The Fatal Conceit By Friedrich Hayek: Chapter Summary
Eco 410
Take Home Test 2
Response #1 Treating one another like family is often thought of as being a fair, just, or humane way to deal with one another. In The Fatal Conceit by Friedrich Hayek, he expands on the evolution of the small group to the extended order. Hayek first elaborates on the small group interactions, attitudes, and governance. Hayek believes that “man’s instincts” were adapted to suit the lives of those in small groups, such as a band or tribe. Within these small groups, instincts were adapted to “steer the cooperation of the members” of the group. The members of small groups shared the same goals and attitudes, each knowing and trusting one another. Hayek refers to the instincts driving the small groups as “solidarity and altruism.” These primitive groups were united by a shared purpose that came before the interests of each member and were often led by single leader. Each small group differed as the instincts applied “to the members of one’s own group but not to others.” In primitive society based on small group interaction, survival of man depended on the group, and survival of the group depended on trust. Hayek then talks about the evolution of small …show more content…
groups to what he calls the extended order, or modern day capitalist society. This extended order was made possible by “the rules of human conduct that gradually evolved” that were “handed on by tradition, teaching and imitation, rather than by instinct.” Society developed as these rules were developed and followed, which “forbade him to do what his instincts demanded.” The behaviors and attitudes are much different in the extended order. According to Hayek, those in the extended order “gain from not treating one another as neighbors” but rather applying these “rules of the extended order…instead of the rules or solidarity and altruism.” In the extended order, rules regarding property, contract, exchange, privacy, competition, etc. replace trust, the foundation of small group success. The evolution of the extended order framework creates a system in which we benefit from “people whom we do not know, and even of whose existence we are ignorant.” Not only do we indirectly benefit from other’s success, the extended order “constitutes an information-gathering process, able to call up, and to put to use, widely dispersed information that no central planning agency, let alone any individual, could know.” The functioning of the extended order created a standard of living that could not have been achieved had small groups not evolved. In Markets and Morality, J.R.
Clark and Dwight R. Lee introduce the concepts of “magnanimous morality” and “mundane morality.” According to Clark and Lee, actions that are categorized as magnanimous morality satisfies “three characteristics: helping intentionally, doing so at a personal sacrifice, and providing the help to identifiable beneficiaries.” This type of morality fits the mold for the type of behavior that was present in what Hayek refers to as small groups. In small groups, the help that was provided to each other was “given intentionally by and to identifiable people who knew each other well.” The behavior fits the third characteristic of magnanimous morality as well. Members within small groups made personal sacrifice for the common purpose of the
group. Clark and Lee define “mundane morality” “broadly as obeying the generally accepted rules or norms of conduct such a telling the truth, honoring your promises and contractual obligations, respecting the property rights of others, and refraining from intentionally harming others.” This definition fits the description of the behavior and results of the extended order. By following the generally accepted rules, man promotes “an end which was no part of his intention.” Acts associated with mundane morality are “accompanied by personal gain” while also benefitting others, the basis of the extended order. Clark and Lee give numerous examples where mundane morality is underappreciated and/or more effective than magnanimous morality. They refer to a barn raising in the first example. Barn raisings involve a close-knit group coming together “with the clear intention of helping someone,” an example of magnanimous morality. “By shifting our reliance from magnanimous morality to the mundane morality of financial incentives…the outcomes of insurance are actually better than traditional barn raisings.
Response # 2
In Atlas Shrugged, Ayn Rand created a fictional example of how the operation of the extended order is affected if the governance of the small group is applied to it. Rand portrays an industrial, capitalist United States that had become increasingly socialist. Rand tells her story through the experiences of a woman by the name of Dagny Taggart, referred to in one p art of the story as “a lady who ran a railroad.”
