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John Gray on Hayek

Current AffairsPosted by David McDonagh Mon, August 24, 2015 20:40:09

On 30 July 2015 in The New Statesman John Gray wrote about “The Friedrich Hayek I knew and what he got right.” He has written many books since he publically announced that he was no longer a libertarian when he got to rather like New Labour in the 1990s. He has since become an admirer of James Lovelock, and so become keen on Green ideas. None of the books he has so far seem to be first rate. Many of them even seem incoherent and rather like rushed hack writing, but the author seemed to find his changes of mind rather productive.

Below, I criticise a recent New Statesman article of his where he, once more, has attempted to assess the liberal idea and why it was so inadequate. What seems to be truly inadequate is the account that Gray has given in his articles and books on pristine or classical liberalism. His latest account reviewed below is no better than what he said on the topic in his many books but seems, nevertheless, to be worthy of comment, as do Gray’s books.

Gray sees Hayek to be of the “New Right” of the 1980s but he called it classical liberalism at the time of his enthusiasm and that was the historic old left. Gray had been a Labourite earlier, which sprung from a tradition that owed a lot to the statist sea-change that began to emerge in the Liberal Party in the 1860s and had almost totally taken over by 1900, before which we might refer to that Party as still largely classical liberal as opposed to statist modern liberalism that was dominant amongst the leadership, as well as amongst the younger members, by the great free trade election victory in 1906, making it something of a swan-song for free trade; though the actual leader, Henry Campbell-Bannerman, was still mainly a pristine liberal. What revived in the 1970s was the pristine classical liberalism.

Gray says that many of those libertarians, called such to distinguish themselves from the statist modern liberals, said that Hayek only valued the state for three things: national defence, law and order and opera. So Hayek was an economist and philosopher that stood for a freer market, if not quite complete free; where freedom was simply freedom from the state. But he was not an anarchist, so Hayek did not see the state as an unnecessary evil. Like the early Tom Paine, Hayek saw it as a necessary evil. Most classical liberals were like that. With Locke, they realised that we could have civil society without the state but they thought that because of crime, the state could be a boon. So reluctantly, they thought that the state was a good thing but only owing to the problem of criminal activity being almost certain to emerge. Since the liberl revival that Gray joined, many have thought that the state is not so good at countering crime. The anarchist contingent is a significant part of the revival.

Gray feels that this pristine liberal paradigm came to power in 1979 but the reality is that it was the Conservative Party that came to power at that time and about half in that organisation did not like pristine liberalism one bit, and the people who liked it, like Mrs Thatcher and her mentor, Keith Joseph, they were flirting with it rather than seeing it as the main thing; but many both in the Conservative Party as well as in the mass media and the rival political parties rather feared they did take it as the main thing. However, pristine liberalism was a factor. It has remained one since.

Gray feels it is important that Hayek was an Austrian, despite him becoming a naturalised British subject. Hayek was born in Vienna, where opera was all-important, in 1899. His father was a medical doctor and his mother came from a wealthy family. Gray seems not to know that liberalism was in decline from about 1860, and that, thereafter, statism was the new fashion. The inter-war years would become nationalistic as a result, for, in practice, socialism was mere statism thus usually more nationalistic. Socialists do not always agree and protest quite the contrary but in 1914 quite a few such socialists, including Prince Peter Kropotkin, largely shed socialism to support the nation state they denied they had owed loyalty to for decades. This was a big shock to those who remained anti-nationalist but they were a minority.

Gray says that Hayek saw the civilisation he grew up in collapse, but it was the war that removed the form of state, and liberalism had been ebbing for over fifty years before 1918. Hayek’s homeland was on the losing side of the war but that is a bit different from a collapse, as Gray imagines, or at least says, as it was not owing to the sort of imaginary perennial fragility that he refers to; which is a major Tory idea and one that looks clearly false to me. I think the Whigs were right that society is far sturdier than the Tory meme has it, such that a great war, like the 1914 war, could cause it to collapse. War does change society but it is not likely to end it.

