“The inevitable ignorance of all of us”: Hayek’s argument for the minimal state
The idea that genuine entrepreneurship and an extensive and sustainable middle class can coexist over the long term with a massive government presence in the economy has been sweeping through the entire world for some time, being very fecund in the Romanian academic and political milieus as well. This mirage has two, mutually-reinforcing facets. One, which gives the semblance of truth of the claimed phenomenon, is that widening the share of government spending in GDP and increasing welfare went hand in hand. In relation to this, mention is seldom made of the strengthening of the monopoly power of some gigantic corporations and of ‘too big to fail’ entities. The other, at the opposite end, more conspicuous especially after the 2008 crisis, points to a deepening of economic inequalities, which would call for stepped-up distributive justice (or social justice, as it is also called) that may be put into practice via an increase in redistributive interventionism, namely via a rise in government size, measured by the share of expenses in GDP. All this is claimed despite the fact that, in many countries, the share of total government spending in GDP is close to 50 percent, while in some of them it is wider, and the increase in expenditure owed, almost everywhere in the world, particularly to social spending, which in many economies reached or even exceeded 20 percent of GDP.
The purpose of my article is to show that entrepreneurship and an extensive and sustainable middle class are incompatible with an ‘overweight’ government. As the mirage described above is spreading and seems more and more convincing, my article is but another modest endeavour inspired by Mises’s older exhortations to fight “bad ideas” and by his belief that “We must substitute better ideas for wrong ideas” (https://mises.org/library/economic-policy-thoughts-today-and-tomorrow). At the same time, I have in mind Tom G. Palmer’s profound remark that “It takes work to free our minds from our dependence on the state” (Cato’s Letter, Fall 2012, Volume 10, Number 4). Finally, given the spread of “the mirage of social justice”, which currently makes people believe they can build a society that can host, at the same time, a big state, preserve economic liberalism and extend prosperity via an increase in redistribution, we should recall that “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design” (Hayek, The Fatal Conceit: Errors of Socialism, in W.W. Bartley III (ed.) The Collected Works of F.A. Hayek, Vol. 1, p. 76, Routledge).
A strong argument against the “bad idea” that the three desiderata – a big state, genuine entrepreneurship, and a prosperous, extensive and sustainable middle class – can be designed to coexist is that of ignorance and uncertainty. Ignorance of each of us regarding that which is known to all the others is the argument that Hayek introduces, if I am not mistaken, in Individualism: True and False (in Individualism and Economic Order, A Gateway Edition, 1972) and uses as a foundation for his view on order in society throughout his works. I will hereinafter dwell on this argument with the purpose of this article in mind.
For those familiar with the Austrian theory, and particularly with that of Hayek, it is well known that there is a division of knowledge, resulting in turn from the fact that we are all necessarily ignorant about “a great many of the factors on which the achievement of our ends and welfare
depends”. Hayek explains this division very clearly in The Constitution of Liberty, where he uses the phrase “the inevitable ignorance of all of us” (in The Constitution of Liberty: The Definitive Edition, p. 80, in Ronald Hamowy (ed.), The Collected Works of F.A. Hayek, Volume XVII, 2011).
This division of knowledge could not highlight more clearly the role of individual freedom in achieving prosperity. In order to adapt to the reality in which ignorance and uncertainty are constitutive elements, man must be free to act using his limited knowledge on “most of the particular facts which determine the actions of all the several members of human society” (Hayek, 1993, Law, Legislation and Liberty, Vol. 1, p. 12; see also the quote from Hayek at the end of the article). Each individual action (decision put into practice), initiated based on each person’s knowledge and on the general laws for achieving individual particular purposes, becomes part of a decentralised decision-taking mechanism in the society: the market. Thus, the market is the only mechanism that man knows (has discovered, has available) to cope with ignorance and uncertainty about the society, whose evolution cannot be known beforehand. Moreover, market-coordinated individual actions lead to unintended benefits (not designed by man) for the society.
However, for a large number of people, ignorance does not seem to play a role in formulating the views on the society. To them, not only that ignorance is not “necessary and irremediable”, as it is for Hayek (Law, Legislation and Liberty, Vol. 1, p. 12) and generally for the Austrian School, but on the contrary, by the pattern of the laws of physics, it can be overcome through rational knowledge, which can be used to design the society and direct it towards achieving certain particular ends.
