Exploring Hayek's Evolution in Political Economy: Values, Liberty & Rule of Law

1. Hayek Jeremy.Shearmur@anu.edu.au

2. Structure of the paper • 1. Introduction & problems of studying Hayek • 2. Hayek’s values and changes in his views about political economy; New York, Vienna and the L.S.E. • 3. Interventionism, Liberty and the Rule of Law • 4. A complication: rules and valuable institutions • 5. A Big Problem • 6. Law, Legislation and Liberty • 7. [Problems of Law and Spontaneous Orders] • 8. Does any of this matter?

3. 1. Introduction • Hayek: HETSA • My task in this paper is twofold • On the one side, I will try to sum up the kind of understanding of Hayek’s work that I have come to, after having worked on him for more years than I like to recall • On the other, I will briefly try to explain what I think is of value, and merits further work • Both by those who are sympathetic to Hayek, and by those who are not

4. Some problems of studying Hayek • Hayek wrote a great deal, and in what, now, would be counted as different disciplines • In addition, the problems that he addressed, and the terms in which he did it, are often not now familiar • He also worked in both German and English, and had a good knowledge of other languages, too – e.g. Italian

5. Problems cont • His views also changed over time • Simon Griffiths, in his Engaging the Enemy: Hayek and the Left • Quotes John Gray as saying that Hayek’s overall consistency means that one should avoid periodizing his work • In my view, this is not right; and if one followed Gray’s suggestion, one would end up trying to solve a single jigsaw puzzle with pieces drawn from many different puzzles

6. Problems cont • But what seems to me distinctive about Hayek, is that there are, in effect, a number of different projects which, while different (and in some ways inconsistent) • Mutually influence one another, and which are never really dropped • Another problem is that, while there is a large Hayek archive • Hayek typically did not keep drafts of published work • And he also threw out most of his correspondence • So that what exists, often exists by chance

7. Problems cont • One may be lucky enough to find Hayek correspondence in other archives • But what one will find there, and its interest, is often a matter of sheer luck • In addition, once the Mont Pelerin Society had been started (1946-) • Hayek had exchanges with many friends and colleagues there, of which we have no record • Let me, nonetheless, have a go at offering you the overview which I had promised • My concern will be with Hayek the political economist rather than Hayek the technical writer on economics

8. 2. Hayek’s Values • The elderly Hayek was a gung-ho economic liberal; but there was a long path to this • Hayek’s parents and also his brother were nationalists in a kind of proto-Nazi sense • Hayek broke with such ideas early on; a friend who was blamed for this by Hayek’s mother credits it, rather, to Hayek’s interest in a Jewish girl, at school! • At any rate, and as Hayek has often told us, he seems as a young man to have been a mild socialist • He became interested in economics because of its relevance to issues of social reform • He chose to study with Wieser rather than Mises, because he was attracted to Wieser’s quasi-Fabian socialism

9. New York 1923-4 • Hayek went, as a young man, to the U.S., and registered for a Ph.D. at NYU • While he was there, he assisted Mitchell with his work on the introduction to the translation of Wieser’s Social Economics • And also urged on him the case for translating Wieser’s The Law of Power • All told, and even bearing in mind that Hayek was a young foreign student, Hayek’s letters to Mitchell seem very friendly • While in New York, he also picked up enough knowledge about recent approaches in the statistical analysis of economic data • For him to be a plausible candidate as head of an Institute for Trade Cycle Research in Vienna

10. Back in Vienna • Hayek returned to Vienna, and worked with Mises on the founding of the Institute (which did empirical and theoretical work) • In which context he got to know Beveridge and Keynes • He also participated in Mises’ Private Seminar, and was impressed by Mises’ critical work on socialism • The association with Mises clearly made a big impression on Hayek: he became interested in the argument about economic calculation under socialism, in ‘methodological’ ideas including material on economics and hermeneutics, and he wrote a paper on problems of rent control. • He became known – along with Machlup and Haberler – as among the liberal members of the seminar

