"The Tradition of Spontaneous Order"

Barry, Norman
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Editor/Trans.
First Pub. Date
Summer 1982
Publisher/Edition
Literature of Liberty. Vol. v, no. 2, pp. 7-58. Arlington, VA: Institute for Humane Studies
Pub. Date
1982
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Carl Menger (1840-1921)

B.67

Carl Menger is associated primarily with Jevons and Walras for his rediscovery of the subjectivist theory of value and the principle of marginal utility in his first published work of economic theory (1871). But his contribution to the theory of spontaneous order is contained in his methodological work, Problems in Sociology and Economics (1883). In this he attacked the methodology of the 'younger historical school' of German economists and tried to found a 'causal-genetic' theory of society in which the regularity and predictability of institutions is theoretically reconstructed out of the actions of individuals. Menger in fact called his procedure the 'compositive' method: this holds that while it is meaningful to talk of social 'aggregates,' the behavior of such aggregates is explicable only in individualist terms.

B.68

Menger's methodology consists of two parts. The first part describes those timeless generalities called 'exact' laws (such as the law of demand) which do not refer to any actual empirical phenomena but which enable us to organize social knowledge. The second part, which is more important from the point of view of the theory of spontaneous order, describes those empirical regularities that, although they are necessarily less precise than the exact laws, are capable of a theoretical and ahistorical explanation.

B.69

What Menger wished to do was to refute what is now called 'historicism,' i.e., the idea that the laws of social science consist of observed historical regularities; normally, in the German historical school, these were purported regularities of holistic (and irreducible) entities, such as the 'national economy.' Menger had no objection to the proper historical method, which was the study of unique individual events; his criticism was directed at the attempt to construe empirical laws as sequences of such historical events. For Menger 'empirical' laws were not historical generalizations but hypothetical constructions derived from regularities in individual behavior. This anti-inductivism is a striking feature of the social science of the Austrian economists and social philosophers. For them the immense complexity of the social and economic world means that the theorist must proceed by the way of 'abstraction' rather than description.

B.70

The institutions that social science explains by the method of abstraction are money, languages, markets, and law. They are examples of what Menger calls organic phenomena because they are the results of natural processes. These organic institutions are to be contrasted with pragmatic institutions, which are the product of human deliberation and will. In common with the eighteenth-century thinkers Menger comments on how the organic institutions serve the common welfare without being the product of a common will. In a revealing passage he wrote:

Language, religion, law, even the state itself, and to mention a few economic social phenomena, the phenomena of markets, of competition, of money, and numerous other social structures are already met with in epochs of history where we cannot properly speak of purposeful activity of the community as such directed at establishing them.[43]

B.71

Menger's most significant example is his explanation of money. He was struck by the fact that, since people only exchange to procure goods that they need, it seems implausible that self-interest would produce a 'public' institution such as money, which is clearly not required for their immediate needs. Menger points out that many social philosophers were driven by this paradox to claim that money was the product of some specific agreement or contract, or positive act of legislation by the state.

B.72

Against this rationalist explanation Menger argues that, although money can and has come about in this way, the institution can be accounted for by natural processes. In an original barter economy it will be apparent that some goods are exchangeable for a greater range of goods than many others and people will naturally exchange their less marketable goods for these, even though they do not immediately need them, to satisfy more conveniently their future wants: "the economic interest of the economic individuals, therefore, with increased knowledge of their individual interests, without any agreement, without legislative compulsion, even without any consideration of public interest, leads them to turn over their wares for more marketable ones... "[44] (italics in original). The process will automatically produce a good that has the familiar properties of money.

B.73

However, all the economic agents could never simultaneously possess the knowledge of the advantages of the money good. The emergence of money is a gradual process and is in fact set in train originally by a small number of individuals perspicacious enough to see its advantages. It was not the intention of those economic agents to produce something for the public's advantage but this is what occurs.

B.74

The interesting thing about Menger's discussion of spontaneous order, however, is that he does not emphasize the value of undesigned institutions in quite the same way as other thinkers in the same tradition and does not assume that they are necessarily superior to pragmatic ones. It is true that in Appendix VIII of his Problems he specifically contrasts evolving law with statute law and draws out the advantages of the former in what has become the orthodox fashion, but he then goes on to discuss some important qualifications. He is particularly concerned that the organic view should not be interpreted to mean that rules which have developed in an undesigned manner should necessarily be regarded as superior to made or contrived law. It is not the origin of the law that determines its value but its usefulness. He says that the "common law has proved harmful to the common good often enough... and legislation has just as often changed common law in a way benefiting the common good."[45]

B.75

Menger is then highly skeptical of the notion that the common law contains some 'higher wisdom' which is immune from rational criticism. The fact that institutions had emerged organically is not a reason for approving of them any more than their pragmatic origin is a reason for condemnation. There is a tendency in some writers in the literature of spontaneous order to regard certain institutions as functional merely because they have survived an evolutionary process, but this conviction is absent in Menger.

F. A. Hayek

B.76

Of all the twentieth-century theorists of spontaneous order, Friedrich A. Hayek (b. 1899) has contributed most to the intellectual reproduction of Adam Smith's vision of a self-correcting social order which requires little direction and control. Throughout the great variety of his works[46] he has stressed the importance of spontaneous processes and the impossibility of predicting the future growth of a social order. The whole of his social philosophy may be described as an assault on the exaggerated claims made for 'reason' and a justification for the view that we must adopt an attitude of humility towards natural processes and "submit to conventions which are not the result of intelligent design, whose justification in the particular instant may not be recognizable, and which will..... often appear unintelligible and irrational."[47]

B.77

While Hayek has been a rigorous critic of 'scientism,' the belief that the methods of the physical sciences can be readily applied to the study of society, with their concomitant advantages of prediction and control, he does not deny that a social system is governed by 'laws.' There are, for example, laws of economics; these consist of, to use Lord Robbins' phrase, "those necessities to which human action is subject." In Hayek's opinion, many of the mistakes of rationalist planning stem from attempts to resist the operation of the basic principles of scarcity, supply and demand and so on, and well-established laws of human behavior. A genuine social science, then, would describe how men adjust to certain inevitable laws and stress how little they can, or need to, control their societies.

