Centralized welfare systems are necessarily run by a bureaucratic leadership that cannot master the knowledge needed to manage a complex society.
European Central Bank President Mario Draghi told The Wall Street Journal last month that the “European social model has already gone.” If his fellow Europeans have read Friedrich Hayek, they would also understand why.
Friedrich August Hayek, who passed away 20 years ago this week, was one of the foremost social scientists of the last century. A Nobel laureate in economics, Hayek is often associated with his critique of socialist systems. There is, in society, a “knowledge problem”: Economic life requires the coordination of individual planning. The relevant knowledge for economic planning is dispersed rather than concentrated in society. If this makes coordination challenging enough in a market system, it also makes coordination a virtual impossibility under central planning: The planner can never secure and process all the necessary information to provide detailed guidance to any given development in society.
Even though this argument was originally deployed against hard-core socialism, it works pretty well against the soft-core version widely adopted by European democracies. Centralized welfare systems are necessarily run by a bureaucratic leadership. The supposed technical superiority of such an organization is simply not enough to master the nuances of a complex society.
Centralized government allocates resources badly—regardless of its intentions. The very nature of centralization makes it impossible to collect and compute all the information that is needed. This is as true for any grand scheme of industrial planning as it is for the government-led welfare systems that characterize Europe’s “social model.”
Hayek was not deaf to the needs of the poor or the sick, and he even advocated some form of safety net. But he was well aware that Western democracies were at risk of developing, as he wrote in 1960, a “household state in which a paternalistic power controls most of the income of the community and allocates it to individuals in the forms and quantities which it thinks they need or deserve.” Regardless of the intentions of its makers, such a system was bound to produce inefficiency and waste.
These inefficiencies and this waste, of course, become rents for those that live off them and return the favor with their political support.
States that control most of the income of the community and allocate it according to the wishes of their bureaucracy are now on the brink of bankruptcy. However, Hayek’s solution—a limited-government state that allowed the free-market economy to flourish—is not getting more popular, at least not in Europe. One of the reasons for this is that many people believe a market system is inherently unjust, whereas the European social model attempts to combine wealth-generation with extensive redistribution to the ostensible benefit of the needy, to guarantee a measure of “social justice.”
Associated Press Austrian Professor Friedrich von Hayek in 1974.
Hayek himself didn’t argue that free-market competition would always reward the deserving. We do not cooperate, he wrote, because we sense the need to properly reward the merits of others. Rather, “so long as we think in terms of our relations to particular people, we are generally quite aware that the mark of the free man is to be dependent for his livelihood not on other people’s views of his merit but solely on what he has to offer to them.” Rewards in society depend on the game of supply and demand and, ultimately, on consumers’ wants and needs.
Hayek pointed out that theories centered on the notion of “social justice” try to resemble, at the level of the “great society,” the nature of smaller groups. In the smaller groups in which human beings lived for most of our history, people were compensated and advanced in society due to some shared vision of merit and worthiness. This also happens within larger societies: There are organizations—think of a corporation or an army or the church—in which people are rewarded because they score well in a particular metric.
It is thus not the case that the market system justly rewards the better and the wiser. Hayek’s point is different. Small, self-organized, voluntary aggregates of human beings should be free to pursue their idea of “merit” as they wish provided that they take full responsibility for their efforts. However, a big society—one based on cooperation with strangers on a large scale, such as a state—should not attempt to play the game of the “just” distribution because it is not fit to it.
The European social model that trade unions and political parties still defend with such passion was ill-conceived from the start. A market system cannot work properly if a society aims to dole out rewards and punishments like a teacher in a classroom. Market institutions are anonymous and blind. Imposing upon them any preordained scheme of merit and reward will just make coordination between individuals—and, thus, wealth creation—more difficult.
The European social model has now reached its inevitable breaking point. Friedrich Hayek still offers the most compelling explanation of why it was bound to do so.
—Mr. Mingardi is director general of the Istituto Bruno Leoni, a Milan-based free-market think tank.
