Book Review: After serfdom

Hayek: The Iron Cage of Liberty
By Andrew Gamble
Oxford: Polity. £45

Friedrich von Hayek’s career is a story of death and resurrection. He was born in Vienna in 1899 and died in Freiburg in 1992, the most famous survivor of the once famous Austrian school of economics. For much of his life he fought a losing battle against the rise and spread of collectivism – the doctrine that the State knows best. His best-known book, The Road to Serfdom, published in 1944, analysed the totalitarian forms of collectivism, fascism and Communism.

But its most striking claim was that democratic socialism, while avowedly anti-totalitarian, was a staging post on the “road to serfdom”. Hayek argued that socialism would ultimately prove incompatible with liberty. It was this thesis which gained the book its fame and notoriety.

In the 1950s and 60s, Hayek had a certain vogue on the Right, but his message was dis-credited by the experience of the “golden age” of American-dominated capitalism, which brought the “free world” unparalleled stability and prosperity. In this period, the specific elements of “socialist” or “social-democratic” intervention against which Hayek had warned – Keynesian economics, the Welfare State, public ownership of basic industries – were regarded, rather, as wise inoculations against the virulent forms of collectivism. They not only seemed to improve the performance of market economies, but also to furnish the means by which the pursuit of collective goals like full employment, faster growth, and social justice could be reconciled with the preservation of political and economic liberty. Although Hayek continued to write massive books, his “thesis” no longer commanded attention. History, with a capital “H”, had proved him wrong.

At this point, longevity came to Hayek’s rescue. In the 1970s, an intellectual revolt against collectivism started, centred on economics, but spilling over into political and social theory. People remembered that Hayek was still alive.

In 1974, he was awarded the Nobel Prize in Economics. In the 1980s, Hayekian sentiments were translated into policy by Ronald Reagan in the United States and Margaret Thatcher in Britain. Markets were opened up to competition, Keynesian policy was abandoned, the State started to divest itself of loss-making public industries, efforts (not very successful but still continuing) were made to trim welfare budgets. The world-wide character of this reversal only became fully apparent with the collapse of Communism between 1989 and 1991. Hayek lived to see it all. In old age, he became the dominant intellectual influence of the last quarter of the twentieth century.

Andrew Gamble’s lucid and intelligent book is another milestone in Hayek’s resurrection. In the 1970s, Gamble was a radical Marxist who argued that socialist planning was the only alternative to fascism. To conclude, as Gamble now does, that Hayek was “more right than wrong”, is, at any rate, a considerable reversal. Put briefly, Gamble accepts Hayek’s theory of dispersed knowledge as a decisive argument against all forms of central planning, but argues that it is not decisive against some decentralized forms of socialism.

It should be noticed that Gamble’s reassessment of Hayek differs from that of libertarian theorists like Anthony de Jasay, Norman Barry and John Gray (in an earlier incarnation), who claim that Hayek failed to provide conclusive arguments against government interventionism.

Hayek’s chief methodological claims are that the mind constructs reality from the shifting data of experience, and that we have no knowledge of the content of other people’s minds. This means that knowledge of social reality is widely dispersed and cannot be concentrated in the “mind” of a single authority.

Hayek’s rejection of collectivism follows from these epistemological postulates. All attempts to make social life conform to a central plan suffer from an irreducible “knowledge deficit”. They require increasing coercion, as the results achieved are contrary to what people want and what the planner expects. All forms of central planning are retrogressive. They can proceed, logically, only by destroying variety and complexity, which are the hallmarks of a progressive order. From the same methodological standpoint, Hayek attacks the static equilibrium models of neo-classical economics, which assume, among other things, that all economic agents possess full knowledge of an unchanging set of facts. He believed that such reasoning plays into the hands of the legislator with pretensions to omniscience.