11. To the L.S.E. • The economy in Austria Vienna faced severe problems; there were no real opportunities at the university, and the Institute’s situation was precarious • When they could, Machlup and Haberler went to the US, Hayek to the UK • Hayek’s initial invitation to the L.S.E. seems to have been initiated by Beveridge • But once there he was given much assistance and encouragement by Robbins • Hayek made a striking impression with public lectures on his ideas about capital theory and the trade cycle (cf. Prices and Production, 1931) • Although, as he indicated later, he was lucky in that the level at which he was talking made things look clear and interesting

12. L.S.E. cont • But when he went on to develop his ideas in more detail, they got messy [cf. Pure Theory of Capital, 1941] • Desai later argued that part of the problem was that he was trying to develop ideas which were at the time beyond his – or anyone’s – mathematical capabilities to handle • A bigger impression was, in the longer term, made by his translation of material on, and contribution to the debate about, economic calculation under socialism (Collectivist Economic Planning, 1935) • Hayek, spurred, it appears, by a conversation with Beveridge (cf. Hayek’s ‘Nazi-Socialism’ 1933 in Collected Works Road to Serfdom) • Was struck that this debate, familiar to people on the Continent • Was not well-known in the UK

13. LSE cont • Hayek’s own contributions here – stressed the role of socially scattered and often tacit knowledge • And the role of the price system in aggregating this, and presenting it in an aggregated form to the acting economic agent • Thus providing them with information about, and incentives towards, bringing their actions into better coordination with those of their fellows • Made a striking impact on Hayek’s more general views • On the one hand, it gave further teeth to Mises’ argument that socialism, if it expected to have to hand the results of markets while abolishing the price system and private ownership, looked in real difficulties

14. LSE cont • On the other, it also led Hayek to argue that there were problems about how economics itself was typically being pursued • I will look at this first, before turning to how Hayek’s values were affected by these developments • There was a certain oddity about academic developments in economics in the UK in the 1930s • For if one considers the disagreements between Cambridge and the L.S.E., it was the L.S.E. which could have been argued to be most intellectually open • They drew, in their teaching and research, on both British and Continental traditions • And were, say, teaching general equilibrium theory

15. LSE cont • At the same time, they were politically conservative, in the sense of being opposed to what became known as Keynesian policy ideas • Hayek was led, by the themes about knowledge which he had brought out in the debate about economic calculation, to offer a critique of both general equilibrium theory, and also of Misesian ideas about equating economics with the ‘pure logic of choice’ • He argued, by contrast, for an approach which took seriously ideas about the socially scattered character of knowledge • And suggested that there should be empirical investigation into the equilibriating characteristics of different kinds of institutions • However, what in principle was opened up as an alternative research program was never further pursued, at least by Hayek

16. Hayek’s values again • But what about the relation of all this to Hayek’s values? • As Bruce Caldwell has stressed, a key role was played, in understand this, by Hayek’s Inaugural Lecture at the L.S.E: ‘The Trend of Economic Thinking’ (1933) • The main thrust of this – which could well have puzzled his audience – was an attack on the German Younger Historical School of Economics for their disparagement of pure economic theory • As I have argued elsewhere, there was a locally-based reason for all this, relating to Beveridge and subsequently Hogben championing similar ideas at the L.S.E. • And engaging in hostile criticism, in the name of a kind of inductivist empiricism • Of theoretical economics at the L.S.E., of Robbins’ work on the methodology of economics (which Hayek saw as close to his own views) • And, indeed, of theoretical economics more generally, including Keynes

17. Hayek’s values cont • Hayek, by contrast with this, defended traditional approaches to economics • And argued for the significance of economic theory – and not least Mises’ work on socialism • All this, he argued, served the valuable function of informing us that ideas which might attract us may, in fact, not be something that could be realized • Indeed, in broad terms one might describe Hayek’s understanding of the significance of his and Mises’ work • As having disclosed that we have inherited valuable mechanisms, the operation of which we tend simply to take for granted • But which – if we wish to continue to enjoy the benefits that they make possible – serve as structural constraints on what else we can do.

