approximation

essentially the argument in favor of market relative to sort of coercion is going to be enormously powerful and when hayek says, look, we have to be worried about the state kick fating the terms of conditions of various transactions. the reason he's got a really strong point about is is you force losing transactions on some individuals so you're not going so have violence, you can have the same downward cycle associates with respect to centralized planning. but then it is the issue of what do you do with refusal to deal? this is important because it was this particular issue which made hayek be so nervous about trying to define his definition of coercion so that the only thing coercion covers is the threat and use of force. in order to get this right, you have to make very key distinctions which hayek doesn't make explicitly, but hints at them. the key distinctions 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's either a legal or a natural monopoly, and one of the interesting things going back to the height of english laissez faire, everybody understood this particular distinction, and they were aware that the particular arrangements want to refusals to work in competitive markets don't work in the other so how does this break itself out? i'll explain. may take an extra minute. in a competitive market, the only way to get to an effective e quill lib yum is not allow people to agent with other individuals. if you enforce transactions, there's resources going in a disarray to one person after another, and you can never figure out whether it's the employer to force the employee

or vice versa so the system defines coercion ordinary market behavior and everything will collapse. once you start to have a natural monopoly, that is, a single supplier, or a legal monopoly from the state, now you have a-symmetry. he's the only one the people can turn. therefore, there's an immense power, and the standard solution 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 in place is a nondiscrimination constraint, one part of the picture, but the entire history of rate regulation with respect to natural monopolies developing in the 20th century indicates you also have to have reasonable misconstraints on the rates charged and develop a huge literature on how it is you

determine what the 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 what george soros presented because it suggests in a fact that what laissez-faire means is it's not the law 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 a 9 markets with a presumption against regulation, but that you can find certain circumstances where it's invocation will, in fact, lead to general kinds of improvements enand that you're regulation is always calibrated to that particular problem, and if we have time and go into the specifics of regulations, you can actually show how the pre-1944 reaction judges had a better sense of how to regulate than the modern judges who lost the presumption against government regulation. now, in also applies to financial markets. i would regard it as a characteristic to say you don't

want any form of insurance or any form of regulation, but the key question to ask is it's not whether you have regulation, but actually what the kind of techniques you're going to use to dpeel with the regulations that you have. everybody i think understands that when you're starting to deal with the banks, with limited liquidity, 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 a liquid. every bank has to have if it's going to engage in transactions, some of the money tied up in long term assets so if the depositors want their money it breaks down. at this point, an immense amount of caution is needed to work the system because if we know the dilemma games can have negative effects, then the question is

what's the design of the system? it is not sufficient under these circumstances to say you're in favor of regulation. you have to talk about the design, and let me give you but one illustration of which hayek understood. he said decentralization has sort of inefficiencies to get redundancy and inefficiencies of one kind or another but in the long run there's a resistance against common most failure bringing everybody down. look at dodd-frank containing all disaster provisions of one kind or another that we can talk about in the discussion series, but the great mistake is when you want to say, you know, everybody trade on a clearinghouse to get rid of certain bank errors, what you do is substitute a common mode error of the big regulator who is too big to fail instead of having the regulations that are done by decentralized authority. even in financial markets, it doesn't follow the complete

centralization by governments is going to be the appropriate response, and therefore, i end on this note is that great insight of the uses of knowledge in society was the recognition of the fact that centralized information is awkward and bulky and decentralized information that communicates through a crisis that 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 it's not going to be that the efficient mart hypothesis is always wrong. it can'tics plain object 1987, but it explains why it spreads in various commodity markets and so forth that are reduces over time for the benefit of consumers or why it is securitization properly run allows you to access financial markets you would never touch.

i think on the financial side we don't want to say they are unstable. what we want to say is that their instability is certainly something that can emerge from these, and what we ought to do is follow hayek at least this far that the presumption is set against regulation, but it is not irreversible, but if you have to regulate, first think less and then think more. i think that's the lesson of constitutional liberty at its highest ground. we're fallible, and we no when we exercise state monopoly powers, a modeu of caution is needed in which way to go. thank you. [applause] >> thank you, richard. i'm going to spend the next month trying to work out the implications of your talk. [laughter] >> i went a little fast.

