by Peter Boettke
In How Innovation Works, Matt Ridley argues that “Innovation is the child of freedom and the parent of prosperity.” This is actually quite a profound proposition to contemplate. It joins, I think, a group of core claims by economic thinkers from Adam Smith’s “division of labor is limited by the extent of the market” to Julian Simon’s “the ultimate resource is the human imagination.” F. A. Hayek had several such intellectual nuggets he invited readers to mull over in their effort to unlock the mysteries of the world. To many, Hayek is most well-known as a critic of socialism – so his intellectual nuggets are associated with negating rival ideas, such as explaining “why the worst get on top,” or his exploration of the “knowledge problem” that socialist societies would confront in the attempt to plan the economic system. But Hayek also had several important propositions about what makes a liberal order desirable, and how a market economy actually works.
Hayek practiced political economy with the same approach as David Hume and Adam Smith, while also practicing economics with the same logical rigor as neoclassical economists such as Menger and Bohm-Bawerk, Wicksteed and Wicksell, Marshall and Jevons, and Clark and Fisher. But his approach to political economy would lead him to raise questions about the sterility of a technical economics too far removed from the choice dilemmas of real-living human actors, and the legal, political, and social institutional background against which commercial life was played out. Hayek was, in this regard, a different sort of technical economist than his peers. The marginalist principles were deeply understood, but both subjectivism and institutional context led him to stress the process of the coordination of economic activity through time as opposed to the end-state that would be revealed in the equilibrium pattern of activity that results after all the economic forces at work had done the job.
Hayek earned his advanced degrees at the University of Vienna, and at the time the study of economics there was within what today we would call a School of Law. As a result, Hayek never thought of the economic process taking place in a vacuum. Instead, these processes are always in the context of specific institutional arrangements – formal and informal. The pure theory of choice can follow the logic of the economic calculus, but our understanding of the complex coordination of activity depends critically on the rules of the social game that determine how we interact with each other, and with nature. Hayek, like earlier political economists and social philosophers, understood that human beings have a propensity to violence, as well as for cooperation. Hobbes taught us that our natural propensity was toward pillage and plunder, and thus the reflective equilibrium was, unless checked, that we would raid rather than trade and life would devolve into a war of all against all. On the other hand, Smith taught us that we had a natural propensity to barter and exchange. Smith thought we could under the right institutional conditions find that trading rather than raiding would increase our well-being, and could, if pursued in the large, lead to the wealth of nations.
But what defines the right institutional conditions? Smith’s friend David Hume suggested that for peaceful social cooperation to emerge we had to have in place the institutions of property, contract, and consent. We needed stability of possession, the transference of those possessions through consent, and the keeping of promises. In the absence of such an institutional framework and practices, we would devolve into Hobbes’s world.
In his essay “Individualism: True and False,” Hayek argues that Smith and his contemporaries sought to find that set of institutions that could guard against the downside risk of bad men being in charge. Hume had argued that systems of governance must presume that all men are knaves, not because men are in fact knaves, but because if a knave rose to power they would be put in check. Human knavery comes in at least two forms: self-interest with guile, and arrogance of the anointed. Smith told us that any system of governance that puts an individual or group of individuals in charge to dictate our economic decisions would not only assume a level of knowledge that they could not obtain, but also assume an authority with which they could not be trusted. And, Smith adds, would nowhere be as dangerous as in the hands of those who thought of themselves as fit for the task.
By building guardrails into the system of governance such that bad men can do least harm, Smith and his contemporaries thought they had developed a system in which all could be free. It did not depend on selecting good men to rule, and it certainly did not require all men to become good and wise. But it made use of men in all their given variety – good, bad; smart, stupid; industrious, lazy. It was the institutional guardrails that did the job. And those guardrails were based on property, contract, and consent. Through the evolution of various efforts to ameliorate social dilemmas a body of conflict resolution rules emerge. Most critical to this conflict-reducing transformation of the social order are private property and freedom of contract embedded in a rule of law.
Hayek’s The Constitution of Liberty is a contemplation of the consequences of being bound by the rule of law in judicial and political decision making. Security of persons and property, sanctity of contract, impartiality in judicial decisions are all part of this vision of a society of free and responsible individuals. One can even read into Hayek if one wants the classic republican idea of a politics that is defined by non-domination. The principle of generality also means that politics and law must be non-discriminatory. A law that applies to one party, must apply to all parties; a policy that benefits one group can only be adopted if it benefits all groups.
