F.A Hayek (1899-1992)

Hello Kinkaid:

 My story is unusual. During the early 1930s, I was considered one of the world’s leading economists when I brought my German-language “Austrian School” economics to the English world in talks at the London School of Economics. The rising economist in England at the time was John Maynard Keynes of the University of Cambridge.

My economics, based on capital theory (the structure of production), explained how the central (government) bank’s monetary inflation lowered interest rates and resulted in an artificial boom. And bust would follow boom as night follows day. The implication: avoid the contrived boom to avoid the dreaded ‘business cycle.’

My particular theory explained, and even predicted, America’s crash in 1929. But then something happened that I wish I do over. In 1936, Professor Keynes came out with a new approach, what he called The General Theory, that I thought would be a passing fancy. He was prone to change his mind, and I thought his fallacies would become evident soon enough. I passed on a chance to challenge, refute, what soon became known worldwide as Keynesian economics.

So I watched Keynesianism sweep the world. Governments loved the idea that public spending could bring recovery. FDR, in fact, was practicing deficit economics before it had a name—and ‘scientific’ rationale.

My micro-theory of macro instability was swept aside. The rout was so complete that I pretty much left economics for social and political philosophy. My mentor Ludwig von Mises stayed the course and was a voice in the wilderness, as his letter to you describes.

Imagine my surprise, then, when I won the Nobel Prize in economics in 1974! That was very exciting, and I returned often to my native discipline in my last decades to salutary effect.

What is important about my work? Remember Adam Smith’s “invisible hand?” I gave his insight more intellectual grounding by explaining how market (scarcity) prices and profit/loss, the hallmark of a free economy, solve the problem of the division of knowledge. There is a long quotation below on “the peculiar character … of a rational economic order” that should be explained in your Economics class.

The basic idea is that the collective (but not collectible) knowledge that all of us impart as buyers and sellers cannot be synthetically reproduced or known by a subset of us, much less central government planners. To think so is that I called in my Nobel lecture “The Fatal Conceit.” And so the economy, like other social systems and conventions (law, language, morals, customs, money), is an undesigned order, aka spontaneous order.

The public policy implication is what has been called simple rules for a complex world. The paradox of government (central) planning is that the more you regulate, the more you ‘need’ to regulate.

This brings me to a relatively new concept, social justice, which is a catch phrase for well-intentioned but nefarious government intervention, as most I can tell. I confess that the very concept—and title of one of your Interim Term course—befuddles me! As I once said:

To discover the meaning of what is called ‘social justice’ has been one of my chief preoccupations for more than 10 years. I have failed in this endeavour — or rather, have reached the conclusion that, with reference to society of free men, the phrase has no meaning whatever.

I lived, like Mises, through the World Wars and the Great Depression. My 1944 book, The Road to Serfdom, was a plea for all to beware of expansive government turning into something that nobody could have wanted at the start of the process. “The road to hell is paved with good intentions,” as the saying goes.

Students, you are living in a crossroads. The political system there in the U.S. has given you a bad fiscal inheritance. But ideas have consequences. May the understanding of the division of knowledge and the unintended consequences of even well-meaning government intervention lead you to the road to freedom.


“The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if ‘given’ is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.”

“The curious task of economics is to demonstrate to men how little they really know about what they imagine the can design.”

“The argument for liberty is not an argument against organization, which is one of the most powerful tools human reason can employ, but an argument against all exclusive, privileged, monopolistic organization, against the use of coercion to prevent others from doing better.”

“Any . . . restriction, any coercion other than the enforcements of general rules, will aim at the achievement of some foreseeable result, but what is prevented by it will usually not be known. The direct effects of any interference with the market order will be near and clearly visible in most cases, while the move indirect and remote effects will be unknown and will therefore be disregarded.  We shall never be aware of all the costs of achieving particular results by such interference.”

“The case for individual freedom rests chiefly on the recognition of the inevitable and universal ignorance of all of us concerning a great many of the factors on which the achievement of our ends and welfare depend. It is because every individual knows so little and, in particular, because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it. Humiliating to human pride as it may be, we must recognize that the advance and even the preservation of civilization are dependent upon a maximum of opportunity for accidents to happen.”

“It is true that the virtues which are less esteemed and practiced now–independence, self-reliance, and the willingness to bear risks, the readiness to back one’s own conviction against a majority, and the willingness to voluntary cooperation with one’s neighbors–are essentially those on which the of an individualist society rests. Collectivism has nothing to put in their place, and in so far as it already has destroyed then it has left a void filled by nothing but the demand for obedience and the compulsion of the individual to what is collectively decided to be good.”

“While an equality of rights under a limited government is possible and an essential condition of individual freedom, a claim for equality of material position can be met only by a government with totalitarian powers.”