F.A. Hayek: The Use of Knowledge in Society

[OR... Why Central Planning is Doomed to Fail Even in the Age of Technocracy and AI ] Chapter 3 from our FREE paperback book: Hayek for the 21st Century

Etienne Note: This is the 4th Article in our tribute to the great Austrian Economist Friedrich August von Hayek better known as F.A. Hayek. Some of Hayek’s core insights were that knowledge is dispersed across millions of individuals and cannot be aggregated by any central authority. Prices are information signals. When you override them with planning, you don’t just misallocate resources — you destroy the very mechanism by which society coordinates itself.

But beyond economics, Hayek was a philosopher of spontaneous order — the idea that complex, functional systems emerge from human action without human design. Language, common law, markets, social norms — none are “planned,” and all work better than their planned alternatives. Hayek explained a sophisticated intellectual framework for voluntaryism operating in practice.

In this essay, Hayek describes why central planning, by “governments” or “technocrats” isn’t just a bad idea… but impossible. Hayek's central move is to reframe the economic problem. The problem isn't "how do we allocate known resources efficiently" — a math problem a smart planner could in principle solve. It's that the relevant knowledge never exists in one place. It exists only as dispersed, fragmentary, often contradictory bits held by millions of individuals, much of it tacit "knowledge of the particular circumstances of time and place" that can't be written down or transmitted to a central authority. The planner's problem isn't insufficient intelligence or insufficient computing power. It's structural: the information the planner would need is destroyed the moment you try to centralize it, because much of it only exists in the act of a local person deciding to utilize (or not) utilize what he has on hand.

Hayek’s critique still applies even in the age of AI: No amount of expert AI brilliance fixes a problem that is about the location of knowledge and individual preference, not the quantity of it.

Hayek’s Example of a Tin Shortage

A tin shortage appears somewhere in the world. Almost no one who reacts to it knows the cause — war, a new use, a mine collapse. They don’t need to. The price rises, and thousands of people who’ve never met economize on tin and its substitutes, passing the signal down the chain. Hayek’s line: the price system works “as a kind of machinery for registering change,” a system of telecommunications compressing a mountain of dispersed facts into one number that tells people what to do without telling them why.

This is Chapter Three from Hayek for the 21st Century - Paperback available for Free with any purchase from ArtOfLiberty.org/Store, “Going Paid” on any of our Substacks or by paying S&H for the book. The copies are free thanks to the generosity of a donor to the Mises Institute and they have an offer with free S&H Here.

Previous Chapters from Hayek for the 21st Century:

Introduction by Thomas J DiLorenzo, President of the Mises Institute & Editor of Hayek for the 21st Century + Hayek bio, quotes, rap battles and memes!

Chapter 1: The Intellectuals and Socialism by F.A. Hayek, Chapter 2: Why the Worst Get On Top [In “Government”] by F.A. Hayek,

The Use of Knowledge in Society

I

What is the problem we wish to solve when we try to construct a rational economic order?

On certain familiar assumptions the answer is simple enough. 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 the available means is implicit in our assumptions. The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.

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.

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society 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 its totality.

This character of the fundamental problem has, I am afraid, been obscured rather than illuminated by many of the recent refinements of economic theory, particularly by many of the uses made of mathematics. Though the problem with which I want primarily to deal in this paper is the problem of a rational economic organization, I shall in its course be led again and again to point to its close connections with certain methodological questions. Many of the points I wish to make are indeed conclusions toward which diverse paths of reasoning have unexpectedly converged. But as I now see these problems, this is no accident. It seems to me that many of the current disputes with regard to both economic theory and economic policy have their common origin in a misconception about the nature of the economic problem of society. This misconception in turn is due to an erroneous transfer to social phenomena of the habits of thought we have developed in dealing with the phenomena of nature.

II

In ordinary language we describe by the word “planning” the complex of interrelated decisions about the allocation of our available resources. All economic activity is in this sense planning; and in any society in which many people collaborate, this planning, whoever does it, will in some measure have to be based on knowledge which, in the first instance, is not given to the planner but to somebody else, and which somehow will have to be conveyed to the planner. The various ways in which the knowledge on which people base their plans is communicated to them is the crucial problem for any theory explaining the economic process. And the problem of what is the best way of utilizing knowledge initially dispersed among all the people is at least one of the main problems of economic policy—or of designing an efficient economic system.

