The Ideas of Friedrich Hayek

Transcript

Aaron Ross Powell: Welcome to Free Thoughts from Lib​er​tar​i​an​ism​.org and The Cato Institute. I’m Aaron Ross Powell, editor of Lib​er​tar​i​an​ism​.org and a research fellow here at The Cato Institute.

Trevor Burrus: I’m Trevor Burrus, a research fellow at The Cato Institute’s Center for Constitutional Studies.

Aaron Ross Powell: Steve Horwitz is the Charles A. Dana Professor and Chair of the Department of Economics at St. Lawrence University. He’s the author of the forthcoming book Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions, which will be released in September. So we’re talking today about Friedrich Hayek and maybe we can just start with some biography.

Steven Horwitz: Well, Hayek was born in 1899 and grew up in Austria, fought in World War One briefly, and then returned to Vienna where he pursued – then with a law degree was the way you studied economics. It’s interesting. His family, his father was a scientist, a natural scientist and Hayek always had an interest in botany and biology which I think, as we talk, will become important in thinking about evolution and science and some of those things.

But he went – he got the law degree and then he went back and studied more economics and then the key was of course that he became an informal student, not an official student, but informal student of Ludwig von Mises, became part of Mises’ circle in Vienna in the 1920s and it was Mises, Hayek says, who converted him away from Hayek’s Fabian socialism towards a kind of classical liberalism.

He then worked for Mises for a while and then had by that point sort of established his own identity as an economist. Hayek ended up – he was in the United States for a while in the 1920s where he was studying US monetary theory and the early operation of the Feds where a lot of his business cycle theory worked, that we may talk about, in the 30s, 20s and 30s and 40s. Came out of him actually having been in the United States and knowing the details.

He then wound up back in London. He got a job as the professor of economics and statistics at the LSE which he got on the basis of the lectures he gave there. That became his book Prices and Production. He was at the LSE for quite a while and there he – while he was there, he participated both in the socialist calculation debate and the debate with Keynes and of course Keynes was his friend and colleague over at Cambridge.

Hayek came to the United States in the 19 – late 1940s after the war. That story is fascinating because it had to do both with his desire to be in the States and he ends up in the University of Chicago at the Committee on Social Thought, but also was wrapped up with his divorce and somewhat scandalous remarriage. We can talk about that if you want.

So he’s at the University of Chicago, again not in the economics department but on the Committee on Social Thought through the 50s and into the 60s. I can’t remember exactly which year but he ends up back in Freiburg, Germany in the early 60s, continues to work there and then he goes through a really difficult period in the late 60s and into the 70s suffering from some depression and things like that.

But he still manages to crank out Law, Legislation and Liberty in the 70s and of course in ’74, he shares the Nobel Prize with Gunnar Myrdal and then Hayek passed away in 1991.

Trevor Burrus: ’92.

Steven Horwitz: ’92. Rand was ’81. ’92, yes, so at the age of – I can’t quite – maybe it is the birthday yet but he – of course his last book before he passed away was The Fatal Conceit in 1988. So you look over the span of over 60 years of writing and published work.

Trevor Burrus: Did you ever get a chance to meet him?

Steven Horwitz: It is one of the great shames of my life that I did not. I just missed him. He was at George Mason. I think his last visit to the States. He may have even come to Cato when he was …

Trevor Burrus: Yeah, I think he did.

Steven Horwitz: That would have been ’83 maybe and I started at Mason in ’85, so I missed him by a couple of years.

Trevor Burrus: When did he become – this is a weird way of putting it. But start becoming more famous. Was that in the 20s? Was he pretty famous …

Steven Horwitz: Well …

Steven Horwitz: His business cycle work, his academic work in the 30s certainly made him – and getting that job at LSE was huge. That was a major thing. So that made him famous within intellectual circles. What made him famous as a public intellectual of course was The Road To Serfdom in 1944 and that book which was – obviously controversial in a number of ways and a book defending classical liberalism at a time when planning and socialism were at their peak. It was serialized in Life magazine.

Trevor Burrus: It was Reader’s Digest.

Steven Horwitz: Reader’s Digest too but there’s also – there’s a Look magazine version, cartoon version …

Steven Horwitz: And so it was sort of all over the culture and the story is he came to the United States to deliver lectures on the book and he was like thinking, you know, typical professor. I’m going to give a lecture. Fifty people will be there and they had booked him in these huge auditoriums, right? And he was not prepared for that but he handled it and certainly that made him very much a public figure in ways that he had not been before.

In some ways too, his dismay because he was – he had thought that he had lost his academic cache gravitas I guess because of that book and felt very strongly going into late 40s and 50s that he somehow had to get that back, right? He had to remind people he was actually a real scientist, not just this guy who wrote these public intellectual books.

Aaron Ross Powell: So what was the argument of The Road to Serfdom?

Steven Horwitz: Well, it’s one of these classic ones where the argument people think it made isn’t quite the one it made. OK? So the version of it that you hear is something like the following, that Hayek argued that any step on the road towards planning, towards greater government control over the economy would inevitably drive us down the road to serfdom into full totalitarianism, right?

So it’s the world’s biggest slippery slope once you’re starting down. Vroom, you were gone. That’s not what he said. What he said more guardedly was that once you begin to believe that you need to plan an economy, if you are to pursue that consistently, you will find that you will have to plan other parts of society, that you will have to take increasing – your attempts to control society will increase over time and that if you don’t recognize that, you can slide down that road to serfdom.

