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Friedrich Hayek and the Future of Liberty
May 16, 2001
Alan O. Ebenstein, Charles W. Baird


Introductory Remarks by David Theroux

Welcome to our program this evening. As you know The Independent Institute regularly sponsors Independent Policy Forum events essentially on a monthly basis. And the events include lectures, seminars, debates and so forth featuring outstanding scholars, policy experts and authors of important new books.

Our program tonight is, as you know, entitled “Friedrich Hayek and the Future of Liberty,” and we have two distinguished speakers with us. The first is Alan Ebenstein, who is the author of this very important biography of Hayek, Friedrich Hayek: A Biography, which I hope everyone will pick up a copy of. It’s a fascinating book. For those of you who know about Hayek, you’ll learn a great deal more. I can guarantee you. Those of you who don’t know much about it, you’ll find it a fascinating story of a man and the ideas of liberty.

Our second speaker is Charles Baird, a good friend, and Chuck is the Professor of Economics at California State University at Hayward. He is also director of the Smith Center, and we’re quite pleased that the Smith Center is co-sponsoring tonight’s program, as you can see from the banner.

Before I move further, I wanted to mention that the Smith Center also sponsors events at Cal State Hayward, primarily. The next event is going to be on May 30th with the syndicated columnist, Robert Novak. Many of you may know of him from being a host of a number of programs on CNN. Chuck has brought tickets. Any of you who would like to buy tickets are welcome to do so, and I certainly encourage you to attend. I think it should be an excellent event.

I want to also thank Robert Mondavi Winery, who donated the wine that we enjoyed this evening. [Applause.] As well as The Customer Company which has also been a sponsor of our series. For those of you who may be new to The Institute, hopefully you picked up a packet when you registered. You’ll find information in the packet about our program of public policy research and publications. We produce many books. This is our quarterly journal called The Independent Review, and you’ll find information about many other projects of The Institute. In the packet you’ll find a flyer which is about tonight’s program and on the bottom of the front of the flyer, you’ll find also information about two of the upcoming events.

I also wanted to point out that you will find information about our program plus an extensive archive of research studies and other publications on our Website at as well as up to date information on events and other activities.

One thing I wanted to point out is the event that we held here in March with John McWhorter, who is from the University of California, Berkeley. He spoke on the topic based on his new book, Losing the Race: Black Progress, Freedom, and Independence. The program’s going to be rebroadcast on C-SPAN2 this Saturday evening at 6:45 p.m.

The upcoming events on this flyer I mentioned that we’re going to be holding, the next one is on July 5th. The subject of that program is “Why Are the Public Schools Failing and What Can Be Done?” The speakers will include John Merrifield, who’s Professor of Economics at the University of Texas at San Antonio, and author of the new book The School Choice Wars, and Richard Vedder, who’s a Senior Fellow here and also Professor of Economics at Ohio University. And he’s authored the new monograph of ours called Can Teachers Own Their Schools?

On August 14th, we’ll also be hosting Larry Elder who many of you know is the very popular talk show host in Los Angeles at KABC, and also is host of the program, “The Moral Court,” on Warner Brothers Television.

And this fall, probably in September, we don’t have it nailed down yet, but probably in September we’ll be hosting Thomas Szasz, who’ll be speaking on his new book called Pharmacracy of which there’s an excerpt in this new issue of The Independent Review.

In your packet, one last thing I wanted to point out is each summer we host a series of summer seminars for high school and undergraduate college students called the Summer Seminars in Political Economy, and this year we’ll be holding them once again. They’re one-week programs—Monday through Friday—8:30 to 12:30. They are conducted by the economist Joseph Fuhrig of Golden Gate University and the University of San Francisco. This year the program will be co-sponsored by Holy Names College here in Oakland. And for those students who are out of town, we have accommodations at Holy Names at an incredible bargain. Also Holy Names is offering a one-hour college course credit in economics for those students who complete the program. So I think that if anyone is interested in having students receive really, I think, a life-changing experience of understanding the world they live in, this is a program that we hope that you will have them participate in.

