Planning & The Rule of Law

Hayek

A government should ultimately be bound by rules that are fixed and announced before it takes up any activity, this allows an individual to plan how they will go about their affairs, or in a more macro sense how firms should behave as they understand the manner in which government may use coercive power. Of course this system is not perfect in that the creators and administrators of these laws are fallible.

However, it does create the assurance that a pursuit of certain aims will not be stifled by a governing body, in the case where all the conditions are realised, so that law rather than stifling freedom allows it to flourish. Here Hayek makes a distinction between the rule of law which enables a government to fix conditions in which resources are used, but the ends they meet is ultimately decided by the individual, and arbitrary government where it directs the means of production to particular ends.

Central planning cannot allow the first to exist, in that the formal rules we have provide a framework rather than step by step guidance, central planning would require these rules to be exact in what they suggest in that the particular ends are met, and it is not by the individuals whim the product of these means. Here arises another problem with central planning and as such collectivism. When a government has to make every decision framework rules are useless, imagine trying to solve at this very moment how many buses should operate. Whereas in our current society the government provides the legal framework for their operation but it then comes down to competition, market forces, etc. which decides the operation of buses. A controlling government would have to make this decision under the circumstances that the problem arises, and this means that it would have to balance all the different aims and needs at that given moment as to not favour one, but inevitably somebody’s views have to be given greater significance.

Hayek uses the example of the Highway Code, which does not instruct people on where to go and exactly how they go about it (planning attempts to do this), it instead offers a framework in which the individual can operate but also ensure that society is not harmed, and is better off on the whole. It is here that the concept of formal rules is developed, in that we create rules that are useful to a yet unknown people, under circumstances which cannot be foreseen in detail.  They are formed on the basis that society is better off due to their existence. Thus, this avoids the need of dealing with each individual’s means and ends, the recognition that precise results are hard to come by, and that by providing a structure of which everyone is aware of, everyone will be better off.

Micromanagement is unsuccessful as concrete rules for a given situation would have to be applied, but we lack this information, and in the ultimate end only one aim can be pursued as otherwise it may conflict with another. Thus Hayek notes that the state should confine itself to providing rules to general types of situations as only the individual currently in the current circumstance possess the correct information to make a viable decision. Also there is the recognition that we cannot see into the future, the state would struggle to see the effect of certain actions on particular people. Furthermore, the state chooses between the different ends consequently favouring one over the other, as it cannot know what would have happened if the other aimed were to be picked. Thus planning in regards to law in the creation of definite rules means that it perpetuates the problem of asymmetric information, whereas formal rules reduce the asymmetry’s influence.

Hayek emphasises that as planning becomes increasingly extensive the struggle in asserting what is “fair” or “reasonable” increases. Providing the need for more authority in making executive decisions, and that this facilitates more deliberate discrimination between the particular needs of different people. It would ultimately determine how “well-off” a certain person will be compared to another, in that only one’s needs are met through this discrimination in choice. The rule of law in a non-planned system ensures that there is an absence of legal privilege. Hayek establishes the paradox that in aiming for equality it is necessary to facilitate a legal system in which not everyone is equal in front of it.

“To produce the same result for different people it is necessary to treat them differently.”

The rule of law undeniably can lead to economic inequality (but to some extent this is the only thing that is truly inevitable), thus socialism protests against “formal justice” in that judges are too independent for example. Hayek ascertains that the rule of law is only effective if it is universal and as such does not work in socialist system, in which again there is the breakdown of political freedom. “It does not matter whether we all drive on the left or on the right-hand side of the road so long as we all do the same.” Rules are meant to enable us to predict each other’s behaviour to a needed extent, in that I won’t drive onto the motorway and find that people are driving in the opposite direction.

The individual should be able to foresee the actions of the state on the basis of the rules of law, and as a consequence use this knowledge to form his own plans and how he goes about his affairs. Here the individual knows where the state can stifle his efforts, and that it is not set arbitrarily on the specific circumstance of that moment. From this Hayek makes an acute reference to the Enlightenment:

“Man is free if he needs to obey no person but solely the laws” – Immanuel Kant

In a socialist system the rule of law will be applied in a manner which is as if a person were to be commanded by another. Legislation in a democratic government is confined by the continued discourse and disagreement, whereas in a socialist system in will be pushed through ultimately serving one individual’s ends at the cost of another.

