Rudd vs Hayek

"Let’s not be misty-eyed about Friedrich Hayek" says Kevin Rudd, "he taught (and modern Liberals believe) that there is no such thing as social justice and that the only dignity to be delivered to human beings is through their emancipation by free markets untrammelled by the state."

In an opinion piece in yesterday’s Sydney Morning Herald, Rudd attacks Hayek’s followers as ‘market fundamentalists’ who care more about the freedom of markets than they do about the well being of people. And in a recent article for The Monthly (pdf), Rudd draws on David McKnight’s Beyond Right and Left to argue that Hayek’s free market policies are turning human beings into commodities and crushing the family.

Noel Pearson disagrees. While not exactly misty-eyed about Hayek, he does think that Rudd has chosen the wrong target. In an opinion piece for the Australian he writes:

Hayek will never be a good target for demonising because people across the political spectrum will always acknowledge that he reminded the world about the importance of some aspects of the liberal heritage that were under-valued for a large part of the 20th century. Not only conservatives, but also social democrats have had to capitulate to some of Hayek’s liberal insights.

Pearson has a point. Even David McKnight concedes that Hayek’s argument in favour of markets is "surprisingly subtle and perceptive" (p 67). But as McKnight also points out, Hayek’s arguments don’t always support his policy prescriptions. Hayek succeeded in showing that markets were more efficient than state planning and that attempting to run the economy so that everyone got what they deserved would end in disaster. But he was never able to show was that moderate social democracy was a serious threat to prosperity and freedom.

At Catallaxy, Jason Soon thinks Rudd’s criticism of Hayek is unfair:

Hayek was among the most moderate of the libertarian thinkers and… his critique of social justice did not extend to an argument against having a social safety net of some kind. The two concepts of using the State to alleviate poverty and using the State to promote social justice in the sense of some ideal distribution of income and wealth are quite distinct.

As Jason says, Hayek rejected radical libertarianism. In the Constitution of Liberty he wrote, "though a few theorists have demanded that the activities of government should be limited to the maintenance of law and order, such a stand cannot be justified by the principle of liberty" (p 257). He went on to say that:

All modern governments have made provision for the indigent, the unfortunate, and disabled and have concerned themselves with questions of health and the dissemination of knowledge. There is no reason why the volume of these pure service activities should not increase with the general growth of wealth. There are common needs that can be satisfied only by collective action and which can be thus provided for without restricting individual liberty (p 257).

Hayek had no in-principle objection to governments raising taxes in order to pay for income support, healthcare or education. As long as these services enabled citizens to pursue their own private goals there was no threat to liberty. The problem arose when governments coerced citizens into pursuing the goals of a political elite.

What Hayek opposed wasn’t the welfare state, it was social justice (Rudd is right about this). For Hayek, social justice means using the "the coercive powers of government to insure a more even or more just distribution of goods" (p 259). He had two major objections to social justice. One was economic and the other philosophical.

The economic argument

Hayek’s economic argument relies on an analysis that McKnight describes as "surprisingly subtle and perceptive". Hayek makes three major claims:

1. The impossibility of a planned economy: Hayek argued that a planned economy would fail because it was impossible for government bureaucrats to find and use all the information they’d need to make effective plans for the production and distribution of goods. Markets, however, are able to solve the information problem through price signals.

2. Markets do not reward merit: Hayek saw social justice as an attempt to give people what they morally deserved or merited. He rejected the idea that free markets produced socially just outcomes (p 93-94).

3. Enforcing reward for merit or equality of outcomes would require state control of the economy: If markets do not reward people equally or according to effort, ability or good intentions, then achieving social justice will require either (a) government control of prices and incomes; or (b) large scale redistribution. Both would destroy the market’s ability to function.

