The Economics Book

174

for private property, and deep

pessimism about the ability of

governments to shape society.

Creating dictatorships

The argument for which Hayek is

best remembered appeared in 1944

in The Road to Serfdom. At the

time there was a growing

enthusiasm for government

intervention and central planning.

Hayek argued that all attempts to

impose a collective order on society

are doomed to failure. He said they

would lead, inexorably, to the

totalitarianism of fascism or Stalinist

ECONOMIC LIBERALISM

Prices move in response to these

individual actions, and so reflect total

market information.

This produces a free market that

governments should protect, because

we wish to preserve a free society.

Firms do not know everything

about the entire economy.

IN CONTEXT

FOCUS

Society and the economy

KEY THINKER

Friedrich Hayek (1899–1992)

BEFORE

1908 Italian economist Enrico

Barone shows how a central

government planner can

replace the free market if it

can calculate prices.

1920 Ludwig von Mises

refutes Barone’s argument.

1936–37 Oskar Lange argues

against von Mises’s position.

AFTER

1970s Hayek’s arguments for

free markets gain ground.

1991 US historian Francis

Fukuyama says free market

capitalism has defeated all

possible alternatives.

Late 2000s Criticisms of

government bank bailouts

prompt a revival of interest

in Hayek’s ideas.

M

ainstream economics has
always had its critics. Its
focus on mathematical
formulas and its sometimes
sweeping assumptions have led
economists to challenge both its
methods and its lack of empirical
evidence. Many of these critics have
been from the political Left, who see
the mainstream as providing a glossy
support for an unjust free market.
One minority tradition, the
Austrian School, has argued quite
differently. Vociferous defenders of
the free market, but critical of the
mainstream, they have carved out

a unique place within the discipline.

Most prominent of these radicals

was an Austrian-British economist,

Friedrich Hayek. Hayek vies with

John Maynard Keynes (p.161) for

the title of the 20th century’s most

influential economist, and he made

a range of contributions to political

and economic thought. These

covered economics, law, political

theory, and neuroscience. His

writings maintained a closely

argued, consistent set of principles,

which he saw as being in the

tradition of classical liberalism:

support for free markets, support

Firms make decisions based on

these facts and act on them, for example

by changing output.

But each firm has information about

production and the market’s demands

that are relevant to itself.