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Hayek and Market Socialism: Science, Ideology and Public Policy

Hayek Memorial Lecture

Professor Peter BoettkeGeorge Mason University

Professor Tim BesleyLSE, Chair

Hayek and Market Socialism: Science, Ideology and Public Policy

Peter J. BoettkeGeorge Mason UniversityHayek Memorial LectureLondon School of Economics19 October 2004

Basic Argument

Hayek’s critique of socialism was grounded in his scientific understanding of economics

Hayek’s ideological position was a consequence of his science, and not the other way around

Hayek’s position in this debate had direct policy relevance during his life, and it still has lasting relevance today for public policy His position is appreciated more today as an ideological one

than as a scientific proposition, but if his scientific contributions were understood economics as a discipline would be transformed in its theoretical and empirical orientation

Some Basic Background for Understanding Hayek Substantive Political Economy Menger’s contribution to economics

Subjectivism and Spontaneous Order Wieser’s contributions to economics

Opportunity costs and imputation theory Wicksell’s work on Capital and Expectations

Correct foresight as a defining characteristic of equilibrium not a precondition

Mises’s contribution to economics Business cycle theory Problems with socialism

Hayek and Mises: Intertwined Research Programs, Separate Professional Fates The best way to understand Hayek is to see

him as following up on the questions that Mises first posed, clarifying those questions and providing more subtle answers to those questions. Business Cycle research Problems of Socialism Different political and economic systems

Hayek’s Research Program

Economics as a Coordination Problem Dovetailing of plans

Complexity of the economic order as it unfolds through time

Economics and Knowledge Use of knowledge in society

Discovery and learning by economic actors

Liberal Institutions and Economic Activity Predictability of the framework

Rule of law and generality Learning environment

The Unity in Hayek’s Research ProgramThough at one time a very pure and narrow economic theorist, I was led from

technical economics into all kinds of questions usually regarded as philosophical. When I look back, it seems to have all begun, nearly thirty years ago, with an essay on “Economics and Knowledge” in which I examined what seemed to me some of the central difficulties of pure economic theory. Its main conclusion was that the task of economic theory was to explain how an overall order of economic activity was achieved which utilized a large amount of knowledge which was not concentrated in any one mind but existed only as separate knowledge of thousands or millions of different individuals. But it was still a long from this to an adequate insight into the relations between the abstract rules which the individual follows in his actions, and the abstract overall order which is formed as the result of his responding, within the limits imposed upon him by those abstract rules, to the concrete particular circumstances which he encounters. It was only through a reexamination of the age-old concept of freedom under the law, the basic conception of traditional liberalism, and of the problems of the philosophy of the law which this raises, that I have reached what now seems to me to be a tolerably clear picture of the nature of the spontaneous order of which liberal economists has so long been talking. Hayek, “Kinds of Rationalism,” 1964.

Hayek’s contribution to the economics of socialism Starting state is the acceptance of Mises’s

calculation argument Recognition that despite the truth of Mises’s

argument it was not going to deter attempts by (a) economists to answer Mises in theory and (b) the ideological inspired to realize socialism in practice. Theory --- essays on knowledge and competition as a

discovery procedure (1935a, b, 1937, 1940, 1945) Practice --- The Road to Serfdom (1944).

Progression of the Argument

Private Property Rights Incentives

Scarce resources Prices

Information Relative prices

Profit and Loss Innovation

New opportunities for mutual benefit Politics

Infrastructure Power and predation

The LSE Contribution --- The Counter Reaction to Hayek, or Beyond Lange to Lerner and Durbin Lionel Robbins, The Economic Problem in

Peace and War (1947)

“An individualist who recognizes the importance of public goods, and a collectivist who recognizes the desirability of the maximum of individual freedom in consumption will find many points of agreement in common. The biggest dividing line of our day is, not between those who differ about organization as such, but between those who differ about the ends which organization has to serve.”

Consumer sovereignty in the “Market” Socialist Model Dobb’s rejection of the Dickinson/Lange model of

market socialism Pricing system is inconsistent with the socialist aspiration

to abolish commodity production and transcend alienation Lerner

Pricing system in consumer goods is essential to ensuring that the maximum freedom of the individual is realized

Durbin “We are socialist in our economics because we are liberals

in our philosophy”

The Road to Serfdom as a Tragic Tale

“socialism can be put into practice only by methods which most socialists disapprove.” p. 137

Hayek’s Challenge to His Colleagues and His Intellectual Frustration Unintended consequences

Failure of the market for consumer goods to provide by implication the value of producer goods Problem with the preoccupation with General equilibrium

The Abuse of Reason Project Methodological

Formalism and Positivism Aggregation as masking underlying economic relationships Limits of formalism

Ideological Constructivism

What is the Relevance of Hayek Today? Science

Epistemic/Cognition direction in economics North, Kuran, Smith Institutions and Policy environment (Shleifer, et. al.) Entrepreneurial theory of the market process

Baumol, Kirzner, etc. Public Policy

Emphasis on Institutions and Institutional Capacity Constructivist versus Ecological Rationality

Simple Rules for Complex World Ideological Vision

Radical liberalism Kukuthas, etc. on toleration and religious and ethnic minorities Decentralized governance, fiscal federalism and the science and art of

association the underlies self-governance