Various authors consider the Austrian theory as belonging to heterodox economics, but this seems inappropriate, particularly for the competition theory of Friedrich August von Hayek. In fact, it is not enough for an economic theory to be different (more in appearance than in reality) from neoclassic economics for becoming “heterodox”. And this especially if this “different theory” leads to the same ideological implications of neoclassical economics (in particular in its most extreme versions).

But what are, in summary, the main differences between neoclassical theory and Hayek’s theory? For the neoclassicals, the market economy leads, when markets are sufficiently “perfect”, to efficient equilibria. In the sense that firms minimize costs and consumers maximize utility. If, on the other hand, the markets are highly imperfect ― for example, due to the presence of monopolies and oligopolies, information asymmetries, externalities ― this optimal equilibria are not realised. The general prescription of the neoclassical economists is therefore laissez faire, which, however, should be accompanied by competition policies aimed at approaching the perfection of the markets as much as possible.

With respect to this position, Hayek’s theory* can be so synthesized: competition is a discovery procedure whose final outcome, the so-called “spontaneous order” ― he mentions as examples sporting events, examinations, the awarding of government contracts, the bestowal of prizes for poems and scientific procedures ― cannot be predicted in advance. This being the case, there is no point in trying to obtain perfect markets where optimal equilibria can be achieved. In fact, in all this uncertainty, one thing is certain: in a capitalist market system ― even if there is an oligopolistic structure that severely limits competition ― it is better to adopt the most complete laissez faire. In fact, every public intervention is automatically associated with the “road to serfdom” of the centralized planning of the countries of real communism.

This theory has had a considerable appeal, even in the progressive field, because it seems more flexible and dynamic. And it certainly has the merit of pointing out the imperfections of public action. In reality, however, this theory has also given rise to a “fundamentalism of the market”, to which also Milton Friedman was inspired, which laid the basis for the neoliberal reaction that began in the second half of the 70s. As a matter of fact, Hayek was among the main founders of the ultraliberal Mont Pelerin Society and was an important inspirer of the policies of Reagan and Thatcher. Such “inspiration” concerned also the monetary side, where Hayek was a fervent advocate of a monetary policy based on high real interest rates. A policy that gave rise in the 1980s to the massive financialisation of the economy, accompanied by a parallel vast and widespread increase of public and private debt.

This fundamentalism of the market is much more ideological and superficial than the theories of the early neoclassicals―based however on simplifying hypotheses similar to wishful thinking, such as the “rationality” of the consumer, perfect markets and homogenous, “rational” and profit maximizing firms. On that account, Alfred Marshall and Léon Walras underscored that their models apply only in specific cases, and that public intervention is necessary to approach the conditions of perfect competition.

Walras, in particular, went a long way in this direction. In a little-known text (and clearly “forgotten” by the neoliberal doctrine), Studies in Social Economics, he proposed**, within the framework of an articulated theory of public and private action, the abolition of taxes on work (including “management wages”, i.e. profits net of rents deriving from market power). And, nothing less, the complete nationalization of the land and of all public soils, combined with a strict control and/or nationalization of public utilities. Of course, his well-known general equilibrium analysis remains highly static and simplistic.

In this context, the discovery procedure emphasized by Hayek tends to overlook the presence of high market power and other imperfections in the reality of the oligopolistic markets of our time. This economic power, in particular of big firms – by allowing the “free unfolding” of unfair deals and exploitation over workers and consumer and the negative externalities on the society – severely limit or bring to nothing the scope of the Hayek’s discovery procedure. It as if, in the examples provided by Hayek (sporting events etc.), the underlying rules and their application were systematically biased in favour of the more powerful competitor. But for Hayek such oligopolistic markets work quite well, with one exception (and it is easy to guess which one): that of labour, where “rigid wages” due to the action of unions are considered the main cause of economic problems (including the crisis of 1929). And, of course, Keynes’ theory is one of Hayek’s main targets.