But it wasn’t this sort of Marxian kind of inevitability. He was – it was a warning. It was in that way like 1984, right? It was a warning that said thinking you can just plan an economy while leaving people free in these other dimensions is naïve. OK? It’s not going to work and he – in the book, he traces through the sort of history of planning and where those ideas come from. But the sort of thesis that everyone kind of grappled with was this one, right? Because obviously we can think of places today that have started down that road.

Trevor Burrus: Sweden.

Steven Horwitz: Right. And they backed up right then. So yeah, and so it wasn’t a story in which human agency wasn’t present, where we couldn’t stop this process, but it was one that he said. If you pursue it consistently, you will have to do these kinds of things and there are some wonderful chapters in that book. One called The End of Truth where he talks about how that you will, eventually if you pursue this, have to engage in all kinds of forms of propaganda in order to persuade people to adopt this set of preferences that consistently.

One of the most enduring chapters is Why the Worst Get on Top which is a sort of pre-​public choice. The kind of story about why once you put power, this kind of power in the hands of the political class, it will attract the people with a comparative advantage and doing nasty stuff because they will be the ones who rise to power.

So again, and remember he’s writing in the 40s while Nazism and the Soviet were seeing both at the same time and it’s a very effective kind of story about both of those not being simply – well Germans are anti-​Semitic therefore but rather the idea that you’ve turned this power over to the States.

So it wouldn’t be surprising that you get people like a Hitler and others who come to power once you believe the state ought to do these things, that the ones who rise to power are the Stalins and the Hitlers and the …

Trevor Burrus: [Indiscernible] is the sort of sociology of the state type of thing that you mentioned there and the real enduring lesson I think when you see in this town and watch the new cycle is – he says basically that they’re going to try and plan something. My next question is about the planning. So they’re going to say – say ObamaCare or whatever the plan – we’re going to take over some part of the economy to make it better, make it more fair, whatever thing.

Then when it doesn’t work, and it won’t work because of Hayek’s other ideas, which we will get to, they’re never going to say, “Oh, it didn’t work because we went too far.” They’re always going to say, “It didn’t work because we didn’t go far enough.” The problem was the freedom that is undercutting the planning and not the planning itself and that’s a very good observation I think about the sociology of the state.

Steven Horwitz: And that’s in Mises too by the way. Mises has this wonderful stuff on – now it gets turned to interventionist dynamic where basically he says people perceive a problem in a largely market economy. More times they’re not caused by the state. So we have to fix this problem. So we need more state intervention to fix it. The state intervention comes along, creates several problems, other problems now that of course most economists would have anticipated. But leave that aside. It creates a bunch of new problems and people say, “Oh my god. We have to solve these problems.” More state, right?

So the same – sort of same version and what Mises argued is again, if you don’t recognize this, you’re either going to end up going all the way to a [0:10:00] more comprehensive form of state control or you’re going to have to realize we got to stop this and back up. So yeah, very – I mean those arguments were deep in that tradition.

Trevor Burrus: So why can’t they plan? I mean this is maybe the biggest Hayek question.

Aaron Ross Powell: This goes back to the socialist calculation debate.

Trevor Burrus: And it’s related to – you can tie any of these together, also the use of knowledge in society which is such an important – so why doesn’t that work?

Steven Horwitz: Well, what Hayek does is to suggest that the fundamental problem in society is a problem of the use of knowledge, hence that famous 1945 article The Use of Knowledge in Society. That the problem we have to solve in any society is the fact that the knowledge we need to produce, create and do almost anything is dispersed, contextual and tacit, right?

That it’s dispersed in the sense that different people know different things and so somehow we need to get people to share the little bits that they know. It’s contextual in the sense that oftentimes the knowledge relevant for economic – for the sort of rational use of economic resources, for efficient use of resources, is knowledge that will only appear when you’re in the context of a market economy that draws it out through the competitive process. So the knowledge doesn’t really in some sense exist until you’re in that game, until you’re in that process.

Then it’s tacit. There are things that we know that we can’t articulate. So my favorite example – my students are less likely to get it these days. If you know how to drive a stick shift, a manual shift, I ask my students. How do you know when the – what’s the hardest thing to learn? When to pull your foot off the clutch. OK? How do you know? How do you know when to pull a foot off the clutch? And there’s this pause.

That’s right! That’s right. You just kind of know. OK. Now I say to them, “Do you know?” Yeah, I know. Do you drive a – yeah, because people are off too early, right? You know, off too late. So they know, but they can’t articulate it. Can you ride a bicycle? If you can ride a bicycle, you’re solving these complicated physics equations but you can’t articulate what it is.

There are all kinds of knowledge like this. A significant portion of the knowledge in any social system but in the economy in particular is of this sort. Entrepreneurs specifically have a great deal of things that they have learned from experience, that they can’t always articulate but that they know.

So when you put all those things together, the idea of planning an economy, of trying to create an economic system from the top down would require that you were able to access and gather and make use of all of this knowledge.

Yet the knowledge is dispersed so it’s challenging to get it on the place. It’s contextual. It can only exist under certain institutional arrangements and if it’s tacit, the people themselves, because you might say, well, why don’t we just put everything – everything on the internet, throws everything they know into a computer and we figure out how to allocate. Well, wait. If you can’t articulate it, you can’t get it into the computer.

Trevor Burrus: Yeah.

Aaron Ross Powell: And the flipside of this then, I mean so that’s – the way that knowledge plays out in the economy and the way that the economy and the people in it operate is why planning doesn’t work but it also leads us to the other great idea that Hayek is known for which is spontaneous order.

Steven Horwitz: Yeah. So for Hayek, spontaneous order is the idea that human institutions and practices are the product of human action but not human design and I think that’s the phrase he liked and it comes really from Adam Ferguson, one of the Scottish Enlightenment thinkers that Hayek loved so much.

