This volume critically explore and extend Hayek’s Nobel Prize-winning work on knowledge and social interconnectedness.
About the Author
Peter J. Boettke is Professor at George Mason University.
Jayme Lemke is a Senior Research Fellow and Associate Director of Academic and Student
Programs at the Mercatus Center at George Mason University and a Senior Fellow in the F.A. Hayek
Program for Advanced Study in Philosophy, Politics, and Economics.
Virgil Storr is Research Associate Professor of Economics and Senior Fellow, F.A. Hayek Program for
Advanced Study in Philosophy, Politics & Economics, George Mason University.
Read an Excerpt
The Disciplinary Role of Market Prices
A Hayekian Critique of Chinese Socialist Governance
In the middle of the twentieth century, the People's Republic of China suffered the largest famine in human history. The famine was not the result of natural forces, but of human engineering. In 1958 the Chinese Communist Party (CCP), under the direction of Chairman Mao Zedong, launched the "Great Leap Forward," a mass-political campaign aimed at transforming China's agrarian economy, practically overnight, through rapid industrialization and socialist collectivization. But, instead of achieving massive gains to productivity as was envisioned, the overzealous policies and brutal systems of extraction pressed the rural Chinese population into hunger, sickness, and starvation. Though the exact death toll remains unclear, scholars have estimated that the Great Famine (1959–1961) claimed as many as 45 million lives. But even more surprising than the sheer quantity of deaths was the fact that this man-made disaster seems to have gone on for well over a year without China's central government being fully aware of its magnitude or scale. Tens of millions of Chinese starved while the state, largely ignorant of their suffering, continued to tax farmers and export grain abroad.
More than a half-century later, scholars still struggle to explain how a famine of such massive scale and scope was ever possible. Historian Frank Dikotter (2011) and journalist Yang Jisheng (2012) have each taken great pains to assign the blame squarely with China's Great Helmsman, Mao Zedong. Both scholars inculpate Mao for his dictatorial style of rule, his misguided utopianism, and the violent state apparatus that he presided over and designed. Other China scholars, such as Gail Hershatter (2011), have focused more on the role of ideology in the production of misinformation, arguing that it was the competitive frenzy to achieve increasingly unrealistic production targets combined with the social pressure to blindly pursue utopian goals that ultimately precipitated systemic food shortages. While these scholars have each deepened our understanding of the multivalent factors that contributed to the Great Famine as well as the social and political contexts in which it occurred, they have largely failed to address the more fundamental question of why the Chinese state, in its supposedly expansive capacity, was not fully aware of the existence of widespread famine within its sovereign territory. If Maoist China was, as these scholars suggest, a Foucauldian society in which state power permeated the most basic of human activities, why then did the central government lack information about the dire conditions in rural society?
Economist Amartya Sen (Sen and Dreze 1989) perhaps came closest to tackling this knowledge problem in the development of his entitlement approach. Sen argued that China's Great Famine, like other major catastrophes, resulted from dire maldistributions of resources made possible by a lack of free press and democratic institutions. If China had been democratic rather than socialist, Sen's theory goes, then people would have spoken up, information would have flowed, and there never could have been a Great Famine. For, as Sen (2000) boldly claims, "no substantial famine has ever occurred in a democratic country — no matter how poor."
Yet, even if we accept Sen's argument as true, the absence of democracy alone seems an insufficient answer. In the example of China's imperial past, we find that even though the structures of governance put into place by paternalistic rulers were far from democratic, officials were acutely aware of the many famines that occurred within their governed territory. Their Maoist counterparts, it seems, were not. Even though the Chinese empire lacked a free press, democratic institutions, and modern communication technologies, it was not until the mid-twentieth century that China faced this type of knowledge problem. Clearly, something changed.
In this chapter I will argue that the root cause of the inability of the Maoist state to understand the changing conditions of Chinese society can be found in neither the charismatic despotism of Mao Zedong nor the oppressive authoritarianism of Maoist politics. Rather, it arose from the suppression of agrarian markets and the gradual breakdown of competitive systems of information aggregation. Drawing upon Hayek's notion of competition as a procedure for the discovery of information, I will attempt to show that the Maoist state effectively blinded itself to the food shortages caused by its own misguided actions by eliminating the primary mechanism for knowledge discovery: market prices.
FAMINES, KNOWLEDGE, AND PRICES
In the premodern world, food shortages were a universal fact of life. In even the most advanced of civilizations, agricultural productivity was relatively low, and the accumulation of surpluses was limited by transportation and spoilage. Any drought, flood, or civil disturbance could easily exhaust grain stores and push agrarian populations to the brink of subsistence. However, these frequently recurring declines in absolute food availability did not directly translate into famine. Generally speaking, if shortages were identified in time, then they could be ameliorated by market or state actors before they led to extreme hunger, sickness, and starvation. Dire famines tended to occur only when there was a concurrent breakdown in the information systems that guided public and private grain circulation. In other words, the central problem of famine management and prevention was a knowledge problem.
