Neoliberalism or neoclassicism is the dominant politico-economic theory today; so dominant that it’s hard sometimes to realise that there are another half dozen or more alternative theories. All theories share one trait; they are all incomplete and cannot fully explain the workings of the economy at micro and macro levels. Neoliberalism is founded on the ideas of FA Hayek.
Friedrich August von Hayek (FA Hayek) was born in Imperial Vienna in 1899; his father was a physician, his mother came from a wealthy family. He graduated in law and political science form the University of Vienna, becoming an economist, and later a philosopher of economic systems. In the early 1930s he moved to the London School of Economics, and after the war moved to Chicago; later he had a rather peripatetic career. Beside his academic work, he published two popular works; The Road to Serfdom in 1994, and the Constitution of Liberty in 1960. Serfdom was very popular when published, particularly in the US; Liberty was very influential in the Conservative party.
Serfdom is a very severe criticism of socialism, fascism and communism. It is one of the densest and most turgid books I have ever read; the sentences are long and complex to the extent that it is hard sometimes to be sure what things mean. Sometimes, I thought that Hayek was thinking in German but transposing into English. Hayek’s criticism of totalitarian systems, socialism, fascism and communism, rests on the idea of ‘liberty’, for he reasoned that all three systems would deprive individuals and firms of this, largely through central planning. For Hayek, liberty was an essential for human development; it includes laissez-faire (originally, laissez-nous faire), the idea that business should be free of artificial, state organised restraints. His concept of freedom, of liberty, is rather bounded by the idea that it is the freedom from coercive action by the state.
Western civilisation, Hayek declared, comprised liberty, democracy, capitalism, individualism, free trade and internationalism. It’s one of the features of the book that Hayek makes statements or assertions on every page as if like axioms they are obviously and self-evidently correct, yet I so often felt that, while he wasn’t wrong, his assertions needed modification.
Collectivism is, he asserted, centralised planning and a planned economy; but competition is always superior, and planning is anti-competitive. He favoured centralised planning for competition, not against it. He felt that a planned economy needed a dictator.
The system of private property, he asserted, was the most important guarantee of freedom, and not just for the wealthy. Even the poor had a better chance in a competitive economy than in a planned one. Although the wealthy had better chances in a competitive economy, there was, he felt, a case for reducing this inequality though the process had to be ‘impersonal’; he did think the world of the wealthy was ‘a better one’. He allowed for state intervention where an individual had been submerged in a ‘hazard’ against which it would have been impossible to make adequate provision; the case for state social insurance in such cases was strong. There’s much more along similar lines, stressing individual liberty, the importance of wealth while admitting that there might actually be a role for the state at times. Keynes thought there was much that he agreed with in the book. Certainly, the criticism of coercion collectivism is severe and continuous, and he makes a good case against it most of the time.
The Constitution of Liberty continues and expands his themes. It’s in three parts; firstly, why liberty is necessary and the value of freedom; secondly, there is a discussion of the law and legal institutions; and thirdly, his principles are tested against some economic and social issues. It’s an easier read than Serfdom; Hayek acknowledges the sympathetic help he received from Mr E McClellan ‘to straighten out [his] involved sentences’ (but see below). The front cover of my copy shows a pair of artery forceps, a rather odd bit of symbolism but perhaps emphasising his Hayek’s criticism of coercion. Let me emphasise just a few bits of what is a long book.
If, Hayek said, ‘capitalism created the proletariat’, it was because the wealthy gave employment to the poor, allowing them to survive and procreate. He thought that only the independently wealthy could ‘reason’ and concluded that wealth is a ‘good thing’.
In Chapter 19 has a section on social security and health. Hayek thought that the case for a free health service was based on two (economic) misconceptions; that medical needs are objectively ascertainable, and that they ought to be met fully in every case ignoring economic consequences, and secondly, that improved medical care results in economic improvements.
The conception that there is an objectively determinable standard of medical services which can and ought to be provided for all, a conception which underlies the Beveridge scheme and the whole British National Health Service, has no relation to reality. In a field that is undergoing as rapid change as medicine is today, it can, at most, be the bad average standard of service that can be provided for all.
Under a system of state medicine choice will have to be imposed by authority upon the individuals. It may seem harsh, but it is probably in the interest of all that under a free system those with full earning capacity should often be rapidly cured of a temporary and not dangerous disablement at the expense of some neglect of the aged and mortally ill. Where systems of state medicine operate, we generally find that those who could be promptly restored to full activity have to wait for long periods because all the hospital facilities are taken up by people who will never again contribute to the needs of the rest.
There are so many serious problems raised by the nationalisation of medicine…But there is one the gravity of which the public has scarcely yet perceived…The inevitable transformation of doctors, who have been members of a free profession primarily responsible to their patients, into paid officials of the state, officials who are necessarily subject to instruction by authority and who must be released from the duty of secrecy so far as authority is concerned.
The Beveridge Report identified ‘five great evils’, want, disease, ignorance, squalor and idleness. Hayek thought that the evils were really inflation, taxation, the dominance of government in education and the arbitrary powers of social security.
In an postscript to the book, Hayek explains ‘Why I am not a Conservative’. He describes himself as an ‘Old Whig’, that is an archeo-liberal, a believer in free trade and laissez-faire. He also says, quite explicitly, that ‘I am not an egalitarian’. A liberal, he thought, was based on moral beliefs of conduct which did not interfere with others and which does not justify coercion. A liberal was someone who went somewhere, who didn’t stand still, and was not an egalitarian. A conservative had a belief in inherited wealth and position with thus a greater influence on others. (Hayek also believed that inherited wealth was accompanied by inherited talent.) A conservative had a fear of change, and a distrust in the new; a conservative lacked principles; not moral principles, for these were usually strong, but political principles which would enable him to work with others with differing moral values, and it was the tolerance of such differences which made it possible to build a strong society.
