An Essay on Work, Gift, and the Order That Exceeds Us
‘A society grows great when old men plant trees in whose shade theyknow they shall never sit.’Greek proverb
‘Cast thy bread upon the waters: for thou shalt find it after many days.’Ecclesiastes 11:1
Two Lives
A man of eighty is sitting in the kitchen of the house he bought in his fortieth year and has lived in since. The morning is quiet. His wife has gone to an appointment. He has, beside his coffee, two sheets of paper on which, in the deliberate hand of the old, he has begun to make two lists.
On the first he sets down what he has to show for his working life. There is the house, which his children will in due course inherit. There are savings, not large by the standards of the times but adequate. There is a pension which will not quite cover the oil bill on its own but which, combined with the rest, will see him through. There are certain books, a collection of tools in the garage, a small painting his wife bought in Italy thirty years ago, and an old car that still runs. He looks at this list for some time, and it seems to him, though he would not have said so in his younger years, a small list.
On the second sheet he tries to put down the things he has contributed, beyond what the first sheet can show. He begins with the firm. He founded it in his thirty-fifth year, ran it for thirty-five years, and sold it, modestly, in his seventieth, at a price that reflected the character of the firm rather than any speculative valuation. At its peak it employed somewhere between two and three hundred people. He begins to count. He writes down his manager from the second decade, a woman who has since retired to Portugal and sends him a card at Christmas. He writes down the draughtsman who worked for him in the 1980s and died too early. He writes down the young apprentice from 1998 who now runs his own business. He realises, as he writes, that the list is not one he can finish. Each name he sets down brings others to mind. Each employee went home in the evening to a family that his wages supported. Each family raised children that his wages educated. Some of those children have children of their own, and the wages he paid, in a way he never thought about at the time, are in the food their grandchildren are eating this morning.
He tries to move on to his customers. He cannot even begin. There were tens of thousands of them across the decades. Some he knew; most he never met. They used what his firm made, and their lives were eased, by some small fraction, in ways that neither he nor they ever registered. He sets the pen down. The second list, he sees, cannot be written. It is of a kind that does not close. It extends in directions he cannot see, and it includes persons he cannot name, and on this morning, over his cooling coffee, he begins to understand that the second list is the larger and the more important of the two, and always was.
This essay is about the second list.
Consider, next, a figure at the opposite end of every scale from the man at the kitchen table. He is one of the richest persons in the world. He has been widely vilified, across more than two decades, for the ruthlessness of his firm as an employer, for his aggressive pursuit of market share, for the apparent indifference with which he has watched smaller rivals go under, and for the spectacle of a private life that has furnished the gossip pages with material of varying flavour. He is, by the accounts of those who have worked near him, not a man one would particularly wish to meet, nor one whose neighbour one would especially wish to be. His motives, so far as they can be read from his actions, run to ego, competition, and the ambition to win at a scale no previous generation could have conceived. The present essay has no interest in defending his character, which is not its business.
But consider the ledger of what he has in fact given the world, entirely without having meant to. Through the firm he built, nearly half a billion households now receive a standard of delivered goods that would have been inconceivable to their parents a generation earlier. Small businesses on six continents sell their products through his platform, reaching customers they could not otherwise have reached. The cloud infrastructure his company developed, almost as an afterthought to its main trade, now supports a great deal of what runs on the internet, including services that in many parts of the world have transformed the prospects of the poor. His employees, hard-driven and often unhappy, have collectively been paid wages whose aggregate, across the decades, has supported tens of millions of people with no other claim on him. Competitors he drove out of business have, in a good many cases, been replaced by better competitors his pressure forced to emerge. The innovations his firm introduced are now used, for the most part freely, by companies that compete with him. The productivity gains his example imposed upon retailers, logistics firms, and manufacturers have flowed through to the prices of ordinary goods in ways no statistician could quite tabulate.
His net worth, at the time of this writing, stands in the low hundreds of billions, a sum so large that the ordinary mind will not hold it. The value he has produced and been unable to retain, by any serious estimate, is at least an order of magnitude greater, and perhaps two orders of magnitude greater. He is, accordingly, by the logic this essay will set out, a person who has given far more than he has taken, although this is the opposite of what he was attempting and the opposite of what he will be remembered for. His motives, as we have said, belonged to him. The surplus belongs to the world. One concedes the point with some reluctance. One would prefer, on personal grounds, that meaner men produce meaner consequences. The candid observation is that the logic of the market has no interest in our personal grounds, and distributes its benefits according to laws that care nothing for the grace of those who set them in motion.
The man at the kitchen table and the vilified founder are not opposites in the way their reputations suggest. They are the same figure, seen from two angles. What they share is the structural fact that in a productive economic order the portion of value one retains is smaller, often very much smaller, than the portion that escapes one and settles in lives one cannot trace. The essay that follows is an attempt to give that fact the consideration it deserves, as a matter of political economy and as a matter of the examined life. It begins, as such attempts ought to, with the two thinkers who saw most deeply into the strange structure of the modern order in which such lives unfold, and ends, as such attempts must, with what that structure asks of the person who finds himself at some point within it, and with what he may, over his coffee on a quiet morning, come to see.
Preface
The title of this essay makes a claim that some readers will find too large for a work of political economy, and others too small for a work of philosophy. It sits, in fact, at the meeting of the two. The proposition is that the meaning of a human life, in the sense the phrase ordinarily bears among those who have reached the years when such a question is no longer idle, is best understood as the aggregate of value one has produced and that one has been unable to retain. What we keep from our work is the captured portion. It is real, and it is not to be despised. What we have given without keeping, to persons we knew and to persons we never met, to our own moment and to generations we shall not see, is the uncaptured portion. It is, I shall argue across the pages that follow, the deeper measure of a life. It is the subject of the serious questions each of us puts to himself in later years, and it is the subject of the serious thought that the two economists at the heart of this essay offered for the order in which such lives are lived. The existential claim and the economic claim are not two arguments. They are one argument stated twice, in the vocabulary appropriate to each register.
Two thinkers from the last century are often cited but rarely read together. Joseph Schumpeter and Friedrich Hayek both wrote in Vienna, both lived through the century’s wars, and both opposed comprehensive economic planning. But they asked different questions, and their answers are not often set side by side.
Schumpeter wanted to explain how capitalism produces new things. Hayek wanted to explain how civilisation coordinates the actions of millions who will never meet. Schumpeter gave us a theory of the entrepreneur. Hayek gave us a theory of the market and its supporting customs as carriers of knowledge. This essay argues that their two accounts, though developed separately, point to the same uncomfortable truth. The parts of a working economy that most resist political control are also the parts on which its working most depends.
The thesis in plain terms. Schumpeter’s idea of uncaptured value, and Hayek’s idea of the extended order, together form a double argument against planning. Uncaptured value is the social surplus an innovator cannot keep for himself. The extended order is the unplanned coordination of strangers. Each idea, on its own, names something productive that no central authority can grasp. Taken together, they make a stronger case against the ambitions of the modern administrative state than either makes alone. This essay traces how the two ideas meet, where they differ, and what they mean for politics today.
The essay has three parts. Part I sets out each idea in the thinker’s own terms. Part II compares and contrasts them. Part III applies the combined argument to state intervention, industrial policy, technocratic government, and the knowledge demands of modern life. A closing chapter considers what both men ask of us: a habit of mind that modern culture finds hard to keep.
A note on method. I have tried to let each man speak in his own voice before drawing the two into conversation. Neither is a simple free-market advocate, and any summary that turns either into one flattens his work. Schumpeter owed much to Marx and had a tragic sense of capitalism’s fate. Hayek, in his later work, moved beyond classical liberalism into the study of culture and evolution. To read them fairly is to see that their criticisms of planning were not partisan manoeuvres. They were attempts to describe how complex social orders actually work, and why they resist the designs of would-be engineers.
The essay is long. I ask the reader’s patience for what may at first seem slow going. The two ideas are subtle, and their force lies in the way they resist compression. One cannot do justice to Hayek’s claim that social order exceeds individual understanding by reducing the claim to a slogan. Nor can one present Schumpeter’s account of the entrepreneur without first setting out the theory from which it emerges. I have chosen depth over speed.
One further signal at the outset. The core argument of this essay, put most plainly, is that uncaptured value is not only an economic fact but a moral one, and at last a personal one. It is the measure, I shall argue, by which a working life is most truly weighed. The wealth a man keeps for himself is a matter on which a balance sheet can report. The wealth his work has scattered through the lives of others, most of whom he never met and never will meet, is not of a kind that any account can tally. Yet it is the larger share. A life measured only by what one has captured is a life measured on the wrong scale. This thought will be traced through the economic chapters that follow and taken up in full in the closing pages, but the reader should have it in view from the start, for it is the root from which the rest of the argument grows.
Part I: Foundations
The two ideas set out in their own terms
Chapter 1Schumpeter’s Uncaptured Value: The Entrepreneur’s Gift to Strangers
Schumpeter saw economic life not as a steady state but as a series of upheavals. His first major work, Theorie der wirtschaftlichen Entwicklung of 1911, translated a generation later as The Theory of Economic Development, was a direct challenge to the Walrasian general equilibrium model, a model he respected more than his critics gave him credit for. What interested Schumpeter was what equilibrium could not explain: the habit of capitalist economies of producing new things, of upsetting their own balance, of generating futures unlike their pasts.
The Schumpeterian entrepreneur is not the careful calculator of marginal gains found in later textbooks. He is a disturber, a breaker of routines, a man (and in Schumpeter’s telling, almost always a man) closer in spirit to a conqueror than to a clerk. He creates what Schumpeter called a new combination, which can take several forms. It might be a new product, or a new version of an old product. It might be a new way to make something. It might be a new market, or a new source of supply. Or it might be a new way to organise an industry. In each case the entrepreneur breaks the routine flow of production. He pulls resources out of their old uses and puts them together in ways that did not exist before.
The importance of this act lies in its scale and its social consequences. Here we reach the heart of the chapter. When an entrepreneur succeeds with a real innovation, the benefits that come to him in person, the profits he can earn from his short-lived market advantage, are only a small share of the total social value he creates. Most of that value flows outward. It flows to consumers, to later industries, to users no one foresaw, to future generations whose lives are remade by developments the original innovator could not have predicted or priced. The gap between private return and social return is, on Schumpeter’s view, enormous. More important for our argument, it cannot be known in advance.
Take the railway, Schumpeter’s favourite example. The first backers of steam locomotion in the early nineteenth century were not saints or seers. Most lost their money. A few made fortunes. The fortunes they made were real but limited. What they could not have foreseen, and certainly could not have charged for, was the full reordering of human geography their machines would bring about. The railway shrank the effective size of nations. It tied together markets that had been cut off from each other. It forced the creation of standard time zones, because the old habit of local noon broke down once trains had to meet on a single track. It made possible the industrial growth of cities. It opened the interior of continents to settlement. It changed the rhythm of daily life from the seasonal to the scheduled. None of this was in the prospectus. The accountants of the Stockton and Darlington Railway had no column for civilisational change, and would have thought the suggestion belonged to a poet rather than a bookkeeper.
This is what I call uncaptured value. Schumpeter does not use the phrase, but the idea runs through his work. The entrepreneur offers, without meaning to, a gift to strangers. He does not intend the gift. He intends profit. But the profit is the smaller share. The larger share is a surplus that, by the normal working of competition and imitation, spreads out into society and cannot be called back. The inventor of the bicycle kept almost none of the health, mobility, and freedom that cycling has given to hundreds of millions. The pioneers of container shipping in the 1950s and 1960s made decent returns, but the huge gains in world trade that containerisation has produced, which some economic historians think outstrip all postwar tariff cuts combined, went largely unrewarded to the firms that took the early risks.
It is vital to see that Schumpeter did not treat this as a flaw of capitalism. He treated it as the very device by which capitalism produces progress. A system in which innovators captured all the social value they created would, on reflection, stop being a system of progress at all. The outward spread of benefits, through the wearing down of monopoly pricing and the copying of successful methods, is exactly what turns a private experiment into a shared inheritance. Every fountain pen, every telegraph, every antibiotic, every transistor has, in its maturity, become cheaper and more widely available than at its birth. The decay of private rent is the life of public welfare.
In Capitalism, Socialism and Democracy of 1942, written in his Harvard years, Schumpeter refined and darkened this analysis. His famous formula of creative destruction appears in Chapter VII. "The opening up of new markets, foreign or domestic," he wrote, "and the organizational development from the craft shop and factory to such concerns as US Steel, illustrate the same process of industrial mutation, if I may use that biological term, that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in." The passage is more than a slogan. It describes a process in which the limit of what any one actor can keep is always receding before the limit of what is being created for all.
Two features of this process matter for the argument against planning that will follow. The first is its time scale. Uncaptured value does not unfold within the time frame of a business plan, or a parliamentary session, or an election cycle. It unfolds over decades and centuries, in directions no one foresaw, and is often visible only in hindsight. The true worth of an innovation is not found in the quarterly accounts of its creator but in the long chain of changes it sets off across generations. Steam power is credited with raising English living standards, but it did so through paths no one could have mapped in 1830: the rise of the factory town, the collapse of village economies, the growth of mass literacy supported by cheaper print, the creation of a salaried middle class with leisure enough to read Dickens, the industrial reshaping of farming, the global cotton trade. Each of these reshaped the conditions for the next wave of change. The surplus is not only large. It compounds.