David Theroux

This evening we’re here to discuss the life and ideas of the imminent economist and political philosopher, Friedrich A. Hayek. For myself, I hold a special reverence for Hayek and his work. In my case, years ago when I was a young man in the Air Force in Louisiana, I managed to first stumble across Hayek’s work. In my instance, in order to overcome what I thought was a blinding boredom and incompetence that I found when I was living in the Air Force, I was going through the book stacks at the base library one day, and I happened to stumble across a book, and I opened the book up, and there’s a chapter in it. The chapter was entitled “Why I Am Not a Conservative,” and I thought that was rather provocative and the book happened to be The Constitution of Liberty by Hayek.

Now this was during the antiwar period of the Vietnam War, and one of the things that struck me about this chapter was, in some respects, what Hayek was saying in a rather more eloquent way, was somewhat reminiscent of what I was seeing in the news almost daily about the antiwar movement and their view of the government. At the same time, it also reminded me of some of the speeches of Barry Goldwater, which were just about five or six years earlier, when he ran for President.

So it intrigued me. It seemed like there were two different wings of popular political culture that were sort of discussing something along the lines of what he was saying, so I read the entire book. I then ordered, through the base library, books, any book that he referenced essentially in his essay. And that led me to von Mises, Friedman, and many others.

Hayek’s point in this chapter, in case you’re interested, “Why I Am Not A Conservative,” was that he was, indeed, not a conservative. He was a liberal in the true classical sense of the word; i.e., he was interested in liberty. And the way he described it, he was a “Whig,” he was not going to align himself with any of the parties then. In fact as many of you may know, his book The Road to Serfdom is dedicated to “the socialists of all parties.” [Laughter.]

He was—in his view—not interested in conserving what governments did. He was interested in conserving ideas or advancing understanding of the ideas of civil society, and he viewed political institutions as being the primary means for undermining these civil institutions—private institutions based on individual choice and action, and the accumulated ideas, traditions and consensual rules going back to antiquity.

And as a result he was, being from Austria, firmly against what Europeans viewed as “conservative,” which was people who believed in defending, or in some respects, were simply apologists for what was the stagnation, oppression and outright human misery of pre-industrial societies under the caste and government privilege of feudal monarchies.

The thing that also struck me about Hayek, and the new and incredibly rich literature that I just happened to accidentally discover, was that it was largely unknown. It was largely unknown to any of the people I knew. And I had already been to a number of colleges, and I just could not find it having much of any sort of impact, and even in those circles in which they talked about free markets, they would talk about free markets on the one hand, on the other hand they needed something that would be the opposite.

So it intrigued me, and in no small way, that fateful day led to the establishment of The Independent Institute. So Hayek has had a profound impact on the very existence of this institution, that we’re delighted that you’re joining with us tonight.

Our first speaker tonight is Alan Ebenstein. Alan is the Director of Research at the Arthur Rupe Foundation. He received his Ph.D. in political philosophy from the London School of Economics and Political Science. He’s been a fellow of the Hoover Institution and he has taught at Santa Barbara City College and Antioch University in Santa Barbara.

As most of you know, Alan is the author of this book I mentioned, widely acclaimed book Friedrich Hayek: A Biography. In addition to his biography of Hayek, he’s also the author of a number of books, including Today’s Isms with his late father, William Ebenstein and Edward Fogelman. Introduction to Political Thinkers also with his late father. Great Political Thinkers: Plato to the Present. Collected Works of Edwin Cannan and The Greatest Happiness Principle: An Examination of Utilitarianism.

Alan has been a member of the Santa Barbara Board of Education, I should mention also for eight years, and has been a former candidate for the California State Assembly. I’m very pleased to introduce Alan to discuss his book. [Applause.]

