Hayek’s first criticism of centralizing economic decisions argues the impossibility of a social welfare function. Socialists believe that central planning will have an overall benefit for society (even the creation of a utopia) by making economic decisions based on social welfare instead of profit maximization. Hayek’s response implements the first theme of imperfect information. In Hayek’s own words:“This fact that one central authority has to solve the economic problem of distributing a limited amount of recourses between a practically infinite number of competing purposes, that constitutes the problem of socialism.” (Hayek 16-17)
Every individual in society has different, often conflicting values. Thus, there is no single scale of standards for all members of a nation. The only way a centrally planned system could properly allocate goods is with a “consistent measure of priorities”. Hayek goes further to argue that implementing such a consensus would require state action such as propaganda leading economics to become politics. The result of such an evolution is the values of the leader substituted for the real values of the citizens. Such an outcome would go directly against the original socialist creed to benefit society overall through concentrating on general welfare. (Keizer 211-212)
The second criticism is also based on the idea of a “division of knowledge,” more specifically the problem of discovering and using all dispersed knowledge. This was Hayek’s first major original contribution to the “great debate” of socialism versus free market policies. Hayek rejects the assumption that the knowledge necessary to solve the economic problem exists within a Central Planning Board (CPB). Because the values of all individuals are entirely subjective, it is impossible for a CPB to have the same information as the sum of all individual’s knowledge. Furthermore, a CPB could not plausibly devise millions of functions to form a single general equilibrium. Similar to the problem of solving millions of utility functions, there is now way to properly calculate the value of capital goods since every machine is in a different state of wear and tear, location, etc. The only way to overcome these obstacles is to have a price system so individuals can act upon their own preferences. In commenting on the marvel of the market system to complete such a task, Hayek makes clear that the market system is bigger than any individual mind. Thus any central planning would only create greater disequilibria in the economy. Also with a price system, citizens themselves are individual planners. Just because an economy does not have a centralized management, doesn’t mean that to some degree there is no planning. Any guiding placed on top of these actions would only serve to override these skills. (Keizer 214-216, Butler 72-73)
Another major problem Hayek sees with socialism is the plausibility of solving general equation models. Some fellow critics of socialism don’t appreciate this argument because it places limits on human actions, but it is still relevant even with today’s computer technology. New proponents of Hayek’s ideas don’t stress the problem of literally solving a large amount of equations (which would seem to be possible with today’s technology), rather actually formulating the millions of equations that need to be solved. Assuming that real-life implementation of central planning is important, the socialist argument that a solution to general equilibrium is possible “in principle” is responded to by Hayek’s argument that it is simply not “practical”. In responding to a specific model laid out by Barne’s, Hayek pointed out that while formally correct, the nature, amount and magnitude of info would make it unfeasible. Given the problem above of assessing value to each, individual capital good would require many items to be treated as separate goods, thus greatly complicating any prospective goods.
The last major theme of Hayek’s critique is the most empirical, the tendency of socialism to lead to totalitarianism and the resulting bureaucratic problems. This idea was central in Hayek’s most famous work “The Road to Serfdom” published in 1944. Hayek’s “slippery slope” argument is that the tendency of planning to lead to more planning will result in an increasing amount of encroachment of liberty thus causing socialism to be incompatible with liberty. Central planning inherently requires strong leadership. The demand for such leadership, though, will often not be filled by the most capable economists or socialist, but by politicians most willing to hold newfound power. This illogical bureaucratic arrangement only serves to exacerbate the inherent problems with central decision-making. As described above, CPB’s have major informational obstacles in achieving general equilibrium. Because of the various coordination failures that imperfect knowledge creates, executive decisions for investment quantity and direction, private vs. public goods, work vs. leisure and foreign trade are almost completely arbitrary. Since economics is only the means to achieving various ends, a dictator holds a monopoly on the means to accomplish individuals’ goals. Hayek comments especially on the problems of socialism used in conjunction with labor and goods markets, for instance dynamic inefficiencies and the division of power and responsibility between managers and planners.
Hayek contributed greatly to the economic debate involving central planning throughout the 20th century. It was never Hayek’s decision to criticize the values of socialists, but merely point out the system’s intellectual errors. Even so, Hayek disputes the fundamental Marxist claim of different economic phases. He believes the there exists only the economic problem (the competition for scarce recources). Theoretical arguments alone do not guide Hayek’s theories. The empirical evidence of the large failures of Russian inter-war planning Hayek believes to be damning evidence in favor of the impracticality of the socialist system.
Butler, Eamonn. Hayek. New York: Universe Books, 1983.
Hayek, F.A. “The Nature and History of the Problem,” in F.A. Hayek (ed.) Collectivist Economic Planning. London: Routledge & Kegan Paul, 1935.
Keizer, Willem. “Hayek’s Critique of Socialism,” in Birner, Jack and Rudy Van Zijp (ed.) Hayek, Co-ordination and Evolution. London: Routledge, 1994.
