Complexity

How Hayek’s Evolutionary Theory Disproves His Politics

He was arguing with Stalin, not Norway.

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By David Sloan Wilson, interviewing Sam Bowles

As an evolutionist critiquing the field of economics, I felt like a disciplinary outsider until I encountered the work of Friedrich Hayek. The Austrian economist was himself critical of Walrasian general equilibrium theory and proposed a radical alternative: Economic systems are a form of distributed intelligence that evolved by cultural group selection. They work without having been designed by anyone.

That was my area of expertise. I had to admire Hayek as a pioneer, especially since group selection was a heresy and the study of human cultural evolution was in its infancy when he wrote. Nevertheless, both topics have advanced by leaps and bounds since then and do not support his view that economic systems work best in the absence of regulations. Instead, cultural group selection theory points to a middle road between laissez faire and centralized planning that is rich with possibilities.

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More recently, three distinguished economists—Samuel Bowles, Alan Kirman, and Rajiv Sethi–have made their own assessment in a retrospective titled Friedrich Hayek and the Market Algorithm published in the Journal of Economic Perspectives. (And their Vox post The Market Algorithm and the Scope of Government: Reflections on Hayek) All three are well read in my discipline of evolutionary science in addition to their economic credentials. Sam recently published The Moral Economy: Why good incentives are no substitute for good citizens, and wrote a piece based on, it for Evonomics. As part of the CORE (Curriculum Open-Access Resources for Economics) he is also co-author of a new free online introduction to economics at www.core-econ.org.

I count Sam as one of my mentors and was proud to work with Alan to edit a MIT Press volume titled Complexity and Evolution: Toward a New Synthesis for Economics, based on a conference that we helped to organize under the auspices of Germany’s Ernst Strungmann Forum, which included Rajiv as a participant. I interviewed Alan on the concept of laissez-faire in 2014, which included a discussion of Hayek. Their jointly authored work, along with a recent op ed by Sam provided a golden opportunity to have a conversation with him.

DSW: Welcome, Sam! I look forward to this conversation. What would you say are the most positive contributions that Hayek made to the field of economics?

SB: Wait! David, before we even start: how can I be your mentor? I learned from you that group selection should be liberated from the dog house, when you were a lone voice against biological orthodoxy at the time.

But to get to your question, I would single out Hayek’s representation of the market as an information processing mechanism that plays an essential role in any economy because information is scarce and local, his critique of perfectly competitive equilibrium thinking in economics, and his dynamic view of the economy.

DSW: Why was his focus on information important for economics?

SB: His 1945 paper – “The use of knowledge in society” — is in my top ten all time contributions to economics. It came in the late innings of the “planning versus the market” debate instigated by Great Depression and the apparent success of the Soviet Union’s first five-year plans. By the end of the thirties the anti-planning side was down by 5 runs at least; even the arch opponent of socialism Joseph Schumpeter had conceded: “Can socialism work? Of course it can. There’s nothing wrong with the pure theory of socialism.” Just in the nick of time: Hayek saved the day, coming up with a clinching argument: central planners could not possibly know enough to plan an economy well.

DSW: But the problem of inadequate information facing the central planner must have been commonplace at the time.

SB: Curiously it was not. The advocates and (still more curiously) the critics of central planning alike had chosen as their terrain the conventional neoclassical (or ‘Walrasian’) model — with its assumption of complete information. Not surprisingly, things had not gone well for the anti-planning side. Some a little closer to the real economics of central planning, however, had seen things differently. Here is an example:

 If a universal mind existed, such a mind, of course, could a priori draw up a faultless and exhaustive economic plan, beginning with the number of acres of wheat down to the last button for a vest. The bureaucracy often imagines that just such a mind is at its disposal; that is why it so easily frees itself from the control of the market …

This is straight Hayek – it could easily have been lifted from his 1945 paper –but the author is the Russian revolutionary Leon Trotsky writing in 1932 in light of what had been learned from the First Five Year Plan.

DSW: How did Hayek connect his theory to economic policy, which you call “The Road to Laissez Faire” in your article?

SB: Well that’s just it, David, he did not. Despite his insistence that the two were part of an organic whole, he didn’t connect his economics to his political position. In fact Hayek’s economics gives you good reason to doubt his politics. I hope we can come back to that.

DSW: Definitely. But first, was his argument against central planning, then, his main contribution to economics?

