Authored by Art Carden via The American Institute for Economic Research,

Had he not passed away (about a month and a half before his 93rd birthday in 1992), F.A. Hayek would have celebrated his 120th birthday a few days ago. Hayek carried the flag for what Peter J. Boettke calls “mainline” (as opposed to “mainstream”) economics in the 20th century. About a decade ago, I exhorted students at an Institute for Humane Studies seminar to read Hayek’s The Road to Serfdom as if their children’s lives depend on it.

Boettke’s new book F.A. Hayek: Economics, Political Economy, and Social Philosophy reinforces my assessment, and newfound public enthusiasm for socialism - democratic socialism, of course, like they practice in Norway, and not the top-down totalitarian variety of the Soviet Union and Mao’s China, which anyway was “not real socialism” - reinforces my sense of urgency. Boettke’s book will, I hope, induce more scholars to take Hayek seriously and to reexamine his contributions to economic science, political theory, and social philosophy.

The knowledge problem, which Hayek explained most famously in his classic essay “The Use of Knowledge in Society” and his collection of essays Individualism and Economic Order — which includes “The Use of Knowledge in Society” — is at the heart of Hayek’s work from beginning to end. How, Hayek asks, do people possessing fragmentary knowledge dispersed over some 7.5 billion minds coordinate and reconcile their disparate and often-conflicting plans? As Boettke has written elsewhere with Zachary Caceres and Adam Martin, “error is obvious, coordination is the puzzle” (in a paper of that title). To Hayek (and Boettke), a lot of the economic modeling that explores the characteristics of and transitions between different equilibria obscures (or begs) the scientifically important and scientifically interesting questions about, for example, the institutional context governing political and commercial exchange.

Boettke divides Hayek’s career into four periods. From 1920 through 1945 (though he never abandoned the project), Hayek focused on “economics as a coordination problem,” to borrow the title of a book by Gerald O’Driscoll. 1940-1960 was the “abuse of reason project,” in which Hayek took the social sciences to task for thinking of articulated reason and planning as “solutions” to social problems of calculation and coordination. From 1960 to 1980, Hayek worked on “the restatement of the liberal principles of justice,” and from 1980 through his death was a protracted emphasis on “philosophical anthropology and the study of man.”

In his analysis of these phases of Hayek’s intellectual evolution, Boettke dispels a few myths and works (albeit implicitly) to rescue Hayek’s scientific program from the calumnies of his modern ideological critics. Keynes, Boettke argues, did not win the Hayek-Keynes debate, just as the socialists did not win the socialist calculation debate. Importantly, The Road to Serfdom was not a “slippery slope” argument in which any intervention whatsoever ultimately leads to totalitarianism.

Take the Hayek-Keynes debate, for example. Boettke notes that “Keynes’s theory begins with an aggregate demand failure, and thus, with unemployment. Idle resources are postulated, not explained” (p. 43). Hayek, by contrast, builds on a tradition stretching back to Adam Smith and J.B. Say and reaching through luminaries of the Austrian school like Carl Menger, Eugen von Boehm-Bawerk, Friedrich von Wieser, and Ludwig von Mises in working to explain how, in light of what we know about how alternative institutional arrangements generate alternative outcomes, we end up with miscoordination and with idle resources to begin with. Hayek concludes, famously, that “Mr. Keynes’s aggregates conceal the most fundamental mechanisms of change.” Those most fundamental mechanisms of change, in turn, are informed by “the epistemic function of alternative institutional arrangements and its impact on productive specialization and peaceful cooperation” (pp. 29-30, Boettke’s words, emphasis in original).

This informs all four phases of Hayek’s work. The socialist calculation debate has been misinterpreted as what we might call a “big enough computer” problem. According to this perspective, Hayek criticized socialist planning on the grounds that it is merely inefficient relative to market calculation. Advances in economic modeling combined with orders-of-magnitude increases in computational capacity in the late 20th and early 21st centuries mean Hayek’s criticism of the inefficiency of socialist planning no longer applies. Hayek, it seems, has been refuted by Moore’s law.

But this is a straw man, and it is one Hayek addresses at the very beginning of “The Use of Knowledge in Society.” He notes that if we define the economic calculation problem as one of solving a massive system of known equations producing known outputs using known inputs, then “economic calculation” is simply a matter of math. It might be hard math, but it’s just math all the same.

That, however, isn’t Hayek’s argument, and as Boettke explains in detail, Hayek is not answered completely or correctly by the mechanism-design studies for which Leonid Hurwicz was awarded the Nobel or the information-economics contributions that earned Joseph Stiglitz a Nobel. Hayek’s emphasis, Boettke points out (p. 82), is on “how actors within the process are going to learn what they need to learn and why they need to learn it so they can adjust their plans to those of others who are also continually learning and in such a manner that the coordination of economic activities through time is achieved.”

Competition, then, becomes a way of discovering the nature of “things” and “implies the existence of sheer (or ‘radical’) ignorance and genuine uncertainty, which is a highly significant element of Hayek’s economic thought and marks an important departure from mainstream economics” (p. 86).

Or, as Boettke puts it in summarizing the Hayekian position (p. 111):

“The competitive market process embodies greater knowledge than any single mind could possess because its institutional structure enables individuals to utilize their own subjective knowledge in pursuing their goals, and contains endogenous mechanisms that encourage the entrepreneurial discovery and spontaneous correction of economic errors.”

In this light, Boettke argues, we should read The Road to Serfdom not as a political tract but as a detailed examination of how a real-life socialist economy would have to solve economic and social problems. It raises a crucial point that builds on the questions pursued by Adam Smith, the father of mainline economics. Smith, Hayek, and others in the “mainline” differ largely in their assumptions about people’s moral and cognitive capacity, and the institutional problem for mainline economics is not, as Boettke quotes Hayek on Smith’s analysis of our capabilities, searching for a system that helps good people do the most good but “a system under which bad men can do least harm” (pp. 228-29).

This informed Hayek’s turn toward political theory and “philosophical anthropology” in The Constitution of Liberty; Law, Legislation, and Liberty; and The Fatal Conceit. What, Hayek asked, are the “liberal principles of justice” and the underlying principles that encourage and govern social cooperation broadly construed? What, he asks, constitutes “the political order of a free people”? Boettke’s treatment shows us that Hayek is worth reading in a new light.

Hayek worked in the context of the near death of civilization in the world wars, near-universal enthusiasm for socialism among the intellectuals, and repeated exhortations in the face of periodic economic troubles that this time really was the Final Crisis of Capitalism. In Boettke’s hands, Hayek’s work is a beginning, not an end: it is the jumping-off point into a vital and dynamic research program on how economic coordination happens in a world rife with fallibility and ignorance. F.A. Hayek: Economics, Political Economy, and Social Philosophy is essential reading for any scholar interested in the Hayekian tradition.