The role of the sceptic

René Scheu: Mr. Gray, you are one of the philosophical voices that is really listened to in the United Kingdom. You yourself once praised Hayek for his lucid analysis of the market economy. Today you praise Karl Marx for his critique of the economic system. Why this change of heart?

John Gray: The destination of intellectual journeys is unknown at any one time. Judgments are always subject to revision. I would say: let’s start with Hayek.

RS: Shoot.

JG: I still see Hayek as the best critic of all forms of centralized economic planning. It is to his merit to have shown scientifically that centralized planning cannot work for an economy because complete knowledge of that economy is never available centrally. As nice as it would be to have one, there is no mastermind who knows and can control everything, and there never will be. This was Hayek’s scientific argument for the superiority of the market economy. A planned economy is only a viable means where there is a clear overarching goal – during wartime. A war economy is always a planned economy. Supporters of central economic dreams should therefore hear it once and for all: centralized economic planning is not suitable during peacetime.

RS: Market economy versus planned economy: that is reminiscent of old ideological debates. What does Hayek have to say to us today?

JG: The centralists are still among us, and they have never read Hayek. However, they should do so. Since we live in a knowledge society, this part of Hayek’s thinking is more relevant than ever. The more knowledge-based a society, the more important the local organization! But the incorrigible centralists give me just as much of a headache as the dogmatic Hayekians.

RS: Please, elaborate.

JG: He who states that markets cannot fail, that market failure is always the result of government intervention, is a dogmatist. How the hell would he know? Overall, Hayek was not a dogmatist, although in his writings there can be found traces of such a liberal utopianism. There we encounter the motto: “What is not supposed to be, must not be! And what must not be, is not!” To me, all isms are suspicious anyway. The sceptic in me asks: why should markets be more reasonable than other human institutions? And we can see it every day: markets are also imperfect, prone to error, and in need of repair, like everything else that man has created.

RS: I have never interpreted Hayek as having declared that the market is infallible. He rejected the naive equilibrium models of his fellow economists in no uncertain terms. His point seems to me to be a different one: the market is far from being perfect, but we have not found a better mechanism to coordinate the needs and preferences of people. We have to live with constant ups and downs.

JG: Hayek thought: if the government does not intervene in the market, then it has a tendency towards perfect coordination.

RS: Exactly: a tendency!

JG: But not even that is true.

RS: Ergo, there is a need for constant government intervention in the market?

JG: I did not say that. It all depends on the situation – that is the point. Sceptics like me always look at the concrete situation, question it, think about it – and then decide. Government measures to support demand are not per se evil. Insofar John Maynard Keynes was right at the time, and he prevailed in the scientific dispute against Hayek. I personally witnessed that – Hayek never got over this defeat and attributed it more to the general Zeitgeist than to scientific knowledge. After the war, he changed from being a strict economist to become a social philosopher. He developed a theory of cultural evolution of society, which is very deterministic and contradicted his previous scientific beliefs…

RS: …in short, you prefer the interventionist Keynes to the market economist Hayek?

JG: In my eyes, both of them are advocates of the market economy, but with a different emphasis. Keynes was a very sceptical mind, this is why I feel more closely related to him.

RS: With his conviction of macroeconomic management, Keynes reminds me more of a modern technocrat.

JG: His lesson is the following: it is not the case that the market is always good and the government is always bad, that the market is always rational and the government always acts irrationally. There are good and bad governments, just as there are good and bad functioning markets.

RS: The question is – what is the market? Hayek’s answer was: it is a real or virtual place where individuals voluntarily exchange…

JG: …That is right, in principle. And do not get me wrong – I think markets are a good thing, they have created peace, freedom and prosperity. Yet, there is no such thing as “the” market. There are, in fact, always different markets in different countries and cultures. They change in the course of history, through wars, through revolutions and, today, through geopolitical competition.

RS: What do you mean by that?

JG: To be specific: take Hayek’s idea of a privatization of money, which aims to deprive the production of money from the central bank. Let us imagine that the European Union or the United States would actually dare to conduct such an experiment. What would be the consequence? The Chinese would be laughing up their sleeves – the renminbi would become the world currency. The world is not simply a textbook. Towards the end, Hayek was not free from liberal utopianism.

RS: I beg to differ. Hayek’s point was that even after the war, the European countries never really emancipated themselves from the collectivist planning carried out during the war. About 60 years later, the welfare state is going through its worst crisis so far. Hayek’s analysis is more relevant than ever.

JG: With all due respect – Hayek’s “Road to Serfdom” never took place. The interventionism he deplored in the 1940s did not lead to the spectre of a totalitarian system that he evoked. During the war, there was central planning – and afterwards there came, on the one hand, new regulations and, on the other hand, deregulations, a step forward and a step back. Hayek’s idea that any intervention required new interventions, so that in the end there can only be the planned economy, was refuted by the empirical observation.

RS: I dare to object again: back then, the Western states have experienced a push of collectivization that continues until today. During the war, each country has introduced many taxes, laws and regulations that endure until today…

JG: …but each state is free to undo them. Another prophecy of Hayek’s concerned out-of-control inflation. Please name a European country in which it came after the war to the hyperinflation that Hayek feared?

RS: The currencies have been drastically devalued since then. We have experienced a high level of creeping inflation for decades, which is much higher than the government-approved inflation…

JG: …this might be true, but hyperinflation? Nowhere. And let me tell you something: it will not happen in the foreseeable future.

RS: You regard this as mere scare tactics?

JG: As the product of the imagination of an outstanding economist who confused the real world with his theories. That is like when you talk to communists: the perfect, humane communist system is still awaiting its implementation – until forever.

