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Hayek: The Good, the Bad, the Ugly
HAYEK’S TWO EPISTEMOLOGIES AND THE PARADOXES OF HIS THOUGHT
ABSTRACT: Hayek developed two contradictory epistemologies. The epistemology for which he is famous attributed dispersed knowledge to economic actors and credited the price system with aggregating and communicating this knowledge. The other epistemology attributed to human and non-human organisms alike the error- prone interpretation of stimuli, which could never truly be said to be “knowledge.” Several of the paradoxes of Hayek’s economic and political thought that are explored in this symposium can be explained by the triumph of the first epistemology over the second, including his historical interpretation of socialism as a planning mentality; his tendentious definitions of “liberty” and “justice”; and his opposition to economic redistribution even as he endorsed all manner of economic and social regulations.
THE FAILED APPROPRIATION OF F. A. HAYEK BY FORMALIST ECONOMICS
Peter J. Boettke and Kyle W. O’Donnell
ABSTRACT: Hayek argued that the central question of economics is the coordination problem: How does the spontaneous interaction of many purposeful individuals, each having dispersed bits of subjective knowledge, generate an order in which the actors’ subjective data are coordinated in a way that enables them to dovetail their plans and activities successfully? In attempting to solve this problem, Hayek outlined an approach to economic theorizing that takes seriously the limited, subjective nature of human knowledge. Despite purporting to have appropriated Hayek’s thought by acknowledging the information-transmitting role of prices, mainstream economists have missed Hayek’s point. The predominant tool of formal economics—equilibrium analysis—begins by assuming the data held by actors to have been pre-reconciled, and so evades the problem to be solved. Even the more advanced tools for modeling knowledge in economic analysis, such as the economics of information, assume away either the subjectivism of knowledge and expectations (rendering the coordination of beliefs and plans a trivial matter) or the frictions and “imperfections” of reality (rendering the coordination problem indeterminate).
HAYEK AND LIBERTY
ABSTRACT: Hayek’s political theory is directed against coercion, which he defines as the intentional control of one person by another. The element of personal intention ensures a clear conceptual distinction between the freedom from coercion— i.e., the “liberty”—that is exercised in the private sphere, and the freedom of choice and opportunity that may be severely constrained by the impersonal, unintentional operation of market forces. Hayek’s narrow definitions of coercion and liberty therefore suggest that he was more intent on defending the benefits conferred on us by market forces than on affirming any value intrinsic in freedom—a suggestion confirmed by his lack of interest in species of freedom, such as autonomy, that might conceivably be fostered by state coercion. Hayek’s consequentialist defense of liberty, however, was grounded in economic doctrines such as his own view that prices served a vital epistemic function. Given his strictures against the ignorance of modern electorates, Hayek was driven to propose extravagant limits on democracy and to embrace traditionalism; a different Hayekianism might limit inequalities of wealth and encourage the ability to learn from experimentation.
THE ROAD TO SERFDOM’S ECONOMISTIC WORLDVIEW
ABSTRACT: At the end of World War II, F. A. Hayek denounced the then-popular idea of central planning by arguing that, if pursued to its logical conclusion, it would entail totalitarianism. But there were at least two problems. First, judging by his example of Nazi Germany, state control over the economy appears to be a consequence, not a cause, of the monopolization of political power. Second, Hayek conflated socialism and mere interference in the market with central planning. Therefore, history did not so much falsify Hayek’s prediction as bypass it: Once the vogue for central planning faded in the West, Hayek’s book became irrelevant— except, ironically, in Germany. There, it was read as a manifesto for “good planning” through the rule of law. Alongside other “neoliberal” writers, Hayek had a profound (if little acknowledged) influence on the shape of the emerging Federal Republic and, through it, on the whole European institutional framework.
HAYEK’S BUSINESS-CYCLE THEORY: HALF RIGHT
ABSTRACT: The Great Recession has brought with it a renewed interest in Hayek’s business-cycle theory, which holds that loose monetary policy generates an unsustainable boom characterized by a lengthening of the capital structure. Hayek’s theory has received robust criticism for decades, although the criticisms have varied in quality. Various empirical disconfirmations pose the most serious challenge. The small empirical literature on the subject generally confirms Hayek’s predictions about variations in the capital structure, but has not persuasively linked the capital structure to the business cycle. A better option, then, may be to abandon Hayek’s business-cycle theory, preserve his capital theory, and graft it onto a Keynesian or monetarist understanding of the business cycle that is more consistent with modern macroeconomics.
