Frederick Hayek and the social-engineering state

01 December 1993
Article
In December 1990, after a tense day negotiating with Renault and Volkswagen over the purchase of the Skoda vehicle manufactUrer, a jewel in the Czech industrial crown, the Czech Minister of Privatization, Thomas Jezek, described the influence of Frederick Hayek on his work: 'Hayek's influence works through my person. Hayek is a guarantee that we are going the right way.'l Jezek is no simple follower of fashion. He was a long-standing supporter of Charter 77, respected by those on its left for his principled resistance to the old regime. (The other driving force behind the privatization programme, the then Finance Minister Vaclav Klaus, who always prevaricated over Charter 77, never won this respect.) Jezek believes in Hayek's thought as providing the economic and philosophical foundation of a free society. He has translated all Hayek's major works and makes excited references to them as he describes his practical policies, assuming natUrally that the listener will share his enthusiasm. At the time that Jezek was explaining Hayek's importance for the privatization programme, his translation of The Road to Serfdom, Hayek's most popular polemic against socialism, was in its third Czech edition. Jezek's negotiations with two of the giant firms which dominate Europe's automobile industry - as part of the government's 'large privatization' programme - hardly illustrate the guiding hand of Hayek, who theorizes the market as the haphazard activities of millions of individual entrepreneurs. But the uniquely Czech 'coupon' privatization (applied to companies not fully privatized by the 'large' or 'small' privatization schemes) comes straight from a Hayekian recipe book, in its ingredients and instructions at any rate. When mixed with the real economy of foreign multi-nationals, sundry financial con men and the average person's lack of financial knowledge, the programme has turned out to be a rather different matter. The idea of coupon privatization was to provide every citizen with a book of coupons worth around $2,000 which they could register as shares in companies of their choice - or rather, their choice of what was available. For instance, Volkswagen, the victor in the negotiations over Skoda, vetoed the government's desire to sell 30 per cent of Skoda shares (Volkswagen had 70 per cent) to the public under the coupon system. VW feared that this would dilute its control. In Jezek's idealistic plan, coupon privatization was to be a means of creating what Hayek called 'the catallaxy': the spontaneous relations of free economic exchange between individuals. Hayek argued that the catallaxy – in effect a theoretical term for the free market as an actual social structure - was the product of decades, even centuries, of evolution. From a Hayekian perspective, this evolution had been interrupted in Eastern Europe. Jezek saw himself as creating the conditions for history to begin where it left off in 1947. The outcome of coupon privatization does not concern us here.[2] The point is merely to illustrate the considerable influence of this prolific economist-philosopher who, ten years ago, was considered a somewhat dated eccentric. Hayekian themes in Eastern Europe Such a direct attempt to translate Hayek's theory directly into precise government prescription is rare. Indeed, such an interventionist influence appears a little contradictory for the theorist of civilization by evolution rather than design. But certain Hayekian themes have been common cultural currency in Central and Eastern Europe in recent years; though without explicit recognition of their systematic, if contradictory, foundation. Firstly, there is a powerful element of wishful nostalgia in much of the support for the 'free market' which echoes Hayek's theory of socialism - any kind of socialism - as a dangerous disruption of the 'spontaneous' order. The idea of the free market is associated in Eastern Europe with the notion of a return to a much idealized pre-Communist society.3 Hayek believed in the resilience of the spontanous free-market order which, like a mountain spring suppressed by rocks, would pour out elsewhere. A similar belief now underlies the faith of many East Europeans that breaking the old state apparatus will release the pent-up energies of a spontaneous order which will create its own channels of development.[4] The initial failure of the 'spontaneous order' to re-emerge as private enterprise has spurred increasingly radical moves to break up - rather than, for instance, attempt in some way to reform and democratize - the existing state, on the assumption that the spirit is there if only the rocks can be removed.[5] Secondly, many people in Eastern Europe value the market for what they see as its lack of favour and discrimination, again echoing a Hayekian theme: the notion of the market as the essentially haphazard outcome of individual activity. There is sometimes a strong streak of fatalism about the hardship that the unregulated market is causing, even amongst those who suffer these hardships. Economic setbacks produced by the apparently impersonal forces of the market are more acceptable, at least initially, than those brought about by the conscious design of a single authority. The relatively naive acceptance of the workings of these market forces - not as impersonal or haphazard as they look - is of course a reaction to the venal corruption of many of the people who ran the economy through the power of the state. So too is the way that the market is bestOwed with magical powers. 'People here think that the market, like God's finger, will show immediately the current price, the equilibrium and will kick out the inefficient managers,' commented Vlado Benacek, an economics professor at Charles University, Prague, and himself an enthusiastic supporter of neo-liberal reforms. Again this echoes Hayek. Hayek 'marvels' at the workings of the market. 'If it ~ere the result of deliberate human design. . . this mechanism would have been acclaimed as one of the greatest triumphs of the human mind.'[6] Thirdly, amongst sections of the liberal intelligentsia there is a strong economic individualism, against not only the state but also other forms of collectivism - trade unions, municipal activity and so on. Here again they echo a fundamental Hayekian theme. It is as if their past experience of the state with its monoploy over virtually all collective action has led them to see a stark choice between individual and collective activity and, seeing the latter as associated with the past, to assume that the former provides the only true way forward. The civic movements in Czechoslovakia and Hungary in particular - collective organizations of a sort - were primarily moral movements, shared ways of expressing and protesting the truth. Except during the first years of Solidarity, civic movements in Central and Eastern Europe were not based on a possibility of social co-operation in organizing economic or social life.[7] Hayek, too, sees only a choice between economic arrangements in which planning is carried out by a 'single central authority', and those based on competition between individuals - that is, 'decentralized planning by many separate persons'. Social associations independent of the state play little role in his theory, except as would-be central authorities.[8] It is not that Hayek's texts are being read in Eastern Europe like Mao's Red Book, but his concepts and themes are used to provide a moral and philosophical rationale to justify harsh economic policies. Moreover, these themes resonate with aspects of people's historical experience, including the final economic failures of the centralized economies. This is not only a response of the intelligentsia, though they have given it articulation. A population used to one ideology finds it natural, initially, to acquiesce in its equally ideological opposite, especially when it appears to offer a better life. 'People still look to a recipe for a shining future,' comments the columnist Jan Urban.