Hayek and 2008

F. A. Hayek (1899–1992)

‘In a market order the fact that a group of persons has achieved a certain relative position cannot give them a claim in justice to maintain it.’ (Hayek, 1984: 377)

Given that we are now working our way through a fourth decade of this neo-liberal order, it might be worth considering what the great Freidrich Von Hayek would have thought about the global financial crisis (GFC) of 2007–8 and more specifically our response to it. The man that gave Thatcher and Reagan a theoretical and ideological framework for crippling the power and size of the state had very strict views on government intervention in the market system. Especially when it comes to the protection of individuals or groups who had manipulated the laws of the system for their own personal gain.

Hayek believed that it was not the responsibility of the state to assist certain groups who got into difficulty in the global market. Any such intervention would for Hayek both seriously undermine the laws that govern the market and be unlikely to resolve the problem in the first place. The freedom of the market must be preserved, as its self-equilibrating nature would eventually iron out any issues that arise. He maintained that the laws of supply and demand must not be interfered with through fear of creating artificial values on the one hand and undermining competition on the other.

It is reasonable to suggest therefore, that Hayek would have wholly rejected the move by Western governments to use taxpayer money to bailout the banks in light of the 2008 GFC. In Britain alone, the government authorized somewhere in the region of £500bn to be made available to banks like RBS and others, whose excessive financial speculation and borrowing, and particularly their involvement with the US sub-prime mortgage market, had caused catastrophic losses for UK banks.

Hayek would have found such a large-scale appropriation of tax revenues for private needs, to be a totally absurd proposition. Business, interest groups and individuals who had played the game and lost, had to be allowed to go down as per the laws of conduct that govern the market system. The notion that any one player was too big to fail or could hold the state government to ransom, would have been a monopolisation of power of grave concern to neo-liberals like Hayek, Friedman and others. This kind of concentration of power and capital was not supposed to be possible under the market mechanism.

The reality of course is that those banks were too big and too important to go under. They in many ways held all of the cards. A lot has changed since the Hayekian insurgency of the 1980s. Today’s corporations and other financial actors, through the very principles of a free, unregulated market, have attained such gargantuan levels of wealth and power that the entire liberal economic system depends on their activity for survival.

To do nothing and simply wait in hope that some spontaneous market order would correct the world economy post 2008, pursuant to Hayek’s classical liberal theory, would have probably led to a depression perhaps even more protracted than the Wall Street crash of 1929. Though it should sicken all of us that our governments intervened to provide ‘corporate welfare’ to the very people who caused the crash whilst cutting real welfare out from under so many in genuine need, it may have been the only way to prevent the entire financial system from collapse.

Some may argue that would have been a good thing, but for me the irony is not in the bailouts of 2008, its in the fact that the ideology of this modern economic system, the ideology laid out by Hayek and carried forward first by Thatcher, then Reagan, then many other Western leaders since, is founded on the notion that providing financial assistance of any kind to anyone under any circumstances is categorically prohibited.

When we are presented with a conservative or any other defender of this decades long free market consensus, we should always remind them of 2008, of how the only reason we still have that market system, is because the likes of Gordon Brown, Barack Obama, Angela Merkel and others broke the no1 rule of neo-liberal economics and intervened to save it.