Published in March 1996 issue of Prospect Magazine
There has always been a tendency for people on the centre and left of politics to belittle the achievements of Friedrich Hayek, the great Austrian-British economist. He is usually regarded as a right wing ideologue. This is a pity, because his work is rich in insight, and has a lot to teach those who do not share his preconceptions. His reputation as an ideologue was established almost as soon as he arrived in England to take up a chair in economics at the LSE in 1931. Lionel Robbins recruited him to help counter the influence of Keynes. He did cross swords academically with Keynes and Sraffa over monetary theory, but surprisingly made no public response to the publication of Keynes’s General Theory of Employment, Interest, and Money, the book which launched the Keynesian revolution. Hayek later said he he was reluctant to spend time criticising Keynes when Keynes changed his mind so often. During the war, he began work on the book that became The Road to Serfdom. Published in 1944, when Hayek was 45, it made a huge impact as a radical attack on the new social democratic consensus. Its success gave him a public prominence which enabled him to spend the rest of his life actively reviving and restating the principles of classical liberalism. He faded from attention in the 1950s and 1960s, but several strands of the new right acknowledged Hayek as their inspiration in the 1970s and 1980s. Thatcher made him a Companion of Honour. He continued to be vilified, however, by many social and political theorists for his argument that even the mildest measures of state intervention risked pushing a society towards totalitarianism. It is true that Hayek saw the world in simplified terms, contrasting a tradition of true liberalism, running through Smith, de Tocqueville, and Acton, with the false liberalism of Bentham, Mill and the New Liberals. But his ideas have recently attracted attention in the social sciences, especially his concept of evolution and spontaneous order, and his theory of knowledge. Hayek revived the anti-rationalist, sceptical tradition of the Scottish political economists, Adam Smith and Adam Ferguson, and insisted on its importance for understanding social evolution and change. In this tradition, order arises spontaneously through the interactions of individual agents. Certain institutions like language, law, and the market are established in this way. Not designed by anyone, they occur in an unplanned and unforeseen manner. Once established, they co-ordinate social interaction and allow other institutions to develop. Hayek persistently attacks constructivist thinking—the idea that only rationally designed changes can be effective. Hayek’s “catallaxy” is an order based on repeated exchanges and mutual adjustment of interests and plans by active agents. Hayek does not suggest that a catallaxy achieves an equilibrium in the economists’ sense of Pareto optimality, in which no individual can be made better off without making someone else worse off. But he argues that a catallaxy co-ordinates social action in manner unrivalled by planning. He accepts the need for “made orders”—particularly the state—but he gives priority to catallaxies. The political imperative is to ensure that catallaxies, upon which the co-ordination of modern societies are heavily dependent, evolve effectively. If they are interfered with, or suppressed, the result will be social dislocation. Socialist planning in the 20th century assumed that an order could be rationally designed with outcomes superior to those of an order which had arisen spontaneously. But those designing the order would have to have the knowledge to perform the task. Hayek’s most important contribution was his explanation of why they would fail. Hayek confronted the rationalist “perfect knowledge” assumption, arguing that perfect knowledge never existed, and that to understand how the economy worked it was necessary to assume that knowledge was fragmented and localised. Constructivist “central planning boards” would never perform as hoped, because planners would never be able to acquire local agents’ level of knowledge to set prices. This has radical implications. There are strict limits to what can be known centrally and therefore what can be attempted centrally. The task of government becomes to ensure an institutional framework in which the knowledge of individual agents can be fully utilised. It has implications not only for the organisation of government, but for schools, hospitals, and companies. It provides a different way of thinking about institutions and leadership. The logic of Hayek’s approach, even if he himself does not always follow it, is that organisations require constant reform to allow the optimal use of the knowledge of each individual in decision-making. Centralist models are far more error prone, and so less efficient. Since knowledge is imperfect and there is no tendency towards equilibrium, some agents must be entrepreneurial if the economy and society are not to stagnate. All catallaxies are discovery processes and, to function properly, require entrepreneurs to take risks and launch new ideas. The problem is how to ensure that catallaxies are as open and flexible as possible. Large inequalities of power, property and status are likely to lead to rigid and stratified outcomes. The implication is egalitarian. Hayek argued that market outcomes would always be inegalitarian, and he was strongly opposed to redistribution in the name of social justice. But within his own thought there is a case for spreading power and property rights, to create a dynamic society. In Hirschman’s terms, Hayek always favoured exit over voice. Intellectuals on the left have generally favoured voice over exit. But both strategies are egalitarian strategies; their use constrains the exercise of power. Catallaxies cannot, however, solve all problems. There are crises, such as famines, wars or environmental catastrophes, where the speed of response that a made order can provide is essential. There are problems of public goods and externalities which cannot easily be handled within catallaxies, and may require government intervention. While wishing to restrict the role of government to an absolute minimum, Hayek also sanctioned several different areas of government intervention. Much of the growth of government in the 20th century is not in fact a made order, an abstract design imposed from above, but an evolutionary growth, sparked by the interactions of many groups and individuals. Modern government itself is a catallaxy, a network of exchange and interdependencies. Hayek offers a way of thinking about how the state can assist in the process of institutional change, without imposing its own designs. Instead, the state sets the framework and uses trial and error to establish new types of organisation. Since government cannot lay claim to any special enlightenment or superior wisdom, there may also be a case for enabling well resourced foundations or trusts to pursue certain long term aims free from the short-termism of politicians. The advantage of a Hayekian approach for any government, but particularly a government of the left which is committed to dispersing power and wealth more widely, is that it offers ways both of identifying the problems which existing catallaxies are not tackling, and an anti-rationalist insight into how in the long run stable orders are created. The steering role for the state does not preclude changing the parameters within which catallaxies operate, but the detailed outcomes would be left to the process of catallaxy. Hayek’s insights into these processes make him one of the great social thinkers of the 20th century, and too important to be monopolised by the right.