The second feature is its resistance to measurement. It is not just that we lack the statistical tools to capture uncaptured value. The thing is, by its nature, unmeasurable, because the counterfactual against which an innovation ought to be judged is a future that never arrived. What would the world look like today without penicillin? Without the internal combustion engine? Without the Haber-Bosch process for fixing nitrogen, which now feeds perhaps half of humanity? No serious economist answers such questions with a number, because any number would be a pretence. The honest answer is that we do not know, and our ignorance is not a failing of method. It is built into the subject.
It may help, before carrying the theory further, to dwell on three cases drawn from the present century, since the historical examples already given belong to generations our readers did not witness and may therefore be too easy to dismiss as remote. Consider, first, the smartphone, and in particular the Apple iPhone, whose first model appeared in 2007. Apple has, in the years since, become one of the most valuable companies in the history of commerce, and its critics have not been slow to draw attention to the revenues it has extracted from its App Store, its hardware margins, and its accumulation of cash. The vilification has been energetic. What is less commonly noted is that the value Apple has captured, while immense in the absolute, is a small fraction of the value the device has produced in the lives of its users. The iPhone and the ecosystem it inaugurated have given billions of people a pocket library, a map of the world, a camera, a payments instrument, a medical consultation service, a translation tool, a navigational aid, a source of ongoing education, and a means of keeping in contact with distant family at negligible marginal cost. Whole industries have risen on its foundations, from ride-sharing to mobile banking to the delivery economies that have made small-scale entrepreneurship accessible to people who had no capital and no connections. No calculation can give a number to the total uncaptured value of the device, but any honest attempt would find that Apple’s trillion-dollar market capitalisation is a rounding error next to it. The company is rich. The society that the company has helped to create is richer by a factor no ledger can report.
Consider, second, the emergence of generative artificial intelligence in the years after 2020, and the companies that have brought it to public use. Here the vilification has been still more heated, for the novelty of the technology and the scale of the firms involved have made them convenient targets for every kind of anxiety our moment entertains. Again the criticism is not without substance, for the firms have acted in ways that merit serious public discussion, and questions of copyright, safety, employment, and concentration all deserve the hearings they have begun to receive. But again the framing misreads the economics. A typical user of these systems, whether a student, a researcher, a small-business owner, a programmer, a writer, or any of the other occupations whose daily work the tools have transformed, receives, at a cost of some tens of dollars a month or nothing at all, the equivalent of services that a decade ago would have required a junior analyst, a research assistant, a paid consultant, or a small team of professionals. The value thus transferred from provider to user, measured even conservatively, outstrips the revenues the provider receives by an order of magnitude that would be difficult to exaggerate. The firms will, in aggregate, capture a very great deal of money by the time the technology matures. Their users, taken together, will have captured many times more. The uncaptured surplus, once more, is the story the balance sheet does not tell.
Consider, third, and with particular care, the case of innovative medicines. The pharmaceutical industry is probably the most vilified of all the sectors that produce large uncaptured surpluses, and the vilification has been earned, in part, by episodes of genuine malpractice and by a pricing regime in several jurisdictions that admits of proper criticism. But the economics of the matter, leaving aside the cultural polemics, are clear to anyone who looks at them without prejudice. A new medicine that extends the useful life of a patient by five years, or that converts a terminal diagnosis into a manageable chronic condition, confers a benefit on that patient which economists, when pressed, typically value at several hundred thousand dollars per year of life saved or improved. The price the patient or his insurer pays is, even in the more aggressive pricing regimes, a fraction of this figure, often a small one. Multiplied across the millions of patients who will benefit over the patent life and the generations of wider use that follow patent expiry, the uncaptured value of a successful therapy is a number that bears no proportion whatever to the revenues of the firm that developed it. The same is true, mutatis mutandis, for the vaccines that arrested the pandemic of 2020, the statins that have reduced cardiovascular death by a great margin, the mRNA platforms that now promise treatments for diseases we once considered incurable, and a long list of earlier therapies from the mid-century antibiotics to modern cancer immunotherapies. In each case, the industry’s profits, however large, are dwarfed by the human value created, most of which has been transferred, silently and without recognition, to the bodies and the lives of people who did not pay for it in anything approaching its worth.
The common feature of these three cases, and it is a feature any honest reckoning must acknowledge, is that the firms involved have been widely despised for the very activity whose overwhelming benefits accrue to persons other than themselves. The public discourse has tended to fix on the portion of value these firms capture, which is visible in their share prices and their executive compensation, and to overlook the portion they do not capture, which is diffuse, unrecorded, and by our earlier analysis impossible to register in any conventional account. The framework of this essay suggests that this asymmetry of attention is a systematic failure of perception, one that would mislead us even if the firms in question were morally exemplary, which they are not, and certainly misleads us when, as now, they serve as convenient focal points for a more general anxiety about modernity. A serious political economy of our moment must include, at a minimum, the recognition that the innovators we most frequently condemn are among the largest net contributors of uncaptured value our civilisation has produced in generations. The condemnation may be warranted in its particulars. The accounting of what they have given is not, by any reasonable measure, complete until the uncaptured portion is weighed alongside the captured.
This double resistance, to time and to number, is the crux of the matter. Schumpeter drew from it the conclusion that any government which tried to direct its economy through the instruments of measurement and foresight would systematically misprice innovation. It would do so in two ways. It would ignore or underfund those new combinations whose benefits fell outside the political attention span. And it would overfund activities whose returns were visible, countable, and therefore politically accountable, even when those returns were small compared with the innovations foregone.
Yet Schumpeter was no simple advocate of laissez-faire. His work has a strong strain of melancholy, one that grew in his later years. In Capitalism, Socialism and Democracy he gave his famous prediction that capitalism would be killed not by its failures but by its successes. The very wealth that entrepreneurial innovation had made possible would, he thought, breed a class of intellectuals, bureaucrats, and administrators who, living in the comfort capitalism provided, would turn against the system that had made them. They would do so not from malice but from blindness. They would fail to see the uncapturable surplus precisely because it was uncapturable. Instead, they would see the inequalities of private gain, the waste of competitive duplication, the rough edges of creative destruction as it fell on the unlucky. And they would reason, with clear logic if with faulty vision, that a system with such visible flaws could surely be improved by organised intelligence.
"Can capitalism survive?" Schumpeter asked. "No. I do not think it can." He offered this view not as a prophet but as a doctor who had grown fond of his patient. The intellectual class, he believed, would not merely dislike capitalism. It would be unable to defend what capitalism achieved, because the achievements were diffuse, anonymous, and unglamorous, while the complaints were concentrated, named, and morally vivid. The bureaucratisation of economic life, which in his prediction would follow the rise of this class, would make the entrepreneurial function obsolete. Committees would commission innovations on schedule. Progress would be planned. The odd, irregular, unpredictable entrepreneur would be crowded out by the manager, whose job is to administer what already exists.
On these matters Schumpeter was more accurate than he might have wished. The managerial revolution he predicted has happened much as he described. What he did not live to see was the stubborn persistence of entrepreneurial disruption in corners of the economy the managerial ethos had not fully colonised, and the occasional return of the uncapturable surplus in new forms, from the personal computer to the World Wide Web to the mRNA vaccine. But these are interruptions of the broader trend, not refutations of his forecast. The main direction of modern political economy has been towards the domestication of innovation under the supervision of administrators who, by the logic of their role, cannot see what is being lost.
We shall return to this prediction in later chapters. For now, fixing the idea is enough. Uncaptured value is the social surplus of entrepreneurial innovation that the innovator cannot keep, that unfolds on time scales beyond ordinary political attention, and that resists by its nature the tools of measurement on which organised authority depends. It is not a market failure. It is the form capitalism’s success takes. And because it is success, the features that make it productive also make it invisible to those trained to see only what can be counted.
A reflection at this stage may be permitted, anticipating the theme to which the closing chapter will return. The logic of uncaptured value runs deeper than the economics of the firm. It reaches, if one is willing to follow it, into the question of how a human life is rightly assessed. Consider a man looking back from his eightieth year. He has, let us suppose, enjoyed a measure of worldly success. He has captured a share of the value his work produced: a comfortable house, some savings, a pension, perhaps the education of his children financed in full. These are real goods, and one would be ungenerous to disparage them. But if he has been, in any degree, a creator of the sort Schumpeter described, whether as entrepreneur, as inventor, as founder of a going concern, as builder of an institution, or simply as a reliable employer of other people, then the goods he has captured are the smaller share of what he has done. The larger share has gone out into the world. It has gone to the employees whose wages supported their families, to the customers whose lives his products eased in ways they never paused to credit him for, to the competitors who imitated his innovations and in so doing improved them, to the strangers in remote places who will benefit, a generation hence, from accumulated knowledge his work added some small part to.
Looking back, the captured portion may be what he once thought the point of the exercise. The uncaptured portion is more likely to be what he finds, on reflection, he is proudest of. He did not set out to give a gift to strangers. He set out, quite reasonably, to make a living, to provide for his own, to succeed by the measures his circumstances allowed. But the gift was given, because the nature of productive work is to give gifts that the giver cannot fully reclaim. The satisfaction of having given such a gift is, I would submit, the deepest satisfaction a working life affords, and it is available chiefly to those who have engaged, in however modest a way, in the kind of enterprise Schumpeter and his successors have described. The idea of uncaptured value, then, is not only an economic idea, though it is that. It is also an ethical idea, and at last a theological one, about the structure of human generativity. We shall return to this in chapter seven, where it may be given the weight it deserves. For now, it is enough that the reader hold it in mind. The argument we are about to pursue will take on a different colour when lit from this angle.
It should be said plainly, lest the foregoing be mistaken for sentiment, that the mechanism of uncaptured value does not depend on the virtue of those who set it in motion. The entrepreneur who founds his firm in pure egotism, who cares for nothing but profit, reputation, and the satisfaction of dominating his market, produces uncaptured value in exactly the same measure as the idealist who sets out with his neighbours’ good in view. The mechanism is indifferent to motive. A man may build a great business from mean impulses or from grand ones, from greed or from generosity, from a wish to vindicate himself against an old slight or from a desire to serve his fellows, and the benefits that escape his grasp will be much the same in each case. The wages paid, the products supplied, the competitors pressed to improve, the stock of working knowledge added to by the example of his methods, do not depend on the state of his soul while he was building the firm. Adam Smith made the point two and a half centuries ago and it remains the single most underappreciated observation in political economy, that it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. Schumpeter, in his way, extended the insight. The entrepreneur of his account is a figure of ambition, restlessness, and the wish to found a private kingdom, not of altruism. His social function is performed in spite of, and sometimes by means of, his personal appetite.
This has a consequence that bears stressing. A society that wishes to enjoy the surplus of entrepreneurial activity must allow the activity its scope even in its less attractive moral forms, for the surplus and the activity cannot be had apart. To demand that the entrepreneur be a moral hero before one admits his contribution is to misunderstand the nature of the contribution, which flows from what he does and not from what he was thinking while he did it. One may judge the man one way and the work another, and if one judges the work by its uncaptured yield to strangers, one will find that the ledger fills whether the man was a philanthropist or a scoundrel. This is not an argument for moral indifference. It is an argument for keeping moral judgement and economic analysis in their proper registers. The greedy tycoon who built a railway and died despised by those who knew him has nonetheless left behind a railway, and the uses to which generations have since put it are no worse for the character of the man who financed it. If anything, the argument gives a certain dignity to the activity of enterprise even when its practitioner does not himself possess any dignity worth admiring. The surplus is the surplus, whoever threw it off.
Chapter 2Hayek’s Extended Order: Civilisation as an Undesigned Achievement
If Schumpeter started from the drama of the entrepreneur, Hayek started from what looks at first like a humble puzzle. How, he asked, does the baker in London know to bake bread for the commuter who has not yet decided to buy it? How does the Argentine rancher know to raise cattle for the German housewife? How does the Ceylonese tea planter fit his harvest to the commercial schedules of merchants in Liverpool and the kitchens of millions of households he will never see? The questions seem ordinary. The answer, properly worked out, is among the most radical in modern social thought.
Hayek’s thinking on this problem can be traced through four works of rising ambition. The first is the essay of 1945, "The Use of Knowledge in Society," which appeared in the American Economic Review and remains, for many readers, the clearest statement of what came to be called the knowledge problem. The second is The Constitution of Liberty of 1960, in which Hayek widened his scope from the mechanics of the market to the legal and political framework within which exchange takes place. The third is the three-volume Law, Legislation and Liberty, published between 1973 and 1979, in which the theory is most fully worked out. The last is The Fatal Conceit of 1988, written when Hayek was nearly ninety, in the more urgent tone of a closing statement.
The starting point is about knowledge. "The peculiar character of the problem of a rational economic order," Hayek wrote in 1945, "is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess." This sentence rewards slow reading, because it holds the seed of the whole Hayekian position. The knowledge needed to run a modern economy is not, and cannot be, held anywhere in full. It exists only in fragments, each held by a particular person, often in a form the person himself could not put into words if asked. The baker knows the habits of his customers. The rancher knows the particular qualities of his pasture. The tea planter knows this year’s leaf. None of them knows, nor needs to know, the whole into which his fragment fits.
That whole is what Hayek came to call the extended order. The name is chosen with care. It is extended because it reaches far beyond the small groups within which humans evolved, groups in which we still feel most at home. For most of our history the social unit was the band, the tribe, the village. In such groups, the economy of favour and obligation runs on personal acquaintance. One gives to a known neighbour in the hope that the neighbour, because he is known and because the village will notice, will give back in kind. The extended order is an order among strangers. It relies on the cooperation of millions who will never meet and who, if they did meet, might well dislike one another. It is held together not by the feelings of neighbourhood but by rules, prices, and institutional habits that allow action at a distance.
