In the previous article we examined some of the basic understandings of the Fatal Conceit, the expression that Hayek used to describe the mistaken belief that we can successfully plan whole economies. Hayek maintained that economies were too complex to be organized by one or several minds, and are generally most successful when individuals are left to buy and sell and trade in unregulated markets. Hayek’s further claim is that, since economies evolved slowly over many thousands of years, institutions and mores slowly developed around these economies, creating rich traditions that are not easily changed through the direct application of reason. The further claim is that, since we evolved in small local or tribal communities, our emotional and psychological responses to the global marketplace are often not very positive. We try, believes Hayek, to import the values of the family and the community into an extended international order and that creates problems. If we have faith in reason, then we try to “fix” the economy in order to satisfy our emotional and psychological longings. This application of reason to a complex system in the hopes of solving problems that might not, in fact, be real problems at all, is the essence of the Fatal Conceit.
What does Hayek mean by his critique of reason and rationalism in the context of central planning? Is it not the case that we see reason successfully applied to solve problems every day? Why is the economy any different? As Hayek makes clear in his book, he is not critical of reason itself, but rather of “constructivist rationalism” – a misapplication of reason to contexts or values or systems that are not appropriately understood by reason.
Hayek provides several explanations for why we misapply reason in this way. One can point to many different intellectual trends in the seventeenth and eighteenth centuries – notably the increased importance of the inductive scientific method (through figures like Bacon); a celebration of rational inquiry as a means of addressing all problems (Descartes); a robust epistemological empiricism (Locke); strong materialist tendencies from Lucretius, through Gassendi to figures like the Baron d’Holback; a new “rationalism” in politics (Paine, Godwin); the flourishing of science in the eighteenth century and the application of science to all areas of intellectual inquiry, including moral theory, economics, history, sociology and other disciplines. This last turn is the basis of logical positivism, which is the belief that all things that claim to be true must be scientifically true, proved by appealing to facts in the world. Of all the figures in intellectual history, Hayek sees Rousseau as the main source for a misguided application of reason, for he encouraged a nostalgic celebration of an earlier tribal life, and championed this tribalism as a means to reclaim lost liberty.
Hayek believed that when reason is misapplied to the economy, it is normally in the attempt to “solve” a perceived problem and achieve a certain end. A good example of this might be the attempts to “solve” the problem of material inequality by redistributing wealth through strong “progressive” income tax. Our strong cultural interest in equality, claims Hayek, can be traced to early tribal societies that valued material equality, homogeneity, charity and similar values. There are several problems with the attempt to “solve” the problem of inequality through this sort of “reason”. The first is that it does not respect the rights of individual private property fairly gained. The second is that the criteria for how to redistribute are decided by people who have no strong vested interest in the efficient reallocation of resources (the redistributed property), the third is a problem of information, that is, how can one possibly know who is most deserving of having their bank accounts debited, and who deserves the credit? There are dozens of other objections to the redistribution of wealth, but these are some examples of how reason sets out to solve problems that she cannot solve, and which may not properly be problems in the global economy at all.
This brings us to another dominant idea in the Fatal Conceit, and that is the central importance of property to individual freedom. I will quote Hayek at length on this point:
Freedom requires that the individual be allowed to pursue his own ends: one who is free is in peacetime no longer bound by the common concrete ends of his community. Such freedom of individual decision is made possible by delimiting distinct individual rights (the rights of property, for example) and designating domains within which each can dispose over means known to him for his own ends. That is, a recognisable free sphere is determined for each person. This is all-important. For to have something of one’s own, however little, is also the foundation of which a distinctive personality can be formed and a distinctive environment created within which particular individual claims can be pursued. (FC, 63)
One of the central claims of the Fatal Conceit is that the attempt to “reorganize” and “rationally construct” society was typically combined with the tribal values that seek to eliminate private property and achieve material equality. This combination has had a devastating effect on individual liberty and, furthermore, has significantly diminished overall prosperity.
One of Hayek’s central claims to be found elsewhere in his writings is that societies change when the intellectual leaders promote certain beliefs that are taken up and popularized by the “second hand dealers in ideas” – teachers, policy writers, journalists and so on. The great challenge today, says Hayek, is to convince the intellectuals that socialist and statist ideas are seriously flawed. One of the reasons this challenge is so formidable is that intellectuals typically believe that they can apply their minds – reason – to solving the ills of the world. And so we find ourselves in a strange situation, where we need to argue rationally with the intellectuals and convince them that reason – or at least a specious constructivist reason – is incapable of solving some of our most pressing social and economic problems. If we can overcome this fatal conceit, then we have made significant progress towards greater peace, prosperity and justice in the world.