18. Hayek’s values cont • Such a picture, it seems to me, then stands at the heart of Hayek’s subsequent work in political economy • He sets out, in various ways, to defend approaches which contribute such an understanding, against methodological criticism • He sees the results of such approaches as constituting constraints on our actions (if we wish to keep valuable institutions in place) • But sees as as all to liable to break with these constraints, without realizing the significance of what we are doing

19. Hayek’s Values cont • Indeed, a key concern then becomes that we should modify what we aspire to, and how we aim to realise it, in the light of these ideas • This, indeed, serves to modify his own values • Hayek was, much later, to praise classical liberal or libertarian approaches in an unqualified manner • This happens especially in Hayek’s old age, and he seems to me never to have given a real account of why this shift should have been made • But it is clear that, up until this period, his underlying values don’t seem to have changed all that much since his early mild Fabianism

20. Hayek’s values cont • In 1934, in correspondence with Henry Simons in Chicago, he indicated that he had shared Simons’ approach (markets plus redistribution) and had only been led away from the latter because empirical evidence of the consequences of the taxation of capital in Central Europe, led to a process of the consumption of capital, which was difficult to stop • In an address to students at the L.S.E. in 1944, Hayek writes in ways which seem to me to suggest that he wishes very much that the constraints which he now thinks are at odds with socialism, were not there • While one could read his Road to Serfdom as an argument about structural limitations on the pursuit of certain kinds of public policy, rather than as a critique of specific values

21. Hayek’s values cont • It is striking that, in this vein, Hayek, in an introduction to the 1956 US edition of Serfdom, when talking about the Welfare State, and criticizing how it had been implemented, wrote: ‘this is not to say that some of its aims are not both practicable and laudable’. • While in Law, Legislation and Liberty(1973-) he argues for state responsibilities when those who had in the past provided voluntary welfare are now no longer able to do so • While emphasising that what calls for remedy is destitution, not simply a fall in people’s relative position • I.e. while most of what he writes is critical of egalitarianism and current ideas about social entitlements and how they are implemented, he nonetheless clearly favours a welfare safety-net

22. Hayek’s values – and two problems • All this, however, poses a couple of problems, to which we should now turn. • First, given that Hayek was the author of The Road to Serfdom, how can he consistently favour certain kinds of interventionism? (Something to which people such as Mises and Ayn Rand objected.) How, as Keynes put to him, does he, given his own account, avoid this placing us on The Road to Serfdom? • Second, what are we to make of his not opposing in principle the idea of a welfare state, given that he was, in Law, Legislation and Liberty, to criticize ideas about social justice?

23. 3. Intervention, Liberty & the rule of law • The issue raised by Keynes and others was an important one • Not least because of how Hayek’s ideas developed in the face of it • In unpublished work between The Road to Serfdom and The Constitution of Liberty he developed a twofold response • In it, a key role was played by a particular view of the Rule of Law • This was, in Britain, customarily understood in terms of people being compelled to do things only on the basis of established law

24. Rule of law • But Hayek championed a much stronger view of the rule of law • This he seems to have inherited from Kantian-influenced jurisprudence • It involved the (‘republican’) idea that law should be strictly universal in its character • With freedom, on his account, as then involving individuals’ being able to act on the basis of their own knowledge, with what they owned • Subject to not interfering with others, and under the rule of law in this republican sense

25. Intervention etc 2 • His aim was that there should be a minimization of coercion • Hayek’s response to the problem raised by Keynes was, then • That a key test as to whether government action was affecting people’s freedom • Was its compatibility with the rule of law (so understood) • I.e that interventionism was not a problem for freedom if it met this test • (Its wisdom, or being good policy, was a separate issue) • Hayek thus ended up with an agenda of the following kind which he explored after The Road to Serfdom, into The Constitution of Liberty

26. Intervention etc 3 • First, to explicate and defend his distinctive ideas about freedom • Second, to develop ideas about the need to resolve public policy problems in ways which were neither at odds with the rule of law, nor damaging to his understanding of what is required to maintain a market order and associated institutions (including the legal system) • And third – but Hayek was awkward about this – to offer advice about the more specific values in terms of which we should address public policy problems • (I.e. there is an attenuated utilitarianism in the background, as serving to justify the entire structure, and implicitly ideas about who owes what, more positively, to whom.)

