The Rule of Law – Part 15

Friedrich Hayek’s Constitution of Liberty.

In the next several essays, we’ll explore the great works of two of the leading thinkers on the moral and practical grounding of free market economies, F.A. Hayek and Milton Friedman, both winners of the Nobel Prize in Economics. Dovetailing with the previous essays in the series on the rule of law, Hayek’s book, the Constitution of Liberty, explains how only limited government provides the space for the sort of economic freedom that is required for people to be able to pursue their own preferences and develop their own identities.

The introductory essay in the Constitution of Liberty by Ronald Hamowy provides some background on the book:

In September 1989 the Solidarity party, an arm of the Polish anticommunist labor movement, took control of the government in Poland after the party had earlier won all parliamentary seats. In the same month, Hungary opened its borders with Austria, thus permitting huge numbers of refugees to flee Eastern Europe and particularly East Germany. Two months later the Berlin Wall was opened and the East German government collapsed. Also, in the same month that Solidarity achieved a massive election victory in Poland, Alexander Dubček, who had been taken into custody by occupying Soviet forces in Czechoslovakia in 1968, addressed a rally of 300,000 in Prague. Mounting protests against the communist regime throughout Czechoslovakia finally led to the resignation of its Communist government in late December. These events throughout Eastern Europe soon spread to the Soviet Union where pressures for reform had been building. Finally, in December 1991, the Soviet Union was officially abolished and Russia, the Ukraine, and Byelorussia created the Commonwealth of Independent States, thus bringing to an end seventy-four years of Communist control. Despite the appearance of impregnability, the swiftness with which these governments collapsed is testimony to how corrupt and diseased their internal structures were. Few Western social theorists foresaw just how feeble the economic framework of communist nations in fact was. It had been assumed by millions that planned economies could somehow put an end to the depredations associated with capitalism and could open the way to a more just and fair distribution of wealth and, while it might require temporary sacrifice and hardship, would in the end result in a better world. Most Western intellectuals were equally convinced that socialism offered a realistic, and in many way superior, alternative to the free market. While most intellectuals were prepared to accept the fact that there was nothing inherent in socialist economies that prevented this outcome, F. A. Hayek, in a series of penetrating analyses, had demonstrated that such planning was impossible in the absence of a price system such as only free markets could provide. In the absence of prices that accurately reflect people's preferences for various goods and services, government direction of the economy can only lead to increasing malinvestment and disorder. This constituted a crucial failing that made the ultimate disintegration of communist societies inevitable … [I]n the early 1930s, the world found itself in the midst of the Great Depression. In 1936 John Maynard Keynes published his General Theory of Employment, Interest, and Money. Released at the Depression's height, the academic world found in Keynes's recommendations regarding deficit spending and vigorous government activity a formula that had far more appeal than did Hayek's … [T]he result was that Keynes's theory of underinvestment and underconsumption during periods of slow or negative economic growth came to dominate economic theory for several decade … Alarmed by the spectacular growth of government involvement in the economy in Great Britain and the United States, in part as a reaction to the Great Depression and the Second World War, Hayek published The Road to Serfdom in 1944, his first work aimed at an audience broader than academic economists. Public response to The Road to Serfdom doubtless contributed to Hayek's decision to devote more of his time and energies to discussing why socialist societies, by their nature, rested on coercion and to lay bare the principles of a free and open society. The upshot of this decision was The Constitution of Liberty, which was published in 1960, wherein he sought more fully to examine the demarcation between the amount and area of government intervention that he regarded as consistent with a free society and governmental actions that illegitimately encroached on personal liberty … [I]n Great Britain and the United States, the transformation of governmental edicts from general rules enacted by the legislature to the ad hoc directives of regulatory agencies, whose decisions in any particular instance are unpredictable, enlarges and intensifies the arbitrary nature of our interactions with the state. In particular, large areas of the economy are increasingly shaped by the decisions of these tribunals, whose outcomes cannot be foreseen. The result is not only the deterioration of the rule of law but also the erosion of the spontaneous order of the market that makes rational investment possible … As he had earlier discussed in his 1945 lecture, “Individualism: True and False,” … we are heir to two distinct theories of liberty, one of which traces its roots to an empirical, evolutionary approach to politics, the other to a rationalist conception of social life. Hayek offers a succinct analysis of the distinction between these two notions of individualism: “It is the contention [of the true individualist tradition] that, by tracing the combined effects of individual actions, we discover that many of the institutions on which human achievements rest have arisen and are functioning without a designing and directing mind; that, as Adam Ferguson expressed it, ‘nations stumble upon establishments, which are indeed the result of human action but not the result of human design’; and that the spontaneous collaboration of free men often creates things which are greater than their individual minds can ever fully comprehend. This is the great theme of Josiah Tucker and Adam Smith, of Adam Ferguson and Edmund Burke, the great discovery of classical political economy which has become the basis of our understanding not only of economic life but of most truly social phenomena.” … Hayek is particularly disturbed by the conception of “social justice,” the notion that a just society obtains only when society's advantages and assets are evenly distributed among all its members … Social justice implies nothing less than that the government be given plenary powers to control the distribution of all wealth, of all that is good in society … “Social justice” …holds that the whole group of which the victim is a member should be recompensed, while the group to which the perpetrator belongs should all be equally penalized. This is a particularly pernicious aspect of current views of justice, that it can as easily be accomplished should rewards and punishments be visited on collectivities as on individuals. This constitutes a reversion to the most primitive aspects of the Old Testament, prior to the introduction of the idea of personal responsibility, in which the sins of certain individuals issued in punishment of the whole community. It is the antithesis of the idea of justice based on a theory of individual rights that holds that only those responsible for a wrong should be held to account … [C]omplex social structures originate as a result of numerous discrete individual actions, none of which aims at the formation of coherent social arrangements. Their shape and function, which in the aggregate form ordered arrangements, are the end result of countless individual actions each of which seeks ends distinct from the social patterns that emerge. This is the evolutionary dynamic that makes for viable social and political institutions and creates the conditions for a society governed by the rule of law and not the commands of men.

