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Saving Private Hayek

UPDATE: 3:30pm links to other reviews (all great) of the Fukuyama review at end of this post

F.A. Hayek continues to be the most mis-characterized economist of all time.  As if Glenn Beck were not doing enough damage, now even someone I greatly respect — Frank Fukuyama– has gotten Hayek wrong yet again. In a review of a new edition of the Constitution of Liberty in the NYT book review, Fukuyama says at the end:

In the end, there is a deep contradiction in Hayek’s thought. His great insight is that individual human beings muddle along, making progress by planning, experimenting, trying, failing and trying again. They never have as much clarity about the future as they think they do. But Hayek somehow knows with great certainty that when governments, as opposed to individuals, engage in a similar process of innovation and discovery, they will fail. He insists that the dividing line between state and society must be drawn according to a strict abstract principle rather than through empirical adaptation. In so doing, he proves himself to be far more of a hubristic Cartesian than a true Hayekian.

To say Hayek’s skepticism about government was based on “great certainty” is not just wrong, it is so much the opposite of  Hayek, it’s like accusing Michele Bachmann of excessive belief in the Koran.

Hayek’s view of knowledge was that it was partial and dispersed among many. The market gave individuals the incentives to apply this knowledge, and coordinated the uses of this local knowledge in a way that rewards each of us who knows best about any particular narrow area. (Frank notes this insight in an earlier paragraph, which makes the paragraph above even more puzzling.)  Government usually lacks both the incentives and the coordination mechanism. In government we don’t know who knows best, so which knowledge wins the argument could often be wrong.

This does NOT imply the caricature that Hayek always opposed government action. As Fukuyama notes:

It may, however, surprise some of Hayek’s new followers to learn that “The Constitution of Liberty” argues that the government may need to provide health insurance and even make it ­compulsory.

A government based on individual liberty will have some feedback and reward mechanisms that would produce better government outcomes in such areas than under tyrannical outcomes, and will make possible some kinds of government innovation and discovery that Fukuyama likes. But the political feedback mechanisms even under liberty (like majority voting, protesting, freedom of speech, or lobbying) are much cruder and less likely to align individual and social payoffs than the market feedback mechanisms, so one should be cautious about the scope of activities in which government programs will be effective.  One should be particularly wary of large-scale government plans that require a type of centralized knowledge that Hayek argued forcefully does not exist (down with Robert Moses, up with Jane Jacobs!)

To sum up,  Hayek’s skepticism about government was NOT based on his certainty, as Fukuyama would have it,  but on his awareness of his ignorance. (and everyone else’s)

Us public intellectuals who are communicating ideas of Hayek to a broader public are NOT fond of ideas that highlight our own ignorance, so one prediction that can be made with a higher degree of certainty than usual is that Hayek will continue to be misunderstood.

UPDATE 3:30pm 5/9/11: Links to other reactions to Fukuyama: Pete Boettke, Don Boudreaux, David Boaz, Don Boudreaux again with more, and, intriguingly, Hayek himself. (HT to Knowledge Problem for bringing them all together.)

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16 Comments

  1. GabbyD wrote:

    perhaps i’m being pedantic, but would he be “certain” of his ignorance?

    Posted May 9, 2011 at 12:30 am | Permalink
  2. Troy Camplin wrote:

    It’s not surprising that a big government conservative like Fukuyama does not like the ideas of Hayek. But that hardly means one has to misrepresent them. I find it hard to believe that Fukuyama is such a bad reader, is so incompetent at understanding, that he just doesn’t get what Hayek is really saying.

    Posted May 9, 2011 at 1:55 am | Permalink
  3. kabs wrote:

    While I’m always glad to see corrections of Hayek caricatures, I wish a more direct link to aid had been made here! It’s unclear to me how Fukuyama’s misrepresentation fits into the purpose of Aid Watch.

    Posted May 9, 2011 at 2:51 am | Permalink
  4. Frank wrote:

    @kabs: I think the paragraph starting “Hayek’s view of knowledge…” also describes Easterly’s view on many well-intentioned aid and development programs that don’t take advantage of market incentives. That’s a pretty tenuous connection to aid, perhaps.

