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The essence of Hayek.

One of the greatest economics thinkers of the 20th century was the late Austrian economist Friedrich A. Hayek. He was Austrian in both senses of the word: he was from Austria, and he was a leader of the Austrian School of economic thought. In his critiques of central planning, he wrote articles that are still widely read today, especially his 1945 classic, "The Use of Knowledge in Society." The Road to Serfdom, his 1944 warning that central planning would reduce not just economic freedom but also political freedom and civil liberties, is still in print 70 years later. In the 1970s and 1980s, he also did groundbreaking work on the legal system.

Unfortunately, many people find his work hard to read. Partly because of his Germanic writing style--with long sentences containing many dependent clauses--many people don't have the patience to read him. What has been needed for some time is a book that gives his central insights succinctly in an easy-to-read format.

George Mason University economist Don Boudreaux has written such a book. Boudreaux, who regards Hayek as his "greatest hero," covers the high points of Hayek's work. (Disclosure: Boudreaux is also a senior fellow with the Vancouver-based Fraser Institute, where I am a senior fellow.)

Probably Hayek's most important contribution to economics was the aforementioned article, "The Use of Knowledge in Society." Boudreaux explains Hayek's insights in the article beautifully. Hayek had laid out how the price system--that is, the free market--coordinates the activities of literally millions of producers and consumers around the world, allowing each to use his or her own special skills. Boudreaux explains the problems that the market solves with a clever analogy: the economy as a jigsaw puzzle with a billion pieces. One person, the analog of a central planner, can't possibly make all the pieces fit. But the price system gives an incentive to each individual to make his own piece fit. Quoting his George Mason colleagues Tyler Cowen and Alex Tabarrok, Boudreaux writes, "A price is a signal wrapped up in an incentive."

Law and legislation / In one brief chapter on the rule of law, Boudreaux nicely lays out how it is like traffic rules. When people understand that they are to stop at a red light, things work much better than when some drivers don't stop at a red. But this means that we should hold all drivers, no matter what their status, to the same rules. He writes,

   If some class of drivers (say, red-headed
   people) were free to ignore traffic lights,
   then the value of traffic lights to all
   other drivers would be greatly reduced.
   A driver approaching an intersection
   when the light is green would still
   have to slow down and look to ensure
   that no red-headed driver is barreling
   through the intersection. Traffic accidents
   would increase and the traffic flow
   would slow down.

Similarly, when

   all people, including the highest
   government officials, are bound by the
   same general and impartial rules, every
   individual enjoys the greatest chances of
   achieving as many as possible of his own
   chosen ends. True equality reigns.

Boudreaux notes that this is equality before the law, but not equality of outcomes. Refreshingly, but not surprisingly given his generally clear thinking, he does not fall into the trap of advocating equality of opportunity. The Kennedy or Rockefeller or Gates child born into a rich family will always have an advantage, and the only way to neutralize that advantage is to have the government take away most of the rich families' wealth.

One of the distinctions that Boudreaux and Hayek both stress is the one between law and legislation. Boudreaux illustrates this with three nice examples, two of law and one of legislation. On the law side, he tells a story that anyone who has ever parked at a shopping mall is probably familiar with. You are looking for a parking spot and see a car pulling out, so you turn on your blinker to signal that you are in line for that spot. Another driver, seeing that you are waiting, drives on to find a different parking spot. "In this everyday example," he writes, "you and the other driver are governed by law." You are widely recognized as having established for yourself "a temporary property right to that space." But that right is not written down anywhere and did not come about because of some committee. Rather, it "emerged, unplanned and unintended, in the course of human interactions."

His second example of law is the lex mercatoria, or the "Law Merchant." This evolved among merchants as international trade developed. When conflicts arose--usually because of differences in expectations--courts, staffed by merchants themselves, ruled on the conflicts. Moreover, no government enforced the courts' rulings. Concern about one's reputation was the "enforcer."

An example of legislation that Boudreaux gives is a provision in Massachusetts' criminal code that makes it a "criminal offense for two unmarried adults to have consensual sex with each other." Boudreaux writes that no police officer would arrest people who violated this legislation. Moreover, he writes, if some out-of-touch policeman and court did attempt to punish an unmarried couple for this "crime," the public "would regard the police officer and the court--not the couple--as having broken the law."

