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.
Tags: Brad Delong, exit and voice, Friedrich Hayek, John Kay, league tables, Milton Friedman
…as a ‘Marxist Austrian’ , I’m so excited by this column!
I don’t know if ‘disciplined pluralism’ is the answer but Kay has certainly identified the problem – which is something along the lines of how you get the balance between centralising and decentralising. This reminds me of another writer who said something like individuals should be free to act but not free to exploit others.
I have The Truth About Markets on my bookshelf but I haven’t read it for 5 years – I remember being so impressed about it at the time that I recommeded it to others as the only book you need to read about economics (and let’s face it who wants to read more than one?).
David
Interesting post. Certainly it is good for us to think carefully about Hayek’s ideas about how markets innovate, rather than just fixate on neoclassicists’ ideas about how they allocate. For my money, however, it takes a pretty creative, even contrortionist reading of Hayek’s work to conclude that it can serve as an intellectual foundation for modern progressive policies. For example:
- Hayek explicitly opposes progressive taxation, which almost all progressives support, on the morality-based grounds that it violates equality before the law. Even most neoclassicists concede that progressive taxation is morally justifiable – their objection is rooted in second order (efficiency) concerns.
- Hayek strongly opposes all progressive-style claims about the virtue of acting collectively to protect our most vulnerable compatriots or to ensure substantive equality of opportunity for all. For Hayek those goals, which he characterizes as “socialist central planning,” are the moral equivalent of totalitarianism as they diminish individual human agency. This, he says, is “The Road to Serfdom.”
Sure, we could cherry-pick some passages about how “human freedom is the only path towards true progress,” then dump a definition of positive Millian freedom on top of that (which Hayek, I think, would likely have opposed), then claim that Hayek had unwittingly argued for progressive “positive-freedom enhancing” social policies.
I do like the general idea behind that thought process, but I think it is a bit disingenuous to claim Hayek as a fan of it. I do not think he is our guy. Tellingly, Hayek did not think he is our guy either.
Rob,
I think you’re generally right, but if I understand what David, or indeed Kay is saying (particularly with reference to the previous post then the essence really is with the first point you raise.
I’m too lazy to go back and quote but I recall that David raised Kay’s dislike of the old Left’s reach for centralist planning as an answer (which is directly attacked by Hayek – and while I know his road to serfdom is wide and easily trodden on by attempts at collective action I do think there’s a point worth absorbing there, that blunt action centrally is just that – blunt and unweildy and potentially injurious to individual integrity).
I don’t think we need to buy into Hayek’s rejection of collective action to accept his assertion that some collective action can be bad for society. But you are right – in the round “Hayek is not our man”. He’s just a man.
Now I have to walk those comments back by saying I absolutely stand for collective action. But I think I’m agreeing with David if I say that we do need to recognise that markets (in the appropriate context) provide a very useful mechanism for delivery.
I think the point David and Kay is making with Hayek (i.e. the lesson to learn) is that there is some kind of inovating and experimenting process in a free society that is critical to human progress.
Where Hayek goes wrong is to conclude that it rules out having any kind of siginficant role for states/government other than to protect private proprty.
Well that is certainly one solution to ensuring that the free creative process is preserved – but progressives would argue that maybe there are ways for collective strucutres to co-exist with and even enhance that creative process.
The other lesson I got myself from Hayek is to take social and economic scientists with their fancy looking mathematical models with a healthy grain of salt. I hold the view that social/economic science is somewhat in its infancy and about where modern medicine was circa 1900 – it had some aspects of anatomy and pysiology worked out, and had added some useful interventions to the practitioner’s toolkit – but it had (and has) a long long way to go. Therefore policy analysis is still an art, and only gradually emerging as a science.
Achela – I think you make an important point in that last para. And while it’s not a big part of what Kay was talking about in his Beyond New Labour chapter, I think he’d be sympathetic with that based on a column of his that I’ve read about the spurious precision of GDP growth figures.
James – in terms of that last sentence, I think the important point about the idea that “markets (in the appropriate context) provide a very useful mechanism” is that it’s important that we are clear about exactly what property/ies of markets we find particular useful. If it’s mainly their innovative capacity, then that may imply different things for policy design than if it’s mainly their allocative efficiency. Hence Kay’s criticism with New Labour’s “centralisation with targets” approach, which (arguably) makes good sense from a market failure doctrine perspective.
