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Contest Essay

Equality Before the Law and its Role for Transition to Capitalism Thoughts from Hayekian Epistemology and Social Theory


     
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Junior Faculty Winner. Second Prize ($5,000)

I. Introduction

1. Outline of the Problem

This essay examines the role of the traditional liberal value of Equality before the Law for the transformation of former socialistic economies from the perspective of Hayekian social theory with reference to the Hayekian epistemology.

First, we will have look at the idea of Equality before the Law in history and at the systematic place and the role of this traditional principle within the extended work of the Nobel Prize laureate Friedrich August von Hayek in Part II. An outline of the Hayekian epistemology and the explanation of the relation of his epistemology to his social theory will then make clear the role of knowledge in Hayekian thinking, and with such an understanding we are enabled to understand the role of order in society. After gaining this understanding of the importance of knowledge for economic and social issues, we will be able to examine the role of order in society in general as well as the differences between kinds of order in society with respect to the principle of Equality before the Law in Part III. From the Hayekian and knowledge-oriented point of view, we can show that the specific kind of order that follows the principle of Equality before the Law possesses economically superior qualities against orders of Inequality before the law. In Part IV we can then apply these findings to the transformation of economic systems and we will interpret the development from former socialistic regimes to market economies as a transformation from an order of inequality before the law with inferior knowledge processing qualities to an order of Equality before the Law with superior knowledge processing qualities. Part V tries to support the economic relevance of the theoretical considerations empirically, while the conclusion in Part VI offers a recommendation concerning the success of transitional countries. It points out the economic relevance of the fulfillment of Equality before the Law for economic development and it refers to the importance of the realization of basic constitutional and liberal principles necessary for the success of the transition to capitalism.

2. The basic Idea of Equality before the Law

The idea of Equality before the Law is often associated with the late political philosophers of the enlightenment era. Like the ideas of democracy, science, critical rationalism and private property, so the ideas of Equality before the Law and of the Rule of Law embody an important part of the intellectual and cultural foundation of the Occident. As the historian Phillippe Nemo explains, all these ideas are a product of the “morphogenesis of the west”, which consisted of cultural inventions of the old Greeks, the humanism of the old Romans, and the eschatological revolutions of the bible (Nemo 2004). To be able to understand the reasons for the emergence of the intellectual and cultural invention of Equality before the Law, we have to have a look to the political changes after 1 200 BC in the ancient Greece, when the Greeks experienced a crisis of sovereignty through which political power became collectivized. Because more and more decisions of the “Polis” became delegated from the central monarch to the public, a “space of publicity” emerged. And within that space, the arts of rhetoric, logic, and of intellectual reasoning became increasingly important. In such a society the moral value and the universability of the argument obtained more and more power against the social position of the person who was expressing the argument. Therefore, the people themselves experienced themselves continuously more as equals before the law, as is oï, and as equals, as homoïoï (Nemo 2004). Because striking arguments can just as well be stated by the most negligible citizen as from the most notable, citizens became mutually interchangeable. An abstract concept of a person had emerged, according to which each human being was seen as equal before the law and equally bound to the same law. Due to the idea of equality, the number of participants in the political process became bigger, and the number of competing ideas became maximized, so that the competition of ideas as a procedure to discover fruitful problem solving strategies became more effective. Additionally, as a consequence of the new idea that law is something that can be constructed according to the voluntary agreement of people who meet with one another as is oï, the Greeks have realized that man is not only dependent on the physical order of nature, the physis, but that man is also dependent on the order of human conventions, to the nomos (Hayek 1973:20, 94ff).

With the mentioned innovation, the Greeks had invented the principle of government of the law, and indissolubly connected with that they have introduced the idea of individual freedom (Nemo 2004)! Instead of obeying the discretionary commands of personal leaders, the people learned to follow an abstract and mutually voluntarily passed law, which was equally valid for each citizen, even for those in power. Because these rules were known to all members of the society from the start, the Greeks became enabled to choose for themselves whether to come into coercive conflict with the state or not. Since the citizens had the cognitive capacity to anticipate what is allowed and what is not, it became possible for them to take in responsibility for one's own life (Nemo 2004). In accordance with this development, Aristotle stated in the third part of his Politics (16th paragraph): “And the rule of law is preferable to that of any individual. On the same principle, even if it be better for certain individuals to govern, they should be made only guardians and ministers for the law. ... He who bids the law rule, may be deemed to bid god and reason alone rule, but he who bids man rule adds an element of the beast; for desire is a wild beast, and passion perverts the minds of rulers, even when they are the best of men. The law is reason unaffected by desire. (Aristotle 2004:266)” In the fourth part of the same book (14th paragraph), he discusses the relationship between the Rule of Law and the power of the majority, and he concluded that the essential characteristic of an order of freedom is that power is exercised by abstractly formulated and general rules (the rule of law), and not the circumstance that the decisions are approved by a majority.