Hannes Edinger email -
My question is about development. There seems to be a bit of a schism in the development community right now, with the more traditional interventionist/aid agenda being championed by Jeff Sachs and opposite view (that I find appealing), the "Hayekian insights" proposed by William Easterly. Barry Weingast talks about open state and closed state economies. He says that many less developed economies are in a closed state, which is an equilibrium of sorts because of the (relative) lack of violence and flux that exists in these economies because production is allocated to monopoly producers with political influence and relative peace is in their interest. Open economies are the sort that the developed world enjoys today. The evolutionary process from a closed state to an open state is a long arduous process of developing cultural institutions that will allow for an open access economy to exist.
From a Hayekian perspective, do you think the best thing to "do" for the developing world would be to do nothing at all. Cease all foreign aid/programs and let the corrupt governments collapse? Do all forms of intervention in developing countries fall under this "engineering" that Hayek cautioned about?
Jonathan Fortier says:
Dear Hannes,
That's a great question, and one of pressing importance today. Although it would seem cruel to do "nothing at all" for developing countries, there are compelling reasons to consider that giving aid to countries like Angola and Zimbabwe simply strengthens the ruling power's hold over the people. As Easterly and others point out, there have been pitiful improvements in developing countries despite the billions of dollars in foreign aid over the last three decades. I would suggest that a Hayekian approach of nurturing local communities to develop businesses, building on positive social networks (churches, community organizations, sports clubs, private owner associations, trading groups, private schools etc) is a way of establishing and strengthening the principles of reciproci
Sid Justice email -
You didnt talk about Hayeks criticism of social justice in your essay, why not? Why is Hayek so critical of this term?
Jonathan Fortier says:
Dear Sid,
Hayek provides a very thorough critique of social justice in the third volume of Law, Legislation and Liberty and briefly reiterates his concerns in a separate chapter on lanuage in The Fatal Conceit. I didn’t discuss it at length in my essay because one could write a whole book on the theme. I will briefly touch on a few of Hayek’s criticisms here.
The first criticism is that the word “social” is used both in a descriptive and a prescriptive way – so that it is meant to clarify our understanding of the world, but also to condition how we think about something. For example, we might refer to “social justice” to describe a certain kind of justice, but at the same time, we also are implying that social justice is something that is not only good, but beyond criticism. Similarly, “social welfare” might describe a certain kind of welfare, but the implication is that this is a good and desirable variation on normal welfare. The second reason that Hayek is suspicious about the term “social” is that it is used so frequently that its explanatory power has been lost. If everything can be modified by the word “social” (ie. Social justice, social goal, social economy, social science etc.) then perhaps it doesn’t really clarify what we mean when we use the term. Hayek refers to “social” as a “weasel word” which is a word “used to draw the teeth from a concept one is obliged to employ, but from which one wishes to eliminate all implications that challenge one’s ideological premises.” Many concepts like “democracy” or “markets” or “justice” have quite clear meanings believed Hayek, but when modified by the word “social” leave no clear indication of what is meant. As Hayek points out, proponents of “social justice” really mean “material equality” or “redistributionism” which is not compatible with a competitive market order, and in fact, works against the very social
Jolie Couillard email -
Could you explain constructivist rationalism more clearly?
Jonathan Fortier says:
Dear Jolie,
I will give it a shot. Hayek used the term to refer to the belief that you could apply reason to complex systems and achieve greater overall outcomes. The extended market economy is a good example. A person who is a “constructivist rationalist” would believe that you could improve economic outputs of a given country by regulating the production, consumption and trading of goods through the imposition of taxes and tariffs and other forms of government planning. The constructivist believes that he or she can apply reason and design and create better overall outcomes to the complex system. Advocates of the free market (like Hayek) would claim that the best way of ensuring the highest overall productivity is to allow the market to operate without government regulation. The market is a sophisticated and highly decentralized set of conventions and agreements, and is much better suited to producing greater overall benefits than central planning (as history has repeatedly shown). Hayek was not critical of reason itself (for we use reason every day to address our own economic concerns and balance our cheque books) but the misapplication of reason to systems of almost infinite complexity.
Jonathan
Naz Dack email -
What are the economic implications of Hayeks major claims in the Fatal Conceit?
Jonathan Fortier says:
Dear Naz,
Hayek was trying to warn us that one of the greatest threats to economic prosperity and human flourishing was the mistaken belief that we can plan economies. Much of his life’s work is dedicated to illustrating this point. The Road to Serfdom, for example, is an early work that explains the perils of following a central planning approach to economic organization (where we saw the disastrous consequences in the former Soviet Union). Many of us may believe that our economies are working well because they are not organized on the same central plans of communist countries. But that is neglecting the fact that large portions of our economies are controlled through taxation and regulation in the forms of labour laws, import tarrifs, export tariffs, subsidization, government monopolies and so forth. While it is good for us that our economies outperform the inefficient centrally-planned communist economies like North Korea, we should also be imagining how much better our economies might be if they were not hindered by the fatal conceit of our politicians.