John Locke was right to hold that civil society was almost perennial being in place long before the rise of the state even if he errs, as David Hume made clear, on social contract theory. The usual respect we show others in society, that we peacefully pass them in the street, do not bother them if they do not bother us, form what the sociologist might call the norms of civil society, and those basic norms are not far off the liberal norms as well as being those of civil society. As Adam Smith said, there is a lot of ruining in a great society. It is not fragile.

Gray says he first became interested in Hayek in the early 1970s. It was owing to his interest in pre-1914 Vienna as much as in the rising paradigm of pristine liberalism in the 1970s UK, he says. He met Hayek at the end of the 1970s and asked him if he knew Karl Kraus, a famous journalist of Vienna before 1914. He was told that Hayek had seen him but that he did not really know Kraus.

Gray says that Hayek had independence of mind and this allowed him to face up to a lot of opposition and criticism including big changes of fashion. Gray feels the paradigm of Woodrow Wilson’s national self-determination imposed by the USA after the war on Europe was one that posed problems for Hayek for the rest of his life. He died in 1992. But he never could see how liberal values got on with tribalism, says Gray.

On the fall of Wilson, the USA, wisely, went back to political isolationism [with free trade, the liberal meme on international relations].

Hayek’s ideas on evolution and on the ideal liberal constitution were not germane to that main problem, Gray says. Hayek had dropped his early socialist ideas owing to the economic calculation argument [eca] put to him by Mises. This seemed to Hayek and many others to be an effective refutation of socialism so he ceased to be a socialist. He afterwards adopted liberalism, and Gray said he made it into a sort of scientism; this is most ironic as Hayek was a major critic of scientism, Gray openly admits. It was held by Hayek to be the inept attempt to apply science to the human world. It was an example of Hayek often called a mere pretence of knowledge when he was looking at the socialists. However, Gray’s account looks weak there, as it so often does elsewhere.

In what sense did Hayek lose the debate with Keynes? Did Keynes win it? Keynes rejected equilibrium but, as he was a coward, he did it by picking on Say’s Law, which few had heard of, and he gave an inadequate account of it, and Keynes also gave an inadequate account of the orthodox economists in general, calling them “the classsics”.

Ironically, John Hicks, who thought he was going over from Hayek to Keynes and who won the debate by a de facto rejection of both of them, had found fault with the fact that Hayek scotched the meme of a self-adjusting economy by ignoring it with an hypothetical lag owing to malinvestment that Hicks held was unrealistic. The Hicks version of Keynes, adopted by all the textbooks, had the meme that Keynes was out to dump at its heart viz. equilibrium. The equilibrium so obvious to Hicks that he never seems to have realised that Keynes was out to reject it, was, of course, just an account of self-adjustment by the market.

All this is lost on John Gray. It was enough for him that Keynes rather than Hayek or Hicks was the nominal victor. Gray has most likely not read Keynes’ 1936 book anyway. More oddly, it would seem that Hicks never did either.

Hayek was rejected as an economist after leaving the LSE [owing to irrelevant personal reasons, rather than to economics] as a result. At Chicago, he was allowed in only as a moral philosopher. A version of Keynesianism had won, Hicks version, but it was not anywhere near what Keynes had wanted. He wanted to reject market adjustment but Hicks largely retained that. Keynes had wanted it to be the rule that the market did not clear, as had Malthus tries to defend against Ricardo in the first decade of the nineteenth century but Hicks innovated a version that suggested that Keynes should have called his book The Special or Particular Theory rather than his actual title of The General Theory of Employment, Interest and Money (1936).

I see no sign that Hayek ever believed that he had lost a debate, intellectually, to either Keynes or to Hicks. Hayek saw the LSE go over to what was called Keynesianism, of course.

Hayek did go somewhat statist owing to emotional pressure, I suppose, but not ever did he become Hicksian or, still less, Keynesian. Keynes truly remained out on a limb as regards his hated equilibrium, that remained as strong as ever, even if a version of Keynes was adopted, and what was called Keynesianism was granted lots of rather incoherent lip service based on supposed rejection of the still largely unknown Say’s Law. Indeed, Keynes caricature of that was accepted completely by the 1950s.