When a state embarks on the complete control of economic life the significance of minority rights, and individual rights are diminished, without even breaking the rule of law at times. Hayek states that ruthless discrimination occurred through a change in economic policy first before and statutory change. Due to the nature of Socialism and the need for an overriding decision to be made, power lands in the hands of few and in that there is the inevitable service of their vested interests, or an ability to go against a large minority.

The “Inevitability” of Planning

Hayek

There was an argument for the inevitability of planning for example technological change bringing about the existence of natural monopolies, consequently requiring government planning as to some extent the lesser evil than production by private monopolies.

Hayek breaks down this argument once more by considering social infrastructure and existing policies. He asks the question whether the development of natural monopolies is a consequence of new technology, or more simply the economic conditions in which they operate. Hayek argues that the latter is true. He uses the breakdown of the following example:

A large firm having superiority over a small firm, due to technological change may result in greater economies of scale, and an as such lower cost per unit produced and thus begins a process of underbidding and driving out small firms in order to increase market share.

Now at first glance the argument stated above is reasonable, but Hayek notes how this is not the case from a congressional report by the temporary national economic committee in that it states:

“The superior efficiency of large establishments has not been demonstrated; the advantages that are supposed to destroy competition have failed to manifest themselves in many fields. Nor do the economies of size, where they exist, invariably necessitate monopoly.”

This leads Hayek on to argue that it was the policies within countries which facilitated the growth of monopolies, which would then drive out smaller firms. He takes the creation of cartels, and syndications as a consequence of governments seeking regulation in prices and sales as the factor that led to the growth of large monopolies. This goes back to his overarching argument of travelling down one road completely or not at all, as there is greater flaw in attempting a mixture. Then going on to state that “monopoly capitalism” became acceptable even more so as countries such as the United States erected protectionist policies and pursued semi-isolation. He uses the example of Great Britain in stating that planning is not inevitable, in that yet again policy had promoted the growth of natural monopolies. He notes that the British system had been extremely competitive up until 1931 where similar to America protectionist policies arose, and economic planning was introduced and thus monopolies came about. Not of technological change, but the actual structure of the economic system.

He then delves into another segment where planning is not inevitable. Arguing against those who make the assertion that the complexity of modern industrial civilisation creates the need for central planning otherwise we cannot combat its problems effectively. They additionally state that it is increasingly difficult to obtain a coherent picture of economic process, thus things should be coordinated or else dissolve into chaos.

Hayek breaks this down by simply stating that if conditions were simple enough for one person or board to have perfect information then planning works, but as they note in their own argument there is this existing complexity where it is increasingly difficult to attain this information. Thus Hayek argues that decentralisation becomes imperative, as then there is the coordination between separate agencies to bring about “mutual adjustment”. Furthermore, he states that “nobody can consciously balance all the considerations bearing on the decisions of so many individuals.” Thus he arrives at the price system and how it operates without the need for recording every single change in information by a central body. It also allows for the greater complexity in our system which helps the growth of the industrial system and that planning ultimately stifles it.

It is here that he comes to point which is of particular interest to me, he writes about how technological change can be stifled in order to maintain the status quo. For example the industrial revolution promised to enhance the productivity of labour; however it came at the cost of employment for many people. So here arises the argument for the need of central planning to efficiently create the change over such that the short term loss does not override the short term gain. To this Hayek states that planning is not needed as either the short term loss can be accepted, or the change can be delayed up until the necessary infrastructure or policy is erected to minimise any loss.

Specialisation & the Allure of Planning

Hayek states there are many good things, which all agree are highly desirable, and possible, that are difficult to achieve within our own lifetime. This develops the allure of planning in that it seems possible to circumvent the barrier that is time, collective action leading to the achievement of these goals.

He then brings this into regards of specialists (technocrats) in that a planned society seems to offer a route to achieving their objectives. He states that this is an illusion and a misdirection of resources, in that the specialist will obviously place greater importance on his aims then others. Hayek uses a nice example to illustrate this:

“The lover of the country-side who wants above all that its traditional appearance should be preserved and that the blots already made by industry on its fair face should be removed, no less than the health enthusiast who wants all the picturesque but insanitary old cottages clear away, or the motorist who wishes the country cut up by big motor roads, the efficiency fanatic who desires the maximum of specialisation and mechanisation no less than the idealist who for the development of personality wants to preserve as many independent craftsmen as possible.”