The ideas which arose in the ancient Greek society were discussed and formulated more precisely later by the later English philosophers in the 18th century. Most notably, the representatives of the Scottish moral philosophy like David Hume, John Locke, Adam Smith, or Adam Ferguson referred again to basic liberal ideas like Equality before the Law. Moreover, the tradition of Greek philosophy and of Scottish moral philosophy finds a lot of continuity in modern economics, and this continuity is rooted at least in the considerations of Adam Smith, who laid the intellectual foundations for modern economics. In the following paragraph we want to think about the idea of Equality before the Law from the standpoint of a prominent economist who can be regarded as an advocate of the mentioned classical ideas.

II. Hayekian Perspective

1. Hayek and Equality.

In his social theory, Hayek refers unequivocally to the tradition of the Scottish moral philosophers (Hayek 1973:20, 22). Furthermore, it is Hayek who gives an epistemological framework, which can be used as a framework to explain the role of the old idea of Equality before the Law for economic development.

The importance of Equality before the Law in Hayek’s thinking becomes obvious in his political main work The Constitution of Liberty when he states: “The great aim of the struggle for liberty has been Equality before the Law. (Hayek 1960:85)” According to him, the equality of the citizens before general rules of law and conduct which are seen as just is the only kind of equality which can be secured without destroying liberty. Further, he refers to the important difference between the different interpretations of equality: “It is of the essence of the demand for Equality before the Law that people should be treated alike in spite of the fact that they are different. (Hayek 1960:86)” Hayek did not believe all men are born equal, but did believe that the widely held uniformity theory of human nature would in time undermine the very basic ideals of freedom (Hayek 1960:86). Because people are very different it follows that, if we treat them equally, the result must be inequality in their actual positions, and that the only way to place them in an equal position would be to treat them differently (Hayek 1960:87). Facing the obvious differences between people, if we want to make unequal people equal we need to rely on isolated case decisions to determine who gets what. Thus, the establishment of social conditions, like material equality, necessarily needs deliberate discrimination of redistributing authorities. Thus, such a kind of planning necessarily involves deliberate discrimination between particular needs of different people, and allowing one man to do what another must be prevented to do. As Hayek concludes in agreement with Aristotle: “It is the rule of Law, in the sense of the rule of formal law, the absence of legal privileges of particular people designated by authority, which safeguards that equality before the law which is the opposite of arbitrary government. (Hayek 1944:87)” Or, in other words: “Equality before the law and material equality are therefore not only different but are in conflict which each other; and we can achieve either the one or the other, but not both at the same time. (Hayek 1960:97)”

With reference to the example that even Hitler acted in accordance with constitutional rules, he explains that the idea of the “Rule of Law” means more than that politicians have to follow rules. The principle of Rule of Law can safeguard Equality before the Law only under the condition that it is understood as the principle that general and abstract law should be the only way of exercising power: “The Rule of Law thus implies limits to the scope of legislation: it restricts it to the kind of general rules known as formal law and excludes legislation either directly aimed at particular people or at enabling anybody to use the coercive power of the state for the purpose of such discrimination. (Hayek 1944:92)” Thus, the Rule of Law and Equality before the Law means that the coercive power of the state can be used only in cases defined in advance by the law which is equal for all.

Hayek supported limited government and Equality before the Law not only because he thought it was morally just, but because he recognized that limiting government and Equality before the Law prevents corruption and lays the basis for the emergence of a spontaneous market order and for a fruitful economic process. But to reveal the relation between the realization of Equality before the Law and the creation of wealth in Hayek’s reasoning, and to be able to apply this relation to the transformation economies, it will be advantageous to have a look at his epistemological ideas.

2. Hayekian Epistemology

In his epistemological work The Sensory Order from 1952, Hayek describes the human mind as an instrument of classification. According to his interpretation, the only way for human beings to receive information from their environment is through the process of classification. Thus, according to Hayek, all we know about the world is known only in the form of how our nervous system classifies incoming impulses (Hayek 1952:55ff). The objects of the physical world are not tangible to our mind; rather our mind consists merely of a system of classifications of objects of the physical world. It follows that the only way in which the world can affect our mind is that it changes or a refines these classes. If sensory perception must be regarded as an act of classification, then what we perceive can never be unique properties of individual objects but must always be only properties which these objects have in common with other objects. Perception is thus always an interpretation, the placing of something into one or several classes of objects. But referring to classes of “something” necessarily means to use abstractions of “something”. For example, if the class A consists of the single elements a1, a2, a3, and a4, talking about properties of A means to deviate from the properties of the single elements. Because information about classes of information is, therefore, always abstract, it follows that human perceptions are necessarily abstract from the start. All sensory perception is therefore in a sense “abstract” (Hayek 1952:142ff).