Yet, despite the immanent and provisional character of knowledge, social life, Hayek argues, is not inherently disorderly. History exhibits a variety of “spontaneous orders” which arise in the course of the mutual adjustment of uncoerced activities by innumerable individuals who have only the vaguest knowledge of the circumstances of others. The best example of these is the market system, by means of which the individual is, in Adam Smith’s words, “led by an invisible hand to promote an end which was no part of his intention”; other examples are languages, religions and the “common law” elements of legal systems. The function of these orders is epistemic and regulatory. They generate enough information to make interaction possible, and establish the limits of permissible action. That is to say, they enable free or un-coerced activity to exhibit the qualities of orderliness, regularity, predictability.

Hayek came to argue that they represent successful evolutionary choices in a Darwinian struggle for survival – success being measured by their ability to support growing numbers of people at improving standards of life.

Hayek’s argument for liberty is developed in this context rather than in the more familiar framework of natural rights. Liberty, by which Hayek means freedom from human coercion, is functional to the working of spontaneous orders, for it is only through the act of choosing that preferences are revealed. Any interference with the system of liberty reduces the effective quantity of knowledge available to the order, thus impairing its effectiveness, and providing the ground for further interferences. In turn, the existence of private property (not that everyone should own it) is necessary for any system of liberty.

The theory of the spontaneous order is Hayek’s finest achievement. It does away with the liberal fiction of the “social contract”, by means of which a disorderly “state of nature” is made orderly by the cession of coercive power to a sovereign. It can enrich our understanding of actual historical orders, like the Middle Ages. But it raises worrying problems for libertarians, because Hayek’s spontaneous orders turn out, on closer inspection, to be far from self-sustaining, and indeed require to be buttressed by large doses of what he himself calls “constructive rationalism”. This is particularly evident in his proposals for constitutional reform in his late book, Law, Legislation and Liberty (1974). The crux of the matter is that not all evolutionary “survivals” are equally useful to the free society. Hayek seems torn between allowing dysfunctional forms of life to die a “natural” death, and intervening to cut them short.

Hayek’s attack on socialism, as Gamble shows, is both moral and epistemic. In a fruitless quest to recover the intimacies of a vanished tribal past, socialism destroys the virtues and knowledge needed to make a modern society work. Its logical outcome is totalitarianism. Particularly corrosive is socialism’s quest for “social justice”. Hayek identified “welfare dependency” as an (unintended) outcome of redistributive measures long before Charles Murray made the idea fashionable. The justice of a market order is procedural, not substantive.

Hayek rejected the association of freedom with range of choice or with power to effect plans. Man is free, if he can “use his knowledge for his own purposes” within the law; and a society is just, “if laws are properly formulated in terms of general, abstract rules”.

Hayek’s famous inter-war attack on central planning was vindicated by the collapse of the centrally planned economies at the end of the 1980s. The Hungarian economist Janos Kornai wrote: “Looking back after 50 years, one can conclude that Hayek was right on every point in the debate.” It was in the course of his polemics with the advocates of “democratic” central planning that Hayek developed his central insight into the market as a process for discovery and co-ordination. As Gamble puts it: “The market is the instrument for mobilizing the knowledge that is dispersed in time and space throughout society. But there is no way that the knowledge can be utilized other than through the market process itself.” To suppress the market is to suppress the production of knowledge.

For Hayek, democratic socialism destroyed the rule of law, and thus paved the way for totalitarianism. Democracy was compatible with liberty only if it preserved the rule of law. Gamble writes of this particular thought:

“Socialism, as the supreme expression of rationalist constructivist thought, removed all constraints on state power, and accelerated the slide towards totalitarianism.” This has been Hayek’s most criticized, and most misinterpreted, contention. The obvious rebuttal is that Hayek was simply wrong. After the war, mild or incomplete forms of socialism coexisted in most Western countries with markets and political liberty. Hayek was not, however, predicting an outcome but describing a logical tendency of a particular style of thought. The important point in Hayek’s favour is that the coexistence of socialism and markets was not stable. There was a tendency for the sphere of collectivism to encroach on that of liberty – whether one measures this by the rising share of GDP which the State spent, or the moves in the 1960s and 1970s towards greater public ownership and planning of incomes and investment. Hayek said that at some point on the “road to serfdom” socialists would be faced with the choice of abandoning liberty or abandoning socialism. In the 1980s, most Western socialist parties made their choice: they jettisoned socialism and accepted market capitalism. Over most of the rest of the world, where economic planning coexisted with dictatorship, the abolition of economic planning was accompanied by the collapse of dictatorial systems. So on this point too, Hayek turned out to be more nearly right than wrong.

Gamble still sees himself as a socialist. The “ideological closure” which Hayek imposed on his own theory of knowledge led him to condone the “highly centralised, hierarchical, and despotic” nature of most actual capitalist market economies. Socialism will survive, because “there are common conditions of human existence which can be sustained only by collective and democratic means”. Problems of race, gender, poverty and the environment will require socialist attention. But it will be a socialism purged of the collectivist hubris which Hayek identified. Hayek’s contributions point to de-centralized institutions and enabling rather than command structures.

However, it may be doubted whether socialism can be got to “mutate” into an ally or complement of a private-property market order. It was founded on the principle that private property in production was the main source of the world’s ills. To say (rightly) that the Thatcher- Reagan model of capitalism is not the only pos-sible type of a capitalist order does not thereby rehabilitate socialism. And as Anthony Crosland once observed: “There are many changes in society which an idealistic reformer might wish to make, but which are not to be subsumed under any defensible definition of socialism.” Moreover, Gamble does not explain how individual liberty can be squared with even decentralized forms of collectivism. There is a fundamental distinction between voluntary and involuntary associations, blurred by the current fashion for communitarianism and “stake-holding”. Hayek’s critique of socialism is not so readily separable from his approach to understanding modern society as Gamble believes.

There are many different ways of organizing a book of intellectual history. A weakness of Gamble’s method of slicing up Hayek’s thought into topics is that it obscures the change and development of Hayek’s ideas over a long life. There was a critical turn from technical economics to general social theory in the mid-1930s. His early work on the theory of money, the theory of capital, and the trade cycle, while reflecting his methodological approach, is separable from his general social theory. So Gamble does not give as good an account as he might have done for the context of Hayek’s famous debate with Keynes in the early 1930s.

One way into this debate is to recognize the striking similarity of their ideas. In the early 1930s, Keynes and Hayek were much more interested in what divided them than what united them; but from a distance it is easy to see how many presuppositions they shared. Both came to their economics through philosophy, and their (neo-Kantian) theories of knowledge were very similar.

When Keynes wrote of the market system that it is “the best safeguard of the variety of life”, preserving “the most secure and successful choices of former generations”, it might have been Hayek speaking. Both believed in the supreme power of ideas, and rejected or ignored explanations of events in terms of vested interests and technology. Both men believed that Western civilization was a “precarious crust”, always liable to crumble – which they found hard to square with their jointly held conviction that it was an evolutionary success story. Both Keynes and Hayek admired Burke and Mandeville. Keynes’s rationalism was highly tempered by prudence and regard for tradition as maxims of statesmanship. In some respects, Keynes was more conservative than Hayek. He paid less attention to the need to strengthen the institutional framework of a free economic order, precisely because he took its continuation for granted (in England). Hayek deplored Keynes’s youthful “immoralism”, but by the time they debated economics, Keynes had long since repudiated it.

Keynes located himself firmly in the anti-collectivist camp. The decisive evidence for this is his “deeply moved agreement” with the thrust of Hayek’s The Road to Serfdom. He clearly believed in the “inoculation” theory of social democracy – some of the outworks of liberal capitalism had to be surrendered in order to preserve the core. Hayek apparently rejected such concessions. Yet he gave the State the duty to provide a minimum subsistence income for all. The reason for this was clearly prudential – to make a free society “more attractive”, as de Jasay puts it. But this is indistinguishable from Keynes’s view; and once prudence becomes the ground for state inter-vention, there is no principled point at which to draw the line.

