Friedrich the Great

Dismissed by critics as a free-market extremist, economist Friedrich Hayek is gaining new attention as a forerunner of cognitive psychology, information theory, even postmodernism. A reintroduction to one of the most important thinkers you've barely heard of.

By Virginia Postrel
January 11, 2004

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AT A RECENT think-tank luncheon in Raleigh, economist Bruce J. Caldwell chatted with a local lawyer active in Democratic party circles. The man asked Caldwell what his new book was about. "It's an intellectual biography of Friedrich Hayek," replied Caldwell, a professor at the University of North Carolina, Greensboro. He got a blank look. "He was an economist. A libertarian economist."

What an understatement.

Hayek, who died in 1992, was not just any economist. He won the Nobel Prize in economics in 1974. His 1945 article, "The Use of Knowledge in Society," is a touchstone work on the role of prices in coordinating dispersed information. His 1944 bestseller "The Road to Serfdom" helped catalyze the free-market political movement in the United States and continues to sell thousands of copies a year.

Economist Milton Friedman calls him "the most important social thinker of the 20th century." Hayek's most significant contribution, he explains, "was to make clear how our present complex social structure is not the result of the intended actions of individuals but of the unintended consequences of individual interactions over a long period of time, the product of social evolution, not of deliberate planning."

Indeed, Hayek is increasingly recognized as one of the 20th century's most profound and important theorists, one whose work included political theory, philosophy of science, even cognitive psychology. Citing the "proof of time," Encyclopedia Britannica recently commissioned Caldwell to replace its formulaic 250-word Hayek profile with a nuanced discussion more than 10 times as long. Harvard has added him to the syllabus of Social Studies 10, its rigorous introductory social theory course.

Hayek is fairly well known in Britain, where he spent much of his life, because of his influence on MargaretThatcher. In the United States, however, well-educated, intellectually curious people who nod at mentions of Max Weber, Hannah Arendt, or Michel Foucault have barely heard of him.

Politics has a lot to do with that ignorance. Hayek drew on the traditions of 18th- and 19th-century liberal thought, leading critics to dismiss him as a man of the past. He defended competitive markets against the champions of central planning, noting that supposedly "irrational" customs, traditions, and institutions often embody the hard-won knowledge of experience. He advocated cosmopolitan individualism in an age of nationalism and collectivism.

But Hayek turned out to be ahead of his time, not behind it. Arguing with the social engineers of the mid-20th century, he grappled with problems equally relevant to the 21st century. He anticipated today's rage for biological metaphors and evolutionary analysis, today's fragmented and specialized markets, today's emphasis on the legal institutions needed to make markets work, even today's multicultural challenges.

Hayek's 1952 book, "The Sensory Order," often considered his most difficult work, foreshadowed theories of cognitive science developed decades later. "Hayek posited spontaneous order in the brain arising out of distributed networks of simple units (neurons) exchanging local signals," says Harvard psychologist Steven Pinker. "Hayek was way ahead of his time in pushing this idea. It became popular in cognitive science, beginning in the mid-1980s, under the names `connectionism' and `parallel distributed processing.' Remarkably, Hayek is never cited."

Hayek was "one of the last unprofessionalized economists," says Harvard political philosopher Glyn Morgan, who was instrumental in adding Hayek's writings to the Social Studies 10 syllabus three years ago. ("It was actually quite controversial," he says, adding, "This course was known as a slightly left-of-center course, and people were skeptical of Hayek.") Unlike today's increasingly professionalized social scientists, Morgan adds, Hayek was "a top-notch economist, but he wrote on the history of ideas, he wrote on a variety of things."

Born in Vienna in 1899, Hayek fought in World War I and earned degrees in law and political economy in the rich intellectual atmosphere of the University of Vienna. In the early 1930s, he was invited to join the faculty at the London School of Economics. There, he made his name as the leading intellectual opponent of John Maynard Keynes. (The two men were nonetheless friends.) Keynes believed that economic slumps could be cured by government deficit spending, while Hayek argued that those policies would only exacerbate the underlying problem of excessive production capacity.

Beyond his technical arguments with Keynes, Hayek was out of step with his contemporaries' zeal for centralized economic planning, which was widely held to be more productive and efficient than market competition. In 1930s Britain, even political moderates advocated nationalizing all major industries. During and after World War II, central planning reached levels of detail that are inconceivable today. Britain's wartime Utility scheme, for instance, dictated mass-produced furniture designs that eliminated craftsmanship and ornament. Wartime rationing treated bookcases as essential and dressing tables and upholstered easy chairs as unnecessary. Price controls and punitive taxes continued to discourage "irrational" designs until 1952.

"It is not enough to say that some of his views were unpopular," writes Caldwell in "Hayek's Challenge," just published by the University of Chicago Press. "For most of his life his economic and political positions were completely out of sync with those of the rest of the intelligentsia . . .. [F]or much of the century Hayek was a subject of ridicule, contempt, or, even worse for a man of ideas, indifference."

Hayek's most important insight, which he referred to as his "one discovery" in the social sciences, was to define the central economic and social problem as one of organizing dispersed knowledge. Different people have different purposes. They know different things about the world. Much important information is local and transitory, known only to the "man on the spot." Some of that knowledge is objective and quantifiable, but much is tacit and unarticulated. Often we only discover what we truly want as we actually make trade-offs between competing goods."

The economic problem of society," Hayek wrote in his 1945 article, "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 totality."