Aboard the train, Taggart invites “an aging tramp” back to her car. The elderly man had snuck on the train traveling West hoping that he would be able to find work. He was in search for the type of work of “the old days,” work that “didn’t go by friendships or seniority” but rather “a man’s record.” The man was employed by a motor company that had operated in this fashion until the passing of its owner. The heirs implemented a system in which the factory employees “would work according to his ability, but would be paid according to his need.” The company’s profits all went to one collective pot and were to be distributed to each individual according to their “need.” “No man could claim his pay as his rightful earning…he had no rights and no earnings, his work didn’t belong to him, it belonged to ‘the family’.”
The man describes in detail the effects of this “moral” plan on the motor company. This plan created an environment where “the harder you work the more is demanded of you.” Instead of those who had underachieved being punished, men who “were the best” were forced to work overtime without pay. According to the man, workers did their best “to be no good.” Production decreased by forty percent in the first six months after the establishment of this plan due to decreased effort and productivity.
Not only did effort and productivity of the company decrease significantly, it created an environment where “hatred was the only thing that men could now feel for one another.” The work place became a danger zone as “fights were beginning to happen among us all the time,” often “over nothing in particular.” The man tells a story in which a guy wasn’t given an allowance to purchase the only thing he loved, phonograph records. Instead a girl was given braces for her “buck teeth.” The man turned to drinking, one night getting so drunk that he knocked the girl’s teeth out. “Drink, of course, was what we all turned to, some more, some less.”
Under this system of pay not “according to his ability” but “according to his need,” there was no incentive for workers to perform their best. Workers were forced into a situation where they “had to compete with one another for who’d do the worst job possible.” Whether you did your job or not, workers were paid their “basic pittance.”
The free rider problem became a major issue within the motor company under this new plan. Those who tried to live up to the “moral law” suffered, and “the more you cheated it, the bigger reward you got.” Not only did the new plan benefit the already “shiftless and irresponsible” as they exploited the term ‘need,’ but “it turned decent people into bastards.” There was a total absence of incentive and people aspired to be free riders. One way in which the free rider problem might be overcome is by people’s love for or altruism toward others. For example, if there is a public park that is maintained using donations from its beneficiaries then there might be enough “good-hearted” people to keep the park in shape. There will also be those who don’t donate but still make use of the park. The free rider problem is even greater for more expensive goods. This donating for the up-keep of the park might appeal to people’s altruism, but not enough will feel that way in majority of the cases. Adam Smith says that people are almost entirely self-interested, and therefore it is unreasonable to think that altruism towards others would solve the free rider problem.
Response #3 A person receiving payments or reward according to their needs is often viewed as being just or fair. In Are Economists Basically Immoral?, Paul Heyne discusses the topics of economic justice and inequality. Heyne considers the idea of redistribution of income according to need. Heyne poses this idea of “work according to one’s ability with pay according to one’s need” and the information problems in rewarding individuals in this regard.
According to Heyne, one of the main issues with paying one according to their needs is that “inequality of current money income is not a reliable indicator of inequality in the power to acquire valued goods.” For example, it is useless to compare the incomes of people in different groups, specifically age groups. Heyne provides the example of Americans over the age of sixty-five. Because this group tends to have low monetary incomes but an accumulation of assets and “special entitlements” (Medicare benefits, tax exemptions), their money income is “a very poor gauge of their real income.” Heyne also says that inequality according to income is a poor indicator due to choices and specific family circumstances. For example, should those families whom both parents work have their incomes redistributed to a family with less income resulting from the decision of one parent to stay at home and take care of the children?
Another concern with rewarding individuals according to their need is the vagueness and inconsistency of the term need. According to Heyne, if need is defined as “what is required to sustain life on an adequate level” then “the criterion of need is unrealistic in poor economies and irrelevant…in affluent ones.” Need varies according to countries and their economic situations. In poor countries, poverty results from low levels of production not from income distributed unfairly. In countries such as Ethiopia, “no redistribution of income…would satisfy the needs” of its people. In wealthy countries such as the United States, “need is continuously redefined” as production increases with new information and technology. Therefore, redistribution according to need is nearly impossible.