But Hayek did recommend a safety net and it was the state’s safety net that alone caused the mass unemployment of the 1930s, not the supposed lag that malinvestment caused that somehow suspended Keynes hated equilibrium, as Hayek had held. The unemployed adjusted to the dole rather than to the market. We might say they joined the sinecure section of the state sector, only they did not, as in the late USSR, pretend to work. Indeed, the few who took a black market job pretended they were not working.

Hayek took the economic calculation argument [eca] from Mises but later found it in a few nineteenth century authors like Baggage, so Hayek made no pretensions to being “most original” in the knowledge finding function of the price system, as Gray has it. But Gray knows the eca, if not all its implications. However, he nevertheless is still silly enough to say it also applies to the free market.

Gray incoherently says:

“The trouble is that it also applies to unfettered market capitalism. No doubt markets transmit information in the way that Hayek claimed. But what reason is there to believe that – unlike any other social institution – they have a built-in capacity to correct their mistakes?”

The eca applies to unfettered market, says Gray, yet they do find viable prices as Hayek said too. That is “no” yet also “yes” too; or P&-P too. Gray is being quite absurd here.

Gray then asks how can the market self-adjust, unlike any other institution [is there a tacit “except the state” assumption there?] overlooking that the answer is by the ever adjusting price system. The market is dynamic as it is always adjusting by the price system.

History itself supports no supposition or thesis.

Panic obfuscates prices? How? Gray has adopted mere bluff from backward Keynes. There never was any irrational exuberance but there has been exuberance but it has not stopped the market from clearing. Why should it?

Yet Gray is content to say, to the backward readers of The New Statesman, founded by backward Keynes himself, that:

“History hardly supports the supposition. Moods of irrational exuberance and panic can, and often do, swamp the price-discovery functions of markets.

When considering how to overcome the Great Depression, Hayek opposed Keynes-style fiscal stimulus for the same reason he opposed monetary expansion of the sort later advocated by his friend the American economist Milton Friedman (1912-2006). In attempting to generate recovery by macroeconomic engineering, both monetarism and Keynesianism required a knowledge of the economy that no one could possess. Unlike monetarism – with which it has sometimes been confused – the Austrian school of economics that Hayek promoted insists that the quantity of money cannot be measured precisely, and that expanding the money supply cannot reflate the economy in a sustainable way.”

Friedman did adopt aspects of Keynes, as did Hicks, but they did not reject what Keynes detested: equilibrium. Gray continues:

“For Hayek, the causes of the Depression lay in earlier central bank policies of cheap money, which resulted in large-scale misallocation of capital. Because no central authority could grasp the shifting pattern of relative scarcities and prices, only the market could determine the right allocation. Accordingly, believing that misguided investments had to be liquidated, Hayek argued in the 1930s for policies that were more contractionary than those that were actually pursued. The task of government was to get out of the way and let the process of adjustment run its course.”

Quite, Hayek was right there but he thought a lag might be created but he erred there as the market is a non-stop process of adjustment; Gray says it yet he also wants to deny it too; again P&-P too.

Gray seems to see how the market adjusts but he still perversely wants, or he writes as if he wants, the state to stop it. Then he, rather stupidly, denies that the market even can adjust.

But he continues:

“If they had been adopted while the crash was under way, Hayek’s prescriptions would have made the Depression even worse than it proved to be – a fact he later admitted.”

He did not admit anything like that, which I can recall. New buyers would have come in and the readjustment would have been fairly rapid.

If Hayek thought the depression would have been worse, if not for the state, why did not Keynes win him over? Anyway, it seems that the state prevents rather than aids market readjustment and that stagnation is alien to it. As Gray says of Hayek:

“But he never accepted Keynes’s core insight that large-scale economic discoordination could be the result of the workings of the market itself. For him it was always government intervention that accounted for market disequilibrium. More sceptical as well as more radical in his turn of mind, Keynes questioned the self-regulating powers of the market. His work on the theory of probability disclosed insuperable gaps in our knowledge of the future; all investment was a gamble, and markets could not be relied on to allocate capital rightly.”

Questioning the market is fine but the price system is clear enough there as a self-adjustment process to fresh conditions, so any serious questioning might have led Keynes to realise that. It might also lead Gray to do so too. He continues:

“There were booms and busts long before the emergence of modern central banking. Left to its own devices, the free market can easily end up in a dead end like that of the 1930s.”

