Thursday, 10 September 2015

Innovation and Dumb Luck

"The real power of free markets: not efficiency, but innovation and dumb luck" is the title of the article published by Rory Sutherland on The Spectator almost a month ago, and it can be praised for being a true "Hayekian manifesto".

In his note, Sutherland dismisses neo-classical economics and embraces two of the most polemical statements that can be found in Friedrich Hayek's works. The first one: competition has little to do with efficiency. In fact, there are more efficient processes than competition to allocate resources. Competition must be regarded as a discovery process of new goods to meet our needs –which some of them remain unknown to us. Competition could be efficient but in an "artificial way" (as David Hume called "justice" an "artificial virtue"): since the discovery process of competition is guided by the tendency for equalisation of the marginal value of relative scarce resources, the innovations brought about by the entrepreneur, despite threatening the stability of the economic order in the short run, stabilise the system in the long run.

The second statement is about meritocracy: again, here the market contributes to assign results in accordance to merit only in an "artificial way". Since the payrolls are related to the marginal contribution of each agent to the productive process, it is highly probable that, in the short run, we see very lucky people reaping huge unexpected profits, whereas other activities, more important but less scarce, are poorly remunerated. Theses processes work as way to equalise relative scarcities in the long run.

“Innovation” and “dumb luck” are two devices of the market to stabilise itself. They provide the economic order with a negative feed back process that allows it to adapt to the changing environment: new habits and tastes, life expectancy, cultural shifts, etc., etc., and this stabilisation via adaptation to the changes in the environment is nothing more and nothing less than evolution.

Wednesday, 13 May 2015

The Causes of Decentralization

            In the chapter fourteen of “Law, Legislation and Liberty”, published in 1979, F. A. Hayek cited three causes of the progressive centralization of government powers: the main one was the danger of war; the second one was the necessity of dealing with the effects of natural disasters; and, finally, the third one was the assurance of a certain minimum income as a compensation for the dissolution of the personal ties of the small communities, which formerly cared of the persons who could not earn their living in the market, brought about by the extended society.

            Today, in 2015, it is interesting to question whether the inverse statement holds true: the dissipation of the danger of war, the international cooperation in case of natural disasters, and the financial aid to countries by supra-national entities contribute to decentralize the government powers. We are thinking of the referenda that are held among the members of the European Union concerning the independence of some of their regions: the United Kingdom and the Kingdom of Spain, for example.

            The avoidance of war is the main objective of every supranational union and the humanitarian aid is now a moral duty of every country despite its affiliation to any international organization. The novelty that could imply a turn of events is the legal duty from the interstate union to provide its members with financial assistance. Normally, the financial aid to a country is based on the interest in preventing the dramatic social consequences of an economic collapse, i.e.: the third cause mentioned by Hayek of the process of progressive centralization of government powers.

            If the financial help to its members becomes a legal duty of the interstate union, then it will be more alluring for a region to leave the country it belongs to and switch to the direct assistance of the interstate union. Moreover, it will be easier for the interstate union to help a small region than it would be for a single member. In the case of The European Union, that is why we consider that the decisions to be made on the economic struggles of Greece will boost or diminish the process of fragmentation experienced by some of its members.

Monday, 16 March 2015

Law and Politics

The theory of spontaneous orders is a byproduct of Hayek's attempt to lay the foundations for his proposal to separate law from politics. The political is related to conflicts that are open to escalation, while the conflicts of the law are meant to be solved by the verdict of the judiciary courts. The former works with the logic of positive feedback systems and the latter is the very example of a negative one. That is why Hayek imagined two different legislative chambers to deal with political issues and to enact general laws. Politics is about expediency and law is based on abstract principles.

Nevertheless, what had once been conceived by Hayek as a tool to justify his project of a constitutional reform, gained a life of its own. Nowadays we can find several works that concerns Hayek's notion of spontaneous orders, but which disregards his proposal on institutional reform. This is not bad at all. After all, the theory of spontaneous orders shows the necessity of keeping separated law from politics. So, the more we develop the spontaneous orders theory, the closer we will be to achieve Hayek's constitutional program.

