Friedrich Hayek was born on May 8, 1899 -- 114 years ago today -- and died on March 23, 1992, just short of his 93rd birthday. In recent years, much of the discussion of 20th century economics has centered around a discussion of the relative influence and contributions of Milton Friedman and John Maynard Keynes, in large part because national fiscal and monetary policy are in such disarray. But it is important to remember that Hayek also did work on some of these issues, including on the business cycle. His lasting influence, however, comes from a very different source: his ability to articulate a coherent attack on the dominant views of central planning that were in fashion during much of that time, especially among the intellectual elites in England.
His most significant work, which culminated in The Road to Serfdom, was his relentless critique of the view that a perfect society could use central planning as a means to achieve incompatible ideals: high production and some preconceived ideal distribution of wealth. His simple insight -- prices are an effective means for individuals to coordinate their efforts in ways that allow society to take advantage of widely distributed knowledge -- remains, to this day, the strongest argument against central planning of the economy. The ability to pull people back from the brink of socialism led to a massive increase in market activity throughout the world, unleashing the constructive forces of voluntary exchange as a tool to advance overall social welfare.
For that one contribution we should be eternally grateful; but, by the same token, we should not deceive ourselves into thinking that there were no weaknesses in the Hayekian intellectual armament. Here are two.
Some years ago (indeed, on the 100th anniversary of his birth) I wrote a short paper called Hayekian Socialism, which was meant to point out the elements in Hayek’s thought that, in fact, were in serious tension with free market principles.
The short version of the argument goes like this: in dealing with the pressures of his own time, Hayek was intent on getting rid of the built-in protections that workers would receive regardless of the demands for their services. Think, for example, of the position of the miners in England before Margaret Thatcher took office. The price that he was prepared to pay to eliminate this wrong was his willingness to guarantee essential social services, like health care and unemployment insurance. This strategy was a vast improvement over the earlier state of affairs, but Hayek did not see the vast extension of state power that could emerge from a robust Medicare program and 99 weeks of unemployment insurance.
The second error in Hayek was his unwillingness to understand that certain elements in society must be subjected to a form of centralized planning. The government need not set prices and production quotas for all goods and services in the economy. But it does have to lay out infrastructure, condemn the land needed to build it, and find some way to finance it all. That requires extensive planning in a limited sphere, and it is notable that Hayek (like Friedman) was reluctant to wade into this area.
In truth, many of Hayek's views are extremely relevant to the question that situation poses: how is it that free market principles can help with the creation, financing and maintenance of these essential projects?
No matter how those issues are resolved, however, Hayek’s signal contributions are always cause for renewed celebration.