Knowledge and Society

B.78

In his description of a self-regulating system Hayek's major achievement has been to show that the advantages of decentralized decision-making in a market stem from the fact that this is the only device that man has discovered for coping with the universal facts of ignorance and uncertainty. It is because the social world does not consist of physical objects governed by simple laws of causality, but is a 'kaleidic' world inhabited by individuals with minds, whose the inner recesses are inaccessible to the external observer, that knowledge is not 'fixed' and available to a single person or institution.[48]

Co-ordinating Dispersed Knowledge: Rationale for Market & Liberty

B.79

The problem of knowledge arises because the 'facts' of a social and economic system are dispersed throughout the minds of thousands, possibly millions of actors; therefore this knowledge has to be co-ordinated if we are to exploit it for the benefit of man. This division of knowledge, which characterizes any social process with a degree of complexity, is, in Hayek's opinion, as important as the division of labor as a mechanism to explain progress; the co-ordination of this diffused knowledge via a market process allows us to utilize a much greater amount of knowledge than under known alternative systems. Thus, whereas Adam Smith and his successors saw the market and law as co-ordinating the self-interested actions of agents so as to produce an unintended beneficial outcome, Hayek speaks of the co-ordination of the actions of necessarily ignorant people. Thus the theory of spontaneous order does not depend for its truth on the so-called 'egoistic' behavior assumptions of traditional economic theory because there remain universal co-ordination problems whether people are selfish or altruistic in their impulses. Nevertheless, one should not ignore the importance of 'vulgar' motivations in the economic nexus; the interdependent parts of an economic system are normally held together by self-interest.

B.80

The justification for individual liberty is then largely instrumental in that the case for 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."[49] It is not that the theory of spontaneous order precludes planning as such; it is that only planning by individuals in decentralized markets will tend towards an optimal use of knowledge. The central planner has only that knowledge available to him, which is less than that which is co-ordinated among all the agents in a market process. Furthermore, because the future is unknowable, a system that relies on liberty allows for the accidental and spontaneous. Hayek's main objection to the rationalist theory of liberty is that the rationalist associates the growth of knowledge with predictability and control; but those things which can be predicted and controlled comprise only a small part of social and economic experience.

B.81

In Hayek's epistemology, scientific knowledge of society is knowledge of spontaneously formed orders: the knowledge that we do have of made orders cannot be genuine scientific knowledge. Thus much of contemporary sociology and political science is not scientific knowledge but rather contemporary history because those subjects deal with phenomena which are the product of will and intention: the only social phenomena which are explicable by scientific, causal-genetic laws are markets and legal systems.

Ambiguity in Explaining Legal Orders: Spontaneous Order vs. Relativistic Evolution

B.82

It is my intention to show that while Hayek's attempt to explain the spontaneous order of the market is largely successful, and indeed contains some of the most brilliant insights into the nature of economic processes since Adam Smith, his attempt to account for the legal order in similar terms is less successful. This is largely because he blends two subtly different types of explanation: one concerned with the formation of spontaneous orders, and one concerned with the evolution of rules and institutions by natural selection. Hayek himself speaks of the 'twin ideas' of evolution and of the spontaneous formation of an order without indicating that there might be an important difference between the two. But the emphasis on evolution and the cultural transmission of rules and practices introduces a note of historical relativism which does not always harmonize with the universalistic liberal rationalism characterizing his explanation of the formation of economic orders.

The Free Exchange System

'Catallaxy' vs. 'Economy': Market Co-ordination vs. Neoclassical Equilibrium

B.83

The word that Hayek uses to describe a spontaneous market order is catallaxy; and a catallaxy is contrasted with an economy. An economy is a social practice defined in terms of the pursuit of a 'unitary hierarchy of ends,' where knowledge of how to achieve these ends is given. A single firm (or a household) is an economy and may be evaluated with the methods of an engineering type of science for its success in achieving prescribed goals, or common purposes. However, a catallaxy is a network of many firms and households and has no specific purpose of its own: it is that which results naturally from the interaction of firms and households through the exchange process: "the order of the market rests not on common purposes but on reciprocity; that is, on the reconciliation of different purposes for the mutual benefit of the participants."[50]

B.84

According to Hayek, the mistake of orthodox neoclassical theory is to treat a catallaxy as if it were an economy. This is because of the neoclassical emphasis on static equilibrium. This is an example of rationalism because it is assumed that an 'efficient' economic order, in the conventional sense of there being a state of affairs in which it is impossible to switch a resource from one use to another and receive a net benefit, can be designed without a market process to signal information about tastes, costs, and so on. However, this assumes perfect information, whereas the real world is characterized by ignorance, change, and uncertainty, so that knowledge cannot be 'objectified' and made to serve given ends. All we can expect is a tendency towards equilibrium as the actions of individuals are co-ordinated through the mechanism of prices. Thus Hayek extends subjectivism beyond the theory of value to the theory of market process.

B.85

This theory, that there is a tendency to equilibrium in a decentralized exchange system is of course an empirical theory, which may be falsified. It is logically possible that there may be such endogenous 'shocks' to the system that the plans of the participants may not harmonize. Indeed, there are extreme 'subjectivists' who do not merely reject the neoclassical orthodoxy concerning static equilibrium, but also suggest that, because of the divergence of 'expectations,' future profitable opportunities may not be exploited so that there is not even a tendency for the actions of economic agents to be co-ordinated. In the work of G. L. S. Shackle and Ludwig Lachmann there is the implication that the spontaneous emergence of an order may be only a chance phenomenon, rather than a theoretical property of an interdependent economic system. In other words, the market does not co-ordinate expectations in the way that it co-ordinates knowledge.[51] In Hayek's early work on the theory of market process, his main concern was with the disequilibrating effect of certain exogenous factors, such as governmental control of money, which dis-coordinated the actions of economic agents; he did not consider seriously the possibility of the presence of ignorance and uncertainty producing spontaneous disorder. Further, although Hayek presented his theory as an empirical one, he did not indicate under what circumstances it might be falsified. The assumption was that a catallaxy was tending towards equilibrium rather than being moved away by endogenous factors.