27. 4. A complication: rules and valuable institutions • All this, to say the least, was rather complicated • But this was not the half of it • And this gets us to a key but tricky theme in Hayek’s work • Hayek was, primarily, an economist; and one would expect, on this basis, for him to be analysing everything in terms of preferences • But in fact, rules and rule-following loom very large in his writing • In part, as I have indicated, this is because of his views about the rule of law • In part, however, this comes from work which he did as a young man on the psychology of cognition • But which he was led to revive, when – confronted by the empiricism and behaviourism of some of the critics of economics

28. Rules etccont • Provoked I suspect, by the work of some critics of economics, who favoured a behaviouristic programme for the social sciences • Hayek started, in the 1940s, to explore what he took to be the hermeneutical basis of the social sciences, as part of a defence of theoretical economics • While, in addition, he emphasised, increasingly, the value of institutions as the products of human action but not of design • In which context he typically understood institutions as the emergent products of rule-following behaviour • But where individuals may not have a conscious knowledge of the character of the rules in question: consider, here, grammar; but also, etiquette • All this leads to a lot of work, on Hayek’s part, on the characteristics of social formations that operate on such a basis • And on problems about how such rules are transmitted across generations

29. Rules etccont • An additional issue, here, was that of the value of such inherited institutions • A key problem that Hayek faced is that he wished to argue that un-designed institutions may be valuable • But how was this the case? Especially if, at a primary level, as it were, people may not be aware of these benefits, that they depended on specific rules and habits, and and thus of the connection of the benefits to various rules which they were following (and not necessarily consciously) • This led Hayek into various ideas of a loosely evolutionary character, which in the work of his old age seemed to me to develop in problematic ways

30. Rules etccont • He seemed at times simply to urge on us the uncritical acceptance of what we had inherited • not least because another of his themes related to the need to appraise and improve on our inherited rules, institutions and so on • And to reject some inherited reactions to things, as problematic (e.g. concerns about sharing, equality and fairness, at odds with the good operation of market-based institutions)

31. 5. A big problem • A big problem for Hayek was behaviour which undermined useful institutions • We have already seen how, when encountering demands for socialism and for the introducing of social planning • Hayek thought that a key problem was that people were (understandably) tempted by ideals and measures • Which, however, if they were acted upon, would destroy complex institutions that, in fact, were valuable and which they would wish to retain if they only knew all about them • To repeat, here, my earlier point: while for Hayek some things would be ruled out if we knew about these institutions • Others would be OK but only if they were pursued by means which were, in fact, compatible with the operation of these institutions

32. Big problem, cont • His Constitution of Liberty attempted to address these problems, by trying to spell out explicitly what the character of the social order was that, he thought, we were in danger of losing • There was, however, a more concrete issue with which he grappled, but which also, in his view, posed some deeper difficulties: that of welfare and virtue • Hayek faced difficulties here with political allies • On the one side, his openness to ideas about a welfare state, and the fact that he did not argue in terms of individual property rights etc, distanced him from American libertarians • On the other, a striking feature of Hayek’s work here also distanced him from American neo-Conservatives such as Irving Kristol

33. Big problem cont • This was Hayek’s explicit defence of the idea that rewards in a market economy, while they could be defended as functional, were not, and could not be, in any obvious sense ‘just’ • What people got, in a market-based society was, on his account, a matter of luck not merit • To be sure, people might well stuff up by behaving badly • But on his account there was no reason why diligence and hard work would get you anywhere • While pay-offs might come to those who happened to look a particular way (cf. fashion changes), to be in the right place with the right stuff at the right time, and so on

34. Big problem cont • The same, in his view, here following Hume, was also the case for the system of justice which a large-scale extended society needed • The value of the law was in its systematic effects; but in particular cases, the application of the very rules needed for the system to work well • Might lead to assets being taken from the poor and needy and given, by the courts, instead to the morally undeserving • This faced Hayek with a massive difficulty: that our moral ideas might be at odds with the very institutions that, in his view, were needed for a large-scale free society to operate successfully • If one adds, to this, Hayek’s view that we are typically not aware of how such a society operates, and of the rules that we are following within it • And, further, that their rationale is typically provided by the functions that they discharge rather than their intrinsic characteristics, things get really messy

