How do markets optimise the delivery of social services and social welfare? This question surfaces many of the challenges for the Austrian School, the philosophy that free markets and the price mechanism can do a remarkable job in managing people and their behaviour. While initially Friedrich Hayek’s theorising argued that the role of the State should be minimal, he ultimately conceded that some State regulation was required in order to maintain markets, and some other functions. For example, ‘[t]o prohibit the use of certain poisonous substances, or to require special precautions in their use, to limit working hours or to require certain sanitary arrangements, is fully compatible with the preservation of competition. The only question here is whether in the particular instance the advantages gained are greater than the social costs they impose.’ (The Road to Serfdom, p.38/9) The ultimate question of Hayekian liberalism is how much does the government have to interfere? What is the minimum possible function of government?
Economic Value and Money
The question has its roots in the concept of value. Value is a subjective thing, a personal thing, where one person places an arbitrary quantum of desire upon a thing. In an abstract sense, as Hayek put it in The Constitution of Liberty (p. 141), ‘each individual has values of his own which he is entitled to follow.’ Those values are of course in areas such as ethics and morality, but also in everyday judgements and decisions. The arbitrariness of subjective value may be determined by any number of factors, and may be expressed in several ways. Values are inconstant, depending on mood, a person’s age (e.g. I had different values when I was younger) or other dispositional factors.
Taking a simple example, a baker may say that a loaf of bread is worth €1. A shopper may agree to the baker’s valuation, and an exchange can happen. The baker’s valuation will be based on the cost of the raw materials – flour, heat and light, rent, wages – and their relative assessment of the market. For example, one baker may charge €2 for the same loaf of bread because it is ‘organic’. This may be because organic flour costs more, or because it is being positioned in the market as a differentiated product. Another baker may charge €2 because there is no other baker for five miles around. As a shopper, I may value the bread at €5 if I am particularly hungry, and even if I am not, I may be better inclined to agreeing with the baker’s high valuation if I am rich, and therefore less valuing of money than I am, for example, of time.
We are most accustomed to value being expressed in money terms, but value can be expressed in other ways. A loaf of bread may be worth ten minutes labour, sweeping the floor of the bakery. It could be worth a small pot of jelly that the bread buyer made at home. A shopper will subjectively assess the value of the bread, and then rationalise the exchange value according to commonly accepted principles – usually money. Similarly, the baker will make the same relative assessment. The simple exchange is for money, a highly liquid, highly transferrable commodity. Other types of exchange are more challenging, as the market for piece-work floor sweepers is less well understood. Similarly, home-made jam often attracts a premium that the baker may not be willing to pay; that premium may be for the ‘homeliness’ that many people like and are willing to pay for, but it doesn’t necessarily mean that the jam is somehow objectively better than the non-home-made variety. In these circumstances, the shopper’s valuation of the home-made-jam and the baker’s valuation may diverge, and exchange is more difficult. Money therefore lubricates exchange.
Recognising Value Beyond the Economic Sphere
Basic economic principles of value operate in this way. But Hayek’s major innovation was to extend the theory beyond commodity exchange into every sphere of human life. The basis upon which we determine subjective value – like the loaf of bread – is the same basis upon which we assess our values, which extend to religion, morality and identity. Fundamentally, everything can be quantified, or assigned an acceptable approximation of relative value.
What does this mean? Well, first of all, all government services should be provided by a competitive market, otherwise they will be highly inefficient. Absent the profit motive, government services will be excessively expensive, reflecting a tax on the population. So the passport office, the motor tax department, and administrative functions are outsourced. Buildings are subjected to ‘sale and lease-back’ arrangements with management companies tasked with managing security and maintenance. So far, there’s nothing controversial. There are exceptions, for example in environmental regulation of ‘certain harmful effects of deforestation, of some methods of farming, or of the smoke and noise of factories [which cannot be] confined to the owner of the property in question, or to those willing to submit to the damage for an agreed compensation.’ (The Road to Serfdom, p.40) Healthcare – a contentious subject in just about every country in the world – gets more complex. This is in part because it is so expensive, but also because it involves ethics, in areas like abortion and euthanasia. Policing and prison management are complex as police and prison officers are at the sharp end of state-authorized deprivation of human rights, such as the deprivation of liberty if you steal a purse.