Co-ordinating Market Knowledge: Competition & Entrepreneurship

B.86

However, it should be argued that there are certain identifiable causal factors at work which bring about this tendency, namely competition and entrepreneurship; and here, Hayek's important suggestions have been taken up by other writers.[52] His argument is that in the standard general equilibrium model competition does not exist, since, if there is an equilibrium, competition has ceased and opportunities for further trade are exhausted. What is not considered in the general equilibrium model is how this stable state of affairs comes about, or what mechanisms produced this optimum. Hayek's theory maintains that in an uncertain world, the 'discovery procedure' of competition spontaneously co-ordinates decentralized information and thus brings about a tendency towards equilibrium.[53] That array of 'correct' prices proposed by orthodox theory is an illusion; in reality prices are always to some extent 'incorrect' and therefore always suggestive of some reallocation of resources through the competitive process.

B.87

It is here that the role of the entrepreneur becomes important because the co-ordination process depends upon the existence of entrepreneurship as a special activity. The concept of entrepreneurship can perhaps be better explained by reference to 'prediction.' Since the general equilibrium model assumes knowledge of tastes, costs, and so on, the implication is that it is possible to predict mechanically what an efficient allocation of resources would be. If this were so, then entrepreneurship would be redundant.

B.88

However, in a world of uncertainty, where the future is unknowable, a predictable outcome is an epistemological absurdity. The entrepreneur, albeit guided by self-interest, accidentally plays a socially beneficial role in co-cordinating economic knowledge to produce an outcome which looks as if it had been designed and predicted by an omniscient legislator, but clearly could not have been.[54]

B.89

In this view of a competitive process such market imperfections as monopoly are not therefore aberrations which can be legislated away so as to eliminate an alleged 'welfare loss' but may well be necessary elements in the emergence of a spontaneous order. It may be the case that the monopoly reflects superior efficiency, or that without the prospect of monopoly gains a particular good would not be produced at all. In these cases there is entrepreneurial activity. In any event, as long as there are no governmental barriers to entry the monopolist operates under some constraint so that rather than eliminate monopoly by law and artificially create some abstract concept of 'perfect competition,' it is better to let natural competitive processes operate. It is Hayek's claim that 'natural' monopolies are extremely rare, and that most monopolies are the product of deliberate government intervention; where they do exist, the market itself is a natural process which generates its own corrective devices.

B.90

The most important feature of the price system is that it economizes on knowledge. Each participant has to know little of the whole system for the co-ordination to be successful since its signals "enable individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement."[55]

Disruptions of Catallaxy

B.91

How then does Hayek explain the breakdowns of this economical order? In short, he maintains that most of the disorder in the market system that we experience is a result of mistaken interventionist measures which distort natural self-correcting processes that are at work in the system. Thus the theoretical study of economic processes must emphasize those institutional structures which are disruptive of a spontaneous order. Later, of course, Hayek was to develop a theory of society which suggests how dis-coordinating institutions may be rectified, but in his writings as an economist he took institutions as given and made certain economic inferences from them. In this sense only is his economic theory independent of his general social theory.

B.92

Throughout his career as a pure economist the institutional factor which has concerned Hayek most is governmental control of the monetary instrument. It is this that has generated economic disorder and dis-coordination by distorting the system of relative prices which would otherwise induce economic actors to produce a stable order. Furthermore, arbitrary privileges granted to trade unions by statute law suppress the natural functioning of the labor market so that resources are misallocated and involuntary unemployment generated. Before looking at these types of disorder, however, we should give some attention to that spontaneous disorder that Hayek himself admits may be produced by a market subject to no controls.

B.93

This occurs in the now familiar areas of public goods and externalities. These areas were little discussed at the time Hayek wrote his pioneering essays on the theory of spontaneous order.[56] He has, however, always argued, against the claims of anarcho-capitalists, that the market cannot spontaneously produce a police and defense system, and other 'public goods' which, according to public goods theory assumptions, it would pay no individual economic actors to supply. In the logically similar area of 'external bads,' i.e. where each individual actor in the market has every incentive to impose external costs on the community, as in the case of pollution, Hayek agrees that there may be a role for collective action.

B.94

One familiar way of preventing this latter sort of spontaneous disorder is to specify a set of appropriate property rights so that any external harm falls on an individual property holder who can then sue the instigator of the harm for damages. In this way external 'bads' might be internalized. While this approach is not antithetical to the Hayekian system it does imply an activist role for some authority in determining new property rules and the deliberate agreement of actors to follow such rules. In this, and other areas, Hayek places (in the opinion of many critics) too much reliance on the evolution of appropriate property rules for the competitive process:[57] and this is a consequence of his refusal to consider the possibility that in some areas reason may improve on natural processes.

Austrian Perspective on Intervention: Dis-coordination of Economic Knowledge

B.95

The kind of disorder, however, to which Hayek has contributed much illumination is that brought about by government intervention in a catallaxy at the 'macro' level. Of course Hayek has never recognized a macroeconomic theory which is not reducible to individual volitions (holistic magnitudes are 'fictions,' they do not display irreducible regularities) but nevertheless his inquiries into the trade cycle focused on the behavior of a catallaxy as a whole.[58] Most of his economic theory addresses those who deny the basic proposition that an unhampered market economy (or catallaxy) tends towards the full employment of all resources. The most notorious of these theories is Keynesian macroeconomics, and it is to this that Hayekian economics is normally addressed, although he formulated his theory of money and the trade cycle before the publication of Keynes' General Theory.

