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The Theory of Competition of F.A.Hayek as an Inspirer of the Neoliberal Turn of the 1980s

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By Arturo Hermann


Various authors consider the Austrian theory as belonging to heterodox economics, but this seems inappropriate, particularly for the competition theory1 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 to be considered “heterodox”. And this especially if this “different theory” leads to the same ideological implications as 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, individual economic action 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 ― these optimal equilibria are not realised. The general prescription of 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.

The Main Aspects of Hayek’s Competition Theory

With respect to this position, Hayek’s theory2 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 known 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 to the “road to serfdom” of the “real communistic countries”.

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” ─ that constituted also for Milton Friedman and other mainstream economists an important point of reference ─ which laid the basis for the neoliberal reaction that began in the late 70s and got full strength in the 80s.

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 monetarist oriented policy. A policy based on high real interest rates that ─ under the official mantle of inflation-targeting ─ gave rise in the 1980s to the massive financialisation of the economy, wide economic disparities and other imbalances that culminated in the 2008 economic crisis.

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 a wishful thinking, such as the “rationality” of the consumer, perfect markets, and homogenous and price-taker 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. 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 hence exploitation) over workers and consumers, and the negative externalities on the society – severely limit or bring to nothing the scope of the Hayek’s discovery procedure. It is 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 the actual 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, J.M.Keynes’ theory is one of the Hayek’s main targets.

Moreover, the discovery procedure is not enough to make Hayek’s theory of competition dynamic (or at least more realistic) because this process is 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, in a heterodox economics’ perspective, considering the endogenous dimension of markets’ imperfections and contradictions─namely, how these aspects co-evolve within the related institutional, cultural and psychological context.

An important insight of this analysis3 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 has been 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 economists4, 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 policies5. Corporate planning is highly hierarchical, as the main decisions are made by the top management with little involvement of workers and citizens.

Thus, it is still public action, so abhorred by Hayek, 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.

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.

In such a system, economic and social life can be organised through various combinations of public and private action.

On that account, it is also important to note that the market ― as being an institution created and maintained by norms, institutions and policies ― 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. Likewise, public action need not be synonymous with an authoritarian and “ceremonial” bureaucracy as it can be organised in creative and flexible forms.

In all these issues, the relevance of democratic planning lies in the process it engenders for improving social valuation6 in decision-making. Such improvement, by promoting a better expression of the motivations and conflicts of the various persons and groups involved in policy action, can lay the basis for the formulation of policies more respondent to the profound needs of society.


1 As the title of work indicates, we wish to highlight how Hayek’s theory of competition laid the foundations of the neoliberal turn of the 80s: namely, a system based on the (ideological) conviction that the private sector is inherently more efficient than the public sector. Accordingly, the role of the latter should be reduced as much as possible. In this paper we will point out how groundless is this belief. As a matter of fact, public action has always played a central role in creating and maintaining private markets. For this reason, public action was by no means reduced in the neoliberal era, as the only relevant change was that markets came even more under the influence of big corporations (see also later on the notion of “corporate planning”).

2 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.

3 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.

4 In William Dugger’s words, ‘The corporation is privately efficient [in the pursuit of its goals], but it is not socially efficient because its low-cost, high-productivity performance benefit those who control it, generally at the expense of those who depend upon it but frequently also at the expense of the society at large.’, in Dugger, W.M. (1988), “An Institutionalist Theory of Economic Planning”, p.239, in Evolutionary Economics, vol.II, edited by Marc.R.Tool, New York, Sharpe.

5 The policies that can be influenced by big business include, but are by no means limited to: (i) privatisation of services realised to the advantages of the incumbent firms (for instance by leaving to them a substantial oligopolistic power at the expense of workers, consumers and society at large); (ii) very favourable fiscal regime for corporations, whereby most of them end up paying on balance very little, or no taxes at all; (iii) various direct and indirect measures of protectionism; (iv) public procurement policies in sectors like armaments, telecommunications, aerospace, and (especially in the present covid-19 situation) pharmaceuticals; (v) last but not least, a relaxation of environmental targets.

6 See also Tool, M.R. (1986) Essays in Social Value Theory: A Neoinstitutionalist Contribution, New York, Sharpe.

From: pp.10-12 of WEA Commentaries 11(3), October 2021

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