Of all the great insights that Friedrich August

von Hayek bequeathed to us in his work, one

in particular shines out today.

For its truth has never been more evident, its

application never more universal.

political divisions of human history are two

distinct and different ways of looking at the

world.

Between them is a deep and irreconcilable

divide.

One Hayek called constructivist rationalism.

The other he called evolutionary rationalism.

Not phrases to trip off the tongue, to be sure.

However, Hayek spent a lifetime arguing that

constructivist rationalism is economically and

philosophically flawed because it assumes that

“all social institutions are, or ought to be, the

product of deliberate design”.

Hayek later famously called this the Fatal

Conceit.

Those who follow this route believe they have

it within their power to build, organise and

mould society so that it conforms to their

concept of what is just and efficient.

But it leads, he argued, to economic decline,

poverty, social regression and, in extremis,

famine, starvation and the collapse of

civilization.

Historic examples of this mindset, said Hayek,

included Sparta, the French Revolution,

Communism in general and the Soviet Union in

particular, Fascism, Nazi Germany – indeed all

the tyrannies that blighted the 20th century.

As Hayek famously put it, it is the Road to

Serfdom.

Hayek favoured “evolutionary rationalism”.

It understands that there “exists orderly

structures which are the product of the actions

result of human design”.

Hayek believed this the right approach because

it is compatible with the teachings of economic

science and goes with the grain of human

nature; for these reasons, he thought, it leads

to prosperity, progress and the flourishing of

humanity.

Evolutionary rationalists such as Hayek argued

that the liberal market economy, for all its

apparent duplication, unfairness, inequalities

and instability leads to wealthier, freer and

fairer societies than all the great plans of

constructivist rationalism.

Indeed, he argued, it was the only way to run

and sustain a successful advanced economy, a

matter of some relevance, we shall see, as

Europe struggles to cope with the rise of Asia.

Though Hayek clearly preferred evolution and

the market to revolution and central planning,

he was not a small-c conservative, as he made

clear in the postscript to The Constitution of

classical, British sense of that word. He took to

calling himself an “Old Whig”, a term which

understandably his followers are not overly

keen to use today.

But Hayek had no truck with those who sought

to preserve the status quo, existing hierarchies

or to block change.

He supported the market for the very reason

that it is disruptive; he relished Schumpeter’s

“creative destruction”. Progress occurred when

an unpredictable market was allowed to

proceed unimpeded; progress was halted when

politicians and planners pretended to know the

future and to mould society and the economy

accordingly.

Hayek’s work is part of a long and illustrious

tradition which includes the great philosophers

David Hume, Adam Smith and Adam Ferguson.

His great achievement was to adapt this

tradition to the circumstances of the late 20th

century and beyond.

The problem with the Cartesian view when

applied to political organization and economics,

said to Hayek, is that it gives the green light to

unlimited, hubristic social engineering.

Hayek thought that Cartesians ignored the

great insight of the Austrian school of

economics, whose leading lights included Carl

Menger and Ludwig von Mises, as well as

Hayek: that much information is simply not

knowable in advance and can only emerge

through an evolutionary and competitive

market process.

It was the great Norman Macrae, deputy editor

there, who once explained to me that if, 20 or

30 years ago, politicians, pundits, academics,

experts and bureacrats had been asked what

recruitment pages, they would all have been

hopelessly wrong.

Why? Because we have no accurate idea of

what technological innovations will emerge

over the next two to three decades or their

implications for society and economy – and

therefore for employment.

Nobody accurately predicted, for example, the

rise of the internet 20 years ago, which only

underlines the futility of trying to pick winners.

It is a lesson many politicians seem

determined not to learn. But the market is too

unpredictable to be double-guessed, as the

French learnt at great cost with their ill-fated

Minitel, which merely delayed the adoption of

the internet in France.

The market, Hayek taught us, is a “process of

discovery”; it does not exist simply to allocate

existing resources, though it is the most

efficient mechanism for doing so.

The “right” price for a product doesn’t exist in

any objective way, argued Hayek. Prices

emerge from supply and demand, reflecting a

myriad of ever-changing variables that can

never be known to a central planner.

Only a decentralised society with property

rights, the rule of law and a competitive

market economy can compute this information.

The market, said Hayek, is the only institution

capable of co-ordinating the actions of millions

of human beings in a way which leads to

progress and prosperity, rather than chaos or

stagnation.

Supporters of Hayek are indebted to him

because he made it plain that planning and

economic controls cannot hope to outsmart the

combined wisdom of the market - whether

grocery market or stock market - and the

myriad of free, voluntary decisions that it daily

represents – the democratic vote of millions of

wallets.

