The Free Market 21, no.4 (April 2003)
Lecturing at the London School of Economics from 1931 to 1950, F.A. Hayek was nicely positioned to counter the rising influence of J.M. Keynes. Keynes’s new vision of macroeconomics was a resurrection of old fallacies but with a modern twist: an open call for a consolidated state to manage investment. More than anyone else, and under the pretense of explaining the economic crisis of the time, Keynes gave intellectual credence to the rise of managerial states in America, the UK, and Europe during the ‘30s and the war.
Hayek countered with a defense of laissez-faire beefed up by the insights of the Austrian School of economics. He had worked with Ludwig von Mises in Vienna after the period in which Mises first laid out his business cycle theory. The danger of central banks, wrote Mises, is that they exercise power of interest rates, and can thereby distort the production structure of an economy. They can create artificial booms, which either lead to hyperinflation or economic bust.
Hayek advanced this theory as the alternative explanation for the global depression, and worked mightily all those years to show how the stock market crash was not the onset of the crisis but rather the much-needed liquidation of a preceding boom. He further showed how the actions of the British and American governments were prolonging the crisis.
In the great debates of the period, it was said that Hayek had lost to the New Economics of Keynes and his followers. It was more precisely true that the Keynesians had won not by having better argument but force of government policy. The Misesians and Hayekians of the time decided that they would fight the battle of ideas and thus sprang up a host of institutions that would continue the work of liberty, despite all political impediments.
In a series of lectures named in honor of Hayek and supported by Mises Institute members, the spirit of those years at the London School of Economics is back. The Mises-Hayek explanation for economic booms and busts is receiving all new attention during this current period of recession and market meltdown. The usual Keynesian prescriptions for more consumer spending, ever cheaper credit, and government spending have done nothing to solve the problems in the US, Europe, or Japan. The series begins with lectures by Roger W. Garrison, who has provided the most extended and comprehensive elaboration on the Mises-Hayek theory of the business cycle.
The relevance of Hayek in our times extends beyond just business cycle analysis. In later years, Hayek turned his attention to other matters concerning the methods of science (he decried the “pretense of knowledge” affected by social scientists) and the uses of power in society. His Road to Serfdom warned that the regimentation of totalitarian societies can only come to Britain and the US through central planning. What is at stake, he wrote, is not just productive economies but freedom itself.
In our time, that freedom is threatened by intervention in every aspect of economic life but also through the use of military power. Government not only claims it is smart enough to manage the economy, fix up our communities, run our schools, but also to decide which foreign politicians deserve to be protected and which deserve to be destroyed.
The implicit assumption is always that government knows more and better than the rest of us, and that this knowledge is sufficient to give it rights the rest of us do not have. It is often said that knowledge is power. In the case of government, however, its power vastly exceeds its knowledge.
When Alan Greenspan of the Fed (a branch of government in every important respect) testifies before Congress, legislators listen attentively to find out what he knows about the state of the economy, as if he has some privileged access to high-level data not reported elsewhere. It is further assumed that he knows precisely how to act on it. It is this knowledge that allows him to operate the gears and levers of the economy, so it is believed.
The same assumptions are made about many aspects of government. Many people who have backed war with Iraq assume that the government must know something awful about Saddam that it cannot share with the general public. It’s true, they admit, that Saddam does not have nuclear weapons and that there is not public information that suggests he is plotting the destruction of America as we know it. But surely the White House must know something we do not, and know what to do about it, else why would the administration be so intent on removing him from power?
The belief that powerful people know more than the rest of us is a main source of their power. It’s true only to this extent: powerful people are likely to know when they are telling the truth and when they are not. The rest of us are put in a position of having to guess or dig to verify their claims point by point. Experience teaches that politicians often lie. But there’s an even more important point: because government activity takes place outside the framework of the market economy, government has no idea how to use the information it does have to achieve social good.