RS: You were a radical anti-communist in the 1970s…

JG: …and I do not take back one iota of my criticism of communism. Communism was a horrible utopia that millions of innocent people paid for with their lives and hundreds of millions suffered under. And for what? For nothing. Here we can learn that utopianism usually ends in disaster.

RS: Today, you praise in your essays Karl Marx as an analyst of the current capitalist-socialist system.

JG: What Marx said about communism is wrong and dangerous. His analysis of capitalism, however, is on many points up-to-date.

RS: For example?

JG: Marx recognized the revolutionary power of capitalist economies – they create wealth, richness, innovation. But they also create uncertainty, and they tend to destroy the middle class.

RS: You speak as if you bemoan the passing of a world where life followed quiet, predetermined paths. This kind of life probably never existed – this is a projection, thus also a form of utopia.

JG: I am not a nostalgic – all I am saying is that Marx was a good analyst of capitalist economies. But just like Hayek, he was a determinist and utopian.

RS: I see you like the role of the philosopher who eludes all categorization.

JG: Of course, that is the role of the sceptic.

RS: Then I ask the sceptic: What kind of world do we live in?

JG: We have a variety of different powers competing with each other. We have different monetary systems, differently operating central banks that cooperate with each other – but only up to a certain point. All countries and players are connected, all networked with each other. All that we can do in this interconnected, fragile, complex world is to scratch along.

RS: In German we speak of durchwursteln (muddling through). And indeed, just now, governments in Europe take ad hoc decisions – the time frame has been reduced to a few months, the perspective is focused on tomorrow, not the day after tomorrow.

JG: No one knows how the world looks like in a year – and you cannot change anything about that.

RS: Sure. I wanted to say something else: in confused situations, clear principles are helpful. They provide guidance. The governments of the EU countries seem as helpless as the governors of the central banks. That things have become what they are is not a matter of destiny.

JG: Let us stick to the EU. Hayek would have insisted on a clear regulatory policy and pursued an even more blatant austerity policy than Angela Merkel is doing today. The austerity policy aims to achieve a devaluation in the over-indebted countries. Since this is, due to the single currency of the euro, no longer possible via national central banks, the wages are simply pushed down. A devaluation of 30 percent would probably be necessary, maybe even 40 percent. This is simply impossible! So what happens?

RS: Unrest is increasing.

JG: Exactly. The result is not only growing unemployment, but poisoned politics.

RS: Agreed. But the question is: why have the politicians disregarded the warnings of serious economists and introduced a single currency, when it was clear that the respective economies were performing at different rates? That is disastrous utopianism!

JG: That it was, no doubt. But today we have to solve today’s problem – do you want to abet a new political nationalism and populism of the worst kind, as we can observe it in Greece, Hungary and Italy, because mistakes have been made in the past?

RS: Absolutely not, however, the politics of “there is no alternative” are not an option either. Especially for a sceptic, the prevailing political reasoning must sounds very implausible: We have accumulated all this debt, and now we must accumulate more debt in order to solve the debt problem.

JG: You see, there are no simple solutions. With economic governance by the book, you do not get ahead. On the contrary – such utopianism would be dangerous in the highest degree. Many liberals lack awareness today of this danger, and Hayek lacked a sense of it during the tense 1930s. If you only argue economically, you risk great social upheavals.

RS: The fundamental data have not changed much since then. What has changed is merely the rhetoric or the perception of the precarious situation. It can tip from one day to the next.

JG: The situation remains precarious, no doubt about it. The high unemployment rate in all EU countries causes me a lot of concern. This is the breeding ground for political extremism. My fear is, in fact, that the situation in the next five years is unlikely to change. Economic stagnation, combined with high unemployment and increasing political populism and extremism, is an explosive mix.

RS: A necessary condition for the solution of the crisis is economic growth. But in recent years, the Europeans have begun to emerge as critics of growth…

JG: …Growth is an important issue – however it is clear: without investments, no growth. Take China. The People’s Republic can suppress a revolution only by generating in its system of state capitalism continuous growth, so that all or almost all Chinese are continuously better off. I have spoken with high Chinese officials. The speak frankly: if we are below four percent of growth for a long time, the whole box will explode. Equally important is the question of the democratic legitimacy of institutions.

RS: The EU institutions do not enjoy high levels of democratic legitimation.

JG: This is your radical Helvetic view. Most EU citizens do recognize the advantages and the potential of a united Europe. Therefore, I am convinced that the Union is facing tough years, but also that it is equipped to master them successfully. Negative utopians, that is, doomsayers, will err one more time. And as always, they will say: the demise will arrive tomorrow. And tomorrow they will say: it comes the day after tomorrow.

RS: If we are still living tomorrow, we at least have the possibility to read good books. For example those of the Jewish liberal Isaiah Berlin, who you also knew in person. What did you learn from him?

JG: Isaiah was an incredibly tolerant person – and I believe that tolerance is an essential part of liberalism. Because tolerance means nothing other than everyone can become happy in his or her own way, as long as it does not bother others. Where tolerance is lacking, there is a need for legislation, rights, entitlements.

RS: Berlin was a representative of negative liberty. To put it bluntly: to be free means to be left in peace by others.

JG: Freedom is the absence of human obstacles that force me to act and live in a way I do not want to act or live. As long as man does not harm anyone, he can live how he wants to live – even if he does harm to himself. That must be borne by the others. Tolerance means precisely that I do not demand from others to live as I want to live. Negative freedom and tolerance are mutually dependent. Berlin was not a liberal fundamentalist – he accepted that in addition to the correct understanding of freedom there are also other values such as justice and social peace. Again, in the end consensus and weighing up are indispensable in a free society.