The answer to this question is closely connected with that other question which arises here, that of who is to do the planning. It is about this question that all the dispute about “economic planning” centers. This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy necessarily means central planning—direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons. The half-way house between the two, about which many people talk but which few like when they see it, is the delegation of planning to organized industries, or, in other words, monopoly.

Which of these systems is likely to be more efficient depends mainly on the question of under which of them we can expect that fuller use will be made of the existing knowledge. And this, in turn, depends on whether we are more likely to succeed in putting at the disposal of a single central authority all the knowledge which ought to be used but which is initially dispersed among many different individuals, or in conveying to the individuals such additional knowledge as they need in order to enable them to fit their plans in with those of others.

III

It will at once be evident that on this point the position will be different with respect to different kinds of knowledge; and the answer to our question will therefore largely turn on the relative importance of the different kinds of knowledge; those more likely to be at the disposal of particular individuals and those which we should with greater confidence expect to find in the possession of an authority made up of suitably chosen experts. If it is today so widely assumed that the latter will be in a better position, this is because one kind of knowledge, namely, scientific knowledge, occupies now so prominent a place in public imagination that we tend to forget that it is not the only kind that is relevant. It may be admitted that, so far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available—though this is of course merely shifting the difficulty to the problem of selecting the experts. What I wish to point out is that, even assuming that this problem can be readily solved, it is only a small part of the wider problem.

Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation. We need only to remember how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody’s skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.

It is a curious fact that this sort of knowledge should today be generally regarded with a kind of contempt, and that anyone who by such knowledge gains an advantage over somebody better equipped with theoretical or technical knowledge is thought to have acted almost disreputably. To gain an advantage from better knowledge of facilities of communication or transport is sometimes regarded as almost dishonest, although it is quite as important that society make use of the best opportunities in this respect as in using the latest scientific discoveries. This prejudice has in a considerable measure affected the attitude toward commerce in general compared with that toward production. Even economists who regard themselves as definitely above the crude materialist fallacies of the past constantly commit the same mistake where activities directed toward the acquisition of such practical knowledge are concerned—apparently because in their scheme of things all such knowledge is supposed to be “given.” The common idea now seems to be that all such knowledge should as a matter of course be readily at the command of everybody, and the reproach of irrationality leveled against the existing economic order is frequently based on the fact that it is not so available. This view disregards the fact that the method by which such knowledge can be made as widely available as possible is precisely the problem to which we have to find an answer.

IV

If it is fashionable today to minimize the importance of the knowledge of the particular circumstances of time and place, this is closely connected with the smaller importance which is now attached to change as such. Indeed, there are few points on which the assumptions made (usually only implicitly) by the “planners” differ from those of their opponents as much as with regard to the significance and frequency of changes which will make substantial alterations of production plans necessary. Of course, if detailed economic plans could be laid down for fairly long periods in advance and then closely adhered to, so that no further economic decisions of importance would be required, the task of drawing up a comprehensive plan governing all economic activity would appear much less formidable.

It is, perhaps, worth stressing that economic problems arise always and only in consequence of change. So long as things continue as before, or at least as they were expected to, there arise no new problems requiring a decision, no need to form a new plan. The belief that changes, or at least day-to-day adjustments, have become less important in modern times implies the contention that economic problems also have become less important. This belief in the decreasing importance of change is, for that reason, usually held by the same people who argue that the importance of economic considerations has been driven into the background by the growing importance of technological knowledge.

Is it true that, with the elaborate apparatus of modern production, economic decisions are required only at long intervals, as when a new factory is to be erected or a new process to be introduced? Is it true that, once a plant has been built, the rest is all more or less mechanical, determined by the character of the plant, and leaving little to be changed in adapting to the ever-changing circumstances of the moment?

