Hayek on How Attempts to “Correct” the Market Lead to its Destruction

In my post yesterday, I partially exonerated Henry Farrell for defending Tony Judt’s over-the-top statement that F. A. Hayek was explicit that:

if you begin with welfare policies of any sort — directing individuals, taxing for social ends, engineering the outcomes of market relationships — you will end up with Hitler.

This seems over the top, because we know that Hayek, unlike many more extreme libertarians — Hayek was not really a libertarian – of either Austrian or non-Austrian pedigree, was willing to support a variety of governmental income-maintenance and social-insurance measures that could plausibly be described as mildly welfare-statist. But Farrell subsequently explained that Hayek’s support for certain types of welfare-statist measures was beside the point, because Hayek had nevertheless argued that welfare-statist measures not carefully devised to satisfy Hayek’s own liberal criteria would indeed lead to a totalitarian result. Farrell cited Hayek’s introduction to the 1956 American edition of The Road to Serfdom in which he maintained that experience under the post-World War II Labour government had undermined British liberties and confirmed the warnings that he had voiced twelve years earlier. To Farrell, this demonstrated that Hayek was indeed making the argument that Judt attributed to him. I countered that Hayek had been sloppy in his 1956 introduction to The Road to Serfdom, and that the argument of the introduction was a tentative and contingent argument based on vague sociological assumptions in contrast to the logically more rigorous analysis on which the argument of The Road to Serfdom rested. The unfairness was to conflate uncritically two different kinds of argument and to ascribe to Hayek’s later warning about a possible slippery slope the same logical necessity that he attached to the earlier argument.

My admittedly equivocal response elicited a comment on my post from the ever-vigilant Greg Ransom rebuking me for not going beyond Hayek’s 1956 introduction to The Road to Serfdom,  ignoring Hayek’s later work in which he more rigorously, and in greater detail, worked out his theoretical view on the consequences of government intervention in the market order. In a similar vein, Ryan Murphy on his blog dismisses The Road to Serfdom as a popular tract, directing our attention to Hayek’s later work, especially his less well-known Law, Legislation Liberty. To be sure, Ransom and Murphy make a valid point, but I am not so sure that it tends to undermine the charge against Hayek made by Judt and endorsed by Farrell, which is what I was concerned with.

Consider the following two paragraphs from volume 2 of Law, Legislation and Liberty (chapter 11, pp. 142-43 section heading: “Attempts to ‘correct’ the order of the market lead to its destruction”):

The current endeavour to rely on a spontaneous order corrected according to principles of justice amounts to an attempt to have the best of two worlds which are mutually incompatible. Perhaps an absolute ruler, wholly independent of public opinion, might confine himself to mitigating the hardships of the more unfortunate ones by isolated acts of intervention and let a spontaneous order determine the positions of the rest. And it is certainly possible to take entirely out of the market process those who cannot adequately maintain themselves on the market and support them by means set aside for the purpose. For a person at the beginning of an uncertain career, and for his children, it might even be perfectly rational to agree that all should insure for a minimum of sustenance in such an eventuality. But a government dependent on public opinion, and particularly a democracy, will not be able to confine such attempts to supplement the market to the mitigation of the lot of the poorest. Whether it intends to let itself be guided by principles or not, it is in fact, if it has the power to do so, certain [strong word] to be driven on by the principles implicit in the precedent it sets. By the measures it takes it will produce opinions and set standards which will force it to continue on the course on which it has embarked.

It is possible to “correct” an order only by assuring that the principles on which it rests are consistently applied, but not by applying to some part of the whole principles which do not apply to the rest. As it is the essence of justice that the same principles are universally applied, it requires that government assist particular groups only in conditions in which it is prepared to act on the same principle in all similar instances.

Hayek here produced a profound and subtle argument, far more cogent and compelling than his argument in the 1956 introduction to The Road to Serfdom. But, if we take him at his word, departing from the liberal principle of non-intervention in the outcomes of the market, except in ways that are completely external to the operation of the market order, is certain (Hayek’s word) to cause the market order to be undermined. But that is the argument of a “remorseless logician” as Keynes, in an unfortunate fit of pique, once disparagingly referred to Hayek. Democratic governments and democratic decision-making are not bound by the rules of individual rationality to produce a set of decisions that are fully consistent. Indeed, Kenneth Arrow, another Nobel laureate, proved a theorem that more or less asserts the logical impossibility of devising a system of collective decision making governed by democratic principles like majority rule, that would produce consistent, i.e., rational, decisions. Hayek, who was often a critic of excessive attachment to formal principles of rationality, would have done well to take a more skeptical attitude toward the consistency of democratic decision-making processes than he displayed in this passage.  Indeed, this whole discussion is a bundle of logical contradictions and antinomies that must be sorted out ever so patiently.