[9] 'Many of us are privately sceptical; but there are few public fotums through which to express this scepticism,' said a sociology student at the Central European University, expressing a view shared by most of a class of around 40. It is also the absence of tools with which to develop alternative directions that makes scepticism difficult. Critics are quickly branded 'Communists' because no third way has any credibility. It is Hayek's philosophical arguments and the economic and political morality he derives from it, rather than his particular economic prescriptions, which underlie the influence of free-market ideas amongst liberal democratic activists. This means that many of the ideological tenets of neo-liberalism could well be resilient to the dismal failure of particular policies. The economic record of neo-liberalism in the West is regarded by many in the East through a rosy haze arising from moral and political rather than strictly economic judgements - reinforced in the past, no doubt, by the selective reporting of Radio Free Europe or Voice of America. The Thatcher and Reagan experiences are seen as success stories, and not just by rabid neoliberals. Mr Jicinsky, the first post-Communist Vice-President of the Czecho-Slovak Federal Parliament, a 1968 reformer, ex-professor of jurisprudence, and no fool, described with approval how 'the Czech and Slovak public were greatly impressed by Mrs Thatcher; especially the way that she influenced the situation in Britain, overcoming stagnation and recession'.[10] He made this remark a month after Prime Minister Thatcher had been ignominiously pushed out of office, leaving Britain with the biggest trade deficit in its history. The historical record of neo-liberal economics, whether in Britain, the US or Chile, is not enough to prevent its influence from riding again, this time over the ruins of the Soviet bloc. It is not enough practically and empirically to challenge the Hayekian nosttums that have permeated popular consciousness. Experience is already doing just that. But there is no inevitability that the questioning induced by harsh experience leads in the direction of a democratic and socially responsible alternative. On the contrary, the signs so far indicate the opposite, as disillusion combined with the absence of any legitimacy for the rule of law, leads to violent ethnic strife. Effective tools for developing such an alternative need to prove themselves against the intellectual roots of neo-liberalism's capacity to bounce back. The cycle of Hayek's popularity Hayek is the most resilient of neo-liberal thinkers, not only in his longevity or his prolific output,[l1] but also in the strength of the intellectual foundations he gives to neo-liberal political economy. The cycle and geographical location of his popularity is striking. The Road to Serfdom was raprurously recieved in the US on its publication in 1944, but in Western Europe the reception was cool.[12] During the social democratic consensus of the 1950s and 1960s Hayek was considered something of a political oddity. Seymour Martin Lipset describes a telling incident. In the fifties the CIA-funded Congress for Cultural Freedom[13] organized a 'world congress of intellectuals' on 'the Furure of Freedom'. Labour politicians Hugh Gaitskell and Richard Crossman, conservative thinkers Raymond Awn and Bertrand de Jouvenal, and US opinion leaders such as Arthur Schlesinger Jr. were amongst a hand-picked gathering of 150 which met for a week in Milan in 1955. They found themselves in broad agreement. Conservatives were prepared to accept a moderate degree of state regulation; social democrats were prepared to accept a powerful private sector. According to Lipset, himself one of the American members of this world class of intellectuals, 'no one seemed to believe that it really made much difference which political party controlled the domestic policies of individual nations,' so long as they were against Russia. 'The only occasions in which debate grew warm,' Lipset remembers, 'were when someone served as a "surrogate Communist" by saying something which could be defined as being too favourable to Russia.' At the end of the Congress, however, a dissonant voice spoke up from the other end of the political spectrum. Frederick Hayek had remained silent until the final day. He then launched an attack on the delegates, according to Lipset's report, 'for preparing to bury freedom instead of saving it'. At that time, Lipset recalls, he was treated as somewhat eccentric. [14] Twenty years after the Milan gathering, a Conservative Minister in Britain (Sir Keith Joseph) was to make The Road to Serfdom required reading for his civil servants. Prime Minister Thatcher spoke of Hayek reverentially as her guiding influence, and met him for several extended rutorials.[15] The cycle of Hayek's popularity coincides, not surprisingly, with periods when state management of the economy in any form is either feared by powerful groups in society (as in the US just after the Second War); is associated with, and blamed for, a faltering of the economy (as was the case for an excessively mild form of industrial intervention in Britain); or when it patently fails to deliver the promised economic goods (as with the collapse of the command economies of the Soviet bloc). His polemics against state intervention were all encompassing: he saw moderate, Keynesian or social democratic forms as the thin end of the wedge of fascist or communist totalitarianism. This is the central argument of The Road to Serfdom. The rise, fall and rise again of Hayek's influence, according to the successes and failures of economic state intervention, is revealing. The resilience of Hayek's rationale for the free market, in spite of its empirical vulnerability, indicates a deeper, philosophical foundation which the left has yet to dig up and critically inspect. The practical, ephemeral and tacit character of much economic knowledge seems crucial to Hayek's theory. On this foundation he built his challenge to what he saw as the all-knowing social engineering states created by the left. (He is noticably reticent about the social engineering of his own followers.) The power of his case ultimately does not lie with his own understanding of practical knowledge - this is flawed by a dogmatic individualism that blinds him to the social and potentially transformable character of economic knowledge. I would argue that the kernel of truth which gives his work such cyclical longevity is his critique of the positivistic, scientistic assumptions behind many forms of socialist or social reforming politics. Such an approach to knowledge underpins the confidence in the state as the prime, in some cases exclusive, agency of social justice. As long as the left has not developed a theory and practice of social transformation, regulation and co-operation which can take account of the practical and tacit character of social and economic knowledge, and therefore the limits on the knowledge of the state and party (the knowledge from above), then whenever the state regimes of the left fail to deliver the social justice they promise, neo-liberalism regains influence, and The Road to Serfdom comes out with a fresh cover. It helps to understand Hayek's appeal to liberal intellectuals in the period of opposition and on a popular scale in the immediate aftermath of 1989, if one can envisage the political culture of 1920s Vienna in which he first developed his central themes, and if one can enter into the contests over the feasibility of socialism in which he was engaged throughout his life. A brief historical detour helps explain features of the resilience of his ideas: for instance, their comprehensive character, embracing philosophy, psychology, economics and constitutional politics; the politically and morally purposeful tone of much of his writing; and the fact that several of the issues which he debated with socialist theorists of his time were left unresolved. Red Vienna and the making of a neo-liberal It is ironic that a writer whose work stressed the unintended character of the social outcomes of individual behaviour should have an influence so close to his lifelong intention. His life's goals were formed in the highly politicized debates of 'Red Vienna' in the aftermath of the First World War, the downfall of the Austro-Hungarian Empire and the Bolshevik Revolurion. Austrian liberalism was in disarray. Socialism was ascendant. So too was xenophobic nationalism. From an early age Hayek made the retrieval and renewal of freemarket liberalism and the defeat of socialism the guiding animus of his intellectual work. After military service, doctoral study and success in law and political science at the University of Vienna, then a year in New York, Frederick Hayek, aged 25, joined the privatseminar of Ludwig Mises, who earned his living not in the University but as Secretary of the Vienna Chamber of Commerce.