The fairly widespread belief in the affirmative is not, so far as I can ascertain, borne out by the practical experience of the business man. In a competitive industry at any rate—and such an industry alone can serve as a test—the task of keeping cost from rising requires constant struggle, absorbing a great part of the energy of the manager. How easy it is for an inefficient manager to dissipate the differentials on which profitability rests, and that it is possible, with the same technical facilities, to produce with a great variety of costs, are among the commonplaces of business experience which do not seem to be equally familiar in the study of the economist. The very strength of the desire, constantly voiced by producers and engineers, to be able to proceed untrammeled by considerations of money costs is eloquent testimony to the extent to which these factors enter into their daily work.

One reason why economists are increasingly apt to forget about the constant small changes which make up the whole economic picture is probably their growing preoccupation with statistical aggregates, which show a very much greater stability than the movements of the detail. The comparative stability of the aggregates cannot, however, be accounted for—as the statisticians occasionally seem to be inclined to do—by the “law of large numbers” or the mutual compensation of random changes. The number of elements with which we have to deal is not large enough for such accidental forces to produce stability. The continuous flow of goods and services is maintained by constant deliberate adjustments, by new dispositions made every day in the light of circumstances not known the day before, by B stepping in at once when A fails to deliver. Even the large and highly mechanized plant keeps going largely because of an environment upon which it can draw for all sorts of unexpected needs; tiles for its roof, stationery for its forms, and all the thousand and one kinds of equipment in which it cannot be self-contained and which the plans for the operation of the plant require to be readily available in the market.

This is, perhaps, also the point where I should briefly mention the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place, and that the central planner will have to find some way or other in which the decisions depending on them can be left to the “man on the spot.”

V

If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders. We must solve it by some form of decentralization. But this answers only part of our problem. We need decentralization because only thus can we ensure that the knowledge of the particular circumstances of time and place will be promptly used. But the “man on the spot” cannot decide solely on the basis of his limited but intimate knowledge of the facts of his immediate surroundings. There still remains the problem of communicating to him such further information as he needs to fit his decisions into the whole pattern of changes of the larger economic system.

How much knowledge does he need to do so successfully? Which of the events which happen beyond the horizon of his immediate knowledge are of relevance to his immediate decision, and how much of them need he know?

There is hardly anything that happens anywhere in the world that might not have an effect on the decision he ought to make. But he need not know of these events as such, nor of all their effects. It does not matter for him why at the particular moment more screws of one size than of another are wanted, why paper bags are more readily available than canvas bags, or why skilled labor, or particular machine tools, have for the moment become more difficult to acquire. All that is significant for him is how much more or less difficult to procure they have become compared with other things with which he is also concerned, or how much more or less urgently wanted are the alternative things he produces or uses. It is always a question of the relative importance of the particular things with which he is concerned, and the causes which alter their relative importance are of no interest to him beyond the effect on those concrete things of his own environment.

It is in this connection that what I have called the economic calculus proper helps us, at least by analogy, to see how this problem can be solved, and in fact is being solved, by the price system. Even the single controlling mind, in possession of all the data for some small, self-contained economic system, would not—every time some small adjustment in the allocation of resources had to be made—go explicitly through all the relations between ends and means which might possibly be affected. It is indeed the great contribution of the pure logic of choice that it has demonstrated conclusively that even such a single mind could solve this kind of problem only by constructing and constantly using rates of equivalence (or “values,” or “marginal rates of substitution”), i.e., by attaching to each kind of scarce resource a numerical index which cannot be derived from any property possessed by that particular thing, but which reflects, or in which is condensed, its significance in view of the whole means-end structure. In any small change he will have to consider only these quantitative indices (or “values”) in which all the relevant information is concentrated; and by adjusting the quantities one by one, he can appropriately rearrange his dispositions without having to solve the whole puzzle ab initio, or without needing at any stage to survey it at once in all its ramifications.

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

VI

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

Of course, these adjustments are probably never “perfect” in the sense in which the economist conceives of them in his equilibrium analysis. But I fear that our theoretical habit of approaching the problem with the assumption of more or less perfect knowledge on the part of almost everyone has made us somewhat blind to the true function of the price mechanism and led us to apply rather misleading standards in judging its efficiency. The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation are made to use the material or its products more sparingly; i.e., they move in the right direction. This is enough of a marvel even if, in a constantly changing world, not all will hit it off so perfectly that their profit rates will always be maintained at the same constant or “normal” level.