i'm sorry. >> [laughter] >> [inaudible] >> what? >> [inaudible] >> no, no, no, i'm just reading. [laughter] >> i want to give the panelists a chance to address the other panelists if they have anything they'd like to add or say or ask. >> okay, i'd like to make a couple 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 the other parts of hayek, he would identify himself, i'll say it provocatively, as a hayekian. i don't think that's nosily true, but i spent the morning reading the lectures by george soros, and there's lots and lots of areas of things he wrote in here are certainly consistent with many of hayek's insights.

i'm just going to mention a couple things in your talk that i would disagree with and further study of hayek, you might see my point. first of all, hayek and the autrians to my estimation reject the useful hypothesis and expectations for capturing the workings of a market process. the accepting of those two theories is the defining characteristic of being a market fundamentalist, then he's not the market fundamentalist that you're describing. i think a way of putting this is there's definitely a difference methodly and in other realms between chicago and vienna. secondly, hayek thought this is a phrase that you used that the financial sectors inherently unstable. hayek thought the financial sector was inherently unstable.

he's saying monetary theories or monetary economies are predator economies are unstable. smith has done experiments saying as soon as you introduce credit, you generate cycles, and they are 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 to how do you get the institutions right to make money more stable? 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 this was one of the things that got you into and interest in the contradiction between popper and the theory of perfect competition. hayek has a 1946 article, the meaning of competition, arguing

for competition as rivalry within a market process, and since the 1930 was very critical of the ability of static equilibrium theories on a market process. i suggest there's elements of hayek's work that are quite compatible with some of the points you made. >> i entirely agree that there are many elements, and he has had an impact on my thinking, and i think both violate and productivity are -- viability and productivity are in accordance with his thinking. i think he allowed himself to be, let's say, expropuated by some extent by the chicago school and extreme view of markets claiming that markets are perfect, and that, of

course, he also denied in his reminder to the chicago school that they have gone too far so i think actually going back to a hayek is a very good -- a very good thing. at that time, the difference of hayek and popper and something between hayek and me are not all that great, and there is 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 -- that let's 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 we can only do through a debate, a discussion, difficult 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 we

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 physical discussion and i think this is an occasion where we could try to do that, and so maybe we can find commonground. i think that people would all agree that the government regulation is a necessary evil. i don't know anyone who could disagree with that 37. >> a necessary evil sets the presumption against that. >> well, yeah -- >> that's all we need. [laughter] >> you give me a presumption, i can move the world. [laughter] >> look, i happen to agree with you because while i argue that

markets are are unstable and this instability has been artificially excavated from current economic dogma. i also agree that regulations are inherently imperfect. in fact, in 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 regulations, you should. we have -- so we have actually found commonground. thank you. >> okay. i mean, i think hayek, to some extent though, 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 wops, and i'm going to refer to it now because i think it was an accurate description of much of hayek, and the article was called "hayekian socialism," and in this argument, e argued that hayek had very powerful social instincts to satisfy the society of minimum standards of needs for all the members. i'll read one sentence from his chapter on social security to give you a drift of what it is, comment about it, and make other points. "in the western world, hayek is never talking small. some provision we don't know how much, for those threatened byes extremes of starvation 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 the motion and so forth. what's left about this, and this drives me nuts 1 you never know