It is an order because it shows a particular kind of coherence. The actions of the many are not, strictly speaking, coordinated, because no one coordinates them. And yet they fit. Shipments arrive. Shelves are stocked. Demand is met. Prices adjust. Surpluses and shortages are communicated outward, without anyone having communicated them, through small movements of market signals. This coherence looks miraculous to the untrained eye. To the trained eye, it looks more miraculous still, for the trained observer sees how unlikely the whole arrangement is, how many failures went into reaching the working present, and how easily the whole might come undone.
The price system, which Hayek famously celebrated, is the most elegant mechanism within the extended order for passing on dispersed knowledge. When the price of copper rises, a user of copper in Birmingham need not know whether the cause is new electrical demand in Osaka, a mining strike in Chile, or a naval blockade in the Persian Gulf. He learns only that copper has become more precious, and he adjusts his use of it. The signal carries the information. The causes remain hidden. Hayek called this a marvel of economy in communication. A single number, emerging from the interaction of countless trades, tells every user of the commodity what he needs to know in order to fit his behaviour to the needs of others. No bureaucracy, however large, could gather that information in time to act on it. And if it could, it would destroy the very process by which the information had come to exist.
But for Hayek, the price system was only the most visible carrier of dispersed knowledge. It was not the only one. Tradition, custom, moral intuition, inherited law, the habits of a trade, the expectations of a neighbourhood: all carry information that resists being spelled out. The common law, on Hayek’s view, is the chief example of such a carrier. No parliament designed it. No commission wrote it. It grew slowly, over centuries, out of the reasoned decisions of judges facing particular disputes, each decision correcting or refining those before, each adjusting the rule to the case without ever trying to write the whole down. The result is a body of rules that often defies summary but that has proved remarkably useful in supporting commerce, property, and cooperation among strangers. The judge who decided, in some thirteenth-century assize, that the finder of lost goods held them against all except the rightful owner, could not have foreseen the long consequences of his reasoning. Yet his judgement became part of an order that, centuries later, made possible the bill of lading, the letter of credit, the insurance contract, and the international trade that depends on them.
Here Hayek’s debt to Michael Polanyi becomes clear, though Hayek extended Polanyi’s argument into territory Polanyi himself did not fully map. Polanyi had drawn a line between explicit knowledge, which can be written down and passed on in words, and tacit knowledge, which lives in skills, habits, and bodily disciplines and cannot be fully caught in language. The cyclist knows how to cycle. He cannot, however, write out the small adjustments of balance that keep him upright. Hayek’s extended order is, at bottom, a store of tacit knowledge on a civilisational scale. The rules and practices by which modern societies hold together have been selected, over long stretches of time, by their power to sustain cooperation under conditions their bearers did not and could not put into words. "We know so many things that we cannot state," Polanyi wrote. Hayek added that we live within so many rules that we cannot state, and that to try to state them is often to destroy them.
This brings us to the idea that gave Hayek’s last book its title. The fatal conceit is the belief that because human reason has designed certain local arrangements, reason can also redesign the whole order. It is the belief that every institution must be intelligible to the individual mind, and that whatever cannot be so rendered is either irrational or expendable. Hayek saw this as the most dangerous intellectual mistake of modern times, and he traced its history with some care. Its philosophical root he placed in Descartes, who had insisted that nothing should be believed unless it could be proved from first principles, and whose rationalism, when moved from geometry into politics, produced the revolutionary ambition to remake society on a clear and explicit plan. From Descartes the line ran through the French Enlightenment, the engineering dreams of Saint-Simon, the scientific socialism of Marx, and into the twentieth-century experiments in comprehensive planning whose disasters Hayek had seen at close range.
The conceit is fatal because the order it would replace is more complex than any planner’s mind. To substitute design for evolution in the arrangements of civilisation is not to improve them but to destroy the information on which they depend. The planner, confident of his reason, tears down rules whose purpose he cannot see, and discovers too late that the rules carried information his models had not captured. This is not merely an argument about the limits of expertise. It is an argument about the nature of knowledge. There is no vantage point from which the extended order could be fully grasped, because the order includes the minds of its observers among the parts it coordinates. No one stands outside.
Hayek put this insight into a formal distinction between two kinds of order, borrowing the Greek terms cosmos and taxis. A cosmos is a spontaneous order, an order that has emerged from the interactions of many agents none of whom intended the order as such. A taxis is a made order, one built to a plan. The market is a cosmos. An army is a taxis. The common law is a cosmos. A statute is a taxis. A language is a cosmos. A committee’s glossary is a taxis. The error of constructivism, on Hayek’s account, is to confuse the two: to treat a cosmos as if it were a taxis, or to think that because certain purposes are best served by made orders within the larger whole, the whole itself can be treated as a made order. This confusion leads, in practice, to poverty, and in politics to tyranny, because the attempt to force designed structures on a spontaneous one requires, sooner or later, the suppression of the spontaneous behaviour that refuses to conform.
Hayek did not deny that deliberate human action has its proper place. He was not against reason. His position was that rational design is appropriate within the framework of rules that make an extended order possible, but that the framework itself is not a proper object of wholesale redesign. One can, with reason, reform a particular statute. One cannot, with reason, remake the legal tradition. One can, with reason, improve a factory’s processes. One cannot, with reason, replace the market within which factories operate. The line is between reform at the margin, which respects the integrity of what exists, and revolutionary reconstruction, which does not. The first is healthy. The second, on Hayek’s view, is almost always a disaster.
Hayek’s position has affinities with a certain kind of conservatism, and he admitted as much, while taking pains to mark off his own view from what he called true conservatism of the Burkean type. Hayek was, by his own account, an Old Whig rather than a Tory. He did not defend inherited arrangements because they were inherited, or because change was in itself unpleasant. He defended them because the burden of proof, in matters touching the framework of an extended order, ought to fall on those who would alter it, and because the rationalist assumption that we understand our institutions well enough to redesign them is almost always unwarranted. This is a subtler position than its critics allow, and it yields conclusions that sometimes sit uneasily with both progressive and conservative sympathies.
Hayek’s argument, pushed one further step, carries an implication for how one should understand one’s own position within the order it describes. If the extended order is a fabric of cooperation whose totality exceeds any participant’s grasp, then each participant is, necessarily, contributing to an achievement he cannot himself see. His labour, his savings, his honesty in small dealings, his preservation of what custom asked of him, go out into the network of exchange and there accomplish things he was not attempting and that no report will ever return to him. This is more than a fact about markets. It is a fact about the shape of a life lived within them. To work in such an order is to give more than one can ever recover. To cooperate in such an order is to produce benefits whose principal recipients are strangers. Hayek, in his Austrian restraint, did not draw out this existential consequence of his position. The title of the present essay does, and so does its concluding chapter. It is worth registering the point here, at the close of the exposition, so that the reader carries it through the comparisons that follow. The extended order is not only an economic fact. It is the medium in which a human life, considered as a contribution rather than as a claim, takes place at all.
We now have before us the two ideas that will occupy the rest of the essay. Schumpeter’s uncaptured value names a field of economic output whose private appropriation is inherently incomplete. Hayek’s extended order names a field of social coordination whose central direction is inherently impossible. What links them is not their content, which differs, but their shared identification of a productive order that exceeds the understanding of those who would govern it. To that meeting we now turn.
Part II: Comparison and Contrast
Where the two accounts meet and where they part
Chapter 3Convergences: Where Schumpeter and Hayek Meet
The claim that Schumpeter and Hayek meet on a single critique of rational constructivism might, on a first reading, look strained. Their vocabularies differ. Their methods differ. Their conclusions about the political future of capitalism differ. And yet, when one moves from the surface to the governing assumptions, the kinship is plain. Each has named a field of productive human activity that lies beyond the grasp of centralised reason, and each has treated this inaccessibility not as a flaw to be fixed but as a condition to be respected. This chapter sets out five points of meeting, each of which strengthens the combined case against the constructivist temptation.
The first and most basic meeting concerns the knowledge status of what both men hold most dear. For Schumpeter, the uncapturable surplus of entrepreneurial innovation is, in principle, unforeseeable. No one, whether the entrepreneur himself or the planner who might wish to direct him, can predict the cascading social consequences of a new combination. For Hayek, the dispersed knowledge that supports the extended order is, in principle, uncentralisable. No authority can gather what is held in tacit form by millions of minds. In both cases the obstacle is not technical but basic. It is not that we lack the computing power to do what the planner dreams. It is that the act of centralising what is dispersed, or of predicting what is unprecedented, would destroy the thing it sought to capture. Schumpeter’s innovation and Hayek’s coordination are alike in being outputs of processes whose working depends on their not being understood from above.
This first meeting has a corollary worth stating. Both men hold what one might call an emergentist account of economic and social order. The most important outcomes, on their view, are not designed. They arise from the interactions of agents, each of whom pursues his local ends without reference to, or knowledge of, the total pattern his actions help to form. The standard of living we enjoy is nobody’s intention. The price of tin is decided by no one in particular. The English language was composed by no committee. The common law was not promulgated. The internet, whose protocols emerged over decades from the work of thousands of loosely coordinated engineers, resembles in this respect the traditions it has otherwise disrupted. In each case an outcome of great importance has come about through what Adam Ferguson, whom Hayek admired, called "the result of human action, but not the execution of any human design". Schumpeter’s innovations and Hayek’s institutions are both, in this sense, emergent.
The second meeting concerns the consequences of intervention. Both men hold that attempts to plan or direct these emergent processes are not merely inefficient but destructive. For Schumpeter, the bureaucratisation of economic life is not simply a less dynamic version of entrepreneurial capitalism. It is a different kind of system, one in which the entrepreneurial function has been abolished in favour of the managerial. A committee cannot approximate an entrepreneur because the entrepreneur’s distinctive contribution lies in doing what no committee would sanction. The committee exists to rationalise, to systematise, to justify. The entrepreneur exists to depart from what has been rationalised. To ask the committee to play the entrepreneur’s role is to mistake the nature of both.
For Hayek, likewise, the substitution of central direction for spontaneous coordination does not produce a worse version of the same order. It produces a different and poorer order. The planner does not merely fail to improve on the outcomes of market exchange. His intervention dissolves the information on which those outcomes rested. When a regulator fixes a price, he does not simply set it at the wrong level. He destroys the signal that would have carried, through that price, information about the state of the world to which producers and consumers needed to respond. The intervention, however well meant, blinds the system. Hayek’s figure of the price system as a "marvel of communication" has its darker counterpart in the silence that falls when its signals are muted by administrative order.
The third meeting lies in a shared temperament, which one might call their tragic cast of mind. Both Schumpeter and Hayek were clear-eyed about the fact that the market order they defended was not destined for easy acceptance, and that the very features which made it productive also made it vulnerable to intellectual criticism. The fruits of capitalism, for Schumpeter, were diffuse and uncredited, while its injuries were concentrated and named. The achievements of the extended order, for Hayek, were anonymous and cumulative, while the failures of any particular market were vivid and immediate. It was therefore to be expected, they both held, that the articulate classes of any capitalist society would develop a settled hostility to the order that had produced them, not because the order was defective but because its merits were invisible to the instruments of articulate thought.
This tragic note links them, in a minor key, to a tradition of thought that runs from Burke through Tocqueville, a tradition that holds certain goods to be real but badly defensible in the currency of public argument. The market, like the inherited constitution, is better defended by the life it makes possible than by the abstractions that might be offered in its favour. Both men knew that the counted benefits of a system are always the smaller share of what it provides, and that the counted costs are always the smaller share of what a proposed alternative would inflict. The arithmetic of political argument, as a result, runs against the kind of order they valued. This is not a cheerful observation, and neither Schumpeter nor Hayek tried to soften its implications with forced optimism.
The fourth meeting concerns their shared suspicion of the pretensions of expert knowledge when applied to complex systems. Neither was anti-intellectual. Hayek was, by temperament and training, among the more learned economists of his generation. Schumpeter was more learned still, and rather more vain about the fact. What they opposed was not learning but a particular posture that learning sometimes takes on, a posture they saw as the besetting intellectual vice of modern life. The posture holds that because one has mastered a formal technique, one is thereby fit to prescribe for a system the technique does not in fact represent. The econometrician who prescribes on the basis of his model, the sociologist who prescribes on the basis of his survey, the engineer who prescribes on the basis of his flow chart, each makes the same mistake. They confuse the map with the territory, and they confuse their mastery of the map with mastery of the territory.
Here the two men may be read as anticipating James C. Scott’s later thesis on what he called "seeing like a state". Scott argued that the modern state, in its characteristic projects of legibility, systematically simplifies the societies it seeks to govern, imposing categories and abstractions that make administration easier at the cost of the local, the tacit, and the particular. Schumpeter and Hayek had, each in his own way, described this tendency a generation before Scott. The constructivist mentality, for Hayek, and the bureaucratic rationalism, for Schumpeter, both rest on laying an administrative grid over a territory that had been organised by less legible principles. The grid permits control. It also destroys information. In both these writers, one finds the same intuition: the things that make a society work are often the very things that make it illegible.
The fifth meeting concerns the implicit politics that follows from these positions. Both men are hostile to the self-expanding logic by which political authority multiplies its fields of competence. For Schumpeter, the intellectual class has a structural interest in persuading the public that economic life needs its guidance. For Hayek, the planning apparatus has a structural interest in persuading the public that social life is insufficient without its articulation. Each account describes a self-reinforcing dynamic. The planner diagnoses an insufficiency, prescribes an intervention, and, by the act of intervening, produces the conditions that appear to require further intervention. The intellectual identifies an injustice, recommends a remedy, and the remedy, by reordering the incentives of economic actors, produces fresh injustices that invite further recommendation. In both accounts the growth of the administrative state is not, in the first instance, the result of any particular policy error. It is the result of a particular stance of the governing mind, a stance that the very success of earlier interventions has made it harder to abandon.
