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Individualism and Economic Order

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Individualism and Economic Order contains several classic essays. Chapter two (Economics and Knowledge) examines decentralized economic planning by individuals. Plan coordination among individuals requires each to form plans that contain relevant data from the plans of others. We each acquire this data through competition in markets. Every time someone adjusts their plans, others must also change their plans. So, initial plan coordination requires each to fully anticipate the actions of others. Since this is impossible, order will emerge as a result of successive trials by individuals in markets. The price system enables individuals to adjust their plans with each other through time. This is the foundation of Hayek's theories of spontaneous order and social evolution. Hayek was far ahead of his peers in examining expectations formation.

Chapter four (The Use of Knowledge in Society) is another classic. Hayek contends that the economic problem is really one how to make use of fragmented and widely dispersed data. As he indicated in chapter two, full knowledge of economic conditions reduces the economic problem to one of pure logic. Markets increase our ability to take advantage of division of labor and capital formation by extending the span of our utilization of resources beyond the span of any individual mind. The price system in markets does this by acting as a communications network. We can then each dispense with the need for conscious control over resources and rely on our own intimate knowledge of local economic conditions, and price information regarding general economic conditions. This proves that decentralized competitive systems will vastly outperform centrally planned systems.

Chapter five looks at the process of competition. Data regarding the least cost methods of satisfying consumer demand comes through the process of competition. The notion of competition as an end state, where we have attained perfect resource allocation, overlooks the importance of the actual processes by which market participants actually compete. Competition is a process of forming opinions and spreading information. It informs us regarding which alternatives are best and cheapest. Those who judge actual market outcomes with theoretical models that assume perfect information are putting the cart before the horse. Competition is the only means by which we can each acquire data on general economic conditions. Governmental bureaucrats do not simply know what the final outcomes of competition are supposed to be. This data is particular to the process of competition itself. We should therefore be wary of those who complain that markets do not deliver perfect competition based on perfect information. Markets are our best source on the data in question, albeit an imperfect one.

In chapter seven Hayek lays out the arguments that some make in favor of Socialism. Some claim that greater equality in incomes is worth the loss of efficiency that is inherent to Socialism. Others want to maintain some degree of free choice- consumer and occupational choice. Yet others want to restrict even these areas of personal choice. Socialists face a problem in trying to show how socialist planners could plan production in terms of satisfying consumer desires, without market prices. The labor theory of value did not explain actual behavior, but was instead an "a search after some illusory substance of value. Since we lack objective measures of the importance of the needs of different individuals, central planners face "a task which far exceeds the powers of individual men". In chapter eight Hayek points to specific informational problems that Socialist planners face. Of course, he deals with information in earlier chapters. But this chapter leads into the next. Chapter nine deals with proposals to simulate market competition under socialism. Hayek mentions that even if central planners have full knowledge of economic conditions, the calculations concerning the allocation of all resources is too difficult to perform. After dealing with the absurd notion of full information, Hayek turns to three issues. First, Socialists once aimed at overcoming the results of markets. Now they accept the results of market competition as a standard to aim at. Second, an omniscient and omnipresent dictator would also require omnipotence to plan an economy using their omniscience. Even if they had omniscience, the central planners would still have to work through an imperfect bureaucracy. So the notion of omnipotence is absurd. We must look at the actual bureaucratic problems that planners will face. Third, Perhaps, in a world of unchanging data Socialist planners could arrive at efficient prices for the means of production through trial and error. But, with changing data, the plans of the authority will never match the decisions of the 'man on the spot'. Hayek discusses incentive problems and knowledge problems at length, and also mentions the potential for abuse by concentrating power into the hands a few. This is the subject of his book "The Road to Serfdom".

The other chapters are not what I would call classics, but are generally of a high quality. Chapter eleven deals with an aspect of trade cycle theory. Chapter six (Free Enterprise and Competitive Order) deals with the limits of market and government and the influence of ideas. This is not Hayek's best effort in explaining these matters. Chapter one (Individualism, True and False) is much better. It discusses the drive to control individual action based on alleged notions of reason. True individualism requires humility towards the processes by which societal order emerges, not as a result of deliberate planning by any particular individual, but as an unintended consequence of self-serving individual interaction.

These are ideas that far too few appreciate. This book is key to understanding the way Hayek thought about social problems in general. The chapters might seem disjointed in the table of contents, but they have much in common. Anyone serious about understanding how society works should read this book, especially if they tend to disagree with the author's pro free market stance. Hayek is one of the worthiest opponents that Socialists face, and this book is one of his best.

F.A. Hayek, well-deserved recipient of the Nobel Prize in Economics, 1976, wrote several other deep books on political economy. This book is about how individuals are better decision-makers when it comes to their own lives, and that a "Committee" of "Planners" cannot possibly do a better job (How can you tell that someone else is happy? What they need? What they want?). It is no accident that countries with relative freedom on economics are more productive and wealthier overall (US/Hong Kong) than countries with little or no economic freedom (India/sub-Sahara Africa) and lots of gov't planning. It can't be mere exploitation or culture, as India has the largest middle-class and a great population of educated people. India has more college-degree persons than the US, yet is significantly poorer. Hayek investigates this. A good book, especially for leftists and right-wing oligarchs. I used to be a commie too, but open your mind and put the rhetoric on hold, just for a moment.

own this book, please, if only for the essay "the use of knowledge in society". in a few short pages, hayek explores how to think about how people use and spread knowledge, and how that affects everyday economic behavior.

Hayek was one of the most important economists and social philosophers of the 20th century. This book contains his most important papers (the first five papers of the book, where he starts to build a new social and economic theory), with were perhaps the most important economic articles of the 20th century (yes, I am serious about this claim).

Even today, most economists are under equipped to deal with the problems that these papers grabbed and even solved about seven decades ago. Many of the fundamental problems of modern macroeconomics come from a lack of understanding of what Hayek already knew in the 40's, that macroeconomic problems are the result of intertemporal discoordination of production plans with consumption plans. While his paper on the meaning of competition makes the modern take on the theory of competition and industrial organization naive and immature by comparison: Most modern authors simply doesn't understand what economic competition is. Hayek shows what competition is all about and integrates the economics of information with it. As with industrial organization, the modern approach on information, mechanism design and games with imperfect information is inferior and unsatisfactory if compared to Hayek's treatment of these same problems, with he does in this book in a few dozen pages.

Hayek goes straight to the point and reveals to the reader what are the real problems of economics and what economics is supposed to do: Explain why individuals, acting in their 'little worlds' (their problem sets, or means/ends frameworks), produce social orders beyond their conscious design. That task was already set by Adam Smith in a crude form more than 200 years ago, Hayek sets the problem in its definitive form. The market is a process of competition between individuals that produces tendencies to integrate the knowledge discovered by millions of minds into a consistent set of action plans, this integration is brought by the price system and it is competition the process that produces the knowledge that the prices transmit.

If you wish to know about why Hayek is the most important classical liberal social scientist in the 20th century (well, I would say: THE most important social scientist), you must read this. If you want to know what's really behind the modern libertarian positions, you must be familiar with these papers. If you want to know what Austrian economics really is about, you must read this book. Absolutely obligatory for anybody who wishes to understand the world in with he or she lives.

I've only read Hayek's "road to serfdom" so my experience with his writings is limited. Hayek has a very readible style and language and he does have a knack for explaining difficult concepts in laymen language. This book is a collection of numerous essays and does appear disjointed at times. Collectively, there are many gems of wisdom in this book and well worth your time to read.