We are one another’s dignified equals. As Adam Smith taught us the only difference between the philosopher and the street porter is in the mind of the philosopher. We are natural equals in this respect. Not equals with regard to skills and aptitudes, not equals with regard to resources at our disposal, but equals with respect to our status before the law and in relation to another as beings worthy of respect. This is the philosophical promise of liberalism – a society of the free choosing of its citizens, and a politics that exhibits neither discrimination nor relationships of domination. This vision of the “good society” has the added benefits of unleashing the creative powers of a free people. A primary task of the political economist is to examine how alternative institutional arrangements either promote or hinder the ability of individuals to pursue productive specialization and realize peaceful social cooperation through exchange. The great discovery as we already pointed out was that the system of private property and freedom of contract embedded in the rule of law was most conducive to the wealth creating activity that produced generalized prosperity, relative peace, and individual autonomy. And, it is this institutional regime that provided justice. Smith referred to his liberal plan for liberty, equality, and justice. Liberalism doesn’t conceive of justice as distributive justice, but as justice as fairness in the rules. We stand equally before the law, the judicial decision process is impartial, and the social order is just.
Hayek took as the subtitle of Law, Legislation and Liberty the following: A Restatement of the Liberal Principles of Justice and Political Economy. These liberal principles of justice were decidedly not related to distributive justice. Hayek, in fact, argued that the notion of “social justice” was an illusion, a category error, when applied to the market economy in a liberal order. The reason, there is no central distributor, just as there is no teleology of the market. The basic economic point that the laws of distribution cannot be separated from the laws of production was joined with this complimentary observation concerning the distributor. By way of illustration let’s take a quick detour into the world of our primate cousins – the capuchin monkey. If you look up a TED talk discussing experiments with capuchin monkeys you will find a discussion of an experiment attempting to discuss issues of inequality and resentment. Two monkeys are placed side by side in cages, and an experimenter stands before them. Each money is asked to perform an identical task for which they will receive a reward – either a grape or a slice of cucumber. Both have the same nutritional value to the monkey, but the grapes are sweeter and thus preferred. The first monkey goes and performs the task and is rewarded with the cucumber, no problem, good reward for the task. But then the second monkey performs the task and is rewarded with the grape. Now the first monkey thinks something is up, but perhaps next time it will get the grape. The experimenter turns to the first monkey and asks the monkey to perform the task, the monkey performs the task but again is rewarded with a cucumber. The monkey throws the cucumber slice out of the cage. The second monkey performs the task and is rewarded again with a grape. At this point, the first money shakes the cage expressing anger at the experimenter.
Correctly so, I would argue, because the experimenter is treating equals unequally. But that isn’t what goes on in the market system. There is no central distributor. We do not in the market economy play games like fair division – where one party cuts, while the other party chooses. Instead, how we cut up the pie will determine the size of the pie that will be distributed among contributors. It is simply a category error for moral philosophers and policy makers to act as if the situation with the monkeys is what we face in the market order. But even the monkey’s outrage reveals something important. The monkey is not envious of the other monkey – if that was the case the monkey would try to reach into the other monkey’s cage. Instead the monkey is demonstrating resentment at an unfair central agent.
If Hayek’s generality principle is violated, then we have every right to react as our capuchin cousin does. The thumb on the scale is unjust, the favors to special interest groups is unjust, the protections and privileges enjoyed by the mercantilist elites is unjust. In a letter discussing his newly published Wealth of Nations, Adam Smith referred to the book as an aggressive indictment of all of British commercial society. Modern progressives misread that passage as Smith criticizing capitalism. He is not, he is criticizing the mercantilist system of government-granted monopoly privileges. Why? They are unjust and imprudent from the perspective of ensuring the material well-being of the people in that society.
Smith’s liberal plan for liberty, equality, and justice is the ancestor of Hayek’s restatement of the liberal principles of justice and political economy. Protection of property and persons, freedom of contract, and the rule of law are the necessary ingredients for a society of free and prosperous people. And, let me add, a just and good society.
Peter Boettke is Distinguished University Professor of Economics and Philosophy, George Mason University and Director of the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, Mercatus Center at George Mason University. Send him mail.
Isonomia Quarterly 