The idea here is that so many of the things in society in particular, economic institutions and practices evolve over time in ways that no one person designed although each one of us contributes to through the choices that we make. So again another example here with students is – I teach up north where it snows a lot. We get the snow covering the quad and what happens over the course of the morning of course is that these paths get – footpaths get worn through the quad as students walk from class to class.

Same thing with tracks in the woods. Hayek uses that example too. There’s no one out there with a sign saying, “Hey, everybody walk here.” There’s no one planning out where these paths will be, yet these paths form through these spontaneous order with process and they work, right? They’re efficient ways.

When I was at George Mason in the 80s, they were building so many new buildings. They were smart. They didn’t pave in any paths. They waited until people walked through the grass and saw the patterns from the bottom up that people were tracing out and then paved them in afterwards.

That’s the idea of spontaneous order. In the market, what makes that possible, what coordinates all that behavior are prices, profits, losses and the other institutions of the market and Hayek’s argument in the use of knowledge in society is that prices – this is my preferred phrase for it, but prices are knowledge surrogates. They serve in the place of that underlying knowledge. It’s not as if a price gives you that knowledge but it lets you act as if you knew all of those other things that people knew.

So when a price goes up, we know that this good is now relatively more scarce. We know we should economize on it. We know we should be looking for substitutes. We don’t need to know why. We don’t need to know the – the price tells us much of the – substitutes for that information that we otherwise have.

Aaron Ross Powell: But does using prices to track that knowledge I guess distort our knowledge as well? Because the prices then, it’s not just that the prices are giving us information but they’re encouraging us to act in certain ways and we’re getting information from prices as opposed to – from other sources. So is it similar to that – look for your keys where the light is best.

Steven Horwitz: Yeah.

Aaron Ross Powell: So this leads us to a market economy where people are chasing profits, chasing the highest prices they can get, creating bubbles in a way that we wouldn’t if we had more rational planning or other incentives or other ways of getting that knowledge and tied to say greed or whatever else.

Steven Horwitz: The question then is, “What’s the alternative?” right? I mean Mises back in 1920 in his first contribution to the socialist calculation debate says look …

Trevor Burrus: Yeah, I’m going to stop – yeah. I think we said socialist calculation debate 10 times. So clarify – yeah.

Steven Horwitz: Yeah. So let’s – we will back up and then we will come forward. So Marx and the Marxians argued that you could plan an economy in the absence of all the institutions in the market, right? That you wouldn’t need price and profits, you wouldn’t need private property exchange. You could scientifically plan an economy and sort of – we could gather the necessary knowledge so that everyone or a group of people could know how to allocate resources efficiently. I don’t want to go too far into the Marxian story but the idea was markets capitalism are full of wasteful duplication and people are doing what’s profitable instead of what’s really valuable.

So if we had planning, we would eliminate that waste. We would eliminate the exploitation of the market and the niche of the market. So the question was, “Could we do this? Could we actually allocate resources rationally in the absence of markets?”

There were several attempts to grapple with this the turn of the century and the most fundamental response to it was Mises’ 1920 article Economic Calculation of the Socialist Commonwealth where he laid out he argument about why you could not plan an economy and essentially it’s this – what we’re talking about here.

Mises said you can’t determine efficiency without knowing the value of resources and the only way that you can know the relative value of resources is through prices. OK? And those prices have to be determined through exchange in the market. The only way you get exchange in the market is if you have private property, right?

And particularly he pointed out in the means of production and capital goods. So his argument was if you want rational economic allocation of resources, you have to have prices to be able to make the comparisons, right? So you can say – you can know technologically. I can make a bridge out of wood, steel, maybe platinum. Let’s suppose for a moment you can do that, right?

So wood, steel, platinum, right? Which one should we make it out of? How do we know, right? And we know – don’t make it out of platinum because it’s really expensive. It has more valuable uses. But in the absence of a market and prices, there’s no way to pick among the technological solutions the one that is economically the most efficient and that difference between sort of technological efficiency and economic efficiency was key.

So Mises writes this in the 1920s, throws the challenge down. There are some responses by the Marxists but the most interesting responses were by mainstream, then mainstream economists, particularly Oskar Lange, the others as well, who argued – and here’s where we get into the weeds a bit. But argued that the principles by which the economists use – the theory that economists use to talk about the market could apply equally to a socialist. So at least a system Lange said were the – where the means of productions were socially owned.

So Lange, this got referred to as market socialism, was allowing prices back in, in ways. So at one point, you can make – well, OK, then you’ve conceded Mises’ main point. But what Lange tried to argue is you could still allocate capital from the top down by kind of mimicking the market by sort of throwing out prices and seeing what people would supply it, would be willing to supply and demand and adjust them accordingly. He had this whole kind of complicated system.

Hayek’s response – work in the 30s and 40s was a response largely to the Lange type proposals about why that couldn’t work. One of the interesting things about that I think is that Lange said – and his original contribution. How grateful the planner should be for Mises’ original argument because it forced them to rethink – think through all these issues, that they should build a statue of Mises in the hall of planning to thank him, right?

Trevor Burrus: That would be ironic.

Steven Horwitz: Lange has been a little snarky. But I think it’s fair to say that without Lange’s response to Mises, Hayek would never have been pushed to develop these knowledge issues in the way that he did and in a real equally ironic sense, modern Austrian economics owes a debt to Lange for – I don’t want to build any statues or anything but owes a debt to Lange.