The inherent abstractness and limited character of the human is not only a central element of Hayek’s epistemology. He also applies his findings to his social theory, as we can see in the beginning of his main work Law, Legislation and Liberty when he argues: “Thus considered, abstraction is not something which the mind produces of logic from its perception of reality, but rather a property of the categories with which it operates—not a product of the mind but rather what constitutes the mind. We never act, and could never act, in full consideration of all the facts of a particular situation, but always by singling out as relevant only some aspects of it. (Hayek 1973:30)” The following paragraph is intended to show the importance of his epistemological reasoning for his social theory.

3. Relation of Epistemology and Social Theory

Hayek’s epistemological realization of the inevitable abstractness and restrictedness of human perception had a strong influence on his social theory. This becomes obvious when he discusses the different kinds of orders in society: “The chief difficulty is that the order of social events can generally not be perceived by our senses but can only be traced by our intellect. It is, as we shall say, an abstract and not a concrete order. (Hayek 1963:457ff)” Here he refers to the limited capacity of the single human mind to realize specific features of the real world, and it is for that epistemological limitation that human beings are dependent on orderly structures in society! Given the infinite number of possible interactions of individuals, the performance of the restricted human mind depends on regularities within society; and such regularities, such an order in society is brought forth by rules. Thus Hayek describes the solution for the epistemological problem when he relates the problem of the limitations of the human mind to the rules: “The only manner in which we can in fact give our life some order is to adopt certain abstract rules or principles for guidance, and then strictly adhere to these rules we have adopted in our dealings with the new situations as they arise. (Hayek 1967:90)” While the mentioned “abstract rules or principles” can also be found by means of intellectual construction, we can suppose that the lion’s share of the rules which actually govern our behavior in society can be seen as a heritage from cultural and biological evolution.

The ability to living as members of society is dependent on the satisfaction of most of our needs from various forms of co-operation with others. Facing the restrictions of our mind, we depend on the reliability of our expectations concerning the actions of others on which our plans are based. Abstract rules or principles of guidance, may they constructed intellectually or may they be a cultural heritage, can be seen as tools for improve the quality of our expectations. This matching of the intentions and expectations that determine the actions of different individuals is the form in which order manifests itself in social life (Hayek 1973:36).

4. The Role of Knowledge

As we have already mentioned, for Hayek economic reasoning is connected with reasoning about epistemological issues, or, with reasoning about knowledge. In his mentioned book The Sensory Order, he gives reference to his profound experience in thinking about epistemological problems and it would be more than unlikely that these skills have not influenced his reasoning about social issues. But while in his main writings Hayek refers to his epistemology only rarely, the importance of knowledge for his social theory is evident. I only want to mention here his reasoning on cultural evolution, the role of rules as cognitive tools to master environmental problems, the reasons for his rejection of central planning, and his view of the market as an instrument to discover and to utilize dispersed knowledge. Additionally, in early methodological writings such as “Economics and Knowledge” (Hayek 1937) and in “The Use of Knowledge in Society” (Hayek 1945) he refers explicitly to his epistemological ideas.

For example, in his important political contribution The Road to Serfdom Hayek makes an argument against central planning with reference to the restrictions of human knowledge: “If individuals are to be able to use their knowledge effectively in making plans, they must be able to predict actions of the state which may affect these plans. But if the actions of the state are to be predictable, they must be determined by rules fixed independently of the concrete circumstances which can be neither foreseen nor taken into account beforehand: and the particular effects of such actions will be unpredictable. (Hayek 1944:84)” And he continues that if, on the other hand, the state were to direct the individual’s actions so as to achieve particular ends, its action would have to be decided on the basis of the full circumstances of the moment and would, therefore, be unpredictable. Hayek concludes: “Hence the familiar fact that the more the state ‘plans,’ the more difficult planning becomes for the individual. (Hayek 1944:84)” And later: “The important question is whether the individual can foresee the action of the state and make use of this knowledge as a datum in forming his plans ... (Hayek 1944:89)”

Since at least economic success rests on the possibilities of making economic plans, the relationships between knowledge, order in society, and economic success in Hayek’s work becomes clear. Finally, it could be said that from a Hayekian point of view the fulfillment of Equality before the Law in a society plays an economic role, which could be explained with reference to the epistemological reasoning about the use of knowledge in society. After we had a look at the general role of knowledge in society in the previous section, the economical relevance of Equality before the Law for transitional countries will become obvious when we will now have a look to the different kinds of order in society.

III. The Role of Order in Society

1. Order in Society

To understand the economic importance of Equality before the Law and the relevance of the realization of this principle especially for transformation economies, we want to understand firstly the differences between two different kinds of order in society and secondly the epistemological relevance of these differences.

