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On March 23, 1992, Friedrich A von Hayek, Austrian/British economist (Road to Serfdom), died at the age of 92. From the article:
"If any twentieth-century economist was a Renaissance man, it was Friedrich Hayek. He made fundamental contributions in political theory, psychology, and economics. In a field in which the relevance of ideas often is eclipsed by expansions on an initial theory, many of his contributions are so remarkable that people still read them more than fifty years after they were written. Many graduate economics students today, for example, study his articles from the 1930s and 1940s on economics and knowledge, deriving insights that some of their elders in the economics profession still do not totally understand. It would not be surprising if a substantial minority of economists still read and learn from his articles in the year 2050. In his book Commanding Heights, Daniel Yergin called Hayek the “preeminent” economist of the last half of the twentieth century.
Hayek was the best-known advocate of what is now called Austrian economics. He was, in fact, the only major recent member of the Austrian school who was actually born and raised in Austria. After World War I, Hayek earned his doctorates in law and political science at the University of Vienna. Afterward he, together with other young economists Gottfried Haberler, Fritz Machlup, and Oskar Morgenstern, joined Ludwig von Mises’s private seminar—the Austrian equivalent of John Maynard Keynes’s “Cambridge Circus.” In 1927 Hayek became the director of the newly formed Austrian Institute for Business Cycle Research. In the early 1930s, at the invitation of Lionel Robbins, he moved to the faculty of the London School of Economics, where he stayed for eighteen years. He became a British citizen in 1938.
Most of Hayek’s work from the 1920s through the 1930s was in the Austrian theory of business cycles, capital theory, and monetary theory. Hayek saw a connection among all three. The major problem for any economy, he argued, is how people’s actions are coordinated. He noticed, as Adam Smith had, that the price system—free markets—did a remarkable job of coordinating people’s actions, even though that coordination was not part of anyone’s intent. The market, said Hayek, was a spontaneous order. By spontaneous Hayek meant unplanned—the market was not designed by anyone but evolved slowly as the result of human actions. But the market does not work perfectly. What causes the market, asked Hayek, to fail to coordinate people’s plans, so that at times large numbers of people are unemployed?
One cause, he said, was increases in the money supply by the central bank. Such increases, he argued in Prices and Production, would drive down interest rates, making credit artificially cheap. Businessmen would then make capital investments that they would not have made had they understood that they were getting a distorted price signal from the credit market. But capital investments are not homogeneous. Long-term investments are more sensitive to interest rates than short-term ones, just as long-term bonds are more interest-sensitive than treasury bills. Therefore, he concluded, artificially low interest rates not only cause investment to be artificially high, but also cause “malinvestment”—too much investment in long-term projects relative to short-term ones, and the boom turns into a bust. Hayek saw the bust as a healthy and necessary readjustment. The way to avoid the busts, he argued, is to avoid the booms that cause them.
Hayek and Keynes were building their models of the world at the same time. They were familiar with each other’s views and battled over their differences. Most economists believe that Keynes’s General Theory of Employment, Interest and Money (1936) won the war. Hayek, until his dying day, never believed that, and neither do other members of the Austrian school. Hayek believed that Keynesian policies to combat unemployment would inevitably cause inflation, and that to keep unemployment low, the central bank would have to increase the money supply faster and faster, causing inflation to get higher and higher. Hayek’s thought, which he expressed as early as 1958, is now accepted by mainstream economists (see phillips curve).
In the late 1930s and early 1940s, Hayek turned to the debate about whether socialist planning could work. He argued that it could not. The reason socialist economists thought central planning could work, argued Hayek, was that they thought planners could take the given economic data and allocate resources accordingly. But Hayek pointed out that the data are not “given.” The data do not exist, and cannot exist, in any one mind or small number of minds. Rather, each individual has knowledge about particular resources and potential opportunities for using these resources that a central planner can never have. The virtue of the free market, argued Hayek, is that it gives the maximum latitude for people to use information that only they have. In short, the market process generates the data. Without markets, data are almost nonexistent.
Mainstream economists and even many socialist economists (see socialism) now accept Hayek’s argument. Columbia University economist Jeffrey Sachs noted: “If you ask an economist where’s a good place to invest, which industries are going to grow, where the specialization is going to occur, the track record is pretty miserable. Economists don’t collect the on-the-ground information businessmen do. Every time Poland asks, Well, what are we going to be able to produce? I say I don’t know.”1
In 1944 Hayek also attacked socialism from a very different angle. From his vantage point in Austria, Hayek had observed Germany very closely in the 1920s and early 1930s. After he moved to Britain, he noticed that many British socialists were advocating some of the same policies for government control of people’s lives that he had seen advocated in Germany in the 1920s. He had also seen that the Nazis really were National Socialists; that is, they were nationalists and socialists. So Hayek wrote The Road to Serfdom to warn his fellow British citizens of the dangers of socialism. His basic argument was that government control of our economic lives amounts to totalitarianism. “Economic control is not merely control of a sector of human life which can be separated from the rest,” he wrote, “it is the control of the means for all our ends.”
To the surprise of some, John Maynard Keynes praised the book highly. On the book’s cover, Keynes is quoted as saying: “In my opinion it is a grand book…. Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in deeply moved agreement.”
Although Hayek had intended The Road to Serfdom only for a British audience, it also sold well in the United States. Indeed, Reader’s Digest condensed it. With that book Hayek established himself as the world’s leading classical liberal; today he would be called a libertarian or market liberal. A few years later, along with Milton Friedman, George Stigler, and others, he formed the Mont Pelerin Society so that classical liberals could meet every two years and give each other moral support in what appeared to be a losing cause.
In 1950 Hayek became professor of social and moral sciences at the University of Chicago, where he stayed until 1962. During that time he worked on methodology, psychology, and political theory. In methodology Hayek attacked “scientism”—the imitation in social science of the methods of the physical sciences. His argument was that because social science, including economics, studies people and not objects, it can do so only by paying attention to human purposes. The Austrian school in the 1870s had already shown that the value of an item derives from its ability to fulfill human purposes. Hayek was arguing that social scientists more generally should take account of human purposes. His thoughts on the matter are in The Counter-Revolution of Science: Studies in the Abuse of Reason. In psychology Hayek wrote The Sensory Order: An Inquiry into the Foundations of Theoretical Psychology.
In political theory Hayek gave his view of the proper role of government in his book The Constitution of Liberty. It is actually a more expansive view of the proper role of government than many of his fellow classical liberals hold. He discussed the principles of freedom and based his policy proposals on those principles. His main objection to progressive taxation, for example, was not that it causes inefficiency but that it violates equality before the law. In the book’s postscript, “Why I Am Not a Conservative,” Hayek distinguished his classical liberalism from conservatism. Among his grounds for rejecting conservatism were that moral and religious ideals are not “proper objects of coercion” and that conservatism is hostile to internationalism and prone to a strident nationalism.
In 1962 Hayek returned to Europe as professor of economic policy at the University of Freiburg in Breisgau, West Germany, and stayed there until 1968. He then taught at the University of Salzburg in Austria until his retirement nine years later. His publications slowed substantially in the early 1970s. In 1974 he shared the Nobel Prize with Gunnar Myrdal “for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena.” This award seemed to breathe new life into him, and he began publishing again, both in economics and in politics.
Many people get more conservative as they age. Hayek became more radical. Although he had favored central banking for most of his life, in the 1970s he began advocating denationalizing money. Private enterprises that issued distinct currencies, he argued, would have an incentive to maintain their currency’s purchasing power. Customers could choose from among competing currencies. Whether they would revert to a gold standard was a question that Hayek was too much of a believer in spontaneous order to predict. With the collapse of communism in Eastern Europe, some economic consultants have considered Hayek’s currency system as a replacement for fixed-rate currencies.
Hayek was still publishing at age eighty-nine. In his book The Fatal Conceit, he laid out some profound insights to explain the intellectuals’ attraction to socialism and then refuted the basis for their beliefs."
COL Mikel J. Burroughs LTC Stephen F. SFC Joe S. Davis Jr., MSM, DSL Lt Col John (Jack) Christensen SPC Woody Bullard 1SG Steven Imerman SFC William Farrell Lt Col Charlie Brown Col Carl Whicker SGT David A. 'Cowboy' Groth SP5 Geoffrey Vannerson MSG Felipe De Leon Brown LTC Stephen C. Maj William W. 'Bill' Price PO1 H Gene Lawrence LTC Jeff Shearer ] LTC Wayne Brandon PO1 William "Chip" Nagel SPC Douglas Bolton PVT Mark Zehner
"If any twentieth-century economist was a Renaissance man, it was Friedrich Hayek. He made fundamental contributions in political theory, psychology, and economics. In a field in which the relevance of ideas often is eclipsed by expansions on an initial theory, many of his contributions are so remarkable that people still read them more than fifty years after they were written. Many graduate economics students today, for example, study his articles from the 1930s and 1940s on economics and knowledge, deriving insights that some of their elders in the economics profession still do not totally understand. It would not be surprising if a substantial minority of economists still read and learn from his articles in the year 2050. In his book Commanding Heights, Daniel Yergin called Hayek the “preeminent” economist of the last half of the twentieth century.
Hayek was the best-known advocate of what is now called Austrian economics. He was, in fact, the only major recent member of the Austrian school who was actually born and raised in Austria. After World War I, Hayek earned his doctorates in law and political science at the University of Vienna. Afterward he, together with other young economists Gottfried Haberler, Fritz Machlup, and Oskar Morgenstern, joined Ludwig von Mises’s private seminar—the Austrian equivalent of John Maynard Keynes’s “Cambridge Circus.” In 1927 Hayek became the director of the newly formed Austrian Institute for Business Cycle Research. In the early 1930s, at the invitation of Lionel Robbins, he moved to the faculty of the London School of Economics, where he stayed for eighteen years. He became a British citizen in 1938.
Most of Hayek’s work from the 1920s through the 1930s was in the Austrian theory of business cycles, capital theory, and monetary theory. Hayek saw a connection among all three. The major problem for any economy, he argued, is how people’s actions are coordinated. He noticed, as Adam Smith had, that the price system—free markets—did a remarkable job of coordinating people’s actions, even though that coordination was not part of anyone’s intent. The market, said Hayek, was a spontaneous order. By spontaneous Hayek meant unplanned—the market was not designed by anyone but evolved slowly as the result of human actions. But the market does not work perfectly. What causes the market, asked Hayek, to fail to coordinate people’s plans, so that at times large numbers of people are unemployed?
One cause, he said, was increases in the money supply by the central bank. Such increases, he argued in Prices and Production, would drive down interest rates, making credit artificially cheap. Businessmen would then make capital investments that they would not have made had they understood that they were getting a distorted price signal from the credit market. But capital investments are not homogeneous. Long-term investments are more sensitive to interest rates than short-term ones, just as long-term bonds are more interest-sensitive than treasury bills. Therefore, he concluded, artificially low interest rates not only cause investment to be artificially high, but also cause “malinvestment”—too much investment in long-term projects relative to short-term ones, and the boom turns into a bust. Hayek saw the bust as a healthy and necessary readjustment. The way to avoid the busts, he argued, is to avoid the booms that cause them.
Hayek and Keynes were building their models of the world at the same time. They were familiar with each other’s views and battled over their differences. Most economists believe that Keynes’s General Theory of Employment, Interest and Money (1936) won the war. Hayek, until his dying day, never believed that, and neither do other members of the Austrian school. Hayek believed that Keynesian policies to combat unemployment would inevitably cause inflation, and that to keep unemployment low, the central bank would have to increase the money supply faster and faster, causing inflation to get higher and higher. Hayek’s thought, which he expressed as early as 1958, is now accepted by mainstream economists (see phillips curve).
In the late 1930s and early 1940s, Hayek turned to the debate about whether socialist planning could work. He argued that it could not. The reason socialist economists thought central planning could work, argued Hayek, was that they thought planners could take the given economic data and allocate resources accordingly. But Hayek pointed out that the data are not “given.” The data do not exist, and cannot exist, in any one mind or small number of minds. Rather, each individual has knowledge about particular resources and potential opportunities for using these resources that a central planner can never have. The virtue of the free market, argued Hayek, is that it gives the maximum latitude for people to use information that only they have. In short, the market process generates the data. Without markets, data are almost nonexistent.
Mainstream economists and even many socialist economists (see socialism) now accept Hayek’s argument. Columbia University economist Jeffrey Sachs noted: “If you ask an economist where’s a good place to invest, which industries are going to grow, where the specialization is going to occur, the track record is pretty miserable. Economists don’t collect the on-the-ground information businessmen do. Every time Poland asks, Well, what are we going to be able to produce? I say I don’t know.”1
In 1944 Hayek also attacked socialism from a very different angle. From his vantage point in Austria, Hayek had observed Germany very closely in the 1920s and early 1930s. After he moved to Britain, he noticed that many British socialists were advocating some of the same policies for government control of people’s lives that he had seen advocated in Germany in the 1920s. He had also seen that the Nazis really were National Socialists; that is, they were nationalists and socialists. So Hayek wrote The Road to Serfdom to warn his fellow British citizens of the dangers of socialism. His basic argument was that government control of our economic lives amounts to totalitarianism. “Economic control is not merely control of a sector of human life which can be separated from the rest,” he wrote, “it is the control of the means for all our ends.”
To the surprise of some, John Maynard Keynes praised the book highly. On the book’s cover, Keynes is quoted as saying: “In my opinion it is a grand book…. Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in deeply moved agreement.”
Although Hayek had intended The Road to Serfdom only for a British audience, it also sold well in the United States. Indeed, Reader’s Digest condensed it. With that book Hayek established himself as the world’s leading classical liberal; today he would be called a libertarian or market liberal. A few years later, along with Milton Friedman, George Stigler, and others, he formed the Mont Pelerin Society so that classical liberals could meet every two years and give each other moral support in what appeared to be a losing cause.
In 1950 Hayek became professor of social and moral sciences at the University of Chicago, where he stayed until 1962. During that time he worked on methodology, psychology, and political theory. In methodology Hayek attacked “scientism”—the imitation in social science of the methods of the physical sciences. His argument was that because social science, including economics, studies people and not objects, it can do so only by paying attention to human purposes. The Austrian school in the 1870s had already shown that the value of an item derives from its ability to fulfill human purposes. Hayek was arguing that social scientists more generally should take account of human purposes. His thoughts on the matter are in The Counter-Revolution of Science: Studies in the Abuse of Reason. In psychology Hayek wrote The Sensory Order: An Inquiry into the Foundations of Theoretical Psychology.
In political theory Hayek gave his view of the proper role of government in his book The Constitution of Liberty. It is actually a more expansive view of the proper role of government than many of his fellow classical liberals hold. He discussed the principles of freedom and based his policy proposals on those principles. His main objection to progressive taxation, for example, was not that it causes inefficiency but that it violates equality before the law. In the book’s postscript, “Why I Am Not a Conservative,” Hayek distinguished his classical liberalism from conservatism. Among his grounds for rejecting conservatism were that moral and religious ideals are not “proper objects of coercion” and that conservatism is hostile to internationalism and prone to a strident nationalism.
In 1962 Hayek returned to Europe as professor of economic policy at the University of Freiburg in Breisgau, West Germany, and stayed there until 1968. He then taught at the University of Salzburg in Austria until his retirement nine years later. His publications slowed substantially in the early 1970s. In 1974 he shared the Nobel Prize with Gunnar Myrdal “for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena.” This award seemed to breathe new life into him, and he began publishing again, both in economics and in politics.
Many people get more conservative as they age. Hayek became more radical. Although he had favored central banking for most of his life, in the 1970s he began advocating denationalizing money. Private enterprises that issued distinct currencies, he argued, would have an incentive to maintain their currency’s purchasing power. Customers could choose from among competing currencies. Whether they would revert to a gold standard was a question that Hayek was too much of a believer in spontaneous order to predict. With the collapse of communism in Eastern Europe, some economic consultants have considered Hayek’s currency system as a replacement for fixed-rate currencies.
Hayek was still publishing at age eighty-nine. In his book The Fatal Conceit, he laid out some profound insights to explain the intellectuals’ attraction to socialism and then refuted the basis for their beliefs."
COL Mikel J. Burroughs LTC Stephen F. SFC Joe S. Davis Jr., MSM, DSL Lt Col John (Jack) Christensen SPC Woody Bullard 1SG Steven Imerman SFC William Farrell Lt Col Charlie Brown Col Carl Whicker SGT David A. 'Cowboy' Groth SP5 Geoffrey Vannerson MSG Felipe De Leon Brown LTC Stephen C. Maj William W. 'Bill' Price PO1 H Gene Lawrence LTC Jeff Shearer ] LTC Wayne Brandon PO1 William "Chip" Nagel SPC Douglas Bolton PVT Mark Zehner
Friedrich August Hayek - Econlib
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POLITICAL THEORY – Friedrich Hayek
The leading theorist of modern right-wing political movements was an Austrian economist called Friedrich Hayek. For more on this and other great thinkers, s...
Thank you my friend SGT (Join to see) for making us aware that on March 23, 1992 Austrian/British libertarian economist (Road to Serfdom) Friedrich August von Hayek died at the age of 92.
POLITICAL THEORY – Friedrich Hayek
The leading theorist of modern right-wing political movements was an Austrian economist called Friedrich Hayek.
https://www.youtube.com/watch?v=SHsCkinrCPE
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1. 1974 Friedrich August von Hayek - Nobel Prize for Economics
2. Friedrich August von Hayek 'Emergencies' have always been the pretext on which the safeguards of individual liberty have been eroded.'
3. Friedrich August von Hayek 'Nobody with open eyes can any longer doubt that the danger to personal freedom comes chiefly from the left.'.
4. Friedrich August von Hayek 'The idea of social justice is that the state should treat different people unequally in order to make them equal.'
Background from {[ https://plato.stanford.edu/entries/friedrich-hayek/]}
Friedrich Hayek
First published Sat Sep 15, 2012; substantive revision Fri Apr 16, 2021
Friedrich Hayek was born in Vienna in 1899 into a family steeped in academic life and scientific research. He worked as a statistician from 1927–31, became a Lecturer in Economics at the University of Vienna in 1929, then moved to the University of London in 1931, the University of Chicago in 1950, and the University of Freiburg in 1962, retiring in 1967. He kept writing into the 1980s, dying in 1992.
Hayek worked in the areas of philosophy of science, political philosophy, the free will problem, and epistemology. For all that, Hayek was more hedgehog than fox. His life’s work, for which he won a Nobel Prize in Economics in 1974, illuminated the nature and significance of spontaneous order. The concept seems simple, yet Hayek spent six decades refining his idea, evidently finding elusive the goal of being as clear about it as he aspired to be.
This essay concentrates on this enduring theme of Hayek’s work, and a question: why would the scholar who did more than anyone in the twentieth century to advance our understanding of price signals and the emergence of spontaneous orders also be driven to claim “that social justice is a mirage” (Hayek 1978b, 57)?
• 1. Price Signals and Spontaneous Order
o 1.1 Order Can Be Undesigned
o 1.1 Order Can Be Unpredictable
o 1.3 Order Can Embody Essentially Decentralized Information
o 1.4 Communities Tend To Be Spontaneous Orders
• 2. Progress
• 3. Planned Orders Are Inferior
o 3.1 Trucking, Bartering, Community, Esteem
o 3.2 Law As An Ecological Niche
• 4. Justice as Impartiality, Politics As Entrepreneurship Without Restraint
• 5. Hayek Against Justice
o 5.1 Input, Output, and What It Means To Economize
o 5.2 The Right To Distribute
o 5.3 Fair Practices
o 5.4 Just Price
• Bibliography
o Primary Literature: Work by Hayek
o Secondary Literature
• Academic Tools
• Other Internet Resources
• Related Entries
________________________________________
1. Price Signals and Spontaneous Order
1.1 Order Can Be Undesigned
Over hundreds of millions of years, order emerged in the natural world. How? It is only human to wonder. “Design arguments” come to mind, but like most philosophers, Hayek considers such arguments fallacious as arguments that we need to posit a designer to explain the emergence of order in nature. (See the entry on teleological arguments for God’s existence.) Hayek, however, was frustrated to find the same fallacy in arguments that we need to posit a designer to explain the emergence of order in society (Hayek 1960, 59).
Just as no one had to invent natural selection, no one had to invent the process by which natural languages evolve. A language is a massively path-dependent process of unending mutual adjustment. Language evolves spontaneously. It would make no sense to call any language optimally efficient, but it does make sense to see languages as highly refined and effective adaptations to the evolving communication needs of particular populations (Hayek 1945, 528).
It would be no exaggeration to say that social theory begins with—and has an object only because of—the discovery that there exist orderly structures which are the product of the action of many men but are not the result of human design. In some fields this is now universally accepted. Although there was a time when men believed that even language and morals had been invented by some genius of the past, everybody recognizes now that they are the outcome of a process of evolution whose results nobody foresaw or designed (Hayek 1973, 37).
1.2 Order Can Be Unpredictable
Natural selection operates on mutations, making the path of natural selection unpredictable, regardless of how well we understand the underlying principles. To Hayek, social and cultural evolution are much the same: driven by innovation, fashion, and various shocks that “mutate” people’s plans in unpredictable ways with unpredictable results. The system may be more or less logical. Most things seem in retrospect to have happened for a reason. Yet, however logical the system may be, its logic does not render the system deterministic. We can make predictions in the broadest sense, such as when we say that increasing the money supply causes prices to rise, other things equal, but we have no basis for predicting the fine details. The system is technically chaotic, to such a degree that even something as straightforward as next week’s stock prices will always remain a matter of guesswork even for experts. (See the entry on chaos.)
1.3 Order Can Embody Essentially Decentralized Information
To Hayek, prices are like languages. How do we know what it will take to get our product to whomever wants or needs it most? Maybe we take bids. As we (and our rivals) take bids for x, x comes to have a price. As with language, prices enable people to form mutual expectations. Free-floating prices help people coordinate in intricate and mutually considerate ways as they individually decide what to produce or consume. To think that an authority needs to decide what the price of rice ought to be is like thinking that an authority needs to decide what sound people should make when they want to refer to rice.
It is a mundane yet intriguing fact that price signals induce people to respond to information they do not possess: such as the changing cost of drilling, or the discovery of a cheap substitute, or that political unrest has made a key input harder to acquire. Having no inkling of those variables, buyers nevertheless respond to them in a rational way, because they know the one thing they need to know: namely, the price (Hayek 1978a, 4).
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 (Hayek 1945, 526).
1.4 Communities Tend To Be Spontaneous Orders
What emerges from the haggling is not only a deal, but something larger: a community. There was no central decision about who should produce tin, or whether anyone should; no central decision about who should consume tin, or whether anyone should; no central decision about what should be given in return for tin. All that happened is that some people guessed that if they were to produce tin and bring it to market, it would be worth something to customers—enough to make the venture worthwhile. When some of these guesses prove correct and trades are consummated, a market in tin emerges and becomes part of what brings people together as partners in mutually beneficial ventures.
Price signals thus economize on information. In the process, they induce patterns of cooperation that involve multitudes. Cooperation evolves among people who need not share a language, need not be aware of each other’s existence, and need not be aware of their mutual dependence. They are only vaguely aware of the thousands of jobs that need doing so as to supply inputs that enable them to have a finished product to sell. Particular agents seldom if ever have more than a glimpse of the big picture, yet they manage to come together to form a community, and almost all are vastly better off as a result.
2. Progress
Technological progress extends the frontiers of the possible. To Hayek, it is the freedom of the few to do something novel that matters most, not the freedom of the many to do something familiar. Accordingly, the freedom I exercise myself often is not the freedom that has the most bearing on my future (Hayek 1960, 32). Consider that early adopters finance research that brings down production costs and thus finances a dispersion of products and services at falling prices that eventually bring late adopters like me to the market. I may never trade with early adopters, yet even so I depend on them, for they help to finance the invention and ongoing re-invention of products whose marginal cost eventually falls to a point where I can afford them.
Often, technological progress consists of innovations that lower transaction cost: steam boat, railroad, air travel, telegraph, telephone, internet, bar code reader, “apps” that make possible such businesses as Uber and AirBnB, along with innovative organizational structures and business models such as Federal Express or container ships (which, after a ten-year legal battle with trade unions, reduced from days to minutes the time that a truck’s contents would spend at the dockyard before being transferred to a ship). In many cases, the cost of transacting concerns the cost of information. As the frontier of knowledge expands, the slice that a given individual can grasp inevitably becomes a smaller fraction of the whole. Prices become an increasingly indispensable window to a world of tacit knowledge.
In summary, technological innovation shocks economies. Formerly profitable investments become relics of a bygone age and must be liquidated. Workers get laid off until they find some other way to produce goods wanted by today’s customers. Transitions are tough, miscalculations abound, but the upshot is that we grope toward heights made possible by a given innovation. Innovative ways of lowering transaction cost spread throughout a community, and failures (including once-useful but now obsolete innovations) are discarded. More precisely, failures are discarded if and when decision makers are innovators on the ground, learning to avoid losing their own money on ideas that fail to bear fruit in a given time and place.
Hayek denies that resources will ever be used at theoretical peak efficiency (1945, 527). Humans being what they are, waste is ubiquitous. Mistakes are ubiquitous. The “marvel” of markets is that people make mistakes, get burnt, learn fast, and make corrections. By contrast, if decision makers are bureaucrats in large organizations, their focus is not on avoiding mistakes but on avoiding budget cuts. If bureaucrats acknowledge that their plan is failing, the consequences is not that they retrench and divert their own resources to better purposes but that their supervisors cut their budgets. Note: what cuts their budget is not the mistake so much as someone learning from the mistake. Bureaucratic structure makes new information a threat that needs to be suppressed, or smothered in propaganda (1944, 126ff, 153ff).
Bureaucrats and their expert advisors experience mistakes not as events from which they need to learn but rather as events that they need to cover up. Their mistakes are with other people’s money, so bureaucrats learn to say with a straight face, when confronted, that their budget was not large enough, or that things would have been worse without their policies.[1] They may even believe what they are saying, but they do not know and have every incentive to avoid learning.
3. Planned Orders Are Inferior
If we understand the principles that drive the logic of the system, we may be able to predict that a population of insects will evolve resistance to a pesticide. We may be able to predict that a society that declares war on drugs will lose. Beyond the question of what we can predict, then, Hayek has a further and more precise target: however much we can predict, there is a drastic limit to what we can simply decide.[2] No one can decide that people won’t respond in predictable ways to perverse incentives unintentionally created by a central plan, in the same way that no one can decide that insects will not become resistant to an insecticide.
This point, as Adam Smith observed, is not obvious. There is a class of technocrats who will not appreciate the difficulty. As Smith famously observed, and as Hayek quotes approvingly, the “man of system”
seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder (Smith 1790, 234).
