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Individuals, institutions and knowledge: Hayek and Keynes

Anna Carabelli and Nicolò De Vecchi(University of Turin and University of Pavia)

(February 1998)

In their economic views, Hayek and Keynes agreed on the role played by institutions in economic life. For both, institutions are necessary for the working of society. However, from this common starting point each of the two authors developed a different analysis of the economic system drawing, for example, quite different conclusions on economic policy. For Hayek, institutions are needed to help the process of co-ordination of individual decisions; for Keynes, on the contrary, co-ordination being impossible, institutions are needed to obviate the negative social effects of disorganisation. In our opinion, the roots of their disagreement lie in their different views on knowledge. In particular, they disagreed on how collective agents are, or should be, guided in the formation of their decisions and on the capability of institutions to intervene and the opportuneness of such intervention to cope with any failures of the market system. Their different views on the knowledge held by institutions influence their individualism. Unexpectedly, Keynes appears to have brought the individual’s personality out more than Hayek.

1 - The nature of institutions1.1 - Hayek presented institutions as complex social phenomena (Hayek, 1952, pp. 141-52; 1967, pp. 76-8; 1978, pp. 26-7). Their complexity derives from the particular relation he established between institutions, individuals and society.

In the first place, institutions are “structures” or “coherent wholes”. This derives from their origin. Hayek believed that institutions originate and change because of the action of individuals pursuing their own ends (Hayek, 1952, 61-

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76, 141-52). Assuming that individuals, when acting with fragmented and limited knowledge, refer to a system of rules of conduct which has settled in time and which they do not necessarily know,1 some of them, while achieving certain aims, follow rules which, in the concrete circumstances, prove more suitable than those adopted by others. This success leads to imitation. It follows that, in the absence of any deliberation or intention, regularities and social practices are established which remain fixed for a longer or shorter period of time. Hayek defined them as institutions and stressed that they are “ the product of the experience of generations [...] the result of customs, habits or practices which have been neither invented nor are observed with any such purpose in view” (Hayek, 1973, pp. 8-11).

Institutions are therefore basically similar to the rules, regularities, habits followed by individuals when facing the situation of “inevitable” ignorance in which they are acting:2 they are in other words spontaneous and undesigned.3

As we shall see, Hayek considered deliberate institutions beside spontaneous ones and showed that they are essential in a liberal society; however, they merely aid and enforce spontaneous institutions. In other words, they are subordinate to the latter.

Institutions are presented as complex phenomena when, as well as their origin, their relationship with society is also considered. Hayek defined society as a whole of “orderly relations”, a structure made up of all the spontaneous relations - rules, habits, regularities, non intentional institutions - and of all the results of a deliberation of the mind - organisations in general, among which the representative or designed institutions (Hayek, 1979, pp. 139-41; 1973, pp. 46-8).

Society shares with the institutions forming it the character of “structure”; it differs from them because it is a “more comprehensive structure”. Being structures within a more comprehensive structure, institutions are purposively bent on preserving the whole.4 This is their social function: a function that spontaneous institutions perform “without any [...] conscious direction” (Hayek, 1952, p. 145).5

The complex relationship between individuals, institutions and society is also shown in a third aspect. Hayek did not merely define the role of institutions with regard to society; he also defined it with regard to individuals. He underlined that there is a close connection between the “preservation of the whole” and the mutual adjustment of the parts. In other words, institutions are instrumental to the preservation of society, and they fulfil their function as “maintenance of an ongoing order of actions” only inasmuch as they are able to achieve the mutual adjustment of individual plans of action (Hayek, 1967,

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pp. 77). Thus, if on the one hand, as we have seen, institutions owe their origin and their transformation in time to the action of individuals, at the same time, they “form the condition of our existence” (Hayek, 1952, p. 146). In fact, they define the context in which individuals formulate their plans of action, relate to each other and act. They provide individuals with informative signals. Therefore they allow each of them to extend his or her knowledge, according to each individual’s peculiar interpretative ability. They shape the individual’s mind (Hayek, 1973, p. 17). They favour the co-ordination of their plans of action. In other words they reveal themselves as the “indispensable conditions for the successful pursuit of our conscious aims”, the foundation “on which human achievements rest” (Hayek, 1973, pp. 10-11).

In addition to spontaneous institutions Hayek introduced deliberate institutions very similar in nature to those taken into consideration by Keynes. In section 2 we will have to consider mainly the functions performed by the latter institutions when we compare Keynes and Hayek. So let us now see why he introduced them and how he defined them.

To answer the first query we have to briefly examine his theory of the spontaneous selection process of abstract rules of conduct. According to Hayek, spontaneous institutions are subject to a selection process, which is identical to that of rules. This process would allow the survival of those institutions which, in contingent circumstances, most effectively guarantee the preservation of society and the co-ordination of individual plans of action.6 For instance, in the field of economics, the market is the central institution for the achievement of the best possible use of the dispersed knowledge and, consequently, the co-ordination of individual actions.

However, precisely when dealing with the theme of evolution process Hayek is seen to be aware, even before his scholars,7 of the fact that the selection of rules and institutions cannot be left entirely to spontaneity. In fact he observes that order, meant as the co-ordination of individual actions, is founded on two essential conditions.

In the first place we must presume that individuals act on the basis of a system of rules of conduct that already possesses intrinsically the ability to establish and maintain order.8 But this abstract system of rules of conduct does not necessarily lead to a "factual" order of actions.9 The separate actions of individuals following rules result in an overall order, only if they do not interfere with one another and if their actions are compatible in the existing factual circumstances. In other words, a system of rules of action, which may lead to a factual order, will really determine it only in the presence of particular circumstances.10 If an order or disorder is established in the existing

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factual circumstances, this depends on an institutional framework, in which in any case the element of deliberation is certainly not of secondary importance.

It must be said that rules of conduct suitable to the formation of the social order may be disobeyed by individuals, because they are against their interest; thus society would proceed towards disorder, in the absence of a deliberate act of coercion imposing respect for those rules (Hayek, 1973, p. 44).

The conclusion must be drawn that, to establish and maintain a concrete social order rules, habits, regularities and spontaneous institutions must continually be implemented and enforced by bodies specially designated for this purpose.11 These are deliberate institutions. They arise because individuals, sustained by the wish to design, by intentions, “combine in a joint effort to realise ends they have in common” and establish supra-individual bodies which represent them and try to achieve their aims. Deliberate institutions therefore owe their existence to an “agreement based on command”, or to a “social contract”, or to an act of will, exercised by even just one individual, but then gradually accepted by others. What really distinguishes them from spontaneous institutions is the act of conscious deliberation on the part of a “mind”, the “invention”, the “intellectual design”, the will to create them for a specific purpose and, therefore, the link previously established between the institution to be created and an aim to be pursued (Hayek, 1973, pp. 8-11).

At this point there is the problem of defining the means with which representative institutions pursue the enforcement of the spontaneous process, within what limits their action must be kept, and finally what their aims, tasks and policy are.12

But, before tackling Hayek’s solution to this problem, let us consider Keynes’s view on institutions.