It has become fashionable to argue that the

past 20 years have seen something of a

political consensus congeal around the

Hayekian worldview. But Hayek would not

recognize his apparent triumph.

The intellectual battle between collectivist

central direction and the decentralized market

economy has not ended with the collapse of

the Soviet Union.

Today, of course, everybody -- apart from the

new Marxists of the radical environmental and

anti-globalization movements -- broadly

accepts that societies should be largely market

economies.

But if Hayek were alive today, he would be

deeply concerned at the way the major

European economies, including Great Britain,

have succumbed to the allure of constructivist

rise in the size and power of the state.

Hayek took much comfort from the manner in

which Europe emerged from the ruins of the

Second World War as an economic

powerhouse, thanks partly to the radical

liberalisation of post-Nazi Germany by Ludwig

Erhard, a disciple of Hayek.

But he would be dismayed how Europe, over

the last few decades, has turned its back on

many of his principles – and paid the inevitable

price in terms of lower growth, fewer jobs and

less wealth creation.

Hayek would consider today’s levels of

European public spending, tax, red tape and

state intervention to be in the red zone that is

dangerous to your economic health.

Hayek would argue, is a major reason why

Europe finds it so hard to compete – and even

inhibits attempts at reform.

The much-vaunted and British-inspired Lisbon

Agenda of 2000 – with its goal to make Europe

“the most dynamic and competitive

knowledge-based economy in the world” by

2010 – is already an irrelevant joke.

The rise of the European Union, on which so

many of us pinned our hopes for so long, was

rumbled as a grandiose project by Hayek long

before Euroscepticism became fashionable.

To a Hayekian, there are few starker instances

of his Fatal Conceit than the EU’s hubristic

launch of a single currency.

The Euro’s supporters, of course, were

hardcore Cartesians. They devised what they

thought was a purely rational currency,

abstracted from history, experience, culture or

even economics.

Their aim was to get rid of the messy,

seemingly irrational patchwork of different

currencies across Europe, all irritatingly lacking

uniformity and harmony.

To them, it was self-evident that Europe ought

to be a single country; and that countries

should have their own currencies. Any

economic objections to the single currency,

and there were many, were dismissed as

irrelevant.

The argument always was that if there were

enough political will and clever administrators

to push it through, the project would triumph.

Today Hayek would be telling us that the

Cartesian result was wholly predictable: the

creation of an inappropriate, one-size-fits-all

monetary policy in an area which is far

removed from what economists call an optimal

currency area.

It is now widely accepted among economists

that the single currency has helped keep

Germany and Italy in recession or nearrecession

while fuelling an inflationary boom at

the periphery of the Euro zone, in Spain and

Greece.

Hayek would not have been surprised: it is the

stiff price you pay for abandoning evolutionary

rationalism.

Yet, as Europe finds itself in a Cartesian bind

which is dragging it down, things are stirring

on the other side of the world, where Hayek’s

principles have found new and powerful

disciples.

China has been gradually moving in a more

Hayekian direction over the past two decades,

after learning at incalculable cost in human

lives and resources, that communism does not

work.

By unleashing its people and adopting at least

some market-based institutions, the Chinese

government – for all its continued attachment

to totalitarianism, a truly horrible human rights

record and worrying military ambitions – has

bowed to reality in one crucial respect.

It has ditched its rigid adherence to

constructivist rationalism.

It has accepted the main insight of Hayek’s

evolutionary rationalism.

That the only way to unleash the potential of

human beings is for the government to focus

on defending and enforcing the key institutions

of the market economy, allowing what Hayek

called a spontaneous order to flourish.

Beijing, of course, still controls its people,

prevent them from reading or watching or

thinking what they like, all of which Hayek

would have abhorred.

But it no longer tries to direct or organize all

economic activity, as it did during the terrible

days of Mao, when tens of millions died. Hayek

would have seen this trend as a necessary if

still far from sufficient step on the road back

from serfdom.

The result of China’s slow and incomplete

embrace of the market has nevertheless been

the greatest and fastest explosion in economic

growth, creativity and human ingenuity in the

history of the world.

China has a long way to go to meet Hayek’s

demanding criteria for a free and prosperous

society.

As we have seen in recent days, this is still a

country whose leaders cannot even bring

themselves to tell their own people about a

massive environmental disaster.

Huge economic distortions remain, including a

deeply defective banking system plagued with

bad debts. Inflation is too high, corruption

endemic.