The term “order” is frequently avoided in social sciences, and this avoidance could be explained by several arguments. For instance, the term could be misinterpreted in an authoritarian and, therefore, in a negative sense, while the imagination of orders which are non-authoritarian seem to be comparatively difficult for a lot of people. But in some sense it could even be said that social theory begins with the discovery that there exists orderly structures, which are the product of the action of many men, even if they are not necessarily the result of human design. Here the analysis of the “unintended social consequences of individual behavior” by Adam Ferguson or the concept of the “invisible hand” of Adam Smith (Hayek 1973:20) could be mentioned as examples. Irrespective of possible misinterpretations of “order”, Friedrich August von Hayek provides a definition of the term which is abstractly formulated and, therefore, largely free from negative connotations: "By ‚'order‘ we shall throughout describe a state of affairs in which a multiplicity of elements of various kinds are so related to each other that we may learn from our acquaintance with some spatial or temporal part of the whole to form correct expectations concerning the rest, or at least expectations which have a good chance of proving correct. (Hayek 1973:36)“ This specific and very general understanding of “order” is relatively inaccessible for ambiguous valuations until it is applied to social applications like in Hayek’s definition of a society: “We call a multitude of men a society when their activities are mutually adjusted to one another. ... Their relations, in other words, show a certain order. (Hayek 1963:457)”

Now we are going to examine the basic principles of social organization, firstly with respect to the realization of Equality before the Law in each of these principles, and secondly with respect to their characteristics from an epistemological point of view. It has to be mentioned that the two basic orders in society, the Organization and the Spontaneous Order, will be presented in their pure and extreme forms, while in reality these forms nearly do not exist in the presented pure forms but they typically exist only in mixed forms.

2. Oikonomia

The first kind of social order in Hayek’s thinking is the Organization, or—to use the terminology of the old Greeks—the Oikonomia or the Taxis. Typical examples for organizations are single companies, armies, departments of a government, or whole governments of countries. This kind of order is to be seen as an order, which is “made” by an exogenous agency or actor, in other words it is regularly a social order, which is deliberately planned (Hayek 1973:36). According to its single planning agency it can be also said that an Organization has a “monocentric structure”. Because it is deliberately planned by a human mind, it is normally also a “relatively concrete” order, and, therefore, it is regularly also perceptible and understandable by the human mind. An organization typically has a special and definite purpose, which is dependent of the purposes of the agent which has created the organization. Therefore, and with reference to the Greek term telos, which means “aim”, it could be said that an organization is a “teleological” social order. It follows that the elements of such an order, that is the members of the organization, have to have aims which are in correspondence with the telos of the organization, so that its members typically have homogeneous aims. For example, in an army which has the aim of conquering a certain territory, each soldier of that army has to share that aim, and within a commercial company the aims of each employee have to be in accordance with the general aim to make profit. The basic mode of how power in this basic kind of social order is executed is the execution of power over persons, and it follows that the most fundamental form of social relations in organizations is the hierarchical relation.

The principles of the organization can also be applied to whole societies. Socialism as the political system of the Central Eastern European and former Soviet Union Countries before 1989 were typical applications of organizational principles to whole societies. They were planned by specific actors like a party or a politburo, were led by leaders like Stalin or Tito, and they had a certain telos, an aim, which consisted of wealth and material equality of the members of the society. But as Hayek has stated, the fulfillment of material equality stands in a certain conflict with the fulfillment of Equality before the Law (Hayek 1960:97), so it could be said that socialistic systems are orders of material equality, rather than orders of Equality before the Law.

Important for our actual consideration is the typical type of rules, which are used to form this kind of order. The rules are necessary to form an organization are typically prescriptive, relatively concrete, and positively formulated, which means that they say something about what people have to do and instead of only forbidding certain actions. Hayek uses the Greek term thesis when he refers explicitly to this specific kind of positive rules (Hayek 1973:126ff). And an import feature of these rules which are fundamental for organizations is that they normally do not have the same validity for each member of this order: normally neither commands in an army nor orders within a company have the same relevance for all members of the order. Again it can be said that the Organization is the order of Inequality before the Law.

The capacity of this kind of social order to process information and knowledge is limited because it is bound to the capability of the single planning agency. Additionally, because of the far-reaching absence of Equality before the Law, the forming of correct expectations besides the single member concerning the future is hindered in an Organization. For example, the application of personal skills within a company depends rather on the changeable strategies of the company leader than on abstract formulated rules. As a consequence, the ability of this kind of order to help the single economic actors to cope with their cognitive limits is regularly low. In a Hayekian, knowledge oriented and epistemological influenced perspective, this deficit has a negative effect on the efficiency of economic systems.

