A Must Read New Book on Friedrich Hayek

Eamonn Butler: “Friedrich Hayek: the ideas and influence of the libertarian economist”, 

Harriman House: Petersfield, Hampshire, in association with the Institute of Economic Affairs, London

ISBN 978-0857191755. £14.99.

The publisher describes Eamonn Butler’s “Friedrich Hayek” as “a breath of intellectual fresh air”.  I concur, for Butler is refreshingly easy to read.   He is a brilliant communicator and needs to be to compress Hayek’s many volumes of his lifetime’s writings into 146 pages and hold his readers’ attention. Scholars familiar with Hayek’s works and general readers exposed to them for the first time will find much here worthy of their attention.

Friedrich Hayek (1899-1992) lived through the turbulent years of two world wars, the Russian revolution and its socialist experiments, the great inflation in Weimar Germany, the rise of the Nazis to power, the Austrian “Anschluss” and the Holocaust, the ensuing Cold War from the expansion of communism in Eastern Europe and Asia, the failures of state planning by Western social-democratic governments, and the fall of the Berlin Wall.  Not surprisingly, perhaps, much of Hayek’s intellectual work focussed on the great socialist ‘mistake’ of central planning (‘The Road to Serfdom’, 1944) versus the case for liberty and free markets (‘The Constitution of Liberty’, 1960.

Holding to his unfashionable convictions for decades led Hayek into intellectual isolation. He was, albeit, politely tolerated rather than listened to by faculty in the universities he taught at. Mainstream economics passed him by during the Keynesian years.  Nobody, for example, mentioned him during my undergraduate years from 1965-69. More is the pity.  I found much in Butler’s book that explained a lot about mid-twentieth-century controversies between Keynes’s and Friedman’s economics, which I would have understood better if I had read him at university. 

Hayek contributed original thinking to philosophy and to neuroscience, which brought him close to Adam Smith’s works in the 18^th century, such as his theories about the emergence of morality from childhood (‘self command’) and as an adult (the ‘impartial spectator’), the origins of language and how knowledge evolves, and of course, the origins of the wealth of nations.

Hayek’s intellectual isolation (described by Eamonn Butler as his “wilderness years”) brought a few like-minded academics and, crucially, centre-right politicians (Thatcher and Reagan) into touch with him.  Think tanks were funded to spread debate on the application of Hayek’s ideas, such as the Institute of Economic Affairs, which offered a barrage of pamphlets on the unsuccessful state planning attempted by Labour governments.  Later, influenced by Hayek’s ideas, Eamonn Butler founded the Adam Smith Institute (disclosure: of which I am a Fellow) to promote interest in free-market ideas applied to a wide-ranging critical commentary on both conservative and labour governments.

Hayek’s life and legacy testify to the lasting power of ideas over the fleeting influence of individual politicians who, because they misunderstand the dynamics of human societies, normally promote the wrong ideas. Radicals of Left and Right believe they can change society by capturing the legislature to correct what they regard as society’s systemic errors. Hayek noted, sardonically, that if designed changes tried to change the world, we cannot be sure that the outcome would please either its designers or those affected by their changes.

Hayek insisted that human institutions throughout history were the result of countless individual human actions, but not from anyone’s deliberate designs.  Yet while human institutions from the primitive to the most complex have some sort of order within them, it does not follow that they were or can be deliberately invented.  Hayek called the process through which societies formed over time examples of “spontaneous order”. Adam Smith remarked that a society of murderers and robbers would have to refrain from murdering or robbing each other. Rules of justice evolve and vary, and those societies that manage spontaneously to absorb evolutionary changes in their rules tend to grow more successfully that those that do not.  A group of hunters evolve rules for sharing the hunt and by staying small in number (30 perhaps) they work within the limits of mutual trust.  The rules of a society of millions are much more complex and history shows how the laws of justice evolve and become more numerous over time (the Ten Commandments were never enough).  Hayek affirmed that a free society was not one without rules or government – rulers and citizens remain constrained by the predictable rule of law, not the whims of designers.

It is in his accounts of why markets flourish naturally that Hayek is most persuasive, and Butler is at his best in showing the importance of this side of Hayek’s work.  This means discussing socialism, which at first glance is a debate about a past that is now over. However, lessons from the endemic failures of socialism are in excellent contrast to the superior results of market capitalism, and Butler develops the contrast clearly, highlighting the untold damage done by the rising tide of deliberate rule changes that eventually clog the operations of markets, restraining them from their full potential.