I have deliberately used the word “marvel” to shock the reader out of the complacency with which we often take the working of this mechanism for granted. I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind. Its misfortune is the double one that it is not the product of human design and that the people guided by it usually do not know why they are made to do what they do. But those who clamor for “conscious direction”—and who cannot believe that anything which has evolved without design (and even without our understanding it) should solve problems which we should not be able to solve consciously—should remember this: The problem is precisely how to extend the span of our utilization of resources beyond the span of the control of any one mind; and, therefore, how to dispense with the need of conscious control and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do.

The problem which we meet here is by no means peculiar to economics but arises in connection with nearly all truly social phenomena, with language and with most of our cultural inheritance, and constitutes really the central theoretical problem of all social science. As Alfred Whitehead has said in another connection, “It is a profoundly erroneous truism, repeated by all copy-books and by eminent people when they are making speeches, that we should cultivate the habit of thinking what we are doing. The precise opposite is the case. Civilization advances by extending the number of important operations which we can perform without thinking about them.” This is of profound significance in the social field. We make constant use of formulas, symbols, and rules whose meaning we do not understand and through the use of which we avail ourselves of the assistance of knowledge which individually we do not possess. We have developed these practices and institutions by building upon habits and institutions which have proved successful in their own sphere and which have in turn become the foundation of the civilization we have built up.

The price system is just one of those formations which man has learned to use (though he is still very far from having learned to make the best use of it) after he had stumbled upon it without understanding it. Through it not only a division of labor but also a coordinated utilization of resources based on an equally divided knowledge has become possible. The people who like to deride any suggestion that this may be so usually distort the argument by insinuating that it asserts that by some miracle just that sort of system has spontaneously grown up which is best suited to modern civilization. It is the other way round: man has been able to develop that division of labor on which our civilization is based because he happened to stumble upon a method which made it possible. Had he not done so he might still have developed some other, altogether different, type of civilization, something like the “state” of the termite ants, or some other altogether unimaginable type. All that we can say is that nobody has yet succeeded in designing an alternative system in which certain features of the existing one can be preserved which are dear even to those who most violently assail it—such as particularly the extent to which the individual can choose his pursuits and consequently freely use his own knowledge and skill.

VII

It is in many ways fortunate that the dispute about the indispensability of the price system for any rational calculation in a complex society is now no longer conducted entirely between camps holding different political views. The thesis that without the price system we could not preserve a society based on such extensive division of labor as ours was greeted with a howl of derision when it was first advanced by von Mises twenty-five years ago. Today the difficulties which some still find in accepting it are no longer mainly political, and this makes for an atmosphere much more conducive to reasonable discussion. When we find Leon Trotsky arguing that “economic accounting is unthinkable without market relations”; when Professor Oscar Lange promises Professor von Mises a statue in the marble halls of the future Central Planning Board; and when Professor Abba P. Lerner rediscovers Adam Smith and emphasizes that the essential utility of the price system consists in inducing the individual, while seeking his own interest, to do what is in the general interest, the differences can indeed no longer be ascribed to political prejudice. The remaining dissent seems clearly to be due to purely intellectual, and more particularly methodological, differences.

A recent statement by Professor Joseph Schumpeter in his Capitalism, Socialism and Democracy provides a clear illustration of one of the methodological differences which I have in mind. Its author is pre-eminent among those economists who approach economic phenomena in the light of a certain branch of positivism. To him these phenomena accordingly appear as objectively given quantities of commodities impinging directly upon each other, almost, it would seem, without any intervention of human minds. Only against this background can I account for the following (to me startling) pronouncement. Professor Schumpeter argues that the possibility of a rational calculation in the absence of markets for the factors of production follows for the theorist “from the elementary proposition that consumers in evaluating (‘demanding’) consumers’ goods ipso facto also evaluate the means of production which enter into the production of these goods.”¹

