Individualism and Economic Order
Individualism and Economic Order is a book written by Friedrich Hayek. It is a collection of essays originally published between the 1930s and 1940s, discussing topics ranging from moral philosophy to the methods of the social sciences and economic theory to contrast free markets with planned economies.
Individualism: True and FalseEdit
"Individualism: True and False" (1945); later published in Individualism and Economic Order (1948)
- There is all the difference in the world between treating people equally and attempting to make them equal. While the first is the condition of a free society, the second means as De Tocqueville describes it, 'a new form of servitude.'
- We must face the fact that the preservation of individual freedom is incompatible with a full satisfaction of our views of distributive justice.
- The part of our social order which can or ought to be made a conscious product of human reason is only a small part of all the forces of society.
Economics and KnowledgeEdit
published in Economica (February 1937), later republished in Individualism and Economic Order (1948); "Economics and Knowledge"
- I am certain that there are many who regard with impatience and distrust the whole tendency, which is inherent in all modern equilibrium analysis, to turn economics into a branch of pure logic, … are subject to no other test but internal consistency. But it seems that, if only this process is carried far enough, it carries its own remedy with it. In distilling from our reasoning about the facts of economic life those parts which are truly a priori, we not only isolate one element of our reasoning as a sort of Pure Logic of Choice in all its purity but we also isolate, and emphasize the importance of, another element which has been too much neglected. My criticism of the recent tendencies to make economic theory more and more formal is not that they have gone too far but that they have not yet been carried far enough to complete the isolation of this branch of logic and to restore to its rightful place the investigation of causal processes, using formal economic theory as a tool in the same way as mathematics.
First published in American Economic Review (September 1945) · Full text online
- The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources — if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.
This character of the fundamental problem has, I am afraid, been rather obscured than illuminated by many of the recent refinements of economic theory, particularly by many of the uses made of mathematics.
- This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals.
- The shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices—are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others. It is a curious fact that this sort of knowledge should today be generally regarded with a kind of contempt and that anyone who by such knowledge gains an advantage over somebody better equipped with theoretical or technical knowledge is thought to have acted almost disreputably. To gain an advantage from better knowledge of facilities of communication or transport is sometimes regarded as almost dishonest, although it is quite as important that society make use of the best opportunities in this respect as in using the latest scientific discoveries. This prejudice has in a considerable measure affected the attitude toward commerce in general compared with that toward production. Even economists who regard themselves as definitely immune to the crude materialist fallacies of the past constantly commit the same mistake where activities directed toward the acquisition of such practical knowledge are concerned—apparently because in their scheme of things all such knowledge is supposed to be “given.” The common idea now seems to be that all such knowledge should as a matter of course be readily at the command of everybody, and the reproach of irrationality leveled against the existing economic order is frequently based on the fact that it is not so available. This view disregards the fact that the method by which such knowledge can be made as widely available as possible is precisely the problem to which we have to find an answer.
- Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to co-ordinate the separate actions of different people in the same way as subjective values help the individual to co-ordinate the parts of his plan.
- In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement.
- The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world.
The Meaning of CompetitionEdit
"The Meaning of Competition", Derived from a paper delivered at Princeton University, May 1946.
- It would clearly not be an improvement to build all houses exactly alike in order to create a perfect market for houses, and the same is true of most other fields where differences between the individual products prevent competition from ever being perfect.
'Free' Enterprise and Competitive OrderEdit
Derived from a paper delivered to the Mont Pelerin Society, April 1947.
Quotes about Individualism and Economic OrderEdit
- Alchian: Two things you [Hayek] wrote that had a personal influence on me, after your Prices and Production, were 'Individualism and Economic Order' [sic — Alchian certainly has in mind Hayek's 'Economics and Knowledge'] and 'The Use of Knowledge in Society.' These I would regard as your two best articles, best in terms of their influence on me.
Hayek: 'Economics and Knowledge' — the '37 one — which is reprinted in the volume, is the one which marks the new look at things in my way.
Alchian: It was new to you, too, then? Was it a change in your own thinking?
Hayek: Yes, it was really the beginning of my looking at things in a new light. … I was aware that I was putting down things which were fairly well known in a new form, and perhaps it was the most exciting moment in my career when I saw it [i.e. 'Economics and Knowledge'] in print.
Alchian: Well, I'm delighted to hear you say that, because I had that copy typed up to mimeograph for my students in the first course I gave here [i.e. UCLA]. And Allan Wallace … came through town one day, and I said, 'Allan, I've got a great article!" He looked at it, started to laugh, and said, "I've seen it too; it's just phenomenal!' I'm just delighted to hear you say that it was exciting, because it was to me, too … that was a very influential article, I must say.
