On 30
July 2015 in The New Statesman John
Gray wrote about “The Friedrich Hayek I knew and what he got right.” He has
written many books since he publically announced that he was no longer a
libertarian when he got to rather like New Labour in the 1990s. He has since
become an admirer of James Lovelock, and so become keen on Green ideas. None of
the books he has so far seem to be first rate. Many of them even seem
incoherent and rather like rushed hack writing, but the author seemed to find
his changes of mind rather productive.

Below, I
criticise a recent New Statesman
article of his where he, once more, has attempted to assess the liberal idea
and why it was so inadequate. What seems to be truly inadequate is the account
that Gray has given in his articles and books on pristine or classical
liberalism. His latest account reviewed below is no better than what he said on
the topic in his many books but seems, nevertheless, to be worthy of comment,
as do Gray’s books.

Gray
sees Hayek to be of the “New Right” of the 1980s but he called it classical
liberalism at the time of his enthusiasm and that was the historic old left.
Gray had been a Labourite earlier, which sprung from a tradition that owed a
lot to the statist sea-change that began to emerge in the Liberal Party in the
1860s and had almost totally taken over
by 1900, before which we might refer to that Party as still largely classical
liberal as opposed to statist modern liberalism that was dominant amongst the
leadership, as well as amongst the younger members, by the great free trade
election victory in 1906, making it something of a swan-song for free trade;
though the actual leader, Henry Campbell-Bannerman, was still mainly a pristine
liberal. What revived in the 1970s was the pristine classical liberalism.

Gray
says that many of those libertarians, called such to distinguish themselves
from the statist modern liberals, said that Hayek only valued the state for
three things: national defence, law and order and opera. So Hayek was an
economist and philosopher that stood for a freer market, if not quite complete
free; where freedom was simply freedom from the state. But he was not an
anarchist, so Hayek did not see the state as an unnecessary evil. Like the
early Tom Paine, Hayek saw it as a necessary evil. Most classical liberals were
like that. With Locke, they realised that we could have civil society without
the state but they thought that because of crime, the state could be a boon. So
reluctantly, they thought that the state was a good thing but only owing to the
problem of criminal activity being almost certain to emerge. Since the liberl
revival that Gray joined, many have thought that the state is not so good at
countering crime. The anarchist contingent is a significant part of the
revival.

Gray feels that this pristine liberal paradigm
came to power in 1979 but the reality is that it was the Conservative Party
that came to power at that time and about half in that organisation did not
like pristine liberalism one bit, and the people who liked it, like Mrs
Thatcher and her mentor, Keith Joseph, they were flirting with it rather than
seeing it as the main thing; but many both in the Conservative Party as well as
in the mass media and the rival political parties rather feared they did take
it as the main thing. However, pristine liberalism was a factor. It has
remained one since.

Gray
feels it is important that Hayek was an Austrian, despite him becoming a
naturalised British subject. Hayek was born in Vienna, where opera was
all-important, in 1899. His father was a medical doctor and his mother came
from a wealthy family. Gray seems not to know that liberalism was in decline
from about 1860, and that, thereafter, statism was the new fashion. The
inter-war years would become nationalistic as a result, for, in practice,
socialism was mere statism thus usually more nationalistic. Socialists do not
always agree and protest quite the contrary but in 1914 quite a few such
socialists, including Prince Peter Kropotkin, largely shed socialism to support
the nation state they denied they had owed loyalty to for decades. This was a big shock to those who remained
anti-nationalist but they were a minority.

Gray
says that Hayek saw the civilisation he grew up in collapse, but it was the war
that removed the form of state, and liberalism had been ebbing for over fifty
years before 1918. Hayek’s homeland was on the losing side of the war but that
is a bit different from a collapse, as Gray imagines, or at least says, as it
was not owing to the sort of imaginary perennial fragility that he refers to;
which is a major Tory idea and one that looks clearly false to me. I think the Whigs were right that society is
far sturdier than the Tory meme has it, such that a great war, like the 1914
war, could cause it to collapse. War does change society but it is not likely
to end it.

John Locke
was right to hold that civil society was almost perennial being in place long
before the rise of the state even if he errs, as David Hume made clear, on
social contract theory. The usual respect we show others in society, that we
peacefully pass them in the street, do not bother them if they do not bother us,
form what the sociologist might call the norms of civil society, and those
basic norms are not far off the liberal norms as well as being those of civil
society. As Adam Smith said, there is a lot of ruining in a great society. It
is not fragile.