Taken together, these five meetings produce a combined argument that neither man would have set out on his own but which emerges from their conjunction with considerable force. The market order, properly understood, is an engine for producing outputs that no one can fully anticipate, coordinated by information that no one can fully articulate, defended by habits that no one can fully justify. The attempt to replace this order with a more rational arrangement, or even to substantially supplement it, involves a misunderstanding of what the order does and how it works. The misunderstanding is not accidental. It is, both men imply, native to the kind of mind that would propose the replacement, and native to the kind of polity that would find the proposal attractive. The meeting is therefore not merely theoretical but practical. It is a warning.
It is also, at a deeper level than either man stated plainly, an account of what it is for a person to participate in a world larger than his comprehension. Both concepts describe the same structural feature of human activity, viewed from different sides. Schumpeter looks at the producer and finds that what he makes exceeds what he can keep. Hayek looks at the order and finds that what it coordinates exceeds what any member can grasp. The convergence is not accidental. It rests on a shared recognition that the goods of human life are not of a kind that can be fully owned by those who produce them or fully seen by those who receive them. This is the philosophical substrate of the title of this essay, and the reason the existential register is not a sentimental departure from the economic analysis but the same analysis rendered in another key. What uncaptured value is to the entrepreneur, the extended order is to the participant: an excess that is the form of his contribution rather than a deficit in his ownership. To see this is to see that the two economists, in their different idioms, were sketching the same fundamental fact about the structure of a generative life. The fact that it holds equally for the Silicon Valley founder and the village shopkeeper, the pharmaceutical researcher and the night nurse, the pioneering engineer and the conscientious clerk, is what gives the thesis its reach. All of them are, in their degree, producing more than they receive back. All of them are, in their degree, meeting the condition the title names.
Chapter 4Divergences: Where the Two Thinkers Part Company
To dwell only on the meetings between Schumpeter and Hayek, however useful, is to flatten the real differences between them. Each man developed his position from a distinct line of thought, and each arrived at conclusions the other would have found partial or mistaken. A fair reading asks us to honour these differences, which are not mere matters of emphasis but reflect deeper differences of temperament, method, and philosophical training. This chapter sets out five such differences, matching the five meetings of the previous chapter, and aims to show that the combined framework offered here is stronger for being built on distinct foundations rather than on a false unanimity.
The first and most obvious difference concerns disruption and continuity. Schumpeter’s account of capitalism is organised around the moment of rupture. The new combination breaks the circular flow. The new firm displaces the old. The new industry makes obsolete the settled arrangements of a whole generation. Creative destruction is the keynote, and the word destruction is not decorative. Real losses are involved, real dislocations, real ruin of those whose capital and skills were formed on the superseded basis. Schumpeter did not pretend otherwise. He thought this the price of progress, a price worth paying, but he did not minimise it. His sensibility is that of a historian who has read Marx with care, who sees the capitalist dynamic as truly revolutionary in its implications, and who admires what is bold, original, and transformative in economic life.
Hayek’s sensibility leans towards continuity. The extended order is the work of millennia of slow cultural evolution, and the rules that sustain it are to be handled with the care one owes to long-accumulated wisdom even when one cannot state its rationale. "It is indeed a truth," Hayek wrote in The Fatal Conceit, "which all the great apostles of things undreamt of have had to learn painfully, that they can only build on the ground that they find." Where Schumpeter celebrates the entrepreneur who departs from custom, Hayek tends to warn against the reformer who demolishes it. Where Schumpeter reads commercial history as a series of ruptures, Hayek reads it as the cumulative refinement of practices whose deepest logic is older than their practitioners can remember. The two sensibilities are not simply opposed; progress depends on both innovation and the framework within which innovation can safely occur. But the emphasis differs, and the difference is more than rhetorical. It reflects a real disagreement about what is most valuable and most fragile in the economic order.
The second difference concerns the political fate of the capitalist arrangement. Schumpeter, as we have seen, was a pessimist. His diagnosis in Capitalism, Socialism and Democracy is bleak. Capitalism, he held, would generate the conditions of its own supersession through its cultural and sociological effects, producing an intellectual class that could not defend it and a political dynamic that would tame its characteristic energies. "Can socialism work?" he asked in the same book. "Of course it can," he replied, meaning only that an economy under socialist management could function after a fashion, not that it would produce the vast wealth and novelty of its predecessor. Schumpeter’s gaze is fixed on the long downward arc of civilisational mood. He is, in the end, more elegist than programme-maker.
Hayek, for all his grimness, kept a more active programmatic commitment. His later writings, especially the third volume of Law, Legislation and Liberty, contain detailed constitutional proposals meant to shore up the framework of the extended order against the corrosive tendencies he had named. He proposed, for example, a bicameral arrangement in which one chamber would be charged with formulating general rules and the other with the day-to-day business of government, so that the confusion of statute and administration, which he thought lay at the heart of modern legislative drift, might be institutionally resisted. One may disagree with these proposals, and many have. The point is simply that Hayek believed reform was possible and was prepared to offer plans, whereas Schumpeter offered chiefly diagnosis and resignation. The hopeful note, muted but audible, in Hayek’s late work is absent from Schumpeter’s.
The third difference, perhaps the sharpest of all, concerns the treatment of monopoly and concentrated economic power. Schumpeter was, on this matter, something close to an apologist, at least compared with his contemporaries. He treated temporary monopoly as the natural reward of successful innovation and as the engine by which large-scale experiment could be financed. The firm that has won dominance through a new combination deserves, for a time, the profits of dominance, because without such profits the new combination would not have been tried, and because the monopoly, being temporary, will be eroded in the ordinary course by the next wave of creative destruction. The big vertically integrated firms of the twentieth century, which a generation of American trust-busters found alarming, Schumpeter tended to see as the typical instruments of continuing innovation rather than as threats to competition. The entrepreneurial function, in his mature account, had become more and more institutionalised within the research laboratories of large corporations, and while he regretted the effect on the heroic individual entrepreneur of his earlier work, he did not believe the innovative function had been abolished.
Hayek was more suspicious. He treated concentrated economic power as only slightly less worrying than concentrated political power, and he worried about how the two could come to support one another. His concern was not, in the main, the classical antitrust concern about allocative inefficiency. It was that great concentrations of economic power distort the dispersed character of the extended order, substituting the plans of a few large organisations for the diffuse knowledge of many independent actors. He also saw, more clearly than Schumpeter, how concentrated firms often become the most energetic petitioners for political protection, and how the alliance between big business and the regulatory apparatus tends, under modern conditions, to harden existing arrangements against the innovative challenge Schumpeter celebrated. The two men thus end up, on the question of monopoly, with conflicting emphases. Schumpeter sees the large firm as the vehicle of creative destruction. Hayek sees it as a potential enemy of the spontaneous order. Both can be right, depending on the firm and the period, but the difference in emphasis is real.
The fourth difference concerns the roles of the exceptional individual and the anonymous multitude. Schumpeter’s framework is built around the exceptional individual. The entrepreneur is a particular kind of person, not merely a role. He shows specific psychological traits: a willingness to depart from routine, a combative bent, a refusal to be governed by the averages that constrain the ordinary economic actor. Schumpeter was, at times, frank in his almost Nietzschean admiration for this figure. "There is the dream and the will to found a private kingdom," he wrote, "there is the will to conquer: the impulse to fight, to prove oneself superior to others, to succeed for the sake, not of the fruits of success, but of success itself." Whatever one thinks of this picture, it is plainly a theory in which the contribution of particular persons is given great weight.
Hayek’s framework is radically decentred. The extended order is an order of anonymous multitudes. No one is indispensable. The judge who refines the common law, the merchant who establishes a new practice, the craftsman who improves on an inherited technique, each contributes, but no one contributes more than a fragment, and the total pattern is produced by the interaction of fragments rather than by the vision of any. Hayek’s paradigmatic hero is not a heroic figure at all. He is an ordinary participant in an order whose working he does not fully understand, whose rules he follows without being able to state them, and whose continued existence depends not on his brilliance but on the collective, unselfconscious loyalty of those like him. The humility Hayek preaches is grounded in this decentred picture. There are no visionaries in the extended order. There are only, as it were, many small stewards.
The difference bears on practical conclusions. A Schumpeterian, thinking about policy, will tend to ask what conditions most favour the appearance and operation of the exceptional individual. He will worry about tax codes that punish concentrated success, about cultural attitudes that disparage the ambitious, about regulatory thickets that favour incumbents over insurgents. A Hayekian will ask what conditions most preserve the dispersion and coherence of the many. He will worry about the erosion of intermediate institutions, about the crowding out of local knowledge by central mandate, about the displacement of custom by codification. Both sets of worries have force. But they are not identical worries, and the policies that address one are not necessarily those that address the other.
The fifth and final difference concerns intellectual lineage, which is subtler than it may first appear. Schumpeter drew heavily on Marx, whom he treated as the most penetrating analyst of capitalism’s inner dynamic, even as he rejected Marx’s normative conclusions. He drew on Walras, whose general equilibrium he treated with the respect one owes to a great work of theoretical architecture. And he drew on the German historical school, with its attention to institutional variation and historical particularity, which gave his work an appreciation for the concreteness of economic phenomena that the purer theorists often lacked. The result is a mixed and sometimes dissonant inheritance, one that gave Schumpeter’s work its characteristic depth and its occasional obscurity.
Hayek’s lineage is different. He drew from Menger, the founder of the Austrian school, and from the long tradition of Scottish Enlightenment thought, particularly Hume, Smith, and Ferguson, whose emphasis on the unintended beneficial consequences of self-interested action he extended and formalised. He drew, in his later years, on evolutionary biology and on the group-selection theorising of his friend the ethologist Konrad Lorenz, though that element of his work has proved the most contested among scholars. The synthesis that results is recognisably liberal in the classical sense but has broader philosophical ambitions than the utilitarian liberalism with which it is sometimes confused. Hayek is not chiefly concerned to maximise welfare. He is concerned to identify the conditions under which a civilisation of strangers can be sustained, and he is willing to follow his inquiry wherever it leads, even into territories, such as cultural evolution, that make some of his admirers uncomfortable.
These differences of lineage produce differences of method. Schumpeter’s economics is saturated with history; his famous business-cycle theory, set out in the massive Business Cycles of 1939, is built out of extensive historical case material as much as out of theoretical abstraction. Hayek’s economics is more formal in its early phases, more philosophical in its later, and throughout more suspicious of historical generalisation as a source of theoretical warrant. Each method has its strengths, and neither man would have denied the legitimacy of the other’s. But the difference does help to explain why the two men’s writings have a different feel, and why their readers sometimes come away with different senses of the shape of economic reality.
One should not overstate these differences, any more than one should overstate the meetings. The two men corresponded, respected each other’s work, and shared a broad opposition to the planning tendencies of their age. Schumpeter lectured at the London School of Economics in the 1930s during Hayek’s tenure there, and each read the other’s books with attention. But the differences are real, and the combined framework this essay offers is stronger for being a framework of two distinct voices rather than of two harmonised ones. Uncaptured value and the extended order are not the same idea. They are two independent lines of argument that happen, on careful inspection, to meet at the same conclusion about the limits of rational design. It is that meeting, not any false unification, that gives the combined framework its force.
Part III: The Challenge to State Intervention and Expert Authority
Why interventions miscarry, what the present age shows, and what is at last required of us
Chapter 5The Planner’s Blindness: Why Intervention Destroys What It Cannot See
We are now in a position to draw the two expositions into a single argument. The combined framework offered in this essay does not claim that all state intervention is misguided, or that expertise has no legitimate role in public life. Such a claim would be a caricature, and neither Schumpeter nor Hayek held it. What the framework does claim, with considerable force, is that any programme of intervention that proceeds without acknowledgement of uncaptured value and the extended order will systematically destroy what it cannot see, and that most interventions in fact proceed without such acknowledgement, because the instruments of public administration are ill-suited, by their very construction, to seeing the things in question. The planner’s blindness is not a chance failure of particular planners. It is a structural feature of the planning enterprise. This chapter unfolds the claim through five distinct problems, each a different facet of the same underlying difficulty.
The first is the measurement problem. Governments and their expert classes can only act on what they can measure, count, and model. This is not, in the first place, a criticism. Public authority must answer to public standards of evidence, and measurement is among the most reliable such standards. But the demand for measurability becomes distorting when applied to things that are, by their nature, unmeasurable. Uncaptured value, as we have seen, is by definition the part of an innovation’s social benefit the innovator cannot keep and that unfolds in directions no one anticipated. Any attempt to reduce it to a figure produces either a shadow of the reality or a fabrication dressed up in the costume of precision. The extended order, likewise, coordinates dispersed knowledge that exists in tacit form and that ceases, on articulation, to be the thing it was. The statistical models by which policy is evaluated treat the world as if it were made up only of the legible. The illegible is either ignored or assumed to be in proportion to the legible, which it is not. Policy therefore favours, in a systematic rather than accidental way, the visible and the countable over the invisible and the tacit.
The consequences of this bias are considerable. An industrial subsidy can be justified on the basis of projected employment effects, because employment is countable. The diffuse losses the subsidy inflicts on the wider innovation ecology, through the mispricing of capital, the distortion of entrepreneurial attention, and the discouragement of unsubsidised alternatives, are not countable in any comparable sense. The subsidy thus appears to be a net gain even when, in reality, it is a net loss. The same logic applies to regulations whose benefits are dramatic and specific while their costs are small and dispersed across thousands of affected firms, each of which bears a share too modest to protest. The administrative mind, trained on cost-benefit calculations that depend on countable quantities, underestimates the damage it does to what cannot be counted.
