Today is the anniversary of the birth of the great Austrian economist and political philosopher, F.A.Hayek.

This tribute to him comes from Investor’s Business Daily, by Gerald P. O’Driscoll Jr., senior fellow at the Cato Institute:

Hayek’s work, whether on economics, politics or law, focused on the ineluctable problems of uncertainty and incomplete information. In economics articles going back to the 1930s, he analyzed the price system as a mechanism for communicating information to buyers and sellers about the intensity of preferences for goods and their relative scarcity. He concluded that the information does not exist anywhere in its entirety and could not be centralized. … Socialist (really communist) societies relying on centralized planning would be characterized by gross economic inefficiencies.

Hayek was vindicated by subsequent events. The power of this argument is lost today on policymakers engaged in “planning lite,” attempts to allocate credit to favored industries and pick winners.

The Great Recession was in large part the consequence of such a policy. The Fed’s balance sheet is loaded up with housing finance paper. In “Ben Bernanke Versus Milton Friedman,” historian Jeffrey Rogers Hummel argues that the Fed has evolved from monetary authority to a credit allocator.

Hayek first began evolving his information argument in his monetary analysis. In 1932, he questioned whether deliberate monetary management could avoid economic fluctuations.

Friedman later developed the argument against discretionary monetary policy in a series of articles that detailed the information problems confronting a central bank. His argument later became encapsulated as the “lags” in monetary policy — i.e., the unpredictability of when the effects of monetary policy actions will be felt. Monetary policymakers give lip service to Friedman’s arguments, but ignore them in practice.

Hayek deftly summed up his argument on information in his 1988 book, The Fatal Conceit:

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

A market economy is a complex order, the outcome of societal evolution that confounds efforts to redesign it. The central tenet of classical liberalism was summed up by George Smith in his brilliant book, The System of Liberty:

Laissez faire in all spheres, personal, social and economic, was the fundamental presumption of liberalism — its default setting, so to speak — and all deviations from this norm stood in need of justification.

In America, by linguistic legerdemain, progressives transformed the meaning of liberalism into nearly the opposite of what it originally meant. Progressives became liberals, and true liberals lost their identity. Hence, we have the peculiar use of conservative to denote in America what had once been liberal thought.

So when Hayek wrote a famous essay on “Why I Am Not a Conservative,” he confabulated some American conservatives. He was not attacking American conservatism. Instead, he was combating the transplantation to America of a “European type of conservatism, which (is) alien to the American tradition.” That European conservatism upheld tradition and status over liberty and innovation.

Hayek argued there, and elsewhere, that liberalism must be the political philosophy of principles. Its central principle is individual liberty. …

Hayek provided a much-needed program for American conservatives today. They must stand for free markets and free people. Free markets and free trade must be seen as the economic core of an opportunity society that provides hope for all. …

Hayek was born in Vienna at the high point of the global liberal economic order comprising free markets, free trade and capital movements, and the classical gold standard. That glorious edifice ended with World War I. So for decades he was arguing against the tide of history. Yet he lived long enough to be vindicated. His words, written over the course of much of the 20th century, constitute a message for today.

On the centenary of Hayek’s birth, May 8, 1999, Barun S. Mitra wrote a tribute to him, published by the Liberty Institute, India.

We quote from it:

Today, a wide range of people has acknowledged his contribution all over the world. From philosophers like Karl Popper, Robert Nozick … to political leaders like Ronald Reagan, Margaret Thatcher and Vaclav Klaus, to Nobel laureate economists like Milton Friedman, James Buchanan … and countless others. As the iron curtain was being built in the aftermath of World War II, Ludwig Erhard, the finance minister of West Germany turned to Hayekian ideas to rebuild his country. Half a century later when the iron curtain collapsed, leaders in many countries in Eastern Europe again turned to Hayek in their attempt to rebuild their societies. And Hayek is reportedly available on the bookshelf of even the Chinese Prime Minister.

If today, the world is witnessing a perceptible change in thinking, it is in no small amount due to the legacy of Hayek. …

No wonder commemorative events are being organised in London, Paris, Vienna, Washington, D.C., Montreal, Eastern Europe, and Central America. The Adam Smith Institute in the United Kingdom has named him the man of the century. …

Hayek was more than a Nobel Prize winning academic. He was an intellectual giant, who was also a gentleman to the core. The man, who went on to become one of the greatest champions of liberty, had begun his life as a young soldier in the Austro-Hungarian Empire and sent to the Italian front in 1917. An academic, whose “controversial ideas” were eventually recognised by the Nobel committee in 1974, Hayek was also an activist who was among the founders of the Mont Pelerin Society in 1948. This was an organisation dedicated to pursuing the intellectual battle against all forms of authoritarianism and tyranny at a time when it was fashionable to call oneself socialist. Today, it has hundreds of members, including many Nobel laureates, spread across all the continents. He inspired many to take up intellectual activism like the late Sir Anthony Fisher, the British businessman who founded the Institute of Economic Affairs in London in 1955. Over the years, IEA, an independent think tank, has produced countless policy papers and books on contemporary issues, and is recognised to have contributed to changing the popular perception that made the Thatcher revolution possible in Britain in the 1980s

Hayek was born in Vienna, Austria, on May 8, 1899, to August Edler von Hayek & Felicitas von Hayek. Even as a teenager, he was interested in philosophy, economics and ethics. But his studies were interrupted as he was called for military duty in 1917, and saw action on the Italian front. On his return from service he went back to college. In the 1920s Hayek was part of that heady circle in post-war Vienna, a group which featured some of the greatest minds of the century. He earned two doctorates, one in law and another in political science. He studied economics under Ludwig von Mises, one of the greatest exponents of the Austrian School. He left for England in 1931 worried about the rise of the Nazis in Germany. Hayek mainly taught at the London School of Economics, but had short spells at universities around world including, Cambridge, Chicago, Stanford, Tokyo, and Freiburg.