Gray
says he first became interested in Hayek in the early 1970s. It was owing to
his interest in pre-1914 Vienna as much as in the rising paradigm of pristine
liberalism in the 1970s UK, he says. He met Hayek at the end of the 1970s and
asked him if he knew Karl Kraus, a famous journalist of Vienna before 1914. He
was told that Hayek had seen him but that he did not really know Kraus.

Gray
says that Hayek had independence of mind and this allowed him to face up to a
lot of opposition and criticism including big changes of fashion. Gray feels
the paradigm of Woodrow Wilson’s national self-determination imposed by the USA
after the war on Europe was one that posed problems for Hayek for the rest of
his life. He died in 1992. But he never could see how liberal values got on
with tribalism, says Gray.

On the
fall of Wilson, the USA, wisely, went back to political isolationism [with free
trade, the liberal meme on international relations].

Hayek’s
ideas on evolution and on the ideal liberal constitution were not germane to
that main problem, Gray says. Hayek had dropped his early socialist ideas owing
to the economic calculation argument [eca] put to him by Mises. This seemed to
Hayek and many others to be an effective refutation of socialism so he ceased to
be a socialist. He afterwards adopted liberalism, and Gray said he made it into
a sort of scientism; this is most ironic as Hayek was a major critic of
scientism, Gray openly admits. It was held by Hayek to be the inept attempt to
apply science to the human world. It was an example of Hayek often called a
mere pretence of knowledge when he was looking at the socialists. However, Gray’s
account looks weak there, as it so often does elsewhere.

In what
sense did Hayek lose the debate with Keynes? Did Keynes win it? Keynes rejected
equilibrium but, as he was a coward, he did it by picking on Say’s Law, which
few had heard of, and he gave an inadequate account of it, and Keynes also gave
an inadequate account of the orthodox economists in general, calling them “the
classsics”.

Ironically,
John Hicks, who thought he was going over from Hayek to Keynes and who won the
debate by a de facto rejection of
both of them, had found fault with the fact that Hayek scotched the meme of a
self-adjusting economy by ignoring it with an hypothetical lag owing to
malinvestment that Hicks held was unrealistic. The Hicks version of Keynes,
adopted by all the textbooks, had the meme that Keynes was out to dump at its
heart viz. equilibrium. The equilibrium so obvious to Hicks that he never seems
to have realised that Keynes was out to reject it, was, of course, just an account
of self-adjustment by the market.

All this
is lost on John Gray. It was enough for him that Keynes rather than Hayek or
Hicks was the nominal victor. Gray has most likely not read Keynes’ 1936 book
anyway. More oddly, it would seem that
Hicks never did either.

Hayek
was rejected as an economist after leaving the LSE [owing to irrelevant personal
reasons, rather than to economics] as a result. At Chicago, he was allowed in
only as a moral philosopher. A version of Keynesianism had won, Hicks version,
but it was not anywhere near what Keynes had wanted. He wanted to reject market
adjustment but Hicks largely retained that. Keynes had wanted it to be the rule
that the market did not clear, as had Malthus tries to defend against Ricardo
in the first decade of the nineteenth century but Hicks innovated a version
that suggested that Keynes should have called his book The Special or
Particular Theory rather than his actual title of The General Theory of Employment, Interest and Money (1936).

I see no
sign that Hayek ever believed that he had lost a debate, intellectually, to
either Keynes or to Hicks. Hayek saw the LSE go over to what was called
Keynesianism, of course.

Hayek
did go somewhat statist owing to emotional pressure, I suppose, but not ever
did he become Hicksian or, still less, Keynesian. Keynes truly remained out on
a limb as regards his hated equilibrium, that remained as strong as ever, even
if a version of Keynes was adopted, and what was called Keynesianism was
granted lots of rather incoherent lip service based on supposed rejection of the
still largely unknown Say’s Law. Indeed, Keynes caricature of that was accepted
completely by the 1950s.