[16] At this time Hayek was a moderate Fabian from a liberal academic and minor aristocratic background. Mises' polemic against the feasibility of a socialist economy, Economic Calculation in the Socialist Commonwealth, turned Hayek against any sustained state intervention in the market - other than to protect the workings of the market against particularistic interests. To share such an intellectual position immediately pur Hayek in conflict with the predominant socialist/social democratic orthodoxy. Following Mises he became an intellectual fighter[17]. He fought against state intervention not only in Austria, but also in London, to which Lionel Robbins invited him in the 1930s specifically to strengthen the neo-liberal resistance to Keynes. After the war he found a more peaceful and receptive base in the United States in Chicago. The liberals in these debates, notably Mises and later Hayek, were influenced by a strong sense of a lost and valued world: the world of constitutional liberalism in the last half of the nineteenth century, whose leaders thought they could preside over an orderly dismantling of the Hapsburg Empire.[18] In historical terms, the intellectual project of Mises and Hayek was self-consciously to re-Iay, in the disarray of the twentieth century, the intellectual tracks that would guide society back to the civilized order which ignorant, primitive social forces had disturbed. Early liberalism had, in Hayek's view, been insufficiently self-conscious of its achievements. It had released forces of working class militancy and xenophobic nationalism that it had no idea how to control.[l9] Hayek's self-appointed task was to make free-market constitutional liberalism conscious of itself, and to put those genies back into the constitutional bottle. The culture in which Hayek began his retrieval and renewal of liberalism had two especial advantages. Firstly, it encouraged intellectual debate of a kind that directly engaged with the main problems facing society. The Bohm-Bawerk Seminar, another of Vienna's famous privatseminars, was led by innovative figures independent of any single institution, who moved between academic, political and commercial life, bringing the preoccupations of each to the seminar. It included liberals such as Carl Menger, the founder of the Austrian school of economics, and Friedrich Weiser, as well as the liberal Bohm-Bawerk himself, who became a finance minister in the first government of the Austrian Republic. Joseph Schumpeter, the corporatist social democrat who served briefly as minister of finance, also joined the argument. Mises and Hayek faced strong antagonists in the socialist economists Otto Bauer, Karl Renner and Rudolf Hilferding. Bauer and Renner both later served in the Austrian Government, Renner as the first Chancellor of the provisional government of 1918 and Bauer as Foreign Minister and head of the Socialization Commission.[2O] Secondly, the intellectually and culturally pluralistic character of the privatseminars encouraged scholars to make confident use of the tools of many different intellectual disciplines to strengthen their case. Hayek's economic arguments, for instance, benefit from their foundation in an understanding, however flawed, of epistemology. The work of Carl Menger, founder of the Austrian School of economics and a major influence on Hayek, is exemplary in this use of a wide range of intellectual tools. His contribution was the subjectivist theory of value which became the school's distinctive position. He deployed ideas from history, psychology and philosophy to argue against the orthodoxies of the time, and asserted that the soutce of value - in his view, the central unifying principle of economics - was not any objective feature of a thing or its production, such as the amount of labour power it involved, but rather was individual subjective preference.21 In other words, the only value which a good has, according to Menger, is its importance for an individual[22]. The Austrian School's debate with socialism Although Menger and the Austrian School developed their theory of value as an alternative to both Marxist and Ricardian labour theories, they did not initially attack the idea of socialism. Some were pragmatically in favour of a degree of social democraticlsocialliberal state intervention to influence trade, encourage certain sectors of business and remedy gross inequalities. After the war, however, the Russian revolution and the left-wing government of the Austrian Republic made the workings of a socialist economy a focus for forceful and practical debate. Mises' attack on the possibility of a socialist economy was based on one central argument. All the same economic variables - consumer demand and resource scarcities, for instance - that guide resource use in a capitalist economy, he argued, must necessarily be taken account of under socialism. It was naive, he said, to expect money and prices to disappear for very long under socialism: as long as people have different preferences and as long as socialists aim to meet consumer desires, the allocation of consumer goods could only be adequately achieved by resorting to some system of money and prices. The infinite and constantly changing combinations of demand and resources could never be second guessed by a central planning system. The most powerful socialist response, within the terms of the debate set by Mises, came from the Polish economists Oskar Lange and A. P. Lerner, together with the British socialist economist H. D. Dickinson. They did not seek to defend the labour theory of value as a basis for resource allocation. They took over the main assumptions of neoclassical, Marshallian economics, concerning the conditions for perfect competition: that is, perfect information, freedom of entry and exit, and the possibility of 'trial and error' in the determining of resource prices. They (Lange most consistently) developed a model in which a central planning board would administer factor prices of state owned enterprises in a way which, through the process of trial and error, imitated the capitalist market but without profit maximization. Lange was concerned to construct a model of a socialist economy able to do everything capitalism could do but also to fulfil social objectives which were beyond capitalism's capabilities. The planning board, in effect substituting for the market, would fix 'shadow' (because shadowing the market) prices of products such that the quantity supplied would equal the quantity demanded. Socialist managers, like capitalist managers, would be required to produce at the point where marginal cost was equal to this price. Yet marginal cost in such an economy would take social costs into account in the internal budget of the firm, whereas in a capitalist economy they would be treated as 'external' to the firm's economic calculations. This theory was developed just before the Second World War. The experience of the wartime economy reinforced widespread faith in the advantages of centralized administration, and the case for Lange's form of market socialism was, for most of the post-war period, widely accepted as coherent. The arguments of Mises and his protege, Hayek, became margina1.[23] Hayek's argument, going beyond Austrian School premisses, fired salvos into this debate from a new, subversive angle: from an exploration of the very character of economic knowledge. Socialists and neo-classicists alike have ignored his arguments until recently. Most varieties of socialists in Europe could ignore them because in immediate post-war years history seemed more or less on their side. Neo-classicists were uninterested because an increasing preoccupation with econometric models had produced a lift-off from the real world; and so long as real-world economies were booming nobody tried to pull them back. Hayek's salvos lay in wait, unanswered. Hayek's theory of knowledge Hayek's central argument concerns the character of knowledge and of social order. His theory of knowledge states that because of the very nature of economic knowledge, no single brain, individual or collective (and he might now have added, computerized system), can know all the factors relevant to the economic decisions which they might take. Neither can a single aurhority effectively centralize the knowledge of individuals. The major part of economically relevant knowledge is, according to Hayek, 'knowledge of time and circumstance'. Often it is tacit - 'things one knows but cannot tell' - often ephemeral and always fallible. As a consequence, he argues, we enter the world socially blindfolded; we can never know the social consequences of our intended action. On this basis, we must understand social order and social development - in particular the development of private property and the market - as the unpredictable outcome of the activity of individuals. Its evolution is the result of unintended experiment. Any attempt to design or engineer a social outcome interferes in the natural processes of civilization. Such intervention is immoral and bound to have deleterious consequences. The idealizing conclusions that Hayek draws from this about the 'free' character of actually existing capitalist markets have been well criticized on historical and empirical grounds, showing the element of conscious social construction involved in shaping the market institutions.