Trevor Burrus: [0:20:00] So I think another thing – for our listeners who aren’t familiar with this, what happened for the fact that Mises was proved correct and Hayek – what happened in the Soviet Union because of the lack of prices?

Steven Horwitz: Well, let me just take one of the points there. In the eyes of the economics profession by the way, Lange won that debate or at least it was a draw, right? The perception was well, Lange showed that you couldn’t decide on theoretical grounds whether capitalism or socialism was better and it really wasn’t until the 80s and here’s where my own dissertation advertiser, Don Lavoie, wrote a wonderful book in the mid-​80s called Rivalry and Central Planning that the socialist calculation debate revisited. He went back and really re-​interpreted what happened there and made the case that actually people misunderstood it and that Mises and Hayek were right.

So that’s an interesting story too. I mean Hayek – Hayek lost the two biggest debates, was perceived to have lost the two biggest debates in social science in the 20th century yet – at the end of the day, he was the one still standing which I think is interesting. So what happens to the Soviet Union?

What you have there is you don’t have a planned economy in the full sense of the term. They still have prices and they had world prices to look at. What you had there was sometimes called an administrative command economy. It’s an economy in which prices are being set administratively from the top. It’s an economy which the – and they’re being set too low, so you constantly have shortages and you have misallocation of resources because they can’t figure out what to do with things.

The old story of the – they’re told to companies – produce 10,000 pounds of nails, right? So they produce ten thousand-​pound nails. So we would never produce in terms of weight, right? We would say, “What kind of nails? What kind of screws? Do you need Phillips head or straight?

So there’s – the market can fine-​tune in the ways that they could. So we had all these inefficiency there but inefficiency that came from heavily-​distorted markets, from what we would today call rent seeking and crony socialism, right? If you want to call it that. All right?

It was never – with the exception of the war, communism years, it was – there was never any serious attempt to fully eliminate the market there. It was a different degree of what we see.

Aaron Ross Powell: But then sort of loop back around to my question …

Aaron Ross Powell: That – so there’s a sense – I mean the way that these arguments kept portrayed end up looking something like a market triumphalism. The market is – it’s not just that the market works compared to the alternative but the market is totally awesome.

Steven Horwitz: Yeah.

Aaron Ross Powell: And so the counter to that might be that these – yes, we may have to rely on prices but they’re distorting or not perfect in the way that we could say like look, if your only source of news about the world was say Fox News, we still wouldn’t say, well, that’s wonderful. There are bad things that would happen from only getting your news from Fox News.

Steven Horwitz: It’s better than being totally knowledge-​free. Yeah. So what Mises said – this is where I think where we left off. But Mises said in that 1920 piece. He said, look, there are things prices can’t do. They can’t tell us about beauty. They can’t – but for the things that we need to do, from day to day to ensure progress and peace and prosperity, they do a good enough job.

I think libertarians who talk about these issues have to be willing to – no, we can’t – prices can’t tell us everything there is to know. They’re not perfect either, right? We live in this – Austrian School economists would say we live in a world of disequilibrium. Prices are never perfectly right. That’s what entrepreneurs are for, right? To figure out when something is not right and sort of make the moves to try to – to make those corrections.

So I think admitting that prices can’t tell us the value of everything, right? I don’t put a price on my relationship with my children or things like that, right? That’s fine. But if the question is how do we generate a prosperous cooperative society, prices are – market prices are necessary even if they’re not completely sufficient for the kind of world that we might like to live in.

Aaron Ross Powell: A couple of times now we mentioned the term “Austrian economics” and Hayek and Mises are like the two giants of the modern Austrian School. But for listeners who aren’t familiar, can you give us the thumbnail sketch of Austrian econ and how it’s different from mainstream?

Steven Horwitz: I will do the brief, very brief history and then – in the 1870s, economics had a major revolution known as the marginalist revolution, the idea – understanding that value was both subjective and marginal in the sense of the specific thing in front of you. What mattered was not the value of all water everywhere but the particular glass in front of you. But there were three kind of …

Trevor Burrus: I wanted to actually just clarify that because I remember when I was learning economics. To clarify, it was the diamond-​water paradox.

Steven Horwitz: Paradox, right, right, yeah.

Trevor Burrus: What did they think before?

Steven Horwitz: The puzzle was look, diamonds are a frivolous luxury that we don’t need to survive. Water is essential to human survival. So why are diamonds so much more expensive than water? If water is so crucial to our survival, why isn’t it more valuable? The answer is, is because we don’t – when we value things, we don’t value the total utility of all water everywhere or all diamonds. We value a particular concrete amount, right?

So what’s more valuable, a glass of water or a glass of diamonds? That’s the question, right? So this – my cup of water sitting on the table here is such a small part of the total supply of water that any given decision human beings make on the margin is always about a specific quantity of that good, not the whole thing.

So that got resolved. But it worked kind of into three branches. The three thinkers were called Menger, Williams Stanley Jevons, and Leon Walras. They all kind of took this in different directions. Menger was Viennese. He was an Austrian and Menger took this insight in a way that really focused on people’s subjective perceptions of the world and their decision-​making. He kind of rejected the early mathematical attempts, not because he couldn’t do math, but because he didn’t think it was the right way to think about economic issues. So this approach to economics got tagged by its opponents as the Austrian School because well, they were very psychological and all these …

Trevor Burrus: They’re not German.

Steven Horwitz: Yeah, they’re not German. That’s right. So that’s how the name came and then there’s Menger’s – Menger was the teacher of Mises and so we get this kind of lineage that comes about. So today, how do Austrians differ today? Austrians today, the Austrian School today starts from the assumption that what matters in economic, really social scientific analysis, is – the task of economics is to explore human plans and their consequences, especially their unintended consequences.

