November/December 1995

The Meaning of Hayek

I am delighted to participate in tonight's gala function, with so distinguished an audience, taking place in these magnificent quarters. I witnessed Cato's birth in San Francisco nearly 20 years ago. I remember even today a two-day meeting in your Embarcadero offices at which an unlikely assemblage plotted how the ideas of Hayek and other free-market economists would be infiltrated into public discourse and policy. How absurdly optimistic we were! Cato's achievement is to have exceeded our giddy expectations of two decades ago. That achievement reflects well on all the staff who have worked at Cato over the years, the donors who have supported the Institute, and especially the leadership of Ed Crane.

Let me turn now to an appreciation of the man we honor in naming this auditorium: Friedrich Hayek.

Hayek is best known for his most widely read work, The Road to Serfdom, which was written to explain to a literate, but nontechnical, readership how the road to political hell is paved with the best intentions. As he made clear, classical liberalism's conflict with central planning was not over the shared goal of enhancing the well-being of the greatest possible number of people but over the way to achieve that goal.

Hayek's thesis in The Road to Serfdom is that one intervention inevitably leads to another. The unintended consequences of each market intervention are economic distortions, which generate further interventions to correct them. That interventionist dynamic leads society down the road to serfdom.

In perhaps the best chapter of The Road to Serfdom, Hayek details "Why the Worst Get on Top" in totalitarian societies. The chapter begins with a quotation from Lord Acton: "Power tends to corrupt, and absolute power corrupts absolutely." Hayek then elaborates the Actonian insight.

There are strong reasons for believing that what to us appear the worst features of the existing totalitarian systems are not accidental by-products but phenomena which totalitarianism is certain sooner or later to produce. Just as the democratic statesman who sets out to plan economic life will soon be confronted with the alternative of either assuming dictatorial powers or abandoning his plans, so the totalitarian dictator would soon have to choose between disregard of ordinary morals and failure. It is for this reason that the unscrupulous and uninhibited are likely to be more successful in a society tending toward totalitarianism. Who does not see this has not yet grasped the full width of the gulf which separates totalitarianism from a liberal regime, the utter difference between the whole moral atmosphere under collectivism and the essentially individualist Western civilization.

Recall that that was written in 1944 at the height of the naive leftist faith in collectivist economic policy. Hayek dedicated his book to the "Socialists of All Parties," never attributing malice or bad motives to them, only sheer intellectual error. He demonstrated, nevertheless, how attempts to do good can produce great harm. The thesis is the counterpart of Adam Smith's famous dictum that self-interested behavior can be the source of great societal good. (And both men owe much to Montesquieu.)

Hayek argued that, in the interventionist dynamic, liberty is lost piecemeal, one freedom at a time, always in the name of necessity and expediency. Hayek echoed the words of Lord Acton: "Liberty is not the means to a higher political end. It is itself the highest political end." Or, as Hayek later amplified Acton's insight,

That freedom can be preserved only if it is treated as a supreme principle which must not be sacrificed for particular advantages was fully understood by the leading liberal thinkers of the nineteenth century, one of whom [Benjamin Constant] even described liberalism as "the system of principles." Such is the chief burden of their warnings concerning "what is seen and what is not seen in political economy" [Frederic Bastiat] and about the "pragmatism that contrary to the intentions of its representatives inexorably leads to socialism" [Carl Menger].

Central planning not only robbed people of their basic freedoms but ruined their economies. The tragedy is that Hayek and others patiently explained not only the political, but also the economic, consequences of central planning. That system ignored its impossible informational requirements. It demanded that all the fragments of knowledge existing in different minds be brought together in one mind, a feat requiring that single mind to possess knowledge far in excess of what anyone could ever comprehend.

The argument is not merely a computational one that could be resolved in the computer age. As Hayek observed in "The Use of Knowledge in Society," each person "has some advantage over all others because he possesses unique information of which beneficial use can be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation." The only social system ever evolved for accomplishing the task is that of private property under a rule of law. That system provides individuals with incentives to use their informational advantages, a price system to efficiently convey dispersed bits of economic information, and a legal framework for appropriating and transferring property.

Many credit President Ronald Reagan's defense buildup with the downfall of the communist countries. If Hayek's analysis is correct, however, communism collapsed because of the inner contradictions of that economic system. I think the evidence shows that Hayek was correct, and it was Reagan's free- market economic policies, which transformed not only the United States but much of the rest of the Western world, that won the Cold War. Understanding that point has important implications for current debates over fiscal priorities.

The chief paradox of the post-Cold War era is that the idea of central planning is discredited intellectually where it was actually tried, but it lives on in the West, particularly in the United States. Last year the president of the United States, many members of Congress, and a substantial part of our intellectual class urged that we bring another one-seventh of our economy under centralized allocation.

