Hayek and the Social Question

The Social Question for Hayek: “Pay generated by the free market is just”

By Patrick Schreiner

[This article published on 6/13/2019 is translated abridged from the German on the Internet. Patrick Schreiner is a unionist, economist and author of “Submission is Freedom.”]


Neoliberals are also devoted to the “social question” in a certain way – by justifying social inequality. A glance at the work of the seminal neoliberal thinker Friedrich August von Hayek confirms this.

In general usage, the term “social question” aims at social problems like mass impoverishment, poverty, precarious work and unemployment – or more exactly at searching for solutions to these problems. Neoliberals are occupied with the social question in a certain way and from their perspective. Hardly surprisingly, they come to conclusions that are clearly different from those of the Left Party. One reason may be their mostly unspoken motivation. Neoliberals are interested in justifying social inequality, not in solving social problems. This article illustrates this in the example of the economist and social philosopher Friedrich August von Hayek.

“To encounter social inequality with the demand for more education means refusing an active redistribution from top to bottom” (Patrick Schreiner)

Hayek’s works are still widely received in market fundamentalist circles today. Born in 1899 in Vienna, he grew up in an educated middle class parental home. After first sympathizing with socialist ideas, he became a student and close collaborator of the economist Ludwig von Mises. In 1931, he went to the London School of Economics where he was the opponent of the economist John Maynard Keynes. In the following decades, Hayek was the central figure of neoliberalism rising from the 1930s. He took part in the “Walter Lippmann colloquium” and organized the founding meeting of the neoliberal movement in 1938 in Paris.

In 1947, he organized a second great meeting at the Swiss Mont Pelerin where the “Mont Pelerin Society” was founded as a central institution for linking neoliberal persons and institutions. Up to 1960, Hayek was president and then was the honorary president of this organization that still has its coordinating function today as the nexus of neoliberal networks. Hayek was one of the most important seminal thinkers and representatives of neoliberalism.

Social justice for Hayek

As for all neoliberals, “the market” is also in the center for Hayek. Concrete markets – like for example fruit yogurt, mobility-services or heroin – did not interest him. Rather “the market” as an abstract social mechanism that gives instruction s for action and organizes society interested him. The market rewards those whose actions and decisions have the greatest benefits for others, Hayek said. This is carried out through prices. The price as a signal symbolizes the benefit of a commodity, service, skill or activity for others. They showed people what to do and what not to do. In this way, markets made scattered, decentralized knowledge useful. Markets are more effective, more efficient and more liberal than any central planning. Society and the economy are much too complex to be sufficiently understood and guided by individual persons, organizations or governments (Hayek).

The market as a superior mechanism for organizing the economy and society has developed and become accepted in long historical processes. Hayek explained these processes in a theoretical-evolutionary way. The more strongly human individuals, groups and societies apply market principles and develop related ideas and skills, the more successful they will be in the competition with other groups and societies. The market principles were accepted more and more because firstly their original supporter groups could prevail over others on account of evolutionary advantages and secondly because other groups recognized and adopted market principles as an advantage. In this way, an extensive bundle of rules and norms coalesced and were followed by people. Without really understanding this in detail and often without even being conscious of this, their adjusted, market-conforming conduct brought them order and prosperity (Hayek).

Hayek did not see any conscious and central authority behind this evolutionary process. The traditions and mechanisms developed by people are rather the result of a selection process out of irrational or rather “unsubstantiated” dogmas… In capitalism, the market is morally charged. This is especially true in neoliberal capitalism. The striving for (market-) success as a life maxim, moralizing insults of allegedly lazy unemployed persons and the close connection between socio-economic position and the social acknowledgment of a person are examples.

The close connection of market and morality is a very different question. Hayek regards it as a social progress. This close connection first makes the market possible and so guarantees freedom and prosperity, freedom because only the market ensures that “everyone can apply his or her knowledge for his or her purposes” and well-being because the market uses the enormous stock of individual knowledge in collectively useful ways. From this view, market societies (Hayek speaks of “spontaneous orders”) are a threatened telos of human evolution and history. While describing the past as a constant advance to market, market rules and market morality, he sees these presently endangered. Human “instincts” like solidarity and altruism that had an important function in small primeval groups are repressed and trivialized today. These instincts endanger the market and are completely out of place. They threaten the evolutionary progress of humanity in their political form – particularly the welfare state and socialism.

Irrationality marks a good portion of Hayek’s argumentation even if he describes non-marketable attitudes like solidarity or altruism as “instincts” and denies their rationality. “The brain is an organ enabling us to accept culture but not to design culture” (Hayek 1981b). Correspondingly, Hayek demands humility. A person has to adjust to tradition and culture, follow the conventional rules without further reflection and accept the morality of the market. Hayek uses terms like “rules,” “morals,” “tradition” and “culture” largely synonymously. These contain the classical goals and values of neoliberalism: respect of private property, safeguarding freedom of contract, trade competition and respect of privacy. He does not see a conflict with human freedom in so far as freedom on the market can first be guaranteed by observing the rules.

From this viewpoint, a person is a rule-follower, not a rule-setter and only needs to use his intelligence. “A person can only consciously and reflectively change the rules to a trifling extent. Hayek’s political engagement served this goal. Hayek’s planned rule changes can only improve evolution, not reverse evolution. More market must be the goal, not less market (Schreiner 2018b).