    Personally, I don’t read the blog for its relevance to aid.

    Posted May 9, 2011 at 3:37 am | Permalink
  5. Hugo wrote:

    Thank you!!!
    I read the article of fuykuyama yesterday and I couldn’t stop wonder how can a (pseudo)intelectual be so wrong? How can he publish an article critizicing something he dont even understand!
    I understand that reading Law, Legislation and Liberty may be a hard task but it is the least someone can do before talking about F.A.Hayek,

    So Thank you for defending such a great intelectual

    Posted May 9, 2011 at 4:58 am | Permalink
  6. Jonathan Padwe wrote:

    I remain befuddled by Professor Easterly’s insistence on drawing Hayek into his critique of centralized planning and hubristic, top-down development. Yes, Hayek was skeptical about government and expertise. But Hayek is a darling of the right not only for that reason, but also for the trust he placed in the market as an arbiter of values. The comment “down with Robert Moses, up with Jane Jacobs!” thus reveals a false dichotomy — the work of Jane Jacobs in no way represents the logical extension of Hayek’s ideas, which provide more ammunition for shopping mall developers than for advocates of livable cities.

    As for the relevance of all of this to the project of Aid Watch, “aid” and “development” generally seek to address failures of government. Hayek seems to provide a useful corrective to the aid agenda’s status quo, by pointing out that institutionalized expertise and heavy-handed government intervention can have disastrous implications for individual freedom. Fair enough. But development and aid also seek to intervene where there is massive economic inequality (a condition that characterizes the whole world). “Freedom” in this case is a relative term — the poor and marginalized do not have the same freedom that the wealthy and powerful do. They need protection from the market, not further exposure to it.

    A final comment: I’m aware that Hayek saw a need for government and was not a complete free-market fundamentalist. Nonetheless, his argument is that improving the larger economy is the best hope for all (ie., the rising tide lifts all boats). While this may result in greater material well-being for the poor, it does little to address their powerlessness and disenfranchisement. They won’t be buying organic produce in Jane Jacob’s neighborhood anytime soon, especially not without a bus pass.

    Posted May 9, 2011 at 8:22 am | Permalink
  7. Gepap wrote:

    To me the great mistake that followers of hayek and Hayek himself make is the assumption that human beings act as rational atomistic individuals – they don’t. People are social beings and left to their own devices will make decisions based on communal feelings and values. For example, xenophobic restrictions on the free movements of people’s are very popular because individuals are generally not confrotable interacting with individuals whose customs are too different from their own.

    I would posit that in fact a true secret ballot is one of the most effective means by which a person might actually act like an individual as posited by the free market – this is because of the lack of communal judgement at the ballot box. The societies that have allowed the most personal freedoms of all are those structure around universal suffrage with a secret ballot. Any other society will constrict human choice in more fundamental ways.

    Posted May 9, 2011 at 10:04 am | Permalink
  8. Jonathan Freije wrote:

    @Jonathan Padwe wrote: But development and aid also seek to intervene where there is massive economic inequality (a condition that characterizes the whole world). “Freedom” in this case is a relative term — the poor and marginalized do not have the same freedom that the wealthy and powerful do. They need protection from the market, not further exposure to it.

    I humbly recognize my lack of knowledge in development knowledge and public policy, but I do have a criticism of this argument. Why do you link material inequality between the poor and the wealthy with the need for protection from the market? In my studies, I read “The Mystery of Capital” by Hernando de Soto. I would summarize his argument that the oppressed need property rights and the rule of law. If the poor have a protected legal right to their belongings, they have the ability to leverage their wealth through investment, whether that be a small shop, farming, etc.

    The market is not the problem for the oppressed. They are not suffering because they are competing in free environment. I believe that the overarching problem is that they do not have clear property rights or a government that supports the rule of law. As such, they are unable to build and develop capital.

    Posted May 9, 2011 at 11:19 am | Permalink
  9. Merijn KNibbe wrote:

    @Gepap,

    Hayek was very (repeat: very) much against (repeat: against) the idea of rational, maximizing individuals.

