Print Edition: The Abuse of Hayekian Economics

Next year will mark the 70th anniversary of Friedrich Hayek’s most famous book, the Road to Serfdom. Written in London in the 1940s, under the constant shadow of Nazi Germany bombing, the book warned of the linkage between socialism and tyranny. Hayek argued that government planning inevitably suppresses individual choice in the economy. To enforce absolute material equality between people with different resource endowment, the state has to be increasingly involved in every aspect of society, leading to Tyranny. Shortly after its publication, the book was met with tremendous (and rather unexpected) success, especially in the U.S. The Reader’s Digest published an abridged version of the book, of which several millions were sold. A cartoonised pamphlet of the book was published and was later distributed by General Motors. The Road to Serfdom became the intellectual tour de force against socialism in the early days of the Cold War.

Image courtesy of A+E Networks, ©2013, some rights reserved.
Image courtesy of A+E Networks, ©2013, some rights reserved.

In 2010, the book was brought back into the public spotlight through an endorsement by Glenn Beck, a television commentator on Fox News. Mitt Romney and Paul Ryan, Republican nominees for vice-presidency in the 2012 election, cited Hayek as the inspiration behind his economic policy. Michele Bachmann, a republican senator and (once) presidential hopeful, claimed that she read Ludwig von Mises – a fellow Austrian school economist to Hayek – while holidaying on a beach. Justin Amash, a Republican congress freshman, has a giant poster of Hayek on the walls of his office. This sudden popularity begs the questions – wherein lies Hayek’s attraction to Republicans? And how congruent are his ideas to the policies his supporters advocate?

Hayek was a public intellectual whose works spanned economics, political theory and philosophy. At the heart of his argument against socialism is his economic theory of the market. He contends that market information is so dispersed among an infinitely large number of market participants, that no one person or body can act as the depository and clearinghouse for all relevant market information. He gives the example that with a market of 100 persons and 700 commodities, there would already be 70,699 ways to distribute the goods. It is therefore absurd that one central planning authority would be able to comprehend an infinite amount of ever-changing market data. In the face of extremely fragmented information, price signals (which would have been one of the ‘greatest triumphs of the human mind’, had it been deliberately invented, he says[1]) serves to guide market behaviour. Market participants need not know the causes of changes in prices – as long as they follow the law of supply and demand, efficient allocation is possible. Government intervention prevents the efficient allocation of resources because it distorts price signals and therefore hinders the transmission of knowledge in the market.

Hayek is also a strong proponent for individual responsibility for the outcomes of market competition. He argues that the idea of ‘social justice’ is meaningless. Claims of justice are only enforceable against people. The market, as an impersonal agglomeration, cannot be blamed for the misfortunes that befall its participants. The Hayekian market is strictly value-neutral.  At the same time, he is scrupulously consistent in his assessment of the market. ‘Worthy’ individuals, he concedes, often lose in market competition while the ‘unworthy’ are rewarded. Success and failure in the market should not be a measure of a man’s worth. The American idea that private enterprise regularly rewards the ‘deserving’, he argues, ‘has largely become the basis of the self-esteem of the businessman’[2].

Hayek was also extremely sceptical of the idea of individual entitlement to public welfare. In 1967, the heyday of the postwar consensus in the UK, he says ‘We are not […] members of an organisation called society, because the society which produces the means for the satisfaction of most of our needs is not an organisation directed by a conscious will, and could not produce what it does if it were.’ Twenty years later, Margaret Thatcher expressed the same idea in her famous ‘there is no such thing as society’ interview.  However, while Hayek believes that individuals have primary responsibility for their material well-being, he does not argue that the state has no responsibility for the disabled, the old, and children born into disadvantaged backgrounds. His belief of limited government also does not preclude the setting up of government health and social insurance – in fact, he suggested that governments might be best placed to insure individuals against catastrophic risks.

So it is perhaps surprising to some readers that Hayek penned in 1960 an essay named ‘Why I am not a Conservative’. He argues that conservatism per se does not constitute a political programme. It could only act against forces of change, without suggesting new directions of its own. His assessment has been proven flawed. In the 1980s, it was a conservative UK politician who tore apart the British post-war consensus in favour of free market economy. This year, self-proclaimed conservatives in the U.S. Congress push the country to the brink of default, which would have permanently altered U.S. financial credibility. ‘Conserving’ no longer seemed to be a priority to U.S. conservatives.

On a deeper level, Hayek was extremely suspicious of the dynamics of conservative politics. The first aspect of conservative dynamics that he disliked was the tendency to promote moral and / or religious convictions through state coercion. He says ‘To live and work successfully with others requires more than faithfulness to one’s concrete aims. It requires an intellectual commitment to a type of order in which, even on issues to one is fundamental; others are allowed to pursue different ends’[3]. Hayek would have likely taken exception to the overt religiosity and claimed moral superiority of American conservatism as it stands. Moreover, Hayek finds that people with a conservative attitude are more likely to reject a piece of well-established knowledge because of its implications. An immigrant to the UK, Hayek was also suspicious of the kind of strident nationalism often heralded by conservative politicians. Hayek would have been very ill at ease in the company of his current American fans.

[1] Nishiyama and Leube (eds.) (1984), The Essence of Hayek, p. 220

[2] Nishiyama and Leube (eds.) (1984), The Essence of Hayek, p. 74

[3] Nishiyama and Leube (eds.) (1984), The Essence of Hayek, p. 286

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