Alan Ebenstein

Thank you very much. It’s a great privilege to be able to talk to you on Hayek tonight. I think that of the think tanks and institutes in the United States, that The Independent Institute is as close to Hayek’s thought as any. This talk tonight will largely consist of a biographical presentation of Hayek’s views together with thoughts on the relationship between Hayek’s views and modern American social conservatism. In addition we are fortunate to have Professor Chuck Baird as a commentator.

Hayek emerged from the milieu Austrian liberalism during the last decades of the 19th century, and first decades of the 20th. Single among those who most influenced him were Carl Menger, founder of the Austrian School of Economics, and Ludwig von Mises, the key initiator of the socialist calculation debate. Both Menger and Mises were staunch liberals in the 19th [century], or perhaps Independent Institute’s meaning of the term. Hayek’s main professor at the University of Vienna—Friedrich Von Weiser was more of a welfare-state interventionist.

The conditions in Vienna following World War I, when Hayek became a student at the University, were grievous. Inflation was out of control. The economy collapsed. The traditional social order had been ripped asunder. A completely new society was in the making. And for this reason it’s unsurprising that as a young student at the University of Vienna, during the late teens and early ’20s, that Hayek for a time adopted mildly socialist outlooks. He was experiencing, and thought he would participate in, the rational construction of a new society.

Hayek Meets Mises, Cannan, Robbins and Keynes

However, he then came into contact with Ludwig von Mises and his views then changed. Hayek liked to describe his first meeting with Mises rather humorously. He came to Mises in 1921 with a letter of introduction from Weiser who described him as “a promising economist.” “Promising economist?” Mises asked, “I’ve never seen you at any of my lectures.” [Laughter.]

Mises was a short, burly man given to occasional temperamental outbursts. He possessed a clear intellect however. Hayek learned much from him. The work of Mises that most influenced Hayek was Mises’s Socialism, which made the argument not that socialism would be ethically or morally undesirable, but that it literally does not deliver the goods. Mises’s accomplishment was to turn the question of socialism from an ethical to a practical one. Not, would socialism be desirable, but how would it work? So effective was Mises’s argument that even many socialists admitted its power. Oscar Lange, a prominent Polish socialist went so far as to say that, “a statue of Professor Mises ought to occupy an honorable place in the Great Hall of the Ministry of Socialization of the Socialist State.” Quite a statement.

In 1931, after 10 years of working for and with Mises, Hayek went to the London School of Economics and Political Science, and it was here that his career blossomed and he gained worldwide renown. Probably the most famous name now associated with the London School of Economics during this period is Harold Lasky, and a considerable part as a result of Lasky’s influence, the LSE, as it is also known, gained a reputation as a haven for socialist thought. But there was another tradition at the London School of Economics, which can be traced to its first professor of economics there, Edwin Cannan, one of the greatest scholars of Adam Smith and a classical liberal in his own right.

There was much in Cannan’s thought that Hayek found congruent with his own: emphasis on the slow gradual, transformation of societies and institutions. Now I think this is one of the really core Hayekian ideas is that institutions and societies are not planned, they cannot be directed and advanced, rather they have to be allowed to emerge. And this was an idea that was in Cannan’s thought, and as well, this process, which Hayek termed “spontaneous order,” is also a concept that he found in the work of Carl Menger.

Hayek’s first work at the London School of Economics was as an economist. He was brought to LSE by the then leading English classical liberal, Lionel Robbins, who was a student and successor of Edwin Cannan. Robbins was almost exactly the same age as Hayek, and together at the London School during the 1930s, Robbins and Hayek led a seminar that included many of the emerging leading lights in economics of the day. It had no less than four future Nobel Laureates in the same seminar. In addition to Hayek, John Hicks, Arthur Lewis and Ronald Coase. Arthur Seldon of England also participated in the seminar, and on the other side, John Kenneth Galbraith was a visiting student in Hayek’s seminar for a year.