For Hayek, rules are in force for all persons. They guarantee reliability and the mutual coordination of human conduct. In the form of the market, they make possible the best-possible order and the highest possible prosperity with the greatest-possible decentralized (individual) freedom. The reverse side of such an equality of rules is the inequality of persons. Finally, market outcomes always lead to a more or less markedly increasing inequality. This is the case when this inequality is not adequately corrected from the outside…

For Hayek, a conception of justice results that is very typical for neoliberal political thought. He reduces the question about justice to the question about just procedures. The resulting inequality is irrelevant to him. From this perspective, a distribution situation is just when it occurs from functioning market processes with absolute authority that are the same for all persons. Hayek wrote: “Justice focuses on the question whether the transactions were fair, not on the results of different transactions” (1986).

Thus a distribution situation is just when it comes about justly. Hayek follows a procedural idea of justice…A person has to accept the inequality of market outcomes. The theoretical-evolutionary demand of adapting to a traditional mechanism is expanded to a demand for adjustment to market results, even if these are marked by inequality.

Hayek justified this attitude with the alleged superiority of a market economy over other forms of economics. Because the market creates the greatest possible chance for prosperity, its market results are regarded as just.

“When we deem every rule of pay as just that contributes to increasing the chances of some members of the community, we should consider the pay that comes about through the free market as just” (Hayek 1977a).

From that, .it follows necessarily that individual effort cannot be a criterion for judging market outcomes as just or unjust. The same is also true for individual needs. The market does not reward efforts and cannot consider needs. Rather it rewards persons whose actions most benefit others. The market decides over the benefits of an act or person – in the form of demand (or non-demand) for certain goods, services, skills and offers (Hayek 1981a).

While Hayek describes the human past as constant evolutionary progress, he sees this progress currently endangered. The market as a just, liberal and efficient mechanism for producing and distributing income comes under pressure through moralizing demands for interventions in the market. Primal human instincts break down again…

Once more a dichotomous world view is clear. Market (good) and politics or state (evil) are diametrically opposed. This juxtaposition pervades all of Hayek’s writings. Hayek’s focus on the market was prompted by the market’s supposed superiority. He was occupied with politics and the state to show the dangers and problems starting from them. For Hayek, the threat of progress is always a threat to the just market by politics.

Very consistently, this led to a critical attitude toward democracy. Ultimately, that state-form had to give persons the possibility of influencing government and politics. A government has the power and means for intervening in markets or correcting market outcomes. If formed democratically, a government will be confronted with the social question. On this background, Hayek urged limiting the action-possibilities of democratic governments, “I prefer a limited non-democratic government to an unlimited and therefore lawless government” (Hayek 1977b).

Hayek wanted to limit democracy to a clear process and fill it with neoliberal conduct. Democratic influencing the content of politics should be restricted as much as possible. This anti-democratic attitude goes far beyond the classical liberal demand for restricting majority rule. Hayek’s concern is not protecting social minorities. Rather, the market should be preserved from political incursions. This goes beyond the protection of only certain profiteering minorities…

Hayek ascribed a very negative role to unions. They meddle in market processes and in the individual freedom of the impacted. They use their monopolistic extortion potential to repress competition on the market of the commodity labor. In this way, they force employers to pay higher wages than would result on the market (Hayek 1981b).

Wages should be formed “freely” on the market. Hayek seemed to recognize that social dislocations could be intolerable in capitalism without unions as neoliberals dreamt… Minimum neoliberal social security is policy for and not against the market.

Neoliberal “social policy” today

When neoliberals pursue economic-, social- and labor market policy, their “reforms” aim firstly at lower wages, lower social standards, more flexible labor markets and so forth. Time and again nuances are heard that seemingly aim at more social and not less. This policy is neoliberal and neither social nor progressive.

The first example is the strong demand for more equal opportunities, particularly through education. This was a central idea in the so-called “Schroeder-Blair paper” of 1999. Ensuring that all persons have equal educational opportunities –so everyone has an equal chance at work and income – is a task of politics and society… Politics should be more concerned with the “globalization losers” by supplying better educational possibilities…

Equal opportunities can only be produced when the state controls and balances the initial conditions of all human biographies – and intervenes in markets for extensive redistribution. Hayek turned strictly against such ideas (Hayek 1981b). That kind of far-reaching interpretation of equal opportunities is radical for contemporary neoliberals… Encountering social inequality with more education does not mean refusing an active redistribution from top to bottom. To speak almost biblically with Marcel Frantzsacher, the head of the German Institute for Economic Research (DIW), “one does not need to take to give” (Fratzscher 2017).

Conclusion

The question who and under what conditions has what claim to income created in a society is one of the central aspects of the social question. It is raised when a given distribution is felt to be unjust – when it leads to impoverishment, unemployment and exclusion. Hayek’s answer was that the market alone determines the distribution of income. Every market outcome is just and social – as long as it was not falsified by external operations. From that perspective and under this condition, there cannot be a “social question” or deficient social justice.

Unlike more extreme neoliberals, Hayek did not exclude the possibility of a minimum income for the needy. This should be restricted to an absolute minimum and may not intervene in the market in any way or influence market processes.

The notion that social policy is only necessary for and with the market is a long-running neoliberal theme. We find it today in the demand for an unconditional neoliberal basic income whose advocates aim more or less explicitly at abolishing all or nearly all other welfare state benefits. We find it in the idea that the social question could be solved for everyone through more education and equal opportunities. Behind the two is an excessive faith in the market – and the unwillingness to redistribute from top to bottom.