F.A. Hayek: His 114th Birthday

by Mario RizzoHayek as Street Art

Today is Hayek’s birthday. Much has been and will continue to written about him. When I look around at much of what passes for economics today, especially in the prestige circles, I cringe.  But reading his work always comforts me that something better is possible. And, in fact, there are many economists all over the world who take their inspiration from Hayek and his work. This is their day too!

Hayek, of course, was more than economist. He also had profound things to say about the mind, the rule of law, and ethics. Recently, I saw a stark example of the difference in ethical thinking between Hayek and more conventional moralists. This was in the case of the tragic fire in a Bangladeshi factory making clothes for western companies. The new Pope Francis condemned it as an example of corporations only caring about their bottom-line.

Now there are legitimate issues, from the point of view of the individuals working in this and other such factories. Can they rely on the attestations of a certain degree of safety in their working environment? Before people can voluntary assume the risks associated with certain kinds of work they must have at least a pretty good idea of what those risks are.

And yet there is a more fundamental issue.  Workplace safety is a matter of degrees. It is a working condition that is part of the cost of labor. There is an inevitable tradeoff between wages and level of employment, on the one hand, and workplace safety on the other hand. In rich countries workers can afford to sacrifice something for greater workplace safety. This is all part of increasing wealth.

Now major corporations are re-thinking their use of factory labor in Bangladesh.  They don’t want the images of large numbers of dead ruining their reputations. Ostensibly, they will argue that since they cannot trust Bangladeshi authorities to keep the factories safe they will not deal with them. Voila, the moral stance.

But what is really going on. Bangladesh is a very poor country. One of the few things it has going for it is inexpensive labor.  Let the West pull out. Where are the jobs for those who found working in the factory a better option than the available alternatives? Let the cost of labor rise due to greater safety precautions. Then the comparative labor-cost advantage falls. Will people, especially the poor, in developed countries buy as much at higher prices? Are the corporations willing to lose money?  Will individual stockholders, pension funds and other equity holders be indifferent to earnings/price ratios?

I guarantee you that the pope is not considering any of this. He focuses on the seen, but neglects the unseen in economic affairs. He looks only to intentions (Do good!) and knows little about unintended consequences. (However, he is pretty good at the unseen in spiritual life.)

The morality of the extended order that is, the world-wide system of social cooperation, cannot be a morality simply of the seen. We can eliminate fires in factories producing western goods by eliminating the production of western goods in Bangladesh. Not good. We can reduce these by requiring higher safety and this labor costs but then there will be fewer people employed in the best alternatives. Who will examine the health and safety consequences of the employment to which the poor are driven?

Perhaps the pope believes that people should not be concerned with profit and loss signals. We can focus on this one issue in Bangladesh only because it is right before us. But, in general, we do not have the epistemic capacity to investigate all of the circumstances of supply and demand with simple moralisms.

Not all Christians are as confused as this pope. Let us go back to Thomas Aquinas. Aquinas often reminded us that men are not angels. We do not have the psychological or epistemic capacity that they have. So when asked whether a merchant who was carrying grain to an area distressed by a shortage had an obligation to reveal his belief that others were coming later with more grain, Aquinas said that he did not have this obligation in terms of justice. The just price was the market price the merchant could get at the time, absent revealing this information.

Why? Aquinas is not explicit. However, I surmise it is because he knew that what motivated the additional supply to come into the area is the expectation of high profit.

Morality is not equivalent to advocating feel-good courses of action when something bad happens. Sure, we can and should be beneficent. It is good to help fire victims. But it is a good thing in the long run to understand economics. As Jean-Baptiste Say said: A good book on economics should be the first volume of a treatise on ethics.

12 thoughts on “F.A. Hayek: His 114th Birthday

  1. It is fine for the government bureaucrats, politicians, captains of industry and the Pope to comment from afar on safety in the work places of poor countries. It is another thing to be poor and need the work to put food on the table and provide other necessities of life that the Pope and other wealthy do gooders take for granted.

    If the Pope wants to make a real contribution to improving living conditions in the World he should start with daily pronouncements against the wholesale murdering of human beings by other human beings in Iraq, Afghanistan, Syria and other war torn areas of the World. He should daily condemn the looting and plundering of property of individuals by political criminal gangs such as took place in Cyprus.

  2. Hayek talks about the impatience to see the poorer people in the world reap the benefits that capitalism has enabled for the rest of us and how that impatience leads to the adoption of interventionist policies. This Pope’s impatience could be very destructive, although he is just the latest.

  3. “When I look around at much of what passes for economics today, especially in the prestige circles, I cringe.”

    Well I cringed when reading this article – – – –

    So the workers in that Bangladeshi factory VOLUNTARILY assumed the risk that the building was in danger in falling down and killing them ??????