Hayek was brought to the London School primarily as an opponent to John Maynard Keynes who had just published in 1930, A Treatise on Money. Hayek wrote a blistering review of Keynes’s treatise that was published simultaneously with his arrival in London. Keynes then wrote an even more blistering reply to Hayek’s review article. This is what Keynes said. “Dr. Hayek’s Prices and Production seems to me to be one of the most frightful muddles I have ever read. It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in bedlam.” [Laughter.]

So notwithstanding this rather inauspicious start, personal relations between Keynes and Hayek soon became good, though they never did agree on economics, and indeed, seemed to have agreed not to discuss it. During World War II, Hayek became fairly close to Keynes when the London School of Economics moved to Cambridge, where Keynes resided. And it’s actually the case that during the war Hayek and Keynes would sometimes take turns at night watching for fires from the top of King’s College in Cambridge. So they had a close personal relationship although they did not agree professionally.

Hayek and the Societal Division of Knowledge

Hayek’s great accomplishment during the 1930s, was to enunciate the idea of the division of knowledge, which many Hayek commentators consider to be his greatest intellectual achievement. This idea, the division of knowledge, occurred to Hayek as he was reflecting on the socialist calculation debate in which Mises had been involved 10 to 15 years earlier. “There are many socialists,” Mises had written, “who have never come to grips in any way with the problems of economics.... They have criticized freely enough the economic structure of a ‘free’ society, but have consistently neglected to apply to the economics of the disputed socialist state the same caustic acumen.... They invariably explain how, in the cloud-cuckoo lands of their fancy, roast pigeons will in some way fly into the mouths of the comrades, but they omit to show how this miracle is to take place.” How would a socialist society practically be organized? It is not enough merely to point to deficiencies under capitalism.

Hayek’s brilliant insight is that there is a division of knowledge among all of the members of a society. Knowledge does not exist anywhere in a compact, complete whole. Rather knowledge is fragmented. It exists in the minds of all of the members of a society. And I think this is really a core Hayekian idea. Words like epistemology and methodology are sometimes somewhat esoteric, but I think the idea is that, how is it the case that you form a society when everyone’s experience is individual? What sort of society is going to be the most effective to accommodate divided knowledge, knowledge that’s divided among the minds of all the people in a society?

Hayek’s idea of the division of knowledge is very simple, but it is an idea that has potentially profound consequences. Hayek thought that the division of knowledge precludes the possibility of classical socialism of the central management and direction of the nation’s economy from one place. The division of knowledge, he thought, requires capitalism. Only under a system, whatever it’s other flaws, in which the reality of divided knowledge is accommodated, is a materially productive society possible, Hayek believed.

Hayek described the essay in which he put forward the idea of the division of knowledge, “Economics and Knowledge,” as the most important of his career. Later in his life he sometimes said that he had made one discovery; this discovery was of the division of knowledge and its consequences.

If knowledge is divided, how is information communicated? Hayek’s answer here, too, is brilliant. Hayek believed that the profit and price system, capitalism, is primarily a system that conveys information. Prices and profits are information. Prices reflect the relative supply of and demand for different goods. Mises uses as an excellent example of how a building would be built under a socialist system to demonstrate the importance of prices. What type of wood should be used? Should bricks or concrete or steel be used in construction? What should the relative amounts of labor and capital that go into construction be? Without a price system none of these questions can be answered in the most cost effective and rational manner. Capitalism, through utilizing prices and profits, has been literally the only system that can deliver goods in an advanced technological society.

And I think what’s really the core question is: how is information about the relative amounts of goods and services to be communicated? How do you know whether you should make building out of wood or out of steel or out of concrete? And it’s the price and profits system in capitalism that conveys that information.

Prices are dependent on private property: unless individuals have exclusive control over property and the ability to exchange it on the terms that they see fit, prices are impossible. This is the problem.

This was the problem in the Soviet Union and in other command economies during the 20th century. With no private property there is no price, and without private properties there cannot be rational economic calculation. Moreover, profits are as essential to prices to a capitalist order.