So we start with the subjective agency of human beings. We are actors. We have plans. We perceive the world in certain kinds of ways. We have means and ends and we want to achieve those ends. How do we go about doing that? That looks a lot like mainstream economics in some sense. We’re economizing behavior and we marginalize utility and those things.

But what we’re really interested in is how – so given your own perceptions, how do you learn about the rest of the world? Here comes Hayek’s story we’ve been talking about. Well, you need that information provided by prices and profits and losses and all the other institutions in the market to enable you to make those decisions, right?

Those institutions are particular – we want to understand how those institutions make possible the coordination of the marketplace. If it doesn’t work, right? Why doesn’t it work? And then that leads to this – have a focus on entrepreneurs and the role that entrepreneurs play and spotting ways in which markets are not coordinated and seeing opportunities to improve outcomes by using resources and ways that people haven’t thought about before.

So the obvious example these days is Uber. Uber is just a beautiful example of two important things. Entrepreneurship that these guys realized this opportunity and took advantage of it. But one of the most fundamental truths about economic progress is economic progress is the progressive reduction of transaction costs, right?

Trevor Burrus: Can you define transaction costs?

Steven Horwitz: Yeah, of reducing the cost of people finding and engaging in trade with each other. So the fact that Uber gets their way before the taxi and can take you to exactly where you want to go and you can do it all on your phone dramatically reduces the transaction cost of getting from here to there, right?

You can think about eBay, right? People used to have a lot of junk in their houses. Now what they have is – what used to be other people’s junk but now is their treasures, right?

So eBay has dramatically reduced the transaction cost of finding people to get rid of your junk and from the other end of that market, of finding stuff you think is a treasure but someone else thinks is a junk.

Trevor Burrus: Well, that’s the – in the transaction cost, my lecture, I talk about that a lot that you also realize that in the basic trading game parable, that you can make the world way awesome at least in subjective preferences by reorganizing the stuff in it.

Steven Horwitz: That’s right.

Trevor Burrus: And the problem is, is that you got to figure out what kind of person wants to trade with you and this is the story of human civilization. You have a hundred people in a group or you have a thousand people in a group and now you have more trading possibilities but now you have more knowledge problems and this is when the Austrians come in with how – not just eBay. First if was classified ads, newspapers and then Craigslist and then eBay and then also in human relations you have Tinder and you have all these different …

Trevor Burrus: They also diminish transaction costs and it’s amazing that – how many of those things are just standing in the way of – that’s the knowledge. That’s the Austrian point.

Steven Horwitz: Right, and the freedom to trade. Economics, it’s a very Austrian point to recognize that economic activity doesn’t change the number of atoms and molecules in the world as you said. We just reorganize stuff in ways that get things [0:30:00] into the hands of people who value them more or transform them into things that people value more without ever changing the number of molecules.

That is awesome, right? Because that really gets at this point that what wealth is, is a subjective perception of us having the things that we value. I think it’s a piece of junk in my basement. You think it’s a treasure. We trade.

Trevor Burrus: And the knowledge, the – I think …

Steven Horwitz: And knowing that the other – right. Knowing that the other person is there and finding ways to make that happen and then we get – and this goes back to the other question about what else besides prices. Huge issue of course is trust, right? And all of these ways in which we all trade has to involve trust. As we trade, it gets more anonymous through these kinds of internet-​enabled things.

We have to find more and more sophisticated ways of signaling trust. So it’s not just about prices. It’s about these other kinds of features of markets too. But again, when people are free to develop these things, we can’t predict where they will go and that’s the sort of spontaneous order argument that when people are left free, under the right institutional rules of the game – we can’t let people club each other over the heads and steal. But under the right rules, when people are free, we generate the results.

Trevor Burrus: And the knowledge element is paramount and one quote that comes from Walter Williams.

Steven Horwitz: Yeah, sure.

Trevor Burrus: Very familiar with about this little element of knowing and it goes back to socialist calculation debate and everything. The one where he says, “My grocer doesn’t know what I’m going to buy, when I’m going to show up or how much I’m going to buy, but if he doesn’t have it, I fire him.”

And it’s the amazing ability for the economy to take all those things and put them together where you walk into the store and you take it for granted that you …

Steven Horwitz: Yeah, that’s right.

Trevor Burrus: And you get really mad that they don’t have something and all those things are what goes into the difficulty of planning. But on the Hayekian point, I think we’ve set a foundation. But if we were going to try and explain now when someone says this is very Hayekian, what are they – like a Hayekian view of the family, Hayekian view of cities or Hayekian view of paths and GMU’s campus. What does that mean?

Steven Horwitz: I think it’s a recognition of the power of evolutionary forces, the recognition of the limits to humanity’s ability to design social outcomes and a recognition of the ways as we’ve been saying, the way in which good institutions can enable us to make use of other people’s knowledge in ways that enable all of us to solve problems more effectively.

So I think Hayek – for me, the key – at least certainly in the stuff of the family is that kind of combination of evolution and spontaneous order and recognizing that that – for example the family as an institution has evolved and changed in ways that no one intended or perhaps even imagined and it has done so in response to the ongoing evolution of economic and political structures and so on.

So when we – people want to say – feminism wrecks the family. Well, no. It’s more – we have to get behind that story and figure out what the forces and institutions and things are that are in place. I think we also have to – another part of that is understanding the family as an institution, as one of the institutions that frames economic activity too, which is how does – not just how does the – how do economic forces affect the family.

