[W]e have crossed a great divide, between what we used to do in all of previous human history and what we do now. Utopia, it is true, this is not. I … - J. Bradford DeLong

In my view, Marx has trapped himself. He has been primed to expect a deeper layer of real reality underneath mere appearances. And he has chosen the wrong model of the underlying real reality--the labor theory of value, which is simply not a very good model of the averages around which prices fluctuate. Socially-necessary labor power usually serves as an upper bound to value--if something sells for more, then a lot of people are going to start making more of them, and the prices at which it trades are going to fall. But lots of things sell for much less than the prices corresponding to their socially-necessary labor power lots of the time. And so Marx vanishes into the swamp which is the attempt to reconcile the labor theory of value with economic reality, and never comes out.

Economists’ instincts are that uncertainty about current prices, future prices, and the real meaning of nominal trade-offs between the present and the future; distortions introduced by the failure of government finance to be inflation-neutral; windfall redistributions; and the focusing of attention not on preferences, factors of production, and technologies but on predicting the future evolution of nominal magnitudes must degrade the functioning of the price system and reduce the effectiveness of the market economy at providing consumer utility. The cumulative jump in the price level as a result of the inflation of the 1970s may have been very expensive to the United States in terms of the associated reduction in human welfare.

Hayek says that the problem with classical liberalism was that it was not pure enough. The government needed to restrict itself to establishing the rule of law and to using antitrust to break up monopolies. It was the overreach of the government beyond those limits, via central banking and social democracy, that caused all the trouble. A democratic government needs to limit itself to rule of law and antitrust–and perhaps soup kitchens and shelters. And what if democracy turns out not to produce a government that limits itself to those activities? Then, Hayek says, so much the worse for democracy. A Pinochet is then called for to, in a Lykourgan moment, minimalize the state. After social democracy has been leveled and the rubble cleared away, then–perhaps–a limited range of issues can be discussed and debated by a–limited–restored democracy, with some kind of group of <s>right-wing army officers descended from latifundistas</s> Council of Guardians in the background to ensure that property remains sacred and protected, and the government small enough to fit in a bathtub. […] Hayek was formed in Austria. From his perspective the property and enterprise respecting Imperial Habsburg government of Franz Josef eager to make no waves, to hold what it has, and to keep the lid off the pressure cooker appears not unattractive. This is especially so when you contrasted would be really existing authoritarian alternatives: anti-Semitic populist demagogue mayors of Vienna; nationalist Serbian or Croatian politicians interested in maintaining popular legitimacy by waging class war or ethnic war; separatists who seek independence and then one man, one vote, one time. An “authoritarian” after the manner of Franz Josef looks quite attractive in this context–and if you convince yourself but they are as dedicated to small government neoliberalism as you are, and that the Lykourgan moment of the form will be followed by soft rule and popular assent, so much the better. And if the popular assent is not forthcoming? Then Hayek can blame the socialists, and say it is their fault for not understanding how good a deal they are offered.