1.2 - Similarly to Hayek, Keynes considered institutions as necessary and essential for the working of society and the economic system but he widely differed in his view on the nature of institutions.

In his view on institutions, as well in his approach to economics, Keynes constantly opposed the idea of a natural order and selection. For him, spontaneity is always associated with instinct, blindness, automatism, and mere chance: all expressions Keynes strongly disliked. Spontaneity means absence of deliberation. Institutions are not the result of spontaneous processes; one cannot even speak of the evolution of institutions, a term which carries the idea of an ameliorative process. In particular, evolution through natural selection was totally unacceptable to him (Keynes, CW IX, p. 284).

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For Keynes, but not for Hayek, institutions are not spontaneous entities but voluntary and deliberate bodies. Thus, the term “rational constructivism” which Hayek used to describe Keynes’s approach seems appropriate. Institutions are under human control and command and are the product of reason, intellect and wisdom. They have a mind and are able to form a judgement.

Moreover Keynes’s institutions, unlike Hayek’s, are not mere social practices or rules. Keynes clearly distinguished between institutions, on the one hand, and social practices, rules and conventions, on the other. While the latter are the result of habits, tradition and custom, the former depend on partial reason and probable judgement. Similarly to social rules and social practices, institutions are historical and changeable; but their historical character is not spontaneous: they are voluntary human artefacts. Actually, in cases of social need, Keynes’s institutions should compete with and try to contrast ethically undesired social practices and custom. Voluntary action and positive policy may and should reform - not revolutionise - custom. Keynes denied that social practices should be accepted because social. By using partial reason and probable judgement, institutions can and should go against social practices, tradition and custom (Keynes, CW XVII, p. 453).

The notion of complexity is also central to Keynes’s thought, as it is to Hayek’s, but again there is a considerable difference. Keynes considered both society and economic organisation complex. Society is a complex organisation that is “balanced” and “complicated”. Economic material, too, is organic and complex (Keynes, CW XVII, p. 450; X, p. 262).13

Complexity implies organic interdependence of the elements of society. Both Hayek and Keynes openly attacked atomism. Hayek took the composite effect and organicism from Menger. For him, the result of the composite effect is positive. In Keynes, on the contrary, it is negative: complexity and organic interdependence are always associated with conflicts, fallacies and paradoxes.

In particular Keynes’s notion of complexity bears with it instability due to uncertainty and social conflict. His macroeconomics is to be seen as a logic of complexity and his macroeconomic policy as a means to counteract the negative social effects of complexity. In fact Keynes thought that the defects of modern economic organisation lay not in the lack of physical and economic resources - that is in material scarcity - but in the collapse of the organisation and of the mechanism of production and exchange. He maintained that one of the causes of disorganisation was the intrinsic faulty working of the economic machine itself. This was due not only to uncertainty, but also to the irreducible

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conflict between individual and social interest. This conflict is one of the main features of the “fallacy of composition”.14

Let us consider this aspect of Keynes’s notion of complexity first. Keynes thought that many individual initiatives raise conflicts between individual and social interest: conflicts that are irreducible. Initiatives of such a type are those which, if taken by an individual (either a producer, a consumer or a saver) would benefit him, but do not benefit anybody if they become shared, that is if everybody adopts them. There is no automatic harmony between these two interests: what is the most advantageous action for the individual is not

1 At this point we cannot dwell upon the nature and role of rules of conduct in Hayek’s theory. To understand the importance of the system of rules within the conformation of social institutions, the following quote may suffice (Hayek, 1973, pp. 10-11): “We live in a society in which we can successfully orientate ourselves, and in which our actions have a good chance of achieving their aims, not only because our fellows are governed by known aims or known connections between means and ends, but because they are also confined by rules whose purpose or origin we often do not know and of whose very existence we are often not aware. Man is as much a rule-following animal as a purpose-seeking one. And he is successful not because he knows why he ought to observe the rules which he does observe, or is even capable of stating all these rules in words, but because his thinking and acting are governed by rules which have by a process of selection been evolved in the society in which he lives, and which are thus the product of the experience of generations”.

2 If we want to point out an element of difference between institutions and rules, regularities or habits, we can resort to the definition of institutions given by Vanberg (1994, p. 235 note 1), which we think correctly summarises Hayek’s thoughts with regard to spontaneous institutions: they are “interconnected and mutually stabilising configurations of rules”.

3 It is a well-known fact that Hayek gives as examples of spontaneous institutions mostly language, money and the market. Carl Menger occupies an important position in Hayek’s sources of inspiration. It is important to observe that, according to Hayek, only the German term “Bildungen” (that he translates as “structures”) or “Gebilde” suitably describes them, while the term “institutions” is misleading because it suggests that these structures have been instituted or deliberately established”. (Hayek, 1973, p. 182, note 26; 1952, pp. 147-8) One juxtaposition which clarifies his thoughts is precisely that between “to form” and “to make”, which he uses to oppose society to state: “Societies form, but states are made” (Hayek, 1978, pp. 139-41).

4 See Hayek (1948, pp. 6-7; 1967, pp. 76-8). As often happens, again Hayek finds support in Hume, as well as in Mandeville, Ferguson and Smith. He defines “teleological” his explanation of the role of institutions.

5 “Anyone aware of the complex nature of this net of relationships determining the process of society should also readily recognise the erroneous anthropomorphism of conceiving society as

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necessarily also the most advantageous action for the society or the economic system as a whole. The best known examples of these conflicts are the paradox of wages, the paradox of aggregate income and the paradox of saving. For instance, the paradox of wages derives from their dual nature: they are, at the same time, cost and demand in an interdependent organic world.15 In this situation, the logical hypothesis of independence, which characterises the atomistic world, does not work. It cannot be applied; otherwise fallacies and paradoxes arise in reasoning.

‘acting’ or ‘willing’ anything” (Hayek, 1979, pp. 139-41). “[...] society cannot think, act, value [...]” (Hayek, 1979, pp. 102-3).

6 For discussion of this topic, see in particular Vanberg, 1994, pp. 77-106.7 See in particular Barry (1978, p. 82), Vanberg (1994, pp. 77-94, pp. 109-124).8 “[...] not every regularity in the behaviour of the elements does secure an overall order [...]

Our problem is what kind of rules of conduct will produce an order of society and what kind of order particular rules will produce. (As the second law of thermodynamics shows in physics) similarly it is evident that in society some perfect regular behaviour of the individuals could produce only disorder [...] Society can thus exist only if by a process of selection rules have evolved which lead individuals to behave in a manner which makes social life possible [...] The individual responses to particular circumstances will result in an overall order only if the individuals obey such rules as will produce an order” (Hayek 1973, pp. 43-4). See also Hayek (1967, pp. 66-70).“Yet, although the order may appear to consist simply in the obedience to rules, and it is true that the obedience to rules is needed to secure order, we have also seen that not all rules will secure order. Whether the established rules will lead to the formation of an overall order in any given set of circumstances will rather depend on their particular content. The obedience to unsuitable rules may well become the cause of disorder, and there are some conceivable rules of individual conduct which clearly would make impossible the integration of individual actions into an overall order” (Hayek, 1973, pp. 104-5).