On his blog, Cafe Hayek, Boudreaux often emphasizes the distinction between law and legislation. The above examples crystallize that distinction well.

Group arrangements / In a chapter titled "The Challenge of Living Successfully in Modern Society," Boudreaux points out, as did Hayek, the two different social arrangements we all find ourselves in: that of our families and close friends, which he calls "small-group arrangements," and that of millions of strangers, which he calls "large-group arrangements." It's a challenge, he argues, to be able to "function comfortably within both types of arrangements." The reason: behaviors that are appropriate in one setting are not necessarily appropriate in the other.

One big difference is that "small-group norms of fairness that work well for determining the distribution of goods and resources within families and among friends are inappropriate for judging the distribution of goods and resources in the larger society." Boudreaux points out that we can know, for example, whether our brother's low income is the result of bad luck or his choices, but we can't know that kind of detail about strangers. Indeed, he writes, "The best available means of gauging the size of each person's contribution to the economy is to measure the monetary earnings he or she amasses in dealing peacefully in the market with customers, suppliers, and competitors."

He does an excellent job of relating Hayek's views on the causes of booms and busts. I do have a problem with those views (though not with Boudreaux's exposition of them): According to Hayek, the central bank, by expanding the money supply, plays a central role in causing a boom. That's good reasoning so far. But the business people who build long-run projects in response to artificially low interest rates overexpand, leading to future problems and a bust. Why do they make this mistake repeatedly? There's an old saying, "Fool me once, shame on you; fool me twice, shame on me." Even animals often learn to stay away from other animals that have attacked members of their herd. Wouldn't human animals be even better at learning that when the central bank increases the money supply substantially, they shouldn't be fooled by artificially low interest rates?

At an Austrian economics conference in Hartford, Conn., in 1975,1 asked Hayek if he agreed with me that his theory would collapse if people had what economists call "rational expectations." He didn't address my question directly, but said that he didn't believe in rational expectations. Yet even if you don't buy the extreme version of rational expectations, all you need for the Austrian business cycle theory to break down is that it gets harder and harder for the central bank to fool people.

Ideas and government/ In the final chapter, "Ideas Have Consequences," Boudreaux argues, as did Hayek and John Maynard Keynes before him, that in the long run, people's ideas affect government policies. He contrasts that view with Karl Marx and George Stigler, who believed that government policies are the result of the interplay of various interests. Boudreaux challenges that latter view in two ways. First, he notes, we live in groups and we are constantly talking and writing. He asks, "And what are talking and writing if not a sharing of ideas?" This reminds me of a statement by Stigler at the Mont Pelerin Society meetings in Hong Kong in 1978. In his presidential address, he had told the assembled members and guests not to kid themselves that they could influence policy because you can't tell policymakers anything they don't already know. I asked him if a fair summary of his talk was that there is no point in trying to persuade people of things because they already have all the information they need. "Yes," he replied. "Ok," I said, "so why did you give this talk?"

Boudreaux points to other strong evidence against the Marx/Stigler view. He argues that "if government policies are driven only by special-interest groups--and therefore that the ideas that people have about the 'rightness' or 'wrongness' of policies are irrelevant--then the government wouldn't bother to portray farm subsidies and the creation of other special-interest-group privileges as being in the public interest." Politicians' dishonesty and duplicity, notes Boudreaux, "testify to the power of ideas."

Fortunately, in The Essential Hayek, Boudreaux is spreading largely good ideas.

The essential Hayek

By Donald J. Boudreaux

85 pp.; Fraser Institute, 2014

DAVID R. HENDERSON is a research fellow with the Hoover Institution and professor of economics in the Graduate School of Business and Public Policy at the Naval Postgraduate School in Monterey, Calif. He is the editor of The Concise Encyclopedia of Economics (Liberty Fund, 2008). He blogs at
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Title Annotation:The Essential Hayek
Author:Henderson, David R.
Article Type:Book review
Date:Dec 22, 2015
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