B.96

In the familiar Austrian theory of the trade cycle, disequilibrium and the dis-coordination of economic knowledge is a function of misleading signals being put out to market transactors by the monetary system. An automatic co-ordination of the intentions of savers and investors, which would produce more or less full employment of all resources, is systematically disrupted by manipulated money, which leads to misallocation and therefore painful periods of readjustment. What happens is that under the fractional-reserve banking system, increased credit lowers the rate of interest on the money market below its 'natural' rate (i.e., the rate determined by the time-preferences of individuals) so that extra investments are made at longer stages of production.

B.97

In Austrian theory the structure of production[59] consists of a series of integrated stages with immediate consumption goods located at the nearest stages and capital goods at the farthest. This 'order' is fundamentally stable if the investment at the farthest stages are warranted by the current consumption-savings ratio of the public, since, then, savings will make available those complementary capital goods which are required to complete the structure of production. However, under the fractional-reserve banking system the structure is unstable. The long-term investments, in this system, are malinvestments, brought about by cheaper credit and not by a lowering of time-preferences by the public. Since individuals are consuming at the same rate as before the credit injection begins, extra earnings of labor factors will be spent on consumer goods and therefore cause a switch back to the nearest stages to meet this new demand; and therefore a shrinking of the capital structure occurs. Thus there will be temporary unemployment in the remote stages. The resulting recession must be endured while normal market processes liquidate the malinvestments brought about by misleading price signals.

B.98

While this is the standard version of the theory, the particular form in which the disorder takes place will vary according to different institutional structures. In the 1930s it was increased bank credit that produced the cycle and its effect was visible in the form of unemployment in investment goods industries. In the contemporary world, characterized by massive government intervention, the misallocation is much more diffused throughout the whole system.[60] Also, today the natural readjustment process may be slower, in Britain especially, because welfare legislation, union privileges, and housing policy have all combined to increase the immobility of labor.

Hayek on Monetary Disorder

B.99

In all this, the instability of a catallactic process is a function of the 'non-neutrality' of money. Since increases in credit do not affect all prices in a uniform manner (which is the implication of the Walrasian general equilibrium theory), disorder must occur under the orthodox banking systems of capitalist economies because changes in relative prices mislead market transactors. The question is whether such disorder is a necessary part of a catallaxy or whether it is always brought about by some exogenous agency.

B.100

Now Hayek has described money as a kind of 'loose joint'[61] in a process which in other respects showed an automatic tendency towards equilibrium. The fractional-reserve system, while its elasticity of credit caused misleading price signals, had itself developed spontaneously, and therefore Hayek, in the 1930s, claimed that its abolition and replacement by a 100 per cent reserve system would create even more problems. All that was required for the self-regulating processes to work was something like the Gold Standard (or fixed rates of exchange) and the withdrawal of government from the economy: this would mitigate, if not entirely eliminate, the effects of the cycle. In practice, it was government mismanagement of the currency that caused severe maladjustment of the catallaxy.

B.101

Hayek gave no suggestion at this time that government should lose its monopoly over legal tender. Rather he claimed that the disequilibrating effects of this could be mitigated by institutional procedures. In recent years, however, Hayek has pioneered the idea that complete removal of government's monopoly over money is required and that competition between rival currencies, issued by banks and governments, would spontaneously generate monetary stability.[62] The curious feature of this proposal is its contrast with previous theorists of spontaneous economic order who had argued that the removal of government from money would produce a commodity-based money (indeed, it was a fundamental feature of the monetary theory of Ludwig von Mises that the value of a money device could ultimately be traced back to its value in use). Hayek, however, appears to think that competition between paper currencies will produce stability. He is skeptical of gold becoming usable again—for the fallacious reason, according to orthodox theory, that "there is just not enough gold about"—and makes the constructivistic proposal that countries should mutually bind themselves by formal treaty not to impede the free use of currencies issued by other countries or banks.[63]

B.102

Irrespective of the details of Hayek's proposed solution to the problems caused by monetary disorder, his persistent argument, over a period exceeding fifty years, that government control of money produces never-ending inflation and a consequent disruption of economic order, has been amply borne out by events. If his social science had been limited to this alone it would constitute a major achievement.

The Structure of a Legal Order

Social Cosmos: Spontaneous Order vs. Constructivistic Rationalism

B.103

The most important aspect of the unity of Hayek's method is his attempt to explain the nature of legal and social institutions with the same intellectual tools which he used in the explanation of economic phenomena: tools that stress natural processes rather than reason and artifice. In an essay, "The Principles of a Liberal Social Order," Hayek said:

Under the enforcement of universal rules of just conduct, protecting a recognizable private domain of individuals, a spontaneous order of human activities of much greater complexity will form itself than could ever be produced by deliberate arrangement.....[64]

The problem here is the explanation of the origin of the 'universal rules of just conduct.' Do they emerge spontaneously? Or is some element of constructivistic rationalism required for the explanation of these rules that service a catallaxy? While Hayek has always been favorable to the common law, as opposed to statute, in the Constitution of Liberty he did suggest that the growth and development of a catallaxy could take place within the context of general codes of law that define the conditions of freedom.[65] However, in his trilogy, Law, Legislation and Liberty, there is almost an exclusive emphasis on the virtues of spontaneously developing law and institutions. The explanation for this change lies in the fact that although Hayek concedes that codified law may be more certain than judge-made law, this advantage is nullified if it leads to the view that "only what is thus expressed in statutes should have the force of law"[66] (italics in original). Spontaneous legal orders will contain rules that have yet to be formulated in words. Hayek does not regard a social system (or cosmos) as completely self-regulating and self-correcting, since he recognizes a role for coercive government in the enforcement of rules and concedes that 'legislation' will be required for the correction of 'law' that may have developed in an inappropriate manner. But the task allocated to evolution in the explanation of genuine law is clearly meant to parallel that of the 'invisible hand' in the explanation of harmony in the market economy.

B.104

However, many contemporary classical liberals argue that Hayek's analogy fails: that just because 'discovered,' as opposed to 'made,' law is a product of accident this does not make it efficient law, in the sense of it providing an appropriate framework for the order of the market. The elimination of reason from the construction of the rules of an economic system would seem to commit Hayek to a certain kind of conservatism and quietism in the face of some ineluctable flow of events, despite his own personal commitment to economic liberalism and his recommendation of quite radical institutional reforms.