The system has a logic. Planners cannot change that logic. Their main decision is whether to work with that logic or against it (which Smith regards as a choice between harmony and misery). Smith holds that planners who disregard economic logic are deciding in effect to sacrifice their “pawns,” something that a person of true benevolence would not do.
When Hayek explains the obstacle to effective central planning, his claim is not merely the Smithian point that information is widely dispersed and therefore hard to acquire. Rather, it is impossible to acquire (Hayek 1973, 51). When prices are set periodically by a central planner, rather than instantaneously by consumers and producers who are the first and typically the only people to have that information in reliable and timely form, prices inevitably carry less reliable, less timely information. As Hayek notes,
If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic. That is, the answer to the question of what is the best use of our available means is implicit in our assumptions. This, however, is emphatically not the economic problem which society faces. And the economic calculus which we have developed to solve this logical problem, though an important step toward the solution of the economic problem of society, does not yet provide an answer to it. The reason for this is that the “data” from which the economic calculus starts are never for the whole society “given” to a single mind which could work out the implications and can never be so given (Hayek 1945, 519).
Soviet central planners made decisions by checking prices on international markets, but suppose there were no information about supply and demand to be had anywhere. Suppose you are a planner, but all you know is that demands are coming in for wire and for jewelry. How do you decide whether to direct factories to make wire out of copper or platinum, or whether smiths should make jewelry out of gold or silver? How do you decide who should get silver jewelry and who should get gold? How do you decide whether anyone at all should get jewelry, as opposed to reserving all such metals for use as wire?
When consumers are not paying for what they receive, their demand is effectively infinite. Inevitably, a central planner’s task becomes one of cost containment. Worse yet, a planner with no measure of cost has only a limited basis for deciding what to count as containing cost. If a given ton of steel can make one car or ten refrigerators, which way of using steel is economical? How does a planner decide whether to invest in upgrading water supplies or nuclear reactors? If all you know as a producer is that people are asking for infinitely more than you can give, then eventually you turn a deaf ear, deliver your quota, and pay no attention to whether demands from below (from customers) are being met. The only demands that have consequences are demands from above (that is, those which come to you through your supervisors).
Suppose that prices are set by planners. Hayek says with a thought more characteristic of neoclassical economists: “Only prices determined on the free market will bring it about that demand equals supply” (Hayek 1960, 63). Price controls—floors and ceilings—make buyers and sellers less able to respond to the signals they would send each other if they could raise their offer or lower their asking price. If price cannot rise, then buyers cannot signal producers that demand has increased and that producers would sell more if they were to increase supply. And if producers do not increase supply, rising demand results in shortages rather than economic growth. (See especially Zwolinski 2008 for further elaboration.)[3]
A central planner could have the world’s most powerful computer, beyond anything imagined when Hayek published “Use of Knowledge” in 1945. No computer, however, could solve the problem that Hayek was trying to articulate. The problem is not lack of processing power so much as a lack of access to the information in the first place. That much seems clear enough, but the problem has a deeper level. Hayek may not have said this in so many words, yet it seems the most charitable way of reconstructing his more fundamental point. That is, the problem is not merely lack of access to information; rather the information does not exist. There is no truth about what prices should be, accessible or otherwise, except to the extent that prices represent what customers are paying for a given service. This is the precise way in which prices are of service to a community (1944, 51–52).
For example, suppose that a manufacturer figures out how to make an “epipen” that can save the lives of consumers otherwise at risk of fatal allergic reaction to bee stings. Suppose the manufacturer can produce a limited supply of epipens for a little less than a hundred dollars each, and proceeds to offer them for sale for a hundred dollars. Suppose that the manufacturer finds that buyers line up by the thousands wanting to buy the pens, and suppose that there emerges a group of “scalpers” willing to stand in line for weeks, who buy all the pens for a hundred dollars each, then resell the pens for two hundred dollars, then three hundred, then four, and demand remains strong. Hayek would predict that if we let the price signals be the marvels that they are, then other producers will jump in and begin to manufacture pens for one or two hundred dollars each. Eventually the demand is met, and the scalpers go away. Meanwhile, new producers drawn by the spike in profitability invent a new process that enables them to produce the pens for ninety dollars, then eighty, and again the price will fall, as competition leads the price signal to track the falling cost of production. Of course, if we issue a patent or a licensing scheme or some other way of preventing rival producers from entering the market, then this will not occur. By the same token, if we impose a price ceiling of a hundred dollars, then no signal is sent to prospective rivals, unless scalpers send the signal to rivals willing to produce for the black market. Or if there is some other reason why it is impossible to increase the supply, then prices may drift up toward the limits of a customer’s willingness to pay. Barring this, there are many ways for kings, legislators, or other planners to interfere, but price signals, if left alone, are an inimitably rapid and incomprehensibly vast generator of information: supply and demand tend to equilibrate, and to converge on a price in the neighborhood of the cost of production. To a uniquely reliable degree, a product will tend to end up in a consumer’s hands just in case that particular consumer wants the product enough to pay what it cost to produce it.
Although computers cannot solve the problem, Hayek thought radically dispersed decision making by buyers and sellers can and does solve the problem, so far as it can be solved. Sellers who charge too much end up without customers; they learn to be more efficient or else find some other line of work. [4] Buyers who want x but consider it overpriced stay home for a while, waiting for the price to fall, but when they see x flying off the shelves, some of them learn something about themselves: that they would rather have the product at that price than not have it at all. To Hayek, only a price mechanism can process changing information almost instantaneously. Ironically, the most efficient thing a central planner could possibly do would be to set a price right where it would have been without the planner’s intervention.
3.1 Trucking, Bartering, Community, Esteem
Insofar as society is a cooperative venture for mutual advantage, learning to survive—not just physically but as full members of a community—will involve learning to cooperate. Learning to cooperate involves learning to become a trading partner. In other words, cooperation begins with having something to offer: a way of making people better off.
Clearly in Smith, who inspired Hayek, but also in Hayek himself, one infers that the driving motivation is not greed or even well-being so much as a propensity to truck and barter, where this deal-making is not only a means to an end but somehow also something we do for its own sake, because making deals is what our kind of social animal was born to do. Neither, Hayek thought, is the objective for buyers and sellers to coordinate on a price that a central planner might stumble on, but to coordinate, period. Mutually satisfying coordination, the ongoing equilibration of supply and demand, constantly evolving in response to changing conditions, is itself the achievement. There is no need for that coordination to be tracking anything beyond itself. To Hayek, the value that we hope to see realized in a marketplace is not so much that the correct volume of goods gets exchanged at the correct price. Rather, the genesis and point of the division of labor is not only a prospect of realizing gains from trade but trade per se. The valued result is buyers and sellers responding to each other, becoming more attuned to what people around them want, and helping to create a community in which their role in an important one.
Such sensitivity is good, but there is little that central planners can do to encourage it. Central planners replace what could be a complex, decentralized network of interdependence and mutual responsibility with something more like a society of spokes tethered to a central distributor at the hub but otherwise dangling. It is no substitute for real community.
3.2 Law As An Ecological Niche
In nature, for biological adaptation to culminate in better-adapted populations over time, the niche to which a population is adapting must be relatively stable. Likewise, under a rule of law, the aim of government is not to win but to provide a stable ecological niche that enables the game’s true players to evolve strategies apt for success within that niche. An elaborate crystal structure cannot form unless the medium in which crystals form is left undisturbed. Hayek’s ideal is a legal “medium” of society, liberal enough to permit creativity, stable enough to reward creativity, and constraining enough (in the right ways) to steer creativity away from zero-sum and negative-sum games and toward positive-sum games: that is, wealth creation, not wealth capture.
Here, then, in a few sentences, is one way of understanding Hayek’s point. Not everything that happens in an evolving community is foreseen or intended. Actions have more than one consequence, and more than the intended consequence. This is especially so when there is more than one decision maker. No one follows a planner’s plan simply because the planner intends that they do so. People adjust to the planner’s plan in service of their own plans rather than those of the planner, and the result is too chaotic to be safely predictable. Further, the rule of law itself is an evolving product of ongoing decision making, so it likewise takes a shape not intended by any legislator. Does this mean that every order is tautologically a spontaneous order? The answer: it is a universally true empirical generalization, not a tautology, that every social organization, even a dictatorship, is partly an ongoing product of ordering processes that are to some degree spontaneous. However, while the degree to which outcomes are unintended is a continuum, there remains a point in categorizing communities as centrally planned versus spontaneous. A central plan is designed to yield an end-state. The plan aims to bring about particular outcomes—what roles people will play, what they will achieve in those roles, and what they will win by so achieving. By contrast, in what we should call spontaneous order, government provides a stable and known framework of rules, aiming not to realize a particular outcome so much as to realize a particular process (Hayek 1944, 113). Although this ideal can never be fully achieved in practice, a government under rule of law acts as referee and provider of the rule book (Hayek 1960, 114) and operates as much as possible by an ideal of “letting the players play.”
Is letting the players play good? Necessarily good? Adam Smith might have said no, as might Hayek. A praiseworthy rule of law—a praiseworthy market process— facilitates mutually beneficial trade by internalizing externalities, by minimizing transaction cost (especially when it comes to acquiring information), by minimizing opportunities to acquire people’s goods without their consent (thereby encouraging people to trade on agreeable—thus typically beneficial—terms), and by being extremely cautious about trying to do more than that. When a government succeeds in doing that much, and further succeeds in restraining itself from trying to do more, progress is the likely result, which is not to say progress is guaranteed.
Hayek had no particular complaint about providing public education or the minimal elements of a welfare state, but not because such institutions are essential. Hayek would simply have said that such institutions need not devolve into central planning and thus need not be antithetical to a free society. Issuing vouchers, for example, to subsidize the purchase of epipens or education would to some extent distort markets in the subsidized products (having an inflationary impact on prices for those products) but it would not distort to the extent that price controls would.
4. Justice as Impartiality, Politics As Entrepreneurship Without Restraint
Hayek was a consequentialist of sorts, as was Adam Smith, and yet Hayek’s defense of economic freedom, like Smith’s, hints at a contractarian or deontological moral sensibility that regards the separateness of persons as morally fundamental. Thus, for example, Hayek says, “the test of the justice of a rule is usually (since Kant) described as that of its universalizability” (Hayek 1969, 168). As John Gray sees it, Hayek commended the laws of justice “as being the indispensable condition for the promotion of the general welfare” but Hayek held, at the same time, that “an impartial concern for the general welfare is itself one of the demands of universalizability” (Gray 1984, 65).
In service of the overall project of fostering the general welfare, the point of law and legislation is to craft a framework such that a market order is a history of pareto-improving trades.[5] A primary role of law and (when necessary) legislation is to narrow people’s options so as to limit opportunities to get rich at other people’s expense.[6] So long as the rule of law can internalize external cost and thereby steer innovation in mutually beneficial rather than parasitic directions, an evolving order will be an order of rising prosperity.
By contrast, in a planned order, even astute and conscientious decisions by men of system are damaging in a particular way. Namely, to the extent that men of system become micro-managers, they are players rather than umpires. If bureaucrats start playing the game—responding to ephemeral events with centralized fine tuning—then even if they play as cleverly as bureaucrats could possibly play, the fact remains that in consequence, the dispersed and tacit knowledge of ordinary buyers and sellers ends up on the sidelines watching. People who would have been job creators become mere spectators, hamstrung by uncertainty, waiting to see what the plan is going to be. Until they know the plan, they have no way to know, or even intelligently guess, something as simple as whether their staff is too small or too large.
Government provides the framework for interaction. Ideally, as mentioned, government operates only within a stable and known framework of rules (Hayek 1944, 113). This is Hayek’s ideal of good government. Is it realistic? Could any government be expected to act as an impartial umpire? Hayek saw the rule of law as the market’s exogenous ecological niche, and thought that this niche, the rule of law, must be properly constructed if the process of spontaneous order is be a good thing. However, Hayek seemingly came to doubt there could be any such thing as properly constructed rule of law, for the following reason. Law-making is a process driven by processes more or less indistinguishable from market process except that benefits to legislators of their law-making are concentrated while costs are widely dispersed, that is to say, external, and at best only dimly understood even after the fact.[7] This is not only a moral hazard but an information problem. A piece of legislation may be thousands of pages. No one intends the bill as a whole. Indeed, there is no overall point to the bill, known or otherwise, because, prior to passage, literally no one has even read more than a few pages of it, not even the hundreds of legislators who each added a few pages of earmarks as the price of securing their vote.
Common law, by contrast, is a body of practice and tradition that sometimes needs to be supplemented by legislation. Crucially, however, by virtue of passing the test of time as a device for settling disputes, common law cannot be seen as mere prejudice or superstition. On the contrary, it will have a decided advantage over ongoing legislation, given that legislation is driven by untested ideas about how to respond to the crises of the day, needing to be passed without anyone knowing the larger and lasting consequences. Hayek never doubted the need for legislation but lamented our propensity to be oblivious to its inevitably unintended consequences and to radically discount its inevitably unseen cost (Hayek 1973, 86).
5. Hayek Against Justice
To Hayek, it matters far more that the law be a framework for coordination than exactly what the coordination points are (Hayek 1960, 118). Hayek realizes that many coordination points have distributive implications, which leads Hayek to lament our tendency to evaluate distributions by asking whether they are just. (Yet, Hayek concedes, at least in principle, the legitimacy of a minimum income or welfare safety net of some sort. See Tebble 2015 for a sympathetic yet acute argument that this concession on Hayek’s part is a “fatal ambivalence.” In fact, Tebble argues, Hayek’s repudiation of social justice leaves him with no room to make any such concession.)
Hayek says, “one of my chief preoccupations for more than 10 years” has been coming to terms with the idea that social justice is a mirage (Hayek 1978b, 57).[8] By social justice, Hayek seems to mean distributive justice, and more specifically what Nozick called end-state principles of distributive justice, which treat justice as a feature of outcomes rather than of procedures.
Why would justice so conceived be a mirage? Hayek says, “there can be no distributive justice where no one distributes” (Hayek 1978b, 58 or 1976, 68–69). In Hayek’s words, “considerations of justice provide no justification for ‘correcting’ the results of the market” (1969, 175). So long as traders are voluntarily making pareto-superior moves, there is nothing else that can be said or needs to be said by way of justification.
Why resist applying conceptions of justice and injustice to situations where no one distributes? What is haunting Hayek here is not the idea that one person might be more deserving than another, but that a “merit czar” might presume to intervene so as to correct markets that fail to give people what the czar thinks people deserve. Fearing the potential for tyranny, Hayek argues not that markets are just but that they are not the kind of thing that can be just or unjust. Where no one distributes, there may be something lamentable about the result, but the result will not be an injustice in the way that engineering such a result would be. Outcomes that would have been unjust if deliberately imposed (such as being born with a cleft palate) sometimes simply happen. As Rawls says, “The natural distribution is neither just nor unjust; nor is it unjust that persons are born into society at some particular position. These are simply natural facts.” Hayek would agree.
Rawls, however, immediately adds what Hayek would call a non sequitur: “What is just and unjust is the way that institutions deal with these facts” (Rawls, 1971, 102), where resigning ourselves to the facts is the paradigmatically unjust way of dealing with them (ibid). If Rawls is right to deem the natural distribution neither just nor unjust, then when institutions “deal with natural facts,” they are, to Hayek, not undoing wrongs. Hayek would never deny that cleft palates are bad or that fixing them is good, but would insist that fixing what is not unjust cannot count as rectifying injustice. If we feel called upon to help children with cleft palates, it will be because having a cleft palate is bad, not because having it is unjust. When we help, we are not fixing an improper distribution of cleft plates. We are simply fixing cleft palates. When we respond to the problem, we take a stand not against injustice but against suffering (Hayek 1976, 87). As Hayek knew, he was profoundly at odds with much thinking about social justice. He expected to be vilified (1944, vii), and he was. Although he was as responsive to misfortune as anyone, and seemed to embrace the same package of duties to children as any social justice theorist would, he also saw the free world at a crossroads between a defeasible presumption that normal adults have agreed to share each other’s fate (Rawls, 1971, 102) and a defeasible presumption that normal adults have the right and the responsibility to play the cards that nature has dealt.
Hayek seems to worry that our sense of justice can make it harder for us to live together, and make progress together. To Hayek, if people cannot claim that a starting point is unjust, then whatever we do must be justified as an improvement, not as rectification. If there is no injustice needing rectification, then the improvement we have a right to strive for is pareto-improvement, or in any case, improvement by mutually acceptable means. By contrast, if (contra Rawls) the natural distribution were unjust, that would open the field to all of the zero-sum and negative-sum moves that people feel warranted in imposing on each other under the guise of being fair. The right to make such moves with other people’s money becomes an overwhelmingly lucrative political football, luring a society’s entrepreneurial talent into politics, where instead of creating new social capital, entrepreneurs spend their time inventing clever new ways of dividing it. (Rawls could note that money being in the possession of others does not entail that the money is rightfully theirs, but Hayek is doing social science here. Hayek would not deny the plain fact that people can and often do treat other people’s possessions as a political football, and sometimes even invent theories according to which they have a right to do so. Hayek is talking about the actual empirical cost of treating other people’s possessions as a political football, not the theoretical possibility.)
In Hayek’s mind, we should want a system of justice to be a framework that helps us to coordinate on a set of mutual expectations that we each find useful in helping us stay out of each other’s way as we each set a course for our individually chosen destinations. No principle of justice would pick our destination for us. Neither would it require us to justify our destination to others. Indeed, the premium would be on people not needing to justify themselves. If we operated by end-state principles of justice (Nozick 1974), we would need to justify every move that bore on how goods would be distributed in the evolving end-state, which is to say we would need to justify virtually every trade we contemplate, which would gridlock us rather than facilitate our inventing new ways of making ourselves more valuable to the people around us.
Perhaps Hayek is overreacting here. In any case, some philosophical interpretation is unavoidable, but this, arguably, accounts for Hayek’s seemingly dogmatic dismissal of end-state principles of justice. For reasons reminiscent of Nozick’s, Hayek finds such principles unaffordable, and incompatible with autonomous agents minding their own business in a free society. Indeed such principles make it impossible to say what could count as minding one’s own business. In that respect, in trying to carve out a coherent realm of individual autonomy, Hayek is, as he often claimed, paradigmatically a liberal, not conservative.
5.1 Input, Output, and What It Means To Economize
Merit, as Hayek understands it, concerns the character of the action as opposed to the nature of the achievement (Hayek 1960, 94). In other words, to Hayek, claims of merit concern the inputs one brings to a process, not the output. In Hayek’s mind, nothing good can come of that. In a free society, to Hayek, we are rewarded for our output, not our input (Hayek 1960, 98).
Hayek has an important point. Among his core concerns is the “mirage” of thinking that justice requires rewarding people for supplying inputs rather than for supplying outputs. Admittedly, if we leave customers to their own devices, output is what they will reward, which is what Hayek wants. By the same token, when people left to their own devices choose to reward us for our output, their behavior will not be utterly insensitive to merit. The tendency of market rewards to track merit will be merely a tendency, but meritocracy being merely a tendency is not the same as meritocracy being a mirage. A key element of the success of a system in promoting prosperity will be that in rewarding excellent output, it will be rewarding the hard work, courage, alertness, and commitment that makes for excellence. It will be rewarding luck too, to be sure, but typically not sheer random fluke.[9] Hayek speaks as if merit has everything to do with trying hard, and nothing to do with achieving excellence.
Hayek says we want to economize on merit (Hayek 1960, 96). If merit were tied exclusively to supplying inputs, then Hayek would be right. But even so, saying we economize on hard work is another way of saying hard work is important. It is not evidence that we are in the grip of a mirage when we imagine that we have reason to reward hard work that culminates in excellent output.
In sum, a merit theorist might concede to Hayek that rewards ought to track actual performance, not inner merit. Customers can judge your product’s merits without needing to know whether you were lucky. The crucial point is that wherever it is more rewarding to work hard than not, more rewarding to do excellent work than not, more rewarding to be alert to customer needs than not, a system is tending to reward the right things. In that system, output will tend to be increasingly excellent over time. Products will tend to work. People will tend to prosper, and will tend to aim at being meritorious to boot.
5.2 The Right To Distribute
As noted, Hayek’s critique of social justice is more specifically a critique of centrally planned distribution according to merit. He thinks a merit czar would be intolerable. However, what Hayek found nightmarish about this vision clearly had more to do with an abhorrence of central planning than of the idea that it would be good to have a way of rewarding merit. If Hayek is right that there is no place for centralized decisions about meritoriousness in a good society, then, contra Hayek, the implication is not that merit does not matter but precisely that it does (Hayek 1976, 64). The problem with merit czars in the world we know, Hayek seems to assume, is that, in a merit-based system, if you cannot prove you deserve G, that licenses merit czars to redistribute from the less to the more deserving. The point is crucial not because it refutes Hayek but because it reveals the exact nature of Hayek’s real concern. Hayek’s core concern is not the mirage ofthinking merit does matter, but the mirage of thinking entitlement doesn’t.[10]
5.3 Fair Practices
Note the similarity between Hayek’s view and the view expressed by John Rawls in “Two Concepts of Rules” (1955). Hayek and Rawls both understood what is involved in a practice having utility. To use Rawls’s example, the practice of baseball is defined by procedural rules rather than by end-state principles of distributive justice. To have a practice at all, we must be dogmatic (Hayek would say) about how many strikes a batter should get.
Imagine changing the concept of the game so that the umpire’s job is to make sure the good guys win. What would that do to the players? What would become of their striving? The result of the change would not be baseball. If we end up with a game where the umpire is making sure the favored side wins, then the players are sitting on the sidelines watching, hoping to be favored. Hayek’s insight (and Rawls’s insight at that stage of his career) is that genuine fairness is not about making sure prizes are properly distributed.[11] It is not even about making sure outcomes are not unduly influenced by morally arbitrary factors such as how well the players played or how hard they worked to develop their talent. True fairness is about being impartial, nonpartisan—proverbially, “letting the players play.”
One of Hayek’s problems with the kind of justice that amounts to making sure the good guys win is that it tends to turn society’s basic structure into a political football, which tends to squander gains from trade. To Hayek, again, true justice is about letting the players play, in the same way as pareto-improving economic coordination is about letting the players play.[12]
5.4 Just Price
Whether we realize gains requires only that we trade, not that we trade at any particular price. Thus, we don’t want to focus on price when the wealth of nations has everything to do with gains from trade and nothing to do with price.
Indeed, Hayek observes, being obsessed with just price would make trading less likely, which would tend to squander some of the cooperative surplus. Much of Hayek’s aversion to justice stems from a sense that (for thousands of years) talk of justice has had a way of turning into talk of just price (Hayek 1976, 73). This makes prices appear morally important, which to Hayek is a mirage.[13] Of Adam Smith’s butchers and bakers, Hayek says,
Precisely because they were interested only in who would offer the best price for their products, they reached persons wholly unknown to them, whose standard of life they thereby enhanced much more than they could have that of their neighbors… (Hayek 1978b, 60).
Hayek’s dismissal of social justice as a mirage is a gratuitously tendentious way of packaging his actual view. However, the motive for his dismissal is understandable: namely his dread of the prospect of licensing a justice czar to intervene to make sure prices are fair, thus derailing the wealth-creating spontaneous trading of a free society within the rule of law. Paraphrasing Michael Munger (2013), the closest thing we have to an omniscient social planner are the twin forces of supply and demand, but those forces speak to people through prices. When the state makes it a crime to charge what the market will bear, it can thereby become illegal for insulin users to respond to a power failure by outbidding beer drinkers for insulin-preserving ice as supply runs short. In a case like that, the law has struck dumb the only voice that could give people reliable, timely advice on how resources need to be allocated right now. This is Hayek’s ultimate concern throughout his writings, and it also underlies his otherwise ill-fitting polemic against social justice. To Hayek, it is simply a mirage to think fairness has anything to do with stopping the price mechanism from telling us where our services are most in need.
Hayek never doubts that we sometimes need legislation, but he thinks the aim of legislation should be to make things better, not fairer; to make things more productive, not more level; to channel innovative thinking in the direction of wealth creation, not wealth capture. Hayek in fact endorses norms of pure procedural justice, and would agree that there is such a thing, after all, as fairness. True fairness, he would say, is about letting players play on a more or less level playing field, but he would insist that this is not about making sure everyone wins their share. Hayek saw a free society as one where people stand or fall on the basis of how well they perform, not how hard they try—what they produce, not what they intend.
6. The Austrian School
Hayek’s economic education at the University of Vienna was within the law faculty. Hayek’s degrees were in political science, jurisprudence, and economics. His dissertation work was on the technical topic of the imputation of value in a capital-using economy, and his early professional work focused on monetary theory and business cycle statistics. As with other scholars of the Austrian School of Economics, the institutional framework within which economic activity takes place was never far from the foreground of even the most technical economic analysis. Law, politics, and social mores all are critical to the way Austrian economists see economic forces playing out in the real world.
Critical to the Austrian examination of the operation of the competitive market process is the primacy placed on property rights, relative prices, and profit-and-loss accounting. The emphasis on institutional infrastructure informed Austrian perspectives on price theory and the market system, on monetary and capital theory, and on obstacles to socialist economic planning in particular and to interventionism more generally. To Hayek, the idea of prices without property is a grand illusion, and efforts to control economic activity through prohibitions and regulations are plagued by unintended consequences and unforeseen costs.
Hayek’s growing frustration with the conversation among elite economists during the 1930s and 1940s was born out his utter surprise that the institutional wisdom passed down from classical political economists to the early neoclassical economists was being lost. He saw wanted to know why. He explored the rise of formalism and an emerging shift toward macro-theory emphasizing relationships between aggregate variables unconnected to the choices of individuals. To Hayek, these shifts were technical in part, but the technicality was masking (and partly driven by) a deeper philosophical shift from seeing the human condition as complex as a relatively simple machine that a good mechanic could tinker with and perfect. The whole idea of studying the human condition as a complex spontaneous order came to seem unscientific. Thus, in “The Use of Knowledge in Society”, Hayek says the maximizing and equilibrium thinking of mathematical economics “habitually disregards” essential parts of the phenomena to be explained, and in so doing “misleads some of our leading thinkers” (1944, 91).
The issue Hayek concerns himself with in The Counter-Revolution of Science was the wrong turn in the philosophy and history of ideas that confused the current generation about the nature of the social sciences and the institutions of liberalism and the principles of justice. His sustained explorations of legal philosophy and political theory sought to counter excessive formalism, excessive aggregation, and a naïve empiricism that in his mind conspired to produce the intellectual dead-end of scientism: that is, an inappropriate and uncritical application of the methods of the natural sciences to the problems of social science. In articulating his critique, Hayek would stress over the next several decades the case for methodological dualism, and the method and approach for the sciences of complex phenomena.