There can be no proper market economy or

individual freedom in the absence of the rule of

law and entrenched property rights, two

democratic necessities that dictatorships

always deny, China’s included.

But at least China is moving in the right

direction, which cannot yet be said of Europe.

And with each step away from Communist

Constructivism to Hayekian capitalism, China

has been richly rewarded. It is now the world’s

it makes 90% of the world’s toys, 70% of its

photocopiers, 50% of its cameras, 40% of its

microwaves, 30% of its handbags and

suitcases and 16% of its clothing.

The pace of growth has defied all predictions:

in 2004, the World Energy Council forecast that

China would consume 1.3bn tonnes of oil

equivalent by 2010; it managed that before

No 2 consumer of energy after the United

world energy prices.

China’s rise has been astonishing. But it has

only just begun. China has yet to become a proper market

economy and what capitalist institutions it

enjoys are still largely confined to the booming

South.

China should really be viewed as an amalgam

booming: the Pearl River Delta which borders

Hong Kong, the Yangtze River Delta near

Shanghai and the Bohai Rim.

Think what will happen to the global economy

and the geopolitical balance of power if all of

China continues to move closer to a Hayekian

view of the world, with a growing middle class

and all the trappings of wealth, science and

technology.

Then think back to Old Europe, with its endless

navel-gazing of the irrelevant, tedious

obsessions with farm subsidies and 35-hour

weeks, bloated welfare states which sap the

incentive work and a bureaucratic desire to

regulate all that moves -- and much that

doesn’t.

Even just the partial embrace of Hayek has

allowed China to enjoy the fastest pace of

poverty reduction in its long history – perhaps

in the history of the world – without any help

from well-meaning Western politicians and

their talk of Marshall Plans for the poor,

another contemporary Fatal Conceit.

Numbers in absolute poverty, defined by those

living on less than $1 a day, have collapsed

With annual growth averaging 8% for the next

China will be ranked among the world’s richer

middle-income countries within the next

decade.

Chinese economy will overtake Germany by

2009, Japan by 2015 and the US by 2039.

(updte in fact, China becme teh second lrehst economy in 2010)

India's economy, in the grip of its own

Hayekian reforms, could be larger than all but

the US and China within 30 years.

Now I have no idea if these long-term

predictions will come true in that timescale:

trees do not grow to the sky, political turmoil

could easily delay or even derail the Chinese

economic miracle.

Most economists cannot yet agree on what last

year’s growth rate was, never mind the one in

2039. As a colleague once said, economists

only use decimal points in their forecasts to

show they have a sense of humour.

But whatever the scale and pace of growth in

China, India and other economies embracing

market-led reform and growth, one thing is

pretty clear: of the current G6 (America,

Japan, Germany, France, Italy, Great Britain)

only the US and Japan are likely to be among

the six largest economies in US dollar terms by

the middle of this century.

the top six. This is a seismic change in the

global economic balance of power and however

you look at it, Europe is the loser.

It is not just a matter of economics. Europe’s

demographics also point to its continuing

demise as a global economic player. From

2010, Europe’s indigenous population will start

to decline as deaths outnumber births; it is

will continue to grow.

But the headline figures conceal a collapse in

the working-age population, which will fall from

67% today to 57% in 2020. By then, one in 10

Europeans will be an octogenarian – today,

only 4%. Our continent is becoming the

retirement home of the world.

With fewer workers, and a soaring number of

pensioners to sustain, and hence a looming

pensions crisis, Europe is on an inexorable

slide which its recent enlargement cannot

the original 15.

The contrast between Europe and China is

most dramatic in cross border capital flows –

especially foreign direct investment flows

(FDI).

We are in the midst of a massive gravitational

pull of plant and capital away from Europe’s

high-cost economies. It is starkly evident in

the latest figures on FDI posted by the OECD

this year.15

These flows are re-writing the economic map

of the world, changing the balance of

economic, political, military and cultural power.

They are a Hayekian revelation in action: the

huge collective vote of thousands of companies

round the world, the one collective vote that

really counts in economics, the voting of

corporate wallets, stampeding to Asia.

universities. Europeans still collect Nobel Prizes

for research; but largely at American

universities.

Over the next few years universities that

nobody at Balliol or Christ Church has ever

heard of will surge to the fore.

Be in no doubt this is the future: all of these

cultural shifts away from Europe are most

pronounced among younger people, especially

those in their 20s and 30s.

It is now clear that the 19th century was

Europe’s century of dominance, the 20th

century when Europe lost its dominance,

forced to rely on America’s help to save it from

itself.