Tomlinson, Jim. Hayek and the Market. London: Pluto Press, 1990.
Friedrich Hayek was both an economist and a champion for freedom he worked not only for the advancement of economics but also for freedom and individuality. In 1944 when the book The Road to Serfdom was published, the world was embroiled in a World War and also witnessing the rise of Communism. Even in the Western nations collectivity seemed to be the way of the future, the individual was taking a back seat to the group. Many states including England (whom the book was intended for) were instituting planning and nationalization of some industries. These developments were taking apart capitalism and threatening the very foundations of democracy and individualism.
His basic premise was that socialism and democracy were incompatible. This was highlighted in his “vacuum theory” which summarized why planning and competition cannot be combined. Combining either market into socialism or planning into capitalism would breed inefficiency “they are alternative principles used to solve the same problem”. Economic planning requires too much arbitrary power for a democracy to still be representative of the people. Conditions in the market change all the time, the government to compensate would need to be able to make spur of the moment decisions on such things as prices, wages, and what to produce. Thus no parliamentary government would have the time to be able to take on such issues. So the only way for planning to be effective is with dictatorial power so that they could make changes in the law quickly. Also another reason is that there never could be a consensus of opinion with regards to economic welfare. As the market shows people are too diverse in what they desire. So in the cases where there would be no majority consensus on economic policy the decision would be left up to the largest minority.
Hayek argued that socialism would destroy freedom of all types. He cited such examples as Russia and Germany which were thoroughly socialist and totalitarian. By taking charge of the economy the government gets the power to determine what will be produced, how much of it will be produced, and what jobs should be available to what people. This eliminates all freedom of choice because government monopolies direct the economy and therefor there are no other alternatives to these monopolies. And as Hayek stated variety is a freedom in itself. One would have to buy government made products. Under such a government money would probably give was to state allocation such as rationing. Money is the medium of the choices we make. Money allows us to choose what we want to buy and without money there we would lose our vote in the market place.
Hayek also stated that socialism would destroy the “Rule of Law”. What he described as the “rules of the game”, give us freedom to act in anyway that is not illegal. The rule of law is based on universal rules that are decided well before hand and affect everyone equally. Within these set solidified rules people have freedoms that cannot be infringed. But with planning rules need to be set as they arise, this creates uncertainty and ambiguity. Hayek made a good analogy of the difference between rule of law and socialist law as being the difference between a traffic code and telling you which road to travel. The arbitrariness of the law limits our freedom since there are no longer “rules to the game” but orders that must be followed. Planning also allows the government to determine what is moral and what is not, through the determination of its views and values imposed on society. By deciding what can and cannot be produced. This in affect decides for people what they should buy, read, watch, and learn. .
Socialism he stated, would be the reversal of all progress western civilization had made. The foundations of democracy are free market economy and individualism. Socialism always stresses the group over the individual. In Nazi Germany or Communist Russia the individual never had any say or choice. And the same would come about in the rest of the western world should the polices of planning continue. Hayek wrote “Yet although history never quite repeats itself, and just because no development is inevitable, we can in a measure learn from the past to avoid a repetition of the process. An accidental combination of experience and interest will often reveal events to one man under aspects which few yet see.” Hayek lived in Germany during the rise of the Nazi party and he saw the same trends happening in England. And he wrote the the Road to Serfdom as a warning to the English people of their impending crisis should they continue down the road of socialism.
He also argued that under planning the allocation of wealth and property will be determined by a small group of people rather than by luck and skill. Here once again freedom would be taken away. As worker would once again become a servant of the state rather than contracted worker. He will now truly become stuck in his job because it would not be up to him to choose his job, but that of the planning commission. This would end many freedoms that we now posses because, should the government be able to determine our jobs they would be able to decide everything else in our lives. For jobs are a large part of who a person is. They determine where he works and as such where he lives and the social setting he’s in. And the only way for advancement would be through the government since it is the government that is in charge. The idea that socialism will bring about “just” wages would not be true. Because as Hayek states what is a “just” wage and “What standards we have are derived from the competitive regime we have known and would necessarily disappear soon after the disappearance of competition.”. He argued that workers rather than feeling less like a part of a machine would feel more like one. Since now they’re jobs are part of the governments economic plan and not they’re plan
Hayek stressed that liberalism, democracy, capitalism were part of each other. That freedom is derived from our ability to determine our economic lives. Private property is fundamental to freedom because it is that persons and he may do with it as he wishes. And individuality is a byproduct of capitalism, because in this system every man chooses his economic destiny and he is not subject to any man. His money gives him the vote just as much as any ballot. What he buys is what he wants and not what is rationed out to him. From capitalism evolves liberal minded Governments that secure property rights and freedoms. There is a reason why capitalism came about before democracy. Our freedom in the marketplace evolved into our freedom in life. Hayek knew this and showed this in his book.