There is much more that I could identify and quote; but now I want to turn to my own thoughts on Hayek, and on what he didn’t say. There is no criticism that I see of free market policies or laissez-faire, rather the acceptance that this is the best way for an economy and always was. Well, the might of the British economy in the 19th century wasn’t originally based on free trade, for that came later. British wealth was based on colonialisation and the expropriation of property, and on tariff barriers. It was only after the mutiny that the ‘pearl in the crown’ was a freed from the grasp of the East India Company who regarded it as a ‘cash cow’. Britain had high import tariffs—think of the ‘Corn Laws’—but demanded that other countries had low tariffs for British guns—think of ‘gunboat diplomacy’. Free trade is fine once you are the world’s major trading power, but it doesn’t get you there.
Hayek thought that the typical man was much better off in 1900 than in 1800; perhaps this was true for the rising middle class. In 1800 much of the population were agricultural labourers who were paid a pittance and lived in hovels. The town/country population split of 20/80 in 1800 was reversed in a century. With industrialisation, many moved to the cities where they were paid a pittance and lived in slums. Things were even worse for single women, even in 1900; they could barely earn enough to provide for themselves, and if they had a child, they were often forced ‘onto the street’. Industrialisation needed workers, preferably cheap ones; children often worked long hours in dangerous conditions. Attempts to reduce their hours were met with the usual excuse that it would be too costly to pay proper wages to adults. Hayek should have known this. If only the wealthy were able to reason, as he said, perhaps it was because the poor were too concerned with everyday subsistence to consider higher things.
The Irish agricultural labourer in the mid 19th century grew his and his family’s staple food, the potato. At that time Ireland exported much food to England. When blight destroyed the potato harvest, the peasant could not afford to food buy in the market, and during the famine food was still exported. At the time, Peel was prime minister, and arranged a covert shipment of ‘Indian maize’; the Irish had no experience of this. Peel was replaced by Lord John Russell who, at least initially, did not want to offer aid because it would be seen as interfering in the market, of upsetting laissez-faire. Hayek should certainly have known this, and should have seen that there were limits to what the market could do, where the market could and did fail.
In a railway accident in 1889 in Armagh, 80 people were killed; many of them were children. The subsequent Report advised the use of a ‘fail-safe’ breaking system. Such an automatic system had been urged for many years by the Board of Trade, but the railway companies always stalled—capitalists aren’t usually altruists, and the Board had no enforcement (coercive) powers. The accident was on 12 June; an Act came into force on 30 August. During a reading of the Bill, one Liberal MP said:
It would be a very serious thing if the Government in its attempt to protect the lives of passengers by rail, and the lives of working men, should take on itself to decide what form of carriage, what form of coupling and break [brake], is the proper form for railway companies to use. I am of opinion that the lives of passengers and railway men will be safer in the long run, if these matters are left in the hands of those who understand them best. I cordially approve of the pressure of public opinion being applied, through this House or through the Press, to railway managers, to compel them to consider both the safety of the public and the safety of their men; but if we endeavour in this matter—as we have, in my opinion, sadly too often endeavoured in the past—to give Government officials the power to decide what is the precise form of appliances which shall be used in connection with railways, we shall not be providing for the safety of the public or the safety of railway servants.
That is what Hayek believed; leave it up to the capitalists, to the market, and all will be well. As so often, it takes a disaster before anything gets done.
There’s a further ‘elephant in the room’; Hayek refers constantly to ‘man’, ‘manhood’ and ‘men’. There are almost no mentions of women; even when acknowledging the help he received from Mr McClellan he notes ‘he understands that Mrs McClellan helped’; she isn’t named. Hayek ought to have known of the role that women twice played in the wartime economies of Britain, and of the ‘women’s lib’ movements.
Hayek was a product of his times; born into the bourgeoisie he saw savings destroyed by the hyper-inflation after the Great War; he saw, and recognised, the evils of fascism and communism, even if he thought that socialism led inevitably to communism. He was an elitist, apparently ignorant of the roles of women, a believer in ‘free trade’ in some sort of golden age, even when neither actually existed; a man of blinkered vision. He felt that his views were unfashionable; his writings are so difficult that I wonder what he conceals that I haven’t discovered. It’s not necessary to write in a way that makes comprehension difficult, but clear writing does take time and effort.
He didn’t believe in ‘socialised medicine’; I’d say his views weren’t just ‘harsh’, they were cruel, unsympathetic and ignorant. They demonstrate the triumph of economic theory over common humanity. The UK’s Health Service certainly isn’t perfect, but much of the founding principles remain. Initially, the planners thought that once the NHS started, the costs of treatment would actually fall; it only took a few months for the extent of the need for treatment became apparent. Only the other day, I read of a gynaecologist in the early days who saw several women every week with a complete uterine prolapse, a procidentia, which they had tried to hold up with towels. The NHS staff most certainly aren’t lackeys of the state. And in the US, even with Obamacare, around 10% of the population have no health insurance and a dubious ability to access treatment; yet the US also provides world-class treatment—but limited to those who can afford it. A ‘bad average’ or nothing?
A last word, an anecdote, a chilling foretaste of the future:
At a meeting a few months after Margaret Thatcher became leader of the Conservative party, one of her colleagues, or so the story goes, was explaining what he saw as the core beliefs of conservatism. She snapped open her handbag, pulled out a dog-eared book, and slammed it on the table.
“This is what we believe,” she said.
The book was The Constitution of Liberty.