SB: Not at all. The planning versus the market debate was the instigation, but his work both before and after the 1945 paper inaugurated a new way of seeing market economies and has made ‘information economics’ a major theme in contemporary economic research.

DSW: What was Hayek’s main idea about markets and information?

SB: It was simple and profound at the same time. Prices are messages. The devil is in the details of course, but ideally they tell you how much it cost to produce a good, and how valuable that good is to others. These are the facts that the planner could not readily know. So, if there is a drought in the mid-west, and the price of wheat soars, the message is: “think of putting potatoes or pasta on the table this evening.” And as the example shows, prices are more than messages, they are motivation too. The higher price of wheat not only suggests a different menu, it makes the alternative a lower cost option.

DSW: And Hayek used this reasoning to demonstrate that markets should not be regulated by the government because they can on their own produce optimal results?

SB: Not exactly. Hayek advocated the market not on grounds of optimality, but by default. The alternative, central planning, could not work, and moreover any substantial degree of government intervention in the economy, he feared, was bound to be a threat to liberal values. Remember, when he wrote Road to Serfdom, he was not thinking about Nordic social democracy, he was writing under the shadow of Hitler and Stalin.

DSW: It always struck me as curious that Hayek developed a radical alternative to general equilibrium theory, but both were used to justify the same laissez faire economic policies and that Hayek and Friedman were both central figures in the Mont Pelerin Society. This makes me think that the impulse to justify laissez faire policies came first and steered the theorizing in both cases. Is that an unfair thing to say?

SB: Yes, that would be unfair, both to Hayek and to the pioneers of general equilibrium theory. Kenneth Arrow – among those who first proved what is sometimes called “the invisible hand theorem” of general equilibrium theory — was quick to point out its limitations in describing any real economy, and 30 years later advanced what he termed “a cautious case for socialism.”

Hayek’s opposition to most forms of government regulation was not based, as I just said, on claims that the market was in any sense “optimal” He was a severe critic of the concept of perfectly competitive equilibrium on which the ‘invisible hand theorem’ is based. His central economic ideas – the importance of scarce and local information, his alternative notion of equilibrium, his insistence that economics had to be about change, not stasis – these all long predated his use of some of this apparatus to attack central planning.

DSW: But his ideas, nonetheless, became central to the cause of laissez faire?

SB: They did, David, though he didn’t much like the term, but only by a highly selective reading of his work. In the paper you mentioned Alan, Rajiv and I advance the view that Hayek’s economics per se provides good reasons to doubt the superiority of the unregulated market.

DSW: Well, in the volumes written on Hayek pro and con, that’s a new one. How does it go?

SB: I’ll give you two examples. First, prices are indeed messages, and precisely because of that we may have house price bubbles when people correctly infer that when house prices go up they may continue to do so, and hence this may be a good time to buy a house. This is the opposite of the “let’s put potatoes rather than bread on the table” reaction to the price of wheat rising.

Second, the market, as Hayek says, processes information and on that basis, determines, for example, the best way to organize production. But applying this logic shows that hierarchical economic planning may not be such a bad thing at least when combined with markets. The boundary of the firm – how big it will be – is determined by the answer to the question, should this component be produced inhouse or purchased? But this is also the boundary between organizing things according to the market or according to the hierarchical structure of command that has led capitalist firms to be termed (ironically) as ‘mini-planned economies.” The ‘verdict of the market’ in this case is that both markets and hierarchies have a place in the economy!

DSW: That’s a great point, but it can be elaborated along very interesting lines! I’ve been delving into the business literature a lot lately, and “command and control” often doesn’t work at the firm level either. A single firm requires the same protections against disruptive self-serving behaviors that Ostrom demonstrated for common-pool resource groups with her core design principles. Also, for a single firm to adapt to change, it needs carefully orchestrated variation-and-selection processes rather than a centralized plan. However, your larger point is well taken: a firm remains a “mini-planned economy” even if not organized as command and control.

Moving on, these examples of Hayek versus Hayek are not what most economists understand as his take home messages about their discipline, right?

SB: I guess, your economist in the street would draw a blank if asked what Hayek’s contributions to economic theory were. But I think you can draw a line from Hayek to contemporary economists’ concern about information problems in labor and credit markets and other exchanges where there is some important pieces of information not known to one of both of the parties.

