More on Neoliberalism

The Guardian had a ‘long read’ a couple weeks ago on “neoliberalism” by Stephen Metcalfe. I want to comment on the piece’s interpretation of Hayek. Although I don’t share Hayek’s politics, I think it important not to misrepresent what he said. (See also this earlier post on neoliberalism, and this post on the issue of the fairness of reward by contribution).

At the level of policy, “neoliberalism” generally refers to the celebration of private property and free markets, along with hostility to the welfare state, regulation, and full employment policies. Metcalfe argues that neoliberalism is also a way of seeing, and a way of thinking about ourselves. Neoliberalism involves seeing society as “a kind of universal market” rather than a political community and individuals as “profit and lost calculators” rather than bearers of rights and duties. Neoliberalism” designates not only pro-market policies, but the increasingly prevalent assumption “that competition is the only legitimate organising principle for human activity.”

The central figure in Metcalfe’s story is Hayek. Hayek has the “big idea” that the market solves a problem of knowledge. Briefly, prices based on supply and demand aggregate dispersed information about individual talents, preferences, and opportunities. Think about all of the different resources (including human resources) that could be used in different combinations to produce different things, in different proportions, that might satisfy different wants and desires. Hayek’s idea is that if prices are free to fluctuate based on supply and demand, then every decision of an individual producer or consumer sends an information-laden signal about that agents’s local environment and that agent’s priorities (some of them not discovered except via trial and error given the freedom to experiment). Economic systems based on central planning have no similarly effective means of figuring out what needs to be produced when by whom for whom (though they can be remarkably effective at accomplishing specific goals, e.g. producing tanks in WWII, simply by mandating massive allocation of resources to those tasks, at the expense of all else).

In Metcalfe’s hands, Hayek’s big idea takes on an additional function, beyond leading to prosperity, which is to provide an objective basis for otherwise subjective values. Metcalfe quotes Will Davies saying that through competition, “it becomes possible to discern who and what is valuable.” The market is not just an institutional means for achieving valuable ends, but the legislator of ends, in effect:

“In its omniscience, the market constitutes the only legitimate form of knowledge, next to which all other modes of reflection are partial, in both senses of the word: they comprehend only a fragment of a whole and they plead on behalf of a special interest. Individually, our values are personal ones, or mere opinions; collectively, the market converts them into prices, or objective facts.”

Ever since the scientific revolution of the 17th C, there had been a problem about the objective basis of human values. Metcalfe suggests that Hayek thought that the price system solved this problem. In making this argument, Hayek allegedly parted company with the founders of the Chicago School of economics, who recognized the market’s ethical imperfections. Metcalfe rightly points out that people such as Frank Knight thought that the competitive system was premised on a kind of selfish ruthlessness that had traditionally been the object of moral criticism. Hayek allegedly abandoned this realism about the intrinsic ethical qualities of the market system. Knight and his colleagues “acknowledged as a first principle that society was not the same thing as the market, and that price was not the same thing as value,” whereas Hayek supposedly collapses value into price.

“Hayek’s Big Idea acts as the missing link between our subjective human nature, and nature itself. In so doing, it puts any value that cannot be expressed as a price – as the verdict of a market – on an equally unsure footing, as nothing more than opinion, preference, folklore or superstition.”

Metcalfe concludes that Milton Friedman popularized Hayek’s view. Whereas “values of the old, mental, normative kind” were subjective, economics is an objective science. “There is the market, in other words, and there is relativism.”

All of this makes for a nice storyline, with clear villains. Unfortunately, it ignores Hayek’s distinction between value and merit. Hayek was clear that the values represented by prices in a market system do not correspond with any notion of individual merit or moral virtue. The fact that my skills command a high value on the market does not necessarily mean that I am meritorious or deserving; I may simply have been lucky in the genetic or parental lottery. Hayek accepted this point from Knight, and like Knight used it to criticize people on the left who objected to inheritance of ordinary capital but not human capital. Hayek even cited (approvingly) Michael Young, on the danger that prices would misunderstood as a measure of merit, thus undermining the self-respect of those who don’t succeed. Chapter 10 of Friedman’s Capitalism and Freedom tells much the same story. Friedman explicitly states that market rewards can’t be counted as fair, in themselves, but are only justified by their consequences, that is to say, by the fact “distribution according to product” tends to generate prosperity. The justification is instrumental, as Friedman explicitly says (166).