The second is the time problem. Political cycles run on timescales of years. Uncaptured value and spontaneous institutional evolution run on timescales of decades and, in the case of legal and moral traditions, of centuries. An electoral majority is in place for perhaps four or five years. A senior civil servant’s tour of duty in a given portfolio may last two or three. The quarterly review, the annual budget, the parliamentary term, the political news cycle: these are the metronomes of public decision. None of them, it hardly needs saying, is suited to evaluating a decision whose consequences will first become visible in 2050. The time structure of public life therefore favours short-term optimisation over long-term soundness, even when individual officeholders are of long view. It is not that politicians are all short-sighted. It is that the incentive structure within which they work rewards action on the nearer horizon and punishes inaction on the further.
The combined Schumpeter-Hayek framework sharpens this worry. If the most important outputs of the market order are revealed only in the long run, and if the most valuable knowledge carried by its institutions has been built up over generations, then any arrangement that favours the short run over the long is positively destructive of value. The temptation to sacrifice future novelty for present reassurance is not a minor vice of democratic politics. It is a chronic ailment whose cure is not easy to imagine. The framers of constitutions have sometimes tried to lengthen the effective horizon of public decision through such devices as staggered terms, judicial tenure, and the entrenchment of constitutional provisions against easy amendment. These buy some distance from the pressures of the immediate. They do not, however, resolve the underlying difficulty, which is that uncaptured value and the extended order are not merely slightly beyond ordinary political time but are on a different scale altogether.
The third is the knowledge problem proper, which is Hayek’s specific contribution. Even when a planning authority is well-intentioned and technically sophisticated, it cannot possess the dispersed, local, tacit knowledge that the extended order coordinates. Its statistical surveys, its expert consultations, its focus groups, its preference elicitations, all of these gather the articulate fragment while missing the inarticulate whole. Central planning does not merely fail to improve on market outcomes. It actively destroys the information on which those outcomes depend. When a regulator fixes the rent of a flat, he does not simply miss the right number. He eliminates the signal by which tenants and landlords would have conveyed their shifting valuations to one another, and he thereby blinds the system to its own condition. When a central bank targets an output gap, it relies on measures of potential output whose construction rests on assumptions the central bank itself cannot justify at a granular level, and it may, through its resulting actions, induce distortions in the price structure that obscure the very signals it seeks to read. The list could be extended indefinitely. Each case confirms the same principle: direction substitutes the planner’s impoverished information for the dispersed information of the market, and the substitution is almost always a loss.
William Easterly, in his studies of economic development, has drawn a line between what he calls planners and searchers that bears closely on this argument. The planner, in Easterly’s telling, formulates grand schemes from a distance and tries to impose them on local conditions he imperfectly understands. The searcher operates within local conditions, experiments at small scale, adapts to feedback, and builds up practical knowledge through trial and error. The history of foreign aid, Easterly suggests, is largely a history of planners’ failures and searchers’ successes. His account is empirically rich and does not depend on any particular theoretical allegiance, but it fits plainly with the Hayekian position. The searcher is an agent of the extended order, constantly aligning himself with local signals he does not need to state in order to use. The planner is a constructivist, working on the assumption that what he can model is the relevant whole.
The fourth is the innovation problem, which is Schumpeter’s specific contribution. State direction of economic activity cannot replicate the entrepreneurial function because the entrepreneur’s distinctive role is precisely to do what no established authority would sanction or foresee. The assessment procedures of bureaucratic organisations are designed to identify acceptable risks by reference to past experience and expert consensus. The entrepreneur’s project, to the degree that it is truly new, is by construction unacceptable to such procedures. The new combination has no track record, contradicts the consensus, and lacks the credentialed sponsors who would reassure a risk committee. If the entrepreneur required the approval of such a committee before proceeding, he would in most cases not proceed at all.
This is why so much important innovation has historically occurred either outside formal organisations, in the garages and kitchens of untried persons, or at the fringes of large organisations, in skunk works tolerated by management precisely because they work beyond the reach of normal procedures. The fringes of IBM gave the world the personal computer, against the better judgement of the centre. The fringes of Xerox gave the world the graphical user interface, to the later regret of shareholders whose leaders did not see its worth. The formal research laboratories of the mid-twentieth century, which Schumpeter himself had seen as the new home of the entrepreneurial function, produced notable results when they were granted a degree of undirected autonomy, and notably fewer when they were brought under the discipline of strategic planning. The pattern is not universal, but it is pervasive. It reflects the deep difficulty of producing novelty by committee, a difficulty rooted in the very features that make a committee reliable for other purposes.
The fifth is the legitimacy problem, which is common to both men and which is perhaps the most uncomfortable of the five to think about. The combined framework suggests that the political class and the intellectual class have powerful incentives to extend their own authority by claiming competence over fields where no such competence is possible. Schumpeter’s analysis of the intellectual’s hostility to capitalism and Hayek’s analysis of the constructivist mentality are complementary accounts of why the political demand for intervention is self-reinforcing rather than self-correcting. The intellectual gains prestige by showing that his expertise can be applied to public questions. The politician gains power by commissioning that expertise. The administrator gains scope by carrying out the resulting programme. Each of the three actors gets a visible benefit from the extension of organised authority into new fields, while the costs, which fall on the dispersed innovation ecology and the spontaneous order, are borne by agents who have no comparable voice in the proceedings.
The asymmetry is structural. The gains from intervention are concentrated, named, and well-represented in the councils of public argument. The losses are diffuse, anonymous, and under-represented. Consider the firm that receives a subsidy. It has staff, lobbyists, a press office, and a direct line to the relevant minister. Consider the firm that never came into existence because the capital which would have financed it was drawn off, through the tax code and the subsidy programme, to the subsidised firm. It has none of these. Its founder may not even have conceived the idea that would have given rise to it, because the investment climate which would have rewarded the idea was altered by the earlier intervention. Bastiat’s line between what is seen and what is not seen, familiar to every classical economist, is given fresh weight by the Schumpeter-Hayek framework. The unseen is not merely less visible. It is, in the crucial cases, the more important.
Taken together, these five problems make a serious case against the constructivist temptation. They do not, as I have said, add up to a doctrine of pure laissez-faire, nor would either man have endorsed such a doctrine without qualification. The framework of rules within which market exchange occurs is itself a proper object of deliberate design, though the design must be of the framework rather than of the outcomes within it. Public goods exist, externalities exist, and certain collective provisions are justified by arguments neither Schumpeter nor Hayek denied. The point of the case is not to dismiss public action but to place it under a discipline of knowing humility. When a proposed intervention touches the uncapturable or the dispersed, the burden of proof must fall heavily on those who would intervene, and it must be met with more than the confident production of models whose assumptions are congenial to the conclusion. This is, of course, not how most public debate is conducted. It is, however, how it ought to be conducted if the arguments of Schumpeter and Hayek are taken seriously.
Chapter 6Contemporary Relevance: Industrial Policy, Technocracy, and the New Interventionism
A framework of ideas is best tested by its application to the questions of its own day. The decades since Hayek’s death in 1992 have seen a revival of ambitions both he and Schumpeter would have found alarming. Industrial policy, in substantial disrepute at the close of the twentieth century, has returned to respectability in Washington, in Brussels, and above all in Beijing. Technocratic governance, under the banner of evidence-based policy, has extended its reach into fields formerly left to custom and local judgement. The platform economy has produced concentrations of corporate power that would have startled the trust-busters of a century ago. A global pandemic has raised, with peculiar urgency, the question of what centralised direction can achieve and what it cannot. In each of these settings, the combined Schumpeter-Hayek framework yields distinct and in some respects unfashionable conclusions. This chapter sketches four such applications, not in order to settle debates that are continuing, but to show what the framework contributes to them.
Consider, first, the return of industrial policy. The passage in the United States of the CHIPS and Science Act, and of the Inflation Reduction Act, each committing substantial public resources to the direction of investment in semiconductors and in green energy respectively, represents a decisive shift from the policy consensus of the preceding generation. In the European Union, the Green Deal Industrial Plan, the European Chips Act, and a series of member-state initiatives have pursued similar objectives. China, which never abandoned industrial planning, has redoubled its commitments under the Made in China 2025 programme and its successors. The broad outlines of these initiatives are by now familiar. The state identifies a strategic sector, deploys subsidies and tax credits to direct private capital into it, erects tariffs or content requirements to protect domestic producers, and in some cases takes equity stakes in favoured firms.
What would a Schumpeterian say? That the state, having identified a sector, has thereby preselected the solutions whose approximate shape is already visible, and has closed off the paths of innovation that would lie elsewhere. Creative destruction in semiconductors may not, in the event, come from improvements to silicon lithography at all. It may come from quantum computing, from neuromorphic architectures, from biological substrates, from directions that do not now appear in the trade press. The subsidy programme, built around today’s idea of the relevant technology, directs capital and talent towards continuations of that idea and away from the departures. What the state has bought is the visible roadmap. What it has sold, though without knowing it, is the unmade future. Schumpeter would not have been opposed in principle to public support for research whose appropriable returns are small. He would, however, have insisted that the support be generic, not sectoral, and that the authority to choose among approaches be left with the researchers and entrepreneurs whose judgement of emerging possibilities is closer to the phenomena than any planner’s can be.
What would a Hayekian say? That the knowledge required to identify which firm, within a chosen sector, is most worthy of support is not available to the granting authority at the level of detail at which it must be exercised. The programme administrator may know a great deal about semiconductors in general. He does not know the tacit particulars of the firms he is grading. His decisions must therefore proceed by proxy, on measurable criteria that approximate the criteria that matter but do not reproduce them. The firms best at producing the measurable proxies, which is to say the firms most skilled at performing for administrative evaluation, will tend to prevail over the firms best at producing the underlying value. The programme thereby systematically rewards a particular kind of competence, namely competence in bureaucratic presentation, at the expense of the competence it is supposed to cultivate. This is not a hypothetical worry. It is the observed pattern of most industrial-policy programmes for which we have decent record.
The Hayekian critique is sharpened when we notice that industrial policy programmes have an almost irresistible tendency to attract the interests of precisely those incumbent firms whose displacement the creative-destructive process would require. The large, politically connected producer is better placed to capture the subsidy than the small, untested challenger. The programme therefore entrenches existing arrangements under the cover of promoting transformative change. The historical record of such programmes, from the French indicative planning of the postwar decades through the Japanese Ministry of International Trade and Industry, shows successes and failures both, but a pattern whose shape is visible even in the successes. Where industrial policy has appeared to work, it has most often done so in catch-up contexts where the target technologies were well understood abroad and the task was imitation rather than innovation. Where the task is to create what does not yet exist, the record is considerably less encouraging. The framework offered here helps to explain why.
Consider, second, the rise of technocratic government under the banner of evidence-based policy. The ambition to put public decision on an empirical footing is not objectionable in itself, and the use of well-designed evaluations to inform policy is a modest improvement over the use of prejudice. The difficulty arises when the ambition extends beyond the fields in which reliable evidence is available to the fields in which it is not, and when the language of evidence is used to confer an authority on decisions whose grounds are less well established than the language implies. Technocracy, in its strong form, is a kind of constructivism. It treats society as a system whose relevant features can be modelled by experts and whose working can be improved by expert direction. Hayek’s critique applies here with particular force.
The randomised controlled trial, imported from medicine into economics and into policy more broadly, has produced important findings. It has also produced a style of argument in which the only considerations admitted to the council are those which have been certified through a trial of approved design. This elevates the legible over the illegible, the short-term over the long-term, and the intervention that can be piloted over the institution that must be cultivated. Few of the developments that matter most in the arc of a civilisation would appear, on the blackboard of the methodologist, as interventions suitable for trial. The rule of law, religious toleration, the institution of limited liability, the Protestant ethic, the rise of the commercial bourgeoisie, the cultural celebration of innovation and enterprise: all of these are things rather than interventions. They cannot be piloted in one county and compared with another. They are, in the strict methodological sense, beyond evidence. And yet they are, Deirdre McCloskey has argued at length, the substance of what she calls the Great Enrichment, the astonishing material transformation that has altered the conditions of human life over the past two centuries.
McCloskey’s thesis, developed across her trilogy on the bourgeois virtues, fits the Schumpeter-Hayek framework in its essential claims. The modern world, she argues, was not made by capital accumulation, institutions, or incentives treated as mechanical variables. It was made by a change in the rhetoric within which economic life was conducted, a change that dignified the innovator and the merchant, that allowed them to pursue their projects without dishonour, and that released the entrepreneurial energies which had always been latent in human societies but which had been suppressed by aristocratic or clerical disdain. Her account restores to the centre the cultural and moral elements of the extended order, the elements no evidence-based method can easily assess and the technocratic style of argument is most prone to neglect. It is a contribution that deserves wider hearing than it has received among economists, most of whom remain more comfortable with variables they can put into a regression than with the ethos that makes the regression worth running.
McCloskey’s first departure from orthodoxy came in the book on the rhetoric of economics, published in 1985, which preceded the bourgeois trilogy by some two decades. The economists of her generation had been trained to regard their discipline as a kind of applied mathematics, concerned with deductive proof and empirical test, and to treat questions of persuasion as beneath serious notice. McCloskey, herself a quantitative economic historian of formal training and high standing, set out to show that this self-image was false to what economists actually did. When they argued with one another, they used metaphors, analogies, narratives, appeals to authority, and a great many other devices belonging to a rhetorical art rather than to a demonstrative science. Her point was not to dismiss economics as mere rhetoric, for she held rhetoric in the classical sense to be a noble art, but to free her colleagues to reflect on the full range of means by which they in fact persuaded each other. Her later work on the Great Enrichment took much of its shape from this earlier recognition that the story of economic life cannot be told in equations alone. A civilisation, like a science, is held together by the words its members use to describe and honour what they do.