No, the market does not stagnate. The dole was needed for mass unemployment to muster in the mass urban economy, and it is true that Hayek did go statist enough to agree that the masses would need a safety net, the very thing that stops the market from clearing. Freedom or liberty means we all need to be responsible and for us all to have savings, that Keynes repeatedly made a very poor case against, for some savings are vital to tolerate the intrinsic self-adjustment of the market.

But Gray feels that Keynes knew more about markets than did Hayek, as Keynes was a practical and successful investor for his college. Indeed, he claims that Keynes was one of the most successful investors in the twentieth century! So he knew about the uncertainty of markets in a way that Hayek did not, says Gray. He was aware of how the misguided economic policies might upset society in a way that Hayek did not, for Hayek ignored all those hazards. Here Gray seems to have lapsed into imagining that it is Hayek advocating state control by political policy rather than Keynes.

Gray says that Hayek’s blindness on politics was all too clear when he advised Margaret Thatcher to cut the state sector, that Gray calls public services, and to cut inflation so that the state budget might be balanced. This was exactly as he had advised in the 1930s, says Gray. He told Gray, in private conversation, that Trade Union power might be broken if the state made cuts. Gray thought Hayek was indifferent to mass unemployment that then, in the 1980s, stood at over three million. Gray does not realise that cuts might get rid of mass unemployment, as he never seems to have seriously thought much about such problems. Instead, Gray said that cuts would increase unemployment. But it is only the dole, paid for by the state from taxation, which can do that.

Gray says:

“Fortunately Hayek never had any influence on Thatcher’s policies. (Her chief economic adviser in these years was Alan Walters, a Friedman-style monetarist.) Equally, and perhaps also happily, Thatcher had no understanding of Hayek’s ideas.”

Gray says she haply never read the stint at the end of The Constitution of Liberty (1960), where Hayek explains “Why I am not a Conservative” for he rejects because conservativism rejects progress, says Gray. “Unlike Hayek, Thatcher understood and accepted the political limits of market economics” Gray says, but Gray and Margaret Thatcher never saw how damaging the state was to society. The main fault with Hayek is that he too had too much tolerance for backward politics. Politics is perverse wastage that needs rolling back, or cutting out completely, by tax cuts and privatisation.

Liberalism went out of fashion around 1860 but Gray imagines it actually collapsed, a very Romantic idea that is utterly unrealistic, given the nature of civil society. War would not have set liberalism back so much had liberalism remained the fashion, but socialism/collectivism was, by then, the fashion. War did end the empire that Hayek grew up in but nor was that particularly liberal in itself: no empire ever, quite, can be. Civil society, that is the basis of liberty, is not one whit fragile and it is very stupid indeed to imagine that it is fragile. No wonder they called the Tory Party “the stupid party”. This idea that society is fragile is about as unrealistic as one can get about civil society. But Gray simply does not see the pounding the backward state hands over to society every single day, thus showing it to be very durable.

But Gray is right that Hayek badly over-rated the law. It never could be the basis of civil society as so many, with Hayek, imagine. Like the state itself, law is at the periphery of society. Nor can it really protect liberty from the state. Gray is right there. Indeed, statutory law is a tool of despotism and privilege. Liberalism is about repealing illiberal laws rather than establishing new statutory laws.

But liberal values, if fostered amongst the public, can see off war. Private property is a problem solver. The state, by contrast, is a trouble maker. So the less we have of the state, the better.

Why Gray imagines the political entity of the Austro-Hungarian Empire kept politics at bay is not one iota clear. Gray is right that the European Union is not going to aid liberalism as it is a warmongering pact, despite the pretense it has of being for peace. The EU is out to be top dog superstate, but it is taking its time. It is almost as slow as the progress towards full liberalism itself. But all societies, even the backward late USSR, had the liberal civil society in their practical everyday life. In any society most members respect the liberty of others. But also all allow the state to scotch liberty at will; that privilege granted to the backward wasteful state by the people is the main problem. They give up this liberty to form state privilege by suspending normal moral values in its favour. As Edmund Burke said: “The people never give up their liberties but under some delusion.” The delusion here is that the state is a boon. Even John Locke thought so.