[24] But an alternative understanding of knowledge and its social and economic production, distribution and utilization, has not been explicitly pitched against neo-liberal political and economic theory and used to ground the case for co-operative and democratic social and economic organization. The absence of such a challenge enables the case for the free market to gain a philosophical and moral appeal totally our of proportion to its economic and social viability. The early Austrians rejected the assumption of perfect information in their work on value, concluding that knowledge of resource costs was so fallible that the subjective value of a good for the individual could be the only reliable indicator of value. They did not follow through the implications of this for understanding the workings of the economy as a whole. Hayek, moreover, did not just question the assumption of perfect information. He made the problem of information - or, more comprehensively, knowledge - the fundamental question of economics; a problem which arose from the very character of human knowledge:
The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exist in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate 'given' resources. . . It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.[25]
Hayek turned the tables of the debate about socialism completely, criticizing the hidden rationalist assumptions of the neo-classicists as well as the active rationalism of the social engineers. He took the Austrian critique of these traditions to a deeper level than the original stress on a subjective determination of value. He thus strengthened the case for economic liberalism by defending it with a critique of the assumptions it had previously shared with state socialism and which had rendered it vulnerable to arguments framed like Lange's - in rationalist terms. The character of knowledge Neo-classicists and social engineers alike, argued Hayek, were assuming a view of science which made the problem of knowledge deceptively simple. They viewed science according to the positivist model; that is, as the accumulation of laws describing empirical regularities. These laws provided the core of valid knowledge; all else was merely an approximation to such laws. Thus everyday knowledge was simply rough and ready scientific knowledge or pure speculation. On this basis, economically relevant knowledge could in principle, however unrealistic in practice, be available to all, as the neo-classical economists assumed. And certainly, if economic knowledge was a matter of codified generalizations and aggregations, then it could be centralized: there might be practical difficulties and problems of the measure in terms of which calculations could be made, but there was nothing about the character of the knowledge itself which would render it impossible to centralize. Hayek questioned the idea of knowledge which underpinned this reforming zeal. In this he was influenced by Ernst Mach and his view of knowledge as sense data of experience unique to each individual. Later he was influenced by Michael Polanyi and his analysis of tacit knowledge, 'those things we know but cannot tell'. Hayek argued that scientific knowledge - which he saw as primarily a matter of classification of those facts, or sense data, that can be classified - is not all that there is to knowledge. He points to the 'body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: knowledge of the particular circumstances of time and place'. His paradigm is the knowledge of the entrepreneur: the shipper, for instance, 'who earns his living from using otherwise empty or half-filled journeys of tramp-steamers'; or 'the estate agent, whose whole knowledge is almost exclusively one of temporary opportunities'.[26] While the Austrian School before him also were giving an alternative view of value, price and equlibrium, his concern with knowledge opens up the question of how in fact prices are formed, what function they serve in the co-ordination of an economy, and what in practice are the processes favouring equilibrium. In his critique of the thought of his Austrian predecessors he argues that 'It is evident, however, that the values of the factors of production do not depend solely on the valuation of the consumers' goods, but also on the conditions of supply of the various factors of production'Y And vital knowledge of these is, he insists, uniquely individual. Hayek then presents the choice for understanding or achieving equilibrium as being whether to bring all the dispersed information to a single central authority or 'to convey to individuals such additional knowledge as they need in order to dovetail their plans with those of others'. Since the character of knowledge makes the former option impossible, the problem becomes how best to implement the latter. Hayek's answer is an unregulated price mechanism, whose values would indicate the relative importance or 'marginal rates of substitution' of different products. On this basis, each scarce resource has a numerical index, a price 'which cannot be derived from the property possessed by that particular thing, but which reflects, or in which is condensed, its significance in view of the whole means-end structure'. Crucial to Hayek's faith in the unregulated price mechanism as the means of economic co-ordination is the assumption that the information that the individual needs concerns simply the comparative cost of a commodity and nothing more. In an economy that has no democratic social regulation, this is in theory what price represents - though more often than not, in practice in modern capitalist economies it represents a series of strategic calculations by firms with considerable oligopolistic market power. Hayek assumes that the economic agent, consumer, entrepreneur or worker, does not need or want information abour, for example, the conditions of workers or the consequences of the production process on the environment. It is on this narrow interpretation of economically relevant information that a price system is alleged to act, 'to co-ordinate the separate actions of different people. . . The whole system acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all'. He marvels at this system as a way of dispensing with the need of conscious control. It may not always be perfect, but because it has emerged without conscious human design it should not be tampered with, concludes Hayek, especially given the limited character of human knowledge. Hayek concludes that the free market is a spontaneous product of civilization. He elides this claim of social theory into a moral case for the free market: as the product of accident rather than design, it favours no one and discriminates against no one. (Inequalities, presumably, are simply the haphazard outcomes of individual activity, which might be reversed on his model by a further round of the haphazard.) For Hayek, the role of the state must consequently be the very opposite of social engineering. Rather than improve or remedy the roughness of the market's justice, its role must be to protect the spontaneous order. Members of the highest body of state should be chosen with this protective, hands-off-and-keep-other-hands-off task in mind. Hayek allows for a lower assembly of regularly elected representatives, but this should be responsible simply for minimal taxation and the maintenance of basic infrastructure and social services. According to Hayek's constitutional prescription there would be a higher body made up of male citizens of mature and expert judgement, preferably over 40 years of age, to guard the products of social evolution. They should be up for election every 15 years, so that they would not be susceptible to the kind of political pressures which might lead to tampering in the particular interest of a vociferous group. A military junta or well-protected Prime Ministerial government have, it seems, been the nearest actual equivalents to this ideal arrangement. Inconsistencies There are rwo problems of consisrency berween the logical implications of Hayek's theory of the production and disrribution of knowledge and his larer political and economic prescriprions.