Hayek, Novak & the Limits of Laissez Faire

By Angus Sibley

April 25, 2008

Originally published in Commonweal

When laissez-faire economists believe in God, they are usually certain that he is one of them. The invisible hand of the market is, they think, also the hand of Divine Providence, which anoints and protects those who manage to provide for themselves.

In 1835, the American economist Henry Carey complained that Britain and France, in restricting trade between themselves, were “doing all in their power to frustrate the designs of the Deity.” (Carey later converted to protectionism.) In the 1840s, English politician Richard Cobden claimed that “free trade is the international law of God.” Thus, those who opposed free trade were not only mistaken; they also lacked faith. Today, many American Christians, including Catholics such as Michael Novak, Thomas Woods, and Robert Sirico, proclaim similar ideas. Novak quarrels with the church's official teachings on social justice, disparaging in particular the traditional emphasis on distributive justice. He argues that state power should be used minimally and only as a last resort in promoting economic justice.

Novak and other contemporary free-marketeers owe much to the “Austrian school” of economists, and especially to one of its founding members, Friedrich von Hayek (1899-1992). A professor at the University of Chicago from 1950 to 1962, Hayek was one of the chief instigators of the wave of libertarian economics that has swept the world since the 1970s. The late Milton Friedman frequently acknowledged Hayek's influence, and Novak celebrated the economist's 1999 birth-centenary with a fervent eulogy, “Hayek: Practitioner of Social Justice.” Hayek's theories underlie the economic policies that have allowed income inequalities in the United States to revert to levels not seen since the 1920s, while similar policies in Latin America have provoked widespread leftward reactions. The “shock therapy” of Boris Yeltsin's economic strategists Yegor Gaidar and Anatoly Chubais was also a product of such non-plus-ultra capitalism. Russia never quite recovered from the shock, and the chaos it set loose eventually brought a return to authoritarian rule under Vladimir Putin.

Hayek was born into a Viennese Catholic family but became an atheist in his teens and remained so for life. He studied economics under Ludwig von Mises, another theorist widely admired by American libertarians. In his book Socialism (1922), Mises lambasted both Catholic and Protestant churches for their unwillingness to endorse free-market dogma. Following Mises, Hayek based his political and economic theories on an uncompromising commitment to “negative freedom,” defined as absence of coercion of the individual by other people. This has some affinity with the immunity from coercion in religious matters propounded in Vatican II's Dignitatis humanae, but Catholic teaching continues to see the absence of coercion as just one aspect of freedom. The Catechism's broader definition is positive: “There is no true freedom except in the service of what is good and just.” Or, as Bernard Häring wrote, “In essence freedom is the power to do good.” Freedom, then, in its most important sense, is essentially a state of grace achieved through the pursuit of goodness and justice.

Hayek repudiated the link between freedom and morality. Philosophers, he complained in The Constitution of Liberty, “have sometimes defined freedom as action in conformity with moral rules. But this...is a denial of that freedom with which we are concerned.” The freedom with which Hayek was concerned simply meant not being imposed upon by others. As a young man in early twentieth-century Austria, he was appalled by the disastrous consequences of gross misrule in fascist and Communist regimes. He therefore sought a philosophy of politics and economics that would minimize the risk of damage to human society by malevolent states, and he believed this meant disempowering the state as much as possible.

The Catholic Church has always taught that the proper alternative to bad government is good government. Sometimes this means less government, sometimes more. In Vatican II's Gaudium et spes we read that “political authority...must always be exercised within the limits of the moral order and dedicated toward the common good.... The complex circumstances of our day make it necessary for the public authority to intervene more often in social, economic, and cultural matters.” According to the church, negative freedom alone is insufficient. A government that refrains from mistreating its own citizens but makes little effort to keep them from mistreating each other-or to keep their pursuit of conflicting goals from leading to injustice-is not doing its job. Hayek would have none of that. He insisted that the proper alternative to bad government is always minimal government. This mindset underlies the libertarian obsession with shrinking the state-with privatization, deregulation, and low taxes. Hayek was no anarchist: he accepted the need for discipline in human society but rejected the disciplines of church and state. So who, or what, was to rule? Hayek's answer: The market mechanism, backed by a rigid legal system, will impose its own discipline, provided the market is indeed free-that is, regulated only by general legal principles. There must be no specific interference with the market, no regulation of wages, prices, or trade.