There are possible errors associated paying or rewarding according to needs. If a society believes that it is fair to redistribute according to need, it runs the risk of two types of errors: Providing assistance to those who are not needy, or failing to provide assistance to those who truly are needy. In my opinion, due to the information problems associated with identifying one’s needs, allocating resources by this method is far too risky. These errors would be prevalent, with each type being just as unfair as the other. Providing assistance to those who aren’t needy would be wasting and not providing assistance to those who are is inhumane.
In Are Economists Basically Immoral?, Heyne discusses the ability of rules to potentially help in avoiding some errors when trying to reward according to one’s needs. Heyne considers the function of rules in his example of the bus driver and whether he should stop for a tardy person or not. Heyne says that “punctual people have a right not to be delayed by tardy people, and the bus driver has an obligation to respect that right.” “The driver’s moral obligation is to provide safe transportation and stay on schedule” and stopping for someone running late shifts the cost of the tardy person to all others on the bus. “Adherence to these rules will sometimes produce results inferior to what an omniscient driver could achieve.” This is irrelevant due to the information problem. According to Heyne, disobeying the rules is “behaving unjustly” and it is “more ethical, more socially responsible, and even more humane” to obey the rules.
Private, nonprofit organizations often try to allocate goods according to need and frequently take actions to mitigate the information problem and complexity of need mentioned above. Private organizations that are established to help those in need are also careful to not create a dependence, rather they attempt to create incentives to better oneself.
According to Professor John Garen, private, nonprofit organizations attempt to overcome by the information problem “through close, emotionally intimate, face-to-face interactions.” Private charities specialize in these type of assessments and are affectively able to gather detailed information and allocate resources properly. Garen also states that this data “also assists in dealing with the problem of falsifying needs and moral hazard problems of overuse and dependence.”
In most cases with private, nonprofit organizations there is usually quid pro quo (“something for something”). There are expectations associated with receiving assistance. Garen uses the example of a homeless shelter. Those who are provided food, clothing, and shelter are expected to be sober, behave politely, and sometimes engage in religious or volunteer activities.
Take Home Test 2
Response #1 Treating one another like family is often thought of as being a fair, just, or humane way to deal with one another. In The Fatal Conceit by Friedrich Hayek, he expands on the evolution of the small group to the extended order. Hayek first elaborates on the small group interactions, attitudes, and governance. Hayek believes that “man’s instincts” were adapted to suit the lives of those in small groups, such as a band or tribe. Within these small groups, instincts were adapted to “steer the cooperation of the members” of the group. The members of small groups shared the same goals and attitudes, each knowing and trusting one another. Hayek refers to the instincts driving the small groups as “solidarity and altruism.” These primitive groups were united by a shared purpose that came before the interests of each member and were often led by single leader. Each small group differed as the instincts applied “to the members of one’s own group but not to others.” In primitive society based on small group interaction, survival of man depended on the group, and survival of the group depended on trust. Hayek then talks about the evolution of small …show more content…
groups to what he calls the extended order, or modern day capitalist society. This extended order was made possible by “the rules of human conduct that gradually evolved” that were “handed on by tradition, teaching and imitation, rather than by instinct.” Society developed as these rules were developed and followed, which “forbade him to do what his instincts demanded.” The behaviors and attitudes are much different in the extended order. According to Hayek, those in the extended order “gain from not treating one another as neighbors” but rather applying these “rules of the extended order…instead of the rules or solidarity and altruism.” In the extended order, rules regarding property, contract, exchange, privacy, competition, etc. replace trust, the foundation of small group success. The evolution of the extended order framework creates a system in which we benefit from “people whom we do not know, and even of whose existence we are ignorant.” Not only do we indirectly benefit from other’s success, the extended order “constitutes an information-gathering process, able to call up, and to put to use, widely dispersed information that no central planning agency, let alone any individual, could know.” The functioning of the extended order created a standard of living that could not have been achieved had small groups not evolved. In Markets and Morality, J.R.