what he says that there's some obligation on the community to be done through voluntary organizations like churches and schools or done through the state, whether 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 that all market processes yield good results and all known-market processes yield bad rurals. there's no part of what he thought it was. the second point is i do not think he was a newtonian in his views. in fact, it's exactly the opposite. if you read passengers in hayek's work, what they do is bring to mind the good part, and there are good parts obviously. robert knows it's utopia and the states, and the key portion that i think was most powerful was his -- and it was, reinversion of the common law 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 are going to try to figure out how it is you turn the cranks to get to them. what hayek was in defense of and knows it was in defense of, and i will list myers with respect what of i'm in defense of is give yourself stable institutions, get rules for the acquisition of property, rules for individuals, rules for voluntary exchange, rules for the prohibition against the use of force, and then you let the voluntary exchange run and see what the outcomes will be, and at the end, if you get mailing distributions and distribution -- maldistributions which you sometimes do get, that's when the other social safety net kicks in. 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 p larger and the number of people who need the 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 cor respondingly 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 element which is the deregulation of markets in which state monopolies have been created. right now, for example, talking about property. all one has to do is look at the situation of labor relations in the united states. in the 1930s what we do is take competitive labor markets where, in fact, 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 structure with heavy government regulation over it such that massive discontinue newties in the worm of walkouts and strikes took place with

massive third parties and back it up with state power which means i can i understand enormous disagreements between us, for example, on how to dpeel with market failures associated with dilemma games. those are open questions. what i cannot understand nobody's been able to explain to me why it is the resources of state should be used to shrink the total productivity and create greater antagonisms across classes. if you want george to come out on the record now to be in favor of the national relations labor act, and then we have 230g -- something we can talk about. i'm serious about this. [laughter] [applause] this is the centralized authority that we ought to dread, and when these guys take after boeing, it's a complete travesty even under the current labor law, and politically, it's

the worst possible add adventure and so forth. [laughter] >> perhaps some people in the audience want to address the panel? [inaudible conversations] >> oh, i'm not so sure it's fair to ask. >> oh, i think it's fair. [laughter] this is a global discussion of hayek. >> as i said, 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 and 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 deficiency deficiencies on the other side and think they have proven their point, and that is not the case because the fact there's 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 the financial regulation. when i look at the way the -- 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 well-framed by two articles. one was by greenspan who said that the genie's out of the bottle. the financial markets have been and the institutions have become so complicated that no regulator can anticipate the results of regulation, and therefore give up on regulation, and frank replied pointing out that leaving markets unregulated can cause financial collapse or consequences, and therefore you can't afford to leave the

markets unregulated, but when we turn to how the dodd-frank acts on issues, there he was lacking because effectively it really did not address the fundmental issues. >> okay, one last comment on the finance -- >> we really shouldn't allow it because we have to adjourn fairly soon, and i want to give the audience a chance to address questions to the panel. yes? >> [inaudible] >> wait for the mic. >> this gives you a chance to address financial markets again addressed to professor epstein, and mr. soros because as you first pointed out the failures

in dodd-frank, but listens to professor epstein that leaves if there should be structure reforms and the other problems that evolved, and i'm curious about the views of the two of you on that subject. >> well, one is a financial oversight board is what we have to worry about that hayek talked about because of the up credible discretions as to what people put on the risk of big risks and which are not. already, there's clear evidence that people are trying to put their competitors on the list and keeps themselves off the list and so forth because they know whether there's an difference in the capital requirements, it's not going to work. i also heard stories to say that the guys who actually do the models in the private area say that all the public models are, in fact, wrok, and so what happens is that they got the wrong model as to whether the source of the credit market or

market fluxuations and so forth, you get the wrong results, and the problem as hayek pointed out is if you get every bank under regulations, it always collapses. if they are under different things, one may go down. one is, it's a great mistake to have the little banks taken over by the big banks, and secondly, i think you have to be cautious about running these bailouts when they are discretionary so that aig survives and lee man brothers does not do so. we didn't cover fannie mae. dodd said he didn't have time. what on earth was this man thinking? >> richard, we have very few minutes left for more questions. george, perhaps you could hold off. [laughter]

yes? >> 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 a presumption not to regulate. i'm curious what you think of your fellow democrat, maybe they never figured you out. i'm a libertarian democrat. maybe you're one too i hope. what do you think of the spigot of welfare reform -- >> is it possible to confine our questions to hayek which is actually the topic of discussion -- >> well, actually they can handle the remarks on agreeing on the sunt of agreeing with regulation. do you quickly care to answer, mr. soros? was it a good regulation? >> really, that's extremely complex question and answer.