Hayek was one of those few fortunate people who lived to see the tumultuous events that shook the socialist empire, and be vindicated. In a letter written in 1989, he noted, “the ultimate victory of our side in the long dispute of the principles of the free market.” He must have been saddened at the enormous cost, both human and material, that was paid in pursuit of a doomed experiment.

Hayek died in  Freiburg on 23 March 1992.

Dispersed knowledge

In the 1930s, Hayek was the principal opponent Keynes. In various scholarly publications – Monetary Theory of Trade Cycle (1933), The Pure Theory of Capital (1941) – he had pointed out that business cycles are caused by monetary mismanagement in [government]. This contribution of Hayek was noted by the Nobel committee. Subsequent events have completely vindicated Hayek. Concerned about the stability of value, he wrote a radical essay in the 1976, “The Denationalisation of Money”, where he argued that it was a serious mistake to allow governments to monopolise the legal tender. He called for the freedom of the individuals to trade in whatever media of exchange they thought best. …

Hayek emphasized that division of labour and division of knowledge were complimentary. Every individual possessed some specialized and local knowledge that was particular to his situation and preferences. Yet, the market, through the competitive price system, successfully coordinated all these bits of knowledge. Prices provide the incentive to invest in certain areas, and the information regarding the possible opportunities. Hayek explained, “We must look at the price system as such a mechanism for communicating information if we want to understand its real function… … 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.” …

Spontaneous order

Hayek also developed the idea of “spontaneous order” to describe the progress of civilizations. Language, customs, traditions, rules of conduct, have all evolved without any conscious design, and without that freedom societies may not have evolved beyond primitive levels, he held. Advancement of society was dependent upon no one overall “plan” being imposed over the actions and plans of the individuals making up the society. Building on Adam Smith’s “invisible hand”, Hayek showed that planning need not necessarily lead to order and lack of a guiding hand need not degenerate in to chaos. …

[Hayek wrote:]

It is largely because civilization enables us constantly to profit from knowledge which we individually do not possess, and because each individual’s use of his particular knowledge may serve to assist others unknown to him in achieving their ends, that men as members of civilized society can pursue their individual ends so much more successfully than they could alone.

This characteristic of the market where order seemed to develop quite spontaneously, along with dispersed nature of knowledge, raises one of the most fundamental questions on the utility of government intervention in the economy to achieve a particular end. The institutions created by government decree to provide direction to such intervention would under the best of circumstances simply be overwhelmed by the sheer volume of knowledge that they will need to process.

In contrast, the market routinely brings to order millions of evaluations undertaken by each individual participant. Hayek showed that progress arises from a continuous process of “discovery” wherein a variety of producers and consumers experiment with a wide range of possible opportunities to make profit. Most such experiments fail in the marketplace, and the innovators bear the cost taking the risk. But some succeed, and the benefits are enjoyed by all. That is the reason why in a free market, voluntary trade creates a win-win situation for all participants. …

The Road to Freedom

Hayek also published works more accessible to a wider public, which included books such as The Road to Serfdom (1944) and The Constitution of Liberty. The former has been nominated by journals like London’s Time Literary Supplement as one the noteworthy books of this century. Dozens of unauthorised editions of it were known to be in circulation among the underground activists in the Eastern block during the cold war. This book has now been published in many languages across the world. …

Then Mitra, looking at Hayek’s ideas from an Indian perspective, points out that India would have done well to have learnt what he taught:

We are concerned that after fifty years of independence, poverty is so wide spread, and as a measure to speed up the process of redistribution of wealth, we thought it prudent to abolish right to property as a fundamental right. Hayek had cautioned all those years ago that “The system of private property is the most important guaranty of freedom, not only for those who own property, but scarcely less for those who do not.”

We want “social justice”, while Hayek warned that “There is all the difference in the world between treating people equally and attempting to make them equal”, and to attempt otherwise would only contribute to social collision. “Equality before the law and material equality are therefore not only different but are in conflict which each other; and we can achieve either one or the other, but not both at the same time”, wrote Hayek.

The world has had a bitter experience in the 20th Century. The dreams of a socialist-collectivist utopia were shattered by economic collapse and degenerated into tyrannical police states. According to historian Thomas Sowell, if one was to mark the time when the intellectual tide began to turn against the ideal of socialism then it was with Hayek’s [The Road to] Serfdom. …

While the world is marking his centenary now, the next century could well belong to him. And ideas do change the world. Let us hope that the intellectual tide in favour of Hayek will become a tidal wave in the next millenium. Hayek’s Road to Serfdom may actually help pave the road to freedom for all of us.

If only!