3. Catallaxia

The second kind of social order which is central in Hayek’s thinking is the Spontaneous Order, or—to use again the terminology of the old Greeks—the Catallaxia or Kosmos. The term Catallaxia comes from the Greek verb kattalein, which has not only the meaning of exchange but can also mean to make a former enemy to a friend, or to admit someone into a community. It is likely that Hayek has got the inspiration to think about Spontaneous Orders from the Epistemologist Michael Polanyi (Polanyi 1951:154-200). A typical example for Spontaneous Orders in the physical nature could be the order of atoms in a crystal, while the typical example for a Spontaneous Order of social relations is the order of the market with all its division of labor. Also the human language could serve as an example for a social Spontaneous Order. Such orders cannot be seen as orders, which are made from an exogenous agency or actor; rather they evolve spontaneously and endogenously. (Hayek 1973:36) In other words, these kinds of orders are regularly not planned, like Hayek expresses it with reference to an example from natural science: “We could never produce a crystal by directly placing the individual molecules from which it is built up. (Hayek 1963:459)” According to the absence of a single planning agency it can be said that a spontaneous order has a polycentric structure. Because this kind of order is regularly not planned by deliberate design, it is a relatively abstract order, which means that it is—especially for the case of social Spontaneous Orders—regularly not necessarily perceptible and not understandable for the human mind. A Spontaneous Order typically has no special and definite purpose, rather it can be said that the single elements of Spontaneous Orders have their own purposes and aims. Therefore, it could be said that a Spontaneous Order is a non-teleological social order without a certain collective aim besides the aims of its single elements. It follows that its members can have heterogeneous aims: in a market the buyers and the sellers could have completely different aims, but, nevertheless, they are producing a certain kind of order. The basic mode of execution of power in this basic kind of social order is the execution of power over things, which means power over property; and one of the most significant characteristics of the social relations in spontaneous orders is the Equality before the Law of the single members!

Like the principles of the organization, the principles of the Spontaneous Order can also applied to whole societies. A market economy, a capitalistic system or—to follow the terminological preferences of Hayek—the Catallaxia is such an application. The structures of a Catallaxia are typically not planned by specific actors like a party or a politburo, their elements are independent in determining their aims, its elements are not led by central leaders, and they have no certain telos. Rather the evolution of these structures is dependent upon abstractly formulated rules, which are the same for all elements of that society! Because of the mentioned conflict between the two “equalities” it could be said that spontaneous market orders—in contrast to Organizations—are orders of Equality before the Law, rather than orders of material equality.

Important for our actual consideration is the typical type of rules, which is used to form this kind of order. They are typically proscriptive, relatively abstract, and negative formulated, which means that they say something about what people are not allowed to do, instead of prescribing certain and definite actions. Hayek uses the Greek term nomos when he refers explicitly to this specific kind of positive rules (Hayek 1973:94ff). But the most import feature of the rules which are fundamental for organizations is that they have normally the same validity for each element of the order: “Rules which are to enable individuals to find their own places in a spontaneous order of the whole society must be general; they must not assign to particular individuals a status, but rather leave the individual to create his own position. (Hayek 1963:463)” Hayek addresses explicitly this kind of rules when he refers to “rules of just conduct” (Hayek 1976:197) and he explains in detail the evolvement of these rules in the process of cultural evolution. These rules, the nomos, are necessary to guide a fruitful market process. It can be said that the spontaneous order is the traditional and true order of Equality before the Law!

The capacity to process information of Spontaneous Orders is regularly higher than the capacity of an Organization, and this is because it is not bound by the capability of any single planning agency. Rather, Spontaneous Orders of persons under a framework of abstract and general formulated rules, which have the same validity for all people are the most effective way to utilize as much from the hidden and economically relevant knowledge about scarcities and about human needs, the knowledge which is dispersed within society. The mechanism, which is used to transfer and to process the knowledge in spontaneous market orders is, according to Hayek, the price mechanism. In his view, the price systems serves as an informational system just as the internal “preferences” or “valuations” serve as cognitive instruments within the human mind: “Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to co-ordinate the separate actions of different people in the same way as subjective values help the individual to co-ordinate the parts of his plan. (Hayek 1945:85)” And while in a planned order of inequality before the law expectations cannot be applied to any member of the society in the same way, in a catallaxia all participants of the market process meet as equals before the law, and this fact enables the full utilization of experience in the market process. Additionally, the principle of Equality before the Law of all participants maximizes the number of competing alternative problem solving solutions within an economic system and, therefore, the probability to find the most fruitful product or strategy. As a consequence, the ability of this kind of order to help the single economic actors to cope with their cognitive limits is regularly very high. This advantage of spontaneous social orders to process more of the economically relevant knowledge has, as we will see, its effect on the efficiency of economic systems.