Later in his career, Hayek further explored the concept of order without orderers or “spontaneous order.” The role of the businessperson who makes profits is essential to the capitalist order. Who’s the best person to be entrusted with resources? In capitalism, this question is ideally answered by the individuals who make the most [profits]. That is, the individuals who use resources most effectively. Profits and prices convey information. They are essential, Hayek thought, to a free market order.

Along these lines, I think what’s crucial in evaluating the role of the entrepreneur is that the ability to make prices, ability to make profits is not necessarily something that people can tell you how they did it. All you know is that somehow they’re able to conduct effective enterprises, and conduct effective businesses. And that’s one of the great strengths of capitalism. It’s not the case that in advance, in the same way of trying to plan out a society or to try to plan out an economy, that you can verbally say before how you’re going to make the profit. All you know is that in a capitalist system the people who are the most effective in making profits through experience are the individuals who will have more resources. Whereas in a command system there is no other information-conveying device like that. Who is the most effective with resources is as much a question as anything else.

The Road to Serfdom

World War II of course affected events in England and the rest of the world greatly, and it focused Hayek’s attention on the political ramifications of socialism. In his most well-know work, The Road to Serfdom, published during World War II in England, he now argued not only that socialism is unproductive, he argued that socialism is necessarily undemocratic and dictatorial. Unless there’s economic freedom, there cannot be political freedom. “This is really the crux of the matter,” he wrote in The Road to Serfdom. “Whoever controls all economic activity controls the means for all our ends. Economic control is not merely control of a sector of human life, which can be separated from the rest, the control of the production of wealth is the control of human life itself.”

And this sounds now commonplace, but at the time there were many who believed that the problems of command collectivist economies wasn’t that they owned all of the nation’s goods and services, but that they were undemocratic and that somehow there could be a democratic socialism. But Hayek argued profoundly that there can be no political liberty without economic liberty.

Hayek in Chicago

The Road to Serfdom was a great success, and Hayek made a lecture tour to the United States in the spring of 1945, just as World War II was ending. He visited the University of Chicago, and later, between 1950 and 1962, he was on the Committee on Social Thought at the University of Chicago, and he came in mind with such figures as Milton Friedman, George Stigler, both future Nobel Laureates at the University of Chicago.

It’s interesting to consider the relationship between Friedman and Hayek—they’re often considered to be the two greatest philosophers or economists of a free market order during the 20th century—and they were not as close, not quite as close personally and intellectually as is sometimes thought. In terms of their technical economics, while they were both free marketeers. They had substantially different ideas of how money works in the economy, and I must admit that my own presentation is much closer to Milton Friedman’s than it is to Friedrich Hayek’s, in terms of how money in the economy works. And I believe that Professor Baird will mention a thing or two about that, having fortunately seen his comments before. I’m covering myself at this point. [Laughter.] So watch for that.

However in terms of notwithstanding their technical disagreements, they both agreed strongly that a free market is the best system, and I think Hayek was much more of a philosopher; someone who put forward broad general ideas, whereas Friedman is much more of an economist, someone who has a more grounded empirical approach.

Another great mind with whom Hayek was in contact during these years was the philosopher Karl Popper. Like Hayek, Popper was from Vienna, and also like Hayek, he wound up teaching at the London School of Economics.

The great work of Hayek’s Chicago period was The Constitution of Liberty [1960]. Here he attempted to expand some of the ideas of the division of knowledge, that he had developed an economic theory and apply them to all of societal life.

In the area of economics, Hayek argued that because knowledge is divided, societies should be able to accommodate divided knowledge in their economic systems, and that economic systems that do not accommodate divided knowledge are necessarily going to be unproductive economic systems. Hayek now attempted to take this idea of the division of knowledge and apply it to all of human life.

And this was his great concept. His two great later works, The Constitution of Liberty and Law, Legislation and Liberty [The Mirage of Social Justice, The Political Order of a Free People, Rules and Order] particularly the latter, draw attention in their titles to the idea that there is a connection, an intrinsic connection, between law in a society and liberty. There cannot be a free society unless people know what the rules in a society are, and are able to interact with one another in a way that they can foresee what the consequences of their actions will be.