Spontaneous 'Nomos' vs. Rationalist Law Common Law vs. Statute Law

B.105

In Rules and Order Hayek defines 'order' as

...a state of affairs in which a multiplicity of elements of various kinds are so related to each other that we may learn from our acquaintance with some spatial or temporal part of the whole to form correct expectations concerning the rest...[67] (italics in original)

This means that a social order is a structure of interrelated parts that displays predictability and regularity because of rules that govern its behavior. In a legal order such rules may be a product of command (and Hayek maintains that in any social system some of its rules will have to be of this type). However, his claim is that greater regularity and predictability, and therefore complexity, will exist in orders where the bulk of the rules that govern interdependency have emerged spontaneously. The point he is making here is the anti-rationalist one that rules are not the product of a mind, abstracted from experience, as in the Hobbesian model. Rather rules and society have developed, as Ferguson and the eighteenth-century writers insisted, coterminously. As a result, 'law' (in the sense of those rules of just conduct which govern individual relationships) differs from, and precedes, 'legislation' (that body of deliberate commands which is addressed to specific purposes). 'Discovered' law is called nomos[68] and is consistent with the order of a free society. This is because, since it is concerned with no overall purpose of its own, nomos enables an unknown number of individual purposes to be fulfilled. Its domain is the protection of the person, of property, and the enforcement of contracts.

B.106

In this argument Hayek is, in effect, restating some familiar themes concerning the virtue of the common law system which he himself has detected in the writings of Hale, Burke, and the European historical school of jurisprudence. However, undoubtedly a major influence on his post-Constitution of Liberty jurisprudence has been the late Bruno Leoni's Freedom and the Law.[69] This is perhaps the most sophisticated expression of the evolutionary theory of law; for Leoni does not merely rely on the 'wisdom of history' but constructs a direct analogy between law and the market. Law develops in a case by case manner during which judges fit and adapt existing law to circumstances so as to produce an overall order which, although it may not be 'efficient' in a technical, rationalistic sense, any more than competitive markets are 'perfect,' is more stable than that created by statute. Statute law may appear to be more predictable because it is written down, whereas common law ('lawyers' law') may not actually be known until a judge has 'discovered' it, statute law is in fact much more capricious precisely because, in the modern world especially, statutes change frequently according to the whims of legislatures. Hayek's position is similar to Leoni's anti-statute approach in all important respects: because it is impossible to predict human (legislative) behavior, a structure of law which is not the result of will and cannot be known in its entirety, paradoxically, displays more regularities than a written code. Furthermore, because the future is unknowable and unpredictable, no code could be designed to cope with all possible cases. This is why judicial activity, as a form of 'puzzle-solving,' is essential to Hayek's jurisprudence.[70]

Cultural Transmission of Rules of Conduct

B.107

However, Hayek adds to these not unfamiliar themes something rather more controversial. This is the argument that a spontaneous system of rules will be more efficient (than known alternatives) to the needs of what he calls the 'Great Society' precisely because it has survived an evolutionary process: a process in which not reason but natural selection determines which rules and institutions are appropriate.[71] The history of institutions consists of a kind of Darwinian struggle out of which certain rules and procedures prove to be more durable than others; and a society progresses not by designing institutions for specific purposes but by adapting those that have emerged independently of men's wills to new circumstances. Furthermore, societies progress to the extent that they 'imitate' known successful rules and practices rather than construct them in some calculating manner.[72]

B.108

The mechanism in this process is what Hayek calls 'cultural transmission.'[73] This means that the rules and institutions that we inherit are neither (1) the product of a biological causality which is traceable to genetic structures (as the extreme sociobiologists would have it) nor (2) do they emanate from an unaided reason. They are 'learnt rules' which, although they may not yet be formulated explicitly, have been transmitted through a process of cultural evolution. Since an evolutionary order is unpredictable it follows that "we will have less power over the details of such an order that we would of one which we produce by arrangement."[74]

B.109

The fact that we cannot fully comprehend or state such rules is not a reason for doubting their efficacy, since that efficacy itself would appear to be a function of their very survival. While Hayek wants to use this argument against a rationalistic legal positivism which erroneously supposes that all laws are mere conventions which are alterable at will, he frequently writes as if we must passively accept a given structure of rules precisely because it is undesigned. It may be true that "law existed for ages before it occurred to man that he could make or alter it."[75] It does not follow, however, that such law is necessarily 'efficient' or appropriate to the order of classical liberalism (which Hayek favors for reasons other than those to do with evolution). The doctrine of the cultural evolution of rules of conduct would seem to bind man in a more decisive way then, say, the 'laws' of economics, which merely indicate the necessary boundaries within which free and rational action takes place.

Hayek's Traditionalist Evolutionism and Liberalism

B.110

It is in the epilogue to volume III of Law, Legislation and Liberty, "Three Sources of Human Values," that Hayek's anti-rationalism seems to collapse into an uncritical traditionalism. In merging legal and moral rules into simply those rules that have developed culturally, he says: "Tradition is not something constant but the product of a process guided not by reason but by success."[76] Also, the limitations of the human mind dictate that 'all progress must be based on tradition '[77] (italics in original). Furthermore, not only are ethical rules relative to particular traditions, but we are incapacitated from recommending alteration, apart from minor tinkering, of such rules because, since the future is unknowable, we cannot predict the consequences of such alteration. This extreme anti-rationalism follows directly from Hayek's claim that mind itself is explicable only in terms of cultural transmission: "all enduring structures up to the brain and society are a product of selective evolution."[78] This clearly differentiates him from the rationalistic classical liberalism of, for example, Ludwig von Mises, who based a theory of laissez-faire economics and politics on the universal properties of the human mind.