[28] On the one hand, he sees all monopolies or attempts ro concentrare power as a threat to rhe spontaneous order. The economic condition under which the spontaneous order can flourish is 'competition ... [which} means decentralized planning by separate persons'. He writes contemptuously of 'the half-way house between the two, about which many people talk but which few like when they see it. . . [namely} the delegation of planning to organized industries, or in other words, monopolies'.[29] The problem for his theory, however, is that monoplies have developed out of the capitalist market. In a sense, business monopolies or oligopolies could be understOod as spontaneous developments of capitalist competition; yet they also become a source of power to carry out conscious, calculated economic projects affecting the rest of the economy. In this case, the spontaneous order carries in it the seeds of its own desttuction. Or, one might argue that concentrations of economic wealth and power are the product of previous conscious attempts to direct the economic order. In both cases they become centres of all-knowing power, appropriating the knowledge of others - work ers, consumers, competitors, sub-contractors - just as much as many a state institution. Either way, there is a case, on Hayek's own terms, for some kind of prohibitive state intervention. But his limitation on the scope of democracy and conscious public decision making means that he provides no basis for deciding which products of the spontaneous order could be interfered with. Another way of putting this is that his criticisms of the abstractness of neoclassical equilibrium theory are incomplete. He points to features of the real world, in particular the character of human knowledge, to gain a closer understanding of how and under what conditions economies tend towards equilbrium, but he ignores real-life economic developments which raise the possibility of influencing what kind of equilibrium is arrived at. At one point in The Constitution of Liberty he does put forward his own personal view, arguing that the monopolies of business are somehow benign and certainly not as damaging as the monoplies of labour and the state. But this, from the point of view of his own theoretical system, is an arbitary judgement, governed more by his animus against socialism than by logic. He does express unease, however, as if aware of this monopolistic tension. What is really necessary, he argues at one point, is for everyone to be selfemployed. Only then does everyone experience and understand the workings of the market and develop the capacities and moral ethics on which it depends: a willingness to take risk, an alertness to entrepreneurial opportunities, habits of thrift and self-discipline. The market, in his view, is the engine of self-education. He accepts that the giant monopolistic corporations create a problem in that their growth means a large population of employees relatively protected and therefore uninitiated into and disrespectful of the ways of the market - even favourable to socialism. He is not prepared, however, to follow a consistently liberal path of favouring legislation which disperses concentrations of wealth. There is a further inconsistency, again concerning the organization of enterprises themselves. He states that the prime problem for economics is identifying the mechanisms for full utilization of the population's economic knowledge. His notion of the actual economically active population seems to be restricted to his ideal (the self-employed entrepreneur or the commercial agent), and not to include the reality of the significant section of the population engaged in wage labour. Indeed, none of his examples of economic activity - shippers and estate agents, for instance - indicates any concern with or knowledge of the social character of production itself. They are all taken from commerce. He appears to overlook a vast, frequently undetutilized, source of tacit knowledge: the knowledge of waged workers. This is a revealing omission: the basis of his theory is very narrow, or involves a fundamental contradiction. It can only be eXplained either by the fact that the spontaneous order at the back of his mind is made up of competing individual, commercial and economic agents; or by the implicit assumption argued by that other notorious twentieth-century Fred Frederick Winslow Taylor - that all economically relevant knowledge implicit in the skill of the worker can be codified by management, and therefore does not exist independently of the entrepreneur. But this goes quite against Hayek's general approach to knowledge. If the state is unable to codify the knowledge of the entrepreneur because of the very character of human knowledge - not the nature of, for instance, social relations of power - then how can the entrepreneur adequately codify the knowledge of the workers? Questioning of the organization of knowledge within production (that is, within the enterprise) raises serious problems for Hayek's reliance on price as the means of communication of economic information. The internal organiza tion of the enterprise is constrained by the market and therefore by the workings of the price mechanism, but it involves economic relations other than those of price - discipline, supervision, training, various forms of cooperation - utilizing or failing to utilize tacit and experiential knowledge. Depending on the size and market power of the company, these can have a major influence on price. It raises the possibility of choices between different kinds of economic relations according to a variety of consciously chosen criteria, including whether or not they favour the utilization of practical knowledge - a possibility ruled out by Hayek's notion of a spontaneous order. Yet what if the spontaneous order produces forms of organization of production that seek to centralize knowledge, overriding the tacit or experiental knowledge of a section of the population? And what if this threat comes not from the state, the trade unions or some collective actor associated with socialism, but from the dominant actors in the capitalist market? Will the wise old men of Hayek's Upper House be prepared to intervene? Underlying these particular inconsistencies or, more generously, 'tensions' in Hayek's theory, is a more fundamental contradiction: between the value he places on individual liberty and human agency on the one hand, and his theory of evolution and the value this leads him to place on social order on the other. His denial of some direct, even if incomplete, connection between human intention and social outcome, and his contention that the outcome of human activity is entirely haphazard, in effect make accident the main mechanism of social evolution. Democracy and social choice become redundant. On this basis, social evolution is very little different from natural evolution. The only difference in fact is that humans, or at least mature wise male members of the human race protected from the vulgar pressures of the people, can discover the trends of evolution and make society conscious of them in order to safeguard them. In effect, therefore, Hayek's arguments lead him, in spite of his libertarian starting-point, to favour order and tradition over human agency. His bizarre constirutional proposals are not the eccentricities of an old man, they reflect the final priorities of his theoretical system. And they guide the political practice of his disciples. The authoritarianism of the philosopher of freedom Thus on close inspection we find a social phliosophy which in its own inner priorities - not simply its uses or abuses by particular politicians - leads in quite the opposite direction to the initial hopes which the young democracts at Respekt or in FIDESZ projected on to the idea of the 'free market'. Where they hoped for a society in which individual and collaborative creativity could shape economic life, we find Hayek's free-market model provides for only the semblance of individual creativity. Where they have come out of their private exiles hoping for a sphere of public activity, independent of the state and not necessarily entirely within the market - what