Liberty as the Supremacy of Law

Hayek believed that liberty is the supremacy of law. To some, this may sound a very distinct conception of liberty, because liberty during the 20th century was more often considered to be either the absence of law constraints or certain material standard of living. How can liberty be the supremacy of law?

Following from his work in the division of knowledge, Hayek postulated that it is law, rules that allow people to interact more or less effectively. The better or worse laws or rules in a society are, the more or less effectively individuals will interact.

The rules that Hayek saw as crucial to a materially productive society are the rules that sustain and create a free market. Private property. Contract. Profit. Freely fluctuating prices. A stable currency. Limited government intrusion and an involvement with individuals lives.

Hayek had two great works in him. After The Constitution of Liberty was published in 1960, in 1962 he and his second wife moved back to Europe to Freiburg in West Germany. Primarily here, Hayek wrote Law, Legislation and Liberty [The Mirage of Social Justice, The Political Order of a Free People, Rules and Order], which because of illness was not published until the 1970s. In Law, Legislation and Liberty, Hayek explored further the relationship between liberty and law, particularly in it’s crucial first volume, Rules and Order, where he developed the insights that had guided him throughout his earlier career. He expanded the idea of law to not just the legal status, statutes of a society, but its customs and morals.

Hayek was appalled by the protests and revolts among the young during the 1960s. He feared that socialism, and in idea and practice, would triumph over the free market, particularly as inflation ignited throughout the western world during the late 1960s and early ‘70s. As the American position in the world diminished, and as the influence of the Soviet Union expanded, he feared that the prospects for freedom were as imperiled as they had been at any time since World War II.

Hayek’s Nobel Prize

In 1974, most unexpectedly, Hayek was co-recipient of the Nobel Prize in Economic Sciences with Swedish socialist Gunnar Myrdal [Laughter.] When Friedman wrote his congratulatory note to Hayek after receiving the Nobel, he said that, “Dear Fritz, I regret that it’s taken this long for the Swedes to award you the Nobel, and even then they went only half the way.” But he was nonetheless happy that Hayek had received the award.

A Nobel Prize in Economics had only been instituted in 1969. Hayek was the first free-market economist to receive the reward, and this was the great rejuvenating event for him.

It was said at the time that the Swedes really wanted to give the award just to Gunnar Myrdal, but they felt they would be subjected to criticism for giving the award to someone so far on the left, so they joined Hayek with Myrdal, right with left, to be able to create more balance in the presentation of the award.

As a result of receiving the Nobel Prize in Economics, Hayek became not merely the best-selling author of a popular book three decades before, but the first free-market economist to win a Nobel.

Hayek’s Influence in the 1980s

As a result of the greater prominence that the Nobel Prize garnered him, he was once again referred to in the popular press, particularly in England. Hayek’s greatest later renown was in England particularly during the 1980s. Prime Minister Margaret Thatcher adopted him as her leading philosophical inspirer, and the renown of Hayek in Great Britain is high as it is in the United States. It’s much, much higher in England than it is here.

During the late 1970s and all through the ‘80s, Hayek was always a fundamentally British individual in the sense that he lived there for 20 years. His children were raised there and still reside there. He identified most with many English ideas. He’s really part of the great stream of English classical liberalism and political philosophy, or political economy, perhaps, as distinct from technical economics.

During the late 1970s and through the 1980s, particularly during the time of the Thatcher government in Great Britain and the Reagan Administration in the United States, the idea began to emerge that Hayek was not just a great political thinker for a point in time, but a great political thinker for all time. His contributions in the area of the division of knowledge, of the essential role of prices, profits, private property and contract to a market order, and of the relationship among liberty, law, customs and morals, began to be recognized as permanent contributions to Western political order and thought.