This desire to replace the state, as far as possible, with the market also reflects Mises's view that “the capitalist system is a democracy in which every penny represents a ballot paper.” Mises argued that the market reflects the people's wishes better than the electoral system, because we vote only every few years but spend money every day. Of course, if every penny represented a vote, the rich would have far more control over the community than the poor. But this did not bother Mises or Hayek, since they both believed that democratic equality was never anything more than a legal status-a guarantee that, whoever made the laws, they would apply to all citizens, rich or poor, in the same way. For them, equality had nothing to do with the distribution of wealth and power.

For Hayek, the market's prime virtue as a source of authority is that it is an impersonal mechanism. It is constraint by persons, not impersonal forces, that damages the kind of freedom Hayek values. The mountains of his native Austria furnished him with a striking metaphor for this argument: he claimed, in The Constitution of Liberty, that a climber stuck in a crevasse between rocks is “not unfree,” since he has not been willfully confined by anyone else. It follows that if people are mired in penury or unemployment by the workings of the free market, they suffer no loss of freedom. Nor, indeed, do they suffer injustice. In The Mirage of Social Justice, Hayek compared the market with a game in which there is “no sense in calling the outcome either just or unjust.” Complaining that “the Roman Catholic Church especially has made the aim of ‘social justice' part of its official doctrine,” Hayek argued that “social justice is an empty phrase with no determinable content.” He was particularly contemptuous of the idea of distributive justice. As he wrote in The Constitution of Liberty, “The results of the individual's efforts are necessarily unpredictable, and the question as to whether the resulting distribution of incomes is just has no meaning.” Not surprisingly, Hayek condemned the use of the tax system to mitigate inequalities. A tycoon, he argued, must not be taxed more heavily in proportion to his income than a waiter. He did grudgingly tolerate “some provision for those threatened by the extremes of indigence or starvation, be it only in the interest of those who require protection against acts of desperation on the part of the needy.” Here, as elsewhere, he was careful to avoid any expression of pity. The destitute did not deserve any help from the state, but since they might become dangerous without it, it might be a good idea to keep them from “extremes of indigence or starvation.”

Hayek was convinced that if every individual freely pursued his own personal objectives, the outcome would be the best possible for society as a whole. This idea is often attributed to Adam Smith, but Smith embraced it with restraint, arguing in The Wealth of Nations (1776) that an individual “by pursuing his own interest frequently promotes that of the society more effectually than when he really intends to promote it.” Note the word “frequently”-not “always” or even “generally.” Smith understood that individual interests could sometimes conflict with the common good. In The Theory of Moral Sentiments (1759), he conceded that “the wise and virtuous man...is willing that his own private interest should be sacrificed to the public interest.” Hayek rejected this kind of moderation. He argued that neither individuals nor governments can possibly know what is best for society; they cannot deliberately promote the “public interest” and should not even try to do so. The market will take care of everything once we get out of its way. Of course, such a strategy gives the market an almost absolute power. It was just this kind of reductive formula that John Paul II had in mind when he warned in Centesimus annus (1991) of “the risk of an ‘idolatry' of the market.” The pope insisted that “there are collective and qualitative needs that cannot be satisfied by market mechanisms.” This claim has been a consistent feature of the church's social teaching. In Quadragesimo anno (1931), Pius XI declared that “the right ordering of economic life cannot be left to a free competition of forces.”

