Economic Theory

Hayek would have voted to remain


Tax and Fiscal Policy
Economic Theory
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To conjecture what Hayek’s stance might have been on Britain’s EU referendum and the current state of the European project more generally, it is instructive to consider his biography. The first half of Hayek’s long life was characterised by the steady unravelling of the liberal order into which he had been born. In 1899, Europe was practically borderless, with only a handful of the more underdeveloped countries, such as Russia and the Ottoman Empire, requiring passports at their frontiers. It was a world of free trade, large-scale immigration, low taxation and little regulation of private affairs, and a high degree of cultural innovation.

All of that was gone by the time Hayek’s most popular work, The Road to Serfdom, was published in 1944. His native Austria-Hungary, a multinational, polyglot, cosmopolitan and – by the late nineteenth century – liberal monarchy was long dissolved and replaced by nation states, many of them the product of human design at the various peace conferences. The First World War had halted the expansion of world trade, while the Great Depression saw the consensus around monetary policy – the gold standard – and economic policy – laissez faire – challenged and then superseded by more interventionist approaches. Finally, the Russian Revolution of 1917, the ascent to power of Mussolini’s fascists in Italy, and the election of Hitler in 1933 all introduced socialistic forms of government into large parts of Europe.

These events and the horror of World War II shaped postwar developments. On one hand, government planning of a significant share of economic activity was taken for granted. This was the case even in the ‘free’ economies of the West, which competed with the unfree communist countries for intellectual and political dominance. On the other hand, a number of institutions – GATT, the IMF, the UN – were created in a deliberate bid to promote peace, avoid the harmful economic policies of the postwar period and encourage mutually beneficial relations between countries.

Hayek’s life was devoted to go beyond the latter and build the intellectual foundations of a movement which would work to reinstate an updated and improved version of the pre-1914 world order. Some of his key writings – Individualism and Economic Order, Serfdom itself – delve deeply into the sort of international institutions which are needed for freedom and peace to flourish. Others – The Constitution of Liberty; Law, Legislation and Liberty – consider the legal and constitutional foundations on which free societies bloom.

One essay in particular, “The Economic Conditions of Interstate Federalism,” offers a glimpse of what Hayek would have considered a desirable and successful economic federation. Written in 1939, this text is striking not only for the author’s optimism at a time of darkness, but also for the prescience of its observations. Notions familiar to anyone who is acquainted with today’s EU, such as the “free movement of men, goods and capital,” and the emergence of a “single market,” are dealt with extensively in the essay.

In it, Hayek argues that political integration necessitates economic integration in the form of free internal trade, since protectionist barriers will tend to lead to frictions between regions and end up undermining political federation. He posits that economic integration will serve to promote peace among the constituent states and eliminate incentives for protection. He concludes that economic links through international institutions are not only desirable but a requisite development for true liberalism to be restored: “the abrogation of national sovereignties and the creation of an effective international order of law is a necessary complement and the logical consummation of the liberal programme.”

Reading Hayek’s essay, one is left with little doubt that he would have found much to like in the European Union as we know it today. Economic integration through international institutions – first the European Coal and Steel Community, then the European Economic Community, then the European Single Market – has relentlessly eroded national protectionism and served to raise the living standards of even the poorest regions in the least developed member countries.

Perhaps to the chagrin of free-market Eurosceptics, Hayek would arguably have looked approvingly at the emergence of a single currency to replace the various national currencies. He would have been relieved to know that the European Central Bank’s ethos was largely inherited from the Bundesbank’s hard money tradition, rather than the inflationary propensities of French, Italian and Spanish central bankers. And while he might have been disappointed that monetary policy was still a public monopoly, he would surely have welcome the ‘denationalisation’ of currency management and its transfer to a supranational body.

Not everything about the EU would have been to Hayek’s liking, of course. In particular, I think he would have been very critical of the constructivism of EU officials and their foolish drive to create a European identity rather than let one emerge gradually and spontaneously. He would probably also have been shocked at the level of centralised regulation stemming from the EU institutions. However, I believe he would have seen this trend not as an indictment of the European project, but rather as symptomatic of a climate of opinion that was still to be shifted much further in the direction of free markets, not just in Europe but worldwide, where similar regulatory centralisation has taken place.