9 As Hayek himself stressed, this does not necessarily mean that the rules, habits and institutions of a concrete society are always of a wholly or predominantly spontaneous nature. Hayek even reaches the hypothesis that, at least on principle, the element of design and deliberation might be total, even if. “In the kind of society with which we are familiar, of course […] most of the rules of morals and custom will be spontaneous growth” (Hayek, 1973, pp. 43-4).

10 “That the systems of rules of individual conduct and the order of actions which results from the individuals acting in accordance with them are not the same thing should be obvious as soon as it is stated, although the two are in fact frequently confused [...] Not every system of rules of individual conduct will produce an overall order of the actions of a group of individuals; and whether a given system of rules of individual conduct will produce an order of actions, and

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Keynes held also that the competitive system is at the origin of the irreducible conflict between individual and collective interest: in fact it stimulates instability and wide movements of prices, and, suffering for “the fear of goods” and abhorring the existence of buffer stocks, it generates negative social consequences such as selling panic and abstinence from consumption (Keynes, CW VII, p. 346; XXVII, p. 131). Besides, “free enterprise is incapable of dealing with the problem of structural unemployment” (CW XXVII, p. 354). In general, for Keynes competition originates loss of social income, waste and unemployment, social injustice, social instability and the breaking of social cohesion.

Another aspect of Keynes’s notion of complexity, which adds to the fallacy of composition due to the conflict between private and social interest, is uncertainty and ignorance. The great inequalities in wealth occur because

what kind of order, will depend on the circumstances in which the individuals act” (Hayek, 1967, p. 67). See also Hayek, 1973, pp. 95-101.

11 This aspect of Hayek’s research is emphasised mostly by Vanberg, 1994, pp. 77-124.12 Here we must refrain from providing an answer to the question of whether the theme of

enforcement and of critical review on the part of institutions designed for this purpose becomes increasingly important in Hayek’s later works or whether instead it is not already acknowledged more or less implicitly in the observations of the ‘30s and ‘40s. We simply state that we are decidedly in favour of the second alternative. As regards Hayek’s awareness of the founding role of deliberate institutions in the formation of social order, but also of the limits within which they have to remain see for example Hayek (1948, pp. 19-20; 1964, p. 8; 1960, p. 5, p. 30; 1967, p. 306; 1973, p. 17, p. 32, pp. 46-8, pp. 104-5).

13 Complexity implies organic interdependence of the elements of society and of the “economic material”: non-atomism, non-independence between the ultimate elements, non-homogeneity through time, non-linearity (small changes have great effects), indivisibility, feedback effects, the whole is not equal to the sum of the parts.

14 For Peacock (1991, p. 13), Keynes recognized the “externality effects”, resulting from individual actions which affect others.

15 “In this quandary individual producers base illusory hopes on courses of action which would benefit an individual producer or class of producers so long as they were alone in pursuing them, but which benefit no one if every one pursues them. For example, to restrict the output of a particular primary commodity raises its price, so long as the output of the industries which use this commodity is unrestricted […] Or again, if a particular producer or a particular country cuts wages, then, so long as others do not follow suit, that producer or that country is able to get more of what trade is going. But if wages are cut all round, the purchasing power of the community as a whole is reduced by the same amount as the reduction of costs; and, again, no one is further forward” (Keynes, CW IX, p. 128).

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particular individuals, through wealth or skill, can obtain advantages from them. Uncertainty and the consequent instability and volatility of prices transform private enterprise into a “lottery”, entrepreneurs into speculators (Keynes, CW IX, p. 291). A negative social consequence is that entrepreneurs are distracted from their “social” task (i.e. to invest) and thus errors of forecasting are more frequent. Price falls, in particular, destroy profit incentives. Thus, uncertainty and ignorance are the ultimate causes of unemployment, of the disappointment of reasonable expectations by entrepreneurs and of the weakening of profit and production. Uncertainty favours the formation of conventional expectations rather than of reasonable expectations. For instance, traders and merchants base their expectations upon “apparent” rather than “real” rewards. Thus their expectations are “false” rather than “accurate” or “reasonable”; they make errors and miscalculations (CW XVII, 265; IX, 291).

Keynes thought that we live in a society organised upon the expectations of individuals for reasonable profit. If, due to uncertainty and ignorance, the economic process blocks itself, the organisation of economic and social system becomes “disorganised” (Keynes, CW XVII, p. 263).

Remedies to the intrinsic conflict between individual and social interest, and to uncertainty, are beyond the reach of the individual: the latter may even find it convenient to worsen the situation resulting from intrinsic conflict and uncertainty, even though this will result to his disadvantage in the end (Keynes, CW IX, p. 232, 291-2). The remedies are only social: provided either directly by the state or indirectly by institutions. In particular Keynes appreciated altruistic impulses by individuals but he thought that the solution of the conflict between egoism and altruism is not to be left to the individual and private charity. The individual can be left to be selfish while institutions are meant to be altruistic and satisfy common interests and good.

Similar is his view on the individual taking of uncertainty. Individuals (traders, merchants, banks or speculators) are unable to bear upon themselves systemic risk and radical uncertainty. Traditional individualist capitalism is based upon individual risk.16 Keynes thinks that this risk can no longer be borne by individuals. Social institutions and reformed capitalist states are to take upon themselves part of this risk, or better, part of the individual and systemic uncertainty, as Keynes called it.

16 Keynes maintained that traders and merchants (like individuals and banks) could not take upon themselves the risk of price fluctuations. In 1921, he wrote that “traders cannot help running the risk of price fluctuations in respect of a great part of their stock” (Keynes, CW XVII, p. 261).

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There are, therefore, two main tasks for institutions: the management and reduction of individual and collective uncertainty and the mediation of the conflict of interests.

2 - Active and positive policies implemented by the state and deliberate institutions2.1 - Keynes rejected both extreme individualism and state centralism in economics, favouring a “middle way” between the unregulated market and the central plan. This position prompted a mid-way role also for institutions: the necessary development of semi-autonomous institutions that stand, or should stand, in the middle between the individual and the state: social bodies whose motive and criterion of action is exclusively public good and common values in their specific domain and from whose decisions private interest is excluded.

These institutions should be autonomous in their current and daily management within precise and imposed limits. Only indirectly are they to come under the democratic sovereignty of parliament.17

For Keynes, unlike Hayek, institutions are necessary to counterpoise the negative social effects of the failures of the market economy. They cope, better than individuals, with problems like uncertainty and long term perspectives necessary to real investments. This is also done by hierarchical organisations and direct controls on some economic variables, the money interest rate governed by the central bank, for example:

Our final task might be to select those variables that can be deliberately controlled or managed by central authority in the kind of system in which we actually live (Keynes, CW VII, p. 247).