Hayek’s conclusion is that any attempt to pursue social justice will put us on the road to serfdom — the closer we get to our goal, the more damage we do to the economic system that we depend on for survival. For Hayek the obvious response was to abandon the goal. But as David McKnight argues, just because an entirely planned economy is impossible, this doesn’t make all planning impossible. Even if social justice and economic efficiency conflict, policy makers may still be able to trade one off against the other. There’s nothing in Hayek’s argument that tells us how high government expenditure can go before it cripples the economy. That’s an empirical question.

Hayek also adds another practical problem– the issue of deciding what incomes different people deserve. For example, should all workers be paid the same or do some kinds of work deserve higher wages? If some workers deserve more, is this because their work is harder or more unpleasant, because it benefits others more, or because it requires a higher level of skill? As a liberal, Hayek was opposed to politicians or bureaucrats making these judgments and enforcing them on the community.

The philosophical argument — Hayek’s liberalism

In The Mirage of Social Justice Hayek writes that:

…we should regard as the most desirable order of society one which which would choose if we knew that our initial position in it would be decided purely by chance (such as the fact of our being born into a particular family). Since the attraction such chance would possess for any particular adult individual would probably be dependent on the particular skills, capabilities and tastes he has already acquired, a better way of putting this would be to say that the best society would be that in which we would prefer to place our children if we knew that their position in it would be determined by lot (p132).

This thought experiment is surprisingly similar to John Rawls’ idea of the ‘original position‘. Rawls asked readers to choose principles of justice from behind a ‘veil of ignorance‘:

Among the essential features of [the original position] is that no one knows his place in society, his class position or social status, nor does any one know his fortune in the distribution of natural assets and abilities, his intelligence, strength, and the like. I shall even assume that the parties do not know their conceptions of the good or their special psychological propensities (p12).

For both thinkers, the purpose of the state was to allow or enable individuals to pursue their own conception of the good life. Hayek rejected the idea that political leaders should use the coercive power of the state to pursue their own moral values — even if these were shared by a large section of the electorate.

Rudd and liberalism

In a way Rudd is right to call Hayek a market fundamentalist. This is because he treats moral values as important primarily because they enable markets to function. Moral rules allow people to live together peacefully and productively — they help people get what they want. The only moral rules that should be enforced by the state are those that enable vital institutions like markets to function (p 67-68). Like many economists, Hayek doesn’t question the worthiness of people’s preferences.

Rudd thinks that Hayek has things back the front. Values don’t exist to serve markets, markets exist to serve values. While some moral rules might have an instrumental purpose, there are moral ideals which have intrinsic value. In other words, there are objective facts about how people ought to live. What people want is not always what they should have.

What Rudd really objects to is Hayek’s liberalism — the idea that government exists to enable individuals to achieve their own private goals. Rudd argues that moral values ought to guide policy making and church leaders and activists are justified in criticising governments when they believe they are not living up to its moral obligations.

Hayek had a cynical view of this kind of church activism. In The Mirage of Social Justice he suggested that the clergy of Christian churches were increasingly losing their faith in supernatural revelation and "appear to have sought a refuge and consolation in a new ‘social’ religion which substitutes a temporal for a celestial promise of justice, and who hope that they can thus continue their striving to do good" (p 66).

Like many economically liberal atheists, Hayek preferred churches which supported private virtues like the work ethic, sexual restraint and voluntary charity. Consoling simple people with tales of a supernatural being and life after death was fine. Meddling in the market was not.

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Nicholas Gruen
Nicholas Gruen(@nicholas-gruen)
15 years ago

Thx for a very interesting post Don.

I wonder if you can find anything as supportive of welfare in latter books by Hayek. Particularly the line below seems more like the late 50s and early 60s Hayek than later, when he began to get a bit more uncompromising about his liberalism – but others will know better I expect.

All modern governments have made provision for the indigent, the unfortunate, and disabled and have concerned themselves with questions of health and the dissemination of knowledge. There is no reason why the volume of these pure service activities should not increase with the general growth of wealth.

Ken Lovell
15 years ago

A problem that I’ve always had with Hayek is his belief that markets are ideologically neutral and provide a context in which individuals can act freely.