    His idea was that our ideas and values and habits and preferences are, to an extent, historical relics which have proved their usefulnes in the past – as they made us survive – even if we do not understand why we do the things we do in the way we do them.

    As a continental scientist of the 1920’s, he did not share the Anglo Saxon preference for the idea of man as a rational being with well behaved preferences and the like.

    His ideas about the nature of mankind have much more in common with those of especially Norbert Elias and even K. Marx than with people like Lucas, Becker, Friedman.

    Remember: Hayek also trained as a neurologist, reconaissance pilot and economic statistician – and therewith knew quite a bit more about the limits to knowledge, data and rationality than most economists.

    Posted May 9, 2011 at 12:34 pm | Permalink
  10. There is a certain problem in Hayek’s thought that has been developed in Ralf Dahrendorf’s 1990 updating of Burke called “Reflections on the Revolution in Europe.” Just to set the stage, Dahrendorf comments on “Francis Fukuyama, who had his fifteen minutes of fame when he published a rather crude article entitled ‘The End of History’ in the summer of 1989.” [p. 37]
    Now to Hayek who Dahrendorf knew well as the Director of the LSE. “Hayek has a fatal tendency to hold up another system against that of socialism. It is a passive system to be sure, but one complete in itself and intolerant of untidy realities;… . Popper on the contrary is a radical defender of liberty, of change without bloodshed, of trial and error, and also of an active march into the unknown, and thus of people who try to design their destiny. This epistle pays homage to Popper rather than to Hayek.” [Dahrendorf 1990, p. 29] And then Dahrendorf continues: “Like Marx, Hayek knows all the answers. He does not find it easy to bear the untidiness of the real world. He gets as angry with those who have set out in his direction without following it through to the bitter end as he does with his ideological opponents. Hayek is an all-or-nothing theorist, which is fine so far as the constitutional preconditions of politics are concerned, but dangerous if not disastrous in the world of real political conflicts.” [Dahrendorf 1990, p. 34] And finally, “I cannot fault Hayek on his constitutional politics, and would not try to do so, but he has an unfortunate tendency to turn all politics, and certainly most economic policy, constitutional. … Not everything that is disagreeable to some, or to me, or even to Hayek, has by the same token constitutional status. Whatever is raised to that plane is thereby removed from the day-to-day struggles of normal politics, until in the end a total constitution emerges in which there is nothing left to disagree about, a total society, another totalitarianism. [Dahrendorf 1990, p. 36]
    If we avoid the mistake of thinking that Hayek’s or anyone else’s views are always perfectly self-consistent, then we should at least see that there was a bit of a Dr. Jekyll and Mr. Hyde problem in Hayek.
    The best test of all this is not to produce dueling quotes from Hayek but to look at precisely Dahrendorf’s topic; the great debates in the early 90’s about the transition from socialism to some form of a market economy and political democracy. Those who spouted Hayek the most were, unfortunately precisely those who Dahrendorf saw as constitutionalizing everything so that they ended up with a new form of utopian social engineering except based on Friedman, Hayek, and free-market economics rather than Marx. The Austrians who now champion Hayek as the great enemy of social engineering could not find their tongue in that debate. In the argument against the shock therapy to install the new master plan overnight, the Hayekians were no-shows. The market Bolshevik social engineers had no truck for any experimentalism since they “knew” what to do. Any opposition in the socialist countries to their master plans was only the cover for trying to keep the privileges and rents acquired under communism. Post-socialist politicians needed to have the political courage to wipe the slate clean of all those impediments to “the free market”.
    The worst of the market Bolsheviks at least were not Hayekians; they were the elite neo-classical economics such as Sachs, Summers, and Shleifer. Sachs explicitly quoted Dahrendorf’s call for trial and error experimentation and then argued against it. “If instead the philosophy were one of open experimentation, I doubt that the transformation would be possible at all, at least without costly and dangerous wrong turns.” (Sachs, Poland’s Jump to the Market Economy, 1993, p. 5)  To avoid “costly and dangerous wrong turns,” the then-Harvard wunderkinder promoted the scheme of mass privatization through voucher investment funds.
    One would have thought that the Hayekians would have been able to find their voice and oppose the market Bolsheviks, but unfortunately they were no-shows in one of the great and consequential debates of our time. Thus the Hayekian views against master plans are all well and good in making the case against a socially engineered transition from capitalism to socialism, but the Hayekians did not seem to have the courage of their convictions when it came to using the same arguments against the shock therapy master plans to make the transition from socialism to capitalism. For more on this old debate, see: http://www.ellerman.org/Davids-Stuff/The-Firm/Challenge-2003.pdf or http://www.ellerman.org/Davids-Stuff/The-Firm/Challenge2001.pdf