Collective authorities and deliberate institutions secure the pursuit of collective and common interests which individuals - inevitably and rightly in Keynes’s view – escape or do not pursue. He maintained that

17 British private universities, Pension Funds, the Trustees, the Bank of England, the Authority of the Port of London and the Railway Company are examples of these semi-autonomous institutions. Among semi-autonomous institutions, Keynes also included modern stock companies. In his view, they tend to be more similar to public rather than to private individualist companies. He holds that modern big companies - such as railways and public utilities companies - tend to socialise themselves as they pay more attention to stability and reputation than to maximisation of profits (Keynes, CW IX, p. 289). See also Skidelsky, 1992, p. 227.

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unless men are united by a common aim or moved by objective principles, each one’s hand will be against the rest and the unregulated pursuit of individual advantage may soon destroy the whole (Keynes, CW XVII, p. 450).

In a complex society, the plurality of institutions also guarantees respect for the plurality of ethical ends. The common aims which the state and deliberate institutions should pursue with active policies and intervention are, for instance, serving the public good and embedding the public spirit; seeking equality of contentment and a good and happy life for the individual and for the mass; seeking social and substantive justice, social stability and cohesion (Keynes, CW IX, p. 211, p. 224; XVII, p. 450).

Economists have to find new tools and political principles to control and intervene in the functioning of the economic forces, so that these forces do not interfere too much with the criteria valid in terms of social stability and social justice: criteria which change according to the changing circumstances (Keynes CW IX, 306). Keynes was in favour of revising existing social rules and institutions on more rational criteria. These criteria are to be based upon reflection and reasoned judgement, not on automatism. He was against any kind of automatism in his stabilisation policies.

He held that the state and institutions should exercise public action grounded upon deliberate and reasonable (probable) judgement. Policies which he considered as remedies to uncertainty and conflict are, for instance, the management of aggregate demand, socialisation of investment, control of global saving and of the quota of national saving exported. Another social remedy - to uncertainty in particular - is the public recollection and diffusion of information, to increase the partial knowledge of individuals and of society: institutions and authorities should exercise a function of investigation and direction on the complex aspects of private firms. Even in the cases when these remedies would be ineffective, Keynes thought that they might supply additional elements of knowledge which help in the formation of a firmer probable judgement, that is a judgement less subject to change: a social contribution to the reduction of uncertainty.

Certainly, one of the most important social remedies lies in the deliberate control of money and credit by central banks. Money management and stabilisation policies of prices and exchange rates, reduction of money interest rate and manipulation of conventional expectations are all means of facing price and exchange rate instability and the negative social effects of uncertainty and ignorance. The fact that monetary policy is able to determine the price level, was judged positively by Keynes: “we have our destiny in our hands” (Keynes, CW IX, p. 189). A deliberate action should be taken to

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maintain the stability of prices (ibidem, p. 192). Automatic readjustments are, on the contrary, negative (ibidem, p. 214). In general, for Keynes automatic adjustments and policies were to be substituted by a “less automatic policy”, which meant “a more reasoned policy”: “a good constructive plan [...] on more deliberate and self-conscious lines” (ibidem p. 171, p. 183).

2.2 - As regards Hayek, we have seen that he believed that deliberate institutions, too, play an active role in the formation and preservation of the Great Society, but the purpose of institutions is to protect the freedom to choose one’s own aims and not to settle conflicts between individual aims and “alleged” social aims. Besides, every measure taken by someone representing an institution should respect the system of rules of conduct, habits and traditions coming from the past, and should not appear as a deliberate “interference” in the spontaneous process, because institutions, just like individuals, possess an extremely short and very circumscribed knowledge of the consequences of their actions.

As far as government is concerned, according to Hayek, its priority18 should be to enforce rules and spontaneous institutions so that “individuals and groups can successfully pursue their respective aims” (Hayek, 1979, p. 139). The concise expression Hayek used to define this role is “coercive functions”. To correctly fulfil its coercive functions the government has on the one hand to implement an active policy and on the other to refrain from doing certain things. This does not mean that Hayek formulated a list of concrete agenda and non-agenda on the part of the government. Indeed, he tended to avoid this topic, while, as we have already mentioned, he described the action criteria, which the government should follow to achieve the objective of forming and maintaining the Great Society (Hayek, 1960, p. 5).

Coercive functions are strictly limited to the prevention of coercion by private persons, that is, preventing that “one man’s actions are made to serve another man’s will, not for his own but for the other’s purpose” (Hayek, 1960,

18 As well as coercive functions, Hayek ascribes to the government “service functions”, in other words it should “use its coercive powers of raising revenue to provide services which for one reason or other the market cannot supply” (Hayek, 1979, pp. 139-41). See also Hayek (1944, p. 28 and following; 1960, p. 222 and following, and in general Part III; 1967, pp. 165-6; 1973, pp. 46-8; 1976, pp. 6-8; 1978, pp. 144-5; 1979, pp. 23-5, pp. 41-9, pp. 147-9), Gray (1984, p. 141 and following); Houle (1988), Kley (1994), Vanberg (1994, p. 116 and following). We will not linger on this function here, because it is of secondary importance with respect to the object of this paper. For a detailed analysis of the service functions considered in the various works of Hayek see Guest (1997).

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p. 20, p. 122, pp. 133-47; 1979, pp. 128-32). This means that the government takes on the role of defending any individual or organisation against any other individual or organisation. The validity of the principle is so general as to include the same public institution exercising the function: in other words, the government also follows those same rules of law it applies to avoid coercion by private persons (Hayek, 1973, p. 55). Otherwise it would become the chief threat to individual freedom, if nothing else because it would obstruct the use of dispersed knowledge and the process towards the co-ordination of individual plans: in fact, individuals would not be able to foresee the action of the state and make use of this knowledge as a datum in forming their plans (Hayek, 1944, pp. 54-5; 1960, p. 222).

The criterion for evaluating any act of government exercising coercive functions is thus its universality of application. Hayek linked this criterion not to a principle of impartiality of the government towards those governed, but rather to the fact that only by respecting it can the government really enforce the spontaneous process, in the sense that it guarantees individual freedom under the law and leaves to the spontaneous institutions the task of co-ordinating the actions of individuals. For instance, in the economics field, competition can act as discovery procedure only under these conditions, in other words it can allow the best possible use of dispersed knowledge and the co-ordination of the individual plans of action. Only under these conditions are income and wealth distributed “justly”, where “just” distribution is that achieved by the impersonal market mechanism, in which all individuals participate, each one with his own skill and knowledge, and in the absence of any organising mind.

It is the example of the market seen as the instrument to distribute income and wealth, which allows us to show a concrete act of government suggested by Hayek and to verify that it satisfies the criterion of universality. Hayek observed that the distribution carried out by the market is accompanied by economic inequality. In fact he compared the market to a game played by individuals following rules. The final result of the market is thus success for some, but also disappointment for others, who may see their income reduced to subsistence level. This could mean instability for society and Hayek believed that, in these cases, the government should act, guaranteeing a uniform minimum income for everyone. (Hayek, 1976, pp. 70-2, pp. 107-17, pp. 139-40; 1979, p. 55, pp. 141-43).

