Individualism and Economic Order

"Yes, he has a famous essay called “The Use of Knowledge in Society”. What he tries to argue is that the price system systematically communicates dispersed information that you and I hold. If you and I go to the store, we’ll have different subjective preferences. We express those subjective preferences in trade-offs that we make when we buy some goods and not others. That gets communicated to other people via prices in the market – you don’t have to pick up the phone to find out. The subjective trade-offs that you and I make have become objective information for other people in making their trade-offs. The price system is a giant telecommunications system. It tells me about relative scarcities of goods. A classic example of this is gas prices over the last year. We don’t need to know whether there has been an increase in supply of gas or a decrease in demand. No, all we need to know is that the price of gasoline has fallen quite a bit since the summer. Then, when I make a decision on whether to take a trip or not, because it’s a lot cheaper, I’ll likely increase my consumption of gasoline. This is all communicated through the price system without any of us having to know in detail what is going on. But Hayek has an influence far beyond his own writings. In the recent financial crisis, the efficient market hypothesis has, it’s true, taken a beating, but you could point out that the kernel of truth in there is embedded in Hayek’s idea. The stock price gives full and complete information of what’s available on the market at that time, and that gets communicated through the system. Hayek also influenced information economics in general. There’s Leonid Hurwicz who won the Nobel Prize [in 2007] for his contribution to mechanism design theory. He was working on information processing. Hayek’s writings set off a research programme to study how it is that information gets communicated within a complex system, and a variety of different people have picked up on that, and worked with that idea and taken it in directions that even Hayek couldn’t have envisioned. And it’s not as if Hayek met leftist intellectuals and said, “Curse on you”. For example, Abba Lerner, a market socialist and author of The Economics of Control , wrote his doctoral dissertation [on which the book is based], under Hayek’s direction. Hayek is the antithesis of the idea of economics as control. Even those guys that went in directions different to Hayek are all trying to provide answers to him. I don’t think he considered himself on the right or on the left. He didn’t like socialism, so if socialism redefines the political landscape so that anyone who is a non-socialist is a right-winger, then Hayek is a right-winger, which is more or less the American context. We like to pick caricatures, and the debate in the US is not sophisticated. In Europe, Hayek is an old liberal, and he remains a European liberal throughout his whole life. He’s for restraint on the abuse of power by the state, he’s for the expansion of human liberties."

"This is the most abstruse and obscure pick on the list. It has nothing to do with the internet per se, it’s really about decentralisation. The key essays in the book were written in the 1930s and Hayek puts forward a general theory of how decentralised processes work, why they are so powerful and can use and mobilise and distribute information so well. He focused on the price system and the market economy. A lot of these ideas are in Shirky, but if you want to go back and read the ideas in their most powerful original form there’s Hayek and there’s Adam Smith, and that’s a lot of what the web is built upon. Nobody knows what the price for something is going to be. There will be a price in the store for bananas, for steel, for stocks and those prices reflect information, sometimes accurately, sometimes not, but they are the result of many people bidding and communicating the personal information they have and aggregating it into one tiny small number which everyone watches. He’s broadly a libertarian, but I don’t think you’d have to read the book in a political way. Most Democrats in America believe in the price system and using markets for a lot of things, and you need a way of explaining how that works and there you look to Hayek. Economic model is a loaded phrase. It means a lot of things to a lot of people. If the economic man is motivated by the desire to express himself or herself and the desire for recognition, then I would say yes. In many ways not, which is why I picked it. I think there is a lot to be said in any area for having at least one book which isn’t very readable. And there Hayek is my pick. But it’s brilliant, it won a Nobel Prize, and it’s one of the most important books of the century. Is it clear and fun? No."