- The Neoclassical school has been the dominant school of economics for the last two generations, so I have also been schooled in it throughout my career. It can provide us with some very useful tools to analyse problems within a given structure, but it is not very good at understanding how the institutions, technologies, politics, and ideas that define that structure evolve over time.
In this respect, Hayek is very different from the Neoclassical school, even though many Neoclassical economists mention him in the same breath as Milton Friedman, on the basis that he was one of the most influential advocates of the free market. Unlike Neoclassical economists, however, Hayek does not take the socio-political order underlying the market relationship as given and emphasizes the ultimately political nature of our economic life. This is a big contrast to the Neoclassical view, which thinks that economics and politics can be, and should be, separated. Indeed, if you read Hayek’s book, Individualism and Economic Order, you will see that he is very critical –sometimes even abusive – of Neoclassical economics.
- Hayek's adversaries — Oskar Lange and company — argued that a market system had to be inferior to a centrally-planned system: at the very least, a centrally-planned economy could set up internal decision-making procedures that would mimic the market, and the central planners could also adjust things to increase social welfare and account for external effects in a way that a market system could never do. Hayek, in response, argued that the functionaries of a central-planning board could never succeed, because they could never create both the incentives and the flexibility for the people-on-the-spot to exercise what Scott calls metis.
Today all economists — even those who are very hostile to Hayek's other arguments … agree that Hayek and company hit this particular nail squarely on the head. Looking back at the seventy-year trajectory of Communism, it seems very clear that Hayek (and Scott) are right: that its principal flaw is its attempt to concentrate knowledge, authority, and decision-making power at the center rather than pushing the power to act, the freedom to do so, and the incentive to act productively out to the periphery where the people-on-the-spot have the local knowledge to act effectively.
- Hayek’s great contribution is this: Competitive markets without externalities populated by well-informed self-regarding rational individuals generate highly productive outcomes because the market has powerful emergent properties that make it an extremely powerful and incentive-compatible societal mechanism for eliciting the revelation, aggregation, and transmission of information about resources, capabilities, needs and desires.
- Hayek thought that the social sciences are capable of greater knowledge than the natural. He wrote in “The Facts of the Social Sciences” in 1943—after, significantly, his “Economics and Knowledge” essay, which he considered to have constituted his decisive breakthrough and departure from Mises (though Mises, as already noted, did not think this):“While at the world of nature we look from the outside, we look at the world of society from the inside.” Because we look at the world of society from, in Hayek’s view, the “inside,” we are capable of more knowledge of it than of the external world of nature.
Similarly, Hayek considered the fundamental divide between the social and natural worlds not to be in kind of phenomena (notwithstanding that we experience the former from the inside and the latter from the outside), but in complexity. [...] From Hayek’s perspective, the natural sciences move from complexity to individual elements; the social sciences move from individual elements to complexity.
- Alan Ebenstein, Hayek's Journey: The Mind of Friedrich Hayek (2003), Ch. 10 : Epistemology, Psychology, and Methodology
- You’ll see the same thing in The Use of Knowledge in Society (1945), where Hayek pits central planning against individuals making use of local knowledge: the tool he uses to explain that individuals acting independently make better use of knowledge than central planners, must also (though he neglects to mention this corollary) “explain” that an individual acting independently in the market must make better use of knowledge than they would within any organization – a large firm, a middle-sized firm, a university, the post office (local knowledge: always better than ZIP codes).
We’re accustomed to critiquing Hayek’s antipathy to things collective in the political realm (“he believes in liberty, but not the liberty of workers to act collectively”), but there’s more involved here than his evident animus towards the organized lower orders: he doesn’t seem to understand the collective aspect of discovery at all. To anybody who knows anything about the processes of discovery in organizations or networks, this looks just clueless.
- Frederick Guy, comment on "The Hayek-Pinochet Connection: A Second Reply to My Critics" (2013)
- When I look back, it seems so 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 the separate knowledge of different individuals. But it was still a long way 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 [thereby] formed....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 a tolerably clear picture of the nature of the spontaneous order of which liberal economists have so long been talking.
- Friedrich Hayek, "Kinds of Rationalism", A lecture delivered on April 27, 1964, at Rikkyo University, Tokyo, and published in The Economic Studies Quarterly, Tokyo, vol. 15, March 1965
- Since I shall be indicating my disagreement with some of the points made by Professor Israel Kirzner, let me stress that I am in complete sympathy with his point of departure, namely, the emphasis on the dispersion of information among economic decision-making units (called by him, "Hayek's knowledge problem") and the consequent problem of transmission of information among those units.
Much of my own research work since the 1950s has been focused on issues in welfare economics viewed from an informational perspective. The ideas of Hayek (whose classes at the London School of Economics I attended during the academic year 1938-39) have played a major role in influencing my thinking and have been so acknowledged.