6.1 Subjectivism
As a student of the Austrian School of Economics, Hayek was a subjectivist as well as a marginalist in his approach to studying human decision making. The value of goods and services resides in the judgment of the individual chooser, and is not inherent in the goods and services themselves. Neither are prices posted in the market merely a summation of costs of production. Value, costs and the expectations of individuals choosers are driven individual buyers and sellers assessing tradeoffs. (To give a concrete example, owners of gas stations may hike the retail price of gasoline in response to breaking news of a supply problem in the middle east. The news does not affect the price of gas already in their storage tanks, but it does affect their assessment of what the wholesale price of gasoline will be next time they are buying new supplies so that they can stay in business. Retail customers see the hike as gouging because they don’t understand that profit from current sales is what has to pay for new supplies.) Thus, Hayek’s point in calling the valuation process subjective is not to say it is a matter of opinion. Rather, it is a process of perceiving reality as needing one response rather than another.
Economic science begins with purposeful human action. And, as social scientists we can interpret human action in terms of beliefs, desires and intentions. “To employ a useful metaphor,” Hayek argued, “while in the world of nature we look from the outside, we look at society from the inside; while, as far as nature is concerned, our concepts are about the facts and have to be adapted to the facts, in the world of society at least some of the most familiar concepts are the stuff from which the world is made” (1948, 76).
Hayek’s mentor, Ludwig Mises, stated the argument as follows in his treatise of economics, Human Action (1949, 92): “Economics is not about things and tangible material objects; it is about men, their meanings and actions. Goods, commodities, and wealth are all the other notions of conduct are not elements of nature; they are elements of human meaning and conduct. He who wants to deal with them must not look at the external world; he must search for them in the meaning of acting man.”
A favorite example among Austrian School economists was to imagine a scientist from Mars studying patterns in the New York subway Our scientific Martian will observe that at 8:00am that there will be bodies and boxes, and the boxes will pick up the bodies and move. Then, at 5:00pm, those boxes will come back to the same places and bodies will leave the boxes. This observer could develop a study of moving boxes and bodies and offer predictions. But can our observer truly understand the phenomena under investigation without reference to the purposes and plans of the actors involved, and thus rather than seeing boxes and bodies, we come to understand the pattern of action associated with commuting to work. Fritz Machlup tried to capture this idea when he penned an essay under the title: “What if Matter Could Talk?” The social sciences are indeed engaged in scientific inquiry, but the subject of study was radically different because we are what we study.
6.2 Complexity
In addition to the uniqueness of the human sciences, the Austrian School of Economics emphasized the passage of time, the uncertainty inherent in human decision making, and the complexity of the economic order. The complexity aspect is not new to the Viennese economists, but can be seen in Adam Smith’s discussion at the beginning of The Wealth of Nations of the division of labor and the spontaneous far-flung patterns of cooperation required to such mundane things as a worker’s woolen coat. The number of exchanges, Smith states, exceeds all computation. The Austrian School added to this computational complexity the idea of ceaseless change that requires constant adaptation and adjustment to the shift in circumstances, including changes in tastes, technology and resource availability. The understanding of the price theory and the market system from the early development by Menger and Bohm-Bawerk, and the more mature formulation in Mises and Hayek argued that a proper understanding of the market economy did not strive to depict the efficiency properties of the end-state, but the adaptive and learning aspects of the system.
Hayek’s intellectual adversaries shifted in the second half of his career, though of course there are common themes. But the German Historicist and the Collectivist Positivist were no longer the animating force they were in the first half of the 20th century. Logical positivism was also transformed. One of the remnants from the influence of Scientism, however, was in Hayek’s mind a failure to address the essential complexity of the social world. As a consequence, his methodological writings in the 1960s and 1970s tend to stress not subjectivism and the human sciences, but the differences between the sciences of simple phenomena and the sciences of essential complexity.
6.3 Toward a Science of the Open Society
Again, Hayek was born in 1899, and born in Vienna. That is to say, Hayek grew up in a glorious age of Viennese culture only to see it evaporate before his eyes with WWI, the Great Depression, the rise of socialism and fascism, WWII, and the Cold War. Hayek fought in WWI. He was among those who left Vienna in the early 1930s never to return. He experienced WWII in his adopted home of Great Britain. Like others of his generation, these experiences were pivotal. He saw totalitarianism distorting science and scholarship, as did two of his philosophical friends: Michael Polanyi and Karl Popper. Despite their differences, Hayek drew inspiration from and helped promote the work of Polanyi and Popper. Totalitarian systems inevitably end up being hostile to the critical attitude at the heart of scientific inquiry. Hayek, Polanyi and Popper all saw this in the 1930s and 1940s, and in their separate ways sought to describe and defend the science of a free society.
Bibliography
Primary Literature: Work by Hayek
• 1944, The Road to Serfdom, Chicago: University of Chicago Press.
• 1945, “The Use of Knowledge in Society,” American Economic Review, 35: 519–30.
• 1948, Individualism and Economic Order, Chicago: University of Chicago Press.
• 1952, The Counter-Revolution of Science, Glencoe,IL: Free Press.
• 1958, “Freedom, Reason, and Tradition,” Ethics, 68: 229–45.
• 1960, The Constitution of Liberty, Chicago: University of Chicago Press.
• 1969, Studies in Philosophy, Politics, and Economics, London: Routledge.
• 1973/76/79, Law, Legislation, and Liberty, in 3 volumes, Chicago: University of Chicago Pres).
• 1978a, “Coping with Ignorance,” Imprimis, 7: 1–6.
• 1978b, New Studies in Philosophy, Politics, Economics, and the History of Ideas, London: Routledge.
• 1988, The Fatal Conceit: The Errors of Socialism, W. W. Bartley III (ed.), Volume 1 of The Collected Works of F. A. Hayek, Chicago: University of Chicago Press.
Secondary Literature
In addition to the sources below, as a general reference, see the Review of Austrian Economics.
• Boettke, Peter J., 1995. “Hayek’s Road to Serfdom Revisited: Government Failure in the Argument Against Socialism,” Eastern Economic Journal, 21: 7–26.
• Buchanan, James M., and Gordon Tullock, 1962. A Calculus of Consent, Ann Arbor: University of Michigan Press.
• Burczak, Theodore, 2009. Socialism After Hayek, Ann Arbor: University of Michigan Press.
• Caldwell, Bruce J., 2004. Hayek’s Challenge: An Intellectual Biography of F.A. Hayek, University of Chicago Press.
• Critical Review, 1997. Special Issue on F. A. Hayek, 11: 1.
• Feser, Edward (ed.), 2006. The Cambridge Companion to Hayek, Cambridge: Cambridge University Press.
• Gray, John, 1984. Hayek on Liberty, Oxford: Basil Blackwell.
• Machlup, Fritz (ed.), 1976. Essays on Hayek, Hillsdale: Hillsdale College Press.
• Mises, Ludwig, 1949. Human Action, New Haven: Yale University Press.
• Munger, Michael, 2013. “They Clapped: Can Price-Gouging Laws Prohibit Scarcity?” See below, under “Other Internet Resources”
• Nozick, Robert, 1974. Anarchy, State, and Utopia, New York: Belknap.
• Pennington, Mark, 2011. Robust Political Economy, Northampton, MA: Edward Elgar.
• Rawls, John, 1955. “Two Concepts of Rules,” The Philosophical Review, 64: 3–32.
• –––, 1971. A Theory of Justice, Cambridge: Harvard University Press.
• Shearmur, Jeremy, 1996. Hayek and After: Hayekian Liberalism as a Research Programme, London: Routledge.
• Smith, Adam, 1790. Theory of Moral Sentiments, Indianapolis: Liberty Fund, 1984.
• Tebble, Adam, 2015. Epistemic Liberalism: a Defense, London: Routledge
• Zwolinski, Matt, 2008. “The Ethics of Price-Gouging,” Business Ethics Quarterly, 18: 347–78.
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POLITICAL THEORY – Friedrich Hayek
The leading theorist of modern right-wing political movements was an Austrian economist called Friedrich Hayek.
https://www.youtube.com/watch?v=SHsCkinrCPE
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1. 1974 Friedrich August von Hayek - Nobel Prize for Economics
2. Friedrich August von Hayek 'Emergencies' have always been the pretext on which the safeguards of individual liberty have been eroded.'
3. Friedrich August von Hayek 'Nobody with open eyes can any longer doubt that the danger to personal freedom comes chiefly from the left.'.
4. Friedrich August von Hayek 'The idea of social justice is that the state should treat different people unequally in order to make them equal.'
Background from {[ https://plato.stanford.edu/entries/friedrich-hayek/]}
Friedrich Hayek
First published Sat Sep 15, 2012; substantive revision Fri Apr 16, 2021
Friedrich Hayek was born in Vienna in 1899 into a family steeped in academic life and scientific research. He worked as a statistician from 1927–31, became a Lecturer in Economics at the University of Vienna in 1929, then moved to the University of London in 1931, the University of Chicago in 1950, and the University of Freiburg in 1962, retiring in 1967. He kept writing into the 1980s, dying in 1992.
Hayek worked in the areas of philosophy of science, political philosophy, the free will problem, and epistemology. For all that, Hayek was more hedgehog than fox. His life’s work, for which he won a Nobel Prize in Economics in 1974, illuminated the nature and significance of spontaneous order. The concept seems simple, yet Hayek spent six decades refining his idea, evidently finding elusive the goal of being as clear about it as he aspired to be.
This essay concentrates on this enduring theme of Hayek’s work, and a question: why would the scholar who did more than anyone in the twentieth century to advance our understanding of price signals and the emergence of spontaneous orders also be driven to claim “that social justice is a mirage” (Hayek 1978b, 57)?
• 1. Price Signals and Spontaneous Order
o 1.1 Order Can Be Undesigned
o 1.1 Order Can Be Unpredictable
o 1.3 Order Can Embody Essentially Decentralized Information
o 1.4 Communities Tend To Be Spontaneous Orders
• 2. Progress
• 3. Planned Orders Are Inferior
o 3.1 Trucking, Bartering, Community, Esteem
o 3.2 Law As An Ecological Niche
• 4. Justice as Impartiality, Politics As Entrepreneurship Without Restraint
• 5. Hayek Against Justice
o 5.1 Input, Output, and What It Means To Economize
o 5.2 The Right To Distribute
o 5.3 Fair Practices
o 5.4 Just Price
• Bibliography
o Primary Literature: Work by Hayek
o Secondary Literature
• Academic Tools
• Other Internet Resources
• Related Entries
________________________________________
1. Price Signals and Spontaneous Order
1.1 Order Can Be Undesigned
Over hundreds of millions of years, order emerged in the natural world. How? It is only human to wonder. “Design arguments” come to mind, but like most philosophers, Hayek considers such arguments fallacious as arguments that we need to posit a designer to explain the emergence of order in nature. (See the entry on teleological arguments for God’s existence.) Hayek, however, was frustrated to find the same fallacy in arguments that we need to posit a designer to explain the emergence of order in society (Hayek 1960, 59).
Just as no one had to invent natural selection, no one had to invent the process by which natural languages evolve. A language is a massively path-dependent process of unending mutual adjustment. Language evolves spontaneously. It would make no sense to call any language optimally efficient, but it does make sense to see languages as highly refined and effective adaptations to the evolving communication needs of particular populations (Hayek 1945, 528).
It would be no exaggeration to say that social theory begins with—and has an object only because of—the discovery that there exist orderly structures which are the product of the action of many men but are not the result of human design. In some fields this is now universally accepted. Although there was a time when men believed that even language and morals had been invented by some genius of the past, everybody recognizes now that they are the outcome of a process of evolution whose results nobody foresaw or designed (Hayek 1973, 37).
1.2 Order Can Be Unpredictable
Natural selection operates on mutations, making the path of natural selection unpredictable, regardless of how well we understand the underlying principles. To Hayek, social and cultural evolution are much the same: driven by innovation, fashion, and various shocks that “mutate” people’s plans in unpredictable ways with unpredictable results. The system may be more or less logical. Most things seem in retrospect to have happened for a reason. Yet, however logical the system may be, its logic does not render the system deterministic. We can make predictions in the broadest sense, such as when we say that increasing the money supply causes prices to rise, other things equal, but we have no basis for predicting the fine details. The system is technically chaotic, to such a degree that even something as straightforward as next week’s stock prices will always remain a matter of guesswork even for experts. (See the entry on chaos.)
1.3 Order Can Embody Essentially Decentralized Information
To Hayek, prices are like languages. How do we know what it will take to get our product to whomever wants or needs it most? Maybe we take bids. As we (and our rivals) take bids for x, x comes to have a price. As with language, prices enable people to form mutual expectations. Free-floating prices help people coordinate in intricate and mutually considerate ways as they individually decide what to produce or consume. To think that an authority needs to decide what the price of rice ought to be is like thinking that an authority needs to decide what sound people should make when they want to refer to rice.
It is a mundane yet intriguing fact that price signals induce people to respond to information they do not possess: such as the changing cost of drilling, or the discovery of a cheap substitute, or that political unrest has made a key input harder to acquire. Having no inkling of those variables, buyers nevertheless respond to them in a rational way, because they know the one thing they need to know: namely, the price (Hayek 1978a, 4).
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 (Hayek 1945, 526).
1.4 Communities Tend To Be Spontaneous Orders
What emerges from the haggling is not only a deal, but something larger: a community. There was no central decision about who should produce tin, or whether anyone should; no central decision about who should consume tin, or whether anyone should; no central decision about what should be given in return for tin. All that happened is that some people guessed that if they were to produce tin and bring it to market, it would be worth something to customers—enough to make the venture worthwhile. When some of these guesses prove correct and trades are consummated, a market in tin emerges and becomes part of what brings people together as partners in mutually beneficial ventures.
Price signals thus economize on information. In the process, they induce patterns of cooperation that involve multitudes. Cooperation evolves among people who need not share a language, need not be aware of each other’s existence, and need not be aware of their mutual dependence. They are only vaguely aware of the thousands of jobs that need doing so as to supply inputs that enable them to have a finished product to sell. Particular agents seldom if ever have more than a glimpse of the big picture, yet they manage to come together to form a community, and almost all are vastly better off as a result.
2. Progress
Technological progress extends the frontiers of the possible. To Hayek, it is the freedom of the few to do something novel that matters most, not the freedom of the many to do something familiar. Accordingly, the freedom I exercise myself often is not the freedom that has the most bearing on my future (Hayek 1960, 32). Consider that early adopters finance research that brings down production costs and thus finances a dispersion of products and services at falling prices that eventually bring late adopters like me to the market. I may never trade with early adopters, yet even so I depend on them, for they help to finance the invention and ongoing re-invention of products whose marginal cost eventually falls to a point where I can afford them.
Often, technological progress consists of innovations that lower transaction cost: steam boat, railroad, air travel, telegraph, telephone, internet, bar code reader, “apps” that make possible such businesses as Uber and AirBnB, along with innovative organizational structures and business models such as Federal Express or container ships (which, after a ten-year legal battle with trade unions, reduced from days to minutes the time that a truck’s contents would spend at the dockyard before being transferred to a ship). In many cases, the cost of transacting concerns the cost of information. As the frontier of knowledge expands, the slice that a given individual can grasp inevitably becomes a smaller fraction of the whole. Prices become an increasingly indispensable window to a world of tacit knowledge.
In summary, technological innovation shocks economies. Formerly profitable investments become relics of a bygone age and must be liquidated. Workers get laid off until they find some other way to produce goods wanted by today’s customers. Transitions are tough, miscalculations abound, but the upshot is that we grope toward heights made possible by a given innovation. Innovative ways of lowering transaction cost spread throughout a community, and failures (including once-useful but now obsolete innovations) are discarded. More precisely, failures are discarded if and when decision makers are innovators on the ground, learning to avoid losing their own money on ideas that fail to bear fruit in a given time and place.
Hayek denies that resources will ever be used at theoretical peak efficiency (1945, 527). Humans being what they are, waste is ubiquitous. Mistakes are ubiquitous. The “marvel” of markets is that people make mistakes, get burnt, learn fast, and make corrections. By contrast, if decision makers are bureaucrats in large organizations, their focus is not on avoiding mistakes but on avoiding budget cuts. If bureaucrats acknowledge that their plan is failing, the consequences is not that they retrench and divert their own resources to better purposes but that their supervisors cut their budgets. Note: what cuts their budget is not the mistake so much as someone learning from the mistake. Bureaucratic structure makes new information a threat that needs to be suppressed, or smothered in propaganda (1944, 126ff, 153ff).
Bureaucrats and their expert advisors experience mistakes not as events from which they need to learn but rather as events that they need to cover up. Their mistakes are with other people’s money, so bureaucrats learn to say with a straight face, when confronted, that their budget was not large enough, or that things would have been worse without their policies.[1] They may even believe what they are saying, but they do not know and have every incentive to avoid learning.
3. Planned Orders Are Inferior
If we understand the principles that drive the logic of the system, we may be able to predict that a population of insects will evolve resistance to a pesticide. We may be able to predict that a society that declares war on drugs will lose. Beyond the question of what we can predict, then, Hayek has a further and more precise target: however much we can predict, there is a drastic limit to what we can simply decide.[2] No one can decide that people won’t respond in predictable ways to perverse incentives unintentionally created by a central plan, in the same way that no one can decide that insects will not become resistant to an insecticide.
This point, as Adam Smith observed, is not obvious. There is a class of technocrats who will not appreciate the difficulty. As Smith famously observed, and as Hayek quotes approvingly, the “man of system”
seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder (Smith 1790, 234).
The system has a logic. Planners cannot change that logic. Their main decision is whether to work with that logic or against it (which Smith regards as a choice between harmony and misery). Smith holds that planners who disregard economic logic are deciding in effect to sacrifice their “pawns,” something that a person of true benevolence would not do.
When Hayek explains the obstacle to effective central planning, his claim is not merely the Smithian point that information is widely dispersed and therefore hard to acquire. Rather, it is impossible to acquire (Hayek 1973, 51). When prices are set periodically by a central planner, rather than instantaneously by consumers and producers who are the first and typically the only people to have that information in reliable and timely form, prices inevitably carry less reliable, less timely information. As Hayek notes,
If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic. That is, the answer to the question of what is the best use of our available means is implicit in our assumptions. This, however, is emphatically not the economic problem which society faces. And the economic calculus which we have developed to solve this logical problem, though an important step toward the solution of the economic problem of society, does not yet provide an answer to it. The reason for this is that the “data” from which the economic calculus starts are never for the whole society “given” to a single mind which could work out the implications and can never be so given (Hayek 1945, 519).
Soviet central planners made decisions by checking prices on international markets, but suppose there were no information about supply and demand to be had anywhere. Suppose you are a planner, but all you know is that demands are coming in for wire and for jewelry. How do you decide whether to direct factories to make wire out of copper or platinum, or whether smiths should make jewelry out of gold or silver? How do you decide who should get silver jewelry and who should get gold? How do you decide whether anyone at all should get jewelry, as opposed to reserving all such metals for use as wire?
When consumers are not paying for what they receive, their demand is effectively infinite. Inevitably, a central planner’s task becomes one of cost containment. Worse yet, a planner with no measure of cost has only a limited basis for deciding what to count as containing cost. If a given ton of steel can make one car or ten refrigerators, which way of using steel is economical? How does a planner decide whether to invest in upgrading water supplies or nuclear reactors? If all you know as a producer is that people are asking for infinitely more than you can give, then eventually you turn a deaf ear, deliver your quota, and pay no attention to whether demands from below (from customers) are being met. The only demands that have consequences are demands from above (that is, those which come to you through your supervisors).
Suppose that prices are set by planners. Hayek says with a thought more characteristic of neoclassical economists: “Only prices determined on the free market will bring it about that demand equals supply” (Hayek 1960, 63). Price controls—floors and ceilings—make buyers and sellers less able to respond to the signals they would send each other if they could raise their offer or lower their asking price. If price cannot rise, then buyers cannot signal producers that demand has increased and that producers would sell more if they were to increase supply. And if producers do not increase supply, rising demand results in shortages rather than economic growth. (See especially Zwolinski 2008 for further elaboration.)[3]
A central planner could have the world’s most powerful computer, beyond anything imagined when Hayek published “Use of Knowledge” in 1945. No computer, however, could solve the problem that Hayek was trying to articulate. The problem is not lack of processing power so much as a lack of access to the information in the first place. That much seems clear enough, but the problem has a deeper level. Hayek may not have said this in so many words, yet it seems the most charitable way of reconstructing his more fundamental point. That is, the problem is not merely lack of access to information; rather the information does not exist. There is no truth about what prices should be, accessible or otherwise, except to the extent that prices represent what customers are paying for a given service. This is the precise way in which prices are of service to a community (1944, 51–52).
For example, suppose that a manufacturer figures out how to make an “epipen” that can save the lives of consumers otherwise at risk of fatal allergic reaction to bee stings. Suppose the manufacturer can produce a limited supply of epipens for a little less than a hundred dollars each, and proceeds to offer them for sale for a hundred dollars. Suppose that the manufacturer finds that buyers line up by the thousands wanting to buy the pens, and suppose that there emerges a group of “scalpers” willing to stand in line for weeks, who buy all the pens for a hundred dollars each, then resell the pens for two hundred dollars, then three hundred, then four, and demand remains strong. Hayek would predict that if we let the price signals be the marvels that they are, then other producers will jump in and begin to manufacture pens for one or two hundred dollars each. Eventually the demand is met, and the scalpers go away. Meanwhile, new producers drawn by the spike in profitability invent a new process that enables them to produce the pens for ninety dollars, then eighty, and again the price will fall, as competition leads the price signal to track the falling cost of production. Of course, if we issue a patent or a licensing scheme or some other way of preventing rival producers from entering the market, then this will not occur. By the same token, if we impose a price ceiling of a hundred dollars, then no signal is sent to prospective rivals, unless scalpers send the signal to rivals willing to produce for the black market. Or if there is some other reason why it is impossible to increase the supply, then prices may drift up toward the limits of a customer’s willingness to pay. Barring this, there are many ways for kings, legislators, or other planners to interfere, but price signals, if left alone, are an inimitably rapid and incomprehensibly vast generator of information: supply and demand tend to equilibrate, and to converge on a price in the neighborhood of the cost of production. To a uniquely reliable degree, a product will tend to end up in a consumer’s hands just in case that particular consumer wants the product enough to pay what it cost to produce it.
Although computers cannot solve the problem, Hayek thought radically dispersed decision making by buyers and sellers can and does solve the problem, so far as it can be solved. Sellers who charge too much end up without customers; they learn to be more efficient or else find some other line of work. [4] Buyers who want x but consider it overpriced stay home for a while, waiting for the price to fall, but when they see x flying off the shelves, some of them learn something about themselves: that they would rather have the product at that price than not have it at all. To Hayek, only a price mechanism can process changing information almost instantaneously. Ironically, the most efficient thing a central planner could possibly do would be to set a price right where it would have been without the planner’s intervention.
3.1 Trucking, Bartering, Community, Esteem
Insofar as society is a cooperative venture for mutual advantage, learning to survive—not just physically but as full members of a community—will involve learning to cooperate. Learning to cooperate involves learning to become a trading partner. In other words, cooperation begins with having something to offer: a way of making people better off.
Clearly in Smith, who inspired Hayek, but also in Hayek himself, one infers that the driving motivation is not greed or even well-being so much as a propensity to truck and barter, where this deal-making is not only a means to an end but somehow also something we do for its own sake, because making deals is what our kind of social animal was born to do. Neither, Hayek thought, is the objective for buyers and sellers to coordinate on a price that a central planner might stumble on, but to coordinate, period. Mutually satisfying coordination, the ongoing equilibration of supply and demand, constantly evolving in response to changing conditions, is itself the achievement. There is no need for that coordination to be tracking anything beyond itself. To Hayek, the value that we hope to see realized in a marketplace is not so much that the correct volume of goods gets exchanged at the correct price. Rather, the genesis and point of the division of labor is not only a prospect of realizing gains from trade but trade per se. The valued result is buyers and sellers responding to each other, becoming more attuned to what people around them want, and helping to create a community in which their role in an important one.
Such sensitivity is good, but there is little that central planners can do to encourage it. Central planners replace what could be a complex, decentralized network of interdependence and mutual responsibility with something more like a society of spokes tethered to a central distributor at the hub but otherwise dangling. It is no substitute for real community.
3.2 Law As An Ecological Niche
In nature, for biological adaptation to culminate in better-adapted populations over time, the niche to which a population is adapting must be relatively stable. Likewise, under a rule of law, the aim of government is not to win but to provide a stable ecological niche that enables the game’s true players to evolve strategies apt for success within that niche. An elaborate crystal structure cannot form unless the medium in which crystals form is left undisturbed. Hayek’s ideal is a legal “medium” of society, liberal enough to permit creativity, stable enough to reward creativity, and constraining enough (in the right ways) to steer creativity away from zero-sum and negative-sum games and toward positive-sum games: that is, wealth creation, not wealth capture.
Here, then, in a few sentences, is one way of understanding Hayek’s point. Not everything that happens in an evolving community is foreseen or intended. Actions have more than one consequence, and more than the intended consequence. This is especially so when there is more than one decision maker. No one follows a planner’s plan simply because the planner intends that they do so. People adjust to the planner’s plan in service of their own plans rather than those of the planner, and the result is too chaotic to be safely predictable. Further, the rule of law itself is an evolving product of ongoing decision making, so it likewise takes a shape not intended by any legislator. Does this mean that every order is tautologically a spontaneous order? The answer: it is a universally true empirical generalization, not a tautology, that every social organization, even a dictatorship, is partly an ongoing product of ordering processes that are to some degree spontaneous. However, while the degree to which outcomes are unintended is a continuum, there remains a point in categorizing communities as centrally planned versus spontaneous. A central plan is designed to yield an end-state. The plan aims to bring about particular outcomes—what roles people will play, what they will achieve in those roles, and what they will win by so achieving. By contrast, in what we should call spontaneous order, government provides a stable and known framework of rules, aiming not to realize a particular outcome so much as to realize a particular process (Hayek 1944, 113). Although this ideal can never be fully achieved in practice, a government under rule of law acts as referee and provider of the rule book (Hayek 1960, 114) and operates as much as possible by an ideal of “letting the players play.”
