Fukuyama and Dahrendorf on Hayek

Frank Fukuyama’s recent NYT review of the “definitive edition” of Hayek’s Constitution of Liberty has raised a ruckus on the libertarian right.1 It seems to be the closing paragraph that caused the most fuss:

“In the end, there is a deep contradiction in Hayek’s thought. His great insight is that individual human beings muddle along, making progress by planning, experimenting, trying, failing and trying again. They never have as much clarity about the future as they think they do. But Hayek somehow knows with great certainty that when governments, as opposed to individuals, engage in a similar process of innovation and discovery, they will fail. He insists that the dividing line between state and society must be drawn according to a strict abstract principle rather than through empirical adaptation. In so doing, he proves himself to be far more of a hubristic Cartesian than a true Hayekian.”

There is a certain problem in Hayek’s thought that was better developed in Ralf Dahrendorf’s 1990 updating of Edmund Burke called Reflections on the Revolution in Europe: In a Letter Intended to have been sent to a Gentleman in Warsaw [Random House]. Incidentally, Dahrendorf was no great fan of Fukuyama’s earlier work as he writes of “Francis Fukuyama, who had his fifteen minutes of fame when he published a rather crude article entitled ‘The End of History’ in the summer of 1989.” [p. 37] so I doubt we would find Fukuyama referencing Dahrendorf’s arguments about Hayek.

As the Director of the London School of Economics, Dahrendorf knew Hayek and Popper well.

“Hayek has a fatal tendency to hold up another system against that of socialism. It is a passive system to be sure, but one complete in itself and intolerant of untidy realities;… . Popper on the contrary is a radical defender of liberty, of change without bloodshed, of trial and error, and also of an active march into the unknown, and thus of people who try to design their destiny. This epistle pays homage to Popper rather than to Hayek.” [Dahrendorf 1990, p. 29]

And then Dahrendorf continues:

“Like Marx, Hayek knows all the answers. He does not find it easy to bear the untidiness of the real world. He gets as angry with those who have set out in his direction without following it through to the bitter end as he does with his ideological opponents. Hayek is an all-or-nothing theorist, which is fine so far as the constitutional preconditions of politics are concerned, but dangerous if not disastrous in the world of real political conflicts.” [Dahrendorf 1990, p. 34]

And finally,

“I cannot fault Hayek on his constitutional politics, and would not try to do so, but he has an unfortunate tendency to turn all politics, and certainly most economic policy, constitutional. … Not everything that is disagreeable to some, or to me, or even to Hayek, has by the same token constitutional status. Whatever is raised to that plane is thereby removed from the day-to-day struggles of normal politics, until in the end a total constitution emerges in which there is nothing left to disagree about, a total society, another totalitarianism.” [Dahrendorf 1990, p. 36]

If we avoid the mistake of thinking that Hayek’s or anyone else’s views are always perfectly self-consistent, then we should at least see that there was a bit of a Dr. Jekyll and Mr. Hyde problem in Hayek.

The best test of all this is not to produce dueling quotes from Hayek but to look at precisely Dahrendorf’s topic; the great debates in the early 90′s about the transition from socialism to some form of a market economy and political democracy. Those who quoted Hayek the most were, unfortunately, also those who Dahrendorf saw as constitutionalizing everything so that they ended up with a new form of utopian social engineering except based on Friedman, Hayek, and free-market economics rather than Marx. The Austrian-school economists who now champion Hayek as the great enemy of social engineering could not find their tongues in that debate. With the exception of Peter Murrell,2 there were few if any economists who opposed the “market bolsheviks” on general conservative principles. The market bolshevik social engineers among the Western advisors had no truck for any experimentalism since they “knew” what to do. Why waste time searching or experimenting when you already have The Knowledge in the Science of Economics? Any opposition in the socialist countries to their master plans was only the cover for trying to keep the privileges and rents acquired under communism. Post-socialist politicians needed to have the political courage to wipe the slate clean of all those impediments to The Free Market…

At least, the worst of the academic market bolsheviks were not Hayekians; they were the elite mainstream economists such as Harvard’s Jeff Sachs, Larry Summers, and Andrei Shleifer. Sachs explicitly quoted Dahrendorf’s call for trial and error experimentation and then argued against it. “If instead the philosophy were one of open experimentation, I doubt that the transformation would be possible at all, at least without costly and dangerous wrong turns.” (Sachs, Poland’s Jump to the Market Economy, 1993, p. 5) To avoid “costly and dangerous wrong turns,” the wunderkinder promoted the disastrous scheme of mass privatization through voucher investment funds throughout the Former Soviet Union.

For an appraisal of the outcome of the economists’ social engineering in Russia and the FSU, we might turn to Gregory Mankiw, himself a Harvard economics professor but who was not involved with advice to Russia and who was head of George W. Bush’s Council of Economic Advisors.

“According to the 2002 World Development Report, from 1990 to 2000, China’s real GDP grew at an amazing 10.3 percent per year. Meanwhile, Russia’s output fell at a rate of 4.8 percent per year. Such a shocking contrast cries out for an explanation.” [Mankiw, N. Gregory 2003. Review of: Reinventing the Bazaar (book by John McMillan). Journal of Economic Literature. XLI(March), 256-7]

The explanation given in the book by Stanford’s John McMillan [Reinventing the Bazaar: A Natural History of Markets. New York: Norton, 2002] being reviewed by Mankiw, is based on the different philosophies: institutional shock therapy and market bolshevism in the case of Russia in contrast to pragmatism and incrementalism in the case of China. The international development agencies and the neoclassical economic advisors lined up behind the Russian strategy; the Chinese went their own way—having already learned the hard way about bolshevik-style social engineering under Mao.

“Russia leaned on lawyers, economists, and bankers from the West for advice on how to privatize state firms, develop capital markets, and reform the legal system… China by contrast called little on foreign consultants.” [McMillan 2002, 207-8; quoted in Mankiw 2003, 257]

Professor Mankiw spells out the stakes in this natural experiment.

“If McMillan is right that shock therapy was the problem, then the economics profession must accept some of the blame. Our profession lent some of its best and brightest to the transition effort, such as my former colleague Jeffrey Sachs.3 Most of these advisors pushed Russia to embrace a rapid transition to capitalism. If this was a mistake, as McMillan suggests, its enormity makes it one of the greatest blunders in world history.” [Mankiw 2003, 257]

One would have thought that the Hayekians would have been able to find their voice and oppose the market bolsheviks in making what was perhaps “one of the greatest blunders in world history”, but unfortunately they were no-shows in one of the great and consequential debates of our time. Thus the Hayekian views against master plans are all well and good in making the case against a socially engineered transition from capitalism to socialism, but the Hayekians did not seem to have the courage of their convictions when it came to using the same arguments against the shock therapy social engineering schemes to make the transition from socialism to capitalism.

For more on this old debate, see my 2001 Challenge article , my 2003 Challenge article, or my recent article in the RealWorld Economics Review.

1See the links given in Bill Easterly’s review of Fukuyama.

2Murrell, Peter 1992. Conservative Political Philosophy and the Strategy of Economic Transition. Eastern European Politics and Societies. 6(1): 3-16.

3 The other two Harvard wunderkinder, Larry Summers and Andrei Shleifer, made more direct contributions to the Russian debacle than Jeffrey Sachs (now with a reinvented persona as a “development expert” at Columbia University) but Shleifer was still a colleague of Mankiw’s at Harvard and Summers was then the President of Harvard University.