B.111

The difficulty with Hayek's analysis is that social evolution does not necessarily culminate in the classical liberalism that he so clearly favors: there are many non-liberal institutions which have indeed survived. The period of the dominance of the open society, the market economy and minimal government may then be regarded as perhaps a chance mutation in a course of evolution which is proceeding in quite another direction, an evanescent torch in an inexorably darkening world. Yet if we are intellectually tied to tradition, and if our 'reason' is too fragile an instrument to recommend satisfactory alternatives, how are we to evaluate critically that statist and anti-individualist order of society which seems to have as much claim to be a product of evolution as any other social structure?

B.112

The problem is that the spontaneous formation of a market is not the same thing as the evolution of a legal system, although neither is designed. In a market there is a mechanism, the price system, which does co-ordinate the actions of economic agents to produce an efficient order (though even here the presence of externalities constitutes 'disorder'); but there is no similar mechanism at work in a legal system. In Hayek's analysis it looks as if rules and practices are functional merely because they have survived rather than because they adequately service a liberal order. One striking example, from the British experience, is the constitutional rule that parliament is sovereign. This is a product of evolution yet is probably the single most important institutional cause of the undermining of the rule of law and the breakdown of the market economy in that country.

B.113

In fact, Hayek implicitly concedes part of the rationalist libertarian's argument in that much of his social philosophy does consist of rational criticism of anti-liberal and anti-individualist economic and political institutions. He admits that the common law does not automatically develop in desirable directions, and may even protect 'class' interests, so that it will have to be modified by legislation.[79] Presumably such artificial correction must be sanctioned by the principles of classical liberalism and individualism. But even here the normative principles that are used must be part of an ongoing tradition. It is epistemologically impossible to stand outside a tradition of conduct and appraise or reject it in its entirety: "Ethics is not a matter of choice. We have not designed it and cannot design it."[80]

Law and Liberty: The Problem of Criteria To Distinguish Liberal and Non-Liberal Orders

B.114

Those modifications that have to be made to an ongoing system will normally take the form of additional rules of just conduct. Again Hayek does not offer any substantive criterion for the evaluation of such proposals: all that is required is that new rules be universalizable within an ongoing system. But, as is well known, this is a purely formal criterion, so that it is possible for a variety of quite different rules to be universalized within a given structure.

B.115

Perhaps, Hayek's explanation of the emergence of a self-regulating liberal order can be 'saved' by interpreting his argument to mean that which is a product of evolution is simply what would have occurred were it not for arbitrary interventions of a constructivistic kind. However, this could lead to an un-Hayekian anarcho-capitalism in which a rationalistic natural law guarantees each individual the right to 'opt out' of the state, and this is clearly not what he has in mind. The liberal order contains an organization (taxis),[81] the state, which operates through designed law (thesis); and this institution is charged with specific purposes. The rationale of this organization seems to be cultural and evolutionary in that, according to Hayek, experience indicates that a form of the state is required to enforce the rules of just conduct and supply public goods.

B.116

Hayek argues that the activities of government can be constrained by the meta-legal principle of the rule of law; rules should be perfectly general, binding on everybody, not be retrospective in application, and should name no individual or group. He does not in fact place substantive limitations on the actions of political authorities but insists only that they conform to certain formal requirements. In this sense law and liberty are consistent, since general rules set boundaries within which people may choose rather than be directed to specific tasks. In Hayek's legal theory a free order would appear to be a predictable order: as long as a person knows in advance how a law will affect him, and can therefore plan his life so as to avoid that law, he cannot be regarded as unfree.[82]

B.117

This contrasts strongly with the natural rights theory of a liberal order in which the boundaries of an individual's liberty are set by the moral requirement that he should not violate the rights of others rather than by certain formal requirements of legality. Under the Hayekian view, general prohibitions which did not require any positive action on the part of individuals could reduce dramatically the range of choices open to them, but they would not, paradoxically, count as restraints on liberty. Curiously, a regime which had a number of mild commands or instructions but few general prohibitions would not count therefore as a free order. In fact, Hayek's own definition of freedom under law breaks down with his justification of conscription, since this is clearly a direct command. That such a command is predictable and perfectly general does not make it any the less destructive of personal liberty. It follows from Hayek's refusal to countenance a more substantive structure of natural law and morality, and his commitment to the outcomes of an undesigned evolutionary process, that it is difficult to distinguish between free and unfree orders. The general consensus of opinion is that Hayek's requirements of legality are necessary but not sufficient conditions for the operation of the order of classical liberalism.

The Breakdown of the Cosmos

B.118

One of Hayek's most important contributions to knowledge is his penetrating exposure of those intentionalist policies which have set in train a seemingly ineluctable process of disintegration of the cosmos, that self-regulating order of events that once constituted western liberal society. Allied to this, and almost in defiance of his own belief in evolutionary processes, is his complex set of radical reforms which is designed to arrest this decline. The major causes of this disruption are attempts to regulate an economy by inflationary methods; the granting of privileges to groups, especially trade unions, by way of 'legislation,' which distorts the functioning of the labor market; the attempt to redistribute income away from that impersonal allocation made by the market on the ground of an entirely subjective theory of 'social justice'; and the tendency for law to be cast in the form of commands addressed to specific purposes rather than in the form of general rules. The combined effect of these measures is to divert a cosmos, in a politically-determined manner, away from its natural course (the destination of which can never be known). A 'road to serfdom' scenario will develop, in which ever-increasing amounts of coercion will have to be used as people naturally try to avoid the effects of the original intervention.