Is letting the players play good? Necessarily good? Adam Smith might have said no, as might Hayek. A praiseworthy rule of law—a praiseworthy market process— facilitates mutually beneficial trade by internalizing externalities, by minimizing transaction cost (especially when it comes to acquiring information), by minimizing opportunities to acquire people’s goods without their consent (thereby encouraging people to trade on agreeable—thus typically beneficial—terms), and by being extremely cautious about trying to do more than that. When a government succeeds in doing that much, and further succeeds in restraining itself from trying to do more, progress is the likely result, which is not to say progress is guaranteed.
Hayek had no particular complaint about providing public education or the minimal elements of a welfare state, but not because such institutions are essential. Hayek would simply have said that such institutions need not devolve into central planning and thus need not be antithetical to a free society. Issuing vouchers, for example, to subsidize the purchase of epipens or education would to some extent distort markets in the subsidized products (having an inflationary impact on prices for those products) but it would not distort to the extent that price controls would.
4. Justice as Impartiality, Politics As Entrepreneurship Without Restraint
Hayek was a consequentialist of sorts, as was Adam Smith, and yet Hayek’s defense of economic freedom, like Smith’s, hints at a contractarian or deontological moral sensibility that regards the separateness of persons as morally fundamental. Thus, for example, Hayek says, “the test of the justice of a rule is usually (since Kant) described as that of its universalizability” (Hayek 1969, 168). As John Gray sees it, Hayek commended the laws of justice “as being the indispensable condition for the promotion of the general welfare” but Hayek held, at the same time, that “an impartial concern for the general welfare is itself one of the demands of universalizability” (Gray 1984, 65).
In service of the overall project of fostering the general welfare, the point of law and legislation is to craft a framework such that a market order is a history of pareto-improving trades.[5] A primary role of law and (when necessary) legislation is to narrow people’s options so as to limit opportunities to get rich at other people’s expense.[6] So long as the rule of law can internalize external cost and thereby steer innovation in mutually beneficial rather than parasitic directions, an evolving order will be an order of rising prosperity.
By contrast, in a planned order, even astute and conscientious decisions by men of system are damaging in a particular way. Namely, to the extent that men of system become micro-managers, they are players rather than umpires. If bureaucrats start playing the game—responding to ephemeral events with centralized fine tuning—then even if they play as cleverly as bureaucrats could possibly play, the fact remains that in consequence, the dispersed and tacit knowledge of ordinary buyers and sellers ends up on the sidelines watching. People who would have been job creators become mere spectators, hamstrung by uncertainty, waiting to see what the plan is going to be. Until they know the plan, they have no way to know, or even intelligently guess, something as simple as whether their staff is too small or too large.
Government provides the framework for interaction. Ideally, as mentioned, government operates only within a stable and known framework of rules (Hayek 1944, 113). This is Hayek’s ideal of good government. Is it realistic? Could any government be expected to act as an impartial umpire? Hayek saw the rule of law as the market’s exogenous ecological niche, and thought that this niche, the rule of law, must be properly constructed if the process of spontaneous order is be a good thing. However, Hayek seemingly came to doubt there could be any such thing as properly constructed rule of law, for the following reason. Law-making is a process driven by processes more or less indistinguishable from market process except that benefits to legislators of their law-making are concentrated while costs are widely dispersed, that is to say, external, and at best only dimly understood even after the fact.[7] This is not only a moral hazard but an information problem. A piece of legislation may be thousands of pages. No one intends the bill as a whole. Indeed, there is no overall point to the bill, known or otherwise, because, prior to passage, literally no one has even read more than a few pages of it, not even the hundreds of legislators who each added a few pages of earmarks as the price of securing their vote.
Common law, by contrast, is a body of practice and tradition that sometimes needs to be supplemented by legislation. Crucially, however, by virtue of passing the test of time as a device for settling disputes, common law cannot be seen as mere prejudice or superstition. On the contrary, it will have a decided advantage over ongoing legislation, given that legislation is driven by untested ideas about how to respond to the crises of the day, needing to be passed without anyone knowing the larger and lasting consequences. Hayek never doubted the need for legislation but lamented our propensity to be oblivious to its inevitably unintended consequences and to radically discount its inevitably unseen cost (Hayek 1973, 86).
5. Hayek Against Justice
To Hayek, it matters far more that the law be a framework for coordination than exactly what the coordination points are (Hayek 1960, 118). Hayek realizes that many coordination points have distributive implications, which leads Hayek to lament our tendency to evaluate distributions by asking whether they are just. (Yet, Hayek concedes, at least in principle, the legitimacy of a minimum income or welfare safety net of some sort. See Tebble 2015 for a sympathetic yet acute argument that this concession on Hayek’s part is a “fatal ambivalence.” In fact, Tebble argues, Hayek’s repudiation of social justice leaves him with no room to make any such concession.)
Hayek says, “one of my chief preoccupations for more than 10 years” has been coming to terms with the idea that social justice is a mirage (Hayek 1978b, 57).[8] By social justice, Hayek seems to mean distributive justice, and more specifically what Nozick called end-state principles of distributive justice, which treat justice as a feature of outcomes rather than of procedures.
Why would justice so conceived be a mirage? Hayek says, “there can be no distributive justice where no one distributes” (Hayek 1978b, 58 or 1976, 68–69). In Hayek’s words, “considerations of justice provide no justification for ‘correcting’ the results of the market” (1969, 175). So long as traders are voluntarily making pareto-superior moves, there is nothing else that can be said or needs to be said by way of justification.
Why resist applying conceptions of justice and injustice to situations where no one distributes? What is haunting Hayek here is not the idea that one person might be more deserving than another, but that a “merit czar” might presume to intervene so as to correct markets that fail to give people what the czar thinks people deserve. Fearing the potential for tyranny, Hayek argues not that markets are just but that they are not the kind of thing that can be just or unjust. Where no one distributes, there may be something lamentable about the result, but the result will not be an injustice in the way that engineering such a result would be. Outcomes that would have been unjust if deliberately imposed (such as being born with a cleft palate) sometimes simply happen. As Rawls says, “The natural distribution is neither just nor unjust; nor is it unjust that persons are born into society at some particular position. These are simply natural facts.” Hayek would agree.
Rawls, however, immediately adds what Hayek would call a non sequitur: “What is just and unjust is the way that institutions deal with these facts” (Rawls, 1971, 102), where resigning ourselves to the facts is the paradigmatically unjust way of dealing with them (ibid). If Rawls is right to deem the natural distribution neither just nor unjust, then when institutions “deal with natural facts,” they are, to Hayek, not undoing wrongs. Hayek would never deny that cleft palates are bad or that fixing them is good, but would insist that fixing what is not unjust cannot count as rectifying injustice. If we feel called upon to help children with cleft palates, it will be because having a cleft palate is bad, not because having it is unjust. When we help, we are not fixing an improper distribution of cleft plates. We are simply fixing cleft palates. When we respond to the problem, we take a stand not against injustice but against suffering (Hayek 1976, 87). As Hayek knew, he was profoundly at odds with much thinking about social justice. He expected to be vilified (1944, vii), and he was. Although he was as responsive to misfortune as anyone, and seemed to embrace the same package of duties to children as any social justice theorist would, he also saw the free world at a crossroads between a defeasible presumption that normal adults have agreed to share each other’s fate (Rawls, 1971, 102) and a defeasible presumption that normal adults have the right and the responsibility to play the cards that nature has dealt.
Hayek seems to worry that our sense of justice can make it harder for us to live together, and make progress together. To Hayek, if people cannot claim that a starting point is unjust, then whatever we do must be justified as an improvement, not as rectification. If there is no injustice needing rectification, then the improvement we have a right to strive for is pareto-improvement, or in any case, improvement by mutually acceptable means. By contrast, if (contra Rawls) the natural distribution were unjust, that would open the field to all of the zero-sum and negative-sum moves that people feel warranted in imposing on each other under the guise of being fair. The right to make such moves with other people’s money becomes an overwhelmingly lucrative political football, luring a society’s entrepreneurial talent into politics, where instead of creating new social capital, entrepreneurs spend their time inventing clever new ways of dividing it. (Rawls could note that money being in the possession of others does not entail that the money is rightfully theirs, but Hayek is doing social science here. Hayek would not deny the plain fact that people can and often do treat other people’s possessions as a political football, and sometimes even invent theories according to which they have a right to do so. Hayek is talking about the actual empirical cost of treating other people’s possessions as a political football, not the theoretical possibility.)
In Hayek’s mind, we should want a system of justice to be a framework that helps us to coordinate on a set of mutual expectations that we each find useful in helping us stay out of each other’s way as we each set a course for our individually chosen destinations. No principle of justice would pick our destination for us. Neither would it require us to justify our destination to others. Indeed, the premium would be on people not needing to justify themselves. If we operated by end-state principles of justice (Nozick 1974), we would need to justify every move that bore on how goods would be distributed in the evolving end-state, which is to say we would need to justify virtually every trade we contemplate, which would gridlock us rather than facilitate our inventing new ways of making ourselves more valuable to the people around us.
Perhaps Hayek is overreacting here. In any case, some philosophical interpretation is unavoidable, but this, arguably, accounts for Hayek’s seemingly dogmatic dismissal of end-state principles of justice. For reasons reminiscent of Nozick’s, Hayek finds such principles unaffordable, and incompatible with autonomous agents minding their own business in a free society. Indeed such principles make it impossible to say what could count as minding one’s own business. In that respect, in trying to carve out a coherent realm of individual autonomy, Hayek is, as he often claimed, paradigmatically a liberal, not conservative.
5.1 Input, Output, and What It Means To Economize
Merit, as Hayek understands it, concerns the character of the action as opposed to the nature of the achievement (Hayek 1960, 94). In other words, to Hayek, claims of merit concern the inputs one brings to a process, not the output. In Hayek’s mind, nothing good can come of that. In a free society, to Hayek, we are rewarded for our output, not our input (Hayek 1960, 98).
Hayek has an important point. Among his core concerns is the “mirage” of thinking that justice requires rewarding people for supplying inputs rather than for supplying outputs. Admittedly, if we leave customers to their own devices, output is what they will reward, which is what Hayek wants. By the same token, when people left to their own devices choose to reward us for our output, their behavior will not be utterly insensitive to merit. The tendency of market rewards to track merit will be merely a tendency, but meritocracy being merely a tendency is not the same as meritocracy being a mirage. A key element of the success of a system in promoting prosperity will be that in rewarding excellent output, it will be rewarding the hard work, courage, alertness, and commitment that makes for excellence. It will be rewarding luck too, to be sure, but typically not sheer random fluke.[9] Hayek speaks as if merit has everything to do with trying hard, and nothing to do with achieving excellence.
Hayek says we want to economize on merit (Hayek 1960, 96). If merit were tied exclusively to supplying inputs, then Hayek would be right. But even so, saying we economize on hard work is another way of saying hard work is important. It is not evidence that we are in the grip of a mirage when we imagine that we have reason to reward hard work that culminates in excellent output.
In sum, a merit theorist might concede to Hayek that rewards ought to track actual performance, not inner merit. Customers can judge your product’s merits without needing to know whether you were lucky. The crucial point is that wherever it is more rewarding to work hard than not, more rewarding to do excellent work than not, more rewarding to be alert to customer needs than not, a system is tending to reward the right things. In that system, output will tend to be increasingly excellent over time. Products will tend to work. People will tend to prosper, and will tend to aim at being meritorious to boot.
5.2 The Right To Distribute
As noted, Hayek’s critique of social justice is more specifically a critique of centrally planned distribution according to merit. He thinks a merit czar would be intolerable. However, what Hayek found nightmarish about this vision clearly had more to do with an abhorrence of central planning than of the idea that it would be good to have a way of rewarding merit. If Hayek is right that there is no place for centralized decisions about meritoriousness in a good society, then, contra Hayek, the implication is not that merit does not matter but precisely that it does (Hayek 1976, 64). The problem with merit czars in the world we know, Hayek seems to assume, is that, in a merit-based system, if you cannot prove you deserve G, that licenses merit czars to redistribute from the less to the more deserving. The point is crucial not because it refutes Hayek but because it reveals the exact nature of Hayek’s real concern. Hayek’s core concern is not the mirage ofthinking merit does matter, but the mirage of thinking entitlement doesn’t.[10]
5.3 Fair Practices
Note the similarity between Hayek’s view and the view expressed by John Rawls in “Two Concepts of Rules” (1955). Hayek and Rawls both understood what is involved in a practice having utility. To use Rawls’s example, the practice of baseball is defined by procedural rules rather than by end-state principles of distributive justice. To have a practice at all, we must be dogmatic (Hayek would say) about how many strikes a batter should get.
Imagine changing the concept of the game so that the umpire’s job is to make sure the good guys win. What would that do to the players? What would become of their striving? The result of the change would not be baseball. If we end up with a game where the umpire is making sure the favored side wins, then the players are sitting on the sidelines watching, hoping to be favored. Hayek’s insight (and Rawls’s insight at that stage of his career) is that genuine fairness is not about making sure prizes are properly distributed.[11] It is not even about making sure outcomes are not unduly influenced by morally arbitrary factors such as how well the players played or how hard they worked to develop their talent. True fairness is about being impartial, nonpartisan—proverbially, “letting the players play.”
One of Hayek’s problems with the kind of justice that amounts to making sure the good guys win is that it tends to turn society’s basic structure into a political football, which tends to squander gains from trade. To Hayek, again, true justice is about letting the players play, in the same way as pareto-improving economic coordination is about letting the players play.[12]
5.4 Just Price
Whether we realize gains requires only that we trade, not that we trade at any particular price. Thus, we don’t want to focus on price when the wealth of nations has everything to do with gains from trade and nothing to do with price.
Indeed, Hayek observes, being obsessed with just price would make trading less likely, which would tend to squander some of the cooperative surplus. Much of Hayek’s aversion to justice stems from a sense that (for thousands of years) talk of justice has had a way of turning into talk of just price (Hayek 1976, 73). This makes prices appear morally important, which to Hayek is a mirage.[13] Of Adam Smith’s butchers and bakers, Hayek says,
Precisely because they were interested only in who would offer the best price for their products, they reached persons wholly unknown to them, whose standard of life they thereby enhanced much more than they could have that of their neighbors… (Hayek 1978b, 60).
Hayek’s dismissal of social justice as a mirage is a gratuitously tendentious way of packaging his actual view. However, the motive for his dismissal is understandable: namely his dread of the prospect of licensing a justice czar to intervene to make sure prices are fair, thus derailing the wealth-creating spontaneous trading of a free society within the rule of law. Paraphrasing Michael Munger (2013), the closest thing we have to an omniscient social planner are the twin forces of supply and demand, but those forces speak to people through prices. When the state makes it a crime to charge what the market will bear, it can thereby become illegal for insulin users to respond to a power failure by outbidding beer drinkers for insulin-preserving ice as supply runs short. In a case like that, the law has struck dumb the only voice that could give people reliable, timely advice on how resources need to be allocated right now. This is Hayek’s ultimate concern throughout his writings, and it also underlies his otherwise ill-fitting polemic against social justice. To Hayek, it is simply a mirage to think fairness has anything to do with stopping the price mechanism from telling us where our services are most in need.
Hayek never doubts that we sometimes need legislation, but he thinks the aim of legislation should be to make things better, not fairer; to make things more productive, not more level; to channel innovative thinking in the direction of wealth creation, not wealth capture. Hayek in fact endorses norms of pure procedural justice, and would agree that there is such a thing, after all, as fairness. True fairness, he would say, is about letting players play on a more or less level playing field, but he would insist that this is not about making sure everyone wins their share. Hayek saw a free society as one where people stand or fall on the basis of how well they perform, not how hard they try—what they produce, not what they intend.
6. The Austrian School
Hayek’s economic education at the University of Vienna was within the law faculty. Hayek’s degrees were in political science, jurisprudence, and economics. His dissertation work was on the technical topic of the imputation of value in a capital-using economy, and his early professional work focused on monetary theory and business cycle statistics. As with other scholars of the Austrian School of Economics, the institutional framework within which economic activity takes place was never far from the foreground of even the most technical economic analysis. Law, politics, and social mores all are critical to the way Austrian economists see economic forces playing out in the real world.
Critical to the Austrian examination of the operation of the competitive market process is the primacy placed on property rights, relative prices, and profit-and-loss accounting. The emphasis on institutional infrastructure informed Austrian perspectives on price theory and the market system, on monetary and capital theory, and on obstacles to socialist economic planning in particular and to interventionism more generally. To Hayek, the idea of prices without property is a grand illusion, and efforts to control economic activity through prohibitions and regulations are plagued by unintended consequences and unforeseen costs.
Hayek’s growing frustration with the conversation among elite economists during the 1930s and 1940s was born out his utter surprise that the institutional wisdom passed down from classical political economists to the early neoclassical economists was being lost. He saw wanted to know why. He explored the rise of formalism and an emerging shift toward macro-theory emphasizing relationships between aggregate variables unconnected to the choices of individuals. To Hayek, these shifts were technical in part, but the technicality was masking (and partly driven by) a deeper philosophical shift from seeing the human condition as complex as a relatively simple machine that a good mechanic could tinker with and perfect. The whole idea of studying the human condition as a complex spontaneous order came to seem unscientific. Thus, in “The Use of Knowledge in Society”, Hayek says the maximizing and equilibrium thinking of mathematical economics “habitually disregards” essential parts of the phenomena to be explained, and in so doing “misleads some of our leading thinkers” (1944, 91).
The issue Hayek concerns himself with in The Counter-Revolution of Science was the wrong turn in the philosophy and history of ideas that confused the current generation about the nature of the social sciences and the institutions of liberalism and the principles of justice. His sustained explorations of legal philosophy and political theory sought to counter excessive formalism, excessive aggregation, and a naïve empiricism that in his mind conspired to produce the intellectual dead-end of scientism: that is, an inappropriate and uncritical application of the methods of the natural sciences to the problems of social science. In articulating his critique, Hayek would stress over the next several decades the case for methodological dualism, and the method and approach for the sciences of complex phenomena.
6.1 Subjectivism
As a student of the Austrian School of Economics, Hayek was a subjectivist as well as a marginalist in his approach to studying human decision making. The value of goods and services resides in the judgment of the individual chooser, and is not inherent in the goods and services themselves. Neither are prices posted in the market merely a summation of costs of production. Value, costs and the expectations of individuals choosers are driven individual buyers and sellers assessing tradeoffs. (To give a concrete example, owners of gas stations may hike the retail price of gasoline in response to breaking news of a supply problem in the middle east. The news does not affect the price of gas already in their storage tanks, but it does affect their assessment of what the wholesale price of gasoline will be next time they are buying new supplies so that they can stay in business. Retail customers see the hike as gouging because they don’t understand that profit from current sales is what has to pay for new supplies.) Thus, Hayek’s point in calling the valuation process subjective is not to say it is a matter of opinion. Rather, it is a process of perceiving reality as needing one response rather than another.
Economic science begins with purposeful human action. And, as social scientists we can interpret human action in terms of beliefs, desires and intentions. “To employ a useful metaphor,” Hayek argued, “while in the world of nature we look from the outside, we look at society from the inside; while, as far as nature is concerned, our concepts are about the facts and have to be adapted to the facts, in the world of society at least some of the most familiar concepts are the stuff from which the world is made” (1948, 76).
Hayek’s mentor, Ludwig Mises, stated the argument as follows in his treatise of economics, Human Action (1949, 92): “Economics is not about things and tangible material objects; it is about men, their meanings and actions. Goods, commodities, and wealth are all the other notions of conduct are not elements of nature; they are elements of human meaning and conduct. He who wants to deal with them must not look at the external world; he must search for them in the meaning of acting man.”
A favorite example among Austrian School economists was to imagine a scientist from Mars studying patterns in the New York subway Our scientific Martian will observe that at 8:00am that there will be bodies and boxes, and the boxes will pick up the bodies and move. Then, at 5:00pm, those boxes will come back to the same places and bodies will leave the boxes. This observer could develop a study of moving boxes and bodies and offer predictions. But can our observer truly understand the phenomena under investigation without reference to the purposes and plans of the actors involved, and thus rather than seeing boxes and bodies, we come to understand the pattern of action associated with commuting to work. Fritz Machlup tried to capture this idea when he penned an essay under the title: “What if Matter Could Talk?” The social sciences are indeed engaged in scientific inquiry, but the subject of study was radically different because we are what we study.
6.2 Complexity
In addition to the uniqueness of the human sciences, the Austrian School of Economics emphasized the passage of time, the uncertainty inherent in human decision making, and the complexity of the economic order. The complexity aspect is not new to the Viennese economists, but can be seen in Adam Smith’s discussion at the beginning of The Wealth of Nations of the division of labor and the spontaneous far-flung patterns of cooperation required to such mundane things as a worker’s woolen coat. The number of exchanges, Smith states, exceeds all computation. The Austrian School added to this computational complexity the idea of ceaseless change that requires constant adaptation and adjustment to the shift in circumstances, including changes in tastes, technology and resource availability. The understanding of the price theory and the market system from the early development by Menger and Bohm-Bawerk, and the more mature formulation in Mises and Hayek argued that a proper understanding of the market economy did not strive to depict the efficiency properties of the end-state, but the adaptive and learning aspects of the system.
Hayek’s intellectual adversaries shifted in the second half of his career, though of course there are common themes. But the German Historicist and the Collectivist Positivist were no longer the animating force they were in the first half of the 20th century. Logical positivism was also transformed. One of the remnants from the influence of Scientism, however, was in Hayek’s mind a failure to address the essential complexity of the social world. As a consequence, his methodological writings in the 1960s and 1970s tend to stress not subjectivism and the human sciences, but the differences between the sciences of simple phenomena and the sciences of essential complexity.
6.3 Toward a Science of the Open Society
Again, Hayek was born in 1899, and born in Vienna. That is to say, Hayek grew up in a glorious age of Viennese culture only to see it evaporate before his eyes with WWI, the Great Depression, the rise of socialism and fascism, WWII, and the Cold War. Hayek fought in WWI. He was among those who left Vienna in the early 1930s never to return. He experienced WWII in his adopted home of Great Britain. Like others of his generation, these experiences were pivotal. He saw totalitarianism distorting science and scholarship, as did two of his philosophical friends: Michael Polanyi and Karl Popper. Despite their differences, Hayek drew inspiration from and helped promote the work of Polanyi and Popper. Totalitarian systems inevitably end up being hostile to the critical attitude at the heart of scientific inquiry. Hayek, Polanyi and Popper all saw this in the 1930s and 1940s, and in their separate ways sought to describe and defend the science of a free society.
Bibliography
Primary Literature: Work by Hayek
• 1944, The Road to Serfdom, Chicago: University of Chicago Press.
• 1945, “The Use of Knowledge in Society,” American Economic Review, 35: 519–30.
• 1948, Individualism and Economic Order, Chicago: University of Chicago Press.
• 1952, The Counter-Revolution of Science, Glencoe,IL: Free Press.
• 1958, “Freedom, Reason, and Tradition,” Ethics, 68: 229–45.
• 1960, The Constitution of Liberty, Chicago: University of Chicago Press.
• 1969, Studies in Philosophy, Politics, and Economics, London: Routledge.
• 1973/76/79, Law, Legislation, and Liberty, in 3 volumes, Chicago: University of Chicago Pres).
• 1978a, “Coping with Ignorance,” Imprimis, 7: 1–6.
• 1978b, New Studies in Philosophy, Politics, Economics, and the History of Ideas, London: Routledge.
• 1988, The Fatal Conceit: The Errors of Socialism, W. W. Bartley III (ed.), Volume 1 of The Collected Works of F. A. Hayek, Chicago: University of Chicago Press.
Secondary Literature
In addition to the sources below, as a general reference, see the Review of Austrian Economics.
• Boettke, Peter J., 1995. “Hayek’s Road to Serfdom Revisited: Government Failure in the Argument Against Socialism,” Eastern Economic Journal, 21: 7–26.
• Buchanan, James M., and Gordon Tullock, 1962. A Calculus of Consent, Ann Arbor: University of Michigan Press.
• Burczak, Theodore, 2009. Socialism After Hayek, Ann Arbor: University of Michigan Press.
• Caldwell, Bruce J., 2004. Hayek’s Challenge: An Intellectual Biography of F.A. Hayek, University of Chicago Press.
• Critical Review, 1997. Special Issue on F. A. Hayek, 11: 1.
• Feser, Edward (ed.), 2006. The Cambridge Companion to Hayek, Cambridge: Cambridge University Press.
• Gray, John, 1984. Hayek on Liberty, Oxford: Basil Blackwell.
• Machlup, Fritz (ed.), 1976. Essays on Hayek, Hillsdale: Hillsdale College Press.
• Mises, Ludwig, 1949. Human Action, New Haven: Yale University Press.
• Munger, Michael, 2013. “They Clapped: Can Price-Gouging Laws Prohibit Scarcity?” See below, under “Other Internet Resources”
• Nozick, Robert, 1974. Anarchy, State, and Utopia, New York: Belknap.
• Pennington, Mark, 2011. Robust Political Economy, Northampton, MA: Edward Elgar.
• Rawls, John, 1955. “Two Concepts of Rules,” The Philosophical Review, 64: 3–32.
• –––, 1971. A Theory of Justice, Cambridge: Harvard University Press.
• Shearmur, Jeremy, 1996. Hayek and After: Hayekian Liberalism as a Research Programme, London: Routledge.
• Smith, Adam, 1790. Theory of Moral Sentiments, Indianapolis: Liberty Fund, 1984.
• Tebble, Adam, 2015. Epistemic Liberalism: a Defense, London: Routledge
• Zwolinski, Matt, 2008. “The Ethics of Price-Gouging,” Business Ethics Quarterly, 18: 347–78.
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The Life & Thought of Friedrich Hayek
The Intellectual Portrait Series: The Life and Thought of Friedrich A. Hayek (Indianapolis: Liberty Fund, 2003)Books Featured Socialism: An Economic and Soci...
The Life & Thought of Friedrich Hayek
The Intellectual Portrait Series: The Life and Thought of Friedrich A. Hayek (Indianapolis: Liberty Fund, 2003)
https://www.youtube.com/watch?v=gU8rQnKN_uo
Images:
1. Friedrich A. Hayek with Andrew Melnyk, Chandran Kukathas and Hannes Hólmsteinn Gissurarson in Jesus College, Oxford, in spring of 1985
2. Friedrich August von Hayek 'There is all the difference in the world between treating people equally and attempting to make them equal.'.
3. Friedrich August von Hayek 'If socialists understood economics, they wouldn't be socialist.'.
4. Friedrich August von Hayek 'Liberty not only means that the individual has both the opportunity and the burden of choice; it also means that he must bear the consequences of his actions. Liberty and responsibility are inseparable.