Taken literally, this statement is simply untrue. The consumers do nothing of the kind. What Professor Schumpeter’s “ipso facto” presumably means is that the valuation of the factors of production is implied in, or follows necessarily from, the valuation of consumers’ goods. But this, too, is not correct. Implication is a logical relationship which can be meaningfully asserted only of propositions simultaneously present to one and the same mind. It is evident, however, that the values of the factors of production do not depend solely on the valuation of the consumers’ goods but also on the conditions of supply of the various factors of production. Only to a mind to which all these facts were simultaneously known would the answer necessarily follow from the facts given to it. The practical problem, however, arises precisely because these facts are never so given to a single mind, and because, in consequence, it is necessary that in the solution of the problem knowledge should be used that is dispersed among many people.

The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world.

That an economist of Professor Schumpeter’s standing should thus have fallen into a trap which the ambiguity of the term “datum” sets to the unwary can hardly be explained as a simple error. It suggests rather that there is something fundamentally wrong with an approach which habitually disregards an essential part of the phenomena with which we have to deal: the unavoidable imperfection of man’s knowledge and the consequent need for a process by which knowledge is constantly communicated and acquired. Any approach, such as that of much of mathematical economics with its simultaneous equations, which in effect starts from the assumption that people’s knowledge corresponds with the objective facts of the situation, systematically leaves out what is our main task to explain. I am far from denying that in our system equilibrium analysis has a useful function to perform. But when it comes to the point where it misleadsThe peculiar character of the problem some of our leading thinkers into believing that the situation which it describes has direct relevance to the solution of practical problems, it is high time that we remember that it does not deal with the social process at all and that it is no more than a useful preliminary to the study of the main problem.

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Biography

F. A. Hayek’s life spanned the twentieth century, and he made his home in some of the great intellectual communities of the period.

Born Friedrich August von Hayek in 1899 to a distinguished family of Viennese intellectuals, 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).

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.” It was around this time that Hayek began attending Mises’s famed Privatseminar. For several years the Privatseminar was the center of the economics community in Vienna.

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.

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.

Within a very few years, however, the fortunes of the Austrian School suffered a dramatic reversal. 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. 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. But economic theory, in particular its style of reasoning, was rapidly changing. In addition, Hayek had ceased to work on economic theory, concentrating instead on psychology, philosophy, and politics, and Austrian economics entered a prolonged eclipse.

When the 1974 Nobel Prize in economics went to Hayek, interest in the Austrian School was suddenly and unexpectedly revived. 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.

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. 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. Hayek’s work is also known in political philosophy, legal theory, and psychology.

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.

Hayek’s writings on capital, money, and the business cycle are widely regarded as his most important contributions to economics. 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.

In Monetary Theory and the Trade Cycle (1933) 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. 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’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.

Clearly, the Austrian revival owes much to Hayek. He 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 remains one of the most intriguing intellectual figures of our time.

Fear the Boom and Bust: Keynes vs. Hayek - The Original Economics Rap Battle!

F.A Hayek vs. John Maynard Keynes square off in Fear the Boom and Bust - The Original Economics Rap Battle where Keynes, who advocated “government” action during periods of recession and depression and “wants to steer markets” squares off against F.A Hayek, who advocates for low taxation and savings-led investment by those who best understand their industries… Hayek “wants them set free”

Full Lyrics Here: https://genius.com/John-papola-fear-the-boom-and-bust-hayek-vs-keynes-lyrics

Fight of the Century: Keynes vs. Hayek - Economics Rap Battle Round Two

Full Lyrics Here: https://genius.com/Econstories-fight-of-the-century-lyrics

Which way should we choose?

More bottom-up or more top-down?

The fight continues

Keynes and Hayek, second round

It’s time to weigh in

More from the top or from the ground?

Let’s listen to the greats

Keynes and Hayek throwin’ down

Introduction to Hayek for the 21st Century

Introduction by Thomas J DiLorenzo, President of the Mises Institute & Editor of Hayek for the 21st Century

The rest of Hayek for the 21st Century will be syndicated in the coming weeks.