DSW: Let’s turn to Hayek the evolutionary thinker who saw economic systems as products of cultural group selection. How new was this against the background of the economic profession at the time?

SB: The language was new, but the fundamental concept really were not. The idea of spontaneous order is at least as old as Adam Smith’s invisible hand. Economists routinely model selection processes by which some firms succeed and others fail with the practices of the winners becoming the norm. What distinguished Hayek was his claim that evolutionary reasoning demonstrated the superiority of substantially unregulated markets.

But this exercise in social Darwinism at the system level need not run along the lines that Hayek chose. Another great conservative thinker, Talcott Parsons, in 1964, had advanced the idea that among ways of organizing society there are “evolutionary universals,” that is, systems that emerge frequently in a variety of environments and persist over long periods once “hit upon” by a population. These are societal analogues to complex biological characteristics such as vision, which are such good ideas that they evolve independently in many species, and are in is seldom abandoned as a result of evolutionary processes.

Parson’s list of the ‘evolutionary universals’ includes markets and money but it also includes “authority of office…backed by coercive force” as “the most effective large scale administrative organization that man has invented, and there is no direct substitute for it.” For Parsons, states as well as markets, pass the test of evolutionary success.

DSW: Can you sum up your critique of Hayek, which I am interested to compare with my own.

SB: I imagine you would focus on shortcomings of his conception of cultural evolution. But to me, he was a great economist whose political agenda did not follow from – even is contradicted by — his contributions to economics. Even more. I think that the liberal values that Hayek espoused would be safer in the world today had he stuck to economics.

DSW: Another remarkable claim, Hayek as a danger to liberal values! How is that?

SB: The union of political liberalism with Hayek’s economic liberalism – laissez faire– has proven to be an unhappy marriage. It is no surprise that some of those who have fared worse during the last quarter century of right wing resurgence are attracted to xenophobic nationalism and intolerance. In the early 21st century it is not ‘big government’ that is the threat to liberal values. Ask yourself: where are they key liberal ideas of tolerance, the rule of law, and defense of the weak against the strong more secure today: the Nordic countries (where governments comprise half of the economy) or the U.S, where Hayek’s political vision has been widely embraced?

Hayek rightly insisted that the question of how best to organize society could not be answered in abstract terms but required instead historical and empirical comparison. I wonder if he might today – on empirical grounds – reconsider his view that a larger government role in the economy is a threat to liberal values?

DSW: As you know, I’m a big fan of Elinor Ostrom and was privileged to work with her to generalize her core design principle approach and polycentric governance from an evolutionary perspective. I think that she points the way toward a middle road between laissez faire and centralized planning more than Hayek. What is your opinion and how do the ideas of Hayek and Ostrom relate to each other?

SB: In opposition to social engineering, Ostrom, like Hayek stressed our human capacity for what might be called bottom up problem solving. She demonstrated that small communities often address problems of environmental degradation such as the tragedy of the commons through a combination of social norms and local rule making. I would place the work of Ronald Coase in the same “bottom up” tradition: he showed how bargaining can often take account of environmental or other ‘external effects’ even where markets fail and governments are either insufficiently informed or motivated to do the job. But Ostrom and Coase differ from Hayek, too. Both gave careful attention to empirical cases – in Ostrom’s case, the result of painstaking fieldwork – and for them the key to solving social problems – communities for Ostrom and bargaining for Coase – was not an unregulated market.

DSW: When we retain Hayek’s positive contribution and add the advances in economics and evolutionary science, what road does it take us on, if not the road to laissez-faire?

SB: The key to my reply is a fact that Hayek stressed: information is scarce, and what one person knows another does not. A result of this situation – called ‘asymmetric information’ – is that it is impossible to write an enforceable contract to cover all of the aspects of the exchange that matter to someone affected. Perhaps surprisingly, what seems a detail – the contract is incomplete – turns the standard economic model on its head. Developments in microeconomic theory over the past 3 decades — I won’t do the heavy lifting here (it is in my Microeconomics: Behavior, Institutions and Evolution) – have shown three paradigm shattering results. First, even competitive markets need not clear in equilibrium; so, for example unemployment, and people without wealth excluded from the credit market are predictions, not anomalies to be explained by ad hoc ‘frictions” or other ‘deviations’ from the standard model. Second, market failures are ubiquitous – they occur in credit and labor markets, for example, not just environmental spillovers — not exceptional. And third, employers, lenders and other “principals” in principal-agent relationships wield power over employees and borrowers.