So, if you are to argue that healthcare should be retained in state ownership in order to preserve ethical standards, to ensure our values are protected, ask the question: who determines what our values are? Rousseau talked about the concept of the General Will being represented by the State, but who is to say what that is? Judges in the Supreme Court make constitutional determinations based on their interpretation of what the intentions of the constitutional framers were likely to have been, but similarly recognise that society and civilisation moves on, and the general will may have shifted. Those judges are smart and educated and thoughtful, and appointed largely on the basis of eminence and achievement. Yet for all their eminence and their thoughtfulness, their assessments are just as subjective as the man on the street, or the CEO of the Private Healthcare Provider. Hayek recoiled from the proposition. The concept of a General Will would in effect be a tyranny, a minority rule, he argued, one he referred to as an ‘ambivalent concept.’ ( The Constitution of Liberty, p. 289)
Hayek took this further in The Mirage of Social Justice. Social justice, he argued, was intellectually dishonest as a concept. He claimed that ‘social justice’ was a ‘semantic fraud’ (The Fatal Conceit, p.118). He scorned the adjective ‘social’ as something useful for securing majorities, something that was ‘irreconcilable with a competitive market order, and with growth or even maintenance of population and of wealth’, and therefore in effect anti-social! This was perhaps Hayek in his anti-totalitarian pomp, railing against the hubris of men, and their ignorant claims on omniscience. The former President of Ireland Eamon deValera once said ‘If I wish to know what the Irish want, I look into my own heart,’ echoing deGaulle of France, Amin of Uganda and countless others, succumbing either to the temptations of demagoguery, narcissism, or ignorance. Justice was based on value, something that he railed against as subjective and oppressive, while the concept of society itself, Hayek argued, was a flawed one. Societies are, in effect, ad hoc arrangements of exchange facilities, given some supernatural characteristics by human beings, in deference to childish nostalgia and a desire to see order, stability and predictability in things. There is no society. There are only markets.
This is in many respects a bleak view. Hayek’s reductionism denies the space for art and politics, for the superfluous, the messy and the noisy. The detritus of human life, of human existence, cast to one side as mere insubstantial distraction.
Markets then, established and enabled by minimalist states, are part of what he referred to as a spontaneous order, a natural evolution of human politics. It has always and ever been thus – the Hobbesian State of Nature persists. Markets could determine issues of so-called morality based on the underlying price mechanism. Value judgements met value judgements in a process of exchange, and as communities, peoples, and nations are constantly defined and redefined in exchange – our everyday interactions with one another – with the price mechanism underlying those transactions.
Bleak and all as the theory may be, there is an elegance and a logic to the position. We as a species have been taken with science for some time, and the truths that it can yield. Science has solutions to all of our problems, if we work hard enough at it. We’ll cure cancer. We’ll end child poverty. With enough time and energy, all of these problems will be solved. We’ll even find a way to immortality.
Fundamental Inequality: The Fly in the Ointment
The problem with Hayekian neoliberalism, however, lies in the fundamental problem of inequality, combined with the tendency of the market to serve itself rather than its constituents, when those markets achieve a certain scale. Markets and exchanges allow not merely for fair distribution, but for inequitable distribution according to talent and advantage. Hayek himself accepts this: ‘From the fact that people are very different it follows that, if we treat them equally, the result must be inequality in their actual position.’ (The Constitution of Liberty, p.150) Hayek does not argue that this should deflect the State from treating all people equally, as ‘a demand for equality is the professed motive of most of those who desire to impose upon society a preconceived pattern of distribution.’ (Id.) This is Hayek’s rejection of planning, his absolute rejection of an external imposition of value.
In the first instance – at the level of the trade – a trader knowing that a loaf of bread below the crust is mouldy has an advantage over the buyer who can only see the crust at the time of the deal. A seller of beans can convince a simple man that the beans have magical qualities. A complex system – like one of mortgage derivatives – can mean that the transaction becomes so detached from the fundamental indicators of asset value like labour-hours and commodity raw materials that disparities in knowledge can imbalance the trade. There are winners, and there are losers.