Let me expand on these ideas a bit focusing on Hayek. Merit, for Hayek, is a morally praiseworthy quality of an action, whereas value refers to the extent of the action’s benefits given other people’s diverse preferences. So there are two contrasts: between the character of an action, and its results, and between a single standard of moral assessment, and the aggregate of people’s various preferences. In Chapter 6 of The Constitution of Liberty (“Equality, Value, and Merit”), Hayek insists that the value of a person’s performance, in this sense, has no necessary connection with merit.

“The inborn as well as the acquired gifts of a person clearly have a value to his fellows which does not depend on any credit due to him for possessing them. There is little a man can do to alter the fact that his special talents are very common or exceedingly rare. A good mind or a fine voice, a beautiful face or a skilful hand, and a ready wit or an attractive personality are in large measure as independent of a person’s efforts as the opportunities or the experiences he has had. In all these instances the value which a person’s capacities or services have for us and for which he is recompensed has little relation to anything we can call moral merit or deserts.” (94)

The rationale for rewarding those with scarce talents (even those who have those talents due to brute luck) is that such a system sends the right signals, e.g. “if you have these talents, put them to work in this area,” and “develop these talents,” and “if your production processes make heavy use of these talents, look for ways on economizing on their use.”

In short, Hayek explicitly rejects the thesis that market prices are rewards for morally meritorious conduct. They are instead signals and incentives that serve to promote general prosperity, benefiting even the worst off (so Hayek thought).

What’s more, Hayek worried about the social impact of miscontruing prices as merit rather than “value” (in his technical sense, which ≠ moral value, but an aggregate of diverse individual valuations of the results of a person’s conduct).

“A society in which it was generally presumed that a high income was proof of merit and a low income of the lack of it, in which it was universally believed that position and remuneration corresponded to merit, in which there was no other road to success than the approval of one’s conduct by the majority of one’s fellows [he’s talking about moral approval of action, here, not personal valuation of its results] would probably be much more unbearable to the unsuccesful ones than one in which it was frankly recognized that there was no necessary connection between merit and success” (98)

Attached to this last statement, in a footnote, is a quote from Crosland’s The Future of Socialism (1956), along with a citation to Michael Young’s The Rise of Meritocracy, which Hayek said he hadn’t yet seen, but “which, judging from the reviews, appears to bring out these problems very clearly” (442). (For more on this, see this earlier post).

Hayek has his flaws, I’m sure, but believing that prices are the sole objective marker of values is not one of them.



5 thoughts on “More on Neoliberalism”

    1. Yes, within organizations and occupations. He recognizes that within a given profession, for example, those that are more skilled will tend to be better rewarded; the returns to different occupations, however, will tend to represent facts about the evolution of tastes and technology that are hard to foresee. There is a specific passage from Mirage of Justice that I have in mind; I will find the page reference later. Of course, he accepted that skill is in part a matter of luck too, because partly a matter of genes and upbringing.

    2. “It would serve little purpose here to enquire at greater length into the relative importance of skill and luck in actually determining relative incomes. This will clearly differ a great deal between diferent trades, localities and times, and in particular between highly competitive and less enterprising societies. I am on the whole inclined to believe that within any one trade or profession the correspondence between individual ability and industry is higher than is commonly admitted, but that the relative position of all the members of a particular trade or profession compared with others will more often be affected by circumstances beyond their control and knowledge.”

      pp.72-3 of Vol.2 of Law, Legislation and Liberty (University of Chicago Press, 1976).

      I think Hayek actually means “correspondence *of income with* individual ability and industry,” here, because the contrast he is drawing is with the influence of luck. He’s not addressing the question of to what extent ability and effort go together. He’s also not considering, in this passage, that some portion of skill is inherited, and thus also a matter of luck, ultimately.

      1. Thank for your replies. So does Hayek’s view of income contradict common management claims that merit determines relative position in organizations and employee expectations that income bears a relationship to subsistence needs?

      2. I think Hayek would grant that organizations typically try and to some extent succeed in setting up merit-based reward schemes. What he rejects is scaling-up that thought to the level of the economy as a whole.

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