The 21st century will the Asian-American

century, with only the US rivalling China and

India in economic, military, educational and

cultural power.

We are at an historic and global inflection point

with enormous implications for the European

Union – which our governing elites seem

determined to ignore.

Like many politicians before them they are

slaves to an out-dated and discredited

economics.

The belief that the more ‘integrated’ the

economies of the EU become, the more it will

prosper as a global bloc has been the leitmotif

of my generation and the one before it. It is

serious argument.

High social wage costs, which make it costly to

hire and impossible to fire when circumstances

change, have created a huge pool of

unemployment.

This, in turn, has raised the cost of the welfare

state and produced an ever-increasing

underclass, especially – but not solely – among

the offspring of immigrants.

Add to that a general cultural decadence

among the influential chattering classes that

denigrates hard work, self-betterment,

independence, success and the traditional

bourgeois virtues – and you hardly have a

formula for meeting the Chinese challenge.

As France’s Nicholas Sarkozy recently

commented, the European social model, which

the Euro-elite still thinks the envy of the world,

is neither a “model” – nobody is copying it –

nor very “social”, given the level of

unemployment.

10% in France, Germany and Spain,

concentrated among the young in all three

and helping to trigger riots and Islamic

rioted, youth unemployment is over 40%.

There is little hope in sight. Since the launch of

under 2% in the euro zone – against over

Things are not expected to get much better

next year.

You don’t need to be a Hayekian to see that

Europe is crying out for a programme of farreaching

reform. But none is forthcoming.

Instead of a new, reforming government,

Germany is being ruled by a grand coalition

whose first act has been to raise taxes, which

could condemn the country to recession.

France’s political establishment is likely to be

Berlusconi for Romani Prodi, which might be a

step up for honesty but is certainly a step back

for reform.

Hayek would conclude, grimly, that the EU is in

eclipse. Run by a political elite that eschews

reform. Determined, it sometimes seems, to

turn Europe into a mixture of a museum for

Asian and American tourists and a retirement

home for its own aging population.

So where does this leave Britain? Hayek would

say that we have a Fatal Conceit of our own.

That we can continue muddling along, mentally

half in, half out of Europe. With an economy

that is gradually becoming more Europeanised,

at a time when the world is turning away from

Europe and the European way of doing things.

It has been one of the great mysteries of the

Blair-Brown Duumvirate these past eight years

that the more they talk about the virtues of

American-style enterprise, the more they have

pushed Britain into the European social model.

11 Downing Street in particular has been

occupied by Dr Jekyll and Mr Hyde. Dr Jekyll

talks the Hayekian talk of markets, dynamism,

enterprise; but Mr Hyde walks the walk of

European-style tax-and-spend and regulation.

I assume Mr Brown, an intelligent man, knows

what he’s doing, even if he won’t admit it. I

suggest Mr Blair, whose grip on economics is

tenuous, might not be aware of what has

happened on his watch.

That Britain is becoming more like Europe, for

all the rhetoric to the contrary, cannot be in

doubt, though few in an increasingly

economically illiterate media seem to realise it.

The most recent figures from the OECD show

that British public spending has surged from

almost 38% of GDP in 2000 to a predicted

44% this year; and a European-style 45% in

2006.

The public spending gap between formerly

lowish-spending Britain and the high-spending

Euro zone has narrowed from 10 points of GDP

five years ago to under four points by next

year.

In terms of tax-and-spend and regulation,

which research published this week shows has

added over £30bn to the cost of doing business

in this country since 1998, Britain can now be

social model.

Now you can regard this process as good or

bad, depending on your politics and your

attitude to Europe. If it wasn’t happening by

such sleight of hand, we might even have a

national debate about it.

But those who believe this trend to be a “good

thing” need to explain why it is in Britain’s

national interest to adopt the trappings of a

social model that the wisest in Paris, Berlin and

Rome wish they could drop – and which

nobody else in the world is copying.

It is not easy to have a sensible debate about

this. Those who raise tough questions about

Europe are still dismissed as Little Englanders.

In an age of globalisation, Hayek would have

said that the greater evil is the predominance

of the Little European mindset at the heart of

our political.

The British Establishment view is still parroted

repeatedly by politicians on the left and right

and unquestioned by a broadcasting

establishment which shares their worldview.

It is that the UK has no credible alternative to

the EU. That the European Project, blessed by

historical inevitability, will produce economic

growth and political tranquillity.

A slightly more sophisticated addendum to this

view is that it is just a matter of time before

the EU finally embraces a version of Hayekian

liberalism. If ever there was a Fatal Conceit, it

is this.