As Hayek showed us, human knowledge exists in a diffuse state, dispersed among all actors in society. Knowledge, Hayek (1945) argued, cannot be "given to anyone in its totality" because each constituent member of a social system possesses unique "knowledge of the particular circumstance of time and place." And because this type of informal knowledge cannot be readily rendered into statistics, it is impossible for a single agent "to survey more than a limited field, to be aware of the urgency of more than a limited number of needs." For this reason, Hayek cautioned governing agents against exercising judgment on behalf of a great number of people. Decision making should be decentralized, left up to the multitude of individuals who know best their particular needs and circumstances (Hayek  2008, 44).
From this understanding of the nature of knowledge, Hayek arrived at an even deeper insight about the use of knowledge in society: the most efficient mechanism by which individual agents can receive and communicate information is the price system. In a market economy, prices are an emergent property of the dynamics of preferences and scarcity. As individuals compete over finite resources, they are compelled to operate in social cooperation to achieve their ends. To buy a loaf of bread, have a tractor repaired, or travel on a train, an economic actor must engage in mutual benefit with a multitude of other actors who are working to obtain other goods and services. Prices serve as a mass communications system, disseminating relevant information to all the members of an economic system, thus enabling them to act as a coordinated whole (Hayek 1945). The market process is thus a disciplinary process, because it forces individual market participants to orient themselves toward the interests of others and thus creates the social function of the market economy (Hayek  2002).
In addition to communicating knowledge horizontally, among the participants in an economic system, prices also enable the aggregation and vertical transmission of preferences. In society, preferences exist within individuals, and they generally go unrevealed until such time as those individuals engage in transactions. Transactions influence prices, and prices thus reflect preferences. Because prices keep account of changing individual preferences and communicate these changes in an informational form, it renders local society legible. Governments and other institutional actors can thus look to prices to better understand what is happening in the economy. And, if monitored closely, prices can provide important feedback on the effects of government action in local society. As we shall see, nowhere was the price system's capacity for information discovery more important than in the realm of famine prevention and management.
MENCIUS AND MARKETS
Throughout China's long imperial past, governing regimes took highly active approaches to managing grain. This was partly because in the Confucian political economy, the legitimacy of rulers was intrinsically tied to the welfare of their agrarian subjects. Emperors held the Mandate of Heaven only so long as they continued to fulfill certain obligations to society, the foremost of which was "nourishing the people." Hunger and famine, it was thought, were not caused by natural or economic forces, but by improper governance. If an emperor placed too great a tax burden on his people, removed them from labor during the agricultural season, or otherwise allowed them to fall into poverty and hunger, then Heaven would rescind its Mandate, and the people would be justified in overthrowing their imposter-king.
The great Confucian philosopher Mencius (372–289 BCE) once chastised a ruler for failing to adequately provided for the welfare of his people. Mencius said: "When men starve along the roadside, you fail to recognize that it is time for [grain] distribution. When people die, you say, 'It is not of my doing. It is the fault of the harvest.' In what way is this different than killing a man with a blade, all the while saying, 'It is not of my doing! It is the fault of the weapon'? Stop blaming the harvest!" A generation later another Confucian philosopher, Xunzi (313–238 BCE), made the relationship between governance and famine more explicit, arguing that: "If [a ruler] follows the Way without deviation, then nature cannot cause misfortune. Flood and drought will not cause famine, heat and cold will not cause illness, and evil spirits will not cause misfortune ... [Famine and suffering] cannot be blamed on Heaven." Present in two thousand years of philosophical texts, this simple idea became the ideological cornerstone of the imperial state.
Applying this Confucian principle to practical governance, imperial regimes fixated on solving what they viewed as the perennial threat to the welfare of agriculturalists: short-term deficits in the grain supply. To militate against shortages, China created what would become premodern history's largest and most networked granary system. During times of plenty, local officials across China taxed surplus grains and stored them in warehouses for disbursement during periods of hardship. Though the specific mechanisms by which they carried out these goals changed significantly over time, the goal remained the same: keeping the people nourished. From a practical standpoint, ensuring the subsistence of agriculturalists helped the state militate against the persistent threat of food riots. These efforts also had the enormously beneficial (yet largely unintended) consequence of making rural citizens more willing to move away from subsistence farming and toward specialization in handicrafts or the monocultural production of cash crops.
