Twenty Years without Hayek

F.A. Hayek died twenty years ago today. In his long career—his first book was published in 1929, his last in 1988—he made important contributions to economics, philosophy, and even psychology. He even won a Nobel Prize along the way.

If there is a unifying theme to Hayek’s diverse body of work, it is an emphasis on intellectual humility. He was a dogged opponent of capital-C Certainty, and was always quick to remind would-be social engineers that there are limits to their knowledge. The unintended consequences of their grand plans are somewhat less limited.

Hayek’s grandfather was a professor of natural science, and his father was a doctor who moonlighted in botany. As happens to many boys growing up in scientifically minded households, the young Hayek was fascinated with evolution. This would profoundly influence his economic thought when he grew up, especially his concept of spontaneous order.

Human language, Wikipedia, and the economy are all examples of spontaneous order. Designs, even complicated ones, don’t always require a designer. Just as the process of natural selection allows species to adapt to their environment over time without someone planning it all, nobody invented the English language. Nobody directed its evolution from Shakespeare to text messages. Jimmy Wales, partially inspired by Hayek, created the Wikipedia website. But he certainly didn’t direct its army of contributors beyond a few basic ground rules, which themselves spontaneously evolved.

And as the 20th century showed, nobody can plan a national economy without severe unintended consequences.

That’s why one of Hayek’s most famous quotes is, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” It’s a fancy of way of telling his fellow economists to please be humble.

Hayek first gained fame for his business cycle theories. He joined the London School of Economics in 1931, just as Keynes was rocketing to fame. The men became close friends, but their ideas were rather different. Keynes thought the way out of the Great Depression was investment. Since the private sector wasn’t investing enough to grow the economy, the solution was an expertly designed policy of inflation, lower interest rates, and public investment projects—stimulus.

Hayek counseled humility instead. Economies are so complicated, and so dynamic, that no expert on earth can accurately foresee unintended consequences. When experts tinker with interest rates, they change peoples’ behavior. They’ll invest in one thing instead of another, and nobody can quite predict how. When prices are distorted, peoples’ decision-making is distorted with it.

When people can’t accurately determine the highest-valued uses for their resources, the result is malinvestment. Too much investment in housing leads to too little investment in other areas that create more value. This does much to explain why the housing crisis is doing so much damage today.

Their friendly debate was the talk of the profession. Politicians almost universally sided with Keynes because he counseled them to do things they already wanted to do anyway; politics is not a humble profession. Most economists did too. The discipline was becoming ever more quantitative, and economists were becoming more and more confident in their ability to precisely direct an economy. They were falling for the fatal conceit.

Hayek’s most popular book, The Road to Serfdom, was written in a barn in England during World War II. The London School of Economics temporarily moved out of London to avoid the blitz. Hayek’s new office was less than glamorous, but at least it was safe. The basic message is that economic intervention doesn’t work, and the usual political reaction to these failures is more intervention. Travel down this road long enough, and the result is a total state, or something close to it. The people will wake up one day to find that they have lost their freedom.

Hayek’s critics, and even many of his supporters, forget that Hayek thought that the road to serfdom is a two-way street. An intervention here and there does not, therefore, mean the end of civilization. But people must be eternally vigilant to make sure interventions don’t metastasize.

In the 1950s, Hayek turned his attention elsewhere. Seeing economists’ still-growing scientific pretensions, he published a book on methodology, The Counter-Revolution of Science, in 1952. In it, he calls this new science-fetish “scientism,” and once again counsels humility. Economics has scientific aspects, but it is not a pure science the way that physics or chemistry is. Economists forget this at our peril.

Economies, and the millions of humans who participate in them, are so complex, so fickle, and so unpredictable, that even the most rigorous multivariate regression analysis is unlikely to actually reflect real world conditions. Economists work with models, which are necessarily simplifications. They can’t account for every relevant factor. What’s more, economic plans based on flawed data are likely to be flawed themselves. There’s a knowledge problem here.

Hayek also published The Sensory Order in 1952, which remains widely cited in the psychological literature—an impressive feat, considering that psychology departments tend not to be bastions of free-market Hayekians. Drawing on his belief that human cognitive capabilities are less than perfect, the book outlines Hayek’s theory of how the mind processes and filters information that the senses send to it.

Whereas The Road to Serfdom was mainly negative in outlook, Hayek spent his later years writing more positive works. If Serfdom is about what should not be, 1960’s The Constitution of Liberty is about what should be. Think of it as Hayek’s answer to Plato’s Republic or Thomas More’s Utopia. It also contains his famous essay “Why I Am Not a Conservative,” which you can read online here.

In the 1970s, he would expand on this vision in the three-volume Law, Legislation, and Liberty. Hayek saw a world of difference between law and legislation. People often use the words interchangeably, but they are not the same. To avoid confusion, Hayek turned to Greek and borrowed the words metis and legis.

Metis is essentially social custom. It evolves as a spontaneous order, and adapts over time to changing circumstances; natural selection operates in the social sphere, not just in nature. Examples of metis include what is considered rude or polite, how one does business, and how a society is structured are not designed top-down. The point is that they evolve bottom-up, and are deeply ingrained in society’s fabric.

Legis is where we get the English word legislation. These are top-down edicts from legislators. When they mesh well with already-existing metis — as with property rights protections — legis tends to work quite well, and can even enhance metis. But when it oversteps its bounds, as often happens in the hands of experts who believe they know better than the rest of us, the result is failure. Law is stronger than any piece of legislation.

Hayek capped his career with what is probably his most approachable book, The Fatal Conceit. It’s as good a summation of his life’s work as one will find. Given spontaneous order, the importance of metis over legis, and the knowledge problem, people who still arrogantly believe their grand plans will work without unintended consequences have fallen for the fatal conceit.

As always, the underlying theme is humility. Twenty years after Hayek’s death at age 92, that message is as important as ever.