176 ECONOMIC LIBERALISM
The free flow of information between individual sellers and vendors
(left) results in the correct pricing of goods, according to Hayek. Centrally
planned economies, on the other hand, impose the view of one person or
committee (right), curtailing individual freedom to communicate and
firms’ ability to trade.
determine price), and turned them
on their head. His work later formed
the basis for welfare economics,
which looks at how free markets
can achieve socially desirable aims.
The Austrian School
However, Hayek and his colleagues
offered quite a different version of
the free market’s virtues. They did
not assume that markets lack
imperfections or that individuals
are completely informed. To the
contrary, they argued, it is because
individuals and firms are poorly
informed and society imperfect that
the market mechanism is the best
way to distribute goods. This view
became an important tenet of the
Austrian School of thought.
In a situation of continual
ignorance, Hayek argued, the
market is the best available means
not to provide information, but to
acquire it. Each individual and every
firm knows their own situation best:
they have goods and services people
demand, they can plan for the future,
and they see the prices that are
relevant to them. Information is
specific and dispersed among
all those in society. Prices move in
response to actions by individuals
and firms, and so come to reflect
the entire amount of information
available to society as a whole.
Hayek maintains that this
“spontaneous order” is the best
available means to organize a
complex modern economy, given
that knowledge about society can
never be perfect. Attempts to
impose collective restraints on this
order represent a reversion to
primitive, instinctual orders of
society—and the free market must
be defended against this.Collective tyranny
The idea of spontaneous order
came to dominate Hayek’s
thinking, and his writing turnedincreasingly to political questions.
These were discussed most fully in
The Constitution of Liberty (1962),
which argues that government
should act only to preserve the
spontaneous workings of the
market, in as far as this is possible.
Private property and contracts are
legally sacrosanct, and a free society
must observe rules that bind all
parties—including the state itself.
Beyond this, the state can, if the
need arises, act against those
collectivist forces threatening to
undermine the rule of law. Hayek
was broadly in favor of democracy,
but critical of its inclination in some
cases toward a “democratic tyranny
of the collective.”Birth of neoliberalism
Following World War II the necessary
rebuilding of countries led to a
Keynesian consensus, which
proposed increased government
intervention in the economy.