The element, which justifies this measure in Hayek’s opinion, is precisely its universal and neutral character. In the first place, the market is a wealth-producing game for all participants, because it improves the chances of

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everyone to have a greater command over the goods (Hayek, 1976, pp. 115-17; 1978, pp. 63-57). Besides, every player runs the risk of seeing his income reduced: in other words the economic inequality linked with the distribution carried out by the market “is not designed to affect particular people in a particular way” (Hayek, 1944, p. 59 italics added). Therefore by providing a “cushion” against this risk which is equal for everyone, the government does nothing but guarantee respect for the liberal principle of individual freedom under the law and of individual responsibility. Hayek insisted on the characteristic of universality of this measure, to distinguish it in the first place from any interventions proposed by the advocates of the welfare state or by Keynes (Hayek, 1960, pp. 214-15).

But above all the measure we are considering exemplifies what Hayek called the “intelligent policy of freedom”, which the government, or any other public institution, should implement in general. For Hayek expressions like “common system of ends”, “social justice”, “common welfare”, “general interest” are completely meaningless and there is no conflict between the aims and action of the individual and the social consequences of individual actions. The only social aim that institutions - both deliberate and spontaneous - can pursue is the abstract overall order of society. Any other policy directed at aims declared to be “social” by whomever proposes or achieves it, in actual fact conceals the defence of particular interests and urges those who are excluded to lay other claims, in an inexorable growing process (Hayek, 1979, pp. 93-6).

The charge Hayek brought against the advocates of the welfare state or of the “middle way” - Keynes, for example - is precisely that of proposing themselves as mediators of a conflict between the individual and society, which, in his eyes, is non- existent. They replace a policy which, following the criterion of universality, protects individual freedom with interventions that “can never be just in the sense of satisfying a rule equally applicable to all” (Hayek, 1976, pp. 142-3, italics added). They accumulate particular acts, interferences by specific commands, interventions by isolated acts of coercion, every one of which corrects the previous one. They grant discriminatory benefits. They aim at particular results, at specific ends.19 They do not oppose the phenomena of economic and social instability, which appear in concrete societies, indeed they create them through their actions.

19 All these expressions are taken from Hayek. See for example Hayek (1944, p. 26; 1973, pp. 49-51, p. 61; 1976, pp. 128-32, p. 142; 1979, pp. 128-32).

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3 - Institutions and knowledge3.1 As seen, in their economic views Hayek and Keynes disagreed both on the nature and role played by institutions in economic life and on how collective agents are, or should be, guided in the formation of their collective decisions. They also disagreed in their views on the knowledge held by institutions, in the capability of institutions to intervene and the opportuneness of such intervention to cope with any failures of the market system.

In line with his Humean view of “nature against reason”, Hayek considered the knowledge held by institutions, similar to that of individuals: institutions should follow the spontaneous rules of conduct; they share with individuals, who constitute them, a condition of ignorance, which impedes an autonomous judgement.

Keynes’s deliberate institutions are collective agents endowed with partial knowledge and reason: what Hayek called “fatal conceit” was, for him, a positive aspect of institutions. As well as individual agents, institutions have a “mind” or a “system or rules of decision”. But, unlike the minds of individuals, the collective mind of institutions is necessarily an “artificial mind”. Hayek thought the idea of a collective and artificial mind totally unacceptable. Keynes, on the contrary, maintained that the collective mind is an autonomous conceptual entity and that institutions know more than individuals.

Keynes’s view on the positive and active role of institutions is linked with his defence of economic intervention; but is also linked to his view of the reasonable (probable) justification of economic intervention by institutions, that is his general view on the knowledge of institutions: a view on knowledge which is totally different from Hayek’s.

Keynes stuck to “rational constructivism”: “schemes conceived by the mind” should substitute “undesigned outcome of instinct” (Keynes, CW XVII, p. 453). In particular, ignorance is not a bar to policy by institutions: his concept of logical probability helps. Keynes recognised that individuals acting alone are totally ignorant and dominated by uncertainty. But, he thought that when they form a group or act as institutions they could defeat the forces of ignorance and uncertainty:

It is not true […] that self-interest generally is enlightened, more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately (Keynes, CW IX, p. 288).

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Institutions actually help isolated and ignorant individuals: they have more partial knowledge at their disposal than individuals. Moreover, ignorance and uncertainty have no paralysing effects on their decisions. Hayek’s stress on ignorance is a manifestation of his Humean scepticism, which results in a tendency to non-intervention. In contrast, Keynes’s anti-scepticist and reformist attitudes are complementary: in his view, “conservatorism and scepticism join arms” (Keynes, CW IX, p. 174). He grouped conservatorism, Marxism and revolutionary socialism equally together. His reformism is rooted in his confidence in the power of partial knowledge and ideas. Keynes was an idealist and always fought against materialism, an early attitude, which he never gave up. He wrote that in his times “idealisms of many kinds are at a discount. We shall have to get back to them gradually” (Keynes, CW XVII, p. 270).

Let us analyse the specific characteristics of Keynes’s discretionary policy. First, policy should be “wise”. The negative consequences of traders and merchants’ errors could be limited by “a wise policy” on the part of authorities and institutions (Keynes, CW XVII, p. 263). Keynes’s notion of wisdom refers to practical human reasonableness, which pays attention to changing circumstances. Policy should also be based upon “correct principles”. These are ethical principles. Two qualities are required for the policy maker: “cleverness and goodness”. Keynes thought cleverness more difficult to be found and also the most important attribute of the two. As policy should be based on reason and intellect, the main tasks of a policy maker are firstly to create a conviction in the need for policy and secondly to find the means to reach the promised goal: “insufficiency of cleverness, not of goodness, is the main trouble”, he wrote (Keynes, CW XXVII, p. 384). In addition to these requisites, Keynes stressed that the timing and the force of policy are important (Keynes, CW XVII, p. 264; see also Moggridge 1992, pp. 359-60).

In their policies, authorities and institutions should also show non-conformist and non-conventional attitudes. Institutions mould the future and cannot be loyal to the past.

Discretionary policy is a “rational construction”. Keynes suggested “constructive proposals” for it (Keynes, CW XXVII, p. 138). Thus, in addition to wisdom, ethical principles and non-conformist attitudes, policy needs a “qualified optimism”. In fact, policy should pay attention to immediate future rather than to remote future and long-term consequences. Keynes’s constructivist attitude towards the future plays down remote future and uncertainty.20 In his view, uncertainty and ignorance about the future should not paralyse policy. Institutions should show will and courage, in particular the

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“power of will” towards the future (Keynes, CW XXVII, p. 260). As to courage, policy should proceed, freeing itself from any “psychology of fear” (ibidem, p. 209).

Finally, the “public spirit” of deliberate institutions should be clear-sighted in policy (Keynes, CW XVII, p. 450). This raises the problem of what is, for Keynes, the knowledge of institutions and how then the decision process by institutions is actually carried out and rationally justified.