After the 2008 crisis, the legitimacy of this groundless belief that we possess the necessary knowledge to direct the economy and the society towards attaining such goals as greater economic equality seemed to be on the rise. Hence, several economists were more inclined to believe that you can strengthen the state’s influence in the economy without impairing the entrepreneurial capacity and eroding the middle class. Schumpeter proved them wrong in his The March into Socialism (The American Economic Review, May 1950, pp. 446-456). Similarly, Nisbet showed us in The Quest for Community that communities as well had a hard time coming to terms with the state. These papers show that a bloated state does not leave sufficient room for anything, neither for entrepreneurship, nor for communities, whose functions have been taken over by the state only in theory. In reality, the state left but vast emptiness in place of communities, reflected first and foremost in alienation.
Those who try to blend the ideas of economic liberalism with relatively strong state interventionism in the economy by positively referring to entrepreneurship, free initiative, middle class, community, etc. while at the same time seeking virtues for socio-economic planning fail to understand that they are actually mixing two types of rationalism – that of spontaneous order and the ‘constructivistic’ one (as coined by Hayek) – which are diametrically opposed.
The first type of rationalism – that of spontaneous order (a phrase first used by Wilhelm Röpke in German back in 1937, in his book Economics of the Free Society) – implies self-correction and, therefore, social order is the product of that self-correction and requires very little outer direction and control. This type of rationalism, specific to liberal economic philosophy, was quasi-absent in the past century because, although rehabilitated at intellectual level by Hayek starting with the 1970s, it was generally overlooked by social sciences (economics included). Nonetheless, the 2008 crisis was attributed to liberalism, only because some excessive financial restrictions imposed during 1950-1980 were lifted starting in the latter half of the 1980s.
The second type of rationalism implies that nothing in the social order can be good unless conceived by the human mind and, hence, social order is good only if it is the product of human reason dedicated to that social purpose. In this latter type of rationalism there is not too much room for self-correction and, therefore, social order needs substantial direction and control. It is the philosophy that has dominated social sciences and which, as already pointed out, seems to have enlisted followers as of late.
At first glance, for those not making a clear distinction between the two types of rationalism, it might seem there is an issue of dosage, so that direction and control, i.e. the size of state intervention, could be larger or smaller, and yet the society could evolve without a problem. The only thing is that society works well if knowledge, which is necessarily dispersed and located at an individual level, is coordinated by the market.
Spontaneous order does precisely that: it coordinates each person’s necessarily limited knowledge for society to have as much from this knowledge and use it (for an outstanding brief introduction into the nexus between knowledge and society in Hayek’s work, see Norman Barry, The Tradition of Spontaneous Order, în Literature of Liberty: A Review of Contemporary Liberal Thought , vol. V, no. 2, Summer 1982). The state’s intervention is, however, a way of
de-structuring knowledge, since it implies that knowledge, even when referring to the individual and to circumstances in his immediate vicinity, is given at a point in time and is located in certain persons or institutions. This assumption is wrong. Knowledge is diffuse and that is why it requires coordination. The market-coordination of knowledge implies an efficient competition to discover that knowledge and use it to our benefit. In fact, Hayek underlines that essentially market order constitutes an effective discovery procedure (Law, Legislation and Liberty, Vol. 2, p. 10). While the quantity of knowledge available for the society increases, this process ensures the reduction in the quantity of knowledge necessary for each of us to bolster our welfare and the welfare of our loved ones. We cannot diminish or eliminate the role of the market without losing knowledge and capacity to innovate at society level.
The knowledge available to a benevolent planning authority (man or institution) will always trail way behind the knowledge stemming from the coordination via decentralised means (the market) of a very large number of agents. Hence, it remains very little to be directed or controlled in society by that authority (see Barry, 1982). Consequently, on one hand, the society does not need a great deal of direction and control, and, on the other, no entity (man or institution) could successfully direct or control it overall if success were measured by each one’s benefits. That is why there is no need for a large government. Hence the need for a minimal government. It is not a whim. It is a logical consequence.
To make a long story short, those who believe that strong entrepreneurship, an extensive and sustainable middle class and increased government interventionism can coexist are wrong. What they want – i.e. an increased state presence – is not possible without altering the market-coordination of knowledge that society needs in order to evolve.
