Labour must embrace the economics that inspired Margaret Thatcher

Next month marks 50 years since Friedrich Hayek won the Nobel prize in economics. At the time, many thought the Austrian economist had faded from relevance, yet his ideas sparked a revival of classical liberalism, laying the intellectual foundation for the economic reforms of the 1980s. Margaret Thatcher herself supposedly slammed his The Constitution of Liberty on to a desk at a Conservative research department meeting, declaring: “This is what we believe!”
Sir Keir Starmer may not share Thatcher’s admiration for Hayek, but if the prime minister is serious about purposeful economic reform, he, too, should grasp Hayek’s insights. In particular, he should understand the simple but profound truth in Hayek’s 1945 essay The Use of Knowledge in Society, that the knowledge needed to make economic decisions is dispersed across the population and often can’t be easily measured, articulated or even observed.
Much knowledge of “what works” cannot be found in aggregated data or scientific studies. It reflects personal experience and local understanding. For example, an estate agent often understands the quirks of their local housing market, a shop manager how to motivate their difficult staff and a factory worker how to keep a faulty machine running. This practical, on-the-ground information can’t be collated by the government, let alone used to plan the economy to boost growth.
This “knowledge problem” is one reason why central planning fails. No government can aggregate the vast, scattered information necessary to maximise efficiency. Even for more modest economic improvements, however, Hayek’s insight demands humility from policymakers. There’s rarely one best solution to problems. The economic challenge is to protect decentralised systems that allow individuals to adapt, experiment and find their own efficient solutions in time.
Fortunately, markets and prices do this fairly well. That’s because prices reflect that tacit knowledge behind our countless supply and demand decisions. Price movements therefore reveal ever-changing realities without us requiring knowledge of their causes. As a consumer, I don’t need to know that bird flu caused egg prices to rise. The price itself tells me eggs are scarce, so I buy fewer and suppliers are motivated to produce more. After “be humble”, the next Hayekian policymaking lesson is thus “don’t control prices and muffle this information”.
Labour’s present policy agenda has many commendable planks, but too often it suffers from what Hayek termed “the pretence of knowledge” when it is focused on generating prosperity. Take the push for a “right to flexible working.” Jonathan Reynolds, the business secretary, recently slammed Amazon’s UK return-to-office policy, accusing the company of “ignoring evidence” on the benefits of working from home. But whose evidence? This is the scientism that Hayek warned against, assuming that the scattered studies or surveys implying work-from-home productivity gains for some companies apply to all, without considering the unique needs of different businesses or the tacit knowledge that Amazon’s managers rely on.
The same problem crops up in Labour’s energy policies. Instead of allowing local preferences and market experimentation to determine cost-effective ways of mitigating carbon through pricing it, the government wants to play energy entrepreneur through Great British Energy, throwing public money at selected technologies such as offshore wind, hydrogen and tidal power.
Labour’s support for equal pay legislation is another example of its unthinking support for top-down determinations. Courts recently have ruled that female retail workers should be paid the same as male warehouse workers at Next, with “experts” deeming their roles to be of “equal value”. Yet the voluntary decisions of employees and employers show that they are not. Mandating to deny this reality is a recipe for jobs market destruction.
Then there’s public sector pay. National pay bargaining, which Labour supports, prevents managers from tailoring remuneration to improve services or to attract staff to fill much-needed positions according to local circumstances.
Once you internalise Hayek’s key insight, you see knowledge problem issues everywhere, including in the last government’s agenda. However, if Labour really wants to prioritise growth, it must harness society’s dispersed knowledge, not suppress it.
Ryan Bourne is an economist at the Cato Institute and editor of the book The War On Prices