>> i can give a one-sentence answer. >> we know your answer, rich. [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 for a peanut and any further reduction in costs of medicines, and then the insurance companies destroyed the core of the form

which would have provided a public option so that alone -- >> oh, okay -- because we have time for two or three more questions at the most. you will get yours. [laughter] yes? yeah. it would be helpful to 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, has made into a national best seller. [laughter] >> what do i think of it? i'd have to frankly reread it to give you my critical assessment. i was certainly on both hayek's

and popper's side in regarding the excessive planning and serve the commonnism as a constraint on freedom in that terrible effect to liberty, but, again, i think on the 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 come prexty with advantage of individual countries, what -- which industries you could focus on and so on, so there's a lot

that can be done by planning as long as you recognize that it is bopped to be flawedded and needs to be deviced. it's wonderful that richard epstein and george soros agree completely on this point. [laughter] >> can i make a comment? i think, look, the answer about hayek is he was fighting against comprehensive allocation and centralized planning, but he through -- threw out the baby with the bad water. you can't have a community with bad infrastructure unless to some degree that you plan, and so with that, what you have to do is get a real appreciation of the tax structures, permanent structures, the subcontracting structures you want. essentially, the way to think about is maybe 80% of the rule is competitive markets and 90% of the attention is given to the other 20%, and hayek's great

weakness is not knowing the regulation where it was strictly necessary to have it. >> marion. >> the implications of dodd-frank and hayek's concept of the rule of law? >> the level of discretion begin to powerful government officials on the consumer fraud division and with respect to the banking division is terrible. i've actually litigated a small piece of this known as the durbin amendment, and what you see is there you're giving a charge to set interchange rates in the market that it does not understand, and there's complete paralysis. they are late on their deadline by a week. it was supposed to be in effect january 21. there's a $15 billion shift in cash put together by a senator who is sublime that the name senator durbin should not be ever uttered in polite company, and that's what you talk about as centralized planning. this is a complete interest

group deal. there is absolutely nothing structural about this industry which is failed. in fact, it's one of the great success stories in america, the rise of the debit card, and, you know, that's the kind of self-inflicted wound that i hope george agrees, but i don't know if you know much about debit cards, george, but i want your views on the subject. [laughter] >> map in the corner. >> the federal reserve exclusively has arbitrary powers. it has position of reserving the financial system from collapse, and when the system is endangered it, it has to put a preservation of the system first, and unfortunately exactly because it is impossible to plan perfectly, there's bound to be an unforeseen situation that the

fed has to coal with. now, in this case, it has used arbitrary power in a -- in an extremely ineffective way where secretary of treasury paulson declared that on friday that there is no bailout on -- and on tuesday, he had to reverse himself and bailout aig, and on thursday, he had to save the money market funds so he had that 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 he had done it there was legal authority to do it, and because in many, many cases, the fed 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 device laws -- devise rules that would cover -- that would have been

comprehensive success of knowledge. >> yes, please. >> to get back to hayek, hayek, i think, all of the pammists have 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 area where most think there has to be role for government and the area we want to keep it out of, and that boundary line, defining it, how he doesn't do well, and yet both george, richard -- richard gave us a crude guideline -- >> oh, i'm very precise on that. [laughter] >> george said i think it's important to have the dividing line, but making the point ideally that no ideal piece of legislation survives first epstein counter of legislature. the ideas that we put things in the hopper and god knows what

