I have a review of the definitive version of Hayek’s The Constitution of Liberty in the latest IPA Review.
Last year marked the 50th anniversary of the publication of Friedrich August von Hayek’s The Constitution of Liberty. This event went unremarked here in Australia and global celebrations, if any, were somewhat muted.
Friedrich von Hayek shared the economics Nobel Prize in 1974 partly for his ‘penetrating analysis of of the interdependence of economic, social and institutional phenomena’ and his most popular book was his The Road to Serfdom published in 1944. This book brought him fame in the United States after it was condensed by Readers Digest.
His most important work, however, remains The Constitution of Liberty. This book has remained in print for the last 51 years, with Routledge last reprinting it in 2006. Apart from English, it has been published in eight languages. Unfortunately it has never enjoyed the successes of The Road to Serfdom.
Early reviews were uniformly hostile. New York University philosopher Sidney Hook wrote in the New York Times that ‘Mr. Hayek is always worth listening to. He is an intellectual tonic. But in our times of troubles, his economic philosophy points the road to disaster’. Far from it, Hayek’s ideas are now very mainstream.
More recently Francis Fukuyama, also writing in the New York Times, published a hostile review of The Constitution of Liberty. His argument was that there is a deep contradiction in Hayek’s thought; that individuals muddling along could organise their lives but that government muddling along would fail. This argument, however, shows a deep misunderstanding of Hayek’s thought.
The key to fully appreciating Hayek’s thought lays in his theory of knowledge and information. This theory was set out in two papers published in 1937 and 1945. Hayek’s great insight is that nobody knows everything – for economists this is a very insightful observation. There is ‘a sum of facts which in their totality cannot be known to the scientific observer, or to any other single brain.’ Knowledge does not exist in ‘concentrated or integrated form’ but is dispersed, incomplete and even contradictory.
The consequences of this insight are fundamental and profound. It means, for example, that social engineering is likely to result in failure and government planning on a broad scale is likely to result in unintended consequences and perverse outcomes. Government is likely to fail because it can never know enough about any individual to organise and plan their life, whereas that individual either does know enough or can soon discover information to make an informed decision.
As part of his Collected Works the University of Chicago Press has now published the definitive edition of The Constitution of Liberty.
What makes this version especially useful to readers is the treatment of Hayek’s end notes. The editor has transformed all end notes into footnotes making it easier for readers to follow Hayek’s arguments. He has also corrected mistakes in the 1,900 citations and provided translations to the foreign language quotes that Hayek was so fond of including in his writing.
Being an old school European academic it probably never occurred to Hayek that his readers may not be fluent in several languages. So the translations are particularly welcome.
The book itself is divided into three parts that discuss the ideals of freedom in the context of the power of the state, democracy and the welfare state. A postscript contains his single most famous essay, ‘Why I am not a conservative’.
Written in the late 1950s The Constitution of Liberty reflects the work of a fine thinker in his prime. Hayek had a deep understanding of information problems within markets – economists now refer to this issue as asymmetric information. Although his appreciation of the information is much deeper and richer than most modern economic analysis incorporates.
Access to information limits what can be known, what can be done, and what can be planned. Allowing individuals to pursue their own interests, which only they could know, within a framework that maximises cooperation, would result in greater prosperity.
Hayek’s Constitution remains as important today as it was 51 years ago. In the 1970s Margaret Thatcher held up a copy of the book and proclaimed, ‘This is what we believe’. More recently, here in Australia, former Prime Minister Kevin Rudd attacked Hayek almost proclaiming, ‘This is not what we believe’.
If Kevin Rudd – or his ghost writer – had actually read Hayek first-hand he may well have come to a very different conclusion. He almost certainly would have asked tougher questions when various hare-brained schemes, like FuelWatch, GroceryWatch, and the mining tax, were being proposed.
Hayek deals with issues such as the welfare state, trade unions, social security, taxation, natural resources, and education. These issues are still at the forefront of political debate.
What many would find surprising is that Hayek did not imagine an emasculated state – rather he took the view that government could play a large role in society.
Hayek insisted that it was the character of government intervention not the size of government that mattered. In particular he was not an anarchist – he readily accepted that a market economy presupposed the existence of a government and a public sector.
Hayek tells us that coercion occurs ‘when one man’s actions are made to serve another man’s will, not for his own but for the other’s purpose’. Hayek explores the overlap between the proper functions of the state and the limits of coercion. Hayek sets out some principles of coercion. The government should never coerce anyone except in the enforcement of a known rule that is certain, general and applied equally.
He imagined that government could set standards, provide public goods, regulate the monetary system, and so on. These views are hardly controversial. That describes more or less exactly what modern governments do.
Where he did believe government should not intervene is in the price mechanism itself. Setting prices would likely result in unintended consequences and perverse outcomes. But the imposition and enforcement of general rules would lead to government that enhanced economic prosperity.
Hayek does not provide a cookbook approach to economic policy, but rather sets out a framework of ideas that he then uses to explore political economy issues such as taxation. He is not opposed to taxation per se, but does believe that progressive income tax is arbitrary and inconsistent with the general principles he establishes.
Hayek was not opposed to compulsory private health insurance to prevent those who can pay for themselves free-riding on the public purse. Similarly he warns against the unfunded, open-ended social security systems of western Europe and north America. They are unsustainable. Australia’s superannuation system is consistent with Hayekian principles – individuals provide for their own old age through compulsory savings.
New readers will find much to ponder. Those who know Hayek’s work will rediscover an old friend.