In a February 7, 2000, article in The New Yorker, journalist John Cassidy wrote that “it is hardly an exaggeration to refer to the twentieth century as the Hayek century.” He said this because of Friedrich Hayek’s prominent role throughout the century in defending free market capitalism and his critiques of socialism, especially his writings on the importance of decentralized knowledge in economic decision-making. Hayek lived to see his ideas proven correct with the worldwide collapse of socialism in the late eighties and early nineties. Watching the images of the collapse on television he said to his son, “I told you so.”

The Knowledge Problem

The “knowledge problem” is Hayek’s key contribution to the critique of socialism. It recognizes the commonsense notion that what makes the economic world go around is the use of knowledge by all kinds of people with different abilities, educations, experiences, and skills. Thanks to this international division of labor and knowledge, we collaborate “as though led by an invisible hand” in order to mutually prosper. It all depends of course on freedom—the freedom to own property, to pursue a profession of your Introduction 7 8 Hayek for the 21st Century choosing, to start and run a business, to buy and sell, to be guided in your decisions by free market prices. By contrast, socialism in all of its varieties is based on the opposite idea—that what is supposedly needed for prosperity is totalitarian powers in the hands of a small number of politicians and “planners” who will forcefully impose a single plan on an entire society. Hayek labeled this “the fatal conceit” of socialism in his last book. The entire world now knows that he was right, and all of the socialist tyrants and their propagandists and court historians were (and are) wrong.

Hayek’s “The Use of Knowledge in Society” and “The Pretense of Knowledge,” reprinted here, are the two best expositions of the Hayekian knowledge problem. Indeed, John Cassidy credited Hayek with providing an explanation of the workings of “the information age” of the internet that would develop some fifty years after he first started writing about the importance of decentralized information in society. This is not mere speculation on Cassidy’s part. As just one example, the cofounder of Wikipedia, Jimmy Wales, claims to have gotten the idea for Wikipedia as an Auburn University undergraduate finance student aft er Mises Institute Research Fellow Mark Thornton got him to read “The Use of Knowledge in Society.” Hayek called free market capitalism guided by private property and free market prices a “telecommunications system,” which Cassidy suggested was “one of the great insights of the [twentieth] century.”

Hayek’s Demolition of Socialists and Their Ideas

Hayek wrote in a 1961 Southern Economic Journal article (“The Non Sequitur of the ‘Dependence Effect,’” republished here) that for over a hundred years socialists had argued that “the problem of production” had been solved, so that “only the problem of distribution remains.” At the time, the “latest form of this old contention” was in the form of numerous books by the socialist Harvard economist John Kenneth Galbraith, the best known of which was The Affluent Society. Galbraith argued in books and articles that all “essential needs” are already met, and that most of what people think are other “needs” are really fake needs created by the brainwashing effects of advertising. Only “innate” needs that we think of ourselves are useful, said Galbraith; everything else that is brought to our attention by others is therefore useless and wasteful. Therefore, the argument went, government should tax more and spend more for what it deems to be our genuinely useful needs. What is genuinely useful would of course be determined by politicians—presumably with the assistance of John Kenneth Galbraith.

Hayek called this argument “a complete non sequitur.” It implies for one thing that “the whole cultural achievement of man is not important.” The only genuinely innate human needs, said Hayek, are food, shelter, and sex. Everything else is brought to our attention by someone. Hayek’s article is a complete demolition of the Galbraithian system and his life’s work of promoting what Hayek called increasing “the share of the resources whose use is determined by political authority and the coercion of any dissenting minority.”

In 1949 Hayek authored “The Intellectuals and Socialism” in The University of Chicago Law Review. His argument is as relevant today as it was then—if not more relevant. Contrary to the common argument that “intellectuals” have little influence on day-to-day discussions about public policy, Hayek argued that “over somewhat longer periods they have probably never exercised so great an influence as they do today.” He pointed out that socialism was never a “working class” movement but was always hatched from the utopian dreams of “theorists” who spent 10 decades preaching their socialist utopianism in university classrooms and all throughout the culture. In many countries the result of this decades-long propagandizing for socialism was that the views held by socialist intellectuals became “the governing force of politics,” wrote Hayek. The “intellectual” spreaders of socialist ideas were not just academics but also “journalists, teachers, ministers, lecturers, publicists, radio commentators, writers of fiction, cartoonists, and artists,” among many others, including “scientists and doctors.” It is “the intellectuals in this sense who decide what views and opinions are to reach us.”