Jonathan
Fred Rogers email -
Hayek seems critical of the belief that we can behave in a "neighbourly" way with other people? Why is it the case that we can't act like neighbours with others in the global marketplace?
Jonathan Fortier says:
Thanks for the question. Hayek returns to this point repeatedly in his work and it is one of the central ideas in The Fatal Conceit. Essentially Hayek argues that the extended order (or what you have properly called the "global marketplace") could not have developed if we treated everyone like neighbours because the global marketplace involves transactions between many billions of people most of whom will never even meet one another. There are other aspects of the market place that are not easily accommodated to close personal relationships -- things like private property, contract, rule of law, private property and so on. A good way to illustrate this is if you were to take the modes of behavior and conventions of a small town farmer's market and try to import them into the Dow Jones trading floor....or even more drastically, into the international bond market. These are two different contexts and demand two different sets of rules. Now this does not mean that many of the similar principles do not translate from one realm to the other (money, honesty, etc) but the expectations and mores of people in both groups are radically different.
Jonathan
Moderator email -
Thanks for the fantastic comments so far! We have less than 15 minutes left, so if you have any questions, please post them now!
Mr. Money Bags email -
In the Fatal Conceit Hayek has a chapter on trade and money. What is his basic argument there?
Jonathan Fortier says:
Dear Mr. Money Bags,
Hayek claims that trade and money are of incredible value to our prosperity and the development of the extended market economy. This may seem obvious to some, but it was not always so. In a brief historical survey, Hayek argues that merchants were always regarded suspiciously because they did not "create" anything -- they simply moved goods from one place to another, and then added a premium to the cost. Some of our suspicion about "middlemen" is connected to this tradition of contempt for the merchant. As Hayek points out, the products and benefits from manual labour -- carpenters and farmers and miners for example -- are clearly visible to all. The benefits of money and trade are not always clearly understood, and so open to unjust criticism. Another reason that trade is often the subject of attack is that there are some short term specific losers as a consequence of trade. People go out of business if they cannot compete with foreign traders for example. Critics of the market place see this specific evil and do not see the overall greater prosperity caused by open trade. If they are susceptible of the fatal conceit, then they set about trying to "fix" this situation, a situation that does not need to be fixed at all.
Jonathan
Moderator email -
That brings our discussion to an end. Thank you to those who participated. And once again, thank you to Jonathan Fortier! Join us for our next discussion Friday June 20th at 11am Pacific for our discussion on 'Prices and Profits' with our special guest professor Steven Horwitz.
Miguel A. Cervantes email -
Honorable Dr. Fortier,
I have a question, this is a question on monopolies. I have read that most of the monopolies are government created, with licencese, special protection, or some special privilege. I have understood that a monolopy that does not receive special protection will not keep its monopoly power, expcept throuh innovation.
My question is how is it that the company De beers, has been able to keep its monopoly power, despite that there are some competitors from Russia, other African countries, and even Canada
greetings
Jonathan Fortier says:
Dear Miguel,
Thanks for your question about monopolies. I do not know enough about the diamond market to say how, exactly, these markets function. It would be safe to say that DeBeers does not have a "monopoly" on diamonds because, as you say, there are other companies mining these precious stones. It may be the case that there is an artificial demand created by holding back or controlling supply, and that many other companies are doing the same in order to ensure high prices. The first part of your question is largely true I believe -- that is, that monopolies are largely the consequence of government intervention and regulation. Burt Folsom's book, The Myth of the Robber Barons, provides a good historical overview of how certain government practices -- and not the free market -- led to monopolies.
Jonathan
Gifted Academic email -
Towards the end of your essay, you refer to Hayeks second hand dealers in ideas. This sounds like a disparaging term, implying that teachers, policy writers, journalists and other similar groups were not as important or gifted as academics. Is this how Hayek used the term?
Jonathan Fortier says:
Gifted Academic,
That’s a common perception about Hayek’s expression, but is not accurate. Hayek did not mean to imply that teachers, policy writers and journalists were less important than academics, but rather that they did not generate the groundbreaking ideas through original research and inquiry. This does not mean that these groups were unimportant – quite the contrary. Each of these groups has a special gift in communicating ideas, and Hayek recognized that in order for certain ideas to gain any traction in the world, they needed to be translated into language that the lay person could understand, and then transmitted through networks to which the typical academic did not have access. So the “second hand dealers” are simply able to add value further along the “production process” of ideas. They are to academics what engineers are to scientists.
Jonathan