He had been right about Keynes and the welfare state all along, and now with the decline of communism and socialism throughout the world during the 1980s, he came to be recognized as the great anti-socialist: the thinker who enunciated the contours of a new free market order in the same way that Marx philosophically enunciated the idea of a communist system during the 19th century.

Hayek’s final work was The Fatal Conceit. In 1978 he conceived the idea of organizing a debate on the question, “Was Socialism a Mistake?” As earlier and elsewhere during his career, Hayek attempted to move a question from the realm of ethics to that of facts. He sought to organize teams on both side of the proposed debate topic for a great public discussion in Paris. This proposed debate did not come off.

However, Hayek wrote a book that was originally intended to be a challenge to debate, The Fatal Conceit: The Errors of Socialism, in which he attempted to bring his life’s work to a conclusion. The insight that he originally developed to the socialist calculation debate that knowledge is divided, and that prices and profits guide production, he now attempted to apply to societies as wholes and their entire complexes of rules, laws, customs, morals and manners.

Now Hayek argued there is essentially a Darwinian struggle among different societies and their laws, their rules, broadly understood, and that societies that have the most materially productive rules will be the societies that prevail in the end.

After several years of illness, Hayek died in March 1992, less than two months shy of his 93rd birthday. Father Johannes Schasching said in his homily that Hayek “was one looking for solutions to the great problems of mankind. He tried to find an answer. He was himself convinced that his answers were merely a piece within a larger mosaic.”

Though ill, Hayek was well aware that the Berlin Wall fell, and that communism and the Soviet Union collapsed. These events have seemed to justify his life’s purpose and message. Within the field of human society there can be no freedom unless individuals possess substantial liberty to live their lives, including their material lives, substantially as they wish. As Hayek concluded The Road to Serfdom almost a half century before his demise, a policy of freedom for the individual is the only truly progressive policy.

The idea that individuals may be made to be better than they are through compulsion is false. As Hayek said so well in The Constitution of Liberty, “liberty is an opportunity for doing good. We praise or blame only when a person has the opportunity to choose.” Near the end of The Road to Serfdom he said along this same line on the proper field of morals, individual conduct, that “issues in this field that become so confused that it is necessary to go back to fundamentals. What our generation is in danger of forgetting is not only that morals are, of necessity, a phenomenon of individual conduct, but that they can exist only in the sphere in which the individual is free to decide for himself. The members of the society who in all respects are made to do the good thing, have not title to praise. In order to be moral, individuals should have the opportunity to choose the right thing to do.”

Economist and political philosopher though he was, Hayek was also ultimately a moralist. His foundational assumptions included that if individuals are given freedom, they will choose to do the right things and that collectivist coercion steals from human what makes us human, free will.

Hayek and the Future of Freedom

Since the talk this night was announced as “Friedrich Hayek and the Future of Freedom,” I’d like to conclude with some thoughts—that are partly extrapolation—on Hayek’s view of freedom in the circumstances of the present political and economic or societal situation in the United States.

Hayek was more a philosopher and philosophical economist than a practical policy advisor, and it is the case that his practical policy suggestions have often been criticized by individuals who thought that they had conceded too much to welfare state liberalism. That although he philosophically enunciated ideas for freedom, nonetheless he would, in his practical advice, allow a reasonable role for government, and to some extent that may be a product of the times in which he wrote given that governmental ideas were so prominent during the idea—the idea of larger government was so prominent during the 20th century, it was perhaps inevitable that his thought would be tainted in that way.

Following a conversation with David Theroux, I’d like to offer these thoughts on Hayek. Hayek concluded the postscript of The Constitution of Liberty with an essay titled “Why I’m Not A Conservative,” and it is undoubtedly the case that Hayek was not a “conservative” in the European sense of one who favored strong governmental control. Indeed he noted in “Why I’m Not A Conservative” that both traditional European conservatives and socialists had more in common with each other than either shares with the classical liberal position on freedom.