But
Hayek did recommend a safety net and it was the state’s safety net that alone
caused the mass unemployment of the 1930s, not the supposed lag that malinvestment
caused that somehow suspended Keynes hated equilibrium, as Hayek had held. The
unemployed adjusted to the dole rather than to the market. We might say they
joined the sinecure section of the state sector, only they did not, as in the late
USSR, pretend to work. Indeed, the few who took a black market job pretended
they were not working.

Hayek
took the economic calculation argument [eca] from Mises but later found it in a
few nineteenth century authors like Baggage, so Hayek made no pretensions to
being “most original” in the knowledge finding function of the price system, as
Gray has it. But Gray knows the eca, if not all its implications. However, he
nevertheless is still silly enough to say it also applies to the free market.

Gray
incoherently says:

“The trouble is that it also applies to unfettered market capitalism. No
doubt markets transmit information in the way that Hayek claimed. But what
reason is there to believe that – unlike any other social institution – they
have a built-in capacity to correct their mistakes?”

The eca
applies to unfettered market, says Gray, yet they do find viable prices as Hayek
said too. That is “no” yet also “yes” too; or P&-P too. Gray is being quite
absurd here.

Gray
then asks how can the market self-adjust, unlike any other institution [is
there a tacit “except the state” assumption there?] overlooking that the answer
is by the ever adjusting price system. The market is dynamic as it is always
adjusting by the price system.

History itself supports no supposition or
thesis.

Panic
obfuscates prices? How? Gray has adopted mere bluff from backward Keynes. There
never was any irrational exuberance but there has been exuberance but it has
not stopped the market from clearing. Why should it?

Yet Gray
is content to say, to the backward readers of The New Statesman, founded by backward Keynes himself, that:

“History
hardly supports the supposition. Moods of irrational exuberance and panic can,
and often do, swamp the price-discovery functions of markets.

When
considering how to overcome the Great Depression, Hayek opposed Keynes-style
fiscal stimulus for the same reason he opposed monetary expansion of the sort
later advocated by his friend the American economist Milton Friedman
(1912-2006). In attempting to generate recovery by macroeconomic
engineering, both monetarism and Keynesianism required a knowledge of the
economy that no one could possess. Unlike monetarism – with which it has sometimes
been confused – the Austrian school of economics that Hayek promoted insists
that the quantity of money cannot be measured precisely, and that
expanding the money supply cannot reflate the economy in a sustainable way.”

Friedman did
adopt aspects of Keynes, as did Hicks, but they did not reject what Keynes
detested: equilibrium. Gray continues:

“For Hayek, the causes of the Depression lay
in earlier central bank policies of cheap money, which resulted in large-scale
misallocation of capital. Because no central authority could grasp the shifting
pattern of relative scarcities and prices, only the market could determine the
right allocation. Accordingly, believing that misguided investments had to be
liquidated, Hayek argued in the 1930s for policies that were more
contractionary than those that were actually pursued. The task of government
was to get out of the way and let the process of adjustment run its course.”

Quite, Hayek
was right there but he thought a lag might be created but he erred there as the
market is a non-stop process of adjustment; Gray says it yet he also wants to
deny it too; again P&-P too.

Gray seems
to see how the market adjusts but he still perversely wants, or he writes as if
he wants, the state to stop it. Then he, rather stupidly, denies that the
market even can adjust.

But he
continues:

“If they had
been adopted while the crash was under way, Hayek’s prescriptions would have
made the Depression even worse than it proved to be – a fact he later
admitted.”

He did not
admit anything like that, which I can recall. New buyers would have come in and
the readjustment would have been fairly rapid.

If Hayek
thought the depression would have been worse, if not for the state, why did not
Keynes win him over? Anyway, it seems that the state prevents rather than aids market
readjustment and that stagnation is alien to it. As Gray says of Hayek:

“But he never accepted Keynes’s core insight
that large-scale economic discoordination could be the result of the workings
of the market itself. For him it was always government intervention that
accounted for market disequilibrium. More sceptical as well as more radical in
his turn of mind, Keynes questioned the self-regulating powers of the market.
His work on the theory of probability disclosed insuperable gaps in our
knowledge of the future; all investment was a gamble, and markets could not be
relied on to allocate capital rightly.”

Questioning
the market is fine but the price system is clear enough there as a
self-adjustment process to fresh conditions, so any serious questioning might
have led Keynes to realise that. It might also lead Gray to do so too. He
continues:

“There were booms and busts long before the
emergence of modern central banking. Left to its own devices, the free market
can easily end up in a dead end like that of the 1930s.”