they call 'civil society' - Hayek would push them back into a private domain where they are out of temptation of social projects or design. Where they looked forward to participating in a pluralistic politics to debate and decide the future direction of Hungary or the Czech and Slovak Republics, Hayek would take the question out of their hands and into a special Chamber of older men who know better, leaving democratically elected representatives to debate tax percentages and the state of the drains. The individualism of Hayek's theory of knowledge The crucial assumption that leads Hayek into these contradictions is his treatment of knowledge as an individual attribute, rather than as a social product. He regards it as almost a physical characteristic, as if the mind and body were one and the individual's knowledge what they atomistically and uniquely experienced. He extols the price mechanism because it makes pos sible 'not only a division of labour but also a co-ordinated utilization of resources based on equally divided knowledge'.3° Knowledge could only be seen as equally divided in this a priori way if it was understood as a given feature of an individual's existence. He is more explicit about this sense of an experiential limit on an individual's knowledge when he justifies his thought against what he sees as the rationalist individualism of John Sruart Mill- whom he lumps together with French writers, such as the Encyclopedists and Rousseau, who acknowledge no limit on human rationality. He asserts that there is
an indisputable fact which nobody can hope to alter and which by itself is a sufficient basis for the conclusions which the individualist philosophers drew. This is the constitutional limitations of man's knowledge and interests, the fact that he cannot know more than a tiny part of the whole of society and that therefore all that can enter into his motives are the immediate effects which his actions will have in the sphere that he knows. All the possible differences in men's moral attitudes amount to little, so far as their significance for social organization is concerned, compared with the fact that all man's mind can effectively comprehend are the facts of the narrow circle of which he is the centre. [31]
What is significant about this statement is not its recognition of limits on human reason but the dogmatically experiential and therefore individual nature of these limits, closing off possibilities (rightly) of total rationaliry and complete knowledge but also (wrongly) of social action to share information and extend the knowledge of individuals through associating for that purpose. This dogmatically individualistic assumption is crucial to the conclusion which he draws from the fallible character of knowledge: that we enter the world socially blindfolded. For Hayek, as I have already shown, the natute of human knowledge is such that not only can we not know the social consequences of our action with certainty, but we cannot even approximate such knowledge through combining with others, thereby cutting a hole in the blindfold and ensuring our actions come nearer to achieving their goal. For Hayek, on the contrary, the social structures we create, we create entirely unintentionally. The assumption that knowledge is an individual attribute thus is essential to his conclusion that social order is the 'haphazard outcome of Out individual activity'; and to the implication that accidents rather than conscious social projects are the legitimate mechanisms of social evolution, the grist to the mill of trial and error. If knowledge is understood as a social product, the foundation of Hayek's case for the free market begins to crumble. For if knowledge is a social product then it can be socially transformed through people taking action - co operating, sharing, combining knowledge - to overcome the limits on the knowledge that they individually possess. Empirical evidence bears this out even in the private market, Hayek's paradigm case of order created in spite of every individual's blindfold predicament. Consider two politically and economically quite different cases where social organizations have been created successfully by economic and political actors, specifically to share information, extend their knowledge of their economic environment and thereby come nearer to achieving their economic goals. In Japan, for example, leading companies and the state have created and now sustain a central economic networking institution for the economic elite, a part of the Ministry of Industry and Technology (MITI) which facilitates the sharing of plans, information on international markets, and areas of murual interest, such as labour relations and aspects of technological development. Participants in this process have created additional informal networks which further share information and skill. These dense knowledge networks amongst the elite of the Japanese economy have undoubtedly been a vital ingredient in the competitive success of the Japanese economy. But no one could call them spontaneous. They have certainly brought many unintended benefits to Japanese corporate management and the state (and no doubt contributed to the corrupt nature of Japanese politics), but there is no doubt that intentions to intervene in the market in a particular way have driven the process. The second very different example comes from Italy: the flourishing textile industry in Modena near Bologna. There, entrepreneurs in small businesses and co-operatives (rather close in some ways to Hayek's self-employed ideal), have clubbed together, instead of relying only on their own individual sense data and alertness, to set up a Textile Centre to gather knowledge about textile technology and trends in the international market. The Centre then shares this information with all those who affiliate to it. Again, here is a conscious and successful attempt to overcome the limits of individual experience and gain a fuller picrure of the economic environment in order to compete more successfully in it. There is no presumption to be all-knowing. But there is a determination to share and combine the insights of individual experience, in order to meet shared goals. Epistemologists and philosophers of science - most notably another Austrian, Ludwig Wittgenstein -long ago convincingly challenged the individualist view of knowledge, owed to Mach, which forms the foundation of Hayek's theory.32 Philosophical notions face many socially determined lags, and whether an idea is confirmed in people's daily experience is an important factor. For instance, long after Galileo had proved to the satisfaction of the scientific community that the earth moves round the sun, the opposite idea an idea so apparently consistent with everyday experience - continued to dominate common sense. In societies like those of Central and Eastern Europe, where the majority of people have had little option but to live a form of private exile, participating knowledgeably in only a small circle of friends, Hayek's individualistic understanding of knowledge did not grate against day-to-day experience, did not appear unreasonable, and does not prove a sticking point in the appeal of his whole social philosophy. These circumstances are changing. The very different experiences in the West, of which Japan and Italy provide examples, explain why even as neo-liberal economic prescriptions spread in the 1980s, Hayek's wider philosophy has not caught on. Support for neo-liberal economics from the Western economic elite - notably measures of market de-regulation - are more a function of the internationalization of capital than of Hayek's philosophy of the free market. Britain, where economics in the seventies and early eighties was notably ideological, was unusual for the West. In some respects it was more similar to later developments in the East, in that Hayek provided the conceptual framework used to sell monetarist economics as a moral and ideological crusade. The democratization of knowledge Evidence of considerable social variation in the organization of knowledge, and of purposeful action to transform the existing production and distribution of knowledge, does not validate a positivistic view of knowledge as in principle always codifiable and centralizable. Rather, it indicates the need for a theory of social knowledge that absorbs Hayek's essential insight into the continuing flow of uncodified and often uncodifiable knowledge but rejects his dogmatic assumption that this knowledge is constitutionally and irredeemably