Now we come to the words of Hayek himself. He starts with the premise that people, and how they have come to cooperate in various ways, is not the significant product of direction by external powers, but a largely organic evolution of social customs:

The Socratic maxim that the recognition of our ignorance is the beginning of wisdom has profound significance for our understanding of society. Perhaps it is only natural that the scientists tend to stress what we do know; but in the social field, where what we do not know is often so much more important, the effect of this tendency may be very misleading. Many of the utopian constructions are worthless because they follow the lead of the theorists in assuming that we have perfect knowledge … The misleading effect of the usual approach stands out clearly if we examine the significance of the assertion that man has created his civilization and that he therefore can also change its institutions as he pleases. This assertion would be justified only if man had deliberately created civilization in full understanding of what he was doing or if he at least clearly knew how it was being maintained. In a sense it is true, of course, that man has made his civilization. It is the product of his actions or, rather, of the action of a few hundred generations. This does not mean, however, that civilization is the product of human design, or even that man knows what its functioning or continued existence depends upon. The whole conception of man already endowed with a mind capable of conceiving civilization setting out to create it is fundamentally false. Man did not simply impose upon the world a pattern created by his mind. His mind is itself a system that constantly changes as a result of his endeavor to adapt himself to his surroundings. It would be an error to believe that, to achieve a higher civilization, we have merely to put into effect the ideas now guiding us. If we are to advance, we must leave room for a continuous revision of our present conceptions and ideals which will be necessitated by further experience.

Hayek writes of the unseen influence of societal evolution on all of us:

There are two important respects in which the conscious knowledge which guides the individual's actions constitutes only part of the conditions which enable him to achieve his ends. There is the fact that man's mind is itself a product of the civilization in which he has grown up and that it is unaware of much of the experience which has shaped it—experience that assists it by being embodied in the habits, conventions, language, and moral beliefs which are part of its makeup. Then there is the further consideration that the knowledge which any individual mind consciously manipulates is only a small part of the knowledge which at any one time contributes to the success of his action. When we reflect how much knowledge possessed by other people is an essential condition for the successful pursuit of our individual aims, the magnitude of our ignorance of the circumstances on which the results of our action depend appears simply staggering … The sum of the knowledge of all the individuals exists nowhere as an integrated whole. The great problem is how we can all profit from this knowledge, which exists only dispersed as the separate, partial, and sometimes conflicting beliefs of all men. We know little of the particular facts to which the whole of social activity continuously adjusts itself in order to provide what we have learned to expect. We know even less of the forces which bring about this adjustment by appropriately coordinating individual activity … Our habits and skills, our emotional attitudes, our tools, and our institutions—all are in this sense adaptations to past experience which have grown up by selective elimination of less suitable conduct. They are as much an indispensable foundation of successful action as is our conscious knowledge. Not all these non-rational factors underlying our action are always conducive to success. Some may be retained long after they have outlived their usefulness and even when they have become more an obstacle than a help. Nevertheless, we could not do without them: even the successful employment of our intellect itself rests on their constant use … Man prides himself on the increase in his knowledge. But, as a result of what he himself has created, the limitations of his conscious knowledge and therefore the range of ignorance significant for his conscious action have constantly increased. Ever since the beginning of modern science, the best minds have recognized that “the range of acknowledged ignorance will grow with the advance of science.” Unfortunately, the popular effect of this scientific advance has been a belief, seemingly shared by many scientists, that the range of our ignorance is steadily diminishing and that we can therefore aim at more comprehensive and deliberate control of all human activities. It is for this reason that those intoxicated by the advance of knowledge so often become the enemies of freedom. While the growth of our knowledge of nature constantly discloses new realms of ignorance, the increasing complexity of the civilization which this knowledge enables us to build presents new obstacles to the intellectual comprehension of the world around us. The more men know, the smaller the share of all that knowledge becomes that any one mind can absorb. The more civilized we become, the more relatively ignorant must each individual be of the facts on which the working of his civilization depends. The very division of knowledge increases the necessary ignorance of the individual of most of this knowledge. We are most familiar with this process of accumulation and transmission of knowledge in the field of science—so far as it shows both the general laws of nature and the concrete features of the world in which we live. But, although this is the most conspicuous part of our inherited stock of knowledge and the chief part of what we necessarily know, in the ordinary sense of “knowing,” it is still only a part; for, besides this, we command many tools—in the widest sense of that word—which the human race has evolved and which enable us to deal with our environment. These are the results of the experience of successive generations which are handed down. And, once a more efficient tool is available, it will be used without our knowing why it is better, or even what the alternatives are. These “tools” which man has evolved and which constitute such an important part of his adaptation to his environment include much more than material implements. They consist in a large measure of forms of conduct which he habitually follows without knowing why; they consist of what we call “traditions” and “institutions,” which he uses because they are available to him as a product of cumulative growth without ever having been designed by any one mind. Man is generally ignorant not only of why he uses implements of one shape rather than of another but also of how much is dependent on his actions taking one form rather than another. He does not usually know to what extent the success of his efforts is determined by his conforming to habits of which he is not even aware.

Hayek then comes to one of his main points, which is that:

[I]ndividual freedom rests chiefly on the recognition of the inevitable ignorance of all of us concerning a great many of the factors on which the achievement of our ends and welfare depends … If there were omniscient men [which there are not], if we could know not only all that affects the attainment of our present wishes but also our future wants and desires, there would be little case for liberty … Liberty is essential in order to leave room for the unforeseeable and unpredictable; we want it because we have learned to expect from it the opportunity of realizing many of our aims. It is because every individual knows so little and, in particular, because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it. Humiliating to human pride as it may be, we must recognize that the advance and even the preservation of civilization are dependent upon a maximum of opportunity for accidents to happen. These accidents occur in the combination of knowledge and attitudes, skills and habits, acquired by individual men and also when qualified men are confronted with the particular circumstances which they are equipped to deal with. Our necessary ignorance of so much means that we have to deal largely with probabilities and chances.

Hayek then counsels that people embrace the sort of ancillary chaos that sometimes results from personal freedom:

From this foundation of the argument for liberty it follows that we shall not achieve its ends if we confine liberty to the particular instances where we know it will do good. Freedom granted only when it is known beforehand that its effects will be beneficial is not freedom. If we knew how freedom would be used, the case for it would largely disappear … Our faith in freedom does not rest on the foreseeable results in particular circumstances but on the belief that it will, on balance, release more forces for the good than for the bad … The freedom that will be used by only one man in a million may be more important to society and more beneficial to the majority than any freedom that we all use. The benefits I derive from freedom are thus largely the result of the uses of freedom by others, and mostly of those uses of freedom that I could never avail myself of. It is therefore not necessarily freedom that I can exercise myself that is most important for me. It is certainly more important that anything can be tried by somebody than that all can do the same things. What is important is not what freedom I personally would like to exercise but what freedom some person may need in order to do things beneficial to society. This freedom we can assure to the unknown person only by giving it to all.

In the next essay in this series, we’ll explore Hayek’s argument that the occasional chaos we tolerate in order to preserve personal freedom and its benefits for all, applies also to the economic decisions people make.