No, the
market does not stagnate. The dole was needed for mass unemployment to muster
in the mass urban economy, and it is true that Hayek did go statist enough to
agree that the masses would need a safety net, the very thing that stops the
market from clearing. Freedom or liberty means we all need to be responsible
and for us all to have savings, that Keynes repeatedly made a very poor case
against, for some savings are vital to tolerate the intrinsic self-adjustment
of the market.

But Gray
feels that Keynes knew more about markets than did Hayek, as Keynes was a
practical and successful investor for his college. Indeed, he claims that Keynes was one of the
most successful investors in the twentieth century! So he knew about the
uncertainty of markets in a way that Hayek did not, says Gray. He was aware of
how the misguided economic policies might upset society in a way that Hayek did
not, for Hayek ignored all those hazards. Here Gray seems to have lapsed into
imagining that it is Hayek advocating state control by political policy rather
than Keynes.

Gray says
that Hayek’s blindness on politics was all too clear when he advised Margaret
Thatcher to cut the state sector, that Gray calls public services, and to cut
inflation so that the state budget might be balanced. This was exactly as he
had advised in the 1930s, says Gray. He told Gray, in private conversation,
that Trade Union power might be broken if the state made cuts. Gray thought Hayek was indifferent to mass
unemployment that then, in the 1980s, stood at over three million. Gray does
not realise that cuts might get rid of mass unemployment, as he never seems to have
seriously thought much about such problems. Instead, Gray said that cuts would
increase unemployment. But it is only the dole, paid for by the state from taxation,
which can do that.

Gray says:

“Fortunately Hayek never had any influence on
Thatcher’s policies. (Her chief economic adviser in these years was Alan
Walters, a Friedman-style monetarist.) Equally, and perhaps also happily,
Thatcher had no understanding of Hayek’s ideas.”

Gray says
she haply never read the stint at the end of
The Constitution of Liberty (1960), where Hayek explains “Why I
am not a Conservative” for he rejects because conservativism rejects
progress, says Gray. “Unlike Hayek, Thatcher understood and accepted the
political limits of market economics” Gray says, but Gray and Margaret Thatcher
never saw how damaging the state was to society. The main fault with Hayek is
that he too had too much tolerance for backward politics. Politics is perverse
wastage that needs rolling back, or cutting out completely, by tax cuts and
privatisation.

Liberalism
went out of fashion around 1860 but Gray imagines it actually collapsed, a very
Romantic idea that is utterly unrealistic, given the nature of civil society.
War would not have set liberalism back so much had liberalism remained the
fashion, but socialism/collectivism was, by then, the fashion. War did end the
empire that Hayek grew up in but nor was that particularly liberal in itself:
no empire ever, quite, can be. Civil society, that is the basis of liberty, is
not one whit fragile and it is very stupid indeed to imagine that it is fragile.
No wonder they called the Tory Party “the stupid party”. This idea that society
is fragile is about as unrealistic as one can get about civil society. But Gray
simply does not see the pounding the backward state hands over to society every
single day, thus showing it to be very durable.

But Gray is
right that Hayek badly over-rated the law. It never could be the basis of civil
society as so many, with Hayek, imagine. Like the state itself, law is at the
periphery of society. Nor can it really protect liberty from the state. Gray is
right there. Indeed, statutory law is a
tool of despotism and privilege. Liberalism
is about repealing illiberal laws rather than establishing new statutory laws.

But liberal
values, if fostered amongst the public, can see off war. Private property is a
problem solver. The state, by contrast, is a trouble maker. So the less we have
of the state, the better.

Why Gray imagines the political
entity of the Austro-Hungarian Empire kept politics at bay is not one iota
clear. Gray is right that the European Union is not going to aid liberalism as
it is a warmongering pact, despite the pretense it has of being for peace. The
EU is out to be top dog superstate, but it is taking its time. It is almost as slow as the progress towards
full liberalism itself. But all societies, even the backward late USSR, had the
liberal civil society in their practical everyday life. In any society most
members respect the liberty of others. But also all allow the state to scotch
liberty at will; that privilege granted to the backward wasteful state by the
people is the main problem. They give up this liberty to form state privilege by
suspending normal moral values in its favour. As Edmund Burke said: “The people never give up their
liberties but under some delusion.” The
delusion here is that the state is a boon. Even John Locke thought so.