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21 Responses to “Hayek on How Attempts to “Correct” the Market Lead to its Destruction”

  1. 1 rhmurphy May 22, 2012 at 9:15 pm

    This is what I was referring to as “stop following the logic before things get really bad.” If you pursue social justice only up to a point and then drop it (as has happened in Sweden), then you are okay. But if you keep following the logic of what the social reformers argued when confronted with the harsh reality of the market order, you are down the road to serfdom.

  2. 2 Greg Ransom May 22, 2012 at 10:15 pm

    David, my rebuke was directed not at you, but at Henry Farrell and others, such as Brad DeLong and Mark Thomas, who love to advertise and pile on the kind of red meat marginalization offered up by Farrell.

    I accept that there was a measure of exaggeration and hand-waving in parts of Hayek’s breezy 1956 preface — but the preface also contains a valid point and a valid empirical observation, an observation which has become only increasingly relevant to discussions of welfare provisions and the redistributive state.

    Now, as regards the passage from L, L & L, I don’t see that your attempted limping of Hayek’s point captures what he actually says. What Hayek says and what you say aren’t the same,

  3. 3 Julian Janssen May 23, 2012 at 1:14 am

    Generally, I don’t go for the slippery slope arguments, which seems to be the idea of the road to serfdom. I do not buy the idea that some degree of planning within the framework of a social democratic welfare state leads to any sort of extremist dystopia (presumably of “central planning” in a totalitarian state?), even by its own logic. Planning in such a society is guided by a representative democratic state, where the ethos is cooperation among the “stakeholders”, which is basically collaboration between the elements of organized labor and private industry.

    If such a development actually leads to a more comprehensively planned society, each step along the path could be an endpoint. Honestly, I don’t see the social democratic parties pushing for central planning, just better planned interventions and some guidance of market forces toward more desirable social outcomes.

  4. 4 Bill Woolsey May 23, 2012 at 5:11 am

    Does government provision of chairity out of tax funds lead to government trying to make sure that the income of English professors is properly proportioned to doctors, football stars, CEO’s, or entreprenuers?

    But when rationalize the government provision of chairity as a matter of justice, with the failure to make provision for the poor being unjust to them, there is a problem.

    If the lack of food for the poor is “unjust,” then what about the English professors not being able to afford Mercedes?

    Anyway, trying to make sure that everyone’s income is just results in the destruction of the market economy.

    I think the reason why the mainstream libertarian support for a social safety net, which can be seen in Hayek, Friedman, and Buchanan, is basically ingnored by the left is because they very much are interested in correcting the injustice to the English professors. Or the injustice to the affluent lawyers by the entrepreneurs, and so on. Making provision to the trully needy isn’t really the point. The trully needy are just an excuse.

    From a narrow political point, there is also correcting the “injustice” done to relatively well off industrial workers by their employers. If our theory doesn’t even leave room for redistribution to the “working class,” what is the point?

  5. 5 Not a Libertarian May 23, 2012 at 5:12 am

    Surely the bottom-line is that Hayek thinks and argues that the actually existing welfare state (1930s on to today) will lead to command planning? I don’t think anyone denies that Hayek favored a guaranteed minimum income/safety net.

  6. 6 Tas von Gleichen May 23, 2012 at 5:26 am

    Great book that you are quoting from “law, legislation, and liberty”. One of his best works.

  7. 7 steve2 May 23, 2012 at 6:54 am

    “I think the reason why the mainstream libertarian support for a social safety net, which can be seen in Hayek, Friedman, and Buchanan, is basically ingnored by the left is because they very much are interested in correcting the injustice to the English professors.”

    No. It is because it no longer exists. Hayek’s support of a safety net is sometimes, no often, acknowledged by libertarian writers. Actually advocating for a safety net is so rarely done by libertarian writers that I cannot remember the last time I saw such.