Background from {[https://www.newworldencyclopedia.org/entry/Friedrich_Hayek]}
Friedrich August von Hayek (May 8, 1899 in Vienna – March 23, 1992 in Freiburg) was an Austrian economist and political philosopher, noted for his defense of liberal democracy and free-market capitalism against socialist and collectivist thought in the mid-twentieth century. Widely regarded as one of the most influential members of the Austrian School of economics, he also made significant contributions in the fields of jurisprudence and cognitive science. His analysis of socialist economics was proven prescient by the breakup of communist Eastern Europe. He shared the 1974 Nobel Memorial Prize in Economics with ideological rival Gunnar Myrdal, and in 1991 he received the Presidential Medal of Freedom.
Biography
Friedrich August von Hayek was born on May 8, 1899 in Vienna, Austria to a Catholic family of prominent intellectuals. He was a distant cousin of the philosopher Ludwig Wittgenstein. At the University of Vienna he earned doctorates in law and political science in 1921 and 1923 respectively, and also studied psychology and economics with keen interest. He was a student of Friedrich von Wieser. Initially sympathetic to socialism, Hayek's economic thinking was transformed during his student years in Vienna through attending Ludwig von Mises' private seminars along with Fritz Machlup, Oskar Morgenstern, Gottfried Haberler, and other young students.
Hayek worked as a research assistant to Jeremiah Jenks of New York University from 1923 to 1924. He then served as director of the newly formed Austrian Institute for Business Cycle Research before joining the faculty of the London School of Economics (LSE) at the behest of Lionel Robbins in 1931. Unwilling to return to Austria after its annexation to Nazi Germany, Hayek became a British citizen in 1938, a status he held for the remainder of his life.
In the 1930s Hayek enjoyed a considerable reputation as a leading economic theorist. However, he was challenged by followers of John Maynard Keynes, who argued for more active government intervention in economic affairs. The debate between the two schools of thought has continued, with Hayek's position gaining currency since the late 1970s.
By 1947, Hayek was an organizer of the Mont Pelerin Society, a group of classical liberals who sought to oppose what they saw as "socialism" in various areas. In 1950, Hayek left the LSE for the University of Chicago, becoming a professor in the Committee on Social Thought. (NOTE: Hayek was barred from entering the Economics department because of his Austrian economic views by one member, whom he would not name but many have speculated was Frank Hyneman Knight). He found himself at Chicago amongst other prominent economists, such as Milton Friedman, but by this time, Hayek had turned his interests towards political philosophy and psychology.
From 1962 until his retirement in 1968, he was a professor at the University of Freiburg. In 1974, Hayek shared the Nobel Memorial Prize in Economics, causing a revival of interest in the Austrian school of economics. In his speech at the 1974 Nobel Prize banquet, Hayek, whose work emphasized the fallibility of individual knowledge about economic and social arrangements, expressed his misgivings about promoting the perception of economics as a strict science on par with physics, chemistry, or medicine (the scientific disciplines recognized by the original Nobel Prizes).
Margaret Thatcher, the Conservative British prime minister from 1979 to 1990, was an outspoken devotée of Hayek's writings. Shortly after Thatcher became Leader of the party, she "reached into her briefcase and took out a book. It was Friedrich von Hayek's The Constitution of Liberty. Interrupting [the speaker], she held the book up for all to see. "This" she said sternly, "is what we believe" and banged Hayek down on the table.
In 1984 he was appointed as a member of the Order of the Companions of Honour by Queen Elizabeth II on the advice of British Prime Minister Margaret Thatcher for his "services to the study of economics." Later he served as a visiting professor at the University of Salzburg.
Friedrich Hayek died in 1992 in Freiburg, Germany.
Contributions to science
Specialists in business cycle theory recognize Hayek's early work on industrial fluctuations, and modern information theorists often acknowledge his work on prices as signals. Hayek's work is also known in political philosophy (Hayek 1960), legal theory (Hayek 1973-1979), and psychology (Hayek 1952).
The philosopher of science Karl Popper wrote in letter to Hayek in 1944: "I think I have learnt more from you than from any other living thinker, except perhaps Alfred Tarski."
Others have lauded also his achievements in the scientific arena:
The first proponent of cortical memory networks on a major scale was neither a neuroscientist nor a computer scientist but… a Viennese economist: Friedrich von Hayek. A man of exceptionally broad knowledge and profound insight into the operation of complex systems, Hayek applied such insight with remarkable success to economics (Nobel Prize, 1974), sociology, political science, jurisprudence, evolutionary theory, psychology, and brain science. (Fuster 1995, 87)
Hayek made a quite fruitful suggestion, made contemporaneously by the psychologist Donald Hebb, that whatever kind of encounter the sensory system has with the world, a corresponding event between a particular cell in the brain and some other cell carrying the information from the outside word must result in reinforcement of the connection between those cells. These days, this is known as a Hebbian synapse, but von Hayek quite independently came upon the idea. I think the essence of his analysis still remains with us. (Edelman 1987, 25).
"Hayek posited spontaneous order in the brain arising out of distributed networks of simple units (neurons) exchanging local signals" says Harvard psychologist Steven Pinker: "Hayek was way ahead of his time in pushing this idea. It became popular in cognitive science, beginning in the mid-1980s, under the names 'connectionism' and parallel distributed processing." (Postrel 2004).
The economic thinker
Hayek’s argument was always that to fully control the economy meant to control all aspects of life. Economic decisions are not separate from individual values or purposes. They reflect those purposes:
We want money for many different things, and those things are not always, or even rarely, just to have money for its own sake. … We want money for our spouses or our children or to do something in terms of the transformation of ourselves; for everything from plastic surgery to reading intellectual history or building a church. These are all non-economic goals that we express through the common means of money. (Muller 2002).
Consequently, Hayek put the price mechanism on the same level as, for example, language. Such thinking led him to speculate on how the human brain could accommodate this evolved behavior. In The Sensory Order (1952), he proposed the hypothesis that forms the basis of the technology of neural networks and of much of modern neurophysiology.
The business cycle
In Prices and Production (1931) and Monetary Theory and the Trade Cycle (1933) Hayek showed how monetary injections, by lowering the rate of interest below what Ludwig von Mises called its "natural rate," distort the economy's inter-temporal structure of production. Most theories of the effects of money on prices and output (then and since) consider only the effects of the total money supply on the price level and aggregate output or investment. Hayek, instead, focused on the way money enters the economy ("injection effects") and how this affects relative prices and investment in particular sectors.
In Hayek's framework, investments in some stages of production are "malinvestments" if they do not help to align the structure of production to consumers' inter-temporal preferences. The reduction in interest rates caused by credit expansion directs resources toward capital-intensive processes and early stages of production (whose investment demands are more interest-rate elastic), thus "lengthening" the period of production. If interest rates had fallen because consumers had changed their preferences to favor future over present consumption, then the longer time structure of production would have been an appropriate, coordinating response.
A fall in interest rates caused by credit expansion, however, would have been a "false signal," causing changes in the structure of production that do not accord with consumers' inter temporal preferences. The boom generated by the increase in investment is artificial. Eventually, market participants come to realize that there are not enough savings to complete all the new projects; the boom becomes a bust as these malinvestments are discovered and liquidated.
Every artificial boom induced by credit expansion, then, is self-reversing. Recovery consists of liquidating the malinvestments induced by the lowering of interest rates below their natural levels, thus restoring the time structure of production so that it accords with consumers' inter-temporal preferences.
Spontaneous order
In Economics and Knowledge (1937) and The Use of Knowledge in Society (1945) Hayek argued that the central economic problem facing society is not, as is commonly expressed in textbooks, the allocation of given resources among competing ends:
It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only those individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge not given to anyone in its totality. (Hayek 1945, 78).
The efficient exchange and use of resources, Hayek claimed, can be maintained only through the price mechanism in free markets. He argued that the price mechanism serves to share and synchronize local and personal knowledge, allowing society's members to achieve diverse, complicated ends through a principle of spontaneous self-organization. He coined the term "catallaxy" to describe a "self-organizing system of voluntary co-operation." (Hayek 1945)
Much of the knowledge necessary for running the economic system, Hayek contended, is in the form not of
"scientific" or technical knowledge—the conscious awareness of the rules governing natural and social phenomena—but of … knowledge, the idiosyncratic, dispersed bits of understanding of "circumstances of time and place" (Hayek 1968).
This tacit knowledge is often not consciously known even to those who possess it and can never be communicated to a central authority. The market tends to use this tacit knowledge through a type of discovery procedure (Hayek 1968), by which this information is unknowingly transmitted throughout the economy as an unintended consequence of individuals' pursuing their own ends.
Indeed, Hayek's (1948) distinction between the neoclassical notion of "competition," identified as a set of equilibrium conditions (number of market participants, characteristics of the product, and so on), and the older notion of competition as a rivalrous process, has been widely influential in Austrian economics.
On the other side, the key to a functioning economy—or society—is decentralized competition. In a market economy, prices act as a "system of telecommunications," coordinating information far beyond the scope of a single mind. They permit ever-evolving order to emerge from dispersed knowledge. In any complex operation, there is too much relevant information for a single person or small group to absorb and act on.
For Hayek, market competition generates a particular kind of order—an order that is the product "of human action but not human design" (a phrase Hayek borrowed from Adam Smith's mentor Adam Ferguson). This "spontaneous order" is a system that comes about through the independent actions of many individuals, and produces overall benefits unintended and mostly unforeseen by those whose actions bring it about. To distinguish between this kind of order and that of a deliberate, planned system, Hayek (1968b, 72-76) used the Greek terms cosmos for a spontaneous order and taxis for a consciously planned one.
Examples of a "cosmos" include the market system as a whole, money, the common law, and even language. A "taxis," by contrast, is a designed or constructed organization, like a corporation or bureau; these are the "islands of conscious power in [the] ocean of unconscious cooperation like 'lumps of butter coagulating in a pail of buttermilk'.”
Most importantly, however, Hayek always stressed that his moral philosophy has to be backed by “a complex system of moral codes, rules of fairness, as well as an articulated system of punishment for the violators … a system under which a bad man can do the least harm.” (Hayek 1945).
Hayek noted that the market does not always work perfectly. People's plans are not always successfully coordinated, resulting in high unemployment, for example. For Hayek, it was government intervention that served as cause not solution to many market problems. Thus, he argued that increases in the money supply by the central bank led to artificially reduced interest rates which gave false signals to investors, resulting in malinvestments (Hayek 1931). Such an artificial boom necessarily leads to artificial bust as the market spontaneously finds its natural order again. Hayek argued that the way to avoid the busts was therefore to avoid the artificial booms.
Hayek versus Keynes
As one of Keynes' leading professional adversaries, Hayek was well situated to provide a full refutation of Keynes' General Theory. But he never did. Part of the explanation for this no doubt lies with Keynes's personal charm and legendary rhetorical skill, along with Hayek's general reluctance to engage in direct confrontation with his colleagues. Hayek also considered Keynes an ally in the fight against wartime inflation and did not want to detract from that issue (Hayek, 1994, 91).
Caldwell (1988) suggests another reason: it was during this time that Hayek was losing faith in equilibrium theory and moving toward a "market process" view of economic activity, making it difficult for him to engage Keynes on the same terms in which they had debated earlier. Furthermore, as Hayek later explained, Keynes was constantly changing his theoretical framework, and Hayek saw no point in working out a detailed critique of the General Theory, if Keynes might change his mind again (Hayek, 1963, 60; Hayek, 1966, 240-241). Hayek thought a better course would be to produce a fuller elaboration of Eugen von Böhm-Bawerk's capital theory, and he began to devote his energies to this project.
The following quote puts Hayek’s “side” into a proper perspective.
Underlying all this has been a fundamental shift in ideas … The dramatic redefinition of state and marketplace over the last two decades demonstrates anew the truth of Keynes' axiom about the overwhelming power of ideas. For concepts and notions that were decidedly outside the mainstream have now moved, with some rapidity, to center stage and are reshaping economies in every corner of the world. Even Keynes himself has been done in by his own dictum. During the bombing of London in World War II, he arranged for a transplanted Austrian economist, Friedrich von Hayek, to be temporarily housed in a college at Cambridge University. It was a generous gesture; after all, Keynes was the leading economist of his time, and Hayek, his rather obscure critic. In the postwar years, Keynes' theories of government management of the economy appeared unassailable. But a half century later, it is Keynes who has been toppled and Hayek, the fierce advocate of free markets, who is preeminent. (Yergin & Stanislaw 1998 14-15)
Contribution to social and political philosophy
Hayek's most significant contribution,
was to make clear how our present complex social structure is not the result of the intended actions of individuals but of the unintended consequences of individual interactions over a long period of time, the product of social evolution, not of deliberate planning. (Postrel 2004).
Hayek's major insight, which he referred to as his "one discovery" in the social sciences, was to define the central economic and social problem as one of organizing dispersed knowledge. Different people have different purposes. They know different things about the world. Much important information is local and transitory, known only to the man on the spot.
"Some of that knowledge is objective and quantifiable, but much is tacit and unarticulated. Often we only discover what we truly want as we actually make trade-offs between competing goods … The economic problem of society," Hayek wrote in his 1945 article, "is thus not merely a problem of how to allocate `given' resources … if `given' is taken to mean given to a single mind which deliberately solves the problem set by these data. … It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know … Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in totality." (Hayek 1945).
Applying this insight to socialist thought, revealed that central economic planning was doomed to failure.
The economic calculation problem
Hayek was one of the leading academic critics of collectivism in the twentieth century. He believed that all forms of collectivism (even those theoretically based on voluntary cooperation) could only be maintained by a central authority of some kind. In his popular book, The Road to Serfdom (1944) and in subsequent works, Hayek claimed that socialism required central economic planning and that such planning in turn had a risk of leading towards totalitarianism, because the central authority would have to be endowed with powers that would impact social life as well.
Building on the earlier work of Ludwig von Mises and others, Hayek also argued that in centrally-planned economies an individual or a select group of individuals must determine the distribution of resources, but that these planners will never have enough information to carry out this allocation reliably. Hayek maintained that the data required for economic planning do not and cannot exist in a central planner, but rather each individual has information regarding resources and opportunities:
Central to Mises’ thesis was that socialist economy is possible in theory but difficult (if not impossible) in practice because knowledge is decentralized and incentives are weak … and thus it cannot achieve an efficient utilization of resources. (Hayek 1992, 127)
In Hayek's view, the central role of the state should be to maintain the rule of law, with as little arbitrary intervention as possible. It was shocking enough for Britain, where his views were respectfully, though critically, received. But in the United States, where Reader's Digest published a condensed version, The Road to Serfdom was a bestseller and a political lightning rod. It rallied supporters of traditional free enterprise and enraged the intelligentsia to whom it was addressed. How dare this mustachioed Austrian suggest that the ambitions of the New Deal might have anything in common with Hitler or Stalin! (Postrel 2004).
Hayek went eventually as far as to attribute the birth of civilization to private property in his book The Fatal Conceit (1988). According to him, price signals are the only possible way to let each economic decision maker communicate tacit knowledge or dispersed knowledge to each other, in order to solve the economic calculation problem.
Theorem on transitional and developing countries
When we combine Hayek’s key theorems, it emerges that economic development requires (a) the “learning process” of how to play the social roles of which market relations is based on and keeping within the implicit rules and (b) the moral codes of co-operative society (which punishes violators), to form a system marginalizing the opportunities and other elements harmful to the society while forming the ultimate criterion of success.
Such a “learning process” - in which the moral codes are spontaneously achieved - is, however, a function of time usually measured in terms of generations (Dallago 1996, 82, 116-117).
The time-element of this “learning process” is obviously non-existent (at least not spanning generations) in developing and transitional societies. Instead, we see quick "privatizations" (often by the old oligarchy who had the money to buy the bulk of industrial infrastructure) and “quasi-market” relations without sufficient moral scruples, codes of conduct, or functioning legal system.
Attempts to substitute the generations-long “learning process”—of how to achieve at least minimum functioning legal, moral, and co-operative notion in the society—in these new “free market” societies have been based on exogenous inputs. Whether involving the transfer of a whole constitution (or major substantive and civil laws) or just amendments to the existing dysfunctional system, the results have unfortunately, in many cases been unsuccessful, as Hayek's insights predicted.
Thus, Hayek’s theorem of generations-long learning process on the road to full-fledged democracy proved to be one of his most prophetic.
Influence, recognition, and legacy
Hayek's intellectual foundation was based on the ideas of David Hume, Adam Smith, and other Scottish thinkers of the 1700s. Like these great thinkers, Hayek was influential in many fields, not the least of which being economics:
When the definitive history of economic analysis during the 1930s comes to be written … a leading character in the drama (it was quite a drama) will be Professor Hayek. … It is hardly remembered that there was a time when the new theories of Hayek were the principal rival of the new theories of Keynes. (Hicks 1967, 203).
He had a wide-reaching influence on contemporary economics, politics, philosophy, sociology, psychology, and anthropology. For example, Hayek's discussion in The Road to Serfdom (1944) about truth and falsehood in totalitarian systems influenced later opponents of postmodernism (Wolin 2004).
Having heavily influenced Margaret Thatcher's economic approach, and some of Ronald Reagan's economic advisors, in the 1990s Hayek became one of the most-respected economists in Europe. There is a general consensus that his analyses of socialist as well as non-socialist societies were proven prescient by the breakup of communist Eastern Europe.
Hayek shared the 1974 Nobel Memorial Prize in Economics with ideological rival Gunnar Myrdal and in 1991 he received the Presidential Medal of Freedom, one of the two highest civilian awards in the United States, “for a lifetime of looking beyond the horizon.”
After his death, Hayek's intellectual presence continued to be noticeable, especially in the universities where he had taught: the London School of Economics, the University of Chicago, and the University of Freiburg. A student-run group at the LSE Hayek Society, was established in his honor. At Oxford University, there is also a Hayek Society. The Cato Institute, one of Washington, DC's leading think tanks, named its lower level auditorium after Hayek, who had been a Distinguished Senior Fellow at Cato during his later years. Also, the auditorium of the school of economics in Universidad Francisco Marroquín in Guatemala is named after him.
Publications
Hayek, F. A. [1931] 1935. Prices and Production. London: Routledge & Sons, Second revised edition: London: Routledge & Kegan Paul.
Hayek, F. A. 1933. Monetary Theory and the Trade Cycle. London: Jonathan Cape,
Hayek, F. A. [1933] 1991. "The Trend of Economic Thinking." Economica (13), 121-137. Reprinted in Hayek, 1948, 17-34.
Hayek, F. A. 1937. "Economics and Knowledge." Economica N.S. 4. 33-54. Reprinted in Hayek, 1948, 33-56.
Hayek, F. A. 1939. "Price Expectations, Monetary Disturbances, and Malinvestments." In Hayek, Profits, Interest, and Investment. London: Routledge and Kegan Paul. 135-156.
Hayek, F. A. 1941. The Pure Theory of Capital. Chicago: University of Chicago Press.
Hayek, F. A. 1944. The Road to Serfdom. Chicago: University of Chicago Press.
Hayek, F.A. [1945] 1949. "Individualism, True and False." Individualism and Economic Order. London: Routledge & Kegan Paul, 10-11.
Hayek, F. A. [1945] 1948. "The Use of Knowledge in Society." American Economic Review 35 (September): 519-530. 77-91.
Hayek, F. A. 1948. "The Meaning of Competition." In Hayek. 92-106.
Hayek, F. A. 1952. The Sensory Order. Chicago: University of Chicago Press.
Hayek, F. A. 1960. The Constitution of Liberty. Chicago: University of Chicago Press.
Hayek, F. A. [1968a] 1978. "Competition as a Discovery Procedure." In Hayek 179-190.
Hayek, F. A. [1968b] 1978. "The Confusion of Language in Political Thought." In Hayek 71-97.
Hayek, F. A. 1973. Law, Legislation, and Liberty. Three volumes. Chicago: University of Chicago Press, 1973-1979.
Hayek, F. A. 1978. New Studies in Philosophy, Politics and Economics. Chicago: University of Chicago Press.
Hayek, F. A. 1989. The Fatal Conceit: The Errors of Socialism. Ed. by W. W. Bartley III. vol. 1 of The Collected Works of F. A. Hayek. London: Routledge and Chicago: University of Chicago Press.
Hayek, F. A. 1991. The Trend of Economic Thinking: Essays on Political Economists and Economic History. Ed. W. W. Bartley III and Stephen Kresge. Chicago: University of Chicago Press, and London: Routledge.
Hayek, F. A. 1992. The Fortunes of Liberalism, Edited by Peter G. Klein. Vol. 4 of The Collected Works of F. A. Hayek. Chicago: University of Chicago Press, and London: Routledge.
Hayek, F. A. 1995. Contra Keynes and Cambridge: Essays, Correspondence. Ed. Bruce Caldwell. Vol. 9 of The Collected Works of F. A. Hayek. Chicago: University of Chicago Press and London: Routledge.
Hayek, F. A. [1995] 1966. "Personal Recollections of Keynes and the 'Keynesian Revolution.'" In Hayek. 240-246.
Hayek, F. A. [1995] 1963. "The Economics of the 1930s as Seen from London." Hayek. 49-73.
References
Birner, Jack, 2001. "The mind-body problem and social evolution." CEEL Working Paper 1-02. In Politics, economics and the history of ideas.
Caldwell, Bruce. J. 1998. "Hayek's Transformation" In History of Political Economy. 513-541.
__________. 1995. "Introduction" In Hayek, 1995, pp. 1-48
__________. 1997. "Hayek and Socialism." In Journal of Economic Literature no. 4. (1856-90).
__________. 2005. Hayek's Challenge: An Intellectual Biography of F. A. Hayek.
Dallago, B. & L. Mintone. 1996 Economic Institutions, Markets and Competition. Edward Elgar.
Edelman, G. 1987. Neural Darwinism, 25.
Epstein, R. Simple Rules for a Complex World. Cambridge, MA: Harvard Univ. Press.
Fuster, J. 1995. Memory in the Cerebral Cortex: An Empirical Approach to Neural Networks in the Human and Nonhuman Primate. Cambridge, MA: MIT Press, MS., 87
Hicks, Sir John. 1967 Critical Essays in Monetary Theory. Oxford, Clarendon Press.
Muller, Jerry Z. 2002. The Mind and the Market: Capitalism in Western Thought. Anchor Books.
Postrel, Virginia. 2004. “Friedrich the Great” The Boston Globe January 11, 2004. Retrieved February 9, 2007.
Wolin, R. 2004. The Seduction of Unreason: The Intellectual Romance with Fascism from Nietzsche to Postmodernism. Princeton University Press.
Yergin , D. & J. Stanislaw. 1998. The Commanding Heights: The Battle Between Government and the Marketplace that Is Remaking the Modern World. New York: Simon & Schuster, 14-15."
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The Intellectual Portrait Series: The Life and Thought of Friedrich A. Hayek (Indianapolis: Liberty Fund, 2003)
https://www.youtube.com/watch?v=gU8rQnKN_uo
Images:
1. Friedrich A. Hayek with Andrew Melnyk, Chandran Kukathas and Hannes Hólmsteinn Gissurarson in Jesus College, Oxford, in spring of 1985
2. Friedrich August von Hayek 'There is all the difference in the world between treating people equally and attempting to make them equal.'.
3. Friedrich August von Hayek 'If socialists understood economics, they wouldn't be socialist.'.
4. Friedrich August von Hayek 'Liberty not only means that the individual has both the opportunity and the burden of choice; it also means that he must bear the consequences of his actions. Liberty and responsibility are inseparable.
Background from {[https://www.newworldencyclopedia.org/entry/Friedrich_Hayek]}
Friedrich August von Hayek (May 8, 1899 in Vienna – March 23, 1992 in Freiburg) was an Austrian economist and political philosopher, noted for his defense of liberal democracy and free-market capitalism against socialist and collectivist thought in the mid-twentieth century. Widely regarded as one of the most influential members of the Austrian School of economics, he also made significant contributions in the fields of jurisprudence and cognitive science. His analysis of socialist economics was proven prescient by the breakup of communist Eastern Europe. He shared the 1974 Nobel Memorial Prize in Economics with ideological rival Gunnar Myrdal, and in 1991 he received the Presidential Medal of Freedom.
Biography
Friedrich August von Hayek was born on May 8, 1899 in Vienna, Austria to a Catholic family of prominent intellectuals. He was a distant cousin of the philosopher Ludwig Wittgenstein. At the University of Vienna he earned doctorates in law and political science in 1921 and 1923 respectively, and also studied psychology and economics with keen interest. He was a student of Friedrich von Wieser. Initially sympathetic to socialism, Hayek's economic thinking was transformed during his student years in Vienna through attending Ludwig von Mises' private seminars along with Fritz Machlup, Oskar Morgenstern, Gottfried Haberler, and other young students.
Hayek worked as a research assistant to Jeremiah Jenks of New York University from 1923 to 1924. He then served as director of the newly formed Austrian Institute for Business Cycle Research before joining the faculty of the London School of Economics (LSE) at the behest of Lionel Robbins in 1931. Unwilling to return to Austria after its annexation to Nazi Germany, Hayek became a British citizen in 1938, a status he held for the remainder of his life.
In the 1930s Hayek enjoyed a considerable reputation as a leading economic theorist. However, he was challenged by followers of John Maynard Keynes, who argued for more active government intervention in economic affairs. The debate between the two schools of thought has continued, with Hayek's position gaining currency since the late 1970s.
By 1947, Hayek was an organizer of the Mont Pelerin Society, a group of classical liberals who sought to oppose what they saw as "socialism" in various areas. In 1950, Hayek left the LSE for the University of Chicago, becoming a professor in the Committee on Social Thought. (NOTE: Hayek was barred from entering the Economics department because of his Austrian economic views by one member, whom he would not name but many have speculated was Frank Hyneman Knight). He found himself at Chicago amongst other prominent economists, such as Milton Friedman, but by this time, Hayek had turned his interests towards political philosophy and psychology.
From 1962 until his retirement in 1968, he was a professor at the University of Freiburg. In 1974, Hayek shared the Nobel Memorial Prize in Economics, causing a revival of interest in the Austrian school of economics. In his speech at the 1974 Nobel Prize banquet, Hayek, whose work emphasized the fallibility of individual knowledge about economic and social arrangements, expressed his misgivings about promoting the perception of economics as a strict science on par with physics, chemistry, or medicine (the scientific disciplines recognized by the original Nobel Prizes).
Margaret Thatcher, the Conservative British prime minister from 1979 to 1990, was an outspoken devotée of Hayek's writings. Shortly after Thatcher became Leader of the party, she "reached into her briefcase and took out a book. It was Friedrich von Hayek's The Constitution of Liberty. Interrupting [the speaker], she held the book up for all to see. "This" she said sternly, "is what we believe" and banged Hayek down on the table.
