Europe According to Hayek. By Alberto Mingardi. Wall Street Journal, March 22, 2012.
Mingardi:
European Central Bank President Mario Draghi told The Wall
Street Journal last month that the “European social model has already gone.” If
his fellow Europeans have read Friedrich Hayek, they would also understand why.
Friedrich
August Hayek, who passed away 20 years ago today, was one of foremost social
scientists of the last century. A Nobel laureate in economics, Hayek is often
associated with a crucial intuition that informs his critique of socialist
systems. There is, in society, a “knowledge problem”: Economic life requires
the coordination of individual planning. The relevant knowledge for economic
planning is dispersed rather than concentrated in society. If this makes
coordination challenging enough in a market system, it also makes coordination
a virtual impossibility under central planning: The planner can never secure
and process all the necessary information to provide detailed guidance to any
given development in society.
Even
though this argument was originally deployed against hard-core socialism, it
works pretty well against the soft-core version widely adopted by European
democracies. Centralized welfare systems are necessarily run by a bureaucratic
leadership. Pace Max Weber, the “technical superiority” of such an organization
is simply not enough to master the nuances of a complex society. Centralized
government allocates resources badly—regardless of its intentions. The very
nature of centralization makes impossible for it to collect and compute all the
information that is needed. This is as true for any grand scheme of industrial
planning as it is for the government-led welfare systems that characterize
Europe’s “social model.”
To be
sure, Hayek was not deaf to the needs of the poor or the sick, and he even
advocated some form of safety net. But he was well aware that Western
democracies were at risk of developing, as he wrote in 1960, a “household state
in which a paternalistic power controls most of the income of the community and
allocates it to individuals in the forms and quantities which it thinks they
need or deserve.” Regardless of the intentions of its makers, such a system was
bound to produce inefficiency and waste.
These
inefficiencies and this waste, of course, become rents for those that live of
them and return the favor with their political support.
States
that control most of the income of the community and allocate it according to
the wishes of their bureaucracy are now on the brink of bankruptcy. However,
Hayek’s solution—a limited government state that allowed the free market
economy to flourish—it is not getting more popular, at least not in Europe. One
of the reasons for this is that many people believe a market system is
inherently unjust, whereas the European social model attempts to combine wealth
generation with extensive redistribution to the ostensible benefit of the
needy, to guarantee a measure of “social justice.”
And
Hayek himself didn't argue that free-market competition would always reward the
deserving. We do not cooperate, he wrote, because we sense the need to properly
reward the merits of others. Rather, “so long as we think in terms of our
relations to particular people, we are generally quite aware that the mark of
the free man is to be dependent for his livelihood not on other people's views
of his merit but solely on what he has to offer to them.” Rewards in society
depend on the game of supply and demand and, ultimately, on consumers’ wants
and needs.
Hayek
pointed out that theories centered on the notion of “social justice” try to
resemble, at the level of the “great society,” the nature of smaller groups. In
the smaller groups in which human beings lived for most of our history, people
were compensated and advance in society due to some shared vision of merit and
worthiness. This also happens within larger societies: There are
organizations—think of a corporation or an army or the church—in which people
are rewarded because they score well in a particular metric.
It is
thus not the case that the market system justly rewards the better and the
wiser. Hayek’s point is different. Small, self-organized, voluntary aggregates
of human beings should be free to pursue their idea of “merit” as they wish
provided that they take full responsibility for their efforts. However, a big
society—one based on cooperation with strangers on a large scale such as a
state—should not attempt to play the game of the “just retribution” because it
is not fit to it.
The
European social model that trade unions and political parties still defend with
such passion was ill-conceived from the start. A market system cannot work
properly if a society aims to dole out rewards and punishments like a teacher
in a classroom. Market institutions are anonymous, and blind. Imposing upon
them any pre-ordained scheme of merit and reward will just make coordination
between individuals—and, thus, wealth creation—more difficult.
The
European social model has now reached its inevitable breaking point. And
Friedrich Hayek, 20 years after his passing, still offers the most compelling
explanation of why it was bound to do so.
