Hayek for Everybody

Donald Boudreaux has done us the favor of writing a popularized primer on the foundational thought of the great economist, Friedrich Hayek. His timing is good. For sadly, as Vaclav Klaus, the free-market president of the Czech Republic from 2003 to 2013, says in the book’s foreword: “State interventionism is back and growing.”

The once-vivid lessons of the failures and crimes of communist regimes are fading in the group memory, 25 years after the collapse of the Berlin Wall and its accompanying socialist ideology. Dirigiste government bureaucrats are busy giving orders, arrogantly convinced that they know what is economically best for you better than you do. Hayek, as presented by Boudreaux in readily accessible language, demonstrates yet once again that they not only do not, but cannot, know this.

F.A. Hayek was a brilliant thinker in economics, politics and philosophy. But he was not as good a rhetorician as his great intellectual competitor, John Maynard Keynes, who was a witty, appealing popularizer and journalistic writer, as well as a famous theorist, intent on producing government interventions by whatever arguments worked. In the 1930s, this led, Boudreaux relates, to “Keynes’ victory over Hayek [and] that victory was total.”  However, in the hands of Keynes’ devoted macro-economic followers (and shortly after then-President Nixon purportedly announced that “We are all Keynesians now”), his victory led to the utterly disastrous great inflation of the 1970s and consequent financial collapse of the 1980s—the victory in time produced a memorable defeat. Hayek, his professional reputation redeemed, got the Nobel Prize in Economics in 1974.  He used the occasion of his acceptance speech to skewer “the pretense of knowledge” displayed by macro-economists, and to suggest they needed a “lesson in humility.”  Numerous such lessons have been provided them in the decades since 1974.

Hayek wrote about Keynes that those who met him “experienced the magnetism of the brilliant conversationalist,” with his “bewitching voice,” and knowledge of “artistic, literary and scientific matters,” who was “supremely confident in his powers of persuasion.” He certainly persuaded many subsequent economists. But Hayek thought that “Keynes was not a highly trained or a very sophisticated economic theorist,” whose General Theory was “too obviously another tract for the times [and] what he thought were the momentary needs of policy,” and which “was bound to lead to a revival of the more naïve inflationist fallacies.” As it did.

Keynes’ emergency proposals for government action in a depression, along with their winning rationales, got translated by his disciples into constant interventions of all kinds at all times by central banks and governments. In this dubious theory, the bureaucrats in charge play the part of Platonic Guardians of the economy because they know better than the people what should be done, just as Keynes was sure he knew better. Hayek is the healthy corrective to this fundamental mistake.

Unfortunately for the pretense of bureaucratic superiority, Hayek demonstrated that it is impossible for central authorities to have superior knowledge.  Beginning with discussions of “How we make sense of an incredibly complex world” and “Knowledge and prices,” Boudreaux nicely explains Hayek’s insights into the essential role of necessarily dispersed knowledge. An extreme specialization of vastly different kinds of knowledge is required to create the amazing prosperity for ordinary people that free markets do. This knowledge can never be successfully centralized; moreover, enterprising actors are constantly expanding and changing it.

To envision of the interaction of dispersed knowledge, consider the book you are reading, Boudreaux suggests. “The people whose efforts, skills, and specialized knowledge, and the detailed information that went into producing the very ink and paper now before you, number in the millions.” The knowledge required to make this traditional object is boggling.  Think of just the paper. “What kinds of trees are used to make it?  Where are these trees found?” We can read the book without knowing this, but somebody has to know a lot about it. And somebody has to

know how to make the blades for chainsaws used to cut down the trees . . . explore for the oil used to make the fuel that powers those chainsaws . . . what chemicals and in just what proportions must be mixed with the wood pulp . . . how to arrange for insurance on the factory . . . how to operate the machines that package the paper.

Here is the grand Hayekian, indubitable conclusion:

No single person more than a tiny fraction of all that there is to know about how to make the ink and paper . . . No single person—indeed, not even a committee of geniuses—could possible know more than a tiny fraction of all the details that must be known to produce the ink and paper.

(Or, if you prefer, to produce electronic representations.) Try to imagine—you can’t—the essentially infinite specialized knowledge which is functioning in an advanced market economy.  How can it possibly work at all?  How can it work as brilliantly as it manifestly does?

“The answer,” as Boudreaux relates, “is voluntary exchange, or markets that are based on private property rights and freedom of contract” and on “the prices of some options relative to the prices of others.” Then “millions [actually billions] of producers all across the globe . . . act in ways that mesh productively with each other,” and “do so at costs that are as low as possible.” This Hayek called “the extended order.” No central direction can know enough to achieve this.

Boudreaux asks us to imagine the “astonishingly complex web of human cooperation” as a jigsaw puzzle with one billion pieces, with “each of these billion puzzle pieces having a mind of its own, as well as the ability to move itself.” No one could put the puzzle together from the top down, but using prices as signals and voluntary exchange, the puzzle puts itself together into a market order.  This order “is intended by no one.” It is planned by no one. It is directed by no one. No one knows how it will turn out. “It is spontaneous.” This is the central Hayekian idea of the order which results from human action but not from human design, which “encourages millions [billions] of people to interact peacefully with each other in ways that are mutually beneficial.”

What can mess all this up? Unwise interventions and manipulations by government and central bank bureaucrats who represent the political bias in favor of command and compulsion, believe in spite of experience that they have superior knowledge, and, in economic particular, push the “political bias in favor of inflation.” This is demonstrated in today’s central banking fashion, as the Federal Reserve and every major central bank has committed itself to perpetual inflation.  But: “a people are wisely advised never to allow their government to exercise discretion over the supply of money.”

Can we ever correct the current institutionalization of endless government interventions and monetary manipulations? Can we ever correct “the very dishonesty and duplicity that is so common in the pronouncements of all governments, today and in the past”?  Can we move toward the maximum realization of “a society of free and responsible individuals”?

Boudreaux’s appeal is to the power of ideas in the long run. He believes that “No economist in the twentieth century has done as much to get the ideas right as did F. A. Hayek.” Those of us who admire these profound and complex ideas are glad to have them published in popularized, compact, introductory form. May they flourish.