In 1984 he was appointed as a member of the Order of the Companions of Honour by Queen Elizabeth II on the advice of British Prime Minister Margaret Thatcher for his "services to the study of economics." Later he served as a visiting professor at the University of Salzburg.
Friedrich Hayek died in 1992 in Freiburg, Germany.
Contributions to science
Specialists in business cycle theory recognize Hayek's early work on industrial fluctuations, and modern information theorists often acknowledge his work on prices as signals. Hayek's work is also known in political philosophy (Hayek 1960), legal theory (Hayek 1973-1979), and psychology (Hayek 1952).
The philosopher of science Karl Popper wrote in letter to Hayek in 1944: "I think I have learnt more from you than from any other living thinker, except perhaps Alfred Tarski."
Others have lauded also his achievements in the scientific arena:
The first proponent of cortical memory networks on a major scale was neither a neuroscientist nor a computer scientist but… a Viennese economist: Friedrich von Hayek. A man of exceptionally broad knowledge and profound insight into the operation of complex systems, Hayek applied such insight with remarkable success to economics (Nobel Prize, 1974), sociology, political science, jurisprudence, evolutionary theory, psychology, and brain science. (Fuster 1995, 87)
Hayek made a quite fruitful suggestion, made contemporaneously by the psychologist Donald Hebb, that whatever kind of encounter the sensory system has with the world, a corresponding event between a particular cell in the brain and some other cell carrying the information from the outside word must result in reinforcement of the connection between those cells. These days, this is known as a Hebbian synapse, but von Hayek quite independently came upon the idea. I think the essence of his analysis still remains with us. (Edelman 1987, 25).
"Hayek posited spontaneous order in the brain arising out of distributed networks of simple units (neurons) exchanging local signals" says Harvard psychologist Steven Pinker: "Hayek was way ahead of his time in pushing this idea. It became popular in cognitive science, beginning in the mid-1980s, under the names 'connectionism' and parallel distributed processing." (Postrel 2004).
The economic thinker
Hayek’s argument was always that to fully control the economy meant to control all aspects of life. Economic decisions are not separate from individual values or purposes. They reflect those purposes:
We want money for many different things, and those things are not always, or even rarely, just to have money for its own sake. … We want money for our spouses or our children or to do something in terms of the transformation of ourselves; for everything from plastic surgery to reading intellectual history or building a church. These are all non-economic goals that we express through the common means of money. (Muller 2002).
Consequently, Hayek put the price mechanism on the same level as, for example, language. Such thinking led him to speculate on how the human brain could accommodate this evolved behavior. In The Sensory Order (1952), he proposed the hypothesis that forms the basis of the technology of neural networks and of much of modern neurophysiology.
The business cycle
In Prices and Production (1931) and Monetary Theory and the Trade Cycle (1933) Hayek showed how monetary injections, by lowering the rate of interest below what Ludwig von Mises called its "natural rate," distort the economy's inter-temporal structure of production. Most theories of the effects of money on prices and output (then and since) consider only the effects of the total money supply on the price level and aggregate output or investment. Hayek, instead, focused on the way money enters the economy ("injection effects") and how this affects relative prices and investment in particular sectors.
In Hayek's framework, investments in some stages of production are "malinvestments" if they do not help to align the structure of production to consumers' inter-temporal preferences. The reduction in interest rates caused by credit expansion directs resources toward capital-intensive processes and early stages of production (whose investment demands are more interest-rate elastic), thus "lengthening" the period of production. If interest rates had fallen because consumers had changed their preferences to favor future over present consumption, then the longer time structure of production would have been an appropriate, coordinating response.
A fall in interest rates caused by credit expansion, however, would have been a "false signal," causing changes in the structure of production that do not accord with consumers' inter temporal preferences. The boom generated by the increase in investment is artificial. Eventually, market participants come to realize that there are not enough savings to complete all the new projects; the boom becomes a bust as these malinvestments are discovered and liquidated.
Every artificial boom induced by credit expansion, then, is self-reversing. Recovery consists of liquidating the malinvestments induced by the lowering of interest rates below their natural levels, thus restoring the time structure of production so that it accords with consumers' inter-temporal preferences.
Spontaneous order
In Economics and Knowledge (1937) and The Use of Knowledge in Society (1945) Hayek argued that the central economic problem facing society is not, as is commonly expressed in textbooks, the allocation of given resources among competing ends:
It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only those individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge not given to anyone in its totality. (Hayek 1945, 78).
The efficient exchange and use of resources, Hayek claimed, can be maintained only through the price mechanism in free markets. He argued that the price mechanism serves to share and synchronize local and personal knowledge, allowing society's members to achieve diverse, complicated ends through a principle of spontaneous self-organization. He coined the term "catallaxy" to describe a "self-organizing system of voluntary co-operation." (Hayek 1945)
Much of the knowledge necessary for running the economic system, Hayek contended, is in the form not of
"scientific" or technical knowledge—the conscious awareness of the rules governing natural and social phenomena—but of … knowledge, the idiosyncratic, dispersed bits of understanding of "circumstances of time and place" (Hayek 1968).
This tacit knowledge is often not consciously known even to those who possess it and can never be communicated to a central authority. The market tends to use this tacit knowledge through a type of discovery procedure (Hayek 1968), by which this information is unknowingly transmitted throughout the economy as an unintended consequence of individuals' pursuing their own ends.
Indeed, Hayek's (1948) distinction between the neoclassical notion of "competition," identified as a set of equilibrium conditions (number of market participants, characteristics of the product, and so on), and the older notion of competition as a rivalrous process, has been widely influential in Austrian economics.
On the other side, the key to a functioning economy—or society—is decentralized competition. In a market economy, prices act as a "system of telecommunications," coordinating information far beyond the scope of a single mind. They permit ever-evolving order to emerge from dispersed knowledge. In any complex operation, there is too much relevant information for a single person or small group to absorb and act on.
For Hayek, market competition generates a particular kind of order—an order that is the product "of human action but not human design" (a phrase Hayek borrowed from Adam Smith's mentor Adam Ferguson). This "spontaneous order" is a system that comes about through the independent actions of many individuals, and produces overall benefits unintended and mostly unforeseen by those whose actions bring it about. To distinguish between this kind of order and that of a deliberate, planned system, Hayek (1968b, 72-76) used the Greek terms cosmos for a spontaneous order and taxis for a consciously planned one.
Examples of a "cosmos" include the market system as a whole, money, the common law, and even language. A "taxis," by contrast, is a designed or constructed organization, like a corporation or bureau; these are the "islands of conscious power in [the] ocean of unconscious cooperation like 'lumps of butter coagulating in a pail of buttermilk'.”
Most importantly, however, Hayek always stressed that his moral philosophy has to be backed by “a complex system of moral codes, rules of fairness, as well as an articulated system of punishment for the violators … a system under which a bad man can do the least harm.” (Hayek 1945).
Hayek noted that the market does not always work perfectly. People's plans are not always successfully coordinated, resulting in high unemployment, for example. For Hayek, it was government intervention that served as cause not solution to many market problems. Thus, he argued that increases in the money supply by the central bank led to artificially reduced interest rates which gave false signals to investors, resulting in malinvestments (Hayek 1931). Such an artificial boom necessarily leads to artificial bust as the market spontaneously finds its natural order again. Hayek argued that the way to avoid the busts was therefore to avoid the artificial booms.
Hayek versus Keynes
As one of Keynes' leading professional adversaries, Hayek was well situated to provide a full refutation of Keynes' General Theory. But he never did. Part of the explanation for this no doubt lies with Keynes's personal charm and legendary rhetorical skill, along with Hayek's general reluctance to engage in direct confrontation with his colleagues. Hayek also considered Keynes an ally in the fight against wartime inflation and did not want to detract from that issue (Hayek, 1994, 91).
Caldwell (1988) suggests another reason: it was during this time that Hayek was losing faith in equilibrium theory and moving toward a "market process" view of economic activity, making it difficult for him to engage Keynes on the same terms in which they had debated earlier. Furthermore, as Hayek later explained, Keynes was constantly changing his theoretical framework, and Hayek saw no point in working out a detailed critique of the General Theory, if Keynes might change his mind again (Hayek, 1963, 60; Hayek, 1966, 240-241). Hayek thought a better course would be to produce a fuller elaboration of Eugen von Böhm-Bawerk's capital theory, and he began to devote his energies to this project.
The following quote puts Hayek’s “side” into a proper perspective.
Underlying all this has been a fundamental shift in ideas … The dramatic redefinition of state and marketplace over the last two decades demonstrates anew the truth of Keynes' axiom about the overwhelming power of ideas. For concepts and notions that were decidedly outside the mainstream have now moved, with some rapidity, to center stage and are reshaping economies in every corner of the world. Even Keynes himself has been done in by his own dictum. During the bombing of London in World War II, he arranged for a transplanted Austrian economist, Friedrich von Hayek, to be temporarily housed in a college at Cambridge University. It was a generous gesture; after all, Keynes was the leading economist of his time, and Hayek, his rather obscure critic. In the postwar years, Keynes' theories of government management of the economy appeared unassailable. But a half century later, it is Keynes who has been toppled and Hayek, the fierce advocate of free markets, who is preeminent. (Yergin & Stanislaw 1998 14-15)
Contribution to social and political philosophy
Hayek's most significant contribution,
was to make clear how our present complex social structure is not the result of the intended actions of individuals but of the unintended consequences of individual interactions over a long period of time, the product of social evolution, not of deliberate planning. (Postrel 2004).
Hayek's major insight, which he referred to as his "one discovery" in the social sciences, was to define the central economic and social problem as one of organizing dispersed knowledge. Different people have different purposes. They know different things about the world. Much important information is local and transitory, known only to the man on the spot.
"Some of that knowledge is objective and quantifiable, but much is tacit and unarticulated. Often we only discover what we truly want as we actually make trade-offs between competing goods … The economic problem of society," Hayek wrote in his 1945 article, "is thus not merely a problem of how to allocate `given' resources … if `given' is taken to mean given to a single mind which deliberately solves the problem set by these data. … It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know … Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in totality." (Hayek 1945).
Applying this insight to socialist thought, revealed that central economic planning was doomed to failure.
The economic calculation problem
Hayek was one of the leading academic critics of collectivism in the twentieth century. He believed that all forms of collectivism (even those theoretically based on voluntary cooperation) could only be maintained by a central authority of some kind. In his popular book, The Road to Serfdom (1944) and in subsequent works, Hayek claimed that socialism required central economic planning and that such planning in turn had a risk of leading towards totalitarianism, because the central authority would have to be endowed with powers that would impact social life as well.
Building on the earlier work of Ludwig von Mises and others, Hayek also argued that in centrally-planned economies an individual or a select group of individuals must determine the distribution of resources, but that these planners will never have enough information to carry out this allocation reliably. Hayek maintained that the data required for economic planning do not and cannot exist in a central planner, but rather each individual has information regarding resources and opportunities:
Central to Mises’ thesis was that socialist economy is possible in theory but difficult (if not impossible) in practice because knowledge is decentralized and incentives are weak … and thus it cannot achieve an efficient utilization of resources. (Hayek 1992, 127)
In Hayek's view, the central role of the state should be to maintain the rule of law, with as little arbitrary intervention as possible. It was shocking enough for Britain, where his views were respectfully, though critically, received. But in the United States, where Reader's Digest published a condensed version, The Road to Serfdom was a bestseller and a political lightning rod. It rallied supporters of traditional free enterprise and enraged the intelligentsia to whom it was addressed. How dare this mustachioed Austrian suggest that the ambitions of the New Deal might have anything in common with Hitler or Stalin! (Postrel 2004).
Hayek went eventually as far as to attribute the birth of civilization to private property in his book The Fatal Conceit (1988). According to him, price signals are the only possible way to let each economic decision maker communicate tacit knowledge or dispersed knowledge to each other, in order to solve the economic calculation problem.
Theorem on transitional and developing countries
When we combine Hayek’s key theorems, it emerges that economic development requires (a) the “learning process” of how to play the social roles of which market relations is based on and keeping within the implicit rules and (b) the moral codes of co-operative society (which punishes violators), to form a system marginalizing the opportunities and other elements harmful to the society while forming the ultimate criterion of success.
Such a “learning process” - in which the moral codes are spontaneously achieved - is, however, a function of time usually measured in terms of generations (Dallago 1996, 82, 116-117).
The time-element of this “learning process” is obviously non-existent (at least not spanning generations) in developing and transitional societies. Instead, we see quick "privatizations" (often by the old oligarchy who had the money to buy the bulk of industrial infrastructure) and “quasi-market” relations without sufficient moral scruples, codes of conduct, or functioning legal system.
Attempts to substitute the generations-long “learning process”—of how to achieve at least minimum functioning legal, moral, and co-operative notion in the society—in these new “free market” societies have been based on exogenous inputs. Whether involving the transfer of a whole constitution (or major substantive and civil laws) or just amendments to the existing dysfunctional system, the results have unfortunately, in many cases been unsuccessful, as Hayek's insights predicted.
Thus, Hayek’s theorem of generations-long learning process on the road to full-fledged democracy proved to be one of his most prophetic.
Influence, recognition, and legacy
Hayek's intellectual foundation was based on the ideas of David Hume, Adam Smith, and other Scottish thinkers of the 1700s. Like these great thinkers, Hayek was influential in many fields, not the least of which being economics:
When the definitive history of economic analysis during the 1930s comes to be written … a leading character in the drama (it was quite a drama) will be Professor Hayek. … It is hardly remembered that there was a time when the new theories of Hayek were the principal rival of the new theories of Keynes. (Hicks 1967, 203).
He had a wide-reaching influence on contemporary economics, politics, philosophy, sociology, psychology, and anthropology. For example, Hayek's discussion in The Road to Serfdom (1944) about truth and falsehood in totalitarian systems influenced later opponents of postmodernism (Wolin 2004).
Having heavily influenced Margaret Thatcher's economic approach, and some of Ronald Reagan's economic advisors, in the 1990s Hayek became one of the most-respected economists in Europe. There is a general consensus that his analyses of socialist as well as non-socialist societies were proven prescient by the breakup of communist Eastern Europe.
Hayek shared the 1974 Nobel Memorial Prize in Economics with ideological rival Gunnar Myrdal and in 1991 he received the Presidential Medal of Freedom, one of the two highest civilian awards in the United States, “for a lifetime of looking beyond the horizon.”
After his death, Hayek's intellectual presence continued to be noticeable, especially in the universities where he had taught: the London School of Economics, the University of Chicago, and the University of Freiburg. A student-run group at the LSE Hayek Society, was established in his honor. At Oxford University, there is also a Hayek Society. The Cato Institute, one of Washington, DC's leading think tanks, named its lower level auditorium after Hayek, who had been a Distinguished Senior Fellow at Cato during his later years. Also, the auditorium of the school of economics in Universidad Francisco Marroquín in Guatemala is named after him.
Publications
Hayek, F. A. [1931] 1935. Prices and Production. London: Routledge & Sons, Second revised edition: London: Routledge & Kegan Paul.
Hayek, F. A. 1933. Monetary Theory and the Trade Cycle. London: Jonathan Cape,
Hayek, F. A. [1933] 1991. "The Trend of Economic Thinking." Economica (13), 121-137. Reprinted in Hayek, 1948, 17-34.
Hayek, F. A. 1937. "Economics and Knowledge." Economica N.S. 4. 33-54. Reprinted in Hayek, 1948, 33-56.
Hayek, F. A. 1939. "Price Expectations, Monetary Disturbances, and Malinvestments." In Hayek, Profits, Interest, and Investment. London: Routledge and Kegan Paul. 135-156.
Hayek, F. A. 1941. The Pure Theory of Capital. Chicago: University of Chicago Press.
Hayek, F. A. 1944. The Road to Serfdom. Chicago: University of Chicago Press.
Hayek, F.A. [1945] 1949. "Individualism, True and False." Individualism and Economic Order. London: Routledge & Kegan Paul, 10-11.
Hayek, F. A. [1945] 1948. "The Use of Knowledge in Society." American Economic Review 35 (September): 519-530. 77-91.
Hayek, F. A. 1948. "The Meaning of Competition." In Hayek. 92-106.
Hayek, F. A. 1952. The Sensory Order. Chicago: University of Chicago Press.
Hayek, F. A. 1960. The Constitution of Liberty. Chicago: University of Chicago Press.
Hayek, F. A. [1968a] 1978. "Competition as a Discovery Procedure." In Hayek 179-190.
Hayek, F. A. [1968b] 1978. "The Confusion of Language in Political Thought." In Hayek 71-97.
Hayek, F. A. 1973. Law, Legislation, and Liberty. Three volumes. Chicago: University of Chicago Press, 1973-1979.
Hayek, F. A. 1978. New Studies in Philosophy, Politics and Economics. Chicago: University of Chicago Press.
Hayek, F. A. 1989. The Fatal Conceit: The Errors of Socialism. Ed. by W. W. Bartley III. vol. 1 of The Collected Works of F. A. Hayek. London: Routledge and Chicago: University of Chicago Press.
Hayek, F. A. 1991. The Trend of Economic Thinking: Essays on Political Economists and Economic History. Ed. W. W. Bartley III and Stephen Kresge. Chicago: University of Chicago Press, and London: Routledge.
Hayek, F. A. 1992. The Fortunes of Liberalism, Edited by Peter G. Klein. Vol. 4 of The Collected Works of F. A. Hayek. Chicago: University of Chicago Press, and London: Routledge.
Hayek, F. A. 1995. Contra Keynes and Cambridge: Essays, Correspondence. Ed. Bruce Caldwell. Vol. 9 of The Collected Works of F. A. Hayek. Chicago: University of Chicago Press and London: Routledge.
Hayek, F. A. [1995] 1966. "Personal Recollections of Keynes and the 'Keynesian Revolution.'" In Hayek. 240-246.
Hayek, F. A. [1995] 1963. "The Economics of the 1930s as Seen from London." Hayek. 49-73.
References
Birner, Jack, 2001. "The mind-body problem and social evolution." CEEL Working Paper 1-02. In Politics, economics and the history of ideas.
Caldwell, Bruce. J. 1998. "Hayek's Transformation" In History of Political Economy. 513-541.
__________. 1995. "Introduction" In Hayek, 1995, pp. 1-48
__________. 1997. "Hayek and Socialism." In Journal of Economic Literature no. 4. (1856-90).
__________. 2005. Hayek's Challenge: An Intellectual Biography of F. A. Hayek.
Dallago, B. & L. Mintone. 1996 Economic Institutions, Markets and Competition. Edward Elgar.
Edelman, G. 1987. Neural Darwinism, 25.
Epstein, R. Simple Rules for a Complex World. Cambridge, MA: Harvard Univ. Press.
Fuster, J. 1995. Memory in the Cerebral Cortex: An Empirical Approach to Neural Networks in the Human and Nonhuman Primate. Cambridge, MA: MIT Press, MS., 87
Hicks, Sir John. 1967 Critical Essays in Monetary Theory. Oxford, Clarendon Press.
Muller, Jerry Z. 2002. The Mind and the Market: Capitalism in Western Thought. Anchor Books.
Postrel, Virginia. 2004. “Friedrich the Great” The Boston Globe January 11, 2004. Retrieved February 9, 2007.
Wolin, R. 2004. The Seduction of Unreason: The Intellectual Romance with Fascism from Nietzsche to Postmodernism. Princeton University Press.
Yergin , D. & J. Stanislaw. 1998. The Commanding Heights: The Battle Between Government and the Marketplace that Is Remaking the Modern World. New York: Simon & Schuster, 14-15."
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Friedrich von Hayek and Leo Rosten Part I (U1003) - Full Video
Leo Rosten, author, and Friedrich A. Hayek, Ph.D. Economics. Hour one of a lively and occasionally controversial three-part interview of noted economist Frie...
Friedrich von Hayek and Leo Rosten Part I (U1003) - Full Video
Leo Rosten, author, and Friedrich A. Hayek, Ph.D. Economics. Hour one of a lively and occasionally controversial three-part interview of noted economist Friedrich A. Hayek by Leo Rosten, in a wide-ranging discussion of Hayek's life and work. ©1978 / 56 min.
https://www.youtube.com/watch?v=34Bre91Ey3Q
Images:
1. June 1945, Friedrich August von Hayek, by Walter Stoneman
2. Friedrich August von Hayek 'The history of government management of money has, except for a few short happy periods, been one of incessant fraud and deception.
3. Friedrich August von Hayek 'The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.'
4. Friedrich August von Hayek 'What our generation has forgotten is that the system of private property is the most important guarantee of freedom, not only for those who own property, but scarcely less for those who do not. It is only because the control of the means of production is divided among many people acting independently that nobody has complete power over us, that we as individuals can decide what to do with ourselves.'
Background from {[https://mises.org/library/biography-f-hayek-1899-1992]}
Biography of F. A. Hayek (1899-1992) by Peter G. Klein 08/01/2007
"A claim for equality of material position can be met only by a government with totalitarian powers."
F. A. Hayek is undoubtedly the most eminent of the modern Austrian economists. Student of Friedrich von Wieser, protégé and colleague of Ludwig von Mises, and foremost representative of an outstanding generation of Austrian school theorists, Hayek was more successful than anyone else in spreading Austrian ideas throughout the English-speaking world. "When the definitive history of economic analysis during the 1930s comes to be written," said John Hicks in 1967, "a leading character in the drama (it was quite a drama) will be Professor Hayek. . . . It is hardly remembered that there was a time when the new theories of Hayek were the principal rival of the new theories of Keynes" (Hicks, 1967, p. 203). Unfortunately, Hayek's theory of the business cycle was eventually swept aside by the Keynesian revolution. Ultimately, however, this work was again recognized when Hayek received, along with the Swede Gunnar Myrdal, the 1974 Nobel Memorial Prize in Economic Science. Hayek was a prolific writer over nearly seven decades; his Collected Works, currently being published by the University of Chicago Press and Routledge, are projected at nineteen volumes.
Life and Work
Hayek's life spanned the twentieth century, and he made his home in some of the great intellectual communities of the period.2 Born Friedrich August von Hayek in 1899 to a distinguished family of Viennese intellectuals,3 Hayek attended the University of Vienna, earning doctorates in 1921 and 1923. Hayek came to the University at age 19 just after World War I, when it was one of the three best places in the world to study economics (the others being Stockholm and Cambridge, England). Though he was enrolled as a law student, his primary interests were economics and psychology, the latter due to the influence of Mach's theory of perception on Wieser and Wieser's colleague Othmar Spann, and the former stemming from the reformist ideal of Fabian socialism so typical of Hayek's generation.
Like many students of economics then and since, Hayek chose the subject not for its own sake, but because he wanted to improve social conditions--the poverty of postwar Vienna serving as a daily reminder of such a need. Socialism seemed to provide a solution. Then in 1922 Mises published his Die Gemeinwirtschaft, later translated as Socialism. "To none of us young men who read the book when it appeared," Hayek recalled, "the world was ever the same again" (Hayek, 1956, p. 133). Socialism, an elaboration of Mises's pioneering article from two years before, argued that economic calculation requires a market for the means of production; without such a market there is no way to establish the values of those means and, consequently, no way to find their proper uses in production. Mises's devastating attack on central planning converted Hayek to laissez-faire, along with contemporaries like Wilhelm Röpke, Lionel Robbins, and Bertil Ohlin.
It was around this time that Hayek began attending Mises's famed Privatseminar. Regular participants, who received no academic credit or other official recognition for their time, included Hayek, Gottfried Haberler, Fritz Machlup, Oskar Morgenstern, Paul Rosenstein-Rodan, Richard von Strigl, Karl Schlesinger, Felix Kaufmann, Alfred Schütz, Eric Voegelin, Karl Menger, Jr., and others not so famous. For several years the Privatseminar was the center of the economics community in Vienna, attracting such visitors as Robbins from London and Howard S. Ellis from Berkeley. Later, Hayek became the first of this group to leave Vienna; most of the others, along with Mises himself, were also gone by the start of World War II.
Mises had done earlier work on monetary and banking theory, successfully applying the Austrian marginal utility principle to the value of money and then sketching a theory of industrial fluctuations based on the doctrines of the British Currency School and the ideas of the Swedish economist Knut Wicksell. Hayek used this last as a starting point for his own research on fluctuations, explaining the origin of the business cycle in terms of bank credit expansion and its transmission in terms of capital malinvestments. His work in this area eventually earned him an invitation to lecture at the London School of Economics and Political Science and then to occupy its Tooke Chair in Economics and Statistics, which he accepted in 1931. There he found himself among a vibrant and exciting group: Robbins, J. R. Hicks, Arnold Plant, Dennis Robertson, T. E. Gregory, Abba Lerner, Kenneth Boulding, and George Shackle, to name only the most prominent. Hayek brought his (to them) unfamiliar views,4 and gradually, the "Austrian" theory of the business cycle became known and accepted. At the L.S.E. Hayek lectured on Mises's business-cycle theory, which he was refining and which, until Keynes's General Theory came out in 1936, was rapidly gaining adherents in Britain and the U.S. and was becoming the preferred explanation of the Depression.
Hayek and Keynes had sparred in the early 1930s in the pages of the Economic Journal, over Keynes's Treatise on Money. As one of Keynes's leading professional adversaries, Hayek was well situated to provide a full refutation of the General Theory. But he never did. Part of the explanation for this no doubt lies with Keynes's personal charm and legendary rhetorical skill, along with Hayek's general reluctance to engage in direct confrontation with his colleagues.5 Hayek also considered Keynes an ally in the fight against wartime inflation and did not want to detract from that issue (Hayek, 1994, p. 91). Furthermore, as Hayek later explained, Keynes was constantly changing his theoretical framework, and Hayek saw no point in working out a detailed critique of the General Theory, if Keynes might change his mind again (Hayek, 1963, p. 60; Hayek, 1966, pp. 240-41). Hayek thought a better course would be to produce a fuller elaboration of Böhm-Bawerk's capital theory, and he began to devote his energies to this project. Unfortunately, The Pure Theory of Capital was not completed until 1941, and by then the Keynesian macro model had become firmly established.6
Within a very few years, however, the fortunes of the Austrian school suffered a dramatic reversal. First, the Austrian theory of capital, an integral part of the business-cycle theory, came under attack from the Italian-born Cambridge economist Piero Sraffa and the American Frank Knight, while the cycle theory itself was forgotten amid the enthusiasm for the General Theory. Second, beginning with Hayek's move to London and continuing until the early 1940s, the Austrian economists left Vienna, for personal and then for political reasons, so that a school ceased to exist there as such.7 Mises left Vienna in 1934 for Geneva and then New York, where he continued to work in isolation; Hayek remained at the L.S.E. until 1950, when he joined the Committee on Social Thought at the University of Chicago. Other Austrians of Hayek's generation became prominent in the U.S.--Gottfried Haberler at Harvard, Fritz Machlup and Oskar Morgenstern at Princeton, Paul Rosenstein-Rodan at MIT--but their work no longer seemed to show distinct traces of the tradition founded by Carl Menger.
