The first Hayek Prize awarded (Exerpts from acceptance speech)
How come the top-down expert approach still dominates development economics despite fifty years of failed predictions from development experts? There are many reasons, but one that I think is particularly interesting is that our brains are hard-wired to believe in top-down planning. We see intentional behavior by someone at the top even in a bottom-up spontaneous order in which the outcomes are not the conscious goals of anyone. Philosopher Daniel Dennett argues that human evolution favored the “intentionality” way of thinking. There was evolutionary payoff in seeing intentional behavior in all living animals. When you saw a lion move, you could get away if you understood that it intended to eat you. When you saw a group of cavemen from the next cave over approaching you with torches and clubs, you could defend yourself more readily if you saw this as a group with a specific agenda, such as killing your men and stealing your women. Cavemen that saw intentional action everywhere survived. Those who didn’t perished.
So now perhaps we can understand statements from those that attribute evil intent to spontaneous processes, such as anti-globalization protesters who said in 2002 that corporate leaders meet at “posh gatherings” in order to “chart the course of corporate globalization in the name of private profits.” Where there is inequality in market economies, people too often believe that somebody intended to make the poorest people poor. Where there is spontaneous entrepreneurship that both creates new jobs and destroys old jobs, the newly unemployed too often believe that somebody conspired to take their job away. With our caveman hard-wiring, it is difficult to understand that nobody intends either the good outcomes or the bad outcomes. Another Nobel laureate, Kenneth Arrow (someone who, unlike Hayek, is not seen as a right-wing ideologue), said: “[T]he notion that through the workings of an entire system effects may be very different from, and even opposed to, intentions is surely the most important intellectual contribution that economic thought has made to the general understanding of social processes.”
The idea of spontaneous order that is not designed or intended by anyone has grown much more comprehensible in our day than it was in Hayek’s. We now realize that such diverse areas as the Internet, language, biological evolution, social networks, and even pedestrians walking on a sidewalk without running into each other are spontaneous orders, with nobody in charge. Seeing the absurdity of top-down planning in these situations is to illustrate just how spontaneous they are: How well do you think it would work to have a top-down planner assign us our friends and our spouses? How well would it work for a Manhattan Department of Walking to give each of us, every morning, our precise paths on the sidewalks so we wouldn’t run into each other? But when you persist in the caveman mindset of seeing outcomes as intended by someone, even in bottom-up, spontaneous orders such as markets, then you will always favor top-down, intentional action by experts to try to improve the outcomes.
Hayek tried to counter this inbred bias by pointing out just how much radical uncertainty there was in economic life, which a top-down expert cannot possibly process. So you need decentralized, independent searches for many types of success by well-informed and highly motivated individuals. He can say it better than I can:
The interaction of individuals, possessing different knowledge and different views, is what constitutes the life of thought. The growth of reason is a social process based on the existence of such differences. . . . [I]ts results cannot be predicted . . . . [W]e cannot know which views will assist this growth and which will not.
Liberty is essential to leave room for the unforeseeable and unpredictable; we want it because we have learned to expect from it the opportunity of realizing many of our aims. . . . [W]e trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it.
The way countries succeed in development is often by finding a big hit in export markets. What will be the big hit is impossible to foresee. That’s why you need Hayek’s “independent and competitive efforts of many.” Who would have predicted that cut flowers in Kenya would capture 40 percent of the European market for romantic men bringing flowers home to their wives? You could say the same about women’s cotton suits in Fiji (42 percent of the U.S. market), or “floating docks” in Nigeria (84 percent of the Norwegian market), or electronic integrated circuits in the Philippines (71 percent of the world market), or regional jets in Brazil (Embraer now has 22 percent of the world market). Egypt’s largest single manufacturing export success, accounting for 30 percent of the total, is bathroom ceramics, of which 93 percent goes to Italy. Can you picture development experts telling the Egyptians, “The secret is just export toilets to Italy!”?
Hayek correctly predicted that development would be unpredictable! This may sound contradictory, but this is a genuinely testable hypothesis, like the prediction of the efficient-markets hypothesis that nobody can, year after year, predict the stock market. Economic growth rates satisfy the unpredictability hypothesis, not only the anecdotes above, but also research conducted by me and others that finds that rapid economic growth seldom persists. China and India are fast growers now but were slow growers in the 1960s and 1970s; Brazil and Cote d’Ivoire were fast growers in the 1960s and 1970s but have had slow growth since 1980. Statistical analysis suggests rapid economic growth in the short run is determined mainly by transitory factors that cannot be predicted. Even a completely free market will randomly have high growth during periods when entrepreneurs find a lot of big hits and low growth when there is a stretch without big hits.