Modern capitalism depends to a large extent on the principle that land is ‘owned’ by private individuals. Once a society adopts this principle, people are forced into the market economy. They can only get access to land with wealth and the only way most can acquire wealth is to sell their labour. A society in which people are compelled either to sell their labour or to live as outcasts, criminals or mendicants is not one in which people are ‘free’, in any meaningful sense of the word.

Markets are therefore an efficient way to exchange information about personal preferences but the purpose of the market is an ideological one, namely, to facilitate the private ownership of land as the bedrock of society. People whose personal preferences are to live in a society where land and other goods like mineral rights and water rights are held in common ownership for the collective good are denied the opportunity to exercise their preferences in a market-based society.

It’s a legitimate response to market fundamentalism to argue that the ideology of markets is flawed, and therefore some interference with markets is justified to achieve ends associated with the collective good.

Don Arthur
Don Arthur
15 years ago

Nicholas – You were wondering whether Hayek continued to support welfare in his later work..
I think the answer is yes. In The Mirage of Social Justice (from the 70s) Hayek supported both government funded education and income support. On education he wrote::

There is also much to be said in favour of the government providing on an equal basis the means for the schooling of minors who are not yet fully responsible citizens, even though there are grave doubts whether we ought to allow government to administer them (p 84).

On income support he wrote:

There is no reason why in a free society government should not assure to all protection against severe deprivation in the form of an assured minimum income, or a floor below which nobody need descend. To enter into such an insurance against extreme misfortune may well be in the interest of all; or it may be felt to be a clear moral duty of all to assist, within the organized community, those who cannot help themselves. So long as such a uniform minimum income is provided outside the market to all those who, for any reason, are unable to earn in the market an adequate maintenance, this need not lead to a restriction of freedom, or conflict with the Rule of Law (p 87).

Hayek certainly wasn’t supporting the kind of welfare state social democrats had in mind. If possible, he didn’t want governments delivering schooling or running social insurance schemes. And I imagine his idea of "severe deprivation" would have been much more severe than most social democrats would tolerate.

Jason Soon
Jason Soon
15 years ago

Yes Don you would not expect Hayek to backpedal on that issue because there is really no logical implication in his particular system which would support a revision of those views.

The interesting point about Hayek’s system is that it is possible to actually take a market anarchist interpretation of his system OR a classical liberal interpretation which accepts that if the State provides defence it must also provide social insurance but it is not really possible to derive a minarchist interpretation from it.

Ken Parish
Ken Parish(@ken-parish)
15 years ago

Did Hayek accept the possibility/legitimacy of regulation of markets for environmental purposes e.g. preservation of fish stocks, water resources, air quality etc i.e. resources where price signals either will never exist or won’t emerge until it’s too late to do anything to reverse the situation, and where businesses can in the short term “externalise” their costs painlessly in the absence of government intervention? This article that I found by a quick Google suggests the answer is predictably in the negative. But is Hayek any more “subtle and perceptive” on environmental regulation than this article suggests? Is this a clearer example of Hayek’s “market fundamentalism” than his attitude towards social welfare issues?

Steve Edney
15 years ago

He did in the Road to Serfdom

There are, too, certain fields where the system of competition
is impracticable. For example, the harmful effects of deforestation
or of thesmokeof factories cannot beconfined to the owner
of the property in question.

Jason Soon
Jason Soon
15 years ago

Environmental issues are a no-brainer. I doubt that Julian Morris is against all environmental regulation.

Frequently libertarian oriented economists quibble over how this should be done and express a preference that such regulations take the form of allocating property rights or proxies for property rights over Pigouvian taxes. Hayek was basically in the mainstream of economics and it is ridiculous to argue that one can derive a case for subsidising education from his system but not environmental regulation.

Why this endless need on the part of the left and the squishy centre to libel Hayek?