individual. Recognition of the social character of knowledge implies that, depending on its distribution and organization, people can through social co-operation increase their understanding of the social consequences of their actions, even though they can never know these consequences in every detail for certain. This in turn implies that people putposefully can influence society with some (albeit limited) knowledge of the outcome, and that this knowledge can always be improved upon. Any particular social arrangement (for example, the organization of the economic market) thus becomes not the haphazard outcome of individual activity, but an outcome whose relation to the intentions of the human actors involved must be open to empirical inquiry. It could be the more or less intended outcome, depending on how comprehensive is the understanding of the actors and the extent of their sources of power to act. An understanding of knowledge which recognizes its socially variable conditions of production and distribution also makes possible an alternative theory of social evolution as radically distinct from natural evolution, but yet not presupposing a designing, directing mind or collectivity. It would involve a recognition that social evolution is the outcome of attempts by people rationally, if never perfectly rationally, to construct/design social projects which are then the subject of trial and error. This understanding enables one to consider a social order in a way which recognizes the distinct role, for good or ill, of purposeful human agency and creativity. This provides a basis for questioning what institutional framework market relations should operate, and of what values and mechanisms should regulate these relations. In other words, we move the private market from the realm of the sacred - God's finger, as the Czech economist describes popular conceptions of the market - to the profane: particular historically shaped and historically transformable institutions. We can also separate the ideal of socialism from presumptions, implicit or explict, of an all-knowing political agent or set of institutions, and open up the possibility of forms of social regulation and control which Utilize practical knowledge and recognize its fallibility. The all-knowing state, however formally democratic, has been a powerful fantasy at the back of many a socialist mind. The assumption that all the knowledge necessary to a socialist transformation of society can be codified, turned into an overview of society and draw upon in a single, more or less democratic process, underlies the reforming and revolutionary ambitions, respectively, of Fabianism and its latter-day practitioners, and Leninism in its various forms. The debates within and between these political traditions have been over how much of society the state should control or what kind of a state should do the controlling; for example how decisions should be made at every level of the planning process. But they have all shared the belief in the possibility, indeed desirability, of a single process of economic and social planning in those spheres where state intervention is deemed necessary. The idea of 'autonomy' or horizontal 'network' forms of cootdination has not been part of their vocabulary. Moreover, common to their conceptions of the party, whether parliamentary or Bolshevik, is the notion of a leadership that knows and interprets the laws of social development and, whether through a form of political Taylorism or through formal democratic debate, is able to distil and centralize the knowledge of the membership.[33] Since 1968 these conceptions have in practice, though not sufficiently in theoty, been challenged. Much of the practice of the social movements which emerged dUting and after 1968 - the student, feminist, peace, ecological and other more community-based movements - along with workers' organizations activated by the collapse of the boom, produced a cumulative popular challenge to all-knowing forms of socialism. At the same time many of them shated the original egalitarian and democratic values of socialism. One of the features which much of this practice (though by no 1J1eans all) has in common is the practical assertion of an alternative view of knowledge, both to that which underpins the free-market right and that which gave state socialist experiments their sense of certainty. An alternative view of knowledge is essential, as the resilience of the ideas of Hayek illustrates, to an alternative view of economic organization, state administration and political agency. William Morris describes men and women as 'the ever-baffled and everresurgent agents of an unmastered history'. This provides an appropriate desctiption of the sense of purpose, qualified by a spirit of self-conscious experimentation, of the new left. Notes 1) Interview with the author. 2) See Bernard Wheaton and Zdenek Kavan The Velvet Revolution; Czechoslovakia 1988-1991 (Oxford, 1992), pp. 157-8. 3) These are somewhat inaccurate given that in Central Europe, in Czechoslovakia, for instance before the Second World War, there wete petiods of social democratic government, strong trade unions and a large co-operative sector. 4) Mrs Thatcher provides a particularly vivid illustration of this belief, learned from the same Austrian guru. She believed that by withdrawing the state from the economy she was releasing a suppressed 'spirit of enterprise' which would then drive the economy to new heights of prosperity. For a moment she was worried: 'I held my breath. Had the spirit of enterprise survived? I was immensely relieved when I found that it had,' she said in 1986. 5) Except, for example, in Poland, where popular resistance has forced the government to weigh the advantages of releasing a spirit whose existence has still to be proved, against those of responding to social forces whose existence in the streets and factories was very real. 6) See F. Hayek, 'The Use of Knowledge in Society', in Individualism and Economic Order (London, 1949), p. 87. 7) Perhaps this is one reason why these movements so quickly dispersed after being used as vehicles for achieving power. 8) See 'The Use of Knowledge in Society'. 9) Interview with author, October 1991. 10) Interview with the author. 11) The scope, range and sheer volume of Hayek's work is vast, spanning more than six decades, involving virtUally every discipline within the humanities and consisting of 34 books authored or edited, 25 pamphlets, and 235 articles, up to 1984. He was still writing before his death in March 1992. 12) Including, in the US, serialization in The Readers' Digest. 13) For details on the CIA's role and purpose in setting up the Congress for Cultural Freedom, see The CIA: A Forgotten History, by William Blum (London, 1986). 14) See Seymour Martin Lipset, Political Man (London, 1960), pp. 403-5. 15) An indication of the influence of Hayek is the way that Ian Gilmour, a leading Conservative critic of Margaret Thatcher in his critical account of the Thatcher Governments, refers to the ideas of Hayek whenever he is in fact criticizing the policies of Mrs Thatcher. In the Conservative circles for which he was writing, the association was sufficiently close for such a code to be effective. 16) Philosophers, economists, historians and sociologists met twice a month in Mises' office for discussion with important men from the business and banking community. Sometimes, with the help of the US-based Rockefeller Foundation, an international scholar or political leader might also participate. 17) Another participant in the Mises seminar, Fritz Machlup, conveys the combative character of Hayek's intellectual mentor in these years:
Mises fought interventionism while almost everybody was in favour of some government action against the 'evil' consequences of laissez-faire. Mises fought inflationism while a large majority of people were convinced that only a courageous expansion of money, credit and governmental budgets could secure prosperity, full employment and economic growth. Mises fought socialism in all its forms, while most intellectuals had written off capitalism as a decaying system to be replaced either peacefully or by revolution, by socialism or by communism. Mises fought coercive egalitarianism while every 'high-minded citizen' thought that social justice required redistribution of wealth and/or income. Mises fought government supported trade unionism, while progressive professors of political science tepresented increasing power of labour unions as an essential ingredient of democracy.