Clark and Dwight R. Lee introduce the concepts of “magnanimous morality” and “mundane morality.” According to Clark and Lee, actions that are categorized as magnanimous morality satisfies “three characteristics: helping intentionally, doing so at a personal sacrifice, and providing the help to identifiable beneficiaries.” This type of morality fits the mold for the type of behavior that was present in what Hayek refers to as small groups. In small groups, the help that was provided to each other was “given intentionally by and to identifiable people who knew each other well.” The behavior fits the third characteristic of magnanimous morality as well. Members within small groups made personal sacrifice for the common purpose of the
group. Clark and Lee define “mundane morality” “broadly as obeying the generally accepted rules or norms of conduct such a telling the truth, honoring your promises and contractual obligations, respecting the property rights of others, and refraining from intentionally harming others.” This definition fits the description of the behavior and results of the extended order. By following the generally accepted rules, man promotes “an end which was no part of his intention.” Acts associated with mundane morality are “accompanied by personal gain” while also benefitting others, the basis of the extended order. Clark and Lee give numerous examples where mundane morality is underappreciated and/or more effective than magnanimous morality. They refer to a barn raising in the first example. Barn raisings involve a close-knit group coming together “with the clear intention of helping someone,” an example of magnanimous morality. “By shifting our reliance from magnanimous morality to the mundane morality of financial incentives…the outcomes of insurance are actually better than traditional barn raisings.
Response # 2
In Atlas Shrugged, Ayn Rand created a fictional example of how the operation of the extended order is affected if the governance of the small group is applied to it. Rand portrays an industrial, capitalist United States that had become increasingly socialist. Rand tells her story through the experiences of a woman by the name of Dagny Taggart, referred to in one p art of the story as “a lady who ran a railroad.”
Aboard the train, Taggart invites “an aging tramp” back to her car. The elderly man had snuck on the train traveling West hoping that he would be able to find work. He was in search for the type of work of “the old days,” work that “didn’t go by friendships or seniority” but rather “a man’s record.” The man was employed by a motor company that had operated in this fashion until the passing of its owner. The heirs implemented a system in which the factory employees “would work according to his ability, but would be paid according to his need.” The company’s profits all went to one collective pot and were to be distributed to each individual according to their “need.” “No man could claim his pay as his rightful earning…he had no rights and no earnings, his work didn’t belong to him, it belonged to ‘the family’.”
The man describes in detail the effects of this “moral” plan on the motor company. This plan created an environment where “the harder you work the more is demanded of you.” Instead of those who had underachieved being punished, men who “were the best” were forced to work overtime without pay. According to the man, workers did their best “to be no good.” Production decreased by forty percent in the first six months after the establishment of this plan due to decreased effort and productivity.
Not only did effort and productivity of the company decrease significantly, it created an environment where “hatred was the only thing that men could now feel for one another.” The work place became a danger zone as “fights were beginning to happen among us all the time,” often “over nothing in particular.” The man tells a story in which a guy wasn’t given an allowance to purchase the only thing he loved, phonograph records. Instead a girl was given braces for her “buck teeth.” The man turned to drinking, one night getting so drunk that he knocked the girl’s teeth out. “Drink, of course, was what we all turned to, some more, some less.”
Under this system of pay not “according to his ability” but “according to his need,” there was no incentive for workers to perform their best. Workers were forced into a situation where they “had to compete with one another for who’d do the worst job possible.” Whether you did your job or not, workers were paid their “basic pittance.”
The free rider problem became a major issue within the motor company under this new plan. Those who tried to live up to the “moral law” suffered, and “the more you cheated it, the bigger reward you got.” Not only did the new plan benefit the already “shiftless and irresponsible” as they exploited the term ‘need,’ but “it turned decent people into bastards.” There was a total absence of incentive and people aspired to be free riders. One way in which the free rider problem might be overcome is by people’s love for or altruism toward others. For example, if there is a public park that is maintained using donations from its beneficiaries then there might be enough “good-hearted” people to keep the park in shape. There will also be those who don’t donate but still make use of the park. The free rider problem is even greater for more expensive goods. This donating for the up-keep of the park might appeal to people’s altruism, but not enough will feel that way in majority of the cases. Adam Smith says that people are almost entirely self-interested, and therefore it is unreasonable to think that altruism towards others would solve the free rider problem.