Notwithstanding the importance of the study of the complex phenomena, all Hayek's enterprise would be lost if we neglected the mission of building a division between politics and law. This topic has generally been worked by authors that intended to erase norms from politics, like Carl Schmitt, but Hayek remains to this day to be the main author to seek to prevent law from being captured by the political logic of solving disputes on an expediency basis. Perhaps we need more papers on law and politics. Those works will be "Hayekian" as long as they state the independence of law from politics, regarding the former as a negative feedback system which provides solutions based on principles to conflicts related to the interaction of different spheres of individual autonomy. In fact, this is the core of the spontaneous order notion: a normative system which does not depend on any political will to work and evolve.

Friday, 30 May 2014

Hume & Humboldt

Divergent dichotomies are not unusual to be found in Hayek’s writings. Besides the essay “Two Types of Mind”, we have his 1945 lecture “Individualism: True and False” on the difference between the British Enlightenment and the Continental Rationalism. Grounded in Edmund Burke’s Appeal from the New to the Old Whigs, Hayek traces the origin of true individualism to Bernard Mandeville, David Hume, Josiah Tucker, Adam Ferguson, Adam Smith and Edmund Burke himself. The XIX Century adds Lord Acton and Alexis de Tocqueville to the list. On the other hand, Hayek states that Jean Jacques Rousseau exemplifies the Rationalist individualism, which postulates isolated and self-contained individuals –whereas, for the former, the individual is determined by his existence in society. The “true variant” of individualism is the notion of “subject” of Hume’s philosophy: the outcome of repetitions, expectancies and habits. Finally Hayek concludes his lecture with the censure to the German type of individualism, rooted in Wolfgang v. Goethe and Wilhelm v. Humboldt: the individualism expressed in the original development of the personality and defended in J. S. Mill’s On Liberty.

Notwithstanding in this 1945 lecture Hayek claims that this German individualism of self-development has nothing to do with what he regards as true individualism and it is “an obstacle to the smooth working of an individualistic system”, much later, in “Law, Legislation, and Liberty”, he will restate his opinion on Wilhelm v. Humboldt’s legacy.

This reconsideration of the value of liberty as the development of the unique and particular character of an individual will be acknowledge not only regarding legal theory but as well in his 1976 proposal of denationalization of currency. In his late writings, Hayek will endorse the development of the originality of character as an important trait for the competition to work as a discovery process.

The key to understand his shift onto this new type of individualism is closely related to Hayek’s involvement into the ideas of cultural evolution. The “true individualism” was important to state how a society can achieve certain order. The “Humboldt’s individualism” is needed to explain the dynamic of the evolution of that order. Hume’s notion of subject is related to the ideas of integration and convergence, to how an order may emerge. Humboldt’s ideal of self-development of the unique and original character of each individual implies differentiation and divergence. These two traits are the key to the adaptation to the changes in the environment that defines the notion of blind evolution. A social and political system that assures the development of differences has keen aptitudes to survive to the changes in its environment. At the level of the “true individualism”, individuals are made of institutions, repetitions and expectancies. But at the level “Humboldt´s individualism”, successful institutions are made of differences, divergent series of facts and adaptation.

Friday, 18 January 2013

Abstraction, Evolution, & Rationality

The late Hayek –the Hayek of the third volume of “Law, Legislation, and Liberty”, not the Hayek of the Fatal Conceit, that would be the apocryphal one- was concerned with terminological matters related to his own works. He lamented that he had employed “knowledge” instead of “information” at the beginning of his career and blamed the confusion on a semantic shift experienced in English language from the 1930’s to the 1970’s. He claimed that he never attempted to use “knowledge” as “theoretical knowledge”, but as, more precisely, “information”, as it was understood forty years before.

 But even a terminological shift occurs from the first volume of “Law, Legislation, and Liberty” (1973) to the third one (1979). In the latter, Hayek claimed that the term “abstract order” was more accurate than “spontaneous order” to convey the meaning of what he wanted to state.  Given some sort of environment –biological, legal, geographical-, the social orders which will survive and develop will be those in which the conduct of the individuals follows some sort of patterns (other orders, with different patterns of social conduct, will disappear or never emerge). For example, if the end of the world will be in a year’s time, a society of defaulters will be more adapted to the environment than a society whose members accomplish their long term duties.  Those patterns are spontaneous because nobody mandates to obey them, but also are abstract because its acknowledgement depends on an intellectual operation. Their recognition does not rely on the senses but on the identification of regularities.

