Economics, People we should know
Friedrich Hayek (1899-1992) showed us that free enterprise is necessary for freedom
One of the greatest social theorists of the twentieth century was a libertarian – some would say conservative – economist named Friedrich Hayek (1899-1992). Hayek spent his life arguing that free enterprise is not only necessary for economic prosperity, but also essential to maintain political liberty.
For much of his career, he faced overwhelming opposition to these views, but he did eventually gain some mainstream acceptance, winning the 1974 Nobel Prize in Economic Sciences.
Hayek’s life and legacy
An important book about Hayek has recently been published, written by Dr. Eamonn Butler of the Adam Smith Institute in London, England. It’s called Friedrich Hayek: The ideas and influence of the libertarian economist (2012), and it summarizes Hayek’s life and key insights.
Hayek was born in 1899 in Vienna, earned a doctorate in law from the University of Vienna in 1921, and a doctorate in political science from the same university in 1923.
At the University of Vienna Hayek became a close associate of Ludwig von Mises, the leading figure in the “Austrian School” of economics, which emphasizes the importance of the free market. Hayek and Mises then set up an economic think tank and Hayek undertook economic research. His research demonstrated that bad government policy was the cause of the “boom and bust” cycle of many countries’ economies, and he predicted that the USA was about to experience such a bust. Shortly thereafter, in 1929, his prediction came true, with the Wall Street Crash and the beginning of the Great Depression.
In 1931 Hayek took up a position teaching economics at the prestigious London School of Economics in England. He became a naturalized British citizen in 1938 after Hitler took over Austria.
The Road to Serfdom
In April 1945 Readers' Digest released an abridged version of Hayek's Road to Serfdom. While the original is 250+ pages, this version is just 60. It can be read for free online here. There is also an 18-page cartoon summary that was meant to create interest in the longer book. You can find the comic at Mises.org/books/TRTS where you can also download the original, both of them also free to download.
Because of World War Two, Hayek began to focus more on political science. He was afraid that totalitarian ideas were going to sweep the world, not just in the more vicious forms of Nazism or Communism, but even in the softer form of socialism. He believed that the moderately socialistic direction of the Western countries in the mid-twentieth century would ultimately lead to authoritarian government.
To articulate this view, in 1944 he wrote a book called The Road to Serfdom, which was very controversial and quickly sold out its first print run. Butler notes that this book was:
read by the young Margaret Thatcher, who later said she found it "the most powerful critique of socialist planning and the socialist state." It made Hayek’s name in America, too, where tens of thousands of copies were sold, and Reader’s Digest distributed another 600,000 copies of its own condensed version.
Due to this publicity, Hayek gave lectures across the USA and became a visiting professor at Stanford University.
In order to help spread libertarian ideas, in 1947 Hayek assembled 39 British, European and American scholars who supported individual freedom to found an organization that would promote the intellectual case for the free society. Because this meeting was held at the Swiss resort of Mont Pelerin, it was called the Mont Pelerin Society. This increasingly important organization still exists today to pursue the same goal.
Shortly after World War Two, a former Royal Air Force fighter pilot named Antony Fisher went to Hayek to get advice on how to promote free enterprise in the face of popular socialist assumptions. Hayek convinced Fisher that the best thing would be to found a think tank that would generate intellectual arguments for freedom. A few years later, in 1955, Fisher set up the Institute of Economic Affairs (IEA), the first of several free market think tanks that would become very influential by the late 1970s and 1980s. Fisher would later play a role in the creation of Canada’s Fraser Institute, as well as like-minded think tanks in other parts of the world.
Rise to prominence
In 1950 Hayek became a professor at the University of Chicago. While there he wrote one of his most famous books, The Constitution of Liberty, articulating the foundations and principles of a free society. In 1962 he moved back to Europe to be a professor at the University of Freiburg in West Germany. As mentioned previously, he won the Nobel Prize in Economic Sciences in 1974. And over the course of the 1970s he wrote a three-volume set called Law, Legislation and Liberty, once again expressing the intellectual case for the free society, as opposed to socialism.
Besides the Nobel Prize, Hayek also received other honors. Butler points out that in
1984, Queen Elizabeth II made him a Companion of Honour (he described it as "the happiest day of my life"), and in 1991 he was awarded the Presidential Medal of Freedom by George H. W. Bush.
Hayek died in 1992, after seeing his ideas receive acclaim in many academic circles, as well as influencing the policies of some English-speaking democracies (especially Margaret Thatcher’s Britain) and some newly-liberated Eastern European countries.
Freedom versus socialism
Among Hayek’s many insights, two are of most significance for Christians.
First, he argued that modern societies are much too complex to be centrally planned by government (i.e. socialism doesn’t work).
Secondly, he argued that attempts to engineer societies to conform to some concept of “social justice” inevitably lead to authoritarian government (i.e. socialism leads to tyranny).
Many people believe that if human societies were completely planned and run by governments, they would be much more efficient and fair. In Western societies today there are so many different kinds of products, of so many different shapes and sizes, that the situation is virtually chaotic. So if the government could decide what is produced, all of the products could be standardized, leading to economic efficiency.
