Hayek, the market and the good life: an exchange

Robert Skidelsky and Karen Horn

This exchange is in response to “Self-appointed messiahs of the nanny state”, a review of How Much is Enough? by Karen Horn in the July/August issue of Standpoint.

Robert Skidelsky:

Everyone is aware of the political collapse of socialism, victim of an overambitious attempt to plan the future. Less clearly noticed has been the parallel collapse of traditional Conservatism. In his book, Modern Conservatism (Penguin, 1992), David Willetts recognised that ties of “duty, loyalty, and affiliation” are needed for “free markets” not to be destructive. But he failed to give a convincing answer to the charge that “free markets” undermine the social virtues on which they depend. As he rightly said, Conservatives have always believed in “free markets”. But they did not believe in a marketised society. Markets needed to be balanced by other social institutions, and non-market habits. This is why Friedrich Hayek said he was not a Conservative. It was the destruction of this balance by Margaret Thatcher which spelt the death of British Conservatism.

John Gray has argued that the “undoing of conservatism” came about as an “unintended consequence of Hayekian policy”. The hegemony, he writes, “of Neo-Liberal ideology has had the effect of destroying conservatism as a viable political project”, since it is no longer realistic “when inherited institutions and practices have been swept away by the market forces which Neo-Liberal policies release or reinforce”. What Gray calls “market fundamentalism” has “mortgaged its future on a wager on indefinite economic growth and unfettered market forces. Such a bet — Hayek’s wager, as it might be called — scarcely exhibits the political prudence which was once revered as a conservative virtue”.

It is therefore hardly surprising that Karen Horn, a president of the Hayek Society, should find unsympathetic the book I have written with my son, which rejects indefinite economic growth for reasons which are substantially, though by no means exclusively, conservative (Standpoint, July/August 2012). She castigates us as “self-appointed messiahs of the nanny state”, who want to “mess about with other people’s lives”, ignoring the fact that we champion the obstacles which conservative, liberal and religious thought have traditionally put in the way of both state and markets “messing about with people’s lives”.

Our own basic goods include “security” (against arbitrary power and continuous market-driven upheavals); “respect” (grounded in both personal achievement and civil rights); “personality” (otherwise autonomy, by which we mean “the ability to frame and execute a way of life reflective of one’s tastes”) with private property as its essential condition; and friendship (which is our term for “community” and “localism”). “They [meaning us] believe autonomy and responsibility to be an aberration anyway,” writes Horn. “If the intention is right, the means don’t matter.” These misreadings can be explained only, it seems, by Horn’s ideological commitment to the neo-liberal agenda.

Horn believes, without apparent qualification, that markets are good and that the government is bad (except insofar as it enforces rules of market competition), and that there is no solid ground between them. This seems to be a misreading of the master himself. True enough, Hayek believed that “once the free working of the market is impeded beyond a certain degree, the planner will be forced to extend his controls until they become all-encompassing”. This is the famous slippery slope, on which Horn believes our feet are firmly planted. But Hayek has inserted an important caveat: “beyond a certain degree”. What is that degree? Hayek never spelt out where the line had to be drawn to stop the descent into Hades; nor does Karen Horn. Unless she comes clean on this, we can’t really have an argument.

In the Hayekian world-view, markets spontaneously evolve to satisfy human wants; state systems by contrast are “designed”, usually to thwart those wants. This is just bad history. Markets may be natural to man — they certainly existed from the earliest times of which we have record. But a large part of the market system was deliberately created — or in Hayekian language “designed” — by government. This is especially true of the extension of markets to the “factors of production”: land, capital, labour. (One has only to think of the British enclosure movement of the 18th century.) The result has been an increasingly marketised society, whose output (GDP) is exclusively measured in marketed products. It requires quite an exceptional degree of unrealism to believe that individual choices today are made in a non-designed system (though, like the British constitution, it may not have been designed all at once). The extent and penetration of markets has always been settled over time outside markets: by ideas, politics, vested interests, and custom. People choose among availabilities; what is not available is not chosen.

In praising the sovereignty of consumer choice, Hayekians decry the value of collective choice. It is not the case that governments step in to thwart people’s choices. In a democracy, people choose collectively through the political system as well as privately. People may choose to shop in supermarkets, because the goods are cheaper, but may prefer to live in a society in which there are fewer supermarkets. The second choice can only be made through politics.

Hayekians typically contrast market success with government failure. “Haven’t these people read any public choice theory?” Horn asks. “How come they so blindly trust the wisdom of the democratic process? Of course it is only through ignoring the pervasive evidence of government failure . . .” Leaving rhetoric aside, the substance of her argument seems to rely on the well-known Principal-Agent problem: the difficulty which the Principal (in this case the voter) has in holding the Agent (or government) to account. This is certainly an important problem. But exactly the same problem exists in the private sector, especially in the modern corporation, where it is almost impossible for the owners (shareholders) to change the policies of management. Which failure is greater is impossible to say a priori. Nor is the idea that private firms face a “hard” and state firms a “soft” budget constraint of much help in assessing their relative efficiency, since managers can misgovern their companies for years before shareholders wake up. Rather than contrast an imbecilic government with a perfect market system, it is more fruitful to discuss a sensible division of labour between the two, and under what conditions both might be made successful.