Gray fails
to reproduce Popper’s attack on Hayek and Michael Oakeshott saying that Hayek’s
spontaneous order as “rubbish” is no explanation of its faults whatsoever but
Gray says it is exact!

However, Gray witnesses civil society every
day in which strangers in the mass urban society freely pass him in the street,
which is done as part of what Hayek would say is a spontaneous order. My guess
is that Gray has no case against civil society; nor any good case against
liberalism.

The change
of fashion away from liberalism towards socialism after 1860 seems to have been
flimsy, though it was aided by some haziness amongst the liberals as well as some
youthful charismatic dash as well as sheer ignorance amongst the rising statist
liberals, like Joseph Chamberlain and Charles Dilke in the UK’s Liberal Party.
The pristine liberals were aging and pragmatic anyway. That there was a generational difference
greatly aided the change of fashion. Gray
makes the quip that there is nothing liberal about the mafia, and that is quite
right but that is also true of the state too, but despite Chamberlain’s talk of
public service it was more like rule than
service that the new man management and more state control of the new fashion was
to embrace.

Gray has the
idea that a mafia would arise spontaneously, even though he also wants to be
sceptical about that meme from Hayek, to say it was exactly rubbish in fact. .
However, the culture developed over a long process of real full privatisation,
designed to shed government and all government policy rather than as a mere new
way to further state policy by political use of the market, as that called
privatisation has been since the 1980s, would result in security services that
would have had lots of time to crowd out the mafia problem.

Herbert
Spencer was right that there was a social movement towards liberalism before
1860 but he also saw the fashion change towards socialism later on too. He
argued against socialism. But he ironically had a holistic meme that the
socialists used to even a greater extent than they used Marx. Just look at
almost any Jack London novel to see a socialist in love with Spencer. William
Hurrell Mallock saw such faults in Spencer, who later admitted to Mallock that
he was too collectivist, though he never met Mallock. But pristine liberalism
lost out to the new fashion of statist liberalism; and to socialism generally.
It revived a bit in the 1970s when Gray joined it. But Gray always did love
pessimism.

Gray simply
errs left right and centre in his rather silly ideas about alternative economic
systems and choice. The USSR never was non-capitalist, for example. An increase
of the state ownership is not an alternative economic system but the
enlargement of a sort of quasi-dole or semi-dole; the rise of where, in the
late USSR, they said the workers in the state sector pretended to work and the
state pretended to pay them. Many thought that in the UK this was “mixed economy” but in reality it was just an
over-taxed market economy that supplied some job security. The mixed economy is
a mixed up idea. There is only the market economy. The state sector just means
higher taxation.

Communism is
a myth, not a real rival to the price system, and the late USSR did not even
claim to be communist but rather it claimed to be socialist, that Lenin said, a
few times, was state capitalism. It
would be clearer to just call it capitalism. But it was anti-liberal. Gorbachev
tried to reform it but Yeltsin got rid of it. No collapse in sight.

The idea that the Afghan war brought it down
is an example of Gray’s inability to judge actual events. There is no choice of
economic systems. It is either capitalism or capitalism. But we can always have
a bit more of the wasteful state.

Of course,
Hayek and Spencer had a lot in common as Gray said. They were both liberals.

Again, China
was capitalist, if statist too, under Mao. Deng Xiaoping simply freed it up a
bit. Pristine liberalism will free it up yet more.

Letting the
banks go under would not have been all that bad from liberal point of view. The
fresh banks that would have emerged to replace them would have most likely be
in better shape today had the state allowed that to happen back in 2007, as Hayek might well have recommended.

Hayek erred
on the fairness of the market. He thought it was wise to say it is unfair, but
few people in the larger society have ever thought that. Most people think it
is fair enough, but no end of fools in colleges think they know better; so do
schoolteachers but not most students in the colleges or most pupils in the schools,
even though they may be usually a silent majority. Hayek thought that the idea
that the market was unfair had something to it, but it looks to be merely a perverse
idea.

Gray, for
all his silly cynicism and pessimism still has not realised how unpopular the
college/mass media sacred cow or ideal of democracy has always been, and always
will be. The “anarchic energies of
global markets” clearly serve the public way better than democracy ever
will.