Hayek and innovation

http://truckandbarter.com/images/170_440.jpgIn an interesting post a day or so ago Ken Parish made this claim, which went largely unchallenged (though I’ve not read all the comments).

The need to avoid stifling innovation as the primary engine of capitalisms remarkable success was Hayeks principal answer to those who argued for socialism or even a strong social democratic welfare state.

Now the attribution of this view to Hayek is pretty irrelevant, as the debate can go on the merits of the proposition, rather than on the less interesting question of whether Hayek ever said that.

I was going to put this in comments, but wanted also to invite others to help me out so here’s a quibble.  I don’t think Hayek ever did say that.It’s certainly not his principle objection to socialism of which more in a moment.

It’s certainly surprising that he didn’t make this a more central part of his critique of socialism since his whole framework, his whole way of thinking about a market does suggest the importance of innovation and dynamism.  After all, like the person he might regard as the first of the Austrians – Adam Smith – Hayek built his economics within an historical framework in which order evolved by human action, but not by human design.

Thus he instances the emergence of currency (I think following Menger) as something that grew up in society as individual trades graduated towards a standard unit of currency.  The simplest example he gives is of a pathway in a field which is made as people walk along it – I think he even ties it back to the animal world in that way, since animals were doing this long before us humangoes came along.

And the way he sees the market is as a process, rather than a determinate mechanism in the way it is conceptualised in neoclassical models and their descendants.  But Hayek made his greatest theoretical contributions to economics in the 1930s and this was in the context of extending Mieses attacks on the socialists in the socialist calculation debate.

This was at a time before Austrian economics branched off as a distinct tradition in economics and Hayek was very much in the mainstream – and working at the LSE at this time.  And if you read his papers from that time, the issue he raises is not the dynamism of the market (perhaps people were a bit worried that the Russian economy was dynamic, it looked like it was as Stalin poured in the resources and dams and power stations rose from the earth.)

His point is that socialism cannot utilise distributed information and that distributed information is very very important to economic efficiency (not necessarily dynamism). And that the concept of economic equilibrium is not coherent unless it includes an equilibrium of information and expectations (that is a situation in which information and expectations are stable and ‘balanced’ – with those expecting each commodity to fall in price balancing those who think it will rise).

This schema pretty much does in the idea of general equilibrium as a useful concept and certainly makes it pretty unusual.  The toy economy that emerges from this is dynamic, but only in the sense that traders are forever adjusting their prices to changing levels of demand and scarcity, not in the micro-dynamic sense that is implied in Schumpeter’s idea of ‘creative destruction’.

Oddly at this time Hayek doesn’t even talk much about incentives – though if you think about it, it’s implicit in the idea that information that people have will be used – because they have an incentive to use it.  (Incentives play a stronger role in The Road to Serfdom I guess, but from memory these are mostly the political incentives that take the worst to the top.)

Later in The Constitution of Liberty, Hayek talks about the way Governments can stiffle innovation but at least from memory, largely in terms of the public standards that governments can get themselves involved in regulating – like currency and sale of goods regulation. This stifles the extent to which people can buck these standards and so initiate experiments.

All this surprises me no end.  Although much of Hayek’s interest was initially stimulated in the context of the debates about general equilibriaum in the 1930s – and these were not dynamic equilibria in any microeconomic sense in which entrepreneurs are engaging in ‘creative destruction’ as the economy chugs along – the entrepreneur argument was such an enticing string to his bow.

Now I have no doubt that some passage can be found where Hayek points to the increased scope that capitalism gives for experimentation and innovation in the production process as a good thing.  It is a good thing.  But I’d be intersted if any of the Hayek scholars out there can prove me wrong.  The first challenge is to find some passage in Hayek that makes this point in a vigorous way. The next challenge is to find some passage in which it’s a major part of Hayek’s thinking.  I won’t be that surprised if I’m wrong – as I say I’m surprised that I’ve never found such a passage myself.   But I’d be interested in any examples people can dig up.

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Ken Parish
15 years ago

I read Road to Serfdom many years ago and didn’t go back and check it when I wrote my post. I confess I relied in considerable part on Don Arthur’s Evatt foundation article from last year titled Hayek and Rawls, where he summarised Hayek’s position as follows:

For Hayek, ‘social justice’ meant allocative justice – the demand “for an assignment of the shares in the material wealth to the different people and groups according to their needs or merits” (Hayek, 1991: 121). Hayek had two objections to ‘social justice’ — it was incompatible with a liberal social order and it would destroy the market. The Hoover Institution’s Kurt Leube neatly summarises Hayek’s liberal vision “Hayek sees its main task as that of finding rules to enable men with different values and convictions to live together. These rules should be so constructed as to permit each individual to fulfill his aims” (Leube, 1984: xxv).

In a liberal social order the government has no aims of its own. As Hayek saw, this is incompatible with the pursuit of ‘social justice’. To ensure that every citizen received the share they needed or deserved, government would have to impose its own aims on society. This is because rational people differ in their interpretations of ‘social justice’. For some, merit is about equal shares for all (Hayek refers to this as ‘egalitarianism’). For others it is about reward for talent, effort or contribution to the welfare of society. For others still it is about giving people what they need to fulfill their innate potential as human beings.

Hayek’s second objection to ‘social justice’ was that it would destroy the market — the only institution capable of supporting developed nations at their current standard of living. In his most famous book, The Road to Serfdom, Hayek warned that pursuing socialism’s project of central planning and nationalised industry would lead to totalitarianism (Hayek, 2001). Later he argued that pursuing ‘social justice’ through the welfare state would lead to the same result (Hayek, 1994: 108). The reason the pursuit of ‘social justice’ is incompatible with the market is that market outcomes do not correspond to any principle of need or merit. In The Constitution of Liberty, Hayek made this clear:

Most people will object not to the bare fact of inequality but to the fact that the differences in reward to do not correspond to any recognizable differences in the merits of those who receive them. The answer commonly given to this is that a free society on the whole achieves this kind of justice. This, however, is an indefensible contention if by justice is meant proportionality of reward to moral merit. Any attempt to found the case for freedom on this argument is very damaging to it, since it concedes that material rewards ought to be made to correspond to recognizable merit and then opposes the conclusion that most people will draw from this by an assertion which is untrue (Hayek, 1960a: 93-94).

In volume two of Law, Legislation and Liberty he was even blunter:

It has of course to be admitted that the manner in which the benefits and burdens are apportioned by the market mechanism would in many instances have to be regarded as very unjust if it were the result of a deliberate allocation to particular people (Hayek, 1976: 64).

I’m sure it’s true that Hayek didn’t place the same emphasis on entrepreneurial endeavour as Schumpeter who was writing around the same time, and it’s interesting to ponder why, given that Hayek would certainly have been familiar with Schumpeter’s writing and that, as you say, Schumpeter’s elaboration of entrepreneurial activity and creative destruction represent a useful elaboration/fleshing out of Hayek’s more general point that the social welfare state or socialism would destroy the market. Schumpeter offers a specific way in which it could do so: by smothering entrepreneurial initiative in bureaucratic red tape.

Mark Hill
15 years ago

It actually is surprising Hayek didn’t emphasise entrepreneurs so much when he crticially made the (IMO correct) distinction of markets being a process and not a mechanism.