But what are the functions that the family as an institution performs in the broader spontaneous order of what Hayek called the great society or what Smith called the commercial society, that grants spontaneous order of civilization.

Aaron Ross Powell: On that, I mean one of the things – we’ve been talking mostly about Hayek as an economist and he was a world class economist but then one of the really remarkable things about his enormously rich career was he wrote very, very important works on topics that we don’t typically think of as economics, applying these insights, into law and political philosophy. So maybe we can …

Trevor Burrus: Neuroscience, don’t forget neuroscience.

Aaron Ross Powell: Shift into some of those and maybe – so after The Road to Serfdom, probably his next most famous book is The Constitution of Liberty.

Steven Horwitz: So one of the ways to understand – as I suggested earlier, what happens after The Road to Serfdom is I think two things. Hayek wants to get his scientific mojo back, right? He wants to be perceived as not this guy who wrote this book that was turned into a cartoon.

And he is very frustrated at having perceived to have lost those two debates and I think he’s trying to figure out what went wrong. What do the Keynesians not understand? What did Lange and the market socialists not understand? What didn’t I communicate well?

So I think you can view the rest of his career after World War Two as a bunch of attempts to address that. The Constitution of liberty, he said of it, it was his attempt to write [Indiscernible] liberty of the 20th century. He found [Indiscernible] endlessly fascinating. He wanted to write something that would have the weight and impact and breadth on liberty.

In The Constitution of Liberty, he tries to lay out a vision of classical liberalism, the market economy that reflects many of the things that we’ve been talking about, that really focuses on the importance of that institutional framework, about the way in which market and other institutions emerge and evolve spontaneously within it. There are all kinds of interesting chapters in there about the political structure and how democratic political structures might play into that and the limits on government.

The last part of that book is a bunch of applied particular questions at the time that people I think who read it are shocked to see how not radical he was. His classical liberalism was a very modest sort but again writing in 1960, that’s understandable.

So you see that – so The Constitution of Liberty is sort of law and political philosophy. Law, Legislation and Liberty, the three volumes in the 70s, is kind of a reworking of that. I think he’s – Hayek said at some point that even after The Constitution of Liberty was done, he was unsatisfied with it. He thought there were things he had to do.

There’s a big debate about who thinks which book is better. I think Law, Legislation and Liberty is better. I think he got it better the second time. The economics is a little more sophisticated. He’s able to bring in some more evolutionary insights and things that – just it’s richer than the first.

He got more radical in his old age. I mean we can talk about denationalization of money too. There’s a famous quote from – the story about Hayek where he met – this was when he was in the States in the early 80s or late 70s.

He met with a group of young Austrian economists. Now my senior people now, but – and they were pushing him all about libertarian or anarco-​capitalism and pushing. You should think about anarchism and all this. Hayek said, “Stop. Look, I’m an old man. I can’t do this, right? I can’t think this way.” “But,” he says, “I think if I were a young man today, I would find this really, really fascinating and I would be where you guys are.”

So I think that’s an interesting – he could see how they were pushing him. So we have to talk about the neuroscience to …

Trevor Burrus: Exactly.

Steven Horwitz: So Hayek – in his student days, Hayek wrote a – was interested in psychology and he wrote a paper on theoretical psychology. That proposed this kind of theory of the mind and cognition that he couldn’t really substantiate the argument at the time and he put it aside.

In the 40s, he came back to it for a bunch of different reasons and I suspect that one of them was he knew from the papers on knowledge as part of the calculation debate that he had to understand something about knowledge and how the brain worked.

So he went back to the – that paper and then read everything that was happening in sort of the neuroscience at the time, cognitive theory at the time, in psychology at the time to figure out where it was. It turned out there was now more substantiation for the argument he was making. But I think what’s – the rhetoric of it I think for him was he needed a scientific basis for the subjectivism of Austrian economics. That is the idea that people perceive the world differently, the idea that knowledge is dispersed and tacit and contextual. The idea that knowledge matters, that – all the things that were in those.

But I think he really wanted to show and this is part of the – get his mojo back too. That this was science. This wasn’t just ideology or whatever. It was science. So he writes The Sensory Order which was published in 1952, way ahead of its time in terms of how it understood mind as an emergent phenomena from the physiology of the brain. It’s sort of anti-​reductionist. It’s – without having the kind of physical evidence that modern neuroscience has because they didn’t have tools. He was absolutely on the right track and it’s a very difficult book to read unless you’re into that sort of thing.

But the last chapter is about the implications for sort of methodology and the social sciences and stuff and it really becomes clear there where he’s going, which is this is – if I’m right, brains work a certain way and those produce a – human minds that process knowledge in certain sorts of ways and if that’s right, then this other stuff makes sense, right?

So it was – I mean he was – all of these things were done with a purpose. He really had an integrated social/​scientific story he wanted to tell there.

Trevor Burrus: So ….

Steven Horwitz: Which makes him endlessly fascinating.

Trevor Burrus: Absolutely. Oh, he’s my favorite, yes. I think this is a good time to perform a Hayekian analysis to clarify some of these for our listeners and what this means and the kind of things you can do Hayekian analysis on. So let’s talk about language. OK. And what it would mean to – so how language develops and what situations. What it would mean to plan a language like Esperanto …

Steven Horwitz: Or Académie Française.

Trevor Burrus: Yeah, and then whether or not you could expect a planner, [0:40:00] the Esperanto. I think they’re still like …

Trevor Burrus: And how this stuff, sort of stuff drips. So can you …

Steven Horwitz: Yeah. Sure, yeah. Well, language is one of the first spontaneous order examples going back to the 18th century. People recognized that nobody – there’s an old Far Side cartoon with two cavemen sitting around, pointing to body parts going, elbow – we know it didn’t work that way, right? We know that it – from earlier, from earlier, from earlier, simple ground.