35. Organizations and Morality • One interesting (side) issue here relates to the problem of remuneration • As indicated above, Hayek is well-aware of the fact that there are clashes between our ordinary moral judgements, and market-based rewards • But there are some additional problems about this, in the current setting • Hayek tends to write as if our remuneration was typically a product of market relations • He also expresses concern, if we bring to markets expectations formed outside of them and try to re-shape markets in the light of these • But clearly, within business organizations, there is a strongly conventional element to remuneration

36. Organizations and morality cont • In this context, problems about bias (e.g. racial and gender) can sensibly be raised (and Hayek is well-aware that these have affected the development of the law) • But there is a risk, from Hayek’s perspective, that once these are admitted, they can then swamp market-based rewards • Especially, people work in organizations rather than more or less directly in the marketplace they may not see the (to him) socially vital role of the latter • Here, we face a problem about the shaping of people by organizations, as a threat to aspects of the market order • There seems to me room for a Hayek-inspired campaign against the kinds of regulations which make genuine self-employment difficult!

37. Organizations and morality cont • There is another aspect to all this, for Hayek, however • Hayek, as I have tried to stress, emphasises the importance of rule-following and traditions • But these, on the face of it, can also be undermined by purely economic developments • I.e. traditions may be inter-related to a way of life, which has an economic aspect to it • And if this is undermined by market developments, there may be problems about re-constituting the tradition • Indeed, issues of these kinds become a major issue for Hayek:

38. Organizations and morality cont • A key motif in his work becomes the significance of various kinds of ‘orders’ • Which we have typically inherited, the existence of which may depend on rules which we don’t understand • And the benefits of which we are apt simply to take for granted • And to imagine will still be available to us, regardless of what else we do (cf. ’Inaugural Address’, which this generalizes) • But which are fragile, because they may be at odds with various moral ideas, or with what will be the consequences of obvious ‘piecemeal’, social improvements

39. 6. Law, Legislation and Liberty • Hayek’s Law, Legislation and Liberty seems to me in some ways his most interesting work, in terms of issues that it opens up • At the same time, it is not well-written, and I think that many of the problems that he addresses are unresolved • I will discuss just three themes: law, social justice, and problems of government and law • In Law, Legislation and Liberty, Hayek indicated that in his earlier work, he had implicitly identified the legal order with a system of laws given by a legislative body • Here, he shifts to a common-law view, and offers an account of this, and of how revision can take place by way of judges discovering inconsistencies in existing rules, or recognising the outcomes of existing law as unjust • In the course of this, Hayek espouses the view, against legal positivism and natural law theory, that law – and its authority – are rooted in traditional practises

40. Law, Legislation and Liberty cont • Second, he offers an extended critique of the idea of ‘social justice’ • He argues, in particular, that the very idea of ‘social justice’ – in the sense of market rewards tracking merit – makes no sense in a large-scale economy • This claim is, in fact, more limited in its scope than one might have expected • For what Hayek is critical of, is the idea of making use of market mechanisms (or rather their manipulation) as an instrument of social justice • His argument is, in effect, an updating of older critiques of ‘just price’ theory

41. Law, Legislation and Liberty cont • As I have previously indicated, he combines this with an openness in principle to the idea of a welfare state – provided that this is kept outside the market • To put all this another way, it would seem to me that Hayek’s view would in principle be compatible with ideas about a ‘social wage’ supplied to all citizens • Subject only to issues about the overall effect of this on the operations of the economy, and the (major) problem of exactly who would be entitled to what from whom! • Third, Hayek is concerned about the way in which – in parallel with what he has said concerning the economy – people may take the view that law is only legitimate if it is the product of deliberate decisions or planning

42. Law, Legislation and Liberty cont • Or that it is appropriate to re-mould law so as to deliver ideas which are compatible with our moral notions of ‘justice’ in each particular case • More generally, his view is that a good legal order is one in which people can choose what to do in the face of general legal requirements, rather than a regime which tells people what, specifically, they should do • He is concerned about the pernicious effects of lobbying by powerful interests, and of the risks of politicians destroying his favoured order, by offering the public specific benefits, by way of measures which would damage it