comes out the other end. richard, bruce, and george gave us an idea, how would they define the dividing line not to use legislation when it's going to certainly go so far about that the proponents are embarrassed. >> one quick answer, and this is a praise of friedman. if you look at the comake work, -- academic work on non-market institutions. it's the work we had with respect to the income hypothesis and the work that he did with respect to the money supply, and the effort you try to do is have nondiscretionary rules on whether you expand or contract money supply in order to keep price levels stale so there's one fewer dimension of uncertainty among private transaction is a good place to start, and, in fact, as john taylor has shown when we try to deviate from that situation, we create the housing bubbles that

created the boom and the assets and so forth. i think you want to do exactly the opposite of what dodd-frapping did to limit -- dodd-frank did to limit rather than give them a pass on the star of the private side. i heard chris dodd speak. it is 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. >> [inaudible] >> i think there were philosophical and pragmatic reasons why hayek was evasive in terms of the details. i think that's the right word to use, and in terms of the philosophical reasons, he recognized that there's lots 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, and hayek was his counterpart. he found the the society in which there were people who were order liberals from germany, friedman which chicago, and people from all over the spectrum with lots of different visions as to what a free society would look like. he was referring to articulating to general principles. he didn't get to specifics, but i think it was intentional and reflected his general views that when dealing with complex phenomena, sometimes as far as you get is regime principles and leave the principles to others. >> i'm afraid our time is now up so -- [laughter] thank you. [laughter] [applause]

>> the university ever chicago press republished the institution of liberty. for more information visit press.uchicago.edu, and search the book's title. >> the title of your book is in the middle and on the the edge, and the process you mentioned has been only middle and edge on different parts of civilization. what do you mean by that? >> well, cliff falls is locateed by lazy, and those areas were watered, larger indian population in the beginning, and so we're almost exactly a middle there, and why really argue in the book is that twin falls is in the middle, between two canyons which is easy to see, but it's also in the middle of

boise and if one was the south, it's in the middle between northern nevada and so forth and the wood river valley and sun valley earlier. everybody loves to be in the middle, but it's not fun to be on the edge. i argue that the fact that twin falls has been on the edge in a number of different instayses has made it -- instances has made people in twin falls more defensive and is crucial in understanding the history. for example, wht freeway was built in the 60s, the freeway was built north of twin falls missing the city, and there was this tremendous disappointment that somehow twin falls had been missed, that we were on the edge again. >> how would native americans and pie heres influence the development of twin falls? >> well, many americans moved around a great deal. in fact, in my book i suggest

they moved much like a lot of senior citizens do today. when the weather was warmer, they moved up into the campus prairie area up into what's present day the south hills so they migrated a great deal, and, of course, new contacts of the area, fur trappers, oregon trail travelers, some of the first people who really came through this area and wrote about it. in fact, in 1811, wilson's hunt party came through here and were celebrating this year the 200th anniversary, and they made people in the east aware of the area for the first time. >> and your book looks at the rise of the unions and bootlegging in twin falls. why did you decide to add that to the book, and how did you research that topic? >> i did extensive research of

twin falls over 12 years. what was key at the time was local newspapers and because twin falls adopted a dry area, adopted prohibition long before national principles p hi ambition, -- prohibition, i was in the area constantly here, and often individuals obtained alcohol in the valley, and just as of today, nevada legalized gambling and so there's that, i think, rather interesting tension between the desire to not have the alcohol and gambling views today, but access to it in northern nevada so it was really following the newspapers in terms of what was being important in the city. >> and what do you see as the biggest change in twin falls after 100 years of existence? >> oh, my goodness. we celebrated in 2004, the 100th

an anniversary of the city, and, of course, just a little over 100 years ago, there was no irrigation here. the snake river had not been dammed at milner, and so there was no agriculture. there's been a tremendous growth of agriculture in the last 100 years, and, of course, within the city itself, there has been a growth associated with travel and nearness to interstate 84, and also the development of tourism and other factors that could not have been envisioned 100 years ago. >> for those not familiar with twin falls, how does your book help them understand the region? >> well, the title is the -- i was trying to make it to deal with those things influencing twin falls, but not deal with county history, for example, and so what one does is it focuses