Machlup adds that 'Hayek became the most forceful exponent and defender of the economic and political views of Von Mises.' See 'Ludwig Von Mises: The Academic Scholar Who Would Not Compromise', Wirtschaftspolitische Blatter, 28, 4 (1981), pp. 6-13; quoted in 'Origins of Market Fetishism', by Kari Polanyi-Levitt and Marguerite Medell, Monthly Review, June 1989. 18) Even in private, the privatseminars' debates were electrified by a sense of the impending downfall of an old order, and therefore an awareness of strange dangers and unaccustomed possibilities. 'Those who were most sensitive to all this because so ambiguously poised between civilization and anti-Semitism, between privilege and ignominious rejection were the intellectual Jews, along with the old patrician families, a stratum of cultivated bureaucrats and the elite of the Social Democratic Workers Party.' Ernst Fischer, the Hegelian philosopher, here describe exactly the mixed social strata from which the Von Mises seminar drew its participants. See Opposing Man (New York, 1974). 19) Carl Schorske, in his classic evocation of fin-de-siecle Vienna, captures the way the Austrian Liberals' every move produced its opposite with his description of the cultural dissonances surrounding the disintegration of the Austro-Hungarian empire: 'A German nationalism articulated against aristocratic cosmopolitans was answered by Slavic patriots clamouring for autonomy. When the liberals soft-pedalled their Germanism in the interest of the multi-national state, they were branded as traitors to nationalism by an anti-liberal petite bourgeoisie. Laissez-faire, devised to free the economy from the fetters of the past, called forth the Marxist revolutionaries of the future.' See Karl Schorske, Fin-de-Siecle Vienna, Politics and Culture (London, 1961). 20) The socialization programme proposed by Bauer and Schumpeter in effect made the debates of the privatseminar public. It was this programme which provoked Mises' public polemic against the possibility of socialism. 21) This subjectivist theory of value was in opposition to classical economic theory, which understood value as governed by past resource costs, with varying inter pretations and understandings of the relative importance of the resources of labour, capital, land and raw materials. Neo-classical economic theory developing frop the work of Alfred Marshall, notably his Principles of Economic Theory (London, 1920), understood value as jointly determined by physical costs and utility (a more abstract subjectivity than that proposed by Menger). Therefore, according to Marshall, there has to be some means of allocating limited resources amongst an infinite variety of wants. 22) 'Value is the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs' (Menger's The Principles of Economics, introduced by Frederick Hayek, first published in 1871). Individuals should therefore be able to rank all goods and services in terms of their own set of personal preferences. This subjective understanding of value became the basic premiss of the Austrian School. Prices are established by economic actors making valuations of goods and services and calculating how best to spend their incomes according to their preferences. Price according to Menger is merely 'a symptom of an economic equilibrium between the economies of individuals'. (For a useful summary of Menger's work see The New Palgarve Dictionary of Economics, eds Eatwell, Milgate and Newman (London, 1987).) 23) For useful summaries of 'the calculation debate' see Karen Vaughn, 'Economic Calculation Under Socialism: The Austrian Contribution', Economic Inquiry, (1980), pp. 535-54; Don Lavoie, Rivalry and Central Planning, (Cambridge, 1985); and also, from a critical socialist point of view, Robin Blackburn, 'Finde-Siecle: Socialism after the Crash', in After the Fall, ed. Robin Blackburn (London, 1991); Andrew Gamble, 'Capitalism or Barbarism: The Austrian Critique of Socialism', Socialist Register, 1985/6. 24) See particularly writers building on the work of Karl Polanyi - especially The Great Transformation (London, 1944) - for instance, G. Hodgson, Economics and Institutions (Cambridge, 1988). 25) 'The Use of Knowledge in Society', in Individualism and Economic Order (London, 1949; first publ. 1945), pp. 77-8. 26) 'The Use of Knowledge in Society', p. 80. 27) 'The Use of Knowledge in Society'. 28) The latter are set our most fully in The Constitution of Liberty (London, 1960). 29) Hayek, 'The Use of Knowledge in Society', p. 79. 30) 'The Use of Knowledge in Society', p. 88. 31) Individualism and Economic Order, p. 14. 32) Ludwig Wittgenstein, Philosophical Investigations (Oxford, 1963). 33) This is documented very clearly as far as Lenin is concerned by Carmen ClaudinUrondo, in Lenin and the Cultural Revolution (Sussex, 1977). In the course of my wotk on Hayek I had several very helpful discussions with Mary Falmer, then a graduate and teacher at Sussex University. She died tragically, and avoidably, in spring 1993. I want to record my gratitude and respect for her work on Hayek. I hope that even though it is unfinished, it will be published.