Who’ll Be Persuaded?

Imagine someone coming upon this subject for the first time. From Hayek’s The Fatal Conceit the novice might well gain the impression that the future of economic and political life on earth will turn on the outcome of a debate between, on the one hand, Hayek virtually alone, and on the other hand, an enormous number of half-witted socialist intellectuals. The previously untutored reader might well conclude that our present world order teeters on a thin edge separating capitalism with its clearly defined and enforced private property rights (“the market order...prevailing in the greater part of the modern world” [p. 84]) from socialism with its full-fledged centrally planned command economy. The reader would learn that although socialism has been an “obvious economic failure” [p. 85] wherever it has been tried, most Western intellectuals remain under socialist illusions, and their continued espousal of this destructive system creates a serious threat to the well-being of us all: the slightest slip toward socialism could plunge the people of the earth into massive famine and poverty. I exaggerate, but not much. Despite its occasional qualifications and concessions to the complexities of reality, Hayek’s exposition comes distressingly close to my caricature. The character of his rhetoric is unfortunate in several respects.

Most importantly, he simply ignores the most significant debates now occurring in political economy. From reading Hayek, one would never know that public choice had been invented. Neither Buchanan nor Tullock nor any of their followers gets a single mention. Nor does Hayek show any awareness of public choice problems. He proceeds as if socialist intellectuals, by faulty arguments and inexcusable obstinacy, have led the world astray. Presumably, by exploding these arguments Hayek expects to keep us away from the precipice. In Hayek’s world, political actors seem always to be at odds over how to operate the whole system. There are no special-interest groups, no vote-maximizing congressmen, no public-good problems, no free riders, no prisoner’s dilemmas, no issues of constitutional revision or meta-constitutional ideology. Hayek makes only a single mention of the sociology of knowledge, which is to dismiss it along with the whole of sociology as “socialist science” proceeding “in sovereign disregard of knowledge gained by established disciplines that have long studied such grown structures as law, language, and the market” [p. 51]. The sheer ignorance embodied in that single observation is disconcerting—what were Weber, Durkheim and Pareto doing? Such an ill-informed outburst raises questions about the reliability of many other freestanding pronouncements by Hayek.

The exposition is also marred by a few outright factual errors and a larger number of questionable deductions. An example of factual error is Hayek’s apparent acceptance of the claim that “political anarchy” prevailed in Europe during the late Middle Ages [pp. 33, 45]. In fact, a pluralistic legal order existed in which multiple jurisdictions held sway— canon law, urban law, manorial law, king’s law, folk law, merchant’s law. It was anything but anarchical. An example of logical error is Hayek’s claim that “if civilisation has resulted from unwanted gradual changes in morality, then no universally valid system of ethics can ever be known to us” [p. 20]. Indeed, Hayek makes frequent claims about what can or cannot be known to us. How does he know these limitations while we do not? Ironically, one is reminded of Marx, who single-handedly hauled his own thought above the superstructure while everyone else’s thought remained intrinsically incapable of this glorious trascendence.

Not only does Hayek ignore the structural and political issues studied by public choice scholars; he also ignores the issues emphasized by the intellectuals who have most successfully challenged the claims of pro-market scholars during the twentieth century. I refer, of course, not to socialists but to the mainstream economists and others who have embraced the concept of “market failure” in its many guises. According to this school, actual markets are beset by deviations from the ideal of Pareto optimality because of externalities, increasing returns to scale, monopoly power, public goods, and insufficiencies of information. Except for presenting his familiar ideas about the nature of the information problem as it is solved by the market process, Hayek makes no explicit attempt to refute the errors of this influential school of blackboard economists. He might easily have done so, for recent decades have witnessed fundamentally important efforts in theory and empirical research having to do with transaction costs and property rights, and these efforts have gone far to discredit the market-failure interpretation. Hayek makes passing mention of Coase, citing the classic papers on the nature of the firm and on social cost, but confines his remarks about recent studies in property-right economics to little more than a page, much of which is taken up by an attack on copyrights and patents [pp. 36-37].

In sum, despite the many insights it offers—most of which appeared in Hayek’s earlier works—Hayek’s The Fatal Conceit fails because of its rhetoric. It does not face up to the nature of the world we live in, a world of more or less mixed economies with not a single case even approximating the ideal market system of private property rights and very few cases approaching the ideal socialist system of central planning. I do not expect Hayek’s argument to win over anyone not already in great sympathy with it: the argument simply does not meet the opponents’ claims on their own grounds. Nor does it exploit the fundamental developments of analysis by friends of the market during the past few decades. Instead, Hayek has chosen to take still another whack at the intellectually dead horse of central planning and to rail against all those impudent enough to think that reason should be brought to bear to understand and, in some cases, to challenge certain received traditions and morality.