IV. Knowledge and The Transformation of Order

1. Economic Effects of Information Processing Characteristics

As we have seen, the different kinds of rules are economically relevant because they produce different types of orders, and these different orders have different capabilities to process dispersed knowledge. Thus the economic relevance of rules can be described in Hayek’s words: “The aim of the rules must be to facilitate that matching or tallying of the expectations on which the plans of the individuals depend for their success. (Hayek 1973:98)” With reference to the equivalence of classification and abstraction he relates the process of abstraction, the role of general rules of just conduct, and the idea of liberalism to one another: “Although the use of abstraction extends the scope of phenomena which we can master intellectually, it does so by limiting the degree to which we can foresee the effects of our actions, and therefore also by limiting to certain general features the degree to which we can shape the world to our liking. Liberalism for this reason restricts deliberate control of the overall order of society to the enforcement of such general rules as are necessary for the formation of a spontaneous order, the details of which we cannot foresee. (Hayek 1973:32)” Also, he refers explicitly to the spontaneous order of Equality before the Law when he describes the most effective way to use the dispersed knowledge: “It is the only procedure yet discovered in which information widely dispersed among millions of men can be effectively utilized for the benefit of all—and used by assuring to all an individual liberty desirable for itself on ethical grounds. (Hayek 1976:70)” Therefore, from a Hayekian epistemological standpoint it appears to be economically necessary to restrict individual behavior by general rules because of the cognitive limits of the single mind! Or, as Hayek expresses it: “It is, in other words, our restricted horizon of knowledge of the concrete facts which makes it necessary to coordinate our actions by submitting to abstract rules rather than to attempt to decide each particular case solely in view of the limited set of relevant particular facts which we happen to know. (Hayek 1963:465)” It may sound paradoxical that rationality should, thus, require that we deliberately disregard knowledge which we possess, but this is part of the necessity of coming to terms with our unalterable ignorance of much that would be relevant if we knew it. As the Hayekian epistemology has showed us, this paradox is a result of the fact that, in contrast to our superficial, introspective experience, all perception consists of abstractions. With implicit reference to his own epistemology, Hayek states: “It is the great lesson which science has taught us that we must resort to the abstract where we cannot master the concrete. (Hayek 1963:466)”

Applying the presented theoretical framework of the different kinds of orders to real economic systems, the process of transformation from socialism to capitalism can be interpreted as an institutional change from an oikonomia, which is based on prescriptive rules, and commands, which are regularly unequal for the members of the society, to a catallaxia, which is based on proscriptive and abstract formulated rules with the same validity for each member of the society. Furthermore, according to the Hayekian observation that the two possible interpretations of “equality” are in conflict with each other (Hayek 1960:97), transformation can be interpreted as the transformation from a political system, which follows the idea of material equality into a system, which follows the competing ideal of Equality before the Law. Facing the different capabilities of the two orders to utilize the dispersed knowledge in society it can be said, that this institutional transformation to an order of Equality before the Law also means an improvement of economic success of the respective order. Such an interpretation could be fruitful for the analysis not only with respect to the transitional countries in Central, Eastern or Southern Europe, but also in other countries which want to strengthen their market economic character, for example Afghanistan, Iraq, or China.

2. Socialism as an Oikonomia

We will now have a look at typical characteristics of socialistic political and economical systems, emphasizing that the ideas of socialism stick to the idea of the “organization” and that these social orders are necessarily characterized by inequality before the law.

Like a typical Organization, the classical socialistic regime followed a definite and homogeneous goal, and that goal was expressed through the idea of “Communism”. We can read in the program of the IX. party conference of the Socialistic Unity Party (SED) of the German Democratic Republic (DDR) from 1976: “Communism—that is the classless order of society in which .. all members of the society are footed socially equal ... and which is governed by the principle: ‘from each according to his ability and to each according to his need’ (SED 1976:73)”. The mentioned Marxian idea of “from each according to his ability and to each according to his need” was translated into public policy by a variety of political instruments. Selective subsidizing of goods and services, rationing of goods, and administratively fixed uniform wages for nearly all occupations are only a few examples. Thus, classical socialistic systems typically followed the ideal of material equality rather than the ideal of Equality before the Law. Typical socialistic regimes tried to achieve this aim by central planning, a style of administration, which has, according to the socialist ideology, an economic as well as a moral superiority against the “anarchy of the market”. To exercise the “superior” central planning according to the will of the working class, dictatorship was officially accepted and wanted. But this dictatorship was not exercised by the working class directly; rather it was “represented” by the party, which was seen as the only authorized “interpreter” of the official ideology, the “Socialistic Scientism”. This central power was exercised in economic relations through the various state owned companies and agricultural cooperatives. The extent of this power could be imagined, if we have a look at the share of the public sector as a percentage of GDP in European Socialistic Countries shortly before the start of the transitional process in 1989: in the year 1988, the Public Sector produced 99.3% of the GDP in Czechoslovakia, 96.4% in East Germany and 95.5% in Romania (Kornai 1992:72).

