Hayek argued that no central planner could run an economy as well as markets. Why?
Hayek argued that the knowledge an economy runs on never reaches any single mind. In his view, the planner's problem was gathering that knowledge, so faster sums would not solve it.
- Lived
- Born 8 May 1899 in Vienna, Austria; died 23 March 1992 in Freiburg, Germany
- Nationality
- Austrian-born; a British subject from 1938
- Work
- Ran a business cycle research institute in Vienna; the London School of Economics (LSE) from 1931; Chicago from 1950; Freiburg from 1962
- Key works
- Prices and Production (1931), The Road to Serfdom (1944), The Use of Knowledge in Society (1945 essay), The Constitution of Liberty (1960)
- Nobel prize
- 1974, shared with Gunnar Myrdal, for work on money and economic fluctuations
- School
- The Austrian school, of which he became the best-known advocate
What Hayek was reacting to
Hayek studied in Vienna after the First World War and joined the circle of Ludwig von Mises, an economist of the Austrian school. In the 1920s Mises argued that a socialist economy could not be planned rationally, because it would have no market prices for land, factories and machines. Hayek took up Mises's theory of the business cycle and, from the mid-1930s, his case against planning.
By the 1940s Hayek was living in Britain. He wrote The Road to Serfdom (1944) to warn his fellow citizens about socialism, including its democratic forms.
Hayek's key ideas
Can you name Hayek's four key ideas?
Investment drawn in by credit made artificially cheap. Hayek argued that when lending runs ahead of what people really save, firms start projects that savings cannot support. In his view, the bust is the economy undoing those mistakes.
Can you think of an example?
Cheap loans persuade many firms to build new warehouses at once. When credit tightens, half-finished warehouses stand empty and building workers lose their jobs.
The knowledge needed to run an economy is spread across millions of people, so no planner can gather it. In his 1945 essay, Hayek argued that prices pass on the part people need.
Can you think of an example?
Tin becomes scarce. Its price rises, and users of tin cut back without needing to know why.
Order that grows out of the actions of many people without anyone designing it. Hayek saw markets, money and much of the law as orders of this kind.
Can you think of an example?
No one invented English or decided its grammar. It grew as speakers adjusted to one another.
Government acting through general rules, known in advance and applied equally to all, instead of aiming at particular outcomes. Hayek argued that only then can people make long-term plans in freedom.
Can you think of an example?
Hayek opposed a progressive income tax, which charges higher rates on higher incomes, because in his view it breaks the principle of equality before the law.