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The 20th century was one of the most violent in the history of humanity. In addition to the millions of deaths caused by international conflicts, anti-liberal ideologies manifested themselves throughout the world for long periods: communism in the USSR, China, Eastern Europe, and elsewhere; Nazism in Germany; fascism in Italy and Spain; etc. In Western societies, this rise of anti-liberalism led to the questioning of the benefits of the market economy and the rise of socialism and the interventionist state.
Economist Friedrich A. Hayek was born on May 8, 1899 and died on March 23, 1992. He spent his entire career defending liberalism and opposing these collectivist ideologies.
As a young economist in Austria, Hayek distinguished himself through his work on business cycles. He tried to explain why economies have “ups and downs.” During these years, he also developed the idea that the market economy was an essential component of a free society.
Having emigrated to Britain, Hayek experienced the Second World War as a traumatic period. Terrified by the rise of fascism and socialism, he popularized his political thought in the book that made him famous: The Road to Serfdom.
His argument was simple: Nazism, fascism, communism, and socialism share the same basic assumption according to which the state is above the individual. According to Hayek, this assumption adopted by many individuals lead to the atrocities that occurred at the time, even if these individuals had good intentions. He argued that the interventionist tendencies of Western governments, far from preserving democracy and freedom, would lead instead to the very authoritarianism that they were trying to avoid.
Published in 1944, this book enjoyed great success around the world, and became a bestseller in the United States. However, it represents only a small part of Hayek’s work, which, in economics as well as in philosophy and political science, lays the foundations for a free and prosperous society.
One of the pillars of Hayek’s thought is his explanation of the role of prices in a free economy. Hayek established his reasoning in his most cited scientific article, “The Use of Knowledge in Society,” which is considered one of the twenty most influential articles in economics. Prices help to allocate scarce resources, informing us of alternative uses that can be made of them. And this price system cannot be planned. Prices emerge from the bottom up, and not the other way around.
Indeed, every person in society possesses a tiny fraction of the total knowledge that allows the economy to function. It is at the individual level that economic calculation happens. An economic agent such as an entrepreneur or a consumer is guided in his or her choices by the relative prices of different goods and services.
Prices therefore contain valuable information, and in order to play their role of coordinating the decisions of economic actors, a decentralized system is needed—namely, a free market. Every time an individual discovers new information, he or she influences prices and gives rise to a new way of organizing scarce resources in order to maximize the well-being of all. Since it is impossible to impose prices from the top, any attempt at planning leads to inefficiencies, shortages, surpluses, deficiencies, and failures. The more a central planner plans, the more these failures multiply, and the more the authoritarian grip must be tightened.
Following upon his idea that information is dispersed, Hayek subsequently developed the idea of spontaneous order. He observed that the economy, without any dominant authority, succeeds in being orderly. The invention of the automobile did not come about because of a central plan in Washington, just as the invention of dental floss did not come about due to a bureaucratic plan in some distant capital.
Evoking Adam Smith’s invisible hand, Hayek argued that individuals create this order by pursuing their own interests. In this way, markets serve not only to coordinate large-scale actions, but also to bring people of different religions, cultures, countries, etc., closer through trade.
His work in economics earned Hayek the Nobel Memorial Prize in Economics in 1974. In his last book, The Fatal Conceit, he returned once again to the role of prices, human action, and spontaneous order from an evolutionary perspective to explain why socialism and state planning threaten the free and complex societies in which we live today.
It is safe to say that Hayek's ideas will continue to exert enormous influence for many decades to come.
Jasmin Guénette is Vice President of Operations at the Montreal Economic Institute. The views reflected in this op-ed are his own.
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