Political Interventionism vs. Market Self-Correction

B.119

In fact, the dramatic kind of disruption of a spontaneous order that Hayek predicted would follow from interventionism has not actually occurred. Western welfare states have not (yet) collapsed into tyranny and serfdom under the weight of welfarist legislation and other forms of intervention. Rather they have become immobile, stagnant, and unable to make the best use of the dispersed knowledge that characterizes an open society. This is because democratic politics, subject to few constitutional restraints, has enabled groups to secure privileges for themselves and encouraged the spread of incomes in society to be a function of political rather than economic mechanisms.[83] Instead of liberal democracy maximizing the public interest (i.e., the interest each person has in such things as a stable currency, the rule of law and the predictability of government action), competition for votes produces coalitions of interest groups, which are held together by privileges which only government can grant. Such a political order is inherently unstable because there are no natural, correcting mechanisms in it that are equivalent to those in the market. Thus instead of being an organization charged with necessary but specific purposes, government becomes a machine for the solving of all problems and the meeting of all grievances. But as Hayek points out: "It is a fact that most of the grievances of particular individuals or groups can be removed only by measures which create new grievances elsewhere."[84]

B.120

Apart from monetary disturbances, the reason the market economy appears to be unstable is that continual intervention has impaired its self-correcting mechanisms. The biggest destabilizing factors here, according to Hayek, are the trade unions, which are able to prevent automatic adjustment in the labor market by keeping the price of labor above its market clearing price. They are able to do this, in many western countries, because of certain legal privileges: such as their exemption from the law of tort (in industrial disputes) and their exploitation of tolerant picketing laws. The former privilege is a breach of Hayek's 'rule of law' doctrine, since it prevents the application of a general rule to particular groups and could not possibly be universalized within a legal order. This privilege is a product of statute law, and it is inconceivable that such a rule would have emerged spontaneously from the common law process. Aside from the distortions caused by inflation, the existence of union privilege and disincentives to work caused by welfare and housing policies constitute the major causes of unemployment. They are almost universally ignored by Keynesian macroeconomists, who deal only in holistic aggregates. These theorists erroneously interpret extensive unemployment as evidence of some inherent disequilibrating tendency in the system rather than as an indication of some deficiency in the adjustment process which can be traced back to a constructivistic intervention. As long as these defects remain unremedied monetary policy can have little or no permanent effect on unemployment.[85]

The Myth of Social Justice

B.121

Hayek's objections to social justice similarly turn on the misallocative effect such essentially arbitrary redistributive measures have on the equilibrating process of a catallaxy.[86] Thus his concern, here, is not with the violation of a right to legitimately acquired property which social justice entails; his argument is that coercive redistributions of income reduce the real output of a catallaxy by suppressing those inequalities that act as signals to attract labor and capital to their most productive uses. He maintains that in the absence of such signals labor and capital will have to be directed by government.

B.122

The argument for social justice usually turns upon an alleged distinction between production and distribution: it is assumed that there is a 'given' volume of goods and services which can be distributed according to abstract moral principles, such as 'desert,' 'need,' or 'merit,' rather than according to the principles by which the goods and services were produced in the first place. In catallactics, however, there is no such distinction: income is distributed according to the anticipated marginal productivity of factors and the consequence of redistributing it in any other way will be a diminution of the volume of goods and services. A person's income in a free society, then, is a function of the value of his services to his fellow men; it has logically nothing to do with any 'merit' or 'desert' (in a moral sense) in his actions.[87] Hayek argues that modern societies, which persist in using merit as a criterion of income, display remnants of the morality of the closed or intimate society. If this is so, however, it implies that these societies have not spontaneously generated a morality appropriate to the economic order of capitalism.

B.123

A catallactic order is a constantly changing system so that the prices paid to labor services must vary considerably over time. Any attempt to impose a pattern of earnings based on non-economic criteria on this order would spell not merely the end of economic efficiency, but would also bring about the collapse of the cosmos, since the enforcement of that pattern necessitates a vast increase in the law of thesis.

B.124

Hayek's arguments against social justice are of a purely consequentialist kind in that they derive from the misallocative tendencies of redistributive policies and from their long-run effect on the order of liberty. While Hayek claims that expressions such as 'social justice' are linguistically meaningless, he does not extend his philosophical arguments into the ethics of property. He certainly gives us no guidance as to the justice or injustice of particular property holdings prior to the operation of an exchange process. Presumably his stance must be the conservative one that we ought not to disturb the existing structure by, say, the application of a natural law rectification rule, because this would disturb a prevailing order of expectations; the consequences of such disturbance cannot, of course, be known.

The Problem of Controlling Government

B.125

While it is clear that political systems do no automatically develop corrective mechanisms, it is noticeable that Hayek does not want to restore the workings of the catallaxy and cosmos by rationalistic natural law limitations on what governments may actually do but, rather, to subject their behavior to strict legalistic and formalistic requirements. Thus in his complex, and somewhat unrealistic, constitutional reform proposals, he hopes to introduce a new version of the separation of powers, in which democratically elected parliaments would enact that public law which is required for government activity, while a separately-elected assembly (less subject to party politics) would be charged with the making of the general rules of just conduct.[88] Thus the Governmental Assembly would decide on what projects taxation would be spent, while the Legislative Assembly would determine what form the tax rules should take. There are in principle no limitations on the government's power to tax and therefore no substantive limits on government spending; of course, the free market in money will prevent government expenditure being financed by the economically damaging and dishonest method of inflation, but there is no actual limit on government spending.

B.126

Hayek is no doubt correct in identifying the main disruptive threat to the preservation of a spontaneous order as the inevitable formation, under present democratic rules, of coalitions of interests which divert the stream of income in a catallaxy to politically-favored groups—to the ultimate harm of all. The problem is that there is a 'public good' trap here in that no rational individual, given the normal behavioral assumptions of classical liberalism, can have any incentive to promote the public interest. This is why there must be an element of constructivistic rationalism in any explanation of the order of a free society. Men will have to design those institutions that will automatically encourage them to maximize their long-run interests.[89]

Conclusion

B.127

In conclusion, it may be suggested that Hayek's theory of spontaneous order is the product of two related but distinct influences that do not always tend in the same direction. As an economic theorist, his explanation of the co-ordinating properties of the catallaxy trades very heavily on those mechanisms that produce order, and which can be given a rational explanation. But as a legal and social theorist, he leans, by contrast, very heavily on a conservative and traditionalist approach which, from Hale onwards, is so distrustful of reason that it instructs us to submit blindly to a flow of events over which we can have little control. But in this latter approach, reason may be so disabled that it is impossible to assess critically this flow of events. The evidence suggests, however, that there is no necessary tendency to equilibrium in a legal order, in which case spontaneous evolution will have to be arrested and diverted under the authority of 'reason.' But such is the force of Hayek's anti-rationalism that it tells just as much against a rationalist justification of the capitalist order of classical liberalism (which is largely derived from a moral order that enshrines an abstract and universalist structure of individual rights) as it does against the familiar varieties of rationalistic collectivism. Hayek's claim, following Hume, to 'whittle down' the claims of reason may have succeeded all too well in that his belief in spontaneous evolution, and his formalistic criteria for the evaluation of government activity, may well inhibit the search for those ground rules which are required for the servicing a free society. In some ways, his evolutionary gloss on the theory of spontaneous order distinguishes him from other writers in that tradition (for example, Menger) who do not preclude the use of reason in the critical evaluation of the outcomes of an undesigned process.