So much for Hayek’s views on today’s European Union. How about Brexit? Hayek was an Anglophile, an avowed fan of the common law, and sceptical of continental rationalism. As a Burkean, he was also in favour of institutional reform rather than revolution. Thus it seems to me that he would very much have appreciated British involvement in the European project, as a moderating influence on the constructivist tendencies of continental politicians and a healthy liberal counterbalance to German corporatism and French etatism. I cannot possibly imagine Hayek endorsing Brexit, especially now that national sovereignty and border control have become the rallying cries of the Leave camp.

Hypothesising what Hayek’s position might have been on the EU and the upcoming referendum helps us to realise how much the world has changed for the better since Hayek himself surmised about the future of liberalism and the international order. What was wildly utopian in 1939 has now largely become reality along the lines that he envisaged. With that in mind and in light of his own life experience, it is clear to me that Hayek would had advised against a British exit from the European Union.

Diego Zuluaga is the IEA’s Financial Services Research Fellow and Head of Resarch at EPICENTER.

Policy Analyst at the Cato Institute's Center for Monetary and Financial Alternatives

Diego was educated at McGill University and Keble College, Oxford, from which he holds degrees in economics and finance. His policy interests are mainly in consumer finance and banking, capital markets regulation, and multi-sided markets. However, he has written on a range of economic issues including the taxation of capital income, the regulation of online platforms and the reform of electricity markets after Brexit. Diego’s articles have featured in UK and foreign outlets such as Newsweek, City AM, CapX and L’Opinion. He is also a frequent speaker on broadcast media and at public events, as well as a lecturer at the University of Buckingham.

12 thoughts on “Hayek would have voted to remain”

  1. Posted 17/03/2016 at 04:59 | Permalink

    Cannot agree with this article which focuses too narrowly on Hayek as an economist rather than a philosopher. It is is impossible to read ‘The Open Society and its Enemies’ today without concluding that the EU is infected with the Spell of Plato and is the single greatest enemy of the open society in the modern world.

  2. Posted 17/03/2016 at 08:00 | Permalink

    “Hayek would arguably have looked approvingly at the emergence of a single currency to replace the various national currencies” – I don’t think so. Hayek advocated multiple competing currencies even within countries. Where is the evidence that he would have supported a single supranational currency? (Not that this has anything to do with the Brexit debate as the UK isn’t going to adopt the Euro under any likely scenario).

  3. Posted 17/03/2016 at 10:32 | Permalink

    Once again, why do you need to be part of a political union to be part of a trade agreement???

  4. Posted 17/03/2016 at 14:23 | Permalink

    In ‘The Road To Serfdom’, written after his essay on ‘The Economic Conditions of Interstate Federalism’, Hayek’s final chapter was about ‘The Prospects of International Order’. In it he pointed out: “The conflict between planning and freedom cannot but become more serious as the similarity of standards and values among those submitted to a unitary plan diminishes.” This has become ever more evident as the original Common Market with six similar countries has expanded to the European Union with twenty-eight much more diverse countries. Hayek said: “As the scale increases, the amount of agreement on the order of ends decreases and the necessity to reply on force and compulsion grows.” and “One has only to visualise the problems raised by economic planning of even an area such as Western Europe to see that the moral bases for such an undertaking are completely lacking.” and “English people … begin to realise what such schemes mean only when it is presented to them that they might be in a minority in the planning authority and that the main lines of the future economic development of Great Britain might be determined by a non-British majority.” Indeed, in his earlier paper on Interstate Federalism, Hayek concluded: “…there would have to be less government all round if federation is to be practicable.” I doubt if anyone today could argue that the EU has led to less government. I only knew Hayek slightly and I cannot pretend to know how he might choose to vote in the British EU Referendum. But I don’t think there is much in his voluminous writings to support the opinion that he would vote for Britain to Remain in the EU.

  5. Posted 17/03/2016 at 21:46 | Permalink

    The EU Bureaucracy have far more creative way of constraining commrcial freedom than good old fashioned protectionism could ever devise. Uncompetitiveness is imposed on European companies by insane regulations and restrictive labour laws.
    And if the EU Bureaucrats have their way TTIP will be pushed through this year and then the global corporations will be able to practice their own kind of protectionism by squeezing smaller businesses out. And worse, they will be able to sue governments whose lawmakers do anything that might restrict the corporate ability to steal money from taxpayers. It will also make it even easier for global businesses to move work to low labour cost economies. This will result in earnings falling, economies contracting and the gap between the one per cent and the rest of you widening.