Deregulation of markets may enhance the “freedom” of entrepreneurs, but its effects on society can be painful and damaging. In the course of my career as a stockbroker in the City of London, I have observed many serious abuses in deregulated markets. Some of these abuses have been curbed by government re-regulation, much disliked in the City because the new rules are more burdensome than the old. But, as John Paul II insisted in Centesimus annus, the market must be “appropriately controlled.” Of course, the very idea of appropriate control is meaningless without an understanding of the common good based on something other than the market itself.

Hayek insisted that the law, like the market, should be an impersonal mechanism, one based mainly on judicial precedent. He argued that a well-designed legal system, together with the free market, could largely replace administration by state officials. He hankered after what T. S. Eliot called “systems so perfect that no-one will need to be good” (The Rock). Hayek even claimed, in Individualism and Economic Order (1949), that his ideal was “a social system that does not depend for its functioning on our finding good men for running it.”

But it was not only Hayek's antipathy for the state and its operatives that motivated his enthusiasm for free markets. He was also convinced that “through competition, not through agreement, we gradually increase our efficiency.” Like other libertarians, Hayek delighted in the power of free markets to generate a torrent of exciting and unexpected innovations. Constant change was a sign of social vitality. For most people, of course, change is rather more complicated: there can be too much of it and it can happen too fast. When it does, it can provoke nasty retrograde reactions. Untrammeled competition also means the disappearance of all loyalties in business, whether between employer and employee, owner and enterprise, or supplier and customer. It implies the end of solidarity among workers: instead of uniting for mutual support, they should all compete against each other. Hayek complained that British trade unions were “the prime source of unemployment” and “the main reason for the decline of the British economy” (Unemployment and the Unions, 1980). He argued that unions cannot enhance wages in real terms without causing higher unemployment (a theory for which there is little historical evidence). On the subject of labor unions, Leo XIII wrote in Rerum novarum (1891) that “to enter into a ‘society' of this kind is the natural right of man,” while in Laborem exercens (1981) John Paul II commended unions as “a mouthpiece for the struggle for social justice.” For Hayek, this was just the problem. The struggle for social justice was a struggle against rationality, while all talk of solidarity was sentimentalism. He went so far as to claim that we “gain from not treating one another as neighbors.”

Although the gulf between Hayek and mainstream Catholicism yawns wide, neoconservative Catholics have striven to bridge it. They believe that Catholic doctrine can be interpreted in such a way as to legitimize laissez-faire capitalism. Since Michael Novak is among the best-known of these Catholics, let us consider how his views reflect, but also diverge from, those of Hayek.

Novak avoids the purely negative Hayekian definition of freedom. For him, “true liberty is ordered liberty.” In This Hemisphere of Liberty (1990), he writes, “Temperance, fortitude, a sense of proportion (justice), and practical wisdom are...cardinal habits [that] give order to our capacity for human freedom.” Here we have a positive definition of freedom not far removed from that of the Catechism. The difference has to do with the relationship between liberty and justice. Novak holds that “social justice is a virtue that can be exercised solely by individuals.” This makes better sense than Hayek's fantasy-the society that does not need good people to run it-but Novak insists that we must work toward a better society through voluntary action, not through political and legislative processes. The latter should merely provide a system of rules within which virtuous individuals can spontaneously create a just society, “only as a last resort, when all else fails, through turning to the state” (On Cultivating Liberty, 1999).

There are serious practical obstacles to achieving a just society without recourse to politics. A political or economic order unconcerned with distributive justice can make individual efforts at justice difficult, if not impossible. For example, if unscrupulous entrepreneurs can find people to work for them for grossly inadequate wages, benevolent employers may be unable to pay much more, since their higher costs would make them uncompetitive with the rascals. Regulation of wages may therefore be necessary.