So the way that words evolve and spelling of words in English evolve, right? Why certain words have meanings. All these things. Nobody decides that from the top down. It’s decided by the user very much like money, right? What makes [Indiscernible] is what people decide.

Trevor Burrus: So a networking effect.

Steven Horwitz: Yeah, there’s network – right, and there’s huge networking effects. If only 100,000 people speak Esperanto or a thing, it’s really not that useful, right? If you’re the only guy with the fax machine, it doesn’t – it’s not that useful.

So yeah, there are network effects and what words get selected in and what words get selected out. No one controls that. My St. Lawrence’s school songs all seemed to have the word “wended” in them. You wended down the hill which is a word that was very common at the turn of the early 20th century but we don’t use it now. Why? No one said stop using “wended,” right?

Just people change their behavior and you can look at the way text speak has invaded our language and the way in which the internet has given us words, right? That we would never have before. It’s this constantly growing – and you see changes too, all these battles over – what it literally means, right? OK?

But the beautiful part is that no one – it’s an ongoing conversation about language, right? And no one can force a decision and what people decide through their usage will determine it. The Académie Française says don’t use the word “weekend” because it’s – but people use it, right? No one listens to them because usage matters and it’s also why the artificial languages are difficult to get going because there’s an advantage to the bottom-​up growth of language. Just like those foot paths, right? You know where people want to walk if you wait, right?

So when you let language bubble up from the bottom, you actually get language that’s more effective because people have chosen these words because they think they convey a meaning and they’ve been able to effectively communicate with them. Top down, you can’t know that and you could draw the analogies to markets here, right?

Trevor Burrus: Yeah. Well, I think that Hayek would use a term which I think we should clarify and define for something like Esperanto. I mean it may be – but the term “rational constructivism”.

Steven Horwitz: Right.

Trevor Burrus: What is that term?

Steven Horwitz: Yeah. What Hayek meant there was again this idea of trying to create top down through human sheer sort of rationality to construct something new that was completely detached from tradition and history.

One of the interesting things in Hayek is his relationship with tradition and he’s very respectful but not reverent of tradition because tradition carries that weight of history and of usage and of success with it.

So we have to recognize. There’s a reason we do things the way we do things. So what Hayek says is you can’t throw everything out and start anew. You can critically examine a piece of the social world and sort of ask whether this works or doesn’t work. But you’re always doing it against the background of these other things and whether it fits.

So you can – for example the debate over same sex marriage would be an obvious example here and it’s an interesting question. What would Hayek say? But there’s no reason to think Hayek wouldn’t say, “We can talk about this question,” right? And think about the evolution of this institution because it has evolved over time. Is this the next step? Are we designing something from the bottom up new? I don’t think we are, right? Are we critically assessing how we’ve taken an existing rule, treat people equally and apply here?

So there are all kinds of ways that you can do this without thinking you can reconstruct the institution of marriage from the top down like we just tore it up and started over. That’s what you really can’t do.

Aaron Ross Powell: Then how does the – how does his views on law and the emergence of common law and law versus legislation fit into all of this?

Steven Horwitz: So he was a great fan of common law because it’s another one of the spontaneous order of bottom up processes. But he recognized too that the law can sometimes get into a dead end or a cul-​de-​sac, right? Where that historical process puts it in a place where now doing things the way we’ve done them doesn’t make any sense.

My favorite example of this is the debates over copyrighting, music sharing and all this kind of things. We took a consistent idea about the importance of copyright and kept applying it. But we were now in a world where the scarcity constraints were different, right? And the technology was different and so in those places, Hayek says that’s where – judges can do the common law, sometimes paint themselves into a corner. That for Hayek was one of the roles of legislation, that is of government, to sort of step in and say, “Can we now fix this law?”

But it was always about making it align better with the rest of the system. It had to be consistent with the rest of the system. It was repairing a hole in the fabric, not designing a whole new thing.

So that – and that’s a very – if you know your Karl Popper, right? It’s a kind that Popper called piecemeal social engineering, right? I think that’s a little stronger than Hayek would put it but it’s the same basic idea that we can fix these holes but we always have to do it against the larger fabric that we’re …

Trevor Burrus: In Rules and Order, which is the first volume of Law, Legislation And Liberty, Hayek has really interesting observations, I would call them, for when I read it. Mind-​blowing. About where rules come from. So it’s not just economies in our plan. It’s also the possibility that law – how does that work?

Steven Horwitz: Well, again, where does the law – the law is a problem solver, right? All institutions solve problems. Market solves problems. The law solves problems.

People have a dispute. They take it to a third party. Third party – they both agreed. Third party renders a decision. That decision becomes potentially precedent. Think about our discussion of language, right? It’s one contender, right? Other judges face similar situations. They look at what other judges have decided and then so – you see this build up over time where what emerges out of this individual problem solving and dispute settling instances is a body of fairly consistent, fairly coherent, well-​known rules that become the law.

So it’s not – again, we have this notion of the law giver, right? The person or entity who sat down and wrote out the law. But that’s just as silly as the Far Side cartoon about naming the body parts, right? The law evolved and emerged.

What Hayek refers to as legislation is the role of government – legislative bodies, government in correcting those errors that we’ve talked about, but also in laying down the internal rules for government itself. So Hayek wants to distinguish between the role – government’s role in setting the rules of the game and the role of government and government actors in directing government as an organization, right?