Rob – I don’t know much about the politics or moral thinking of Francis M Bator, and I don’t feel I need to in order to take a view about the validity or usefulness of the ‘market failure’ concept. Certainly, though, I can assure that I don’t intend to argue that Hayek is “our guy”!!
A little high brow for me on this. Kay, as I understand it, has uniquely criticised both the central reformist model as well as neo liberal doctrine evident in New Zealand in the market reforms of the 1980s. The idea that there could be a testing of economic solutions that are surgical rather grand sweeping, upon whose results would determine their longevity is difficult to swallow for modern pragmatic progressive stylists I think.
Achela has lots of good things to say in that last posting, I agree there is a robust argument for what you’re saying about the easily attractive mathematically explained models of the populist right. Infancy is evident, yes for certain. But I’m stuck on this idea of Disciplined Pluralism, the old FDR approach I see. In any case, there is discomfort in this from a progressives point of view given we dislike, so much, to appear to have been foiled in our selection of doctine. But I think this is the point isn’t it? That there is a modicum of truth in the idea that we try and then we fail so we try with something else and continue to build on success rather than escalate failure. Or is that failure itself?
There is something in James’ last sentence that rings a truth in what you say too David and that is the value in component parts of market behaviour – of the disciplined kind rather than the unfettered kind – that resonates with this discussion disciplined pluralism. What’s wrong with cherry picking?
Please note, I am well out of my depth on this one.
A lot of interesting stuff in these comments. Fun to read.
I think Achela makes a good point about the innovative capacity of markets, and also about the fragility of economics and social sciences more generally in terms of the consistency and accuracy of their real-world predictions. But before we throw all the models away, we have to ask “what are we left with without them?” If what we are left with has even less predictive accuracy than the flawed models, then it is hard to defend rejecting the models in their favor. A badly flawed empirical model is probably still better than ideologically-biased guesswork, for example.
James closed, rightly, with: “But I think I’m agreeing with David if I say that we do need to recognise that markets (in the appropriate context) provide a very useful mechanism for delivery.” I agree with this sentiment, but then again I think basically **everyone** agrees with this general sentiment, they just disagree over the meaning of “appropriate context.” Even that disagreement lies within some universally understood bounds: Essentially everyone in NZ agrees, for example, that the free market is the best way to deliver restaurant meals or movie tickets, and that the free market is not the best way to deliver primary education or policing. So I’m not sure how much specificity we gain as a movement by aligning ourselves with very, very broad principles like this one. I like David’s and Kaine’s ideas about the need for putting a lot of flesh on these bones.
And I’m pleased to see that there isn’t much support for jumping wholesale on a Hayekian bandwagon – I don’t think it is going anywhere we want to go.
Given that we are addicted to metaphors on this thinksite – for me ‘taking something with a healthy grain of salt’ does not mean we should ‘throw the baby out with the bathwater’. Just be skpetical about things like spurious precision and the fact that a lot of modellers are guns for hire and can justify just about any decision you want.
Models should be approached with caution, assumptions made transparent, and have a sense of the confidence interval around any predictions they make.
…but you still need a model and a modelling fraternity! (where did I leave my business card?)
One other thing. I think some of the Theoretical Foundations discussions and comments (my own included), have veered a bit much towards wondering “given our policies, what should our intellectual touchstones be?” That is putting the cart before the horse. I think a more open way for us all (including me) to think about it is “whose ideas are best, at the level of ideas?” Then a second order question would be “what do those ideas imply for policy?” Easy to propose and tough to do, I know. But worth striving for.
yeah – I know I was being overly general with the closing comment Rob, but sometimes it helps me to return to first principles. It it certainly helps remind others that I’m not really striving to be a raving neo-liberal although at times I’m conscious (perhaps overly so) that I can sound that way.
I’m not sure I’m completly ready to reject allocative efficiency outright (movie tickets and restaurant meals being good examples), but I’m much more willing to jump on board with market innovation.
And sure – the space we argue over is what ‘appropriate context’ means but I think it’s more contested than you might be willing to accept. Are we ready to create markets to deliver other social outcomes? And to get to one of David’s points, for what reasons might we do this? Sure it’s easy to reach conclusions at the extreme. Only hardcore neo-libs might seek market delivery of policing, yet there’s smart and ongoing debate (of which I have firm views) in environmental policy about market mechanisms.
And I think David’s last point before his post-scripts is an interesting one (even if I’m not remotely ready to accept that ‘exit’ is a valid response in primary school delivery.