    And you guys (and Hayek) claim to be voices of ethics??

  4. The problem with your analysis is that you are using expectations of safety appropriate to high wealth environments to conditions in Bangladesh. Let us assume, for the moment, that the state were to require the same working conditions (and wages — the pope complained that their wages were not high enough) in Bangladesh as we experience here. What do you think would happen? I have no doubt that, even at half or one-quarter the US level, these people would have no jobs.

  5. I think it’s possible, indeed likely, that if the Bangladeshi workers had known the true probability of an accident like this, they would have refused to work there (or demanded higher wages to do so). So in that sense, I can share in the outrage because it’s plausible to me that some amount of deception was involved. But for the most part, it seems like the outraged crowd doesn’t even ask the question of whether the workers consented, or would have consented, to work on these terms. Nor do they seem to recognize the trade-offs involved. The implicit assumption seems to be that the probability of an accident should always be zero.

  6. I am perplexed at why Pope Francis has been drawn into a celebration of Hayek’s birthday. Francis’ remarks were clearly normative, a moral judgment, not economic analysis. We can agree or not with the moral judgment.

    Most economists, at least from Adam Smith, have supported minimal building regulations for safety. There are externalities to buildings falling down (or burning down, as Smith analyzed). Inidviduals not parties to any contract with the building owner will be harmed.

    Hayek supported minimal standards for building construction (COL, pp. 354-56). He invoked two arguments. First, he raised the externality argument. Second, he argued that “the enforecment of certain standards is perhaps the only effective way of preventing fraud and deception on the part of the builder.” In law and economics terms, he had an argument on torts and an argument on contracts.

    Historically, governments, however minimal, have viewed it as a duty to protect the health and safety of their citizens. It is basic police power. I take the point that the standards (and technological knowledge) of health and safety will change as standards of living rise. What happened in Bangladesh appears, based on the reports I read, to have violated the most minimal standards. I do not think we are operating under contracts law, but tort law or the criminal code.

  7. @ Glen: This an empirical issue, of course. In particular, we do not know what the workers expect of the Bangladeshi government in terms of its representations about building safety. But I suspect that the government promises or represents to foreign clothing firms a greater degree of safety than is the case in order to get foreign firms to come in and provide employment to their people. I would even suspect that the government, firms and the workers all know this. Lots of winking of the eyes. This makes sense to me because of the westerners lack of appreciation that safety is a normal good and the political-economic problems that poses for the very poor.

  8. @Jerry. It is always good to take an opportunity to bring the ignorance of the popes into question. However, the basic point here is in my reply to Glen. Safety is a normal good. Things are not on or off here. There are margins. All I am saying is that we must expect that at a low level of development people will *ex ante* want more wages and less safety. And the pope argued more generally (see the link) that these people were not being paid just wages or the popular expression a “living wage.” Will the Bangladeshis be better off if the manufacturers leave as the threaten to do? Does the government in Bangladesh have the money to subsidize safety construction?

  9. Let me just say, in fairness to both Jerry and Glen, that there are some unobvious issues here. If the standard of safety represented makes sense in the context and if the workers relied on that representation, then I agree they were treated badly. But neither of you would deny my basic point about safety and development.

  10. In my opinion Mr. Rizzo shouldn’t shoot off unfounded claims such as “I guarantee you that the pope is not considering any of this. He focuses on the seen, but neglects the unseen in economic affairs,” without studying a bit more about the history of this gentleman or WHAT HIS JOB IS (not what Rizzo wants it to be.)

    Pope Francis worked extensively with many evangelicals and (free market oreinted) missionaries over the past 20 years in S. America that not only preached personal responsibility for individuals but was very influential with leaders from Chile which had a profound (positive) impact.

    But it isn’t his job to water or distort the “Gospel” for the sake of any political or economic outcome. You’re statement: “He looks only to intentions (Do good!)” is woefully naive to his (or Jesus Christ’s) message. It is about accepting the free gift of righteousness and faith in God WITHOUT expecting you are judged according to performance (what evangelicals would refer to as “the law”.)

    What you certainly seem oblivious to is the direct correlation of the SPIRITUAL health of a nation and it’s ensuing blessings which include the acceptance of knowledge. While I agree it is an observable fact that say, more economic freedom creates more wealth for the poor, it totally ignores the social science evidence that a leadership (or people) don’t WANT those freedoms unless they have faith something other than government is looking out for them.

  11. Anyone who trusts safety and health to the government is deluding himself or herself. This is the same government that does not hesitate to kill people of other countries and to kill people within the government’s own country. Government is a criminal gang engaged in fraud, theft, violence and murder. How could such a gang of criminals be at all concerned with the health and safety of individuals?

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