HAYEK, SOCIAL THEORY, AND THE CONTRASTIVE EXPLANATION OF SOCIO-ECONOMIC ORDER
ABSTRACT: Hayek’s later work on the possibility of socio-economic order in decentralized market economies is an exercise in contrastive causal explanation as conceptualized by realist social theorists and philosophers. This interpretation of Hayek’s work lends support to the view that Hayek’s post-1960 writings can be thought of as an example of comparative institutional analysis. It also provides a means of reinforcing Hayek’s own efforts to establish the scientific credentials of his work.
THE “MIRAGE” OF SOCIAL JUSTICE: HAYEK AGAINST (AND FOR) RAWLS
ABSTRACT: There is an odd proximity between Hayek, hero of the libertarian right, and Rawls, theorist of social justice, because, at the level of principle, Hayek was in some important respects a Rawlsian. Although Hayek said that the idea of social justice was nonsense, he argued against only a particular principle of social justice, one that Rawls too rejected, namely distribution according to individual merit. Any attempt to make reward and merit coincide, Hayek argued, would undermine the market’s price system, leaving us all poorer and less free. Like Rawls, Hayek held that we should assess social institutions from behind a veil of ignorance, and he thought that doing so pushed us toward egalitarianism. Most of the distance between Hayek and Rawls at the level of policy stems from Hayek’s optimism about the operation of markets, his equivocation about the meaning of central concepts, and his appeal to under-argued slippery slopes. Hayek wavered, however, between claiming that private property and markets benefit everyone, compared to the feasible alternatives, and the principle that they maximize the opportunities of a randomly selected member of society, i.e., aggregate opportunity. Contemporary Hayekians claim that capitalism raises the position of the worst off in the long run, in future generations, whereas Rawlsians insist that inequalities between social positions should benefit the worst off now.
THE PLANNERS AND THE PLANNED
ABSTRACT: Much of what makes Hayek so controversial can be found in The Road to Serfdom, the theoretical basis of which is provided by The Counter-Revolution of Science. The Road to Serfdom, a polemic against the “planning mentality,” did not defend complete laissez faire, but argued that planning disrupts the coordination between prices and supply and demand; that effective planning is thus impossible in a modern industrial society; that it is coercive; and, of course, that it leads to totalitarianism. In The Counter-Revolution of Science, Hayek argued that the “planning mentality” is the result of the hubristic attempt to reconstruct society along scientific lines. But the likes of Edward Bellamy envisioned a planned but free society, while John Dewey contrasted planning, where people collectively choose their goals, against a planned economy that is coercively imposed. Hayek’s welcome strictures against a scientistic society and an overly ambitious social science aside, his binary approach to intellectual history distorted through oversimplification.
SOME IMPLICATIONS OF HAYEK’S COGNITIVE THEORY
ABSTRACT: Hayek’s oft-neglected cognitive theory, articulated in The Sensory Order, provides a foundation for a theory of innovation that integrates cognition, experience, and the importance of freedom for the creation of entirely new conceptual categories and fundamentally innovative entrepreneurial endeavors. For Hayek, one sees only what one is prepared to see; that is, we can notice sensory and other phenomena only after we have classified the data into often-implicit abstract categories that are mediated to us physiologically. Learning takes places by using received categories while innovation takes place by creating new categories or moving data from one category to another, which is often an attempt to resolve anomalies. The new perceptual awareness required for discovery leads, in turn, to new categorizing and new perceptual horizons. Such innovation often requires not just freedom of imagination, but freedom of action, for one has to be able to try out many different perceptual possibilities.
HAYEK, EQUILIBRIUM, AND THE ROLE OF INSTITUTIONS IN ECONOMIC ORDER
Karen I. Vaughn
ABSTRACT: Inthe1930s, socialist economists used the assumptions of equilibrium theory to argue that a central planner could coordinate supply and demand from above. This argument led Hayek, over the years, to try to explain the limitations of equilibrium theory and, conversely, to explain how capitalism functioned without the assumptions of equilibrium being met. In a changing world of agents who are ignorant of the future, how is a functioning market “order” possible? One answer can be found in Hayek’s argument that evolved rules make people’s future behavior more predictable and, more to the point, that they contain previously accumulated knowledge that provides the building blocks for future economic growth. Hayek’s evolutionary theory was flawed, however, in failing to explain how people can know which rules are responsible for their success or failure so that they persist in using those rules and pass them forward in time. However, markets provide immediate feedback about success and failure through profits and losses. An evolutionary explanation of the economy would have permitted Hayek to dispense with the metaphor of general equilibrium, which was increasingly irrelevant to his understanding of economic order.