The central claim of the trilogy, made most fully in Bourgeois Dignity of 2010 and Bourgeois Equality of 2016, is that the Great Enrichment cannot be explained by the material causes economists had habitually cited. Capital accumulation, on McCloskey’s calculations, accounts for only a modest fraction of the growth that followed 1800. Institutions, in the sense favoured by Douglass North and the new institutional economics, had in many cases been present for centuries before the take-off and could not by themselves explain why the take-off occurred when and where it did. Colonial exploitation, to which writers on the left have sometimes assigned the whole weight of the modern world, produced transfers of wealth far too modest to account for a sixteen-fold or thirty-fold rise in real income per head. What changed in Holland in the seventeenth century, and in Britain in the eighteenth, was the esteem in which commercial and inventive activity was held. Innovators who had once been mocked as tinkerers or despised as upstarts came to be spoken of with respect. A rhetoric that had licensed the confiscation of merchant wealth gave way to one that protected it under law and celebrated its enjoyment. The result was that the latent entrepreneurial capacities of human beings, which had always been present but had been held in check by social contempt, were released on a scale the world had never seen.
McCloskey’s argument sits comfortably beside the two thinkers at the heart of this essay, and adds to them what neither quite supplied. Schumpeter had described the entrepreneur as the agent of change, the carrier of new combinations through the economic system. He said less than one might wish about why such agents were tolerated in some societies and not in others, why the mediaeval moneylender was despised while the eighteenth-century manufacturer was feted. McCloskey answers that question. She points to a cultural and rhetorical shift whose traces can be read in the pamphlets, novels, and sermons of the period, a shift that allowed the Schumpeterian function to flourish in some times and places and not in others. Hayek had described the extended order as a fabric of rules whose rationality no participant fully grasps, but Hayek wrote chiefly of rules of property, contract, and law. McCloskey reminds us that the rules include rules of speech and honour, the ways communities praise and blame, which shape conduct as surely as any written statute. Where Schumpeter shows the function of the innovator and Hayek the structure within which the innovator operates, McCloskey shows the ethos without which the function cannot operate within the structure. All three, in their different registers, insist against the statisticians and planners that what most matters in economic life is not easily reduced to measurable inputs.
For policy, McCloskey’s thesis carries a sobering lesson, one that sharpens the Hayekian scepticism about constructivism. If the Great Enrichment was a work of rhetoric and esteem as much as of capital and institutions, then the familiar instruments of development economics, whether foreign aid, structural adjustment, import substitution, or industrial policy, cannot be expected to do the decisive work. What makes nations rich is a condition of the wider culture that the state may protect or damage but cannot manufacture. This is, as McCloskey freely admits, an uncomfortable conclusion for those who wish to fix poverty by fiat. It accords, however, with the pattern of the twentieth century. Top-down development schemes in Africa and South Asia produced disappointing results over decades, while the most dramatic gains, in post-war Japan, in South Korea, in Taiwan, and later in coastal China, came in societies where a cultural shift towards dignifying commerce preceded or accompanied the institutional changes the textbooks had emphasised. The East Asian miracles did not wait for the completion of legal reform. They required, first, a change in what the society admired. The lesson is consistent with the framework of this essay. The deepest sources of wealth lie deeper than the ordinary instruments of public policy can ordinarily reach, and any policy that does not respect this fact will squander resources on efforts aimed at the wrong level of the problem.
A further voice whose work bears directly on the present argument is that of the American lawyer Philip K. Howard, who has spent three decades documenting, in a sequence of books beginning with The Death of Common Sense of 1994 and continuing through The Rule of Nobody, Life Without Lawyers, and Everyday Freedom, the ways in which the regulatory state has come to impair the local judgements on which the ordinary functions of a society depend. Howard writes from neither the Austrian nor the ethnographic tradition. He writes from observation of how law and regulation actually fall upon the daily work of teachers, doctors, engineers, builders, public officials, and the many other classes of professional whose competence is exercised at first hand in particular places with particular persons. What he has found, across a wide range of domains, is that the very effort to secure reliable performance through comprehensive rules has produced, in many institutions, the opposite of reliable performance. The rules have displaced the judgement; the displacement has yielded work that is compliant but poor; and the poor work has invited further rules, compounding the difficulty. The pattern is precisely the one the framework of this essay would predict, and Howard’s catalogue of cases provides the empirical body that the abstract argument of the Austrians can rarely supply on its own.
Consider, with Howard, the case of the ordinary schoolteacher. A teacher’s competence consists largely in her ability to read the particular child before her, to notice what he does not yet understand, to notice what he can be drawn to discover for himself, to judge when to stretch and when to reassure. This competence is local in the strictest sense. It is exercised towards a specific pupil at a specific moment, and it cannot be replaced by any rule, however well drafted, written for all pupils in general. Yet the accumulation of educational regulation across the past forty years has produced, in many Western school systems, a regime in which the teacher’s exercise of such judgement is suspect by default. The syllabus is prescribed. The tests are standardised. The pedagogical techniques are mandated. The assessment is carried out by protocols from which a teacher may not deviate even when she sees, as she does, that a departure would serve this particular child better. The local knowledge of the teacher, with all its subtle and accumulated form, is displaced by the distant rule, which presumes to know better. The result is a system that can report its compliance but cannot report its education, and whose outputs, measured by what education used to produce in the same societies, have in many cases declined. The uncaptured value of a teacher’s exercised judgement, the insight that does not show up on any test score but that leaves a mark on a life that will emerge decades later in quiet ways, is the very substance that the rule has driven out.
Howard’s catalogue extends, with similar care, to the work of engineers and builders, and here the loss of local judgement has measurable consequences in the form of projects that are delayed, cancelled, or built at many times the cost they would have borne in an earlier age. A recurring example is the raising of the Bayonne Bridge in New York harbour, whose conversion to accommodate modern container shipping was determined to be necessary in the early years of this century and took many years longer than the original construction of the bridge in the 1920s, chiefly because the project had to pass through successive environmental reviews, public hearings, legal challenges, and permitting processes, each conducted with painstaking formal care and none of them able at any point to permit the responsible engineer to apply his judgement and proceed. The effect is not unique to the Bayonne Bridge. American and European public infrastructure has, over the past three decades, become remarkably difficult to build at reasonable speed or cost, and the difficulty is traceable not to any single regulation but to the cumulative weight of many regulations, each defensible in isolation, none defensible in aggregate, and all tending to displace the responsible exercise of professional judgement with the verification of procedural boxes. The extended order, in such a field, is not merely interrupted. It is actively obstructed by an apparatus whose every component has a plausible story to tell about why it is needed and which, taken together, produces the paralysis Howard has made it his life’s work to describe.
The same picture, with local variations, can be drawn in medicine, in architecture, in public administration, and in the civic work of volunteer organisations, school boards, and neighbourhood associations, each of which has been altered in the past half-century by the arrival of formal rules where informal judgement once sufficed. The doctor who must practise defensive medicine is not free to treat his patient as his training tells him he should. The architect whose building code prescribes the width of every hallway is not free to design for the particular site and use. The civil servant whose decisions are catalogued and appealable cannot make the timely call that the difficulty in front of him requires. Howard’s diagnosis is uncompromising. The present regulatory apparatus has not failed in its stated purpose of preventing misjudgement; it has, in many domains, succeeded all too well, by eliminating the occasion for judgement altogether. The price has been paid, as the framework of this essay suggests, by the persons whose lives these professions were meant to serve. The child whose teacher could not adapt to him. The patient whose doctor could not think past the protocol. The neighbourhood whose bridge could not be rebuilt within a span its residents could live to see. The small business whose permit could not be issued within a useful portion of its founder’s working life. The fine mesh of rule catches the vulnerable first, and in each of these cases the benefit that has been lost is chiefly uncaptured value that the free exercise of competent local judgement would have produced and that now lies, as Howard has it, undelivered. The regulatory instinct, pressed past the point of its usefulness, does not merely fail to create such value. It prevents others from creating it. And the society thereby deprived is, in the most literal sense, poorer than it might have been, and poorer in the parts of its life that are least easily replaced.
Consider, third, the platform economy and the great digital monopolies. The firms of the digital age present a new challenge to both strands of the framework. On one hand, their rise shows the creative destruction Schumpeter described: the displacement of older retailers by Amazon, of older media by Google, of older telephony by the smartphone, amounts to one of the most rapid revaluations of economic arrangements in history. On the other hand, their current positions show concentrations of market power that last beyond what one would have expected of ordinarily contestable markets, sustained by network effects, data advantages, and ecosystem lock-in. The Schumpeterian will see, in the first aspect, the characteristic virtues of the innovative process, and will be slow to see the dominant firms regulated in ways that would foreclose the next round of disruption. The Hayekian will worry, in the second aspect, about the scale at which discretionary decisions by these firms now affect the lives of billions, and about the potential alliances between the firms and the states that regulate them.
A nuanced framework, as ours is, declines to issue a simple verdict. It suggests, rather, that the appropriate posture is one of caution before regulatory ambition, together with vigilance against the entrenchment of incumbents by public authority. The most serious worry is not that Google or Amazon will exploit their present positions but that the regulatory response to them will take forms that harden those positions against the next wave of challengers. The historical pattern is clear. The antitrust settlement of IBM, however justified in the particular, helped to make the personal-computer industry possible. But such well-timed correctives are rare. Most regulatory regimes, once established, are colonised by the firms they were supposed to discipline, and they work thereafter as barriers to entry rather than as checks on incumbency. A framework that values the uncapturable surplus of innovation and the dispersed knowledge of the extended order will be slow to see regulatory authority over the platform sector expanded on grounds that were valid a decade ago but whose application to present circumstances is more uncertain than its enthusiasts admit.
Consider, fourth and last, the pandemic response of 2020 and 2021 as a case study. The episode threw into sharp relief the tension between centralised direction and spontaneous adaptation. On the side of spontaneity, the rapid emergence of mRNA vaccines, the redeployment of industrial capacity to respiratory equipment, the improvisation of remote work and schooling, and the informal learning by which millions of households navigated an unprecedented situation represented the extended order operating under duress. On the side of centralised direction, lockdowns, travel prohibitions, school closures, and contact-tracing regimes varied greatly in their character and consequence across jurisdictions, with results the intervening years have been slow to assess candidly. A Schumpeter-Hayek analysis does not yield a pat verdict on these measures, nor should it. What it does yield is a disciplined suspicion of confidence.
The confidence of public-health authorities, in particular, proved in several cases to have outrun the knowledge on which it claimed to rest. Judgements about the closure of schools were made in conditions of acute uncertainty, and the reassurances offered at the time did not always survive the later evidence. The Hayekian would observe that the centralisation of decision-making, however useful in an emergency, suppressed the local experimentation which would have allowed different jurisdictions to learn from one another’s adjustments. Where such learning did occur, it was in spite of, rather than because of, the prevailing preference for coordinated national policy. The Schumpeterian would observe that the capacity to respond quickly, where it existed, was an inheritance of earlier periods of unregulated innovation in biotechnology, pharmaceuticals, and logistics. The companies and capabilities that made the response possible had not been chosen by any planner and could not have been. Neither observation is conclusive. Both, however, suggest that the framework offered here shows what the usual vocabulary of pandemic policy debate often obscures. Our ability to respond well to such events depends on prior conditions that pre-emptive planning would have foreclosed, and on decentralised adjustments that emergency consolidation tends to suppress.
Nassim Nicholas Taleb has given these intuitions a sharper form under the headings of antifragility and skin in the game. A system is antifragile, on his account, when it benefits from shocks, volatility, and disturbance, growing stronger through the selection pressures these impose. The extended order, in its healthy operation, is antifragile in just this sense. It contains within itself the redundancy and variation that allow response to the unexpected. Central direction, by contrast, produces fragility, precisely because it concentrates risk and removes the diversity from which resilient adaptation would have emerged. Taleb’s further insistence on skin in the game, the rule that those who make decisions must bear their consequences, addresses the legitimacy problem we set out earlier. The planner who escapes the costs of his error lacks the feedback that would discipline his judgement. The entrepreneur who bears those costs acquires an education no seminar can provide. Taleb’s vocabulary is his own, but the intuitions he states belong to the Schumpeter-Hayek lineage, and they deserve a place in any serious contemporary application of the framework.
None of the contemporary applications sketched here is conclusive, and none is intended to be. The framework offered in this essay is a lens rather than a set of policy prescriptions. It asks of any proposed intervention a set of questions that conventional policy debate seldom asks: what uncapturable value is being disturbed, what dispersed knowledge is being overridden, what timescale of adjustment is being compressed, what feedback from the affected to the affecting is being severed. These questions do not always produce a clear answer. Often they yield only degrees of doubt where others find confidence. But degrees of doubt, rightly held, are more valuable to the conduct of public life than confident errors. This is the combined contribution, to contemporary debate, of the two thinkers whose concepts we have been tracing.