    Posted May 9, 2011 at 3:40 pm | Permalink
  11. Michael wrote:

    I agree with the first comment from GabbyD. Your disagreement seems more semantic than fundamental. Hayek does seem very certain that governments will screw up. I don’t think that’s some sort of basic misreading at all.

    Posted May 9, 2011 at 4:04 pm | Permalink
  12. Jacob AG wrote:

    @GabbyD,

    Lol, good question.

    In a similar vein, is Prof. Easterly skeptical of skepticism? (Should he be?)

    Posted May 9, 2011 at 11:37 pm | Permalink
  13. Rafe Champion wrote:

    A third rate effort by Fukayama. http://catallaxyfiles.com/2011/05/07/third-rate-review-of-hayek-by-fukayama/

    For a nuanced appraisal of Hayek on the fatal conceit of socialism.
    http://www.the-rathouse.com/hayfatalconreview.html

    Posted May 10, 2011 at 12:53 am | Permalink
  14. Phil wrote:

    @Gepap:
    In my opinion, cognitive biases are not evidence that people are not rational. It can look irrational, but maybe they are optimizing something else, for example information. In general, you could say you that ones have to much information too processes, so you rely on others experiences.

    The rational agent is one of the most misunderstood concept within economics.

    Posted May 10, 2011 at 2:25 am | Permalink
  15. Troy Camplin wrote:

    Why might Hayek be certain governments will screw up, but that individuals are going to be more likely to make the right decisions for themselves? To even think this distinction strange makes it clear that one cannot make the distinction between individuals with local, tacit knowledge and people in government far away without local knowledge, who are making decisions for you even though they don’t know you or your particular conditions. That seems a strange cognitive error to make.

    One can be fairly certain that in a organizational hierarchy such as a government, that any information is getting filtered as it moves up the hierarchy. Let us assume that there are 10 levels in a hierarchy and that there is only a 10% loss of information. What happens? At level 1, we have 100% of the information, at level 2 we have 90%, at level 3 we have 81%, at level 4 we have 73%, etc. up to level 10, where we are down to a mere 39% of the relevant information. Can you really tell me that the person at the top of this hierarchy can make better decisions for the person at level1 than the person at level 1 can? Hayek understood this, which is why he was pretty certain someone high up in an organizational hierarchy like a government could not make good decisions — they don’t have enough information. They do not and cannot know what information is missing, and that missing information may be vital to the decisions in question.

    This is the kind of certainty Hayek had about the inability of those in government to make good decisions. If you understand information theory and networks, it should be obvious to anyone.

    Posted May 12, 2011 at 4:22 am | Permalink
  16. Robert Tulip wrote:

    The key insight in Hayek’s The Constitution of Liberty, of direct relevance to aid policy, is that government should steer not row, and that rule of law is the foundation of economic growth. By setting the rules of the game, government catalyzes market incentives. Much aid is based on the theory that governments should row the boat by providing direct services for the poor. While government service delivery has immediate impact, it also creates dependency on donors, instead of liberating the poor for sustainable growth based on their own efforts and skills.

    Posted May 14, 2011 at 6:02 pm | Permalink

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  • About Aid Watch

    The Aid Watch blog is a project of New York University's Development Research Institute (DRI). This blog is principally written by William Easterly, author of "The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics" and "The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good," and Professor of Economics at NYU. It is co-written by Laura Freschi and by occasional guest bloggers. Our work is based on the idea that more aid will reach the poor the more people are watching aid.

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