However, they all have a wish to go about this planning and therefore they will ultimately come into conflict with each other. As such this brings about the central issue, that not everyone can be pleased. It’s attractive to those who have devoted their lives to a single task and want to see it done universally. But practically this cannot occur, also defining to some extent the authoritarian nature of central planning, only one direction can be pursued and thus not everyone will be pleased.

Individualism & Collectivism

Hayek

 

The concept of socialism must be defined it its aims and the actions it proposes to take in order to achieve them. He recognises that its general use is to describe the ideals of social justice, equality, and security. However it becomes more specific in the way that this is brought about such as the abolition of private enterprise, private ownership of the means of production, and the use of central planning.

Hayek laments that many proclaimed socialists are only looking at the first aim of social justice or equality but “neither care nor understand how they can be achieved”. Therefore he understands that there is dispute in that some people support the ends but not the means, and it also raises the question of whether socialisms ultimate aims can be achieved simultaneously.

Here he begins to breakdown the problem that socialism proposes, first by noting that central planning can result in two separate ends in regards to distribution of income, where one use of it may result in equal distribution, similar use of it may result in income reaching the hands of few. Thus, he states that socialism must be approached as a species of collectivism. As collectivism claims that we are interdependent which conflicts with Hayek’s libertarian outlook in that each individual is sovereign of his/hers decisions. So this conflict also applies to socialism, in that there is a loss of an individual’s sovereignty. However, he does mention that the root support of planning comes from rational thought. In that we plan our own decisions, and governments before putting through policy plan in considering bad or good action, or wise or short-sighted action. However he argues that modern socialism does not take the stance of liberal planning in that a framework should be erected in order to achieve this aims, he states that socialism looks to establish is a central direction for all economic action, where all resources are consciously directed. He summarises the dispute in the question:

“For this purpose is it better that the holder of coercive power should confine himself in general to creating conditions under which the knowledge and initiative of individuals is given the best scope so that they can plan most successfully; or whether a rational utilisation of our resources requires central direction and organisation of all our activities according to some consciously constructed “blueprint”

In order to argue his point he clarifies that a libertarian approach must be accompanied with the correct infrastructure and institutions in order to make competition and the benefits of market forces actually work and to not simply leave things be. I believe that it is here that Hayek begins to develop the point where a system must travel down one road completely or risk failure. In that he expands upon his point citing that legal framework is one example of ensuring competition achieves its purpose. Furthermore, competition should not be supplemented by conscious direction as it is a method in itself which provides the adjustments to our behaviour without the intervention of authority. Then he delivers an integral point: “any attempt to control prices or quantities [he previously mentions how competition solves this problem, e.g. market forces creating price signalling] of particular commodities deprives competition of its power of bringing about an effective co-ordination of individual efforts, because price changes then cease to register all the relevant changes in circumstances and no longer provide a reliable guide for the individual’s actions.”

I think that at points like these it seems that Hayek portrays himself against any form of corrective intervention, however he fully realises the existence of negative externalities or factors that may corrupt competition’s benefits. He simply asks the question “are the advantages gained greater than the social costs which they impose” as a condition in which intervention is decided. Hayek considers both the existence of negative and positive externalities, and where price signalling through competition seems to have failed. He argues that the fact we may bring in direct regulation through authority where it is difficult or impossible to develop regulation for competition is not proof to suppress competition where it may function. Here he states that in “no system that could be rationally defended would the state just do nothing”, for the system to be effective however the need for state activity needs to be realised but also stress the creation of effective competitive system by “continuously adjusting legal framework” (alongside the already well-established institutions) thus reducing the occurrence of fraud, deception, exploitation, etc. as the existence of asymmetric information, moral hazards, adverse selection are all realised, and can be acted against appropriately.

Finally, Hayek states the point that not only is complete centralisation an unbelievably difficult task, but more so the sheer loss of freedom in that one single centre decides everything. He argues that there is no middle position, that by going down one path you must commit to it consistently he states that:

“Both competition and central direction become poor and inefficient tools if they are incomplete, they are alternative principles used to solve the same problem.”