  8. 8 Gepap May 23, 2012 at 7:32 am

    People are full of internal contradictions, and our preferences are always contextual – we demand that swift and brutal justice be carried out against bad people, unless they are our friends or loved ones, and then we expect mercy and understanding. We want to be left alone, but not to be alone. Sometimes we want more taste, sometimes we want less filing. Any attempt to implement policies driven by some inflexible notion of some single value being paramount will fail. I hope economists come to an understanding of this reality soon, though I don’t know if it can ever be simplified enough to plop into some simple grand model.

  9. 9 Rick Kane May 23, 2012 at 8:10 am

    Again, just as point of historical fact, the great totalitarian dictatorships 20th century emerged not from social democratic states, but from nations that were, or recently had been, monarchies or subjected foreign colonoies undergoing the radical sociological transition from feudal-peasant societies to industrial bourgeos societies (Russia, Germany, China, & Vietnam). Judt uses a questionable literary trope (Hitler!!), to make a legitimate point, that the empirical facts of the situation do not support Hayke or the libertairans.

  10. 10 Greg Ransom May 23, 2012 at 8:41 am

    I post something about every month on my Twitter feed from Britain on the breakdown of British character, esp. among the most paternalistically cradled of the population.

    Hayek was from a generation where this sort of thing was shocking and alarming.

    Today we take it for granted.

    Mindless unethical behavior from the most paternalistically cradled is taken for granted.

    We aren’t shocked or surprised when Drudge posts video or photos of the violence or of the victims.

    And the unending leftist / redistributionist / resource demanding street violence in Europe and America is an increasing part of the same picture.

    It’s part of the modern breakdown, which even the most sheltered academic or housewife knows about.

    For decades there have been books written on this stuff, magazine articles contemplating the issue.

    And some measure of welfare reform hoping to address some of the basic problems.

    I have no idea why leftists pretend to not to see the multi-ton red elephant in the living room, besides the contemptible and tired choice of their religion like ideology over truth.

    The thing that Hayek got wrong in his 1956 preface was his false empirical claim that Hot Socialism was dead.

    It wasn’t even dead in Europe, Britain or America, much less Cuba, North Korea, Vietnam, and elsewhere.

  11. 11 David Glasner May 23, 2012 at 10:38 am

    rhmurphy, And my point is that in a democracy things happen in a messy piecemeal haphazard fashion and rarely in well conceived logically self-consistent fashion. So the fact that a democracy enacts a measure aimed at lessening one perceived problem doesn’t necessarily increase the likelihood that it will enact another measure aimed at lessening another perceived problem. That’s the slippery slope argument that Hayek seemed to be working with in his warnings about the welfare state. His argument in the Road to Serfdom was not a slippery slope argument.

    Greg, Trust me no one is going to marginalize Hayek. I am not sure what the correct way is to read the passage from L, L & L that I quoted. Why don’t you share your thoughts on how to read it correctly?

    Julian, You are correct that there are few social democrats any more who advocate full-scale central planning. That was not the case when Hayek wrote The Road to Serfdom, so his argument at that time was both correct and necessary, and it was not, or only to a limited degree, a slippery slope argument. The abandonment of central planning as an ideal is in no small measure a consequence of Hayek’s argument in The Road to Serfdom, which no one has successfully challenged. But it is fair to point out that Hayek was not as careful as he should have been in distinguishing between the different arguments that he was making about central planning and welfare-state measures and how the latter might lead to the former. That lack of care provides Judt et al. with some grounds on which to make the charge that Hayek held that any sort of welfare-state intervention would lead to totalitarianism.

    Bill, I think the motives for redistributionist measures come from all over the map. Boeing wants subsidies from the Export-Import bank, corn growers want mandates to put ethanol in gasoline. Why do you begrudge English professors a chance to get theirs?

    Not a Libertarian, I actually don’t think that that is what he thought. I think that he had in mind a more contingent less categorical argument. If I had nothing else to do, I could probably reconstruct the argument he wanted to make, but that effort would take more time and effort than I care to devote to it, so I am just kibitzing from the sidelines. But I concede that Hayek wrote a lot that could be construed as making a categorical argument.