- Leonid Hurwicz, in "Economic Planning and the Knowledge Problem" : A Comment" in Cato Journal Vol. 4, (Fall 1984), p. 419
- A number of papers emerged which focussed on the role of knowledge in market processes, culminating in the 1945 paper "The Use of Knowledge in Society." These papers were to form the core of Hayek's Individualism and Economic Order (1949). A second series of papers, published during the war, focused on the role of subjectivism in the social sciences, and formed the core of The Counter-Revolution of Science: Studies on the Abuse of Reason (1952). Together these two strands of contributions constitute, in this writer's opinion, Hayek's most profound explorations of the foundations of economic understanding. Taken together with Mises's contemporaneous work, these contributions represented a most significant deepening and extension of the subjectivist Austrian tradition. There can be little doubt that it was this work that was responsible both for the fact that Austrian economics survived the midcentury dominance of Keynesian thought, and for the renewed late-century interest in Austrian economics, despite the dominance of neo-classical equilibrium theory.
- Israel Kirzner, "Friedrich A. Hayek 1899–1992", Critical Review: A Journal of Politics and Society, 5:4, 585-592 (1991)
- The Austrian School of Economics traditionally underestimates, if not neglects macroeconomics (or at least its importance), and Hayek understood that he was not going to win the debate accepting the Keynesian macro economic playground. He decided to attack the interventionist doctrine of Keynes by moving to microeconomics, to the defence of the irreplaceable role of markets and prices in the economy, and to demonstrating that interventionism makes the efficient functioning of markets impossible. His seminal articles “Economics and Knowledge,” and especially “The Use of Knowledge in Society,” are among the most important contributions to the field of economic science in the whole of the twentieth century. Hayek devoted his analysis to explaining the coordination of human action in a world in which knowledge is inevitably dispersed and he was able to prove that the solution is in the price system, not in central planning.
- Václav Klaus, Foreword to The Essential Hayek (2014) by Donald J. Boudreaux
- Professor Mises' denial of the possibility of economic calculation in a socialist system must be rejected. However, Professor Mises' argument has been taken up recently in a more refined form by Professor Hayek and Professor Robbins. They do not deny the theoretical possibility of a rational allocation of resources in a socialist economy, they only doubt the possibility of a satisfactory practical solution of the problem. […] The position taken by Professor Hayek and by Professor Robbins is a significant step forward in the discussion of the problem. It promises a much more fruitful approach than Professor Mises' wholesale denial of the possibility of economic accounting under socialism.
- Oskar Lange, "On the Economic Theory of Socialism: Part One", The Review of Economic Studies, Vol. 4, No. 1 (Oct., 1936)
- Many economists have professed to analyze information; relatively few have considered carefully the problems of knowledge. Among those who have, Hayek is pre-eminent, and he has emphasized the value of a market system in providing encouragement to individuals to find and make use of knowledge, while simultaneously affording checks on its misuse.
- Brian Loasby, The Mind and Method of the Economist, London: Edward Elgar, p. 38
- While in graduate school I encountered the writings of Friedrich Hayek and Ludwig von Mises, which shook me out of my then socialist beliefs. There was Hayek's book of essays, Individualism and Economic Order, and Mises's wide-ranging and unsettling Socialism, which showed me I had not thought through any details — economic, social or cultural — of how socialism would work. One of their arguments in particular, about the impossibility of rational economic calculation under socialism, dumbfounded me. Whether or not the argument was ultimately judged to be correct, it was amazing, something I never would have thought of in a million years.
- Robert Nozick, as quoted in "Robert Nozick" in The Harvard Guide to Influential Books : 113 Distinguished Harvard Professors Discuss the Books That Have Helped to Shape Their Thinking (1986), p. 187
- If one writing contributed more than any other to the framework in which this work [Sowell's "Knowledge and Decisions"] developed, it would be an essay entitled 'The Use of Knowledge in Society,' published in the American Economic Review of September 1945, and written by F. A. Hayek … In this plain and apparently simple essay was a deeply penetrating insight into the way societies function and malfunction, and clues as to why they are so often and so profoundly misunderstood.
- Thomas Sowell, Knowledge and Decisions (1980), p. ix
- At the core of the failure of the socialist experiment is not just the lack of property rights. Equally important were the problems arising from lack of incentives and competition, not only in the sphere of economics but also in politics. Even more important perhaps were problems of information. Hayek was right, of course, in emphasizing that the information problems facing a central planner were overwhelming. I am not sure that Hayek fully appreciated the range of information problems.
Encyclopedic article on Individualism and Economic Order at Wikipedia