At Chicago Hayek again found himself among a dazzling group: the economics department, led by Knight, Milton Friedman, and later George Stigler, was one of the best anywhere, and Aaron Director at the law school soon set up the first law and economics program.8 But economic theory, in particular its style of reasoning, was rapidly changing; Paul Samuelson's Foundations had appeared in 1947, establishing physics as the science for economics to imitate, and Friedman's 1953 essay on "positive economics" set a new standard for economic method. In addition, Hayek had ceased to work on economic theory, concentrating instead on psychology, philosophy, and politics, and Austrian economics entered a prolonged eclipse.9 Important work in the Austrian tradition was done during this period by Rothbard (1956, 1962, 1963a, 1963b), Kirzner (1963, 1966, 1973), and Lachmann (1956), but at least publicly, the Austrian tradition lay mostly dormant.
When the 1974 Nobel Prize in economics went to Hayek, interest in the Austrian school was suddenly and unexpectedly revived. While this was not the first event of the so-called "Austrian revival," the memorable South Royalton conference having taken place earlier the same year, the rediscovery of Hayek by the economics profession was nonetheless a decisive event in the renaissance of Austrian economics.10 Hayek's writings were taught to new generations, and Hayek himself appeared at the early Institute for Humane Studies conferences in the mid-1970s. He continued to write, producing The Fatal Conceit in 1988, at the age of 89. Hayek died in 1992 in Freiburg, Germany, where he had lived since leaving Chicago in 1961.
Contributions to Economics
Hayek's legacy in economics is complex. Among mainstream economists, he is mainly known for his popular The Road to Serfdom (1944) and for his work on knowledge in the 1930s and 1940s (Hayek, 1937, 1945). Specialists in business-cycle theory recognize his early work on industrial fluctuations, and modern information theorists often acknowledge Hayek's work on prices as signals, although his conclusions are typically disputed.11 Hayek's work is also known in political philosophy (Hayek, 1960), legal theory (Hayek 1973-79), and psychology (Hayek, 1952). Within the Austrian school of economics, Hayek's influence, while undeniably immense, has very recently become the subject of some controversy. His emphasis on spontaneous order and his work on complex systems has been widely influential among many Austrians. Others have preferred to stress Hayek's work in technical economics, particularly on capital and the business cycle, citing a tension between some of Hayek's and Mises's views on the social order. (While Mises was a rationalist and a utilitarian, Hayek focused on the limits to reason, basing his defense of capitalism on its ability to use limited knowledge and learning by trial and error.)
Business-cycle theory.
Hayek's writings on capital, money, and the business cycle are widely regarded as his most important contributions to economics (Hicks, 1967; Machlup, 1976). Building on Mises's Theory of Money and Credit (1912), Hayek showed how fluctuations in economy-wide output and employment are related to the economy's capital structure. In Prices and Production (1931) he introduced the famous "Hayekian triangles" to illustrate the relationship between the value of capital goods and their place in the temporal sequence of production. Because production takes time, factors of production must be committed in the present for making final goods that will have value only in the future after they are sold. However, capital is heterogeneous. As capital goods are used in production, they are transformed from general-purpose materials and components to intermediate products specific to particular final goods. Consequently, these assets cannot be easily redeployed to alternative uses if demands for final goods change. The central macroeconomic problem in a modern capital-using economy is thus one of intertemporal coordination: how can the allocation of resources between capital and consumer goods be aligned with consumers' preferences between present and future consumption? In The Pure Theory of Capital (1941), perhaps his most ambitious work, Hayek describes how the economy's structure of production depends on the characteristics of capital goods--durability, complementarity, substitutability, specificity, and so on. This structure can be described by the various "investment periods" of inputs, an extension of Böhm-Bawerk's notion of "roundaboutness," the degree to which production takes up resources over time.12
In Prices and Production (1931) and Monetary Theory and the Trade Cycle (1933a) Hayek showed how monetary injections, by lowering the rate of interest below what Mises (following Wicksell) called its "natural rate," distort the economy's intertemporal structure of production.13 Most theories of the effects of money on prices and output (then and since) consider only the effects of the total money supply on the price level and aggregate output or investment. The Austrian theory, as developed by Mises and Hayek, focuses on the way money enters the economy ("injection effects") and how this affects relative prices and investment in particular sectors. In Hayek's framework, investments in some stages of production are "malinvestments" if they do not help to align the structure of production to consumers' intertemporal preferences. The reduction in interest rates caused by credit expansion directs resources toward capital-intensive processes and early stages of production (whose investment demands are more interest-rate elastic), thus "lengthening" the period of production. If interest rates had fallen because consumers had changed their preferences to favor future over present consumption, then the longer time structure of production would have been an appropriate, coordinating response. A fall in interest rates caused by credit expansion, however, would have been a "false signal," causing changes in the structure of production that do not accord with consumers' intertemporal preferences.14 The boom generated by the increase in investment is artificial. Eventually, market participants come to realize that there are not enough savings to complete all the new projects; the boom becomes a bust as these malinvestments are discovered and liquidated.15 Every artificial boom induced by credit e xpansion, then, is self-reversing. Recovery consists of liquidating the malinvestments induced by the lowering of interest rates below their natural levels, thus restoring the time structure of production so that it accords with consumers' intertemporal preferences.16
Knowledge, prices, and competition as a discovery procedure.
Hayek's writings on dispersed knowledge and spontaneous order are also widely known, but more controversial. In "Economics and Knowledge" (1937) and "The Use of Knowledge in Society" (1945) Hayek argued that the central economic problem facing society is not, as is commonly expressed in textbooks, the allocation of given resources among competing ends. "It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only those individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge not given to anyone in its totality" (Hayek, 1945, p. 78).
Much of the knowledge necessary for running the economic system, Hayek contended, is in the form not of "scientific" or technical knowledge--the conscious awareness of the rules governing natural and social phenomena--but of "" knowledge, the idiosyncratic, dispersed bits of understanding of "circumstances of time and place." This tacit knowledge is often not consciously known even to those who possess it and can never be communicated to a central authority. The market tends to use this tacit knowledge through a type of "discovery procedure" (Hayek, 1968a), by which this information is unknowingly transmitted throughout the economy as an unintended consequence of individuals' pursuing their own ends.17 Indeed, Hayek's (1948b) distinction between the neoclassical notion of "competition," identified as a set of equilibrium conditions (number of market participants, characteristics of the product, and so on), and the older notion of competition as a rivalrous process, has been widely influential in Austrian economics (Kirzner, 1973; Machovec, 1995).
For Hayek, market competition generates a particular kind of order--an order that is the product "of human action but not human design" (a phrase Hayek borrowed from Adam Smith's mentor Adam Ferguson). This "spontaneous order" is a system that comes about through the independent actions of many individuals, and produces overall benefits unintended and mostly unforeseen by those whose actions bring it about. To distinguish between this kind of order and that of a deliberate, planned system, Hayek (1968b, pp. 72-76) used the Greek terms cosmos for a spontaneous order and taxis for a consciously planned one.18 Examples of a cosmos include the market system as a whole, money, the common law, and even language. A taxis, by contrast, is a designed or constructed organization, like a firm or bureau; these are the "islands of conscious power in [the] ocean of unconscious cooperation like lumps of butter coagulating in a pail of buttermilk" (D. H. Robertson, quoted in Coase, 1937, p. 35).19
Most commentators view Hayek's work on knowledge, discovery, and competition as an outgrowth of his participation in the socialist calculation debate of the 1920s and 1930s. The socialists erred, in Hayek's view, in failing to see that the economy as a whole is necessarily a spontaneous order and can never be deliberately made over in the way that the operators of a planned order can exercise control over their organization. This is because planned orders can handle only problems of strictly limited complexity. Spontaneous orders, by contrast, tend to evolve through a process of natural selection, and therefore do not need to be designed or even understood by a single mind.20
Hayek and Austrian Economics
Clearly, the Austrian revival owes as much to Hayek as to anyone. But are Hayek's writings really "Austrian economics"--part of a separate, recognizable tradition--or should we regard them, instead, as an original, deeply personal, contribution?21 Some observers charge that Hayek's later work, particularly after he began to turn away from technical economics, shows more influence of his friend Sir Karl Popper than of Carl Menger or Mises: one critic speaks of "Hayek I" and "Hayek II"; another writes on "Hayek's Transformation."22
It is true that Popper had a significant impact on Hayek's mature thought. Of greater interest is the precise nature of Hayek's relationship with Mises. Undoubtedly, no economist has had a greater impact on Hayek's thinking than Mises--not even Wieser, from whom Hayek learned his craft but who died in 1927 when Hayek was still a young man. In addition, Mises clearly considered Hayek the brightest of his generation.23 Yet, as Hayek (1978a) noted, he was from the beginning always something less than a pure follower: "Although I do owe [Mises] a decisive stimulus at a crucial point of my intellectual development, and continuous inspiration through a decade, I have perhaps most profited from his teaching because I was not initially his student at the university, an innocent young man who took his word for gospel, but came to him as a trained economist, versed in a parallel branch of Austrian economics [the Wieser branch] from which he gradually, but never completely, won me over."
Much has been written on Hayek's and Mises's views on the socialist calculation debate. The issue is whether a socialist economy is "impossible," as Mises charged in 1920, or simply less efficient or more difficult to implement. Hayek (1992, p. 127) maintained later that Mises's "central thesis was not, as it is sometimes misleadingly put, that socialism is impossible, but that it cannot achieve an efficient utilization of resources." That interpretation is itself subject to dispute. Hayek is arguing here against the standard view on economic calculation, found for instance in Schumpeter (1942, pp. 172-186) or Bergson (1948). This view holds that Mises's original statement of the impossibility of economic calculation under socialism was refuted by Oskar Lange, Fred Taylor, and Abba Lerner, and that later modifications by Hayek and Robbins amounted to an admission that a socialist economy is possible in theory but difficult in practice because knowledge is decentralized and incentives are weak. Hayek's response in the cited text, that Mises's actual position has been exaggerated, receives support from the primary revisionist historian of the calculation debate, Don Lavoie, who states that the "central arguments advanced by Hayek and Robbins did not constitute a 'retreat' from Mises, but rather a clarification directing the challenge to the later versions of central planning . . . Although comments by both Hayek and Robbins about computational difficulties of the [later approaches] were responsible for misleading interpretations of their arguments, in fact their main contributions were fully consistent with Mises's challenge" (Lavoie, 1985, p. 20). Kirzner (1988) similarly contends that Mises's and Hayek's positions should be viewed together as an early attempt to elaborate the Austrian "entrepreneurial-discovery" view of the market process. Salerno (1990a) argues, by contrast, in favor of the traditional view--that Mises's original calculation problem is different from the discovery-process problem emphasized b y Lavoie and Kirzner.24
Furthermore, Hayek's later emphasis on group selection and spontaneous order is not shared by Mises, although there are elements of this line of thought in Menger. A clue to this difference is in Hayek's (1978a) statement that "Mises himself was still much more a child of the rationalist tradition of the Enlightenment and of continental, rather than of English, liberalism . . . than I am myself." This is a reference to the "two types of liberalism" to which Hayek frequently refers: the continental rationalist or utilitarian tradition, which emphasizes reason and man's ability to shape his surroundings, and the English common-law tradition, which stresses the limits to reason and the "spontaneous" forces of evolution.25
Recently, the relationship between Mises and Hayek has become a full-fledged "de-homogenization" debate. Salerno (1990a, 1990b, 1993, 1994) and Rothbard (1991, 1995) see Hayek's emphasis on knowledge and discovery as substantially different from Mises's emphasis on purposeful human action. Salerno (1993), for example, argues that there are two strands of modern Austrian economics, both descended from Menger. One, the Wieser-Hayek strand, focuses on dispersed knowledge and the price system as a device for communicating knowledge. Another, the Böhm-Bawerk-Mises strand, focuses on monetary calculation (or "appraisal," meaning anticipation of future prices) based on existing money prices. Kirzner (1995a, 1995b, 1996, 1997) and Yeager (1994, 1995) argue, by contrast, that the differences between Hayek and Mises are more matters of emphasis and language than substance.26
Regardless, there is widespread agreement that Hayek ranks among the greatest members of the Austrian school, and among the leading economists of the twentieth century. His work continues to be influential in business-cycle theory, comparative economic systems, political and social philosophy, legal theory, and even cognitive psychology. Hayek's writings are not always easy to follow--he describes himself as "puzzler" or "muddler" rather than a "master of his subject"--and this may have contributed to the variety of interpretations his work has aroused.27 Partly for this reason, Hayek remains one of the most intriguing intellectual figures of our time.
References
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• 2. For a fuller biographical account see Hayek, 1994, and the introduction by Stephen Kresge.
• 3.Hayek's father was a physician and botanist. One grandfather, a statistician, was a friend of Eugen von Böhm-Bawerk; the philosopher Ludwig Wittgenstein was a second cousin.
• 4.Hicks (1967, p. 204) noted, in reference to Hayek's first (1931) English book, that "Prices and Production was in English, but it was not English economics."
• 5.In addition, Hayek (1963, p. 60) cited his own "tiredness from controversy"; he had already engaged the market socialists on economic calculation, Knight on capital theory, and Keynes on money.
• 6.For more on Hayek's failure to respond to the General Theory see Caldwell, 1995, esp. pp. 40-46. Hayek (1963, pp. 60-61; 1966, pp. 240-41) also believed that an effective refutation of Keynes would have to begin with a thorough critique of aggregate, or "macro" economics more generally. Caldwell (1988) suggests another reason: it was during this time that Hayek was losing faith in equilibrium theory and moving toward a "market process" view of economic activity, making it difficult for him to engage Keynes on the same terms in which they had debated earlier. McCormick (1992, pp. 99-134) and Blaug (1993, pp. 53-55) propose an entirely different reason: Hayek couldn't respond because the Austrian capital theory, on which the cycle theory was built, was simply wrong.
• 7.On the emigration of the Austrian economists see Craver, 1986.
• 8.However, at Chicago Hayek was considered something of an outsider; his post was with the Committee on Social Thought, not the economics department, and his salary was paid by a private foundation, the William Volker Fund (the same organization that paid Mises's salary as a visiting professor at New York University).
• 9.By this time, Hayek (1994, p. 126) said, "I had . . . become somewhat stale as an economist and felt much out of sympathy with the direction in which economics was developing. Though I had still regarded the work I had done during the 1940s on scientific method, the history of ideas, and political theory as temporary excursions into another field, I found it difficult to return to systematic teaching of economic theory and felt it rather as a release that I was not forced to do so by my teaching duties."
• 10.The proceedings of the South Royalton conference were published as The Foundations of Modern Austrian Economics (Dolan, 1976). A follow-up volume appeared two years later: New Directions in Austrian Economics (Spadaro, 1978). For perspectives on the Austrian revival see Rothbard, 1995, and Vaughn, 1996. Salerno (1996b) argues that the Austrian revival should be dated not from 1974, but from 1962-63, when Rothbard published Man, Economy, and State (1962), America's Great Depression(1963a), and What Has Government Done to Our Money? (1963b), the works that sparked the younger South Royalton participants' interest in Austrian economics.
• 11.Lucas (1977) cites Hayek as a leading exponent of pre-Keynesian business-cycle theory. Grossman and Stiglitz (1976) and Grossman (1980, 1989) argue that contrary to Hayek, market prices are not "sufficient statistics" for changes in tastes and technology. This literature tries to test the "informative content" of price signals, and contends that in general only perfectly competitive prices convey useful information. Farrell and Bolton (1990) claim that Hayek overstates the coordinating properties of decentralized market exchange. Hayek's 1945 paper is also frequently cited in the new institutional literature emphasizing process and adaptation, although coordination through markets is seen as only one type of desirable coordination. See, for example, Williamson, 1991.
• 12.Hayek ultimately rejected Böhm-Bawerk's "average period of production" as a useful concept, though he had used it earlier in Prices and Production (1931). See Hayek, 1994, p. 141, and White, 1996.
• 13.Hayek thought the more important case was when the market interest rate was kept constant despite a rise in the natural interest rate. In his writings, however, he focused on the expositionally easier case when credit expansion lowers the market interest rate below an unchanged natural rate.
• 14.For most of his career Hayek viewed a system of fractional-reserve banking as inherently unstable, endorsing a role (in principle) for government stabilization of the money supply. In later writings, beginning with The Constitution of Liberty (1960) and culminating in Denationalisation of Money(1976), he argued in favor of competition among private issuers of fiat money. See White, 1997.
• 15.Anticipating modern cycle theories, Hayek (1939) recognized that the behavior of the cycle depends on expectations about future price and interest-rate movements. As Garrison and Kirzner put it (1987, p. 612), for Hayek "prices are signals, not marching orders." But Hayek did not believe agents could know the real structure of the economy, to correctly distinguish movements in interest rates generated by changes in consumers' intertemporal preferences from those generated by changes in the money supply.
• 16.For general overviews of Hayek's macroeconomic views see O'Driscoll, 1977, and Garrison and Kirzner, 1987. For expositions and interpretations of the Austrian trade-cycle theory, particularly as it relates to modern cycle theories, see Garrison, 1978, 1984; Bellante and Garrison, 1988; Van Zijp, 1993; and Foss, 1994, pp. 39-55.
• 17.Hayek's use of an argument from ignorance as a defense of the market is unusual. Modern economists typically require assumptions of hyperrationality--complete and perfect information, rational expectations, perfect markets, and so on--to justify market allocations as "efficient." In the new microeconomics literature on information and incentives, theorists like Joseph Stiglitz have used deviations from these assumptions of perfection to reach a verdict of market failure and to provide a rationale for government intervention (see note 9 above). For Hayek, by contrast, the fact that agents are not hyperrational is an argument not against individual freedom, but against state planning and social control.
• 18.Earlier Hayek (1933b, p. 27) had used "organism" and "organization," borrowed from Mises, to distinguish the two; this is the distinction cited by Coase in his famous 1937 article, "The Nature of the Firm."
• 19.On the relationship between the socialist calculation debate and the theory of the firm see Klein, 1996.
• 20.For more on spontaneous order see Fehl, 1986. Vanberg (1994) argues that Hayek's notion of spontaneous order via group selection is incompatible with methodological individualism.
• 21.Wieser's have generally been considered a personal contribution, by Hayek himself and others. For a contrary view see Ekelund, 1986.
• 22.For Hayeks I and II see Hutchison, 1984, pp. 210-19; for the "transformation" see Caldwell, 1988. The secondary literature contains some debate about whether Hayek's 1937 article "Economics and Knowledge" represents a decisive break with Mises in favor of a Popperian "falsificationist" approach, one holding that empirical evidence can be used to falsify a theory (though not to "verify" it by induction). For the case that 1937 is a crucial turning point see Hutchison (1984, p. 215) and Caldwell (1988, p. 528); for the reverse see Gray (1984, pp. 16-21) and Garrison and Kirzner (1987, pp. 610). Hayek (1992, pp. 55-56; 1994, pp. 72-74) himself supported the former interpretation, maintaining that it was indeed Mises he had hoped to persuade in the 1937 article. If true, Hayek's attempt was remarkably subtle, for Mises apparently welcomed Hayek's argument, unaware that it was directed at him.
• 23.Margit von Mises (1984, p. 133) recalls of her husband's seminar in New York that he "met every new student hopeful that one of them might develop into a second Hayek."
• 24.Hayek's writings on socialist economic calculation are collected in Hayek, 1997. See Caldwell, 1997, for an overview.
• 25.For more on the complex and subtle Mises-Hayek relationship see Klein, 1992, pp. 7-13 and the references cited therein.
• 26.Kirzner (1995b, p. 1244), for example, writes that Mises's and Hayek's critiques of socialism "are simply different ways of expounding the same basic, Austrian, insight. . . . To fail to see the common economic understanding shared by Mises and Hayek, is to have been needlessly misled by superficial differences in exposition and emphasis. To compound this failure by perceiving a clash, among modern Austrians, of 'Hayekians' versus 'Misesians,' is to convert an interpretive failure into adogmengeschictliche nightmare." For more on the de-homogenization debate see Herbener, 1991, 1996; Salerno, 1994, 1996a; Hoppe, 1996; Boettke, 1997; and Yeager, 1995. Rothbard (1994, p. 559) identifies three "distinctive and often clashing paradigms within Austrian economics: Misesian praxeology; the Hayek-Kirzner emphasis on the market as transmission of knowledge and coordination of plans--rather than the Misesian emphasis on continuing coordination of prices; and the ultra-subjectivism of [Ludwig] Lachmann."
Interestingly, Hayek himself sought to de-homogenize his work from that of free-market thinkers with whom he disagreed methodologically. In an interview in the 1980s he described Milton Friedman as a "logical positivist," who "believe[s] economic phenomena can be explained as macrophenomena, that you can ascertain cause and effects from aggregates and averages. . . . [Friedman] is on most things, general market problems, sound. I want him on my side. You know, one of the things I often have publicly said is that one of the things I most regret is not having returned to a criticism of Keynes's treatise, but it is as much true of not having criticized Milton's [Essays in] Positive Economics, which in a way is quite as dangerous a book." Quoted in Hayek, 1994, pp. 144-45.
• 27.On puzzlers and masters of their subjects see Hayek, 1975. Along with himself, Hayek named Wieser and Frank Knight as representative puzzlers, and Böhm-Bawerk, Joseph Schumpeter, and Jacob Viner as representative masters of their subjects. As Hayek (1975, p. 51) recalled, "I owed whatever worthwhile new ideas I ever had to not being able to remember what every competent specialist is supposed to have at his fingertips. Whenever I saw a new light on something it was as the result of a painful effort to reconstruct an argument which most competent economists would effortlessly and instantly reproduce."
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Leo Rosten, author, and Friedrich A. Hayek, Ph.D. Economics. Hour one of a lively and occasionally controversial three-part interview of noted economist Friedrich A. Hayek by Leo Rosten, in a wide-ranging discussion of Hayek's life and work. ©1978 / 56 min.
https://www.youtube.com/watch?v=34Bre91Ey3Q
Images:
1. June 1945, Friedrich August von Hayek, by Walter Stoneman
2. Friedrich August von Hayek 'The history of government management of money has, except for a few short happy periods, been one of incessant fraud and deception.
3. Friedrich August von Hayek 'The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.'
4. Friedrich August von Hayek 'What our generation has forgotten is that the system of private property is the most important guarantee of freedom, not only for those who own property, but scarcely less for those who do not. It is only because the control of the means of production is divided among many people acting independently that nobody has complete power over us, that we as individuals can decide what to do with ourselves.'
Background from {[https://mises.org/library/biography-f-hayek-1899-1992]}
Biography of F. A. Hayek (1899-1992) by Peter G. Klein 08/01/2007
"A claim for equality of material position can be met only by a government with totalitarian powers."
F. A. Hayek is undoubtedly the most eminent of the modern Austrian economists. Student of Friedrich von Wieser, protégé and colleague of Ludwig von Mises, and foremost representative of an outstanding generation of Austrian school theorists, Hayek was more successful than anyone else in spreading Austrian ideas throughout the English-speaking world. "When the definitive history of economic analysis during the 1930s comes to be written," said John Hicks in 1967, "a leading character in the drama (it was quite a drama) will be Professor Hayek. . . . It is hardly remembered that there was a time when the new theories of Hayek were the principal rival of the new theories of Keynes" (Hicks, 1967, p. 203). Unfortunately, Hayek's theory of the business cycle was eventually swept aside by the Keynesian revolution. Ultimately, however, this work was again recognized when Hayek received, along with the Swede Gunnar Myrdal, the 1974 Nobel Memorial Prize in Economic Science. Hayek was a prolific writer over nearly seven decades; his Collected Works, currently being published by the University of Chicago Press and Routledge, are projected at nineteen volumes.
Life and Work
Hayek's life spanned the twentieth century, and he made his home in some of the great intellectual communities of the period.2 Born Friedrich August von Hayek in 1899 to a distinguished family of Viennese intellectuals,3 Hayek attended the University of Vienna, earning doctorates in 1921 and 1923. Hayek came to the University at age 19 just after World War I, when it was one of the three best places in the world to study economics (the others being Stockholm and Cambridge, England). Though he was enrolled as a law student, his primary interests were economics and psychology, the latter due to the influence of Mach's theory of perception on Wieser and Wieser's colleague Othmar Spann, and the former stemming from the reformist ideal of Fabian socialism so typical of Hayek's generation.
Like many students of economics then and since, Hayek chose the subject not for its own sake, but because he wanted to improve social conditions--the poverty of postwar Vienna serving as a daily reminder of such a need. Socialism seemed to provide a solution. Then in 1922 Mises published his Die Gemeinwirtschaft, later translated as Socialism. "To none of us young men who read the book when it appeared," Hayek recalled, "the world was ever the same again" (Hayek, 1956, p. 133). Socialism, an elaboration of Mises's pioneering article from two years before, argued that economic calculation requires a market for the means of production; without such a market there is no way to establish the values of those means and, consequently, no way to find their proper uses in production. Mises's devastating attack on central planning converted Hayek to laissez-faire, along with contemporaries like Wilhelm Röpke, Lionel Robbins, and Bertil Ohlin.
It was around this time that Hayek began attending Mises's famed Privatseminar. Regular participants, who received no academic credit or other official recognition for their time, included Hayek, Gottfried Haberler, Fritz Machlup, Oskar Morgenstern, Paul Rosenstein-Rodan, Richard von Strigl, Karl Schlesinger, Felix Kaufmann, Alfred Schütz, Eric Voegelin, Karl Menger, Jr., and others not so famous. For several years the Privatseminar was the center of the economics community in Vienna, attracting such visitors as Robbins from London and Howard S. Ellis from Berkeley. Later, Hayek became the first of this group to leave Vienna; most of the others, along with Mises himself, were also gone by the start of World War II.
