When the Going Gets Weird, the Weird Turn Hayek

Lately it seems there’s been a lot of talking and writing about the failure of American Capitalism and the wrongs of market based economies. On Monday alone, while perusing my favorites on My Yahoo, I came across “Now Is No Time to Give Up on Markets” (Wall Street Journal) and “American Capitalism Besieged” (Washington Post). It makes sense for business and financial writers to spend more time on the subject of critiquing capitalism these days as current events have shaken foundational beliefs in markets and the pursuit of profit through private interests. I’ll get right to the point; my faith and confidence in the capitalist democratic model of our society is as strong as it’s ever been. In fact, the model is working like it’s supposed to and as described by many of the economists who for the past 100+ years have been thinking and writing about how messy and unpredictable yet efficient and successful this model can be.

One of those economists was Frederick Hayek. Hayek, who died in 1992, spent most of his life playing Lex Luthor to John Maynard Keynes’ Superman. He also produced some of the clearest thinking as to why capitalism and markets provide the best chance for the most people to grow beyond a subsistence level of living. He did this at a time when Keynesian economics ruled and only freaks like Ayn Rand and the guy who slept in my town’s cemetery and wore only purple were champions of free markets and small government. Hayek’s work is difficult to read even when you discount for the boredom factor required for all Economics texts. One must be patient to read a deeply philosophical economics tome written by a somewhat curmudgeonly Austrian, and if one persists one comes across some of the most insightful bits of economic thinking ever put down on paper.

Getting back to the subject at hand, in “The Fatal Conceit: The Errors of Socialism” Hayek reminds us that Capitalism is far from perfect but beats the pants off of any competing economic model, like say Socialism. So attempting to leverage the brilliance of Hayek I’d like to defend Capitalism and markets by beating the snot out of Socialism. In addition, to paraphrase Eddie Murphy, I like to make fun of Socialists because they’re Socialist.

In The Fatal Conceit Hayek writes “The market is the only known method of providing information enabling individuals to judge comparative advantages of different uses of resources of which they have immediate knowledge and through whose use, whether they so intend or not, they serve the needs of distant unknown individuals. This dispersed knowledge is essentially dispersed, and cannot possibly be gathered together and conveyed to an authority charged with the task of deliberately creating order.”

Allow me to expand on Hayek’s premise by invoking one of the foremost examples of Socialism America has ever produced: Gilligan’s Island. If you think Cuba is the only place that could successfully combine palm trees, pristine beaches, and the triumph of the proletariat I beg you to flip on Nick at Nite and behold a Marxist paradise.

In all seriousness (yeah right, but work with me here) the seven castaways serve as perfect examples of why Socialism cannot scale beyond a handful of people. Each castaway uses his/her talents to produce something that is shared among the group. The Skipper and Gilligan provide manual labor like in the episode where the Skipper shoves a bit in Gilligan’s mouth so his ‘little buddy’ can serve as a 98 pound oxen and plow a field. The Professor provides the intellectual firepower to develop technologies like coconut phones and an amazing array of transistor radio based applications that can do everything but send a radio signal. Mary Ann cooks and cleans in a perky half-shirt and short-shorts combo (yummy). The Howells did nothing, representing the 15 – 20% of every society who feel entitled to leach off the work of others. And Ginger did everybody.

Now let’s introduce a crushing blow to this Socialist island Eden. Assume (that’s economist talk for ‘let’s pretend’) another island within traveling distance of Massachusetts, I mean Gilligan’s Island. Assume this nearby island is populated by a small group of people, some of whom have the same skills as the seven castaways and some of whom have developed a differentiated set of skills (like ways to produce two-way radios, outboard motors, and cannibal repellent). What would happen if competition was introduced? What would happen to the productive capacity and usefulness of our castaways? If you were the Generalissimo of the Republica d’Gilligan what would you do?

Hayek wrote that “Competition is a procedure of discovery, a procedure involved in all evolution, that led man unwittingly to respond to novel situations; and through further competition, not through agreement, we gradually increase our efficiency.” If the kids on the other island could plow fields, cook, or make better coconut phones than you, you could chase them away (lower your standard of living through losing out on further specialization and more efficient resource allocation), or try to manage all interactions with them so everybody felt things were fair and everybody felt equally treated (Socialist central control of an economy to meet political needs), or you could throw down a few laws and regulations and allow a market to evolve through voluntary transactions and private control of the means of production (market based Capitalism supported by property rights and rule of law). If you opted for path number three things could get complicated and change would be constant. For instance Ginger might have to go to work for Mary Ann or vice-versa (double yummy!). But you would unleash a powerful force among the two islands. A force that would be difficult to manage and would often cause people to be felt unfairly treated. You would have to develop the faith and cajones to ride out these tides of ill feelings and tension. You would have to learn to appropriately tax and regulate the fishing, coconut oil (stop thinking about Mary Ann), and bamboo car industries based on the economic environment not people’s feelings.

Hayek too saw governance of market based societies as difficult and potentially self destructive; “Governments strong enough to protect individuals against violence of their fellows make possible the evolution of an increasingly complex order of spontaneous and voluntary cooperation. Sooner or later, however, they tend to abuse that power and to suppress the freedom they had earlier secured in order to enforce their own presumedly greater wisdom and not to allow social institutions to develop in a haphazard manner.”

Hayek did not live on Gilligan’s Island at least the back panels of most of his books don’t mention it. But he did live through a period of massive change and disruption (WW I, the economic collapse of Europe in the 20’s and 30’s, Facism, WW II, and the Cold War). When many blamed the uncertainty and unfairness of Capitalism for society’s ills, Hayek shot back that it was the lack of freedom provided to make Capitalism work that led to half-baked policies and tore societies apart. For a society to truly succeed it had to be strong enough through its rules and its guarantee of individual freedom to withstand the weird and uncomfortable byproducts of an evolutionary process, not try to control the uncontrollable. “Civilisation is not only a product of evolution – it is a process; by establishing a framework of general rules and individual freedom it allows itself to continue to evolve. This evolution cannot be guided by and often will not produce what men demand. “ he wrote. And that “…by repressing differentiation due to luck, it would have scotched most discoveries of new possibilities.”

So what’s my point? We live in a time of uncertainty but one not nearly as frightening as when Hayek was developing his ideas and warning us not to think so short term as to lead ourselves down the Road to Serfdom. Next time someone tells you what a great idea it is for a government to wrest control of a business or industry from the greedy hands of cowboy capitalists please think of what a weird idea that actually is.