Winners repeat their successes, and concentrate and industrialise their strategies. Financial engineers optimise the processes. The unfettered free-market objective – profit – becomes itself commoditised, tradeable. International networks established through globalisation elevate the integration, and arbitrage global political and economic inequity. Small islands in the Caribbean with no natural resources exploit their sovereignty and effective tax equivalence in the international system to enable the further elevation of capital into a supracivilisational realm. Capital, money, the product of human creativity, is then not redistributed, but essentially vapourised.
As this process continues, those at the bottom – the unaware bread buyers – are increasingly deprived. The loaves become smaller, more expensive, in order to serve those in the rest of the system. The baker still needs to buy flour, which comes in smaller sacks now. The wheat farmer needs to buy fertilizer, the price of which keeps going up. The fertilizer manufacturer needs to hit margin targets in order to maintain its share price, and on and on it goes. Gradually, the malaise creeps up as inequality grows. The lower middle classes – the bakers, the farmers – find themselves under more strain.
Systemic Upset: Technology, Innovation and Breakdown
Occasionally, technologies and innovations are developed that inject relief into the system – a new more efficient baker’s oven, or an alternative fertilizer – but the system quickly adapts to strip that benefit. The rewards for disruptive innovation are significant for the innovator – think about social media, consumer electronics, and the patent wars. The rewards system is important and targeted: inventors need to be incentivised to continue to streamline and accelerate the process of capital elevation. But those innovations then become part of the productive orthodoxy: social media becomes surveillance capitalism. Consumer Electronics attack the norm of an eight hour work day. The patent wars drive armies of lawyers to ratchet up the price of life saving drugs.
Occasionally, the system breaks. Revolutions and reactionary politics such as Brexit, or the election of Donald Trump, upset the established order. Each has been attributed to large swathes of white lower-middle and working class people feeling alienated. Sometimes service delivery fails. 80 people died in a fire at Grenfell Tower in London, where a decision to use cheaper cladding with reduced fire resistance appears to have been an aggravating factor. The renovation work that had included the cladding had been the subject of an aggressive tendering process. In the United States, 64,000 people died in 2016 from drug overdoses, an increase of 19% on 2015. Pharmaceutical companies continue to lobby for easier access to their drugs. In each situation, corrective measures are being taken, reports are being commissioned, and hearings are convened, but the effects are cosmetic, localised, and incapable of effecting systemic change.
Those disadvantaged, incapacitated, or otherwise marginalised by the economic system are clearly at risk of being further isolated as markets grow and evolve. This causes severe problems for the spontaneous order theory, or rather for our acceptance of its effects. If we are to believe that human beings arrived at a spontaneous order that logically and naturally formed, in the first instance that may well mean that efficient systems – markets – ensure. This is a positive thing, in a general sense. We must also believe, however, that the negative consequences of market forces will have a crushing impact on those less well off in society. With less access to resources and education, the resulting poverty is accompanied by poor health, lower life expectancy, and other bad outcomes. Markets reward innovation and excellence; they also severely punish suboptimal performance.
New Realities, New Threats
Hayek died in 1992, at a point which could probably be seen as the high water mark for Hayekian economics. Having triumphed over Keynesiasm in the late 1970s, the Thatcher-Reagan axis of the 1980s managed to defeat communism and usher in an era of new hope. The markets, it appeared, would save us. Internationally, however, this didn’t work. The attacks of 9/11 brought home to America that the neoliberal tide had consequences on a global scale; free market economics created losers that were angry, and largely unseen. The exploitational hard edge to neoliberalism had no soft touch in its new imperialism, and the new inequalities that were being created in developing countries were far more profound than at home. In 2008, the under-regulated financial sector collapsed in on itself after years of vacuous self-dealing. New technologies operating new abstractions such as data trading and cryptocurrencies challenge the fundamental economic assumptions upon which the world works today, and challenge democratic politics itself. ‘Freedom’ and ‘values’, the bedrocks upon which Hayek built his anti-totalitarian thesis, are become fungible, malleable, controllable.
Hayek built much of his perspective in response to the appalling governance in Europe in the 1920s and 1930s, emboldened by the consequences that followed, of war, holocaust and communism. His prescriptions were of their time. Globalization and technology have conspired to neuter Hayek. His time is done.