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Home > Blogs > Anthony Harrington > Casting about for a new economics: rediscovering Hayek, part 2

Casting about for a new economics: rediscovering Hayek, part 2

Austrian School of Economics | Casting about for a new economics: rediscovering Hayek, part 2 Anthony Harrington

On the face of things it might seem odd that the Austrian School, in the shape of Friedrich Hayek and Ludwig Von Mises should be back in the spotlight, if not yet back in fashion, as people search around for a replacement to classical economics. The contradiction is particularly acute given the huge enthusiasm in political circles and the media for re-regulating, well, everything, but especially anything to do with financial services.

Massive increases in market regulation by government approved or quasi governmental bodies is not exactly in keeping with the Austrian School’s central dictum that less is more, and not-at-all is best of all, where state intervention in the markets is concerned. However, proponents of the Austrian School would argue that the state and the banks have been increasingly conspiring together since the Middle Ages. The latest global smash, on this view, was just the latest indication of the fact that markets will not let you run State-inspired Ponzi schemes forever. (And what is fiat money, they would argue, if it is not a Ponzi scheme that constantly tries to kick the can down the road by the constant monetisation of debt?)

The route to rethinking the relevance of the Austrian School to today’s circumstances, then, is not via debates about how to re-regulate the banks. It seems to me that on regulation the Austrian School would want the debate to go in a totally different direction, back to real, gold-backed money, for example, and an end to the State’s ability to roll the presses, which just ain’t going to happen and which has not been the state of affairs since pre Breton-Woods. Their approach would give you very different banks, no fractional reserve banking and not a great deal to regulate. But again, that’s fairyland.

The banks as they more or less are, are with us to stay whether or not Glass-Steagall is re-imposed. Given the temper of the times, re-regulation is not something you can dismiss with a wave of the hand and an appeal to “the Austrian School”.

So a better, more fruitful starting point is to consider Hayek’s “three sources of human value”, namely: law, legislation and liberty. This is where Hayek the social commentator, rather than Hayek the economist, comes into play, but it has major relevance for economics, which returns to being the science of measuring the dynamic interplay between these three factors. As Hayek puts it in his interview with Robert Bork,

“Our rules of conduct are neither innate, nor the product of intelligent design, but come from cultural evolution, which operates similarly to Darwinian evolution, but much faster. The whole of our system of rules of conduct evolves without our understanding their function. It is culture that has made us intelligent, not intelligence that gives us culture. We live by rules that we did not consciously design and which we do not understand. Now we are forced to [try to] understand these rules because they are being opposed by an external system of rules [that are threatening to be] imposed on us from outside [namely socialism].”
[Note: this interview took place in the mid-1970s, when it looked as if the Cold War would go on indefinitely].

For Hayek, the socialist tradition flows out of Cartesian Rationalism and is wildly mistaken in its belief that the whole datum required to understand and generate valid rules for the progression of human society can be encompassed in rational thought. In reality, things are much messier than this and the required data is not available to any one mind but is dispersed right through global society. Rationalism never admits this and therefore progresses from error to error, creating woe and horror as it does so. (Remember Soviet state collective farms? Now there’s a fine rational concept.)

What is magical about the interplay of free markets for Hayek is that the market generates prices and prices adjust themselves constantly. As such they give individuals priceless information (no pun intended) about how to deploy the resources they have, to achieve whatever goals they have set for themselves. That, for Hayek, is what freedom is all about. Let a socialist central planner get into the mix and what you have is major muddle and the creation of a system that piles up unwanted stuff in warehouses and has empty shelves and endless queues where the desired stuff should be. The only way to fix this is to pension off the planners and get capitalism back into the mix...

No surprise here, because central planners, by the very nature of things, can’t assimilate sufficient information to get the system right. The knowledge they need is too dispersed. The logic of socialism for Hayek is that force inevitably takes the place of competence when the central planners, good folks all, become desperate. When the queues get unruly, you get more police to keep them quiet and stronger rulers to hold the lid down more firmly until the whole thing blows or greyness rules. See The Road to Serfdom for a more detailed exposition of this.

What Hayek doesn’t say, at least in the Bork interview, is that socialism and state planning are the perfect breeding ground for corruption, nepotism and gangsterism. Those in control of the state apparatus inevitably discover that they can use the state as if it was their private property, while raiding everyone else’s private property. The system becomes wildly inefficient since, unlike the self-correcting “trade cycles” or booms and busts of capitalism, there is no way to purge it short of bloody revolution by enraged citizens who “are mad as hell and are not going to take it anymore” – unless, of course, the authorities read the runes, have a change of heart and scrap the system themselves by reintroducing market capitalism, hopefully, in the nick of time.

Those who know their Adam Smith will recognise the core of Hayek’s love of market logic from The Wealth of Nations. Hayek’s Smith is not the Adam Smith who supposedly invented “economic man”, the rational individual at the heart of classical economics. Here is Hayek on Smith in his book “Individualism and Economic Order” (available as a free ebook from the Mises website):

“Smith's chief concern was not so much with what man might occasionally achieve when he was at his best but that he should have as little opportunity as possible to do harm when he was at his worst. It would scarcely be too much to claim that the main merit of the individualism which he and his contemporaries advocated is that it is a system under which bad men can do least harm. It is a social system which does not depend for its functioning on our finding good men for running it, or on all men becoming better than they now are, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent and more often stupid. Their aim was a system under which it should be possible to grant freedom to all, instead of restricting it, as their French contemporaries wished, to "the good and the wise."

This, for Hayek, is the essence of getting the state out the way of the individual and the essence of individual freedom. The market is the mechanism that makes individual freedom work coherently to the benefit of all. He quotes Smith from The Wealth of Nations with approval:

“By directing that (his own) industry in such a manner as its produce may be of the greatest value, he (the individual) intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it."
[Extract from The Wealth of Nations]

Should you take this view, government intervention, even for the best of motives, is the high road to disaster and to the curtailing of liberties. Surprisingly, perhaps, in the middle of his conversation with Robert Bork, Hayek actually makes a concrete proposal regarding the institutions he would like to see set up to bring about a “proper” free market economy and a properly functioning (and therefore decently circumscribed) state. We will conclude this brief tour of Hayek with an account of these proposals and with Bork’s rather pertinent concerns with them, in part 3.

Further reading on the crash, planning and financial booms and busts:

Tags: Austrian School of Economics , discrimination , economic thought , fiat money , fractional reserve banking , freedom , Friedrich Hayek , John Maynard Keynes , liberty , Ludwig von Mises , personal freedom , state power
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