The irony is, David, that the information revolution in economics that Hayek kicked off well over a half century ago, ended up pointing to a larger public role both in rectifying market failures and in addressing the problem of unaccountable power exercised by employers over employees.

But a new paradigm along these lines is not simply a refurbished Nordic social democracy, or even less centralized planning. It points to an active role for a democratic civil society, and not simply government regulation.

DSW: There are a number of scholars who share your high opinion of Hayek-the-economist, at GMU’s Mercatus center, for example, and around the world. But it is probably fair to say that Hayek is not part of the canon that economists consider essential to their field. Why is this?

SB: True, and economics has been impoverished as a result. Two reasons come to mind. First, Hayek’s vision of the economy as a complex evolving system was less readily rendered in mathematical form than the Walrasian paradigm that dominated economics in the late 20th century. This limited its take-up among economists because we – rightly in my opinion – place a high value on the precise formulation of models using mathematics where this is possible. Second, in the aftermath of the Great Depression, Hayek’s bitter opposition to Keynesian stabilization policies and other forms of highly beneficial government regulation of the economy led many economists – few of whom bothered to read Hayek — to reject his other, more fundamental insights. His reputation has also been tarnished by extreme claims on behalf of laissez faire made by those claiming his mantle. In this he has suffered a fate similar to Marx: his economic insights have been overlooked in part because those who most famously took up his name advocated systems that were rightly opposed by most scholars.

2017 December 9


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  • Fred

    The problem lies in the search for equilibrium. Capitalism cannot control cheaters, socialism larger than a community cannot eliminate free riders, both evolve into oligarchy, then decay. Social democracy controls neither cheaters nor free riders.

    “”The fault, dear Brutus, is not in our stars,

    But in ourselves…”

  • mervynhyde

    Hayek is a contradiction in himself, which is not a theory but a revelation. He faces both ways saying opposite things, whereas in reality progressive policies need planning, how would they emerge otherwise.

    We have followed hands off Neo-Liberalism now for over forty years, and funnily enough the world economy is relatively worse off as a result. With the exception of those that disregarded his nonsense and carried on doing the intelligent thing, which was to invest in their future. That means planning.

    • Frederick Malouf

      Honestly think that neoliberalism is hands off you must be kidding. Do you think that planning for corporations to own the economy isn’t planned?

      Many srguments for change are politically focused. This misses the point. It’s much more to do with what we create in the most sustainable way we can, and how we measure the value of that.

      No political system is anchored based on economics, especially one with a debt based sketch driven currency.

      Look at my work here: http://www.medium.com/@swooned. Happy to discuss further.

      • mervynhyde

        Neo-Liberal politicians do what is in their best interests for them at any given time, but in essence Neo-Liberals claim that government must get out of the way of business. Until of course we have a crisis, then it’s all hands to the pumps to bail them out.

        You are perfectly correct to point out how the feral elite have planned and co-ordinated their activities over the last forty years and laid their basis for that up to the last war. The Koch Brothers lay testament to how corporations have funded bogus institutions that work against the interests of society as a whole.

        I am not a fan of speculative currencies such as Bit coin and don’t believe that you can purchase a currency with another currency and gain validity. I follow positive money and MMT which explain money creation, any sane government can organise money to benefit it citizens without market interference and logic.

  • Homer Connor

    Economic systems are a form of distributed intelligence that evolved by cultural group selection. Gee and I thought it was about money $$$$$?

  • Andrew

    The article is very focused and among other things makes clear the divergence and multiplicity of economic theories and ideas within “neo-liberalism” let alone within the wider post war Conservative movement (crusade) that also contained many other strands such as libertarianism, neo-conservatism, religious conservatism and neo-nativism. I think it is time to up our game in criticising “neo-liberalism” and conservatism by recognising this complexity. Otherwise we risk confusing which targets of our criticism is aimed at.

    I appreciate the way that the article makes clear how the point of convergence within neo-liberalism and the wider conservative movement was the politics and not the economic theory. Since Conservatives have spent a long time trying to convince the world that their economics is not only internally consistent, coherent and true but that it is the source of their politics rather than the reverse. It is good to see it highlighted that the politics came first (in this case) and is not necessarily consistent with the economic theories.

  • While I agree that Hayek had some profound insights, and that the information aspect is important, and the complex adaptive systems aspects are important, and that Fred raises two good points, I still see major omissions.