The key to a functioning economy -- or society -- is decentralized competition. In a market economy, prices act as a "system of telecommunications," coordinating information far beyond the scope of a single mind. They permit ever-evolving order to emerge from dispersed knowledge.

"What's the single most important thing to learn from an economics course today?" economist Lawrence Summers said in an interview for "The Commanding Heights," Daniel Yergin and Joseph Stanislaw's 1998 study of the resurgence of economic liberalism. "What I tried to leave my students with is the view that the invisible hand is more powerful than the hidden hand. Things will happen in well-organized efforts without direction, controls, plans. That's the consensus among economists. That's the Hayek legacy." Summers, who was then deputy treasury secretary and is now president of Harvard, recently reaffirmed those views in an e-mail.

Information technology has strengthened Hayek's legacy. At MIT's Sloan School, Erik Brynjolfsson uses Hayek to remind students that feeding data into centralized computers doesn't necessarily solve a company's information problems. In any complex operation, there is too much relevant information for a single person or small group to absorb and act on.

"As Hayek pointed out, the key thing is to have the decision rights and the information co-located," says Brynjolfsson. "There are at least two ways of achieving that. One is to move information to decision maker. The other is to move decision rights to where the information is."

This analysis, which applies as much to culture as to economics, informs Hayek's best-known work, "The Road to Serfdom," which he wrote as a wartime warning to a popular audience. Published in 1944 and dedicated "to the socialists of all parties," the book argued that the logic of socialist central planning implied the erosion of personal freedoms. Britain's well-intended socialists were headed down the same path as the National Socialists whose rise Hayek had witnessed in Austria.

The book was shocking enough in Britain, where it was respectfully, though critically, received. But in the United States, where Reader's Digest published a condensed version, "The Road to Serfdom" was a bestseller and a political lightning rod. It rallied supporters of traditional free enterprise and enraged the intelligentsia to whom it was addressed. How dare this mustachioed Austrian suggest that the ambitions of the New Deal might have anything in common with Hitler or Stalin!

Even today, the book's thesis is often misstated as what Caldwell calls "the inevitability thesis -- that if you start down the road to intervention in the economy, you're automatically going to end up in a totalitarian state." But Hayek spent much of his career arguing against the then-popular idea of historical laws. Nor did he oppose an economic safety net; a wealthy society, he believed, could provide a basic income for the poor.

Rather, he argued that to fully control the economy meant to control all aspects of life. Economic decisions are not separate from individual values or purposes. They reflect those purposes."We want money for many different things, and those things are not always, or even rarely, just to have money for its own sake," explains Jerry Z. Muller, a historian at Catholic University and author of "The Mind and the Market: Capitalism in Modern European Thought" (2002). "We want money for our spouses or our children or to do something in terms of the transformation of ourselves -- for everything from plastic surgery to reading intellectual history or building a church. These are all noneconomic goals that we express through the common means of money."

Hayek argued that only in a competitive market, in which prices signal the relative values placed on different goods, can people with very different values live together peacefully. And only in such a market can they figure out how best to meet their needs and wants -- or even what those needs and wants are.

Caldwell, who is editing Hayek's collected works for the University of Chicago Press, is currently working on the project's edition of "The Road to Serfdom," a task that entails reading the largely forgotten contemporary works with which Hayek was contending. "It's almost chilling to read some of these books. They were willing to accept fairly massive interventions in the economy -- directing labor, who should be working at what jobs and that kind of thing," says Caldwell. He adds, "`The Road to Serfdom' today reads reasonably, most of it. You read these other books and you feel like you're on another planet."

Because he emphasized the pluralism of values, the limits of knowledge, and the totalitarian side of "rationalist" (or, as he would put it, "scientistic") control, some have claimed Hayek as a precursor to postmodernism. Indeed, toward the end of his life, postmodernist philosopher Michel Foucault gave lectures on Hayek's work.

Nick Gillespie, editor-in-chief of the libertarian magazine Reason, says that in a broad sense Hayek anticipated many postmodern critiques. "Hayekian liberalism and postmodernism alike are not interested in total knowledge, or in the total institutions necessary to maintain such a vision," says Gillespie, who holds a doctorate in literary studies. "For Hayek, the very essence of liberalism properly understood is that it replaces the ideal of social uniformity with one of competing difference." That's why Foucault, though no Hayekian liberal, "recognized that Hayek's formulation of a private sphere was a meaningful hedge against the worst excesses of state power."

Unlike postmodernists, Hayek never rejected the idea of scientific knowledge. But in confronting the advocates of centralized economies, Hayek did take pains to distinguish between science and pseudoscience.

Beginning with "The Sensory Order," he began to differentiate between "simple" sciences like physics, which study phenomena that can be explained by only a few variables, and "complex" sciences like biology, psychology, and economics, which depend on so many variables that precise predictions are impossible. "Hayek felt that many of his opponents, all claiming the mantle of science, were but pretenders to the throne," Caldwell writes. "He constantly encountered people who thought of themselves as objective scientists, people who held ideological views different from his and who immediately felt comfortable attributing their differences to the fact that, whereas they were scientists, he was an ideologue."

Hayek and postmodern philosophers were troubled by many of the same issues, but they came to different conclusions. "I don't view him as a postmodernist in the way that some interpreters have," says Caldwell. However, he adds, "I think they had similar enemies."

Virginia Postrel is the author of "The Substance of Style: How the Rise of Aesthetic Value Is Remaking Commerce, Culture, and Consciousness" and an economics columnist for The New York Times business section.