A favourite tactic of Hayekians is to blame governments for egregious market failures. Thus Horn writes of the financial and economic collapse of 2007-08 that it was due to “political mistakes” and an “excessively expansionary monetary policy”. She ignores the now extensive evidence of the failures of self-regulation in the financial system, leading banks and asset managers to make unjustifiable gambles with their depositors’ or investors’ money, ruining not only themselves but the world economy. Hayekians, too, want to have their cake and eat it: if the government fails, that’s inherent in governments; if the market fails, that must be due to government interference.

Having by these devices cleared the ground for the final assault, Horn writes: “The policy recommendations that flow from the Skidelskys are as old as they are proven recipes for disaster: ever more government influence, massive income redistribution, a basic wage, progressive consumer taxes, a slower integration of the world.” Two comments can be made. The first is that most of our recommendations have not in fact been tried. A progressive consumption tax has been recommended by distinguished economists from John Stuart Mill onwards, but has never been implemented. Nor has any government except in Alaska instituted an unconditional citizens’ income (imprecisely dubbed here a “basic wage”). A “slower integration of the world” is by definition not something that can already have failed. We are left with income redistribution. In the 1950s and 1960s redistributive taxation went further in the Western world than it does today, but far from being disastrous, it coincided with faster economic growth than we have experienced since it was curtailed in order to “incentivise” private enterprise.

In short, our argument is not that government has to take over. Our proposals are designed to make it easier for people to work less and reduce the pressure to consume. The change in attitudes to growth which these policies will reflect has to come from individual choices. Our book tries to persuade people that there is such a thing as a good life and that it can be known. If people are so persuaded, they will start to change the way they live their own lives and vote for policies which will modify the system within which their individual choices are made.

Karen Horn:

The Skidelskys certainly have the best of intentions as they call on us to “chain up the monster” of capitalism and to suppress the “deathly orthodoxy” of economics. They promote their vision of the “good life”. But that alone doesn’t make their concepts innocuous. It is one thing arguing for liberty and openness, voluntary interaction and spontaneous order; another entirely when one preaches limitation and encourages coercion, as the Skidelskys do; one thing when an idea is built on a humble recognition of human ignorance, another when based on a paternalistic pretence of knowledge; one thing to respect individuality, another to produce one model for all.

Some unnecessary misconceptions about Friedrich Hayek and “the Hayekian world view” also require clarification. Hayek rejected Conservatism not because he had a problem with “other social institutions”, but because he was optimistic about the spontaneous forces of human interaction and because he welcomed the yet unknown, as a glance at the last chapter of his Constitution of Liberty suffices to reveal. Hayek and the Hayekians indeed treasure tradition, i.e. social “rules of just conduct” that evolve over time and are passed on between generations, without people understanding their origin, meaning or effect. The point is that this social fabric of values, rules and habits evolves through our unconscious action; it is not “from design”. Just as tradition encapsulates valuable experience, artificially narrowing the path to the future can only impede our flourishing. “Political prudence” is about just that.

The charge that Hayekians misread history, taking markets for the result of evolution and the state for the product of design, is as incorrect as it is beside the point. Opposing the market and the state (system) is anyhow a stale exercise. Human beings interact. This interaction may lead to economic exchange or to agreement on policy and rules. Wherever humans interact, a market ipso facto constitutes itself: a market for goods, for policies, for ideas. Interaction is spontaneous — and while it can take many different forms, it cannot fail. Failure is a meaningless term here. Yet when we turn our attention from the phenomenon of interaction toward the system, it is trivial to note that the rules governing the interaction on any of these platforms are a mixture of both heritage and design. Rules are set and rules go on to evolve. And as they are set, they had better be prudently conceived. How ideologically constrained must one be to reject the lessons learned from the financial crisis?

What is crucially different between economic (market) transactions and collective (political) choice is the effect on the individual. A transaction in a market for goods is a priori voluntary. In the political sphere, however, policies and rules always apply even to those who disagree with them. Unless unanimity is guaranteed, collective decision-making invariably implies coercion. That is the core of the problem and the predicament of unlimited democracy. Take Lord Skidelsky’s supermarket example: while Hayekians would invite enemies of the supermarkets simply to purchase their groceries at smaller stores, paternalists would sooner seek to ban supermarkets altogether so that nobody could shop cheaply any more. There is no way around it: this is an attack on liberty and a dangerous step towards totalitarianism. Hayek’s notorious line on the slippery slope has been crossed.