Response #3 A person receiving payments or reward according to their needs is often viewed as being just or fair. In Are Economists Basically Immoral?, Paul Heyne discusses the topics of economic justice and inequality. Heyne considers the idea of redistribution of income according to need. Heyne poses this idea of “work according to one’s ability with pay according to one’s need” and the information problems in rewarding individuals in this regard.
According to Heyne, one of the main issues with paying one according to their needs is that “inequality of current money income is not a reliable indicator of inequality in the power to acquire valued goods.” For example, it is useless to compare the incomes of people in different groups, specifically age groups. Heyne provides the example of Americans over the age of sixty-five. Because this group tends to have low monetary incomes but an accumulation of assets and “special entitlements” (Medicare benefits, tax exemptions), their money income is “a very poor gauge of their real income.” Heyne also says that inequality according to income is a poor indicator due to choices and specific family circumstances. For example, should those families whom both parents work have their incomes redistributed to a family with less income resulting from the decision of one parent to stay at home and take care of the children?
Another concern with rewarding individuals according to their need is the vagueness and inconsistency of the term need. According to Heyne, if need is defined as “what is required to sustain life on an adequate level” then “the criterion of need is unrealistic in poor economies and irrelevant…in affluent ones.” Need varies according to countries and their economic situations. In poor countries, poverty results from low levels of production not from income distributed unfairly. In countries such as Ethiopia, “no redistribution of income…would satisfy the needs” of its people. In wealthy countries such as the United States, “need is continuously redefined” as production increases with new information and technology. Therefore, redistribution according to need is nearly impossible.
There are possible errors associated paying or rewarding according to needs. If a society believes that it is fair to redistribute according to need, it runs the risk of two types of errors: Providing assistance to those who are not needy, or failing to provide assistance to those who truly are needy. In my opinion, due to the information problems associated with identifying one’s needs, allocating resources by this method is far too risky. These errors would be prevalent, with each type being just as unfair as the other. Providing assistance to those who aren’t needy would be wasting and not providing assistance to those who are is inhumane.
In Are Economists Basically Immoral?, Heyne discusses the ability of rules to potentially help in avoiding some errors when trying to reward according to one’s needs. Heyne considers the function of rules in his example of the bus driver and whether he should stop for a tardy person or not. Heyne says that “punctual people have a right not to be delayed by tardy people, and the bus driver has an obligation to respect that right.” “The driver’s moral obligation is to provide safe transportation and stay on schedule” and stopping for someone running late shifts the cost of the tardy person to all others on the bus. “Adherence to these rules will sometimes produce results inferior to what an omniscient driver could achieve.” This is irrelevant due to the information problem. According to Heyne, disobeying the rules is “behaving unjustly” and it is “more ethical, more socially responsible, and even more humane” to obey the rules.
Private, nonprofit organizations often try to allocate goods according to need and frequently take actions to mitigate the information problem and complexity of need mentioned above. Private organizations that are established to help those in need are also careful to not create a dependence, rather they attempt to create incentives to better oneself.
According to Professor John Garen, private, nonprofit organizations attempt to overcome by the information problem “through close, emotionally intimate, face-to-face interactions.” Private charities specialize in these type of assessments and are affectively able to gather detailed information and allocate resources properly. Garen also states that this data “also assists in dealing with the problem of falsifying needs and moral hazard problems of overuse and dependence.”
In most cases with private, nonprofit organizations there is usually quid pro quo (“something for something”). There are expectations associated with receiving assistance. Garen uses the example of a homeless shelter. Those who are provided food, clothing, and shelter are expected to be sober, behave politely, and sometimes engage in religious or volunteer activities.