    But the article is probably right about Hayek, I haven’t taken much notice of him in the past (Wilkins Micawber is my favourite economist) but like most academics he knew little about how businesses or human communities work.

  6. Posted 17/03/2016 at 23:28 | Permalink

    The EC is staffed by people who wish to impose their (demented) ideology on the natural order of things because they think they know how to run things better.

    Hayek would never put up with that and would vote for Brexit.

  7. Posted 18/03/2016 at 11:16 | Permalink

    Interesting article. I won’t claim to know more about Hayek than the author but I must say that I suspect that Hayek would see the shock of Brexit (and by Brexit I mean the UK leaving the EU but retaining access to the Single Market via EFTA/EEA) is now a necessary corrective to the centralising and explicitly anti-democratic quality that the EU’s political reality and future ambitions possess.

    In terms of reduced trade barriers convergence of standards at the global level is the real prize, rather than via merely regional groupings. In terms of borderless travel, Hayek identified threats to the liberalism he found so important present in European nations pre-mass immigration. It is entirely possible Hayek would have perceived additional threats to liberalism created by the immigration crises currently faced by European states.

    Hayek might indeed have concluded that the only way to defend true liberalism from the perfect storm of unfettered global migration, cultural relativism, the destruction of free speech by political correctness, demographic decline, the suicidal self-hostility of the left and the wilful cultural blindness of the free-market right might be to be re-impose as many of the firebreaks of national sovereignty as is possible.

    Just a thought…

  8. Posted 19/03/2016 at 15:24 | Permalink

    David – I would challenge the statement at the end of your comment. The EU has in my opinion led to less government in many countries on the continent. In some circumstances, it has also caused better government via such things as sounder monetary management, more competitive utility and telecoms markets, less subsidy for national industries, and more trade. The various indices of economic freedom seem to bear out this trend – particularly when you look at the periods immediately after a country joined the EU and, for those countries that were members prior to the Single European Act, in the period immediately following its passage. There does seem to be an upper limit which is probably made firmer by EU regulations which are harder to unravel, but for the majority of member countries this limit is substantially above what they could realistically be expected to have achieved as non-members.

  9. Posted 21/03/2016 at 11:34 | Permalink

    Diego, it may be true that rule from Brussels is less bad than rule from Moscow. Certainly in many respects conditions overall are better today in a number of European countries than they were sixty years ago, as I suspect they probably would have been even without the EU. I question whether we in Britain want to be ‘ruled’ from outside our own country, especially as a subordinate non-euro member-state inside the EU. Of course we want to go on trading with people and firms in Europe, as we have been doing for hundreds of years. There is no reason why that should not continue if we were to leave the anti-democratic EU. Then, in my view, we should try to work with other countries that remain inside to reform the EU, which its own complacent and inflexible eurocrats are clearly unwilling to contemplate. I envisage a Multi Currency Union which would encourage some eurozone members to join and restore their own national currencies. I think Hayek might approve of that!

  10. Posted 21/03/2016 at 14:27 | Permalink

    David – I think he would! The question is whether that is the position the UK will find itself in after a hypothetical Brexit, and also whether it can hope to have any influence then. It certainly has influence as an EU member!

  11. Posted 05/05/2016 at 08:54 | Permalink

    WTF? Do you know who Hayek was at all?

    What a stupid propaganda

  12. Posted 05/05/2016 at 10:32 | Permalink

    At least when Britain is again an independent country it will have 100 per cent responsibility for any negotiations on trade etc. At the moment Britain has, in effect, a 1/28th share in the endeavours of the Swedish former social worker who I believe is in charge of such negotiations on behalf of the EU — the interests of most of whose members in these matters is often very different from Britain’s. Talk about being ‘at the back of the queue’! If Britain’s influence is so great, why has so little progress has been made on extending the Single Market in services some thirty years after the Single Market Act was passed? I know the EU sometimes moves slowly, but that is ridiculous.

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