For over 30 years, politicians as diverse as Ted

Heath, Robin Cook, Douglas Hurd, Tony Blair

and Michael Hesletine have assured me we

were “winning the arguments” in Europe.

There were times when I even believed them,

just as a wee lad I believed Scotland could win

the World Cup.

Through bitter experience I now suspect there

is more chance of Scotland winning the World

Cup than Britain winning the arguments in

Brussels!

British radar screen; even Mr Brown pays ritual

obesiance to it in his speeches. But Hayek

would have regarded the response as pathetic.

response” to China would have had him

chuckle.

China within 10 years would have had him

rolling in the aisles, a classic case of the Fatal

Conceit.

The idea that the proper response to China is a

set of McKinsey-style nostrums would have

been proof positive for him that our

government classes had no idea what was at

stake. In Beijing they no doubt regard it as a

manifestation of our peculiar sense of British

humour.

But, again, Britain’s response is very much in

the European mainstream.

Hayek would have been astounded and

dismayed that Europe's leaders still spend so

much of their time – and so much of our

money – arguing about the Common

Agricultural Policy, a subsidy programme

designed to placate French farmers after the

Second World War.

Devoting millions of man-hours to a

Constitution that enshrined the very social

model that is condemning Europe to continued

decline.

Speaking endlessly about greater defence

cooperation, while cutting military budgets at

every opportunity.

I suspect the radical in Hayek would force him

to an unfashionable conclusion: that the entire

EU project has become a giant and

unaffordable distraction.

In the grand scheme of things, he would have

regarded most European discussions as trivial

and parochial, with no relevance to any of the

great challenges facing Europe in the 21st

century.

Consider, he would have said, the inordinate

amount of Britain's political and intellectual

capital diverted and squandered into dealing

with European matters, including the 100,000

when the rise of China, India and East Asia is

what requires our attention.

Hayek would have had the guts to say the

emperor has no clothes.

Hugely expensive farm subsidies are here to

stay.

Protectionist sentiment will remain strong, if

anything get stronger.

Supply-side reforms will remain elusive.

Second-rate military capabilities – armies that

can’t fight, weapons that don’t work – seem

inevitable.

These, Hayek would say, are the givens of the

European firmament for the foreseeable future.

Even Europe’s 10 newest members,

supposedly more market-minded, have failed

to shift the balance of power in any real way.

So, I ask again in my imaginary conversation

with Hayek, what of this septre’d isle? I fear

his answer would be unpalatable to our

political classes and media opinion.

He would be in no doubt that, if Britain was to

its future could not lie in ever greater

integration with a European continent in

economic, social, cultural and geopolitical

decline. Nor in becoming the 51st state of

America, as some like to sneer is the only

alternative to Europe, because they know it is

so unpalatable.

Hayek would have been blunt: Britain should

regain its right to set global trade and military

alliances, building on its position as an

international trading nation and a financial and

business crossroads to the world.

Government policy should not respond to

China as such, he would say, but strive to

become a low-tax, high-skill, well-educated,

high-productivity vibrant nation-state just

offshore the highest-taxed, increasingly lowskilled,

sclerotic set of rich nations in the

world. The ability to compete with China would

follow naturally.

All this, of course, would require a Hayekian

cultural revolution that our political system is

not yet capable of contemplating.

A reorientation of British foreign policy away

from Europe towards Asia and Latin America.

Unilateral free trade, regardless of the policy in

Brussels.

A radical programme to liberalise the British

economy.

A radical reduction in tax and public spending

as a share of the economy.

A flat tax to remove the poorest from tax

altogether and encourage entrepreneurial flair.

The injection of choice and competition into the

public sector on a scale yet not contemplated.

A radical programme of Welfare reform,

Wisconsin-style, accompanied by a

transformation in policing to re-establish the

rule of law in our inner cities.

Excellence in schools with vouchers for all, so

that merit rather than money determines the

quality of your education, producing a genuine

meritocracy that ends the current scandalous

waste of talent that blights our education

system.

The rescue of British universities from the dead

hand of a miserly state which cannot fund

them properly and the creation of a UK Ivy

League.

Such a Hayekian programme for the 21st

century is a tall order; I am not sure we have

the stomach for it.

But Hayek would have seen it as a stark choice

(he was good at that).

Either continue with the Fatal Conceit and

totter towards inevitable decline and eventual

oblivion.

Or make the radical embrace of change and

dynamism to ensure a prosperous future in the

If the spirit of Hayek is to remain strong in the

beginning.