    Two fundamental and critical concepts are not mentioned:
    1 the cooperative aspect of evolution; and
    2 the impact of fully automate production on markets.

    Both contain aspects critical to understanding the incentives to systemic failure, and how to avoid them.

    Viewing evolution simply as competition is faulty.
    All complex systems contain both competitive and cooperative elements.
    In the most simple form, if the risks to individuals comes mostly from other individuals like self, then competitive systems will emerge and dominate, and the systemic incentive is to drive to simplicity.
    If the risk to individuals comes largely from factors external to the population, then new levels of cooperative systems can emerge, and complexity can increase.

    It is a reasonable first order approximation to say that all major advances in complexity of living systems has resulted from the emergence of new levels of cooperative systems. And of course it gets complex quickly, as raw cooperation is vulnerable to exploitation, and thus evolves an evolutionary arms race between detection strategies and cheating strategies that rapidly becomes a complex ecosystem in itself (at all levels).

    Markets are founded in scarcity.
    If you don’t need anything, you don’t go to the market.
    In most places there is no market for air, yet it is arguably the most valuable commodity for any of us.
    When most things were genuinely scarce, markets and the concept of money as a general metric of exchange value were great tools that performed many valuable roles in distributing goods, information and governance.

    We are now in an age of exponentially expanding automation.
    We can now produce a large and exponentially expanding set of goods and services in universal abundance but there can never be any economic incentive to do so universally.

    Thus the sort of value that markets and money measure (exchange value, scarcity value) is undermined by fully automated technology.

    What most people want is a reasonable abundance of the things they need.

    We are rapidly approaching the time when we will have the technology to deliver that – universally, yet the modes of thinking engendered by market measures of value directly work against such universality.

    Markets and full automation are anathema to each other.

    How we manage transition from scarcity based thinking (money and markets) to abundance based thinking, while preserving distributed systems of information, trust, production, distribution and governance are the critical questions that we have very few years left to get something workable trialed, operational, and ready for universal distribution.

    • Fred

      “What most people want is a reasonable abundance of the things they need.”

      I’m past 70 now and can finally say that is true of me, but the farther away I get from the time when my hormones and drives were strong, the more clearly I can see how they dominated my behavior and that of all young people.

      Jonathan Haidt’s analogy of the elephant and the driver is pretty much spot on. The rational mind is the driver, but the elephant of our emotions takes us where it wants to go.

      • Very similar Fred.
        I’ve played with a few toys in my youth, pushed cars, motorcycles, boats, aircraft to limits not many approach. Pushed my body and mind towards a few too.

        And even there, going there didn’t actually require a lot of resources (not in the big scheme of things).

        Yeah – sure – our rational(ish) consciousness is just the driver of an elephant, and provided the elephant stays calm(ish) the driver can get it do some amazing stuff – particularly if the elephant develops a liking for what the driver wants it to do.

        The numbers do seem to be achievable, and there are some provisos.
        Diet needs to be largely plant based (but that is required for health anyway).
        Large scale engineering (and we need quite a bit of that) needs to be done off planet by fully automated systems (which isn’t actually that much of a technical challenge once full automation is achieved).
        We need to be much smarter about how we manage our interaction with the biological systems we are part of on this planet (which is entirely doable, with minimal interference to freedoms, with sufficient appropriate technology – see above).
        We need effective working models of distributed trust networks and distributed governance – and again, that seems doable.

        So yeah – challenges, and achievable,
        And it does need to be done, and soon.

        It is creating the various levels of collective will that is becoming rather urgent.
        We have less than a decade to make significant progress (like achieve full automation, and have a first workable approximation to global cooperation).

        Can be done, and needs significant effort applied sooner (next couple of tens of months) rather than later.

    • Tom Clark

      Thank you Mr. Howard. Great response!

  • Drumsgoon

    I would love to see these guys debate some actual Austrian economists, because you are so sure of your own political righteousness. You make a beginner mistake of blaming the housing crisis on the free market, whereas any Hayek expert worth his salt would know how government intervention in the money system and the housing market distorted the price signals that let to the boom and thus the bust. Which shows exactly why the ‘mixed’ economy is not a good idea, once one accepts the insights of Hayek and his mentor Mises. Blaming them for the rise of socialists like Trump and guys like Spencer is truly beyond the pale!