If health care escaped central planning, financial services still bear its yoke. Sixty years ago Congress decided to partition the financial service industry into three sectors: commercial banking, investment banking, and housing finance. If the division made any sense at all, it did so only at the moment it happened. (A. P. Gianinni's financial empire, the Bank of America, began eroding the legal distinctions soon after their enactment.) The terrible second depression of 1937 set back economic recovery and financial innovation. World War II froze the civilian economy as the war effort absorbed all available resources. Financial evolution resumed in the 1950s, gained momentum in the 1960s, and accelerated in the inflationary 1970s.

Glass-Steagall is a six-decade-old plan, which still blocks competitive adaptation and responses to clients' needs. The good news is that Glass- Steagall reform is afoot. The bad news is that the process is driven, at least in part, by those who cannot let go of the planning idea. What is needed is a Hayekian vision of competition in financial services. Otherwise, we may end up tinkering with the titles of Glass-Steagall without addressing the bill's inner contradictions.

Out of the contribution of The Road to Serfdom (the 50th anniversary of the publication of which we celebrated last year), there arose an important institutional legacy: the Mont P¶lerin Society. Its significance merits a few minutes of our time.

Hayek founded the society to provide mutual support for liberal thinkers, many of whom were otherwise isolated. From the beginning, it was Hayek's intention to use the society's deliberations strategically to disseminate liberal ideas. Hayek viewed it as an intellectual bulwark against the rise of totalitarianism he feared in the postwar era. He recognized that, as a practical matter, the largely Catholic parties of the center — the Christian Democrats — would be the chief political force countering the new totalitarianism of the left. He hoped the society would function as a transmission belt of ideas to the Christian Democrat leaders.

In pursuit of that strategy, Hayek proposed naming the new society the Acton-de Tocqueville Society, after the two great Catholic liberals of the 19th century. He was thwarted in his purpose from the beginning by the anti-catholicism of one of the senior American invitees. In the end, the founders opted to name the organization after the mountain in Switzerland on which they met.

The Mont Pelerin Society still has great influence in nurturing liberal ideas and spreading them among policymakers. It is one of the ironies of an international laissez faire organization that, over the years, numerous government officials and ministers have been members. In its own way, the society helped keep Western Europe off the road to serfdom.

Beginning in the early 1970s, a renaissance of interest developed in Hayek's purely economic output. In June 1974 the Institute for Humane Studies sponsored a conference on Austrian economics in South Royalton, Vermont. The following October Hayek won the Nobel Prize in economics.

Subsequently, numerous conferences and books were generated. The Institute for Humane Studies, the Liberty Fund, and the Cato Institute sponsored and underwrote the events, including several visits by Hayek to the United States. A generation of scholars benefited from those programs and are now developing Hayekian ideas in universities and think tanks around the world.

In all his work, Hayek focused on the self-ordering forces in society. Hayek's fellow Nobel laureate Kenneth Arrow has suggested that "the notion that through the workings of an entire system effects may be very different from, and even opposed to, intentions is surely the most important intellectual contribution that economic thought has made to the general understanding of social processes." The Arrovian formulation echoes Adam Smith's observation that, as a consequence of the interaction of conflicting interests, man is "led by an invisible hand to promote an end which was no part of his intention." The classic Hayekian statement visualizes economics as analyzing "the results of human action but not of human design."

The economic conception of society is an affront to the conceit of those who would impose order from above. Economic forces defy the will of authoritarians seeking to mold social outcomes. Human beings respond to each government intervention by rearranging their lives so as to minimize its disruptive effects. The resulting outcome may thus be different from and even opposed to the intention of the intervention.

Examples abound. A policy of moderate inflation to stimulate economic growth time and again degenerates into rapid inflation and economic stagnation. Attempts to alter trade patterns exacerbate the problems addressed by the policy. A 30-year-old policy to help the poor has greatly increased their number and largely redistributed income within the middle class. The list goes on.

In The Constitution of Liberty, Hayek included a chapter, "Why I Am Not a Conservative," in which he argued the case for classical liberalism: the policy that leaves people alone in the bedroom as well as the boardroom. What is delightful about Hayek is that, as he aged, he became more radical. We celebrate this evening a clear-sighted man, as well as the enduring quality of his intellectually radical work, Friedrich Hayek.

Gerald P. O’Driscoll Jr. is director of policy analysis at Citicorp, a senior fellow of the Cato Institute, and the author of Economics as a Coordination Process: The Contributions of Friedrich Hayek. He delivered these remarks at the dedication of Cato’s F. A. Hayek Auditorium on May 9, 1995.