Think of all the bits of information the government had been collecting to assess the likelihood of a terrorist incident. A few warnings among tens of thousands of tips did not suffice to prevent this destructive attack. The accumulation of information has grown steadily more voluminous. The government is in no better position to make judgments about it today than it was two years ago.
In contrast, insurance companies are in the business of assessing risk all the time, and they do this by means of a system of profit and loss, which Mises demonstrated is essential to a rationally organized society. Government, on the other hand, just collects piles of data and is completely at a loss on how to assess the relative likelihood of any particular scenario, or what to do about it.
Remember this winter’s now-famous announcement that Americans should stock up on duct tape to protect themselves from chemical warfare. People rushed to the stores and cleaned out the shelves. Later it turned out that duct taping windows can be very dangerous and even cause asphyxiation. Not only that: the tip concerning the coming bio-terrorism was a hoax. The “high alert”—as if that means anything to regular people—that government told Americans to be on was not justified.
In contrast, the private sector enhances security through peaceful and normal means. Home insurance companies give premium breaks for people who install alarm systems. Health insurers charge more for people who live dangerously. Premiums go up when risk is high and they fall when it is low. Through this mechanism, people are encouraged to adopt safe ways of living or pay the difference if they choose not to. Those who contract to provide security face competition and have the incentive and means to provide what they promise. What a contrast to the chaotic and fumbling ways of government security provision!
But failure does not deter the state. Indeed, we are now asked to believe that the White House is not only omnipotent but omniscient as well. These people in government presume to make definitive judgments about the entire Iraqi ruling class, even going so far as to say that they know the secret hostility of a huge range of people toward Saddam, which thus qualifies them (who just happen to have essential technical knowledge) to help in administering the country. They can’t possibly know this. That they believe they can, or they believe we will believe their claims to know, is incredible and frightening.
The alarming reality brings to mind Hayek’s Nobel Prize lecture in 1974. With great courage, Hayek spoke of the tendency of economists to presume that they know things about human behavior that they do not and cannot know. They do this because they try to apply the models of the physical sciences to explain human action, always with an aim toward controlling the outcomes of human choice.
In truth, human action is too complex and subjective to be accessed by social scientists, and the attempt will always lead to abysmal failure. Hayek went on to explain how his critique of positivist economic modeling applies more broadly to anyone who would attempt to imitate the form while missing the substance of scientific procedure.
“But it is by no means only in the field of economics that far-reaching claims are made on behalf of a more scientific direction of all human activities and the desirability of replacing spontaneous processes by ‘conscious human control’.” He mentions that the point applies to sociology, psychiatry, and the philosophy of history.
Hayek was raising an objection not to the idea of omniscience but of the possibility of accessing even mundane knowledge. No small group in government, much less a single person, can accumulate and sort through the kinds of information necessary to administer society, much less destroy and reconstruct one, as the Bush administration proposes to do throughout the Gulf region and the Middle East.
The attempt to assemble such a list is an act of power, not intelligence. We are being asked to make an enormous leap of faith that the Bush administration has somehow solved the great problem that afflicts us all: the limits of human comprehension. Because of those limits, we are right to try to limit the ability of men to exercise power over their fellows, at home or abroad.
Thus does Hayek’s point apply to politics, especially to politics, even more especially to the politics of the military machine. The social scientist who believes he has the master plan to run the world is enough of a menace. But the politician who believes this, and is contemplating war, can bring about massive amounts of destruction and death. In these nuclear days—and let us say what we don’t like to contemplate but which is nonetheless true—he can bring about the end of the world as we know it. As Hayek notes, a tyrant who carries the pretense of knowledge too far can become “a destroyer of civilization.”
“If man is not to do more harm than good in his efforts to improve the social order,” said Hayek, “he will have to learn that . . . he cannot acquire the full knowledge which would make mastery of the events possible.” To believe otherwise is foolhardy and dangerous. “The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society.”
Llewellyn H. Rockwell, Jr., is president of the Mises Institute and editor of LewRockwell.com (Rockwell@mises.org).