“Planning and competition can be combined only by planning for competition, but not by planning against competition.”

It is determined that planning is inevitable, a necessity in ensuring that competition works well, Hayek only critiques the planning that is working against competition, as he has stated before not only due to economic outcomes, but on the fundamental principle of maintain political freedom.

 

The Abandoned Road?

Hayek

It is here that Hayek develops what can be seen as his doctrine of freedom, this is more of political science then economics but it is integral in understanding his ultimate support of capitalism and the threat socialism and communism pose on liberty.

He identifies how it was the liberation of action and thought which had resulted in the improvement in our general living standards whether at the top or bottom of the social ladder.

“During the whole of this modern period of European history the general direction of social development was one of freeing the individual from the ties which had bound him to the customary or prescribed ways in the pursuit of his ordinary activities”

The example of science and its development alongside freedom is noted as a direct benefit of allowing individual thought, he notes the remarks of Auguste Comte “the perennial Western malady, the revolt of the individual against the species” but rather than Hayek noting this in a derogatory sense he uses it an example of freedom being the force which created Western civilization.

Hayek is often bundled in with far right wing economic policy, with taking a completely laissez-faire approach, but he to some extent is more of an opponent to socialism then a proponent of laissez-faire policy. This originates from his core ideology of libertarianism which he states can be a mobile creed that does not stay on set values when conditions of society change. The other supporters of the liberal cause had made laissez-faire a “hard and fast rule” in which there was a failure to recognise the need for developing institutions to support it. This is identified as the cause for the picking apart of the liberal argument and then the slow progress of policy, as it was (and still is) difficult to change the institutional framework of society.

He uses a delightful metaphor to summarise this:

“The attitude of the liberal towards society is like that of the gardener who tends a plant and in order to create the conditions most favourable to its growth must know as much as possible about its structure and the way it functions.”

Moving on from this he accounts for the rise of the argument for planning, “conscious direction”, and socialism. In that he looks at how society changed from the rough rules of the 18th century accompanied by new thought but slow progress in making gaps which were yet to be filled. Thus, there were those who argued that “it was no longer a question of adding to or improving the existing machinery [of society], but of completely scrapping and replacing it.” Consequently, leading to the removal of unseen forces that produce unforeseen results, and its place have a collective and conscious direction towards deliberately chosen goals.

He accounts for the spread of similar thought throughout Europe as a consequence of the import of German ideas, he notes that the ideas may have not been first conceived in Germany but were “developed to perfection”, and that during Germany’s materialist accumulation these ideas were spread and were encompassed in the government itself which had a large socialist party in the parliament. He then notes a distinction that German thinkers developed in that “Western” was west of the Rhine, and that the society become opponents of this “Western” ideology which was constituted in liberalism, democracy, capitalism, and individualism. As the German people conceived these things to be shallow ideals, or “the rationalisation of selfish interest” thus defining the nature of German society in the early 20th century.

Capitalism by Dessert

Pudding

The other night I went out with a couple of friends to my favourite local restaurant. Three years ago this restaurant was a simple English pub, but under new ownership a chef was brought in and it is now gastro pub cuisine. The food is very good (London standard) albeit at relatively high prices for the local area.

No matter what I choose to eat during the meal, I will always take sticky toffee pudding for dessert. When I went out with my friends and it came to the arrival of dessert, I was struck by the significant decrease in size of the sticky toffee pudding. It had only been two or three months since the last time I was there, and I recalled that the pudding was far bigger.

Two things were clear to me, firstly the menu was unchanged and so the prices were unchanged. Secondly, the restaurant just created more profit by decreasing the size of the pudding. I found this rather infuriating as the quality had not changed; it was just a smaller version of my favourite pudding. After venting to my friends, we came to the conclusion that this was capitalism and free markets operating at their very best.

It was always noticeable that people were in awe of the size of the sticky toffee pudding before its reduction, it was a dessert worth sharing. Now that it is smaller it is more likely that fellow diners will not share the dessert but have to order their own. This would have not been noticeable to anyone but a regular, and it is evident that the pub is maximising their profits.

Nevertheless, I think I will still come back to eat there as it is arguably the best sticky toffee around the area. It seems that for the restaurant it is dessert first, costumers second.