Source: Hayek, Friedrich, The Road To Serfdom. The university of Chicago press 1944.
Friedrich A. Hayek, who died on March 23, 1992, at the age of 92, was probably the most prodigious classical liberal scholar of the 20th century. Though his 1974 Nobel prize was in Economic Science, his scholarly endeavors extended well beyond economics. He published 130 articles and 25 books ranging from technical economics to theoretical psychology, from political philosophy to legal anthropology, and from the philosophy of science to the history of ideas. Hayek was no mere dabbler; he was an accomplished scholar in each of these fields of inquiry. He made major contributions to our understanding in at least three different areas - government intervention, economic calculation under socialism, and development of the social structure. It is unlikely that we will see the likes of such a wide-ranging scholar of the human sciences again.
Building on Mises' The Theory of Money and Credit (1912), Hayek refined both the technical understanding of capital coordination and the institutional details of credit policy. Seminal studies in monetary theory and the trade cycle followed. Hayek's first book, Monetary Theory and the Trade Cycle (1929), analyzed the effects of credit expansion on the capital structure of an economy.
Publication of that book prompted an invitation from Lionel Robbins for Hayek to Lecture at the London School of economics. His Lectures there were published in a second book on the "Austrian Theory of the Trade Cycle," Prices and Production (1931), which was cited by the Nobel Prize Committee in 1974.
Hayek's 1930-1931 Lectures at the London School were received with such great acclaim that he was called back to the prestigious University of London and appointed Tooke Professor of Economic Science and Statistics. At age 32, Hayek had reached the pinnacle of the economics profession.
Soon after Hayek's arrival in London he crossed swords with John Maynard Keynes. Keynes, who was at that time serving on the governmental Committee on Finance and Industry, was also the author of serious books on economics. The Hayek-Keynes debate was one of the most fundamental debates in monetary economics in the 20th century. Beginning with his essay, "The End of Laissez Faire" (1926), Keynes presented his interventionist pleas in the language of pragmatic classical liberalism. As a result, Keynes was heralded as the "savior of capitalism," rather than being recognized as the advocate of inflation and government intervention that he was.
Hayek pinpointed the fundamental problem with Keynes's economics - his failure to understand the role that interest rates and capital structure play in a market economy. Because of Keynes's unfortunate habit of using aggregate (collective) concepts, he failed to address these issues adequately in A Treatise on Money (1930). Hayek pointed out that Keynes's aggregation tended to redirect the analytical focus of the economist away from examining how the industrial structure of the economy emerged from the economic choices of individuals.
Keynes did not take kindly to Hayek's criticism. He responded at first by attacking Hayek's Prices and Production. Then Keynes claimed that he no longer believed what he had written in A Treatise on Money, and turned his attention to writing another book, The General Theory of Employment, Interest, and Money (1936), which in time became the most influential book on economic policy in the 20th century.
During this time, Hayek was also involved in another grand debate in economic policy-the socialist calculation debate, triggered by a 1920 article by Mises which stated that socialism was technically impossible because it would lack market prices. Mises had refined this argument in 1922 in Socialism: An Economic and Sociological Analysis, the book which had profoundly impressed the young Hayek when it appeared. Hayek developed Mises' argument further in several articles during the 1930s. In 1935, he collected and edited a series of essays on the problems of socialist economic organization: Collectivist Economic Planning. Additional Hayek essays on the problems of socialism, and specifically the model of "market socialism" developed by Oskar Lange and Abba Lerner in their attempt to answer Mises and Hayek, were later collected in Individualism and Economic Order (1948).
The economics profession and the intellectual community in general did not appreciate Hayek's criticism. Had not modern science given man the ability to control and design society according to moral rules of his own choosing? The planned society envisioned under socialism was supposed to be not only as efficient as capitalism (especially in view of the chaos capitalism was said to generate with its business cycles and monopoly power), but socialism, with its promise of social justice, was expected to be fairer. Moreover, it was considered the wave of the future. Only a reactionary, it was argued, could resist the inevitable tide of history.
Not only had Hayek appeared to lose the technical economic debate with Keynes and the Keynesians concerning the causes of business cycles but, in view of the rising tide of socialism throughout the world, his general philosophical perspective was increasingly labeled as a primitive version of liberalism.
Hayek was right on both counts, of course - on the economic as well as the political problem of socialism. The 20th century is replete with the blood of the innocent victims of socialist experiments. Stalin, Hitler, Mao, and a host of lesser tyrants have committed heinous crimes against humanity in the name of one or another variant of socialism. Totalitarianism is not an historical accident that emerges solely because of a poor choice of leaders under a socialist regime. Totalitarianism, Hayek shows, is the logical outcome of the institutional order of socialist planning.
Hayek lived a long life, and in the end, determined that law, like the market is spontaneous, but people cannot coexist without law. This law is preferably common law, which rather than a set of statutes, is derived over time through trial and error.