So the difference between successful bottom-up systems that protect individual liberty and systems that restrict liberty often cannot be seen that clearly in comparisons of growth rates over limited periods, even over periods as long as a decade. This difficulty is often exploited by the critics of liberty, who can easily cite a counterexample of an unfree country with rapid growth (China is the current favorite). In fact, growth rates are so volatile that experts can prove just about any theory of economic development they want with a spurious example of a country with a temporarily high-growth rate that also happens to have whatever economic policy the expert likes. These arguments are the intellectual equivalent of the Las Vegas gambler who attributes his streak of good luck to the socks he was wearing at the time, and will then keep wearing his increasingly foul socks in a futile attempt to reproduce that luck.
The difference between free and unfree systems does show up in long-run comparisons, such as in the level of per capita income. The relevant fact about China’s long-run performance is that its per capita income is still today ranked only 122nd in the world, behind Albania, Ecuador, Gabon, Jamaica, and Suriname, at one-tenth of the level of free America. Levels of per capita income are strongly correlated with measures of economic and political liberty, and statistical techniques suggest this correlation is causal: liberty causes prosperity. Even North Korea has had periods of high growth, but it would be hard to miss the argument for liberty supplied by the vast differences today in per capita income, health, and nutrition between free South Koreans and enslaved North Koreans.
The last stab at finding employment by us development experts is for us to concede that individual liberty is the best system, but also to say that you need us to design the government rules that make individual liberty possible. It is certainly true that liberty needs government rules to protect private property, to enforce contracts, to prevent cheating and looting, and many other rules of good behavior that make dealings between individuals possible. But it doesn’t follow that experts need to design government rules from the top down. Hayek’s last and possibly greatest insight was that the government rules for a market economy are not designed. They also evolve from the bottom up. As Hayek put it: “The value of freedom consists mainly in the opportunity for the growth of the un-designed, and the beneficial functioning of a free society rests largely on the existence of such freely grown institutions.”
How do institutions freely grow? Here I think economists have gained further insights since Hayek wrote, although we still have a lot to learn. We now have game theory, which can describe a trust outcome in which each one of us agrees to respect everyone else’s property rights and contracts in return for all of you to respect my property rights and contracts. Anyone who cheats or steals can be punished through social ostracism, which carries the added penalty of exclusion from profitable contracts in the future with anyone. The social norm will stabilize around respect for individual liberty that treats individuals as both deserving of the rewards of their own efforts and responsible for any costs that they impose on the rest of us. Unfortunately, there is also another equilibrium. If cheating and stealing start out being widely accepted as normal, and each individual expects to live off everybody else, then such a society can get stuck in a distrust outcome and be unable to reach the liberty norm. In fact, international differences in the answer to a World Values Survey question on whether individuals should take responsibility for themselves (about as close as this questionnaire got to individual liberty) are excellent predictors of which societies do in fact have free-market and democratic institutions. So yes, of course, you do need governments that pass laws to enforce rules, but good governments just formalize the bottom-up reality of social norms that respect liberty, which carry most of the weight in enforcing the rules.
What explains different social norms across countries? Here, frankly, neither Hayek nor today’s researchers have reached a completely satisfying answer. Historical accidents probably matter: A recent study finds more distrust between individuals today in regions of Africa where more individuals were betrayed and sold into slavery during the centuries of the slave trade. But Hayek also suggested that rules and norms are themselves subject to a survival-of-the-fittest evolutionary process (perhaps a slower one than we would like). Individuals in poor societies without liberty who see the connection between liberty and prosperity are going to want liberty!
Now, here at last is a clear role for development experts. They can try to speed up the evolutionary process by persuading individuals around the world of how well a bottom-up system works in the long run when people value individual liberty.
These benefits are not abstract: As the share of nations with economic and/or political freedom has trended steadily upward since 1970, the global poverty rate has fallen by two-thirds. For the Kenyan employed exporting cut flowers to Europe and the Egyptian employed exporting toilets to Italy, free trade is not an abstraction.