    Tas, You are right, Law, Legislation and Liberty is a truly great book. It is less accessible than The Constitution of Liberty (not an easy read, either), but one marvels at how almost his entire life’s work is distilled into those three very powerful volumes.

    steve2, My impression is that there has been a real shift in the libertarian mainstream towards increasingly extreme positions. But I really don’t pay that much attention to libertarians.

    Gepap, Well said.

    Rich, Actually my impression is that Germany, under Bismarck, did institute many social-welfare measures, part of an imperialistic strategy of co-opting working-class political support for a militaristic foreign policy.

  12. 12 Becky Hargrove May 23, 2012 at 2:37 pm

    Hayek also – in his later years – witnessed a world which came to rely more and more upon human services and individual skill. Nonetheless, that reality contrasted with the growing view that the individual was less and less a part of actual wealth. I give Hayek credit for staying sane in the face of such a paradox.

  13. 13 Bernie Lee May 24, 2012 at 1:35 pm

    I don’t usually frequent the site below, but Bruce Caldwell argues that RTS is only about command planning. Since when has partial planning and command planning been the same beast?

    Seriously, all should check out the link below: A Hayek 1945 piece reflecting on his message in RTS.


    ps – I love David’s CUP book on free banking – it is good to see someone praising Fullarton (author of a much under-rated book IMHO!)

  14. 14 Keith May 24, 2012 at 5:40 pm

    I live in Britain; I would like to know where this mythical British “character” is to be found! This is unhistorical quazi racist hog wash. All the bad conduct you can think of has been around for centuries every where. IN the middle ages Henry 2 set up the jury courts as his subjects petitioned him for protection from the sturdy drunk teenagers running amok and disrespecting their elders, the vagabonds roving the realm, and unemployed Knights harassing the common man on their return from crusade. Von Hayek seems to have been very keen on Pinochet overthrowing left wing governments with Kissingers support. Installing Fascists is a odd way to show your belief in Liberal values. In 1931 a lot of perfectly moderate people suspected that Capitalism was falling apart and a left wing alternative was the only hope for avoiding universal beggary. Many have qualms today about the amazing financial mess produced by private greed. Or have you not noticed how banks throw away billions on mistaken trades? Some sort of realistic perspective is needed when discussing Hayek and other people who cannot distinguish social democracy from Stalinist Dictatorships.

  15. 15 Greg Ransom May 25, 2012 at 12:13 pm

    Farrell’s absurd notion of “scholarship” can be witnessed in his false & absurd account of “Hayek’s position” on discursive “collective” enterprises — Hayek explicitly says the exact opposite of the position Farrell ascribes to Hayek, i.e. Hayek says that the advance of knowledge & science and the growth of reason comes via people interacting — in large measure discursively — each from somewhat differing perspective.

    Farrell’s “scholarship” consists in reading _one_ paper written by Hayek, his 1945 paper on how prices provide signals, when Hayek produced well over 100 papers and an armful of books, many of them presenting the opposite of the view Farrell puts upon Hayek.

    We’ve got a genuine problem of scholarly practice here.

    I wrote a conference paper years ago pointing out how the peer reviewed academic literature if chock full of fall accounts of Hayek and his work.

    The practice continues.

  16. 16 Greg Ransom May 25, 2012 at 12:14 pm

    Farrell’s new paper can be found on his web site.

  17. 17 Bernie May 26, 2012 at 12:16 pm

    I’d be interested in seeing your paper Greg. Where was it published? Thanks

    I’ll also read the Farrell paper you mention.

  18. 18 David Glasner June 2, 2012 at 9:50 pm

    Becky, One of his many admirable qualities.

    Bernie, Thanks for the link, and thanks for the kinds words about my book. I found out when I read Perry Mehrling’s excellent biography that Fischer Black was also a fan of Fullarton.

    Keith, I agree that Hayek seems to have had an unfortunate blind spot regarding Pinochet, but it is not fair to reject his work based on one mistake. And it was certainly not Hayek who invented the idea that there is something called the “British character.” Lots of perfectly respectable people have believed that there are certain character traits that are (or used to be) very commonly found among the British.

    Greg, Thanks for the update

  1. 1 Economist's View: Links for 2012-05-23 Trackback on May 23, 2012 at 12:08 am
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About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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