As Keynes never took perfect knowledge and certainty into consideration, the only situation worthy of consideration, is where partial knowledge is available to institutions. Keynes hold that the decision process by institutions is not substantially different from that of individuals, apart from the greater amount of partial knowledge which he attributes to them, in addition to their power to directly control economic variables, as in the case of central banks with interest rates (Keynes, CW VII, p. 247). In this case, Keynes’s logical probability and the “weight of argument” justify a reasonable policy based upon an autonomous probable judgement made by institutions. Here, the justification of policy is only probable. Compared with that of isolated individuals, the institutions’ decision process is based, in Keynes’s view, on a larger absolute amount of partial knowledge: thus institutions know more than individuals. This means that confidence in their probable judgement is higher and this, in general, means less uncertainty. 21

20 As to Keynes’s attitude to the future: “The future will be what we choose to make it. If we approach it with cringing and timidity, we shall get what we deserve. If we march on with confidence and vigour the facts will respond. It would be a monstrous thing to reserve all our courage and powers of will for War and then, crowned with victory, to approach the Peace as a bankrupt bunch of defeatists” (Keynes, CW XXVII, p. 260).

21 Probability measures the balance between the favourable and unfavourable partial knowledge available to institutions; while the weight of argument measures the absolute amount of it. The weight, in particular, measures the confidence in their probable expectations, i.e. their uncertainty. The institutions’ probable judgement is a joint judgement of probability and weight.

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Problems arise when institutions are in situation of uncertainty and total ignorance.22 Keynes was aware of the problems raised by ignorance which public authorities face in their decision processes and policies.23

Thus, if the institutions’ possible ignorance is not different from that of individuals, how is their policy justified? The justification is, again, only probable. Keynes based his justification on the distinction between immediate future and remote future. In forming their probable judgement, which is the basis for a reasonable policy, institutions must, first of all, distinguish between immediate and remote future. They should take into account the limited knowledge regarding the immediate future actually at their disposal, discarding the remote future and long-term consequences of policy. If this knowledge is available and nothing is known about the remote future and long-term consequences, it is to be judged positively. Even if scarce, it plays a positive role in forming a probable judgement and in grounding a probable policy. Besides, for Keynes, institutions are rarely in situations of total ignorance in the actual and concrete situations of life.24

3.2 - For Hayek the policy proposed by the advocates of the welfare state or by Keynes is in contrast with the Great Society, not only because it is particularistic, but also because it is based on the idea that the cognitive horizon of those who act in the name of institutions is less limited than that of individuals or organisations. According to Hayek, any representative of a public institution who means to interfere with the evolution of the spontaneous order is forced sooner or later to realise that this idea is merely a fatal conceit. Therefore he is limited to acts having particular, foreseeable or visible short-

22 Let us recall that, for Keynes, uncertainty is a situation where logical probabilities are either incommensurable or non-comparable or where the confidence (the weight of argument) in these probable expectations is low (see Keynes, CW VIII and also CW XVII, p. 448). The incommensurability of probability depends on the incommensurability of the material to which it refers. Some economic problems are characterised by “a material” which is intrinsically incapable of precise measurement or of being reduced to a formula: political events, for example. Let us further recall that, for Keynes, ignorance is a situation where either no partial knowledge is available or economic events are relative to a very remote future.

23 In his proposal of regulating the value of gold, he noted that: “If, indeed, a providence watched over gold, or if Nature had provided us with a stable standard ready-made, I would not, in an attempt after some slight improvement, hand over the management to the possible weakness or ignorance of boards and governments. But this is not the situation, We have no ready-made standard” (Keynes, CW IX, p. 178).

24 See Keynes MSS 1904-6, p. 25 and CW VIII, pp. 341-2.

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term effects. His policy in conclusion can only be a “short run” policy: together with the defect of particularism, as far as the protection of the individual is concerned, there is also the defect of temporary shortsightedness. The inevitable result is “a dirigist organization of society”. With barely concealed sarcasm towards Keynes Hayek commented: “Indeed, what will certainly be dead in the long run, if we concentrate on immediate results, is freedom”.25

Hayek formulated this type of criticism of intervention policies in general, because in his theory of knowledge he drew a very distinct line between the immediate, foreseeable future and the remote unpredictable future. Any agent can formulate a judgement only on the extremely close consequences of his action. Therefore to act he resorts to the system of rules of just conduct which sediments in the evolutionary process of social order: the only “device for coping with our ignorance”. This cognitive characteristic for Hayek also applies to the representatives of public institutions, in primis to the government. This does not mean that the government should abstain from any policy: as we have already seen, in the Great Society there is certainly no laissez-faire, on the contrary an active policy of the government is indispensable. Nevertheless

[...] the role [of government can] only [be] to provide certain generic conditions whose effects on the several individuals will be unpredictable. It can enhance the chances that the efforts of unknown individuals towards equally unknown aims will be successful by enforcing the observance of such abstract rules of conduct as in the light of past experience appear to be most conducive to the formation of a spontaneous order (Hayek, 1976, pp. 10-11).

Hayek added that this policy is the only one which can really be defined long term and can be implemented in the long term: because the rules of just conduct “will perform their function only if they are adhered to for long periods”, a truly long term policy is only that which respects and enforces them. Consequently, it must be implemented in a very gentle and smooth manner, so as not to give “too great a disturbance to society”, as Hume had already recommended (Hayek, 1976, p. 29; 1979, pp. 105-7).

Although he generally denied deliberate institutions a superior knowledge to that of individuals or organisations, in the case of one institutional figure at least Hayek not only admitted this superiority, but also underlined its importance both for society as a whole and for individuals. This figure is the

25 See Hayek (1976, p. 29). On the damage of Keynesian policies, concentrated, according to Hayek, on purely monetary factors, see for example Hayek (1941, pp. 407-10).

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judge whom Hayek coherently entrusted with a task that seems to call for a high level of discretion. However, we will see that the judge exercises his high discretional power, not following “his own will”, but placing himself completely in the service of the system of abstract rules which is the foundation of social order (Hayek, 1960, p. 212).

To understand the institutional role that Hayek ascribes to the judge it becomes necessary to go back to the presupposition that every individual who acts following abstract rules of just conduct may be unaware of the rules he obeys. In other words, for Hayek, individuals know how to act in accordance with the rules even if they cannot articulate the rules they follow, i.e. they do not know that the rules are such and such (Hayek, 1967, p. 44; 1948, pp. 79-91, 1988, p. 78). So long as the general situation in which they act is normal, their know how gives them enough security to act without the fear that their expectations will be disappointed. Instead, when unusual situations occur, every agent may be in doubt as to which rules to apply, or agents entering into a mutual relation may have to cope with unexpected damage, for which neither of them feels responsible because he has followed correctly a rule of just conduct, albeit different from that followed by the other one.

In these cases the need arises “to appeal to men who are supposed to know more about established rules”. In what sense, according to Hayek, does the judge “know more”? Wherein lies his skill? How far can he venture with his discretion in judging (Hayek, 1973, pp. 122-23)?

The greater knowledge of the judge consists in a greater awareness of coherence and the ranking of the rules of conduct inherited by tradition. His normal function consists precisely in articulating already established rules or already observed practices. He makes explicit and known to individuals many of those rules that they follow without knowing them.