Additionally, the administration in socialistic systems exercised a lot of influence into the civil society via “mass organizations,” which were also led by the ruling socialistic parties. Neither in civil nor in economic life there were independent actors which could be seen as equals before the law. (Kornai 1992:33ff) Since the central planners in such political systems were subject only to the “interests of the working class”, and not to any constitutional law or to the aims of independent individuals, they had exercised their power not according to the Rule of Law but to the rule of reason—which means necessarily that they had to treat different persons unequal! Or, as Hayek expresses it: “A necessary, and only apparently paradoxical, result of this is that formal Equality before the Law is in conflict, and in fact incompatible, with any activity of the government deliberately aiming at material or substantive equality of different people, and that any policy aiming directly at a substantive ideal of distributive justice must lead to the destruction of the Rule of Law. (Hayek 1944:87)”

V. Empirical Study

1. Rule of Law and Equality before the Law

In our considerations of the role of knowledge we have seen that Equality before the Law, the basic principle of the spontaneous market order, is supposed to have certain relevance for economic performance. For Hayek, the idea of a non-discriminating social order in which all people are treated equally before the Law is not only related to, rather it is to be seen as the core of the idea of the Rule of Law (Hayek 1944:87, 92). Since until now there has been no estimation of the realization of Equality before the Law available, we want to make use of this tight relation between the two principles of liberalism.

The realization of the principle of the Rule of Law had been estimated by Kaufmann, Kraay, and Mastruzzi in 2003 and we want to use this index as a proxy for the realization of Equality before the Law in single transformation counries. To estimate economic performance, we will use the Gross National Income in single transformation countries. To see the relation between these basic liberal principles and the economic performance we have depicted in the following chart on the X-axis the estimation variable for the realization of the principle of the Rule of Law in the single transformation countries. The variable reaches from -2.5 for countries which treat their people completely unequal up to +2.5 for the (imaginary) country, which provides full Equality before the Law to its citizens. At the Y-axis we can see the Gross National Income of each of these countries, measured by the Worldbank per year and per capita according to the Atlas method (Worldbank 2003).

The above graph clearly shows a positive relationship between the Rule of Law index of Kaufmann, Kraay, and Mastruzzi at the X-axis and the income parameter on the Y-axis.

2. Constitutional Framework

To support this result, we want to compare the Gross National Income also with the parameter for “Constitutional, Legislative, and Judicial Framework” of the Freedom House’s annual “Freedom in the World” survey, because this parameter explicitly refers to the fulfillment of Equality before the Law (Freedom House 2004) and could, therefore, serve as an additional proxy. The mentioned parameter reaches from 1 for a good constitutional framework and high Equality before the Law up to 7. On the Y-axis you will find again the Gross National Income per year and per capita in 2002, measured by the Worldbank (Worldbank 2003).

Like in the first chart one can see a clear relationship between our proxy for the fulfillment of Equality before the Law and national income.

3. Explanation of the Results

As we have pointed out, the transformation process of former socialistic states to market economies can be interpreted with reference to the Hayekian kinds of orders as a transformation from a society, which is organized according to the principles of the Organization, to a society, which possesses the characteristics of a Catallaxia. With respect to the institutions and rules, which form the order in society, it can also be stated that transformation means an institutional change from an order of mainly prescriptive, concrete commands to an order of mainly proscriptive, abstractly formulated rules. Additionally, we have found out that in the Hayekian view the use of knowledge in society plays a crucial role in affecting the success of the overall economic process. Since we have also seen that societies which are organized according to the principles of the Catallaxia, have a higher capacity to process knowledge than those orders which obey the rules of the Organization, it could be expected that the catallactic structures support economic success better.

As we have argued, the order of the Oikonomia can be expected to have only a low capacity to process economically relevant knowledge. In the real existing socialistic systems that deficit became visible in the poor innovative forces and in the regular shortages in all markets: while lacking innovation is a phenomenon of the missing discovery of new knowledge, shortages are the phenomenon of a lacking exchange of knowledge about scarcities and needs! On the other hand, the Catallaxia possesses the necessary characteristics to discover and to exchange knowledge. In capitalistic and catallactic systems the characteristics are regularly provided by the mechanism of competition and the price system. The price systems serves as information systems just as the internal “preferences” or “valuations” serve as cognitive instruments within the human mind. Or, expressed differently, “We need decentralization because only thus can we insure that the knowledge of the particular circumstances of time and place will be promptly used. (Hayek 1945:84)”

If we describe the transformation process as a institutional change from thesis to nomos, that means a change to an order of Equality before the Law, then the above charts show that the more perfect this change is realized, the more successfully the economy works. Or, in other words, the closer an economic order comes to the ideal of the Catallaxia, the order of Equality before the Law, the wealthier the participants of that order can be. But, on the other hand, if political systems adhere to their organizational principles of socialism and of inequality before the law, they omit the opportunities to discover innovations and to make use of the knowledge which is dispersed among society. Differences between the success of implementation of the principles of the spontaneous market order in the constitutional framework as well as differences between the economic impact of such implementation can be explained, like Zweynert and Goldschmidt have done recently, with reference to the different cultural legacies and the different “informal institutions” (also with reference to cognitive reasoning) in the single countries (Zweynert/Goldschmidt 2005).