Where they differed was on a technical issue, which seemed supremely important at the time: the causes of depressions, and the remedies for them. Here again it is important not to overstate their analytical differences. Both rejected theorizing the behaviour of economies in terms of perfect information, perfect competiton, and so on. Both were deeply mistrustful of mathematical models in economics, which gave a spurious precision to what was necessarily imprecise, and of econometrics, with its assumption of an immutable external reality. Both rejected intersubjective utility comparisons as a legitimate ground for income redistribution. Both gave money a central role in the genesis of disturbances, and both tried to integrate monetary and value theory. Keynes’s account of the failure of the market system to provide continuous full employment can be expressed in a Hayekian language of co-ordination failures, as has been done by Shackle, Leijonhufvud and others.

Their crucial disagreement concerned the point at which uncertainty entered and dislocated the system of market co-ordination. Hayek postulated a natural tendency for individual plans to be successfully co-ordinated, provided that the government or banking system did not throw spanners into the works – typically by inflating the money supply. This robbed economic agents of essential information provided by the system of relative prices. Since it is the external (or exogenous) suppression of information which causes economies to misbehave, disturbances cannot, in general, be cured by further doses of the same medicine. By contrast, Keynes traced co-ordination failures to the epistemic machine itself. Uncertain expectation was not a property introduced into a naturally self-regulating market system from outside, but a property of the know-ledge-generating system itself. It is always present in the mind of every individual agent and, more often than not, locks the system of prices – particularly the rate of interest and the real wage rate – into non-market clearing relations. In the Keynesian analysis, the government can play a role in reducing uncertainty and improving expectation; from the Hayekian standpoint, government interventions of the Keynesian type are almost certainly bound to make things worse.

Why should Hayek, having rejected the neo-classical postulate of perfect information, suppose that, more often than not, the market system will be sucessful in co-ordinating individual plans? Gamble provides no clear answer, but an answer of some sort is suggested by Hayek’s remark that “a successful free society will always in a large measure be a tradition-bound society”.

Hayek believed that a free price system contained enough culturally embedded information to make economic trades not excessively uncertain to individuals.

Individual preferences are subject to cultural constraints. It is this feature of a free economy which gives it a relatively stable structure. The interesting question is whether a “successful free society” can survive in the culturally fragmented world into which we are now entering.

Hayek was defeated by Keynes in the economic debates of the 1930s, not, I think, because Keynes “proved” his point, but because, once the world economy had collapsed, no one was very interested in the question of what exactly had caused it, or whether it would recover on its own after a few years or decades.

As Keynes often pointed out, too many nasty things might happen in the interval – like the rise of Hitler. Yet some fragments of Hayek’s economic contributions did not deserve the obliteration they received – specifically, the idea that the disruption of a spontaneous order is often due to exogenous interventions by government, like monetary mismanagement, trade-union privileges, and welfare benefits. Perhaps the safest conclusion from the debate is that while governments have an important role to play in stabilizing economic activity, the need for stabilizing policy will be less, the less impeded the market system is – and the more tightly the parameters of discretionary interventions are drawn.

In the end, the analytic differences between Keynes and Hayek are probably traceable to temperament and national background. Keynes was a problem-solver, Hayek was more interested in analysing (and recommending) rules and institutions which would prevent the problems from occurring. Hayek suggested one contrast between Keynes and himself when he quoted the old maxim that “the fox knows many things, but the hedgehog knows one big thing”. The successful management of human societies requires both hedgehogs and foxes – both an intransigent support for framework rules and a willingness to break them when required. But the attempt to build a wholly satisfying theory of social policy, which states the rules necessary to underpin a free society, specifies the circumstances in which they might be broken, and sets limits to the scope of democracy, seems doomed to failure.