Yet within the Confucian political economy, it was not enough for the government to simply ameliorate food shortages. Rather, a moral leader was one who maximized the welfare of agrarian producers. Confucian thinkers held, rightly or wrongly, that peasants were overly local in their thinking and had limited time horizons. The common man, they believed, lacked the ability to apperceive how his present actions would bear upon his future self, his descendants, and greater society. When building a dam to irrigate their fields, for instance, farmers did not rightly consider how it would affect the water supply of the village a hundred kilometers downstream. Or when taking their crops to market at the close of a harvest, they did not properly calculate how much more they might earn by waiting until winter to sell. It was, therefore, the role of a Confucian state to adopt on behalf of its subjects a wider temporal and spatial perspective, designing institutions that could bring the decisions of individuals in harmony with greater social good.
The key institution developed to maximize the welfare of agriculturalists was a market-stabilizing system originally proposed by Mencius, the so-called "ever-normal granaries." Ever-normal granaries were part of a national buffer stock scheme that attempted to smooth cyclical fluctuations in grain prices (i.e., keep them "ever-normal") through directed purchases and sales (Will, Wong, and Lee 1991). In ordinary times, granary administrators actively traded grain on rural markets, buying when prices were at their yearly lows and reselling a portion of their reserves when prices were at their height. It was hoped that through such acquisitions the government could both elevate minimum grain prices after the spring and autumn harvests, thus protecting farmers from unscrupulous speculators, and militate against sharp price spikes in winter, thus ensuring that people could afford enough to eat year-round. In periods of critical shortage, when it was determined that prices in a given area were beginning to approach socially unacceptable levels, granary administrators further intervened through subsidized disbursements of grain in an attempt to secure the food rights of the poor.
Ever-normal granaries also operated on the logic that by smoothing grain prices and rendering them predictable, they could exert a stabilizing influence over the broader economy. As Bai Juyi and Yuan Zhen, two renowned ninth-century scholar-officials, reasoned: "If the accumulation and distribution of grain attain their proper measure, and the relative strength and weakness of the currency varies according to the season, then the value of all the myriad commodities will achieve stability in and of themselves. And the four classes of people [i.e., literati, agriculturalists, artisans, and merchants] will all profit in their respective enterprises." Through the institutional stabilization of grain prices, it was hoped that there would be fewer cyclical downturns left farmers hungry, artisans out of work, and merchants without goods to trade.
However eager to promote the welfare of their citizenry, rulers and granary administrators were entirely overzealous in their market interventions. Throughout much of the history of the imperial granary system, there existed an ever-present tension between the desire to address social problems through bureaucratic means and the recognition of the desirability of non-intervention. By the second millennia CE, China had developed a highly commercialized domestic economy that circulated commodities across its vast empire. Even in poor and remote regions, where mountains and marshes limited the ability of oxen-drawn carts to access local markets, itinerant traders carrying goods on shoulder-poles brought commerce to rural communities. Chinese scholar officials were thus wary not to disrupt markets' vital role in the distribution of grain and other goods. As the historian Helen Dunstan has argued, while the imperial state often viewed merchants with suspicion, "it was generally accepted that redistributing grain surpluses was primarily the task of merchants" (Dunstan 2006, 15). A handful of pro-market statesmen called for even greater reliance on market forces in the work of famine relief. They argued that for areas with a high degree of commercialization, instead of combating critical food shortages through the stockpiling of grain, the state should instead disburse quantities of silver to famine victims and allow private grain merchants to meet their needs (Dunstan 2006, 446–47).(Continues…)
Excerpted from "Exploring the Political Economy and Social Philosophy of F. A. Hayek"
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Table of Contents
1. Introduction, Peter Boettke, Jayme Lemke & Virgil Storr / Part I: Hayek's Social and Cultural Theory / 2. Emotion, the Senses, or the Limits of Reason? On the Role of Affect in Hayek's Social and Political Philosophy, Bri Wolf / 3. The Social Basis of Ultimate Legal Rules: Hayek Meets Hart, Mikolaj Barczentewicz / 4. How is Culture Acquired? A Review of Hayek's Model of Cultural Evolution, Matthew Martinez / Part II: Moral, Political and Legal Philosophy / 5. Derailing an 'Uneasy Alliance': Why National Self-Determination Cannot Justify a Right for State to Unilaterally Control Borders & Immigration, Elizabeth Hemsley / 6. Prescriptive Limits in Moral and Political Philosophy: A Hayekian Account, Greg Robson /7. Justificatory Failures and Moral Entrepreneurs: A Hayekian Theory of Public Reason, Brian Kogelmann / 8. Defending Liberal Individualism Against Collectivism, Samantha Godwin / Part III: Applications and Policy Debates / 9. The Disciplinary Role of Market Prices: A Hayekian Critique of Maoist China, Mitchell Frost / 10. The Social Basis of Ultimate Legal Rules: Hayek Meets Hart, Mikolaj Barczentewicz / 11. White Supremacy & the Possibility of Trust, Caleb Harrison / 12. Agriculture as Unintended Consequence, Crystal Dozier / 13. The Spontaneous Ordering of Congress, Daniel Gibbs