Eventually, so many institutions are taken over by socialists that an intellectual who espouses the philosophical foundations of a free society, by contrast, “soon discovers that it is unsafe to associate too closely with those who seem to share most of his convictions and he is driven into isolation.” This sounds like a perfect description of today’s American university world. Nevertheless, all is not lost, Hayek concluded. What is needed is education about a classical “liberal Utopia” to counter the endless promises of socialist utopias—not a “diluted kind of socialism,” he wrote, but a “truly liberal radicalism” that does not pull punches to please any special interest group. Leave the compromising to the politicians, he advised.

Hayek was relentless in his devastating critiques of socialism and interventionism, and nowhere is this more on display than in his essay “The Meaning of Competition.” By the 1940s the academic economics profession had adopted a straw-man argument version of competition. Rather than the Austrian School conception of competition as a dynamic, rivalrous discovery process, competition was newly defined as a static situation where “many” business firms all produced a homogeneous product and charged identical prices in a world where all market participants had “perfect knowledge” of everything—what consumers wanted, how to minimize costs and maximize profits, and so on. They called it “perfect competition.” In his essay Hayek explained that “‘perfect’ competition means indeed the absence of all competitive activities” because all of it—product differentiation, price cutting, mergers, advertising—was all assumed away by the perfect competition “model.”

This method of analysis was later labeled a “nirvana fallacy” by UCLA economist Harold Demsetz. Positing a utopian never-never land and comparing it to the real world, and then condemning real-world markets as “failed” because they are “imperfect,” is one of the biggest hoaxes ever perpetrated by the economics profession.

In “Choice in Currency” Hayek did not oppose government issuance of money but instead opposed governmental monopoly and governments’ “power to limit the kinds of money in which contracts may be concluded.” Competing currencies could be valued “in seconds” with “electronic calculators,” Hayek wrote, long before the invention of the cell phone. Competition in currencies would be the path to honest money, for “even the slightest deviation from the path of honesty would reduce the demand for their product.” It is little wonder that Hayek’s writings on competing currencies have become enormously popular among advocates of cryptocurrencies.

Hayekian Political Philosophy

Oddly enough, despite all of his contributions to economic science and his Nobel Prize, what Friedrich Hayek is most known for among the general public is his writings on political philosophy, in particular his infamous book The Road to Serfdom, a critique of collectivism in all its forms. Hayek did not distinguish between fascism and socialism, the former being just a variant of the latter, with a common hatred of private property, free enterprise, economic freedom in general, constitutionalism, and the rule of law. The most famous chapter of The Road to Serfdom is chapter 10, “Why the Worst Get on Top,” republished here. Since any kind of socialism requires a central plan for all of society, it also requires the use of massive governmental force (and censorship of critics) to implement the plan. Consequently, the kind of people who would rise to the top of such a system are those with the fewest qualms about coercing, imprisoning, and brutalizing (or worse) their fellow citizens, wrote Hayek. That is why, he wrote, “the practice of socialism is everywhere totalitarian.”

Hopefully, this brief introduction has helped the reader to understand why the journalist John Cassidy was so inspired by the power of Hayek’s scholarship and writings that he made a case that the entire twentieth century (the good parts of it, anyway) should be thought of as “the Hayek century.” Ludwig von Mises was surely right when, he said that “Doctor Hayek . . . will be remembered as one of the great economists of all time”.

Thomas J. DiLorenzo

Quotes & Memes

“From the fact that people are very different it follows that, if we treat them equally, the result must be inequality in their actual position, and that the only way to place them in an equal position would be to treat them differently. Equality before the law and material equality are therefore not only different but are in conflict with each other; and we can achieve either one or the other, but not both at the same time”

― Friedrich August von Hayek, Constitution of Liberty

“Fascism is the stage reached after communism has proved an illusion.”

