The Unconditional Basic Income and the Hayekian Price System

Sam Bowman of the UK’s Adam Smith Institute writes what he calls “a neoliberal case for a basic income.”

I loathe the term neoliberal, but his case is persuasive. It’s summarized as follows:

1. It addresses in-work poverty well.
2. It reduces complexity in the welfare system.
3. It facilitates other reforms that would raise overall living standards.

Let’s add to it Jacob Levy’s argument against putting conditions on welfare:

A lot of people a lot of the time underestimate how burdensome, onerous, and intrusive complicated bureaucratic rules and regulations are. They casually treat the only cost of a rule as the cost to bad people of not doing whatever the rule prohibits, which isn’t a cost at all. But in order to have effect, rules have to be enforced; efforts have to be made to detect violations and monitor performance on an ongoing basis. This is a burden on the whole class subject to the rule, not only those who were going to break it….

And so poor people will be subjected to another set of forms, another set of inspections, another set of surveillance and monitoring, another set of insults, another risk of false findings of guilt, for trivial financial savings. Someone gets to posture as having zero tolerance for some unacceptable outcome; that’s what the zero tolerance policies are for. And life for a sixth of the country’s population gets worse, more unfree, more subject to the burdens and intrusions of micromanaging regulation.

I find that argument pretty strong as well. And I’d like to add another argument for a basic income, also in the classical liberal tradition, one that I don’t believe I’ve heard before.

Let’s start with F. A. Hayek’s examination of prices as economic signals. If you’re not familiar with it, you will do well to start with “The Use of Knowledge in Society.” For the moment some quotes will do:

[A] little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation…

Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coördinate the separate actions of different people in the same way as subjective values help the individual to coördinate the parts of his plan. It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all this without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.

We must look at the price system as such a mechanism for communicating information if we want to understand its real function—a function which, of course, it fulfils less perfectly as prices grow more rigid. (Even when quoted prices have become quite rigid, however, the forces which would operate through changes in price still operate to a considerable extent through changes in the other terms of the contract.) The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement.

In short, prices are an impersonal index of the needs of economic actors all across the world. They’re weighted against one another, taking into account the opportunity costs and tradeoffs that the production process will always entail: If you’re going to use tin to make lithium-ion batteries, then you can’t use that same tin for electroplating.

F. A. Hayek

Which do you choose? If you’re looking to sell tin futures, the answer is simple: You sell your futures to the highest bidder. In a price system, the highest bidder tends to be the one with the highest profit margin. And it turns out that the highest profit margin comes from consumers bidding up the prices of lithium-ion batteries.

A holder of tin futures don’t actually need to know anything about the use of the tin, or the profit margins of various firms, or even why consumers like lithium-ion batteries so much. All she needs to know is to buy low and sell high, combined with her local knowledge about how to mine tin. Just like that, all across the chain of production, consumers send signals that reach primary producers, who are in effect put to work for the consumer.

Posturing, meanwhile, gets discounted to zero. There’s a reason why sending price signals costs money: It forces consumers to prioritize, and to tell producers, through revealed preferences, only that which they truly want. Posturing is for politicians, not for traders. Hayek never put it quite this way, but we can almost think of the price system as a place where only real needs are communicated, while the political system is reserved for unmonetizable needs. The set of unmonetizable needs may include some real needs, but it also includes a lot of magical thinking.

As real incomes rise, we can expect that more urgent price signals will be sent about progressively less important consumer needs. Now, there’s nothing necessarily wrong with this. When living standards rise, consumers tend to spend less of their incomes on food. They spend more on education, recreation, and end of life care, and we should be glad that they do. But again, the signals for these goods still need to cost money if the price system is to function.

But also as real incomes rise, the price system may run into trouble on the low end of the economic spectrum: How can someone send a price signal when they don’t have any money at all? How can the comparatively feeble price signals of the very poor compete with the price signals of the middle class, which are strong and (happily) getting stronger?

It’s possible, and tempting, to make gross simplifications of this situation. But the impaired ability of the poor to signal via the price mechanism has some predictable effects, and they aren’t especially good. We might say, for example, that inexpensive, high-quality basic consumption goods will be underprovided, in favor of conspicuously non-basic goods. The latter signal at great cost that the consumer belongs to a higher social class. That’s a big problem if you’re poor. (Revealing, too, is that the word “basic” itself has acquired such a negative connotation in recent years.)

We might further hypothesize that when charity is left to the upper classes, a good deal of supposed charitable expenditure will be devoted instead to virtue signaling. Charity will tend to be demonstrative rather than helpful, a subject I’ve discussed before. Charity in the form of simple cash transfers to the indigent will almost certainly be more efficient, and Hayek’s theory of price signals explains why this is so, and this would apply as well to state-provided charity as private.

In short, it seems that an unconditional basic income might do three important things in light of the Hayekian price system:

1. A UBI would allow the indigent to communicate their needs by means of efficient price signals, rather than relying on inefficient charities to do the exact same thing. The needs of the indigent would therefore be met more effectively, as the economy re-ordered itself to match them.

2. A UBI would allow the price signals of the indigent to compete somewhat better with the signals being sent by the still-rising middle class. May our middle class rise forever, but long as they do, the gap between them and the utterly indigent is going to grow. That’s a real problem as regards the communication of local knowledge in the economy, but it’s also a problem that a UBI could address.

3. The unconditional nature of a UBI would prevent the market distortions inherent in conditional grants, which always incentivize or disincentivize particular behaviors. The incentives that are set up by means of conditional grants are the product of politics, and to the extent that politics intrudes on the economic process, it crowds out the price signals that communicate consumers’ actual needs. Hayek argues that such intrusions should be resisted with great force, and a UBI might be one means of doing so.