Moreover, the discovery procedure is not enough to make this theory dynamic (or at least   more realistic) because this process is still implicit in neoclassical models (which are essentially static). In fact, to make the analysis of the markets dynamic (i.e. evolutionary) a real departure from the neoclassical/austrian models is needed. This implies considering the institutional, cultural and psychological dimensions of the market.

An important insight of this analysis*** is that an increasingly significant part of individual action is carried out not in a vacuum but in institutions of various kinds (including the markets). This is accompanied by the transition from the early individual capitalism (however supported by public intervention) to the “concerted capitalism” or “mixed economy” of the current period. Moreover, even when the action appears purely individualistic — for example, in an isolated exchange between seller and buyer — there is the implicit presence of a collective element, constituted by the set of rules, institutions and policies that make such a transaction possible.

In this context, corporate planning, analysed by institutional economists***, constitutes the reality of modern capitalist economies. In this system, the “free operation of market forces” is strongly conditioned by the interests of big business, which possesses a wide variety of instruments to influence economic policies.  Corporate planning is highly hierarchical, as the main decisions are made by top management with little involvement of workers and citizens.

Thus, it is an activity of economic planning (so abhorred by Hayek, as he said “my plan is to resist all plans”) that makes it possible for private firms to exist in a market economy. The problem is therefore to orient public action towards objectives of public interest through a process of democratic planning****. The relevance of democratic planning lies in the process it engenders for improving social valuation in decision-making. In such a system the market, as being an institutional phenomenon, is not synonymous with private property as it can well imply, within a principle of subsidiarity, cooperative firms also within various forms of democratic socialism.

Arturo Hermann

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* We consider in particular, without any claim of a complete analysis of the various aspects of his work, Hayek’s article “Competition as a Discovery Procedure”, The Quarterly Journal of Austrian Economics, Vol. 5, N.3 (Fall 2002): 9–23. It is a translation from German of F.A. Hayek’s “Der Wettbewerb als Entdeckungsverfahren,” a 1968 lecture sponsored by the Institut für Weltwirtschaft at the University of Kiel. Translated by Marcellus S. Snow.

** We have addressed these aspects in Hermann, A. (2016) “The Studies in Social Economics of Léon Walras and His Far-Reaching Critique of Laissez Faire”, International Journal of Pluralism and Economics Education, Vol 7, n.1. pp.59-76.

*** Refer, in particular to, Commons, J.R. [1995 (1924)], Legal Foundations of Capitalism, New Brunswick (New Jersey, U.S.A.), Transaction Publishers. Originally published by Macmillan in 1924; and Commons, J.R. [1990 (1934), Institutional Economics: Its Place in Political Economy, New Brunswick (New Jersey, USA), Transaction Publishers. Originally published by Macmillan in 1934.*** See, in particular, and Dugger, W.M. (1988), “An Institutionalist Theory of Economic Planning”, in Evolutionary Economics, vol.II, edited by Marc.R.Tool, New York, Sharpe; and Tool, M.R. (1986), Essays in Social Value Theory: A Neoinstitutionalist Contribution, New York, Sharpe.

**** One central difference of democratic planning in respect to corporate and totalitarian systems resides in the capacity to self-correct ─ by a process of trial and error ─ its own shortcomings. By allowing a more complete expression of the experiences, motivations and conflicts of the involved subjects, such system improves the process of social valuation, and then the capacity of policy action to respond to the profound needs of society.

In this regard, one central objective of democratic planning is overcoming the dichotomy, identified by Veblen, between the objectives of profit and serviceability related to the production of goods; this can be attained by reducing the artificial scarcity and the “invidious distinctions” stemming from market power and ceremonial status, and by making a better and participatory use of the community’s knowledge. All this is related to the fulfilment of John Dewey’s democratic principle: people affected by decisions must have a say in decision-making and in assessing the results.