― Friedrich von Hayek

“The argument for liberty is not an argument against organization, which is one of the most powerful tools human reason can employ, but an argument against all exclusive, privileged, monopolistic organization, against the use of coercion to prevent others from doing better.”

― Friedrich August von Hayek, The Constitution of Liberty

“The curious task of economics is to demonstrate to men how little they really know about what they imagine the can design.”

― F. A. Hayek, The Fatal Conceit: The Errors of Socialism

“Probably it is true enough that the great majority are rarely capable of thinking independently, that on most questions they accept views which they find ready-made, and that they will be equally content if born or coaxed into one set of beliefs or another. In any society freedom of thought will probably be of direct significance only for a small minority. But this does not mean that anyone is competent, or ought to have power, to select those to whom this freedom is to be reserved. It certainly does not justify the presumption of any group of people to claim the right to determine what people ought to think or believe.”

― Friedrich August von Hayek, The Road to Serfdom

“The more the state “plans” the more difficult planning becomes for the individual.”

― Friedrich A. Hayek

“Our freedom of choice in a competitive society rests on the fact that, if one person refuses to satisfy our wishes, we can turn to another. But if we face a monopolist we are at his absolute mercy. And an authority directing the whole economic system of the country would be the most powerful monopolist conceivable…it would have complete power to decide what we are to be given and on what terms. It would not only decide what commodities and services were to be available and in what quantities; it would be able to direct their distributions between persons to any degree it liked.”

― Friedrich August von Hayek, The Road to Serfdom

“It is true that the virtues which are less esteemed and practiced now--independence, self-reliance, and the willingness to bear risks, the readiness to back one’s own conviction against a majority, and the willingness to voluntary cooperation with one’s neighbors--are essentially those on which an individualist society rests. Collectivism has nothing to put in their place, and in so far as it already has destroyed then it has left a void filled by nothing but the demand for obedience and the compulsion of the individual to what is collectively decided to be good.” ― Friedrich August von Hayek, The Road to Serfdom

“I am certain, however, that nothing has done so much to destroy the juridical safeguards of individual freedom as the striving after this mirage of social justice.”

― F.A. Hayek

“I was quite depressed two weeks ago when I spent an afternoon at Brentano’s Bookshop in New York and was looking at the kind of books most people read. Once you see that you lose all hope..”

― Friedrich August von Hayek

“Emergencies” have always been the pretext on which the safeguards of individual liberty have eroded.”

― Friedrich Hayek

“While an equality of rights under a limited government is possible and an essential condition of individual freedom, a claim for equality of material position can be met only by a government with totalitarian powers.”

― Friedrich A. von Hayek, The Mirage of Social Justice

“Our faith in freedom does not rest on the foreseeable results in particular circumstances but on the belief that it will, on balance, release more forces for the good than for the bad.”

― Friedrich A. Hayek

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.”

― Friedrich Hayek, The Fatal Conceit: The Errors of Socialism

“It is because every individual knows little and, in particular, because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it.”

― Friedrich August von Hayek, The Constitution of Liberty

“From the saintly and single-minded idealist to the fanatic is often but a step.”

― Friedrich A. von Hayek

“It is one of the saddest spectacles of our time to see a great democratic movement support a policy which must lead to the destruction of democracy and which meanwhile can benefit only a minority of the masses who support it. Yet it is this support from the Left of the tendencies toward monopoly which make them so irresistible and the prospects of the future so dark.”

― Friedrich August von Hayek, The Road to Serfdom

“To act on behalf of a group seems to free people of many of the moral restraints which control their behaviour as individuals within the group.”

― Friedrich Hayek, The Road to Serfdom

“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 and will receive praise or blame for them. Liberty and responsibility are inseparable.”

― Friedrich Hayek, The Constitution of Liberty

“Although we had been warned by some of the greatest political thinkers of the nineteenth century, by Tocqueville and Lord Acton, that socialism means slavery, we have steadily moved in the direction of socialism.”

― Friedrich Hayek, The Road to Serfdom

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