Chapter 7Conclusion: The Humility That Markets Teach
It remains to say what Schumpeter and Hayek together ask of us. The combined framework yields, at bottom, an argument not primarily about policy but about disposition, a certain bearing of mind towards the world one seeks to govern. That bearing is one of humility about knowledge, and it is, I have suggested, deeply counter-intuitive to the modern mind. We live in a culture that has inherited from the scientific revolution and its political successors the conviction that reason is, in principle, capable of understanding any object to which it turns its attention, and that understanding is the first step towards control. The vast technical achievements of the last three centuries encourage this conviction, for in the fields to which it has been most successfully applied, it has been triumphant. The cathedral, the railway, the vaccine, the communications satellite, the integrated circuit, each bears witness to the power of reason disciplined by measurement and experiment.
The extension of this disposition from the natural to the social, however, has been less uniformly triumphant, and the reasons why are the subject of the earlier chapters. Social orders are not natural objects. They are made up of agents whose expectations and responses alter the environment within which inquiry proceeds, whose local knowledge cannot be gathered into a public form without loss, and whose flourishing depends on outcomes that the methods by which we might wish to measure flourishing cannot register. In such a field, the methods of the natural sciences, when imported without care, tend to replace reality with those of its features that are tractable to the chosen techniques. What is thereby lost is precisely what Schumpeter and Hayek were at pains to describe.
The humility the two men commend is not, it bears saying, a counsel of inaction. Neither was an advocate of passive acceptance of inherited arrangements. Schumpeter celebrated the entrepreneur, whose role is precisely to disturb the settled order and who acts on initiatives whose consequences he cannot fully predict. Hayek defended the judge who refines the common law case by case, each adjustment respecting the integrity of the whole while correcting what the whole has been shown by particular cases to require. Both men admired reform at the margin, experiment at small scale, and the slow build-up of practical knowledge. What they resisted was the assumption of comprehensive understanding that issues in comprehensive design. The line is not between action and inaction. It is between action that respects the order within which it occurs and action that claims to replace that order from without.
It may be useful, in closing, to say what this disposition looks like in practice. It looks, I would suggest, like a preference for rules over discretions: not because rules are always wise, but because rules preserve the possibility of independent judgement on the part of those who work under them, while discretions invite the planner’s error. It looks like a preference for general frameworks over specific provisions, because frameworks admit the unforeseen while provisions presuppose the foreseen. It looks like a preference for the reversible over the irreversible, because irreversibility shuts down the future adjustments that experience would otherwise invite. It looks like a patience with processes whose working is not fully intelligible, a readiness to credit what one cannot explain, and a suspicion of the policymaker who believes he can explain it. It looks, in short, like the virtues Israel Kirzner saw in his picture of the entrepreneur as an alert and humble participant in an order larger than himself, rather than as a heroic master of it.
Kirzner’s development of the Austrian theory of entrepreneurship, built on Mises and Hayek rather than on Schumpeter, is worth a brief look here, for it adds a useful element to our composite picture. Kirzner held that entrepreneurial action is not primarily a matter of introducing radical novelty, in the Schumpeterian sense, but of alert discovery, of noticing opportunities that were there all along but had been missed. The entrepreneur, on Kirzner’s account, does not invent the market opportunity. He finds it, in the gaps of existing arrangements, where others had walked past without seeing. The role of such alertness in the working of the extended order is considerable, and it reinforces the humility at the heart of the Hayekian position. No central direction could have placed the observer where the opportunity was to be seen, because the opportunity had not been seen at the time any direction would have been issued. Kirzner’s entrepreneur is, in this sense, an agent of the extended order in the one act of participation the order most needs, namely the act of local responsiveness to conditions no one else has yet noticed.
Deirdre McCloskey’s contribution, which we have already examined at some length, bears recalling here in its bearing on this concluding theme. Her insistence that the modern world was made by a change in what societies honoured, and not merely by the accumulation of capital or the sharpening of incentives, places at the centre of the enquiry precisely the element most apt to be forgotten by a policy literature trained on measurable variables. The entrepreneur is not simply a function waiting to be allowed. He is a figure of a certain kind in the imagination of his neighbours, respected or despised according to traditions of speech and judgement that no legislator composed. A society that wishes to enjoy what Schumpeter called the fruits of creative destruction and what Hayek called the returns of the extended order must first learn, or recover, the habit of speaking well of those who trade, invent, and risk. No reform of law alone can substitute for this deeper reform of sentiment, and no regression, however fitted, can reach the phenomenon McCloskey has been at pains to describe. Her work, read alongside the two thinkers at the centre of this essay, completes a picture whose outlines neither Schumpeter nor Hayek drew in full, though both supplied the materials from which the picture has been painted.
A further figure whose work throws light on the territory our two principals have mapped is Ronald Coase, whose late essay on China, co-written with Ning Wang, offered an unexpectedly Schumpeter-Hayek reading of that country’s transformation. Coase argued that the astonishing growth of the Chinese economy after 1978 was driven less by the central reform programmes history has tended to credit than by what he called "marginal revolutions": the unauthorised experiments of peasants, township enterprises, and Special Economic Zone administrators, whose initiatives were tolerated rather than commanded from above. Official policy followed, ratifying after the fact what local actors had already proved by trial. The account fits the framework of this essay. The productive surplus of Chinese reform lay in experiments no planner could have designed, and the dispersed knowledge of countless local agents proved a better guide to what worked than the calculations of the Central Committee. That the subsequent direction of Chinese policy has turned towards greater centralisation is, on this reading, a cause for disquiet rather than celebration, whatever the short-term visible outputs may suggest. It is, in our terms, a move from cosmos towards taxis, with consequences the logic of both our men would predict.
One should admit, in a last act of candour, that the framework offered here does not speak directly to every contemporary difficulty. Questions of distribution, of environmental limit, of collective deliberation under conditions of cultural pluralism, are not addressed with any great specificity by either Schumpeter or Hayek, and to pretend otherwise would be to misrepresent them. What the framework does offer is not a complete theory of political economy but a particular corrective to a particular excess, namely the excess of confidence in rational design that has been the besetting temptation of modern government since at least the French Revolution. If one thinks, as I do, that this excess is still very much with us, perhaps more acutely today than at many points in the intervening centuries, then the corrective is timely. If one thinks the opposite, that the contemporary West suffers from a deficit rather than a surplus of planning ambition, the framework will seem less useful. Each reader must judge for himself where, on that spectrum, his own diagnosis of the age should fall.
I promised at the outset that the argument of uncaptured value carried a personal register to which I would return at the close. The reader will forgive a moment of direct speech. The framework we have traced from Schumpeter through Hayek, McCloskey, Kirzner, Coase, and the rest does not belong only to the study. It belongs also, and perhaps principally, to the examined life, to the question each of us must at some point put to himself about what our working years have amounted to. The question that presses most, in the quieter period when the books have been closed, is not how much one has gained but how much one has given without even noticing, how many lives one has touched at second and third and fourth hand, how many strangers one has in some way enriched without ever knowing it. This is the deepest sense in which the argument of this essay may be said to have a core. The core is not the critique of planning, though the critique of planning is much of what has occupied the earlier chapters. The core is the recognition, on which the critique of planning finally rests, that the best of what we make cannot be kept, and that this fact is not a disappointment but the very form of human productivity.
A person of eighty, looking back, has before him two ledgers. One is the captured ledger, the one the world is equipped to recognise: the salaries earned, the savings accumulated, the house, the pension, the holidays abroad. This ledger is real and is not to be scorned. Most people work for most of their lives to fill it, and they are right to do so, for it sustains those they love and dignifies a life with the independence one owes to one’s own. But there is a second ledger, one that the world has no instrument to read in full, and that the man himself can only guess at from fragments. This is the ledger of uncaptured value, the total of what his work has scattered abroad. If he has run a business, it contains the wages he paid to employees whose names he has forgotten, and which those employees spent on children who are now themselves grown. It contains the customers he served, whose lives were easier by some small measure because of what his firm provided, though none of them ever traced the improvement back to him. It contains the competitors his example pressed to raise their own game, and the next generation of entrepreneurs who learned from his mistakes as much as from his successes. Even the casual worker, the shopkeeper, the tradesman, the clerk, will find, on close inspection, that his second ledger is not empty. The orderly execution of ordinary duties is itself a contribution to the extended order, one that nobody else will ever compile.
It is, I would venture, the second ledger that, on mature reflection, such a person is most apt to be proud of. The first was necessary, and he need make no apology for it. But the first was always, in a sense, his purpose. The second was the surplus of his being there at all, the part that exceeds what he was trying to do. To recognise this is to recognise something important about the shape of a human life. We are not only receivers of value. When we work, we are also distributors of it, and the greater part of what we distribute passes through us without our ever being able to reclaim it. This is not a misfortune. It is the form of a well-spent life. To have been a knot in the net of exchange, through which some portion of wealth, goods, competence, and knowledge has flowed towards the lives of others, is a better account of a career than any self-regarding calculus can supply. It is also, if the argument of this essay is correct, the only account that matches the actual structure of the economic order in which such a career took place.
Nor, to recall a point made earlier in the essay, does the argument require the entrepreneur to have intended any of this. The ledger of uncaptured value fills whether the man who built the firm was a philanthropist or a scoundrel. He may have meant only to enrich himself, to build a monument to his own name, to outdo a rival, to take revenge on a world that had slighted him in his youth. The wages he paid, the products he supplied, the competitors he spurred to better work, the practical knowledge his example added to the common stock, are what they are regardless. His motives belonged to him. The surplus belongs to the world. This is not a moralising point but a structural one, and it is the answer to those who would require of enterprise a saintliness they do not require of any other human activity. The scoundrel, at eighty, if he has built anything of substance, has nonetheless scattered more than he has kept, even though scattering was the last thing on his mind. The uncaptured ledger is no less his work for having been unintended. Indeed, in the economy of a free society, almost all of what we owe one another has this character. It was given without being meant, received without being acknowledged, and is nonetheless the substance of the wealth we share.
The philosophical claim embedded in the title of this essay deserves, at this point, a more direct defence than it has so far received. That the meaning of a human life is to be found in its uncaptured value is not a piece of rhetorical elevation attached to an argument that could have stood without it. It is the load-bearing thesis of the whole, and the economic argument is its specification rather than its decoration. The defence runs thus. A human being, considered in his full nature, is not merely a consumer of goods or a receiver of benefits. He is also, and more essentially, a generator, a person who produces effects that flow outward through his conduct, his work, his speech, his example, his relations with those near and distant. The effects he produces are of two kinds. Some return to him, as wages, reputation, pleasure, security. These constitute the captured portion, the portion that his own reckoning can inspect. Others flow outward and do not return, but settle, instead, in the lives of others, often without his knowing and often in forms he cannot recognise. These constitute the uncaptured portion, which no ledger of his can record. If we ask what distinguishes a life that has amounted to something from a life that has not, the honest answer, drawing on the lives we have known as well as the lives the history books recall, is that it has produced an uncaptured portion of considerable extent. A life whose entire effect returned to its owner would be, by this measure, a life of small meaning, however comfortable. A life whose effects spread far beyond what their author could gather would be, by the same measure, a life of considerable meaning, however modestly its author lived.
This is not a derived conclusion of the economic argument. It is the structural fact of which the economic argument is the applied form. What Schumpeter called uncaptured value, at the level of the firm and the market, is what we have been calling meaning, at the level of the person. What Hayek called the extended order, at the level of civilisation, is the medium within which meaning in this sense becomes possible. To subtract uncaptured value from an economy is to subtract the primary source of its dynamism. To subtract the uncaptured portion from a life is to subtract what distinguishes that life from the merely self-maintaining animal existence our bodies would otherwise be content with. In both cases the deletion is severe, and in both cases the authority that would impose it, whether the planning committee or the cramped reckoning of the self-regarding calculus, would do so by mistaking the captured for the whole. The argument against this mistake, at both levels, is the argument of this essay. Its full statement is perhaps best given in the formula that furnishes the title: the meaning of life is uncaptured value. To object that the phrase is too large for political economy is to fail to notice that the problems political economy has tried to solve, from the eighteenth century onward, have never really been separate from the problems philosophy has tried to solve about the structure of a worthwhile human existence. The two questions always were the same question, asked in different languages. The present essay has tried to show how they look when asked together.
The meaning of life, if one may be permitted so heavy a phrase in a work of political economy, may therefore be closer to uncaptured value than to captured value. To live, in the fullest sense, is to produce effects one cannot fully trace, to have mattered to lives one cannot fully enumerate, to have added something to the common stock that cannot be retrieved even by the one who added it. The happy duty of the entrepreneur, the inventor, the builder, and in some degree the ordinary worker doing ordinary work with care, is to have served as a conduit for such value. What one keeps, one keeps. What one has given, one cannot count, but on a cold morning in one’s eightieth year one may allow oneself the suspicion that it was the better half. The old distinction between what one has earned and what one has bestowed reappears here in economic dress, and the moral weight falls, as it has always fallen, on the side of the bestowing. The very feature that makes uncaptured value invisible to the planner makes it central to the person, for both the planner and the person are trying to read a ledger written in an ink that fades before it can be counted. But the person, unlike the planner, has the advantage of not needing to count it. He needs only to have added to it.
This, I think, is where the economic argument of Schumpeter meets the moral argument our moment most needs. The critique of planning is not only a defence of markets. It is a defence of a kind of human seriousness, the seriousness of those who work without the expectation of being fully understood, who produce more than they can retain, and who live in the awareness that the better part of what they do will outlive them in forms they will never witness. The planner imagines a society whose outputs can be catalogued and whose benefits can be assigned. The person who has actually built something knows that the catalogue is impossible and the assignment a fiction, and knows, further, that this is not a defect of the activity but its dignity. Our institutions ought to honour this recognition, but whether they do so or not, the individual may, and should. It is the best of what the twentieth century’s two great critics of constructivism, writing from different angles of the same difficulty, left us to take forward into our own time. It is also, I believe, the best way to read the measure of a life.