In Deus caritas est, Benedict XVI clearly eschews antistatism. He distinguishes between the roles of the state and of voluntary Christian charity without suggesting that the latter alone is responsible for ensuring distributive justice: “The church cannot and must not take upon herself the political battle to bring about the most just society possible. She cannot and must not replace the state.... A just society must be the achievement of politics.... Caritas will always prove necessary, even in the most just society.” The problems caused by a hypercompetitive society find little recognition in Novak, whose account of competition-“the natural play of free persons”-is entirely favorable.

Novak is not worried that the every-penny-a-vote theory of Mises would lead to plutocracy, since “corporations which seek mass markets have a far larger economic base” than those which cater to the rich. Therefore, even if spending power were the same as political power, the nonrich would have much more of it than the rich. U.S. Census Bureau statistics disagree. They show that, in 2005, the richest 20 percent of households enjoyed 47.3 percent of aggregate household disposable income (that is, income after tax but including state benefits and realized capital gains). Thus, the top 20 percent have almost as much spending power as the bottom 80 percent.

But, like Hayek, Novak does not consider economic inequality a problem. “Under democratic capitalism, inequalities of wealth and power are not considered evil in themselves.... Nature itself generates inequalities,” he writes in The Spirit of Democratic Capitalism (1991). Or, as he puts it in Three in One (2000), “It is not unjust if some acorns fail to become oaks.” By contrast, in a speech he gave on May 13, 2006, Benedict XVI affirmed that “it is right to foster equality in the distribution of wealth in the world.”

Novak has argued that “productive justice” is fundamentally more important than distributive justice, for the latter depends on the former. Wealth must be produced before it can be shared. The top priority, therefore, should be to increase output, so that there will be more for everybody. This is an argument dear to many defenders of laissez-faire capitalism, but it ill accords with the evidence of recent American history: despite robust growth, inequalities have increased, while poverty and insecurity are more widespread and fewer and fewer people can afford medical care.

Nor does this argument address the urgent need to curb the environmental ravages of rapid economic expansion. Novak denies that there are real limits to growth, and he decries those who see social justice as a “zero-sum game” of distributing fairly a limited pool of riches. But ecologists warn that we are already consuming the earth's resources at a more-than-sustainable pace, even though many people are still extremely poor. The World Wildlife Fund's Living Planet Report gives a detailed analysis covering most countries in the world. According to the report, the overall consumption of natural resources is running at a rate 25 percent above what is sustainable for our planet. It would seem, then, that there are indeed certain natural limits to economic growth. At the very least, there is a need to spread natural resources more evenly. Novak isn't bothered by the fact that Americans use more than their share of the world's natural resources: after all, he argues, Americans were among the first to figure out how to use (and sell) these resources. Why shouldn't they have first dibs? This is a seductive non sequitur: the fact that entrepreneurs in Europe and the United States first discovered and developed oil as a source of fuel does not give Americans and Europeans a moral right to consume a disproportionate amount of this energy.

Libertarian economic theories develop and extend the work of “classical” eighteenth-century economists: Smith in Scotland, Ricardo in England, Turgot in France. Since that time at least, the world of economics has never lacked thinkers averse to state regulation, redistributive taxation, and strong trade unions. But whatever their failings, these institutions have helped us achieve fairer, more civilized economies. Beginning in the late 1970s, libertarian economists saw their opportunity to reinstate the “progrowth” policies of the early nineteenth century, policies that had profoundly harmful consequences. Given the totalitarianisms Hayek observed in his youth, one can understand why he wanted to see the state stripped of as much power as possible. From a Christian perspective, however, many of his ideas seem seriously misguided. We need an economic philosophy that, far from undermining the state, recognizes the vital importance of good government, the need for judicious regulation of capitalism, and the malignancy of extreme inequalities. All these principles can be found in the church's teaching. We Catholics should not be shy about what distinguishes our recipe for the good society from that of libertarian theorists. We should not be afraid to insist that the health of communities and the demands of justice should take priority over the growth of markets.

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