Happy Birthday Hayek!

On this day in 1899, in Vienna, Friedrich Hayek was born. He would go on to write about economics, philosophy, politics, psychology, and the history of ideas, and win the Nobel Prize in Economics. His 1944 wartime book The Road To Serfdom, which showed how easily social democracy could morph into totalitarianism, brought him fame.

The young Hayek was hired as an economist by Ludwig von Mises, and in 1927 the pair set up an institute to explore boom-bust cycles. They concluded that these cycles were caused by central banks setting interest rates too low—encouraging excessive borrowing, investment and spending. But low rates also discouraged saving, and when funds dried up, investments had to be abandoned and people were thrown out of work. 

In the 1930s, Hayek came to Britain, where he fought a long intellectual duel with John Maynard Keynes (1883-1946). But Keynes’s ideas prevailed, and Hayek turned more to social and political philosophy. His key insight here was the concept of spontaneous order. Human and animal societies, he observed, show obvious regularities. Yet nobody planned the society of bees or the operations of markets. They came about naturally, and grew and persisted simply because they were useful. Spontaneous orders (e.g. language) emerged when we followed certain regularities of action (e.g. grammar). We might not be able to articulate these ‘rules', but they contained the ‘wisdom’ that allowed us to thrive.

We did not design this system, but simply stumbled upon it. When people first started bartering and swapping goods, they did not know it would grow into a worldwide system of cooperation through trade and commerce. But when they did barter and exchange, prices began to emerge: and prices contain all the information needed for the system to work. High prices induce customers to economise and suppliers to look for new ways to satisfy them; low prices tell suppliers they should train their effort in some more useful direction. 

Freedom was critical to the working of these spontaneous economic and social orders. They needed new ideas in order to evolve and adapt—which is why free societies advance more rapidly.

Hayek saw justice as the framework that enabled social life to work. We do not invent the rules of justice: we discover them through trial and error. But while justice facilitates an evolving social order, what people call ‘social justice’ instead aims to deliver a preconceived social outcome. It required us to treat individuals differently; and once we began to do that, we were on the road to serfdom, with no obvious end point. A liberal government would merely create the conditions needed for the social order to function. Socialism—trying to design a social order—was a dangerous mistake. No socialist planner could ever match the creative genius of a free people.