Because he’s not an anarchist and there are things government should do and we need rules for that. We need processes for that. That’s what – that’s this notion of legislation.

Law on the other hand is these – sort of the rules of just conduct, these framework type rules and that’s why in Law, Legislation and Liberty volume three, in his attempt to some would say rationally construct the political – so he comes up with this model constitution and there are some interesting stuff there. But he has two different bodies responsible for law and one for law and one for legislation because he thinks those are so distinct and such distinct …

Trevor Burrus: When I teach Hayek’s view of law, what rules in specific? Because he has a lot of observations about how there are all these – again, going back to task and knowledge, there are rules that you follow that you know – that you don’t even know that you know them and that the only thing that make social – society work and specifically when people are together, physically together and they might step on each other’s toes.

My teaching tool for that is actually playing clips of Seinfeld because Seinfeld is entirely about breaking rules that you didn’t even know existed until someone breaks them.

Steven Horwitz: Right, double dipping, double dipping.

Trevor Burrus: Talking, close talking. Right at your face. So what is – if you tried to legislate from the top down, this is exactly how far people have to talk from each other but there are all these rules there.

Steven Horwitz: And you know it and the thing about those rules is you know it when they’re violated. You might not be able to articulate what it is but you know it when it’s violated.

Trevor Burrus: Or the rule of putting your bag on a seat in a crowded cafeteria and having it be there when you come back.

Steven Horwitz: Turning on your parking signal to indicate you want that space.

Trevor Burrus: Yeah.

Steven Horwitz: I mean these are all – again, all these little social norms and rules that have evolved that nobody invented but that we have developed out of practice like the law, like money …

Trevor Burrus: And that would be the Hayekian view of something.

Steven Horwitz: Yeah.

Trevor Burrus: Another thing that we could have a Hayekian view of in terms of rules is traffic.

Steven Horwitz: Yeah.

Trevor Burrus: It’s different everywhere.

Steven Horwitz: Yeah, yeah, right, right. And notice too – right. This is the interesting thing. Their scope within this for cultural variation, that it doesn’t – people who often perceive free market types are sort of saying, well, everyone has got to look like us. No, I mean the rules will vary by local circumstances. We do know that there are certain – that societies that want to be peaceful and prosperous and so on have to have the same general types of rules but they don’t have to be the same. They don’t have to be exactly the same, as long as they work for that population.

Aaron Ross Powell: You mentioned a couple of times Hayek is a classical liberal but you said as – when talking about the end of The Constitution of Liberty that he was not a radical in any way. So I’m curious about how he fits into the libertarian tradition. Is Hayek a – I mean we draw – here at the Cato Institute, we have the FA Hayek auditorium where we hold all our events. I mean clearly we’re fans but …

Trevor Burrus: Pictures of him everywhere.

Steven Horwitz: Yeah.

Aaron Ross Powell: How does he fit into libertarianism?

Steven Horwitz: Well, I think two things. I think – here’s the way to put it. You can use Hayek’s insights to make a much more radical argument for libertarianism than Hayek himself [0:50:00] did.

I mean catch me on the right day and I will call myself a Hayekian anarchist because I think you can – when you really understand the richness of spontaneous order and all this stuff we’ve been talking about, right? It becomes difficult particularly if you now throw public choice insights on top of it, right? To – and sort of recognize the limits of the state, to think what the state can do effectively.

But that aside, I think the more general point is that, that Hayek’s analytical framework, Hayek’s intellectual system undergirds a lot of the arguments that modern libertarians make even if Hayek himself was not willing to draw the same – or as radical political conclusions out of them. I think that’s the key to me, right? It’s that oftentimes – it’s a game that our friends on the left like to play is, oh, you love Hayek. But Hayek, he believed this thing about universal basic income or something that you guys reject. So therefore – and I want to go, “Therefore what?”

Do you guys not draw in Marxian insights, right? I mean does that somehow invalidate? No. It’s just – it’s that we’re not – I think it’s important for modern libertarians to not be worshippers of a thinker to the point where the only way you can agree with that thinker is to agree with everything, right? And everyone is either a white hat or a black hat sort of thing. No. Use his insights to develop arguments that go beyond him. That’s what we do. That’s great.

Aaron Ross Powell: For listeners who found this interesting have not necessarily read Hayek in the past, but want to explore more. Where’s the best place to start?

Steven Horwitz: Oh, I love this question. I think it depends on what your interests are. I actually think for the general kind of reader, The Road to Serfdom or The Constitution of Liberty are probably the best places to start.

If you are a little more sophisticated, you can jump to Law, Legislation and Liberty right away. That and The Constitution of Liberty are fairly substitutable.

If you’re interested in the economics, the book to read is his collection of essays called Individualism and Economic Order which is still in print. That has got all these knowledge essays from the 30s and 40s.

I mean when I teach Hayek or I teach classic Austrian economics, that’s the book I use for Hayek because that’s where all the action is. For the more professional economist out there, there are other things that they might touch. But I think for the general listener interested in libertarianism, those would be the four I would talk about. Individualism and Economic Order, The Constitution of Liberty, The Road to Serfdom and Law, Legislation and Liberty, particularly the first two volumes. No one really reads [Inaudible] except the epilogue which is great, epilogues.

Trevor Burrus: But people should absolutely read Hayek.

Steven Horwitz: Yes, they should. Yes.

Aaron Ross Powell: Thank you for listening. If you have any questions, you can find us on Twitter at FreeThoughtsPod. Free Thoughts is produced by Evan Banks and Mark McDaniel. To learn more, find us on the web at www​.Lib​er​tar​i​an​ism​.org.