Notes for this chapter


43.
Carl Menger, Problems of Economics and Sociology, p. 146.
44.
Menger, Problems of Economics and Sociology, p. 154.
45.
Menger, Problems of Economics and Sociology, p. 233.
46.
See following Bibliography for a comprehensive list of Hayek's major works.
47.
Hayek "Individualism: True and False," in Individualism and Economic Order, p. 23.
48.
See especially Hayek's The Constitution of Liberty (1960), chapter 2.
49.
Hayek, The Constitution of Liberty, p. 29.
50.
Hayek, Law, Legislation and Liberty, vol. II, The Mirage of Social Justice, pp. 109-110.
51.
See Ludwig Lachmann, "From Mises to Schackle," Journal of Economic Literature 14 (1976): 54-62. For a sophisticated critique of the extreme 'subjectivitsts,' see G. P. O'Driscoll, Jr. "Spontaneous Order and the Co-ordination of Economic Activities," in Louis M. Spadaro (ed.), New Directions in Austrian Economics, pp. 111-142.
52.
Hayek's views are contained in the following essays, "The Use of Knowledge in Society," and "The Meaning of Competition," at pp. 77-91 and 91-106, respectively, in Individualism and Economic Order. Also, Hayek's theory of the competitive process emerged from his critique of those socialists who tried to use the neoclassical equilibrium as a model for a socialist economy without private property and a decentralized market. See Hayek's three essays on "Socialist Calculation," in Individualism and Economic Order, pp. 119-208. Israel Kirzner has produced a sophisticated version of Hayek's pioneering ideas in Competition and Entrepreneurship. See also S. C. Littlechild, The Fallacy of the Mixed Economy.
53.
See Hayek's "Competition as a Discovery Procedure," in New Studies in Philosophy, Politics, Economics and the History of Ideas, pp. 179-90.
54.
Hayek, "The Use of Knowledge in Society," in Individualism and Economic Order, p. 86.
55.
Hayek, "The Use of Knowledge in Society," in Individualism and Economic Order, p. 87.
56.
For Hayek's recent thoughts on these topics, see Law, Legislation and Liberty, vol. III, The Political Order of a Free People, chapter 14.
57.
Hayek, Constitution of Liberty, p. 365.
58.
For expositions of the Austrian theory of the trade cycle see the following: F. A. Hayek, Prices and Production (2nd edition); Hayek, Monetary Theory and the Trade Cycle; G. Haberler, Prosperity and Depression; and G. O'Driscoll, Economics as a Co-ordination Problem.
59.
See Hayek's Prices and Production (2nd edition), pp. 34-42.
60.
See "The Campaign Against Keynesian Inflation," in Hayek's New Studies in Philosophy, Politics, Economics and the History of Ideas, p. 212.
61.
Hayek, The Pure Theory of Capital, p. 408.
62.
First suggested in 1976; see Hayek's The Denationalisation of Money (2nd edition).
63.
Hayek, The Denationalisation of Money (2nd edition), p. 19.
64.
Hayek, "Principles of a Liberal Social Order," in Studies in Philosophy, Politics and Economics, p. 162.
65.
See, Hayek, The Constitution of Liberty, chapter 13.
66.
Hayek, Law, Legislation and Liberty, vol. II, Rules and Order, p. 116. [N.B. Vol. II is The Mirage of Social Justice.—Econlib. Ed.]
67.
Hayek, Law, Legislation and Liberty, vol. I, Rules and Order, p. 36.
68.
See Hayek, Rules and Order, chapter 5.
69.
Bruno Leoni, Freedom and the Law (1961).
70.
Hayek, Rules and Order, pp. 18-23.
71.
Hayek, Constitution of Liberty, pp. 58-61.
72.
See, "Rules, Perception and Intelligibility," Studies in Philosophy, Politics and Economics, p. 47.
73.
See Hayek's Epilogue, "Three Sources of Human Values," Law, Legislation and Liberty, vol. III, The Political Order of a Free People, pp. 154-155.
74.
Hayek, Rules and Order, p. 41.
75.
Hayek, Rules and Order, p. 73.
76.
Hayek, "Three Sources of Human Values," p. 166, (see note 73 above).
77.
Hayek, "Three Sources of Human Values," p. 167.
78.
Hayek, "Three Sources of Human Values," p. 158.
79.
Hayek, Rules and Order, p. 88.
80.
Hayek, "Three Sources of Human Values," p. 167.
81.
Hayek, Rules and Order, pp. 48-54.
82.
Hayek, The Constitution of Liberty, pp. 207-210.
83.
Hayek, The Political Order of a Free People, p. 13.
84.
Hayek, Rules and Order, p. 144.
85.
See especially "The Campaign Against Keynesian Inflation," pp. 191-217.
86.
See, Hayek, Law, Legislation and Liberty, vol. II, The Mirage of Social Justice, chapter 10.
87.
Hayek, The Constitution of Liberty, pp. 93-9.
88.
See, The Political Order of a Free People, chapter 17.
89.
For a contractarian critique of Hayek's doctrine of evolution, see James Buchanan, "Law and the Invisible Hand," in Freedom in Constitutional Contract, pp. 25-39.

End of Notes


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