Word from Palgrave/Macmillan is that my book, F. A. Hayek: Economics, Political Economy, and Social Philosophy will be published next week. In the process of preparing the book for final publication I was asked to provide chapter abstracts. Here they are: Chapter 1 Friedrich Hayek’s ideas played a fundamental role in all major debates over economic policy-making throughout his lifetime and beyond. They were developed in a precise historical context and were the result of the intellectual influence of his teachers and colleagues. Unfortunately, they are surrounded by the following misconceptions: his economics was atomistic; he believed markets to be perfectly efficient and government plays no role in a market economy; and he thought any government intervention will lead to
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Word from Palgrave/Macmillan is that my book, F. A. Hayek: Economics, Political Economy, and Social Philosophy will be published next week. In the process of preparing the book for final publication I was asked to provide chapter abstracts. Here they are:
Friedrich Hayek’s ideas played a fundamental role in all major debates over economic policy-making throughout his lifetime and beyond. They were developed in a precise historical context and were the result of the intellectual influence of his teachers and colleagues. Unfortunately, they are surrounded by the following misconceptions: his economics was atomistic; he believed markets to be perfectly efficient and government plays no role in a market economy; and he thought any government intervention will lead to totalitarianism. Due to their importance, these ideas demand careful consideration to go beyond the misconceptions in order to engage them fully and employ them to make sense of Hayek’s ideas and how they apply to our world today.
Hayek was born in Vienna, Austria in the last year of the 19th century. His academic career would take him first to London, then to Chicago, Salzburg, and finally Freiburg. In Vienna, he studied under Friedrich Wieser, one of the leading economists of his generation, and then began research under the direction of his intellectual mentor, Ludwig von Mises. Recruited in 1931 by the London School of Economics, he rapidly became a major academic and policy figure. During his time in London, Hayek became, alongside his colleague Lionel Robbins, engaged in debates in macroeconomics simultaneously with his debate on the problems of economic planning and economic calculation under socialism. Hayek’s vision of the price system and the liberal market order emerged from these debates, after which, for the rest of his career, he sought to rearticulate the epistemic role of institutions that underpin a liberal market order.
What would Hayek have to say about financial crises and the Great Recession? In the mind of the public policy makers, the Great Recession constituted the most serious challenge to free market ideas since the Great Depression. The bust of the housing bubble led to a financial market crash, which in turn led to a severe economic downturn. Markets seemed to have failed. Our analysis of the causes of the crisis and the policy response must rely on some theoretical framework. The consensus of policy makers around the world converged on a Keynesian understanding of the macroeconomy while the Hayekian alternative was unfortunately ignored. Hayek developed a theory of the trade cycle in which loose monetary policy generates a boom, followed by a bust caused by the economic reality of scarce resources.
Hayek’s economics is fundamentally price theoretic. Economy-wide dynamics can only be understood as the result of individual agents, each endowed with dispersed, subjective, and often contradictory knowledge, carrying out their plans according to the information conveyed by the price system. This insight has been extremely influential to the development of economics since the Second World War, especially in the fields of information economics and mechanism design theory. This appropriation of Hayek’s ideas has fallen short of truly incorporating the radical challenge to our understanding of the economic system due to the profession’s focus on formalism, equilibrium analysis, and logical validity. A fully Hayekian economics must put the limits of human knowledge and the coordinating role of institutions at its core.
Hayek’s understanding of the nature of the market process developed as a critique of the economic theory of market socialism. These market socialists believed that a centrally planned economy, organized around the rational economic order described by neoclassical economics, would outperform the anarchy of the free enterprise system. To Hayek, this position badly misunderstood both the nature of the knowledge that economists have about the economy and that economic agents possess. Hayek saw change as the ultimate cause of the economic problem of society. This led him to conclude that alternative economic systems must be compared and evaluated on their ability to utilize the local knowledge of individuals to adapt to unexpected change in economic circumstances.
The Road to Serfdom is by far Hayek’s most successful work. It is also deeply misunderstood. Critics and advocates of his position alike interpret Hayek as saying that any step towards the concentration of economic power into the hands of the government must necessarily lead to totalitarianism. In short, Hayek’s argument is seen as a slippery slope one. Hayek actually argued that the members of a society must choose to continue on the path of centralization, and if consistently pursued, must ultimately substitute political discretion under central planning with democracy under the rule of law, a tragic outcome that is undesired by those who advocate central planning. The alternative is to impose constraints on the ability of the state to substitute individual planning for central planning, as was happening in some countries while Hayek was writing his book.
Hayek belongs to a long tradition of social scientists who saw themselves as contributing to the “invisible hand theorizing” of Adam Smith. In this, he was influenced by other Austrian economists, particularly Carl Menger and Ludwig von Mises. Menger was the first economist to develop an evolutionary theory of institutional formation, which he used to make sense of the emergence of money. Mises extended Menger’s argument on money and elaborated the methodological foundations of the study of institutions. In turn, Hayek himself influenced the development of a new, genuine institutional economics during the emergence of the law and economics approach pioneered by Aaron Director, Ronald Coase, and Bruno Leoni in the second half of the twentieth century.
Hayek spent much of his intellectual life trying to identify the institutional foundations of a society of free individuals. In doing so, he ended up investigating topics beyond the scope of economics proper and entered into the realm of legal and political theory. During this time, he came to realize that a society that optimizes both on the degree of social order and that of recourse to violence must rely on the rule of law as its fundamental principle: equality before the law; stable and universal rules of conduct; and freedom to pursue one’s ends within the boundaries of the law. In devising public policy, the government of a free society must take these principles as its guiding principles.
In order to understand Hayek’s intellectual journey, one must appreciate his formation in Vienna during the early 20th century, one of the most vibrant intellectual centers of the time. Hayek was familiar with the debates on the role of epistemology in the natural sciences, and these arguments influenced his own understanding of the scope and method of economics. What the social scientist is always studying is the result of the interaction of the minds of a multitude of individuals. The context within which these minds interact is fundamentally important to trace the basis for the unintended consequences of human action. Hence, epistemic considerations must be front and center in our study of economic, political, and social phenomena.
Hayek was a major player in the rebirth of the classical liberal project. His The Constitution of Liberty (1960) and Law, Legislation and Liberty (1973-1979) served as the foundations for the following work of other classical liberal thinkers. Hayek developed a liberal (as opposed to illiberal) view of classical liberalism in which the end goal is the freeing of the creative energies of individuals. In order to be as productive, inventive, and creative as they possibly can, individuals must be left free to use their knowledge and property according to their independently devised plans. Hence, Hayek’s view of liberty is neither merely “negative” nor “positive.” His liberalism is a truly progressive, universalist, cosmopolitan political philosophy.
Hayek’s project is a challenge to the scientistic understanding of economics and political economy, and a rejection of constructivist rationalism in social philosophy. It is a project full of tensions, but also of great promise. As a social scientist, he emphasized the limits of our knowledge in devising institutions. As a political economist, he made policy recommendations, with the specifics of those recommendations evolving over time. Nonetheless, his ideas remain important and anyone with an interest in the study of society must wrestle with them. Doing so requires going beyond the many misconceptions about Hayek’s work and taking him as the serious and influential thinker he was and still is.