Jason Soon
Jason Soon
15 years ago

This is from your cite, Ken:

On the other hand, piecemeal legislation may effectively amend minor defects in the law, and so should not
automatically be dismissed. Indeed, Hayek notes in the Constitution of Liberty that even the British Factory
Acts may be justifiable. Nevertheless, even in making such piecemeal changes to the law, the potential for
adverse consequences should always be borne in mind.

Morris is putting a particular spin on Hayek. He wants to undermine the case for large scale regulations like Kyoto. He would prefer piecemeal legislation to tackle environmental problems on a case by case basis. This confirms my interpretation that even Morris himself is not against environmental regulation. His paper is primarily philosophical rather than policy oriented.

Don Arthur
Don Arthur
15 years ago

Ken – The answer is yes. Hayek did accept that, in some circumstances, it was legitimate to regulate the use of natural resources.
Like most classical liberals Hayek believed that private property rights were a far better way of preserving natural resources like forests than government regulation. But in The Constitution of Liberty he did acknowledge that in some cases property rights wouldn’t promote conservation because owners would be unable to reap the benefits of forgoing consumption:

This problem arises in particular in connection with the various types of "fugitive resources," such as game, fish, water, oil, or natural gas (and perhaps rain, too, in the near future) which we can appropriate only by using them up and which no individual exploiter will have an interest in conserving, since what he does not take will be taken by others… It is undeniable that where for such technological reasons we cannot have exclusive control of particular resources by individual owners, we must resort to alternative forms of regulation (p 369).

It’s hard to know what he would have said about climate change. But asking what a real life Hayek would have said is less interesting than asking what he should have said given his theories and assumptions.

Don Arthur
Don Arthur
15 years ago

Looks like Steve beat me to it.

Nicholas Gruen
Nicholas Gruen(@nicholas-gruen)
15 years ago


As I understand it Hayek accepted some safety net throughout his life, but I’m wondering if there is anything as accommodating as the last sentence of the quote I cited above in later writings viz. “There is no reason why the volume of these pure service activities should not increase with the general growth of wealth.”

Hayek defended Sweden against the UK early in his career, on the grounds that tax levels weren’t such a big deal, but rather the kind of intervention. I think he did that less and less as time passed (and admittedly tax rates went up).

Don Arthur
Don Arthur
15 years ago

Nicholas – You’re probably right. I’m guessing that if Hayek were alive today his policy stance would be pretty similar to Peter Saunders’ (CIS). Here’s an extract from an interview in 1977 where he was asked about Sweden:

Reason: If big government is really the culprit, why do Sweden and many Scandinavian welfare states seem to be prospering?

Hayek:Well, we mustn’t generalize. Sweden and Switzerland are the two countries which have escaped the damages of two wars and have become repositories of a large part of the capital of Europe. In Switzerland, there is still some traditional instinct against government interference. Switzerland is a marvelous example where, when the politicians become too progressive, the people hold a referendum and promptly say, "No!"

Reason: Yet Sweden is reasonably successful…

Hayek: Yes. But there is perhaps more social discontent in Sweden than in almost any other country I have been. The standard feeling that life is really not worth living is very strong in Sweden. Although they can hardly conceive of things being different than what they’re used to, I think the doubt about their past doctrines is quite strong.

Reason: From 1948 until about a decade ago. West Germany pursued pointedly free-market policies and experienced an economic recovery so vital as to be judged a "German Miracle." Yet, the Social Democrats are firmly in power today, and some American analysts have suggested that this indicates a basic flaw in the philosophy or strategy of the so-called Freiburg School, the group of free-market economists that led the "German Miracle." What mistakes did they make and what can we learn from their example?

Hayek: First, the idea that the Germans are now governed by a socialist government is just wrong. The present German chancellor admits–perhaps not publicly, but in conversation–that he is not a socialist. Secondly, until recently, the German trade unions were led by people who really knew what a major inflation is. And, until recently, all you needed to tell German trade unionists when they made excessive wage claims is that "this will lead to inflation," and they would collapse.
The German prosperity is due, to a very high degree, to the reasonableness of the German trade-union leaders which, in turn, was due to their experience with inflation.