Many progressives, used to hearing the names Milton Friedman and Friedrich Hayek paired together as advocates of free markets and arch-critics of Keynesian economics, are likely to assume that the two were very similar in their economic theories. But actually there were very important differences between them.
Friedman’s Chicago School was the driving force behind what has been variously described as neoclassical economics, monetarism or freshwater economics. It has been the dominant paradigm in economics for the last thirty years, though is perhaps now being challenged by a Keynesian resurgence. It is generally known for elegant and detailed theoretical models using quite complex mathematics.
Hayek’s Austrian School on the other hand emphasised the unpredictability of the market economy and was generally distrustful of the claims of theoretical models and complex maths. While Hayek’s moral and political writings are sometimes fondly quoted on the Right, the Austrian School’s economic thinking has largely been relegated to an historical footnote.
Hang on, though – didn’t I say this post was going to be about John Kay, following on from his critique of the market theory to look at what his alternative? And so it is.
Kay, as we saw, is critical of the market failure doctrine. But its greatest failure, in his eyes, “is that its model provides not just an inadequate account of how markets fail, but an inadequate account of how they succeed“.
For Key, the most profound strength of market economies lies, not in the the way they efficiently allocate production and resources, but “in their ability to innovate and adapt in an environment of uncertainty and change.”
The sustained achievement of market economies comes from their pace of innovation — in products, technology and organisation – derived from the ability of market systems to undertake small-scale experiment, to watch the results, to mimic what works, and discard what doesn’t.
. . . That insight — the economics of Friedrich Hayek (concerned with the dynamic capacity of market economy to experiment and innovate) rather than of Milton Friedman (concerned to promote the allocative efficiency of competitive markets and to attack all kinds of state intervention) — is the lesson the left needs to learn from the right.
So far as I know, Kay is not affiliated with the Austrian school; he certainly doesn’t share their hatred of collective action. His own analysis centres on the concept of “disciplined pluralism”, which he describes as “decentralised choices with accountability”. This “allows a multiplicity of small-scale experiments and in which the successful experiment is quickly imitated while the unsuccessful quickly folds”.
He criticises old-style progressives who “conflate the need for collective choices and collective action with central direction and political control”, but also the tendency of UK New Labour to combine quasi-market mechanisms in areas like health and education with a system of detailed centrally-prescribed targets. He notes that “rationalist bureaucracies detest” the “inherently inefficient process” of disciplined pluralism, which “relies on constant displays of irrational optimism, and most of its experiments fail”.
Kay envisages a world where:
educational goals are not determined either by central state direction or by the simple aggregration of individual choices. Both are relevant but neither is sufficient. Multiple goals emerge, are different across different parts of the educational system and evolve over time, through an interactive process between those who provide the services and those who pay for it. In a similar way, medical treatment must be managed through trust relationships between politicians, professionals and patients.
I’ve found John Kay’s account of the limitations of market failure pretty persuasive. As he says, “the list of market failures is a guide to some common problems in economic policy” but is not a good theoretical basis for progressives to rely upon to justify and guide their interventions.
I’m a little more inclined to reserve judgment about his proposal of “disciplined pluralism” as an alternative. Partly, it’s just that I’m interested in looking around to see what other approaches are out there.
But I also have a few reservations. Firstly, I’d want to know a bit more about how “disciplined pluralism” would work and what it would mean. Kay’s earlier book The Truth about Markets covers some of that, apparently. Also, as Policy Progress newsletter readers already know, he has a new book out called Obliquity: Why our goals are best achieved indirectly, which may shed further light.
Secondly, some of the implications that he does set out may be a little troubling to progressives. For instance, he argues that we might not know the secret of successful provision but we recognise a good school or hospital when we see it. That means that ‘exit’ is more effective than ‘voice’ and policymakers should give people a choice of health and education providers – “the most effective means of getting a good school is to be able to reject a bad one . . . recognising success and failure is indispensible to innovation and imitation.” In other words, perhaps, provided that Professor Hattie can devise a valid methodology for them, school league tables might be a good thing! Is that a notion we’d be comfortable with? If not, what would be our theoretical basis for arguing against this?
I’d be interested in hearing what Policy Progress readers think of these ideas, including any impressions from anyone who’s read some of Kay’s other works.
Postscript: another book that might be worth following up on that seems to reflect a similar perspective is James Scott’s Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed. Anyone read it? What did you think – anything valuable for the Theoretical Foundations topic in it? Berkeley economist Brad Delong has an interesting though rather involved discussion on it (and its connections to Austrian economics) here.
Postscript 2: The classics of Austrian economics are probably worth engaging with further, but the modern Austrian school(s) are probably best steering clear of, a lesson Brad Delong draws from Time’s Justin Fox’s experience.