But what is even more important is another role of the judge: more significant for safeguarding the social order than the previous one. In the face of sudden changes or unusual events for the agents, and therefore such as to make any decision to act difficult, individuals continue to act according to the habits they have learnt. In this case what fails is the adaptation of the system of abstract rules to the concrete circumstances which, as we have seen, is an essential condition for maintaining factual order. The gap in the body of already recognised rules cannot be left to the slow course of the spontaneous process, but must be quickly filled with an act of deliberation, entrusted to the judge. The latter is shown to be an essential “organ” of the factual order of actions (Hayek, 1976, p. 41), because he accelerates the evolution process of the rules of conduct, suggesting individuals follow a rule, which seems to him

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more effective, for the pursuit of their aims and for maintaining order, than the one the individuals themselves are following on the basis of their experience (Hayek, 1973, pp. 95-101).

But of what nature is the rule proposed by the judge? Hayek says he lays down a “new” rule. However he uses the adjective “new” with a particular and precise meaning, which it is important to clarify. The judge does not create a rule on the basis of his autonomous will: this if anything is the task attributed to the judge by Kelsen and his followers, comments Hayek26 From his point of view, instead, the task of the judge consists in “discovering something which exists” (Hayek, 1973, p. 78) or in “upholding the principles on which the existing order is based” (ibidem, pp. 118-20), or again, in fitting into a given system of rules “a piece required by the aim which the system as a whole serves”. The judge, in other words, “is not a creator of a new order, but a servant endeavouring to maintain and improve the functioning of an existing order” (ibidem, pp. 118-20).

For the very reason that he intends to enforce social order, he proposes a rule, which has passed trials of coherence not only in concrete circumstances, but also in respect of the system of abstract rules on which society is based. He proposes it only inasmuch as it reveals itself as “part” of this whole: a hidden part, which has not yet emerged to the awareness of the agents, but already present within that tradition everyone - individual or institution, consciously or unconsciously - must refer to before acting.

In conclusion, the judge apparently possesses the maximum power of discretion, but in actual fact he is the most trustworthy servant of tradition. He constantly moves within the existing system of rules, the wholeness of which is never doubted. In other words he exercises towards the rules of conduct that “immanent criticism”, which Hayek stressed as the main instrument of anyone performing the intellectual task of understanding how society functions, and which consists in “endeavouring by a process of piecemeal tinkering” to make the “wisdom” inherited from the past a constantly valid milestone for individual action.27

26 See Hayek (1976, p. 51). For the critical evaluation of Hayek regarding Kelsen see for example, Hayek (1960, p. 238; 1978, pp. 19-20).

27 Hayek (1973, pp. 118-20). There are similar considerations, for example, in Hayek (1988, p. 20). Hayek (1967, pp. 3-21; 1978, pp. 31-34) considers the scientist’s research work in similar terms to those employed to describe the judge’s tasks; there is also a constant reminder of Popper. Hayek (1988, p. 8) affirms that the same perspective must be kept when facing problems of distributive justice.

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[...] since we owe the order of our society to a tradition of rules which we only imperfectly understand, all progress must be based on tradition. We must build on tradition and can only tinker with its product (Hayek 1979, 166-7, original italics).[...] The basis of criticism of any one product of tradition must always be another product of tradition which we either cannot or do not want to question; in other words, that particular aspects of a culture can be critically examined only within the context of that culture (Hayek, 1976, p. 25).

More than any other representative institution, the judge is an organ of the factual order similar to spontaneous institutions or to those same rules towards which he exercises the function of immanent criticism, because he is an active part in the process of cultural selection which characterises the spontaneous development of society. He does not pursue “the construction of some new edifice” (Hayek, 1976, p. 41); rather he discovers and brings to light pieces of hidden knowledge which are part of the cultural inheritance accumulated by society in the past. He associates, in other words, a “know how” to a “know that” based on an experience superior to that of any other individual.

Hayek vigorously stressed the element of deliberation present to the utmost degree in the judge’s work, but perhaps with more vigour he stressed the strict dependence of the judge on tradition. One might suggest that Hayek’s growing interest in the judge’s tasks and in other deliberate institutions - such as government - is connected to the equally growing awareness on his part that a system of abstract rules capable of founding a social order is a necessary but not sufficient condition to form a factual order of actions. On the other hand, the fear he constantly nurtures for the discretion that judges, governments and other representative institutions can exercise induces him to severely limit their action within the boundaries of coherence with the traditions inherited. As we have already emphasised, this produces a Humean concept of policy as a smooth and gentle process of adaptation of the abstract rules to contingent circumstances, far from breaches or sudden changes with respect to the past.

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4. Individualism: Keynes versus Hayek 4.1 - In our 1997 paper “Hayek and Keynes on knowledge, ethics and economics” we advanced the idea that Keynes was a more individualistic thinker than Hayek in his view on the individual decision process. Keynes defended the autonomy of individual judgement in contrast to Hayek’s suggestion to follow conventional rules.28 Keynes’s individuals should be non conformist in their process of decision. In this paper we have seen that for Keynes this was also true for institutions. As seen, monetary authorities should guide rather than follow events: they should not follow the rules and

28 He wrote: “To such fanatics of the individual judgement as many of us are born to be” (Keynes, CW XXVIII, pp. 76-7).

ReferencesBarry, N.P. 1978, Hayek’s Social and Economic Philosophy, Macmillan,

London.Carabelli, A. and De Vecchi, N. 1997, “Where to Draw the Line?” Hayek and

Keynes on Knowledge, Ethics and Economics, paper presented at the European Society for the History of Economic Thought, Marseilles, 27

February-2 March 1997, forthcoming.Gray, G. 1984, Hayek on Liberty, Basil Blackwell, Oxford.Guest, C. 1997, Hayek on Government: Two views or One?, School of

Marketing and Management, Charles Sturt University, Bathurst, Australia, Mimeographed.

Hayek, F.A. 1941, The Pure Theory of Capital, The University of Chicago Press, Chicago.

Hayek, F.A. 1944, The Road to Serfdom, Routledge and Kegan Paul, London.Hayek, F.A. 1948, Individualism and Economic Order, The University of

Chicago Press, Chicago.Hayek, F.A. 1952, The Counter-Revolution of Science. Studies on the Abuse of

Reason, Liberty Press, Indianapolis.Hayek, F.A. 1960, The Constitution of Liberty, Routledge and Kegan Paul,

London.Hayek, F.A. 1967, Studies in Philosophy, Politics and Economics, Routledge

and Kegan Paul, London.Hayek, F.A. 1973, Law, Legislation and Liberty: A New Statement of the

Liberal Principles of Justice and Political Economy, Vol. 1, Rules and Order, Routledge and Kegan Paul, London.

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conventions of the market. For Keynes, the conformism of individuals, as well as of institutions, meant conservatism and a rejection of discretionary reforms.