VI. Conclusive Remarks

With respect to the intellectual history of the occident and to the work of Friedrich August von Hayek we have pointed out the importance of the principle of Equality of Law for liberalism and for economic performance. The systematic place of the struggle of liberalism for Equality before the Law in Hayek’s work is to be found in his differentiation between the fundamental principles of order in society. Since in his work the order of Equality before the Law is the Spontaneous Order or the “Catallaxia”, the transformation from a central planned society to a catallacitic and spontaneous order can in a Hayekian sense interpreted as a transformation to a liberal order of Equality before the Law! And while the principles of the Organization can be fruitfully applied in hierarchical social orders like armies or companies, for whole “open” societies only the application of the principles of the Spontaneous Order can cause positive effects to the processing of knowledge in these societies.

The role of order in society for the processing of knowledge has been explained with reference to the Hayekian epistemology, while the role of knowledge for the economic performance of societies has been explained with reference to his social theory. Additionally, the theoretical relation between the order of a society and its economic performance has been tried to express with statistical figures. We have shown that those countries, which became better examples for the realization of the liberal value of the Rule of Law, have regularly a higher income per capita. As a consequence it could be stated that Equality before the Law is not only important with respect to the fulfillment of human rights in an ethical sense. Additionally, the realization of Equality before the Law is has economic importance, which is by no means an argument with less moral value. With respect to the transitional countries it could also be stated that the success of transition depends, in addition to a lot of other important parameters, on the grade of the realization of the principle of Equality before the Law and of the Rule of Law in those counties! The recommendation to transitional countries from the standpoint of this article is, that if these countries want to improve the wealth of their citizens, they have to realize the value of Equality before the Law! Major steps to fulfill this goal would be to install and to respect constitutional structures and to realize and to adhere to the basic principles of liberalism.

VII. Literature

Aristotle (2004): Selections from Nicomachean Ethics and Politics, The Collector's Library of Essential Thinkers, London.

Hayek, F. A. (1937): Economics and Knowledge, in: Economica IV 1937, S. 33-54.

Hayek, F. A. (1944): The Road to Serfdom, University of Chicago Press, Chicago.

Hayek, F. A. (1945): The Use of Knowledge in Society, in: American Economic Review, XXXV, No. 4, September, S. 519-530. Reprinted in: Individualism and Economic Order (1948), University of Chicago Press.

Hayek, F. A. (1952): The Sensory Order: An Inquiry into the Foundations of Theoretical Psychology, University of Chicago, Chicago.

Hayek, F. A. (1960): The Constitution of Liberty, The University of Chicago Press, Chicago.

Hayek, F. A. (1963): Kinds of Order in Society, New Individualists Review, Vol. 3(2), pp. 457-466.

Hayek, F. A. (1973): Law, Legislation and Liberty, Vol. I: Rules and Order, The University of Chicago Press, Chicago.

Hayek, F. A. (1976): Law, Legislation and Liberty, Vol. II: The Mirage of Social Justice, The University of Chicago Press, Chicago.

Hayek, F. A. (1967): Studies in Philosophy, Politics and Economics, University of Chicago Press, Chicago.

Kaufmann, D./Kraay, A./Mastruzzi, M. (2003): Governance Matters III: Governance Indicators for 1996-2002, Worldbank 2003.

Kornai, J. (1992): The Socialist System: The Political Economy of Communism, Claredon Press, Oxford.

Nemo, Ph. (2004): Qu'est-ce que l'Occident?, PUF, collection Quadrige, Paris.

SED (1976): Programm der Sozialistischen Einheitspartei Deutschlands, erschienen zum IX. Parteitag der SED, Dietz Verlag, Berlin (own translations).

Smith, A. (1759): The Theory of Moral Sentiments, London.

Worldbank (2004): GNI per capita 2003, Atlas method and PPP, World Development Indicators database, Worldbank, www.worldbank.org.

Zweynert, J./Goldschmidt, N. (2005): The two transitions in Central and Eastern Europe and the relation between path dependent and politically implemented institutional change, in: Freiburger Diskussionspapiere zur Ordnungsökonomik, http://www.eucken.de.






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