The humility we have been describing has, I think, both a political and a personal aspect. Politically, it counsels against the rhetoric of control, the language of solving problems, the cast of mind that treats every difficulty as an engineering question awaiting the right expert. It counsels instead a language of stewardship, of tending to conditions rather than producing outcomes, of trusting processes whose working one does not fully understand. Personally, it counsels against the certainty that one’s own view is adequate to the whole. The wealth of our civilisation, if the earlier analysis is correct, is largely the work of persons no one remembers, working by rules no one ever fully stated, in transactions whose importance they did not suspect. We are the heirs of an achievement we did not make and could not have made. To see this is the beginning of the humility required. To act as though it were true is the continuation.
There will be those who find this conclusion unsatisfying. Modern political argument is impatient of dispositions. It wants programmes. It wants the three-point plan, the presidential initiative, the five-year strategy. The framework offered here yields no such documents. It offers, instead, a way of reading the proposals that others bring forward, a set of questions to be asked of every intervention, a discipline of doubt that may attach to proposals of all political colours. Some on the left will object that the framework is not engaged enough with the injustices that concentrated private power can inflict. Some on the right will object that it is not robust enough in its defence of tradition and authority. Both objections misread the framework. It is not a doctrine of political alignment. It is a doctrine of the limits of any political alignment’s capacity to see what lies beyond its instruments of perception.
It may be worth pausing here on the political placement of the argument, since the names of Schumpeter and Hayek, and still more the critique of planning they shared, are commonly labelled as libertarian or of the right. The label is not altogether wrong, for both men were indeed critics of the statist tendencies of their century. But it is misleading if it suggests that the insights I have been drawing out belong to any single political camp. The deep respect for local knowledge, for the particular over the universal, for the judgement of those close to the ground over the directive of those at a distance, has been equally at home in schools of thought whose political colouring is very different from that of the Austrian economists. A reader who takes this essay for a restatement of free-market doctrine will have missed the wider lineage within which its arguments stand.
Twentieth-century anthropology, in particular, has built up a substantive body of work whose practical lessons run along lines closely parallel to those of Schumpeter and Hayek, though few of its major figures would have described themselves as disciples of either. Clifford Geertz’s insistence, in Local Knowledge of 1983, that social life can only be understood through thick description of situated practice is an anthropological rendering of the Hayekian point about tacit, dispersed understanding. James C. Scott, whose Seeing Like a State has already been cited, writes in the anarchist tradition and yet arrives, by a quite different route, at a Hayekian conclusion about the epistemic violence of comprehensive planning schemes. Mary Douglas, in How Institutions Think of 1986, developed an account of how communities coordinate through shared classifications whose rationality exceeds any individual member’s grasp, which is not far from what Hayek meant by the extended order. Marcel Mauss on gift exchange, Bronislaw Malinowski on the kula ring, Karl Polanyi on the embeddedness of markets in social custom, each in his own idiom, assumed that economic activity is woven into inherited practice that functions well without the direction of experts and responds badly when such direction is imposed from above. These are not writers of the libertarian right. They are writers of the ethnographic left and centre. And yet the conclusion they draw about the folly of universalist administrative ambition converges, to a striking extent, with the conclusion we have drawn from Schumpeter and Hayek.
The convergence is worth stressing because it bears on how the present argument ought to be received. The respect for local, individual, and situated knowledge, and the suspicion of schemes that override such knowledge from above, are not the intellectual property of any political faction. They belong to a broad current of twentieth-century thought that runs from the Vienna of the Austrians through the American anthropology department, the English social-anthropology seminar, and the development studies literature of more recent decades. It runs also through the writings of practitioners, those who have spent their working lives among real communities rather than in the capitals of policy, and who have come, by long contact with particular places and particular people, to the same scepticism of grand design that the economists in question reached by theoretical means. The Austrian and the ethnographer met, in effect, at the same door, having walked towards it from opposite sides of the academy.
It may therefore be said, without any violence to the tradition I have been tracing, that the case against rational constructivism is as much an anthropological case as it is an economic one. The universal bureaucrat, who sees society as a field of interchangeable units to be rearranged according to a plan, is the same figure that anthropologists have encountered, often to their sorrow, in the colonial administrator, the development officer, the five-year planner, and the modernising social engineer of our own day. What the anthropologist has learned in the field, often at cost, is the same thing that the economist of the Austrian school learned in the library, namely that local knowledge is never redundant to the organising categories of the central office, and that interventions which ignore it tend, whatever their intentions, to destroy what they cannot see. Both disciplines, in their best moments, have arrived at the same humility.
A further observation, and one the present essay would be incomplete without, concerns the distribution of what the framework defends. If the argument seems to privilege the entrepreneur, this is a misreading of its distributive structure. The surplus of entrepreneurial activity, as we saw in the first chapter, flows chiefly to those who are not the entrepreneur. It flows to the customers whose lives his products ease, to the employees whose wages support their households, to the communities whose infrastructure and civic capacity his enterprise quietly reinforces, to the strangers in distant places who will benefit, a generation hence, from the practical knowledge his work added to the common stock. The entrepreneur’s personal share is the part that economic measurement sees most clearly, and the part the critics of enterprise most frequently denounce. But the entrepreneur’s personal share is, by the logic we have traced, the smaller share of the total value his activity produces. The larger share is distributed among everyday people, most of whom have never heard the entrepreneur’s name and never will.
This is why the case for enterprise, rightly understood, is not a case for the enrichment of a small class at the expense of the many. It is a case for the arrangements by which the many are enriched by the activity of the few, and by which the activity of the few is, in turn, made possible by the labour, custom, trust, and local knowledge of the many. A society that suppresses its entrepreneurs in the name of the ordinary worker punishes the ordinary worker most of all, for the ordinary worker is the principal recipient of what the entrepreneur could not keep. And a society that centralises its affairs in the name of efficiency, of equity, or of any other abstract good, overrides precisely the local knowledge of the many, on whose continued operation the prosperity of all depends. The argument, in other words, is not an argument for an economic aristocracy. It is an argument for an arrangement in which the gains of ordinary life are produced, and distributed, through channels too numerous and too local for any authority to replace. Read in this light, the Schumpeter-Hayek tradition is less the ideology of the capital-owning few than the best available description of how the benefits of human cooperation have, in fact, been spread abroad among those who were not at the negotiating table.
One further point, delayed until now because it is the most politically charged, must be put on the record before this essay closes. The argument we have traced identifies, by clear implication, who has the most to lose when its lessons are heeded. The losers are not the poor and vulnerable, as a casual reading of the political geography might suggest. They are, rather, the centralised experts and regulators who have, across the twentieth century, come to occupy a position of great consequence in the public life of the Western democracies and the societies that follow their example. These are the ministerial policy officers, the supranational technical committees, the international development officers, the think-tank authorities, the journalists of record who translate expert consensus into popular opinion, and the academics whose credentialled pronouncements furnish the intellectual authority on which the whole apparatus rests. The framework, if its arguments are taken seriously, tells these classes that their self-image has been inflated by their own success, and that the knowledge they command, while not negligible, is less than they take it to be and decisively less than the aggregated knowledge of the millions of local truths their policies presume to override.
This will be a difficult conclusion for the expert class to absorb, and it has not so far been absorbed in any significant degree. The self-image of the regulator is that he knows what the many who are being regulated do not. He has read the literature, followed the hearings, attended the conferences, and can speak with confidence on matters the ordinary citizen must take on trust. This self-image is not wholly wrong. The regulator does know some things the citizen does not. But he does not know, and cannot know, the local truths held in the judgements of millions of citizens operating in circumstances he has never visited. What he takes for a deficit in the citizen’s knowledge is, on careful inspection, a deficit in his own. He has one kind of knowledge, the summary, statistical, conference-ready kind. The citizen has another kind, the particular, situated, embodied kind, held in the form of practice rather than in the form of argument. The Hayekian point is that the second kind of knowledge, aggregated across the whole population, is richer than the first, and cannot be replaced by it without loss. The regulator, therefore, stands in a position of less knowledge than he believes. This is not a charge against his intelligence or his intentions. It is a description of the structural limits of his office.
The other side of this point is that the position defended in the preceding pages is, when rightly understood, one that optimises for the freedom and prosperity of the poor and vulnerable, not for the comfort of the already rich. Centralised regulation hurts the poor disproportionately. Zoning law, occupational licensing, development-zone designation, agricultural-policy quotas, benefit bureaucracies that punish the earning of a modest additional income, immigration rules that forbid the most productive matches of willing worker to willing employer, tax codes so complicated that only the wealthy can afford the advice needed to navigate them: in each case, the heavy hand of expert administration falls most crushingly on those with the fewest resources to work around it. The rich have their lawyers. The middle class has its accountants. The poor have nothing but the rules that were made for them by a class whose acquaintance with their actual circumstances is thin. A society that reduces the scope of centralised administration, and that allows its ordinary members the latitude to earn, build, trade, and organise in the ways they find best, benefits the poor first and the rich scarcely at all, since the rich already possess the scope they need and have often purchased it from the very regulatory apparatus that denies it to others.
This inverts the usual political geometry in a way that should be frankly stated. The standard reading has it that the defence of markets is the defence of the propertied against the claims of the dispossessed, and that the critic of markets is the friend of the dispossessed against the propertied. The argument of this essay, and of the tradition it draws on from both the Austrian economists and the ethnographic anthropologists, cuts across that geometry. The friend of the dispossessed is the one who allows the dispossessed the scope to dispose of themselves, to exercise the local knowledge they possess and the freedoms that such exercise requires. The enemy of the dispossessed is often the expert class, which, in the name of care for the vulnerable, constructs an apparatus of regulation that catches the vulnerable in its fine mesh while the powerful slip through or capture the apparatus for their own ends. That this inversion is not commonly acknowledged is, I think, one of the chief confusions of our political moment. It is also, if the arguments of this essay hold, one of the chief reasons why well-meaning reform so often produces the opposite of what it intended. The true contest is not between markets and the poor, as the conventional framing would have it. The true contest is between the aggregated local knowledge of millions, on which the prosperity of the poor actually depends, and the centralised knowledge of a credentialled few, whose confidence in their own sufficiency is, by the best account this essay has been able to give, the principal source of avoidable error in the public life of our age.
There are, in the end, grounds for hope as well as for sobriety. The extended order has proved more resilient than Hayek himself sometimes feared. The entrepreneurial function has proved more persistent than Schumpeter’s pessimism expected. The Great Enrichment McCloskey celebrates has continued, through setbacks that might have seemed terminal, into our own age. The sources of this resilience are not mysterious, but they are easily overlooked by those whose attention is fixed on the immediate. The extended order is resilient because it is diffuse. The entrepreneurial function is persistent because it can never be fully suppressed without the society that suppresses it paying a price in stagnation it will eventually find intolerable. There is, as it were, a gravitational pull towards the arrangements that work, even among polities that have repeatedly tried to escape it. This is not a guarantee. It is, however, a ground for the mild optimism with which I would end.
We began by noting that Schumpeter and Hayek are often cited but seldom placed in sustained dialogue. I hope to have shown, in the earlier chapters, that the dialogue is richer than separate citation would suggest, and that the twin concepts of uncaptured value and the extended order, taken together, give us a lens of considerable power for looking at modern political and economic life. The lens does not solve our difficulties. No lens does. But it shows us features of our situation that other lenses hide, and it counsels a humility that our moment peculiarly needs. That counsel, if it is heard, will not produce a final settlement of the questions that have occupied us. It will, however, produce a better quality of question, and that, in political economy as in other kinds of inquiry, is very often the most that intellectual work can accomplish. For the rest, we must trust, as both Schumpeter and Hayek in their different ways did, the unsupervised processes that have carried us further than any supervisor could have imagined, and that may yet carry us further still.
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A Note on Sources
The principal texts on which this essay has drawn are Schumpeter’s Theorie der wirtschaftlichen Entwicklung of 1911 (translated as The Theory of Economic Development, 1934); his Capitalism, Socialism and Democracy of 1942; Hayek’s "The Use of Knowledge in Society" of 1945; The Constitution of Liberty of 1960; the three volumes of Law, Legislation and Liberty of 1973, 1976, and 1979; and The Fatal Conceit of 1988. Among secondary sources, I have drawn on Israel Kirzner’s Competition and Entrepreneurship of 1973 and his later essays on the Austrian theory of entrepreneurship; Michael Polanyi’s Personal Knowledge of 1958 and The Tacit Dimension of 1966; James C. Scott’s Seeing Like a State of 1998; Deirdre McCloskey’s trilogy on the bourgeois virtues, especially Bourgeois Dignity of 2010 and Bourgeois Equality of 2016, with her earlier The Rhetoric of Economics of 1985 in the background; William Easterly’s The White Man’s Burden of 2006; Nassim Nicholas Taleb’s Antifragile of 2012 and Skin in the Game of 2018; Philip K. Howard’s The Death of Common Sense of 1994, The Rule of Nobody of 2014, Life Without Lawyers of 2009, and Everyday Freedom of 2024; and the late essay of Ronald Coase and Ning Wang, How China Became Capitalist of 2012. From the anthropological side I have drawn on Clifford Geertz’s Local Knowledge of 1983; Mary Douglas’s How Institutions Think of 1986; Marcel Mauss’s Essai sur le don of 1925 (translated as The Gift); Bronislaw Malinowski’s Argonauts of the Western Pacific of 1922; and Karl Polanyi’s The Great Transformation of 1944. The interested reader will find in these works ample confirmation that the themes traced in this essay continue to occupy serious minds across disciplinary lines, and that the conversation between them is very far from closed.