Gray fails to reproduce Popper’s attack on Hayek and Michael Oakeshott saying that Hayek’s spontaneous order as “rubbish” is no explanation of its faults whatsoever but Gray says it is exact!

However, Gray witnesses civil society every day in which strangers in the mass urban society freely pass him in the street, which is done as part of what Hayek would say is a spontaneous order. My guess is that Gray has no case against civil society; nor any good case against liberalism.

The change of fashion away from liberalism towards socialism after 1860 seems to have been flimsy, though it was aided by some haziness amongst the liberals as well as some youthful charismatic dash as well as sheer ignorance amongst the rising statist liberals, like Joseph Chamberlain and Charles Dilke in the UK’s Liberal Party. The pristine liberals were aging and pragmatic anyway. That there was a generational difference greatly aided the change of fashion. Gray makes the quip that there is nothing liberal about the mafia, and that is quite right but that is also true of the state too, but despite Chamberlain’s talk of public service it was more like rule than service that the new man management and more state control of the new fashion was to embrace.

Gray has the idea that a mafia would arise spontaneously, even though he also wants to be sceptical about that meme from Hayek, to say it was exactly rubbish in fact. . However, the culture developed over a long process of real full privatisation, designed to shed government and all government policy rather than as a mere new way to further state policy by political use of the market, as that called privatisation has been since the 1980s, would result in security services that would have had lots of time to crowd out the mafia problem.

Herbert Spencer was right that there was a social movement towards liberalism before 1860 but he also saw the fashion change towards socialism later on too. He argued against socialism. But he ironically had a holistic meme that the socialists used to even a greater extent than they used Marx. Just look at almost any Jack London novel to see a socialist in love with Spencer. William Hurrell Mallock saw such faults in Spencer, who later admitted to Mallock that he was too collectivist, though he never met Mallock. But pristine liberalism lost out to the new fashion of statist liberalism; and to socialism generally. It revived a bit in the 1970s when Gray joined it. But Gray always did love pessimism.

Gray simply errs left right and centre in his rather silly ideas about alternative economic systems and choice. The USSR never was non-capitalist, for example. An increase of the state ownership is not an alternative economic system but the enlargement of a sort of quasi-dole or semi-dole; the rise of where, in the late USSR, they said the workers in the state sector pretended to work and the state pretended to pay them. Many thought that in the UK this was “mixed economy” but in reality it was just an over-taxed market economy that supplied some job security. The mixed economy is a mixed up idea. There is only the market economy. The state sector just means higher taxation.

Communism is a myth, not a real rival to the price system, and the late USSR did not even claim to be communist but rather it claimed to be socialist, that Lenin said, a few times, was state capitalism. It would be clearer to just call it capitalism. But it was anti-liberal. Gorbachev tried to reform it but Yeltsin got rid of it. No collapse in sight.

The idea that the Afghan war brought it down is an example of Gray’s inability to judge actual events. There is no choice of economic systems. It is either capitalism or capitalism. But we can always have a bit more of the wasteful state.

Of course, Hayek and Spencer had a lot in common as Gray said. They were both liberals.

Again, China was capitalist, if statist too, under Mao. Deng Xiaoping simply freed it up a bit. Pristine liberalism will free it up yet more.

Letting the banks go under would not have been all that bad from liberal point of view. The fresh banks that would have emerged to replace them would have most likely be in better shape today had the state allowed that to happen back in 2007, as Hayek might well have recommended.

Hayek erred on the fairness of the market. He thought it was wise to say it is unfair, but few people in the larger society have ever thought that. Most people think it is fair enough, but no end of fools in colleges think they know better; so do schoolteachers but not most students in the colleges or most pupils in the schools, even though they may be usually a silent majority. Hayek thought that the idea that the market was unfair had something to it, but it looks to be merely a perverse idea.

Gray, for all his silly cynicism and pessimism still has not realised how unpopular the college/mass media sacred cow or ideal of democracy has always been, and always will be. The “anarchic energies of global markets” clearly serve the public way better than democracy ever will.





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