This concept of “abstract order” is the place where Hayek’s legal studies (Law, Legislation and Liberty) connect with his work on theoretical psychology (The Sensory Order). The rationality of the individuals does not make a rational order, but it is the abstract order which delivers rationality to the individuals in it, since the given order is made of the norms that allowed it to survive and develop. The subjective rationality of the agents is bounded by a set of norms of conduct grown from the evolutionary process –and at this point Hayek meets Max Weber.

The question is whether we can determine any criteria to assert that some type of normative order is better than other one. Perhaps the answer is the Hayekian version of the invisible hand process: the better orders are those which allow the individuals to coordinate the bits of information they possess and employ to fulfil their own plans of life and, as an unintended consequence of this, the whole system, spontaneously, adapts itself to the changes in the environment.

Saturday, 1 December 2012

Turner & Goethe

In the basement of Tate Britain Gallery one can find the studies of vision by J. M. W. Turner, regarding on how to produce on the eye of the observer a sensation of colour by just printing onto a lithography a set of tiny black lines, one close to another, leaving a white background. The eye, as a perception device, does not register each black fine line, but receives a spectrum of different colours from the decomposed white background, cut by the said black lines. In that exhibition you are learnt that, at the same time, J. W. Goethe was also studying this kind of phenomena. In fact, he wrote two books related to the matter: one essay, “Theory of Colours” (Zur Farbenlehre) and one novel “Elective Affinities” (Die Wahlverwandtschaften) –the latter concerning how chemistry has influence over human passions and institutions.

Similar subjects were analyse in F. A. Hayek’s “The Sensory Order”, where he stated that “There exists, therefore, no one to one correspondence between the kinds (or the physical properties) of the different physical stimuli and the dimensions in which they can vary, on one hand, and the different kinds of sensory qualities which they produce and their various dimensions on the other”. This formulation can be taken as an enunciation of the Hayekian critic to the Cartesian Dualism, which he would later refer to in Law, Legislation and Liberty. That is why “The Sensory Order” cannot be just regarded as a book on theoretical psychology. It is a book concerning how a system of information can adapt to its environment despite it does not carry completely accurate information about it  –just the degree of accuracy it needs to survive and reproduce.
We can recognize continuity –although heterogeneous continuity- along Hayek’s works. In his celebrated paper “The Use of Knowledge in Society”, he remarks that it does not matter if the rise in the price of a commodity may obey to an increasing demand or a falling supply of it –in any case, an increasing relative scarcity- and that it is relevant that it does not matter at all. The decisions of the economic agents are taken on the base of profits and losses, disregarding the subjacent movements in the supply and demand of commodities that caused the change in the relative scarcities of them. That is how a social system can survive and adapt to the changes of its environment, allocating its resources spontaneously, although none of its members can achieve a complete knowledge of the variables operating on it. The same as we enjoy a work of art by Turner or the time we spend with our friends, ignoring the secret resorts that make them so attractive to us.

Tuesday, 12 June 2012

On the Epistemic Value of Liberty

We would not hesitate to endorse Fritz Machlup as one of the most accurate analyst of Hayek’s works. Here, writing about Hayek’s papers afterwards The Constitution of Liberty, he states: “This great work done, Hayek did not rest. He could not let go of a topic on which he found so much more to do. In an article in German (“Die Ursachen der ständigen Gefährdung der Freiheit”, Ordo, 12, 1961) he asks why it is that personal liberty is in continual jeopardy and why the trend is toward its being increasingly restricted. The cause of liberty, he finds, rests on our awareness that our knowledge is limited. The purpose of liberty is to afford us an opportunity to obtain something unforeseeable; since it cannot be known what use individuals will make of their freedom, it is all the more important to grant freedom to everybody (p. 103). Liberty can endure only if it is defended not just when it is recognized to be useful in particular instances but rather continuously as a fundamental principle which may not be breached for the sake of any definite advantages obtainable at the cost of its suspension (p. 105). It is not easy to convince the masses that they should sacrifice foreseeable benefits for unforeseeable ones.” (Machlup, Fritz, "Hayek's Contribution to Economics", edited in Essays on Hayek, Routledge & Kegan Paul, London, 1977)
Machlup’s summary of Hayek’s statement on the value of individual liberty offers a reason that is neither substantialist nor instrumental. In this context, although the “instrumental reason” would lead us to a disregard of  the individual liberty in order to achieve a concrete end, his defense of liberty is not based on a substantial truth, but on an epistemic value.