Socialism is a mistaken response to how societies evolve and work.   The “battle lines” may have changed from what they were in the 19^th century when socialism was an untried idea, but having been tried and failed in the 20^th century, the central problem remains today: how does a central agency manage a complex economy? Socialism necessarily means dispensing with an existing market capitalism, which whatever else is regarded as dispensable, the visible success of markets that grew within the margins of the millennia-old human experiences since our ancestors left the forest and plains to become shepherds and farmers 10,000 years ago, suggests that markets are dispensed with at an enormous cost.  We can contrast the experience of China and Britain since the 15^th century; China’s government deliberately ended foreign trade despite its massive technological lead.  Meanwhile individuals in Britain continued trading and eventually re-discovered the ‘lost’ technologies of China which led to the spread of local markets, science and unheard of new technologies.  Market capitalism flourishes under conditions of constitutional liberty more than totalitarian socialism can flourish by destroying markets. 

In founding permanent settlements, where hunting, scavenging and farming were necessarily less important, a new way to subsistence was found spontaneously.  This was through markets, where individuals ‘exchange’ on the simple rule that each individual, household, community or locality exchanged things they valued less for that which they valued more.  This is no zero sum rule where only one trader benefits from the exchange; each offers what they value less to gain what they value more from those who voluntarily offer to exchange with them for something they value more.  Markets allow both parties to gain, which historically was a completely new set of rules, discovered spontaneously and not invented by anyone. What works once, they try again, and again. Voluntary exchange in turn, writes Butler, “allowed people to specialise in producing particular goods and services for exchange; they could then develop their skills and tools and so make their production more efficient.  And this greater productivity generated greater [mutual] wealth, on which the population could grow” (p 32).

This also created the new morality different from just accepting what their “betters” allowed them for their lifelong slavish servitude.  The “old morality” was challenged by the “new free exchange morality” and, eventually, the new market morality broke through, first in Britain, later in Europe and North America.  It is now spreading and deepening by countries ditching socialism and mimicking capitalist markets across a developing world, like India, China, and Brazil. The historical results under markets are astonishing.  The majority of labourers, living in poverty under the rule of warlords, lived their very short lives on under $1 a day (in occasional “good times” on as much as $3 a day).  Unlike their ancestors, who were dependent on a barely changing economics for millennia, those few living around 1800 in a corner of North West Europe, began to experience the effects of the new market capitalism as it grew and spread, and which gradually lifted the per capita income of their descendants to upwards of $100 a day by the 21^st century. No such results were experienced in the historic past for any large proportion of the world’s populations, certainly not by rival socialist economic systems, nor by mercantile, hyper-protected economies, as have been tried throughout the recent past.

Markets work by the very visible price system that spurs people to produce what consumers’ want, which consumers may choose to buy voluntarily among competing offers of what is available.  Prices “encapsulate all the information that producers and consumers need” to produce what consumers might want, and for consumers to select from what producers discover is, or can be, made available for sale at a profit.  No central planning authority, whatever their intentions, can possibly know enough about the dispersed details by which of billions of products, and their technologies work to satisfy the objectives of the billions of individuals close to the way markets manage to answer those tasks daily.  Planning authorities, at best, fail to reach their own targets, even with the most powerful computers ever built. Mostly they don’t even manage to match market-produced products and services in quality or quantity, manifested in the one-way dash to emigrate from poorer non-market countries into the market countries.  These desperate people would rather be a minority of poor in a rich country than remain part of the majority of poor in a poor country.  The famous “Iron Curtain”, we remember, was primarily to keep its citizens inside the Soviet Union rather than to keep foreigners out.

Hayek showed why socialist economies are made obsolete by the their inability to acquire sufficient knowledge even to produce a simple product by central command, without creating massive distortions to the production of other goods. Markets undertake such tasks all the time because they fit well with the dispersed knowledge shown by visible prices along the interlinked supply chains that make up competitive market economies. Profit rewards those who discover better ways of producing what consumers are prepared to pay for.  No central plan, no amount of computational genius, no advanced mathematics, can capture for a moment the dispersed knowledge or shifting tastes that constitutes what happens across whole economies.  Hayek called the belief among the Left that it could be done by planners their “fatal conceit”.  He agreed with Adam Smith that market prices gravitate towards but never need to settle at an ideal balance.

Hayek, of course, wrote about much more and this short book covers Hayek’s range brilliantly.  I recommend Eamonn Butler’s “Friedrich Hayek: the ideas and influence of a libertarian economist” without hesitation. I only wish it had been available to me fifty years ago when I had to waste the next fifteen years reading and teaching Keynesian public finance and state-funded economic development.

Gavin Kennedy Emeritus Professor, Edinburgh Business School, Heriot-Watt University