Mises had done earlier work on monetary and banking theory, successfully applying the Austrian marginal utility principle to the value of money and then sketching a theory of industrial fluctuations based on the doctrines of the British Currency School and the ideas of the Swedish economist Knut Wicksell. Hayek used this last as a starting point for his own research on fluctuations, explaining the origin of the business cycle in terms of bank credit expansion and its transmission in terms of capital malinvestments. His work in this area eventually earned him an invitation to lecture at the London School of Economics and Political Science and then to occupy its Tooke Chair in Economics and Statistics, which he accepted in 1931. There he found himself among a vibrant and exciting group: Robbins, J. R. Hicks, Arnold Plant, Dennis Robertson, T. E. Gregory, Abba Lerner, Kenneth Boulding, and George Shackle, to name only the most prominent. Hayek brought his (to them) unfamiliar views,4 and gradually, the "Austrian" theory of the business cycle became known and accepted. At the L.S.E. Hayek lectured on Mises's business-cycle theory, which he was refining and which, until Keynes's General Theory came out in 1936, was rapidly gaining adherents in Britain and the U.S. and was becoming the preferred explanation of the Depression.
Hayek and Keynes had sparred in the early 1930s in the pages of the Economic Journal, over Keynes's Treatise on Money. As one of Keynes's leading professional adversaries, Hayek was well situated to provide a full refutation of the General Theory. But he never did. Part of the explanation for this no doubt lies with Keynes's personal charm and legendary rhetorical skill, along with Hayek's general reluctance to engage in direct confrontation with his colleagues.5 Hayek also considered Keynes an ally in the fight against wartime inflation and did not want to detract from that issue (Hayek, 1994, p. 91). Furthermore, as Hayek later explained, Keynes was constantly changing his theoretical framework, and Hayek saw no point in working out a detailed critique of the General Theory, if Keynes might change his mind again (Hayek, 1963, p. 60; Hayek, 1966, pp. 240-41). Hayek thought a better course would be to produce a fuller elaboration of Böhm-Bawerk's capital theory, and he began to devote his energies to this project. Unfortunately, The Pure Theory of Capital was not completed until 1941, and by then the Keynesian macro model had become firmly established.6
Within a very few years, however, the fortunes of the Austrian school suffered a dramatic reversal. First, the Austrian theory of capital, an integral part of the business-cycle theory, came under attack from the Italian-born Cambridge economist Piero Sraffa and the American Frank Knight, while the cycle theory itself was forgotten amid the enthusiasm for the General Theory. Second, beginning with Hayek's move to London and continuing until the early 1940s, the Austrian economists left Vienna, for personal and then for political reasons, so that a school ceased to exist there as such.7 Mises left Vienna in 1934 for Geneva and then New York, where he continued to work in isolation; Hayek remained at the L.S.E. until 1950, when he joined the Committee on Social Thought at the University of Chicago. Other Austrians of Hayek's generation became prominent in the U.S.--Gottfried Haberler at Harvard, Fritz Machlup and Oskar Morgenstern at Princeton, Paul Rosenstein-Rodan at MIT--but their work no longer seemed to show distinct traces of the tradition founded by Carl Menger.
At Chicago Hayek again found himself among a dazzling group: the economics department, led by Knight, Milton Friedman, and later George Stigler, was one of the best anywhere, and Aaron Director at the law school soon set up the first law and economics program.8 But economic theory, in particular its style of reasoning, was rapidly changing; Paul Samuelson's Foundations had appeared in 1947, establishing physics as the science for economics to imitate, and Friedman's 1953 essay on "positive economics" set a new standard for economic method. In addition, Hayek had ceased to work on economic theory, concentrating instead on psychology, philosophy, and politics, and Austrian economics entered a prolonged eclipse.9 Important work in the Austrian tradition was done during this period by Rothbard (1956, 1962, 1963a, 1963b), Kirzner (1963, 1966, 1973), and Lachmann (1956), but at least publicly, the Austrian tradition lay mostly dormant.
When the 1974 Nobel Prize in economics went to Hayek, interest in the Austrian school was suddenly and unexpectedly revived. While this was not the first event of the so-called "Austrian revival," the memorable South Royalton conference having taken place earlier the same year, the rediscovery of Hayek by the economics profession was nonetheless a decisive event in the renaissance of Austrian economics.10 Hayek's writings were taught to new generations, and Hayek himself appeared at the early Institute for Humane Studies conferences in the mid-1970s. He continued to write, producing The Fatal Conceit in 1988, at the age of 89. Hayek died in 1992 in Freiburg, Germany, where he had lived since leaving Chicago in 1961.
Contributions to Economics
Hayek's legacy in economics is complex. Among mainstream economists, he is mainly known for his popular The Road to Serfdom (1944) and for his work on knowledge in the 1930s and 1940s (Hayek, 1937, 1945). Specialists in business-cycle theory recognize his early work on industrial fluctuations, and modern information theorists often acknowledge Hayek's work on prices as signals, although his conclusions are typically disputed.11 Hayek's work is also known in political philosophy (Hayek, 1960), legal theory (Hayek 1973-79), and psychology (Hayek, 1952). Within the Austrian school of economics, Hayek's influence, while undeniably immense, has very recently become the subject of some controversy. His emphasis on spontaneous order and his work on complex systems has been widely influential among many Austrians. Others have preferred to stress Hayek's work in technical economics, particularly on capital and the business cycle, citing a tension between some of Hayek's and Mises's views on the social order. (While Mises was a rationalist and a utilitarian, Hayek focused on the limits to reason, basing his defense of capitalism on its ability to use limited knowledge and learning by trial and error.)
Business-cycle theory.
Hayek's writings on capital, money, and the business cycle are widely regarded as his most important contributions to economics (Hicks, 1967; Machlup, 1976). Building on Mises's Theory of Money and Credit (1912), Hayek showed how fluctuations in economy-wide output and employment are related to the economy's capital structure. In Prices and Production (1931) he introduced the famous "Hayekian triangles" to illustrate the relationship between the value of capital goods and their place in the temporal sequence of production. Because production takes time, factors of production must be committed in the present for making final goods that will have value only in the future after they are sold. However, capital is heterogeneous. As capital goods are used in production, they are transformed from general-purpose materials and components to intermediate products specific to particular final goods. Consequently, these assets cannot be easily redeployed to alternative uses if demands for final goods change. The central macroeconomic problem in a modern capital-using economy is thus one of intertemporal coordination: how can the allocation of resources between capital and consumer goods be aligned with consumers' preferences between present and future consumption? In The Pure Theory of Capital (1941), perhaps his most ambitious work, Hayek describes how the economy's structure of production depends on the characteristics of capital goods--durability, complementarity, substitutability, specificity, and so on. This structure can be described by the various "investment periods" of inputs, an extension of Böhm-Bawerk's notion of "roundaboutness," the degree to which production takes up resources over time.12
In Prices and Production (1931) and Monetary Theory and the Trade Cycle (1933a) Hayek showed how monetary injections, by lowering the rate of interest below what Mises (following Wicksell) called its "natural rate," distort the economy's intertemporal structure of production.13 Most theories of the effects of money on prices and output (then and since) consider only the effects of the total money supply on the price level and aggregate output or investment. The Austrian theory, as developed by Mises and Hayek, focuses on the way money enters the economy ("injection effects") and how this affects relative prices and investment in particular sectors. In Hayek's framework, investments in some stages of production are "malinvestments" if they do not help to align the structure of production to consumers' intertemporal preferences. The reduction in interest rates caused by credit expansion directs resources toward capital-intensive processes and early stages of production (whose investment demands are more interest-rate elastic), thus "lengthening" the period of production. If interest rates had fallen because consumers had changed their preferences to favor future over present consumption, then the longer time structure of production would have been an appropriate, coordinating response. A fall in interest rates caused by credit expansion, however, would have been a "false signal," causing changes in the structure of production that do not accord with consumers' intertemporal preferences.14 The boom generated by the increase in investment is artificial. Eventually, market participants come to realize that there are not enough savings to complete all the new projects; the boom becomes a bust as these malinvestments are discovered and liquidated.15 Every artificial boom induced by credit e xpansion, then, is self-reversing. Recovery consists of liquidating the malinvestments induced by the lowering of interest rates below their natural levels, thus restoring the time structure of production so that it accords with consumers' intertemporal preferences.16
Knowledge, prices, and competition as a discovery procedure.
Hayek's writings on dispersed knowledge and spontaneous order are also widely known, but more controversial. In "Economics and Knowledge" (1937) and "The Use of Knowledge in Society" (1945) Hayek argued that the central economic problem facing society is not, as is commonly expressed in textbooks, the allocation of given resources among competing ends. "It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only those individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge not given to anyone in its totality" (Hayek, 1945, p. 78).
Much of the knowledge necessary for running the economic system, Hayek contended, is in the form not of "scientific" or technical knowledge--the conscious awareness of the rules governing natural and social phenomena--but of "" knowledge, the idiosyncratic, dispersed bits of understanding of "circumstances of time and place." This tacit knowledge is often not consciously known even to those who possess it and can never be communicated to a central authority. The market tends to use this tacit knowledge through a type of "discovery procedure" (Hayek, 1968a), by which this information is unknowingly transmitted throughout the economy as an unintended consequence of individuals' pursuing their own ends.17 Indeed, Hayek's (1948b) distinction between the neoclassical notion of "competition," identified as a set of equilibrium conditions (number of market participants, characteristics of the product, and so on), and the older notion of competition as a rivalrous process, has been widely influential in Austrian economics (Kirzner, 1973; Machovec, 1995).
For Hayek, market competition generates a particular kind of order--an order that is the product "of human action but not human design" (a phrase Hayek borrowed from Adam Smith's mentor Adam Ferguson). This "spontaneous order" is a system that comes about through the independent actions of many individuals, and produces overall benefits unintended and mostly unforeseen by those whose actions bring it about. To distinguish between this kind of order and that of a deliberate, planned system, Hayek (1968b, pp. 72-76) used the Greek terms cosmos for a spontaneous order and taxis for a consciously planned one.18 Examples of a cosmos include the market system as a whole, money, the common law, and even language. A taxis, by contrast, is a designed or constructed organization, like a firm or bureau; these are the "islands of conscious power in [the] ocean of unconscious cooperation like lumps of butter coagulating in a pail of buttermilk" (D. H. Robertson, quoted in Coase, 1937, p. 35).19
Most commentators view Hayek's work on knowledge, discovery, and competition as an outgrowth of his participation in the socialist calculation debate of the 1920s and 1930s. The socialists erred, in Hayek's view, in failing to see that the economy as a whole is necessarily a spontaneous order and can never be deliberately made over in the way that the operators of a planned order can exercise control over their organization. This is because planned orders can handle only problems of strictly limited complexity. Spontaneous orders, by contrast, tend to evolve through a process of natural selection, and therefore do not need to be designed or even understood by a single mind.20
Hayek and Austrian Economics
Clearly, the Austrian revival owes as much to Hayek as to anyone. But are Hayek's writings really "Austrian economics"--part of a separate, recognizable tradition--or should we regard them, instead, as an original, deeply personal, contribution?21 Some observers charge that Hayek's later work, particularly after he began to turn away from technical economics, shows more influence of his friend Sir Karl Popper than of Carl Menger or Mises: one critic speaks of "Hayek I" and "Hayek II"; another writes on "Hayek's Transformation."22
It is true that Popper had a significant impact on Hayek's mature thought. Of greater interest is the precise nature of Hayek's relationship with Mises. Undoubtedly, no economist has had a greater impact on Hayek's thinking than Mises--not even Wieser, from whom Hayek learned his craft but who died in 1927 when Hayek was still a young man. In addition, Mises clearly considered Hayek the brightest of his generation.23 Yet, as Hayek (1978a) noted, he was from the beginning always something less than a pure follower: "Although I do owe [Mises] a decisive stimulus at a crucial point of my intellectual development, and continuous inspiration through a decade, I have perhaps most profited from his teaching because I was not initially his student at the university, an innocent young man who took his word for gospel, but came to him as a trained economist, versed in a parallel branch of Austrian economics [the Wieser branch] from which he gradually, but never completely, won me over."
Much has been written on Hayek's and Mises's views on the socialist calculation debate. The issue is whether a socialist economy is "impossible," as Mises charged in 1920, or simply less efficient or more difficult to implement. Hayek (1992, p. 127) maintained later that Mises's "central thesis was not, as it is sometimes misleadingly put, that socialism is impossible, but that it cannot achieve an efficient utilization of resources." That interpretation is itself subject to dispute. Hayek is arguing here against the standard view on economic calculation, found for instance in Schumpeter (1942, pp. 172-186) or Bergson (1948). This view holds that Mises's original statement of the impossibility of economic calculation under socialism was refuted by Oskar Lange, Fred Taylor, and Abba Lerner, and that later modifications by Hayek and Robbins amounted to an admission that a socialist economy is possible in theory but difficult in practice because knowledge is decentralized and incentives are weak. Hayek's response in the cited text, that Mises's actual position has been exaggerated, receives support from the primary revisionist historian of the calculation debate, Don Lavoie, who states that the "central arguments advanced by Hayek and Robbins did not constitute a 'retreat' from Mises, but rather a clarification directing the challenge to the later versions of central planning . . . Although comments by both Hayek and Robbins about computational difficulties of the [later approaches] were responsible for misleading interpretations of their arguments, in fact their main contributions were fully consistent with Mises's challenge" (Lavoie, 1985, p. 20). Kirzner (1988) similarly contends that Mises's and Hayek's positions should be viewed together as an early attempt to elaborate the Austrian "entrepreneurial-discovery" view of the market process. Salerno (1990a) argues, by contrast, in favor of the traditional view--that Mises's original calculation problem is different from the discovery-process problem emphasized b y Lavoie and Kirzner.24
Furthermore, Hayek's later emphasis on group selection and spontaneous order is not shared by Mises, although there are elements of this line of thought in Menger. A clue to this difference is in Hayek's (1978a) statement that "Mises himself was still much more a child of the rationalist tradition of the Enlightenment and of continental, rather than of English, liberalism . . . than I am myself." This is a reference to the "two types of liberalism" to which Hayek frequently refers: the continental rationalist or utilitarian tradition, which emphasizes reason and man's ability to shape his surroundings, and the English common-law tradition, which stresses the limits to reason and the "spontaneous" forces of evolution.25
Recently, the relationship between Mises and Hayek has become a full-fledged "de-homogenization" debate. Salerno (1990a, 1990b, 1993, 1994) and Rothbard (1991, 1995) see Hayek's emphasis on knowledge and discovery as substantially different from Mises's emphasis on purposeful human action. Salerno (1993), for example, argues that there are two strands of modern Austrian economics, both descended from Menger. One, the Wieser-Hayek strand, focuses on dispersed knowledge and the price system as a device for communicating knowledge. Another, the Böhm-Bawerk-Mises strand, focuses on monetary calculation (or "appraisal," meaning anticipation of future prices) based on existing money prices. Kirzner (1995a, 1995b, 1996, 1997) and Yeager (1994, 1995) argue, by contrast, that the differences between Hayek and Mises are more matters of emphasis and language than substance.26
Regardless, there is widespread agreement that Hayek ranks among the greatest members of the Austrian school, and among the leading economists of the twentieth century. His work continues to be influential in business-cycle theory, comparative economic systems, political and social philosophy, legal theory, and even cognitive psychology. Hayek's writings are not always easy to follow--he describes himself as "puzzler" or "muddler" rather than a "master of his subject"--and this may have contributed to the variety of interpretations his work has aroused.27 Partly for this reason, Hayek remains one of the most intriguing intellectual figures of our time.
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Salerno, Joseph T. 1990a. "Ludwig von Mises as Social Rationalist." Review of Austrian Economics 4: 26-54.
Salerno, Joseph T. 1990b. "Postscript: Why a Socialist Economy Is 'Impossible.'" In Ludwig von Mises, Economic Calculation in the Socialist Commonwealth. Auburn, Ala.: Ludwig von Mises Institute, pp. 51-71.
Salerno, Joseph T. 1993. "Mises and Hayek Dehomogenized." Review of Austrian Economics 6, no. 2: 113-46.
Salerno, Joseph T. 1994. "Reply to Leland B. Yeager." Review of Austrian Economics 7, no. 2: 111-25.
Salerno, Joseph T. 1996a. "A Final Word: Calculation, Knowledge, and Appraisement." Review of Austrian Economics 9, no. 1: 141-42.
Salerno, Joseph T. 1996b. "Why We're Winning: An Interview with Joseph T. Salerno." Austrian Economics Newsletter 16, no. 3 (Fall): 1-8.
Schumpeter, Joseph A. 1942. Capitalism, Socialism, and Democracy. New York: Harper & Row.
Spadaro, Louis M., ed. 1978. New Directions in Austrian Economics. Kansas City: Sheed Andrews & McMeel, 1978.
Van Zijp, Rudy. 1993. Austrian and New Classical Business Cycle Theories: A Comparative Study Through the Method of Rational Reconstruction. Brookfield, Vt.: Edward Elgar.
Vanberg, Viktor J. 1994. "Spontaneous Market Order and Social Rules: A Critical Examination of F. A. Hayek's Theory of Cultural Evolution." In idem., Rules and Choice in Economics. London and New York: Routledge, pp. 75-94.
Vaughn, Karen I. 1996. Austrian Economics in America: The Migration of a Tradition. Cambridge: Cambridge University Press.
White, Lawrence H. 1996. "Hayek's Pure Theory of Capital." Unpublished manuscript. Department of Economics, University of Georgia.
White, Lawrence H. 1997. "Why Didn't Hayek Favor Laissez-Faire in Banking?" History of Political Economy, forthcoming.
Williamson, Oliver E. 1991. "Economic Institutions: Spontaneous and Intentional Governance." Journal of Law, Economics and Organization 7 (special issue):159-87.
Yeager, Leland B. 1994. "Mises and Hayek on Calculation and Knowledge." Review of Austrian Economics 7, no. 2: 93-109.
Yeager, Leland B. 1995. "Rejoinder: Salerno on Calculation, Knowledge, and Appraisement." Review of Austrian Economics 9, no.1: 137-39.
• 2. For a fuller biographical account see Hayek, 1994, and the introduction by Stephen Kresge.
• 3.Hayek's father was a physician and botanist. One grandfather, a statistician, was a friend of Eugen von Böhm-Bawerk; the philosopher Ludwig Wittgenstein was a second cousin.
• 4.Hicks (1967, p. 204) noted, in reference to Hayek's first (1931) English book, that "Prices and Production was in English, but it was not English economics."
• 5.In addition, Hayek (1963, p. 60) cited his own "tiredness from controversy"; he had already engaged the market socialists on economic calculation, Knight on capital theory, and Keynes on money.
• 6.For more on Hayek's failure to respond to the General Theory see Caldwell, 1995, esp. pp. 40-46. Hayek (1963, pp. 60-61; 1966, pp. 240-41) also believed that an effective refutation of Keynes would have to begin with a thorough critique of aggregate, or "macro" economics more generally. Caldwell (1988) suggests another reason: it was during this time that Hayek was losing faith in equilibrium theory and moving toward a "market process" view of economic activity, making it difficult for him to engage Keynes on the same terms in which they had debated earlier. McCormick (1992, pp. 99-134) and Blaug (1993, pp. 53-55) propose an entirely different reason: Hayek couldn't respond because the Austrian capital theory, on which the cycle theory was built, was simply wrong.
• 7.On the emigration of the Austrian economists see Craver, 1986.
• 8.However, at Chicago Hayek was considered something of an outsider; his post was with the Committee on Social Thought, not the economics department, and his salary was paid by a private foundation, the William Volker Fund (the same organization that paid Mises's salary as a visiting professor at New York University).
• 9.By this time, Hayek (1994, p. 126) said, "I had . . . become somewhat stale as an economist and felt much out of sympathy with the direction in which economics was developing. Though I had still regarded the work I had done during the 1940s on scientific method, the history of ideas, and political theory as temporary excursions into another field, I found it difficult to return to systematic teaching of economic theory and felt it rather as a release that I was not forced to do so by my teaching duties."
• 10.The proceedings of the South Royalton conference were published as The Foundations of Modern Austrian Economics (Dolan, 1976). A follow-up volume appeared two years later: New Directions in Austrian Economics (Spadaro, 1978). For perspectives on the Austrian revival see Rothbard, 1995, and Vaughn, 1996. Salerno (1996b) argues that the Austrian revival should be dated not from 1974, but from 1962-63, when Rothbard published Man, Economy, and State (1962), America's Great Depression(1963a), and What Has Government Done to Our Money? (1963b), the works that sparked the younger South Royalton participants' interest in Austrian economics.
• 11.Lucas (1977) cites Hayek as a leading exponent of pre-Keynesian business-cycle theory. Grossman and Stiglitz (1976) and Grossman (1980, 1989) argue that contrary to Hayek, market prices are not "sufficient statistics" for changes in tastes and technology. This literature tries to test the "informative content" of price signals, and contends that in general only perfectly competitive prices convey useful information. Farrell and Bolton (1990) claim that Hayek overstates the coordinating properties of decentralized market exchange. Hayek's 1945 paper is also frequently cited in the new institutional literature emphasizing process and adaptation, although coordination through markets is seen as only one type of desirable coordination. See, for example, Williamson, 1991.
• 12.Hayek ultimately rejected Böhm-Bawerk's "average period of production" as a useful concept, though he had used it earlier in Prices and Production (1931). See Hayek, 1994, p. 141, and White, 1996.
• 13.Hayek thought the more important case was when the market interest rate was kept constant despite a rise in the natural interest rate. In his writings, however, he focused on the expositionally easier case when credit expansion lowers the market interest rate below an unchanged natural rate.
• 14.For most of his career Hayek viewed a system of fractional-reserve banking as inherently unstable, endorsing a role (in principle) for government stabilization of the money supply. In later writings, beginning with The Constitution of Liberty (1960) and culminating in Denationalisation of Money(1976), he argued in favor of competition among private issuers of fiat money. See White, 1997.
• 15.Anticipating modern cycle theories, Hayek (1939) recognized that the behavior of the cycle depends on expectations about future price and interest-rate movements. As Garrison and Kirzner put it (1987, p. 612), for Hayek "prices are signals, not marching orders." But Hayek did not believe agents could know the real structure of the economy, to correctly distinguish movements in interest rates generated by changes in consumers' intertemporal preferences from those generated by changes in the money supply.
• 16.For general overviews of Hayek's macroeconomic views see O'Driscoll, 1977, and Garrison and Kirzner, 1987. For expositions and interpretations of the Austrian trade-cycle theory, particularly as it relates to modern cycle theories, see Garrison, 1978, 1984; Bellante and Garrison, 1988; Van Zijp, 1993; and Foss, 1994, pp. 39-55.
• 17.Hayek's use of an argument from ignorance as a defense of the market is unusual. Modern economists typically require assumptions of hyperrationality--complete and perfect information, rational expectations, perfect markets, and so on--to justify market allocations as "efficient." In the new microeconomics literature on information and incentives, theorists like Joseph Stiglitz have used deviations from these assumptions of perfection to reach a verdict of market failure and to provide a rationale for government intervention (see note 9 above). For Hayek, by contrast, the fact that agents are not hyperrational is an argument not against individual freedom, but against state planning and social control.
• 18.Earlier Hayek (1933b, p. 27) had used "organism" and "organization," borrowed from Mises, to distinguish the two; this is the distinction cited by Coase in his famous 1937 article, "The Nature of the Firm."
• 19.On the relationship between the socialist calculation debate and the theory of the firm see Klein, 1996.
• 20.For more on spontaneous order see Fehl, 1986. Vanberg (1994) argues that Hayek's notion of spontaneous order via group selection is incompatible with methodological individualism.
• 21.Wieser's have generally been considered a personal contribution, by Hayek himself and others. For a contrary view see Ekelund, 1986.
• 22.For Hayeks I and II see Hutchison, 1984, pp. 210-19; for the "transformation" see Caldwell, 1988. The secondary literature contains some debate about whether Hayek's 1937 article "Economics and Knowledge" represents a decisive break with Mises in favor of a Popperian "falsificationist" approach, one holding that empirical evidence can be used to falsify a theory (though not to "verify" it by induction). For the case that 1937 is a crucial turning point see Hutchison (1984, p. 215) and Caldwell (1988, p. 528); for the reverse see Gray (1984, pp. 16-21) and Garrison and Kirzner (1987, pp. 610). Hayek (1992, pp. 55-56; 1994, pp. 72-74) himself supported the former interpretation, maintaining that it was indeed Mises he had hoped to persuade in the 1937 article. If true, Hayek's attempt was remarkably subtle, for Mises apparently welcomed Hayek's argument, unaware that it was directed at him.
• 23.Margit von Mises (1984, p. 133) recalls of her husband's seminar in New York that he "met every new student hopeful that one of them might develop into a second Hayek."
• 24.Hayek's writings on socialist economic calculation are collected in Hayek, 1997. See Caldwell, 1997, for an overview.
• 25.For more on the complex and subtle Mises-Hayek relationship see Klein, 1992, pp. 7-13 and the references cited therein.
• 26.Kirzner (1995b, p. 1244), for example, writes that Mises's and Hayek's critiques of socialism "are simply different ways of expounding the same basic, Austrian, insight. . . . To fail to see the common economic understanding shared by Mises and Hayek, is to have been needlessly misled by superficial differences in exposition and emphasis. To compound this failure by perceiving a clash, among modern Austrians, of 'Hayekians' versus 'Misesians,' is to convert an interpretive failure into adogmengeschictliche nightmare." For more on the de-homogenization debate see Herbener, 1991, 1996; Salerno, 1994, 1996a; Hoppe, 1996; Boettke, 1997; and Yeager, 1995. Rothbard (1994, p. 559) identifies three "distinctive and often clashing paradigms within Austrian economics: Misesian praxeology; the Hayek-Kirzner emphasis on the market as transmission of knowledge and coordination of plans--rather than the Misesian emphasis on continuing coordination of prices; and the ultra-subjectivism of [Ludwig] Lachmann."
Interestingly, Hayek himself sought to de-homogenize his work from that of free-market thinkers with whom he disagreed methodologically. In an interview in the 1980s he described Milton Friedman as a "logical positivist," who "believe[s] economic phenomena can be explained as macrophenomena, that you can ascertain cause and effects from aggregates and averages. . . . [Friedman] is on most things, general market problems, sound. I want him on my side. You know, one of the things I often have publicly said is that one of the things I most regret is not having returned to a criticism of Keynes's treatise, but it is as much true of not having criticized Milton's [Essays in] Positive Economics, which in a way is quite as dangerous a book." Quoted in Hayek, 1994, pp. 144-45.
• 27.On puzzlers and masters of their subjects see Hayek, 1975. Along with himself, Hayek named Wieser and Frank Knight as representative puzzlers, and Böhm-Bawerk, Joseph Schumpeter, and Jacob Viner as representative masters of their subjects. As Hayek (1975, p. 51) recalled, "I owed whatever worthwhile new ideas I ever had to not being able to remember what every competent specialist is supposed to have at his fingertips. Whenever I saw a new light on something it was as the result of a painful effort to reconstruct an argument which most competent economists would effortlessly and instantly reproduce."
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