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 ¹ 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.

1. the original position[↩]