Hayek brought arguments in favour of spontaneous order starting from the division of knowledge and from the need to coordinate the action of men that possess only limited knowledge. Adam Smith described spontaneous order as the mechanism of coordinating actions guided by personal interests. Those who think we can have at the same time solid entrepreneurship, an extensive and sustainable middle class and increased interventionism harbour two big illusions. One is that they can borrow the methods from physics to understand and direct the society. However, the society is more complicated, because it is the result of human action, which follows laws of a completely different nature than those at play in physics. These different laws do not allow predicting – consequently nor the control implied by interventionism –, but merely explaining the phenomena.
The other illusion is that the role of personal interests in keeping the economic system components together can be substituted by the common interests that an authority could promote.
But, if the economy overall is market order, strictly necessary to coordinate dispersed knowledge, then the economy is logically incompatible with a hierarchy of ends, namely with common interests established beforehand, although Smith admitted that – if the market cannot achieve some particular aims, in his case regarding education or extreme poverty – then they should be attained through government actions. As far as Hayek is concerned, market order means abstract rules of conduct, which are used to coordinate the means for achieving ultimate purposes, which are always non-economic. In other words, what the market coordinates are the means, not the ends. The dispersed knowledge that the market coordinates is a means, not an end. Preserving the market’s general property of coordinating the means, or in other words generally applying the order is more important than a particular end, although Hayek admitted that we should not let any human being fall below human condition. This is important because “in a free society, the general good consists principally in the facilitation of the pursuit of unknown individual purposes” (Law, Legislation and Liberty, Vol. 2, p. 1; I italicised the term).
Failure to understand the need of preserving the general nature of order is one of the key explanations for the persistence of the illusion of distributive justice in the society. This mirage fuels the idea that the society should have a hierarchy of ends, even though the authority that would impose these ends, be it the authority of the majority, lacks the necessary knowledge of each one’s particular circumstances, altering the freedom of pursuing individual ends. Thus, along this line of reasoning, the only instance in which the society might have a hierarchy of ends would be that when the society were no longer free to coordinate the means for accomplishing each one’s aims. The entrepreneur would no longer be free to dispose over means of production. The employee would not have the liberty to dispose over the fruit of his toil because of excessive taxation, etc.
By way of consequence, genuine entrepreneurship, an extensive and sustainable middle class, and increased interventionism in favour of common ends and interests cannot coexist. And yet, majorities might attempt to increase the state’s role in the economy, believing this would do no harm, on the contrary. How wrong could they be? Mises states that democracy “cannot prevent majorities from falling victim to erroneous ideas and from adopting inappropriate policies which not only fail to realize the ends aimed at, but result in disaster” (published in Romanian as Acțiunea umană: un tratat de economie, Curtea Veche Publishing, 2018, p. 213; translation by Gabriel Mursa and Dragan Stoianovici; introductory study: Horia Roman Patapievici).
Finally, let me conclude by underlining that I do not understand at all the reasons why those referring to spontaneous order highlight relentlessly that free markets, without laws, would somehow take us back to the jungle condition. It is impossible for someone who has read the quality literature on market order not to understand the strong focus on general rules of conduct, on the key role of general laws, on the role of ethics, tradition, experience, etc. The free market cannot exist outside a coherent legislative system.
Hayek clearly states that “a condition of liberty in which all are allowed to use their knowledge for their purposes, restrained only by rules of just conduct of universal application, is likely to produce for them the best conditions for achieving their aims; and that such a system is likely to be achieved and maintained only if all authority, including that of the majority of the people, is limited in the exercise of coercive power by general principles to which the community has committed itself” (Law, Legislation and Liberty, Vol. 1, p. 55). Smith, also, is very clear regarding the “natural liberty”, which he explains by stating that “every man, so long as he does not violate the laws of justice, [is] left perfectly free to pursue his own interests in his own way” (An Inquiry into the Nature and Causes of the Wealth of Nations”, MetaLibri Digital Library, p. 533; this edition reproduces the mentioned book included in The Glasgow Edition of the Works and Correspondence of Adam Smith, Vol. II, p. 687, edited by R. H. Campbell and A.S. Skinner, Oxford University Press, 1976).