The idea that Keynes was a more individualistic thinker than Hayek is here re-stressed and extended. Keynes’s institutions were actually means to defend what he called the “variety” and the “fancy” of the individual:

But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life. […] For this variety preserves the traditions […] it colours the present with the diversification of its fancy (Keynes, CW VII, p. 380).

Hayek, F.A. 1976, Law, Legislation and Liberty: A New Statement of the Liberal Principles of Justice and Political Economy, vol. 2, The Mirage of Social Justice, Routledge and Kegan Paul, London.

Hayek, F.A. 1978, New Studies in Philosophy, Politics, Economics and the History of Ideas, The University of Chicago Press, Chicago.

Hayek, F.A. 1979, Law, Legislation and Liberty: A New Statement of the Liberal Principles of Justice and Political Economy, vol. 3, The Political Order of a Free People, Routledge and Kegan Paul, London.

Hayek, F.A. 1988, The Fatal Conceit: The Errors of Socialism, The Collected Works, vol. I, edited by W.W. Bartley, Routledge, London.

Houle, F., 1988, Hayek et la justice redistributive, in Dostaler G., Ethier D. (eds.), Friedrich Hayek: philosophie, économie et politique, Montreal, Association canadienne-française pour l'avancement des sciences, pp. 199 - 221.

Keynes, J.M., MSS, Keynes Papers, King’s College, Cambridge:1904-6(?), Ethics in Relation to Conduct.1906, Egoism, 24 February.

Keynes, J.M., Collected Writings, Macmillan, London:vol. VII, The General Theory of Employment, Interest and Money (1936).vol. VIII, Treatise on Probability (1921).vol. IX, Essays in Persuasion.vol. X, Essays on Biography.

vol. XVII, 1920-1922 Treaty Revision and Reconstruction.vol. XXVII, Activities 1940 - 1946: Shaping the Post-War World: Employment and Commodities.

Kley, R. 1994, Hayek’s Social and Political Thought, Clarendon Press, Oxford.

Moggridge, D.E. 1992, Maynard Keynes. An Economist’s Biography, Routledge, London.

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We have seen above that Keynes’s rejection both of the extreme

individualism and of state centralism suggested a mid-way role for institutions: the necessary development of semi-autonomous bodies, which stand, or should stand, in the middle between the individual and the state. This represents a defence of the individual. In fact, Keynes’s institutions are necessary to preserve the positive aspects of individualism, while contrasting the negative ones. His defence of the positive aspects of individualism was a defence of individual personality, of the idiosyncrasy of the individual, of the variety of individuals:

it will be the role of this country to develop a middle way of economic life which will preserve the liberty, the initiative and (what we are so rich in) the idiosyncrasy of the individual in a framework serving the public good and seeking equality of contentment among all (Keynes, CW XXVII, p. 369).

Keynes defended individual liberty but he, if necessary, was also keen to set limits and place impediments to liberty, such as, for example, to the building riches when this contrasts with the common good and interest and has negative social consequences.

Free competition and the individualist liberal philosophy of Bentham and of the XIX century stressed negative liberty, thus avoiding limits to existing liberty. Socialism, on the contrary, stressed positive liberty in order to destroy natural or acquired monopolies. His position on liberty was reducible to neither of them (Keynes, CW IX, p. 168). Was then Keynes’s position on liberty a third one?

Keynes did not respect individual rights if the latter contrast with the common interest. What interested him was social justice. For instance, he was contrary to blind respect of money contracts and debts of honour concerning rentiers: “in order to do justice to a minority of creditors [...] a great injustice would be done to a great majority of debtors” (Keynes, CW IX, p. 168). He affirmed that the political problems of humanity consisted in putting together three elements: economic efficiency, social justice and individual liberty.

Peacock, A. 1991, Keynes and the Role of the State, in Crabtree, D. and Thirlwall, A. P. (eds.), Keynes and the Role of the State, St. Martin's Press, pp.

3-33.Skidelsky, R. 1992, John Maynard Keynes. The Economist as Saviour. 1920 -

1937, Macmillan, London.Vanberg, V.J. 1994, Rules and Choice in Economics, Routledge, London.

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Economic efficiency requires “criticism, precaution and technical knowledge”; social justice requires altruism, “an unselfish and enthusiastic spirit” and love for the ordinary man; individual liberty requires “tolerance, breath, appreciation of the excellencies of the variety and independence”; all factors which “give unhindered opportunity to the exceptional and to the aspiring”, that is the virtues of individualism (ibidem, p. 311).

One may wonders where Keynes’s great interest in common ends and public institutions came from. From the very beginning, Keynes thought that institutions and the state should intervene in cases of intrinsic conflict of interests and stand for the defence of common values. In his early paper on Egoism of 1906, Keynes already stressed the irreducible conflict between egoism and “universalism” (altruism). In particular, while Moore thought that, in cases of conflict between the two interests, one should choose for universalism, imposing upon the individual the duty to be universalistic and altruistic, Keynes thought this choice unacceptable. He remained an egoist all his life. Perhaps this early attitude was responsible for his view on the institutions’ duty to be universalistic and altruistic, in defence of the individual.

4.2 - As concerns Hayek, in the process leading up to the Great Society, the individual seems destined to have an increasingly modest awareness of the possible aims. Even his “know that” seems to get smaller. Everything around him - habits, customs, rules of law, spontaneous institutions, deliberate institutions - is aimed at protecting him and allowing him to follow the wisdom of his ancestors and to worry less and less about knowing its contents. Hayek is fully aware of this situation, but he does not express any negative judgement on the loss of the individual’s personality, precisely because it coincides with the fatal conceit of the human mind reducing itself to interference with the spontaneous process. He observes that ignorance is growing with civilisation: “the more civilized we become, the more relatively ignorant must each individual be of the facts on which the working of his civilization depends”. Then he adds that with the progress of civilisation

[...] we command many tools - in the widest sense of that word - which the human race has evolved and which enable us to deal with our environment. These are the results of the experience of successive generations which are handed down. And, once a more efficient tool is available, it will be used without our knowing why it is better, or even what the alternatives are. These ‘tools’ [...] consist of what we call ‘traditions’ and ‘institutions’, which [man] uses because they are available to him as a product of cumulative growth without ever having been designed by any one mind (Hayek, 1960, pp. 26-7).

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Once again within the process leading up to the Great Society, Hayek seems to underestimate the fact that the contextual presence of individuals who are increasingly disposed to accepting conventions, to cope with their growing ignorance, and of representative institutions which are respectful “servants” of spontaneous evolution, can prove to be a source of deep economic and social instability: a source of disorder, in his terminology. In fact, if conventions capable of generating instability take root in society, a vicious circle is established between a “long period” policy in the Hayek sense - in other words aimed at modifying those conventions, but only smoothly and gently - and the action of individuals, increasingly accustomed to them. The long period required to get out of this disorder might prove to be so long as to jeopardise the values in the name of which Hayek is fighting his battle.

So, in the end, what unexpectedly emerges from this investigation is that Keynes’s institutions socialise altruism and bring out the individual’s personality, while Hayek’s institutions and conventions only tend to protect and safeguard him.