43. Law, Legislation and Liberty cont • It is, however, striking that Hayek says that common law may, in some areas, be systematically biased – e.g. in favour of landlords as against tenants – as a result of the circumstances under which it developed • And that he is in favour of its being reformed • More generally, he is open to law-and-economics style re-appraisals of the law • As well as for rules to be modified to meet changing economic circumstances

44. Law, Legislation and Liberty cont • In addition, his account of the ideal mechanisms of the formation of common law • Would allow for it to be changed by judges, when they discover it generating injustices, or if they discover clashes between different legal principles • We then, however, hit what seems to me a major problem about the book • It is that, in the face of problems of the operating of lobbying in a politically pluralistic setting, and bribing the electorate with measures which will be damaging • Hayek goes back to what, in fact, is a familiar theme from the ‘republican’ political tradition • I.e. that we should move to a two-chamber political body

45. Law, Legislation and Liberty cont • One of which should function much as politics does currently • While the other – which he suggests might be constituted by people elected on a cohort basis by the population when they hit the age of 40 – works out what general rules the first body should operate under • A key problem about all this, however, is that this is essentially a lay body, when the problems about the revision of the law to which Hayek has drawn attention really call for a body which is highly specialized, and which is not only expert in law, but which is in a position to draw upon other relevant disciplines, too • I.e. something that would more like a version of a U.S. Supreme Court • All told, Hayek seems to me here to raise more interesting problems than he can resolve

46. 7. Some problems about Law and Spontaneous Orders • In this section, I will make some critical remarks, of a somewhat tentative and speculative character • Hayek’s work, as I have indicated, ranges over many different spheres • And it seems to me that he in some ways over-rates the commonalities between them • Take what he says about ‘spontaneous order’ – which ranges across markets, to a contrast between organizations which operate in a top-down manner and ones within which people have simply to comply with abstract rules, to discussions of language and of law

47. Some Problems cont • One initial point needs to be made for the sake of clarity • By ‘spontaneous order’, Hayek seems to me to be concerned, primarily, with a situation as it exists here and now • But he is also often concerned with the development of such orders, and with this as having an unplanned character • This seems to me inessential; and Hayek has made it clear that we can design things to work as spontaneous orders • But what, then, of ‘spontaneous orders’ themselves? • I’d like to argue, here, that Hayek’s approach risks confusion, by assimilating things to a single model – one which puts at the centre of everything the following of abstract rules, with the ‘order’ then being an emergent product from these

48. Some problems, cont • Why confusion? • Primarily, because markets, language and legal systems here look to me rather different • Market transactions do, indeed, give rise to emergent products (e.g. things seen in terms of distribution, the utilization of resources, and so on) • But this surely arises from people acting on the basis of preferences, prices and the incentives that these provide, making use of their own knowledge, insights etc, within the broad rules of a legal system • I.e. the emergent product is the product of the concrete, complex and multifarious activities, rather than just a product of the following of rules • Language does in some ways look more like Hayek’s model

49. Problems cont • But law looks to me different yet again: it is, I’d have thought, akin to a coercive version of Hilary Putnam’s ideas about meaning as working on the basis of the division of linguistic labour • Putnam, a city-dweller, argued that he has a rough idea about the meaning of the word ‘tree’ • But that his understanding of it carries within itself the idea that while he might make rough-and-ready distinctions here, his knowledge was less than adequate • And what, say, ‘a beech tree’ means, is something to which one would need to refer, beyond him, to the knowledge and practises of specialists • We are, I’d suggest, in the case of the law, in a similar situation

50. Problems cont • I.e. rather than participating in practises on the basis of shared rules • We grow up participating in practises in which general understandings, and also expert judgements rather than ours are authoritative • And which can be, and are, imposed coercively upon us • If, say, Australians go to N.Z., the U.K., Canada or the U.S., we are likely to have rough ideas about how we should behave, but will not be surprised if we get things wrong