As well, there is a considerable amount of inequality in society, because some people benefit much more than others in a free market system. Through central planning, the government could equalize incomes, and thus enhance social justice.
1. Too complex for central planning
But Hayek points out that societies are much too complex for any human organization to be able to centrally plan successfully. Societies are spontaneous orders, with millions of people every day making economic decisions of various kinds. How could a government possibly be able to aggregate and apply all of the information that would be necessary to anticipate these economic decisions every day? It’s simply impossible. Any attempt to do so would lead to all kinds of economic problems (think, for example, of the old Soviet Union).
Consider one particular example of this problem, namely, the determination of salaries in a centrally planned economy. Should a nurse get paid more than a mathematics professor? Should a butcher get paid more than a coal miner? There are thousands of different occupations, and the central planning authority would have to determine each of their salaries relative to each other. How could they possibly know what was right?
Hayek correctly argued that the free market takes care of this efficiently without central planning.
People pay us for the goods and services we produce because they value those products. So market rewards do depend, in a very real sense, on the value that we deliver to other members of our society. They also reflect the scarcity and skill of the producers, the numbers of customers who want the service and the urgency or importance that buyers attach to it
Therefore a person’s salary reflects a number of economic factors, not the political calculation of a bureaucrat. If there are too many people pursuing a particular occupation, their salaries will go down. If there is a shortage of people in a particular occupation, their salaries will go up.
In a free market society, economic information is communicated through prices. Prices are signals that indicate “to everyone where their product is most highly valued, and prompting them to steer their efforts and expertise in those directions.” Say, for example, that there is a shortage of tin. Because there is not enough of it, its price will rise. Due to the price increase, companies that use tin will use less of it or find a substitute for it.
The extra demand for the substitute will in turn bid up its price, and prompt those using the substitute to seek yet other materials to substitute for that; and so it goes on. The entire market order adjusts to the shortage of tin, even though hardly anyone knows what caused it.
The overall point is that free markets automatically adjust to changing conditions. It’s part of the nature of the free market to process all kinds of information and respond to it spontaneously. Central planners could never hope to know all of this information and to be able to respond to changes in the economy so rapidly and effectively.
Besides the fact that socialism doesn’t work, its tendency is to lead inevitably to authoritarian government. A central planning government must determine how labor, land and other productive resources are used in the economy. It has to coordinate all these different factors so that they work towards the completion of the government’s plan.
In such a situation, everyone would have to do what the authorities have determined is necessary for the achievement of the government’s objectives.
Individuals must expect to be uprooted and deployed at the direction of the authorities, since personal life now counts for nothing compared to the good of the collective – a good that is defined by those same authorities.
Butler summarizes the point this way: “When governments believe they can ‘run the country’ just as they might run a factory, our lives and property become a mere input at their disposal.”
2. Inequality can be a good thing
A centrally planned economy can redistribute resources between people and therefore lead to a situation of greater material equality. However, the loss of freedom necessary for such an endeavor is quite high. As well, the economic benefits of inequality are lost. In the economic sphere, inequality is not always a bad thing. Yes, you read that right: inequality is not necessarily a bad thing.
Butler describes Hayek’s insights on the economic importance of inequality this way:
Inequality is not just the outcome of the market process: it drives the market process. The high gains made by successful producers act as a magnet, pulling people and resources to where the greatest value can be captured, and away from less productive and less valuable uses. So people and resources are attracted to where they will make the greatest possible contribution to future incomes. And this is a continuous, dynamic, growing process. The inequality that so many people resent is, in fact, the very attraction that steers effort and resources to their most productive applications, pulling up incomes at every level.
Hayek argued that the government should have a minimal role in society. Mostly it should be concerned with national defense and enforcing the rules (laws) that protect people from each other. It would also provide public goods such as roads, land registries, organized responses to natural disasters, and other things that governments can do best. He also saw the need for government “to support needy groups such as people with disabilities, those incapable of work, orphans or the elderly.” Needless to say, the government can fulfill these tasks without becoming socialistic.
Conclusion
Hayek was not a Christian scholar and he was not trying to promote a Christian perspective. Nevertheless, his scholarship dovetails well with Biblical Christianity because he believed in the need for a private property-based economic system. The Bible establishes private property as an essential institution and assumes a private property-based economy. In this respect Hayek’s intellectual work supports an economic system much like what the Bible demands.
There are few twentieth century thinkers that were as important and influential as Friedrich Hayek. Whereas so many academics think that mankind is smart enough to re-engineer societies through governmental power, Hayek was humble enough to concede that human beings are very limited in their knowledge and that their efforts to re-engineer any society are bound to be detrimental. While not everything in his thinking can be embraced by Christians, his overall perspective on economics and society provides a powerful intellectual antidote to the socialistic fallacies that are still common in North American colleges and universities today.
Hayek and his ideas are featured below in a couple of epic rap battles vs. his economics arch nemesis, John Maynard Keynes.