At the same time, as earlier mentioned, Hayek was appalled by the student riots and protests of the 1960s, and of the general counter-cultural movement during this time, though he did not believe that government should prescribe or proscribe certain ethics. However he was greatly disappointed by the change in societal ethics during the 1960s and ‘70s, and in some of his last essays, he spoke of the importance of the family in the capitalist societies.

I believe that there’s a fundamental alliance between Hayekian liberalism and social conservatism. And this would be based on the idea that if people are given freedom, they will choose conservative social values. The problem with government in our time is that it encourages values that are antithetical, to enabling strong communities based on traditional values and morals to merge.

The essence of the Hayekian position is that people should, in freedom, have the opportunity to lead the lives and choose the communities in which they desire to live. One Hayekian scholar—Jeremy Shearmur—has written of optimal Hayekian society as consisting of competing communities, communities that would have variegated lifestyles and societal patterns. Individuals would then have the choice to live in the communities in which they desire.

This is an attractive ideal. The idea of societal diversity is, from a Hayekian perspective, not adequately understood. Diversity is not just in societies and institutions, but of societies and institutions. A recent example will provide a case in point.

There’s an institute, or there’s an entity called WASC, which is the Western Association of Schools and Colleges, through which all colleges and institutions have to be accredited, and there were questions regarding diversity issues at a small private college, Thomas Aquinas College, as to whether they would be accredited by WASC as a result of the moral and ethical principles which they wanted their students and faculty to uphold. And it’s very important for colleges to be accredited because if colleges aren’t accredited, then students aren’t able to receive guaranteed student loans, and that sort of thing, so it’s a real practical issue.

And I think that the Hayekian idea of diversity is not that every single university in the United States is going to be a carbon copy of each other. There can be diversity of institutions as well as diversity in institutions, and the problem in our society today is that we focus almost exclusively on diversity in institutions and not diversity of institutions. There’s another idea of diversity, and I think that Hayek’s idea is entirely congruent with that other idea. Let’s see here.

I think that Hayek’s position would not be that state-sanctioned imposition of universal policy codes of any sort are the appropriate way to go. Rather there should be the greatest diversification and diversity of societies and institutions possible.

This emphasis—this example—moreover, has broader societal implications. Over 100 years ago, John Stuart Mill wrote in On Liberty of the increasing tendency of people to read the same things, speak the same things, hear the same things, and he suggested that liberty of thought and expression is the essence of a genuinely free and libertarian society.

American society today is in many respects much the same as Mill described it over a hundred years ago. As politically correct speech codes on college campuses attest, there are great limits on what can be expressed and thought in American society today. As in Mill’s time, individuals with views contrary to those sanctioned by the majority, or perhaps even, merely an empowered elite minority, may express their views only using extreme care.

The idea of reducing the power of government all around is consistent with the practice of diverse communities within themselves and among themselves, and of genuinely free intellectual inquiry and thought.

One of the things that most interested me in researching Friedrich Hayek: A Biography were lecture notes of Hayek that he gave while he was on the Committee on Social Thought at the University of Chicago, where he emphasized the absolute importance and centrality of freedom of thought, expression and discussion to a free and libertarian society.

From a practical perspective, Hayek’s ideas point in the direction of local governance rather than centralized governments, and of private and voluntary provision of social services and activities than of state-mandated ones. In the same way that government cannot centrally manage a nation’s economy, neither can government centrally manage the provision of a nation’s welfare services, at least not optimally, which social policy during recent decades seems to suggest.

The Hayekian idea of community is in many ways similar to that of the socially conservative one, of free and moral individuals who choose and create the communities in which they live. Too often government is a hindrance toward the creation of these sorts of communities as government attempts to manage all of the nation’s economy were.

Perhaps the next step in the Hayekian public policy program should be to turn the insights that he developed in his critique of socialism—that government attempts to manage all of the nation’s economy are invariably inefficient—to turn this insight to the idea that government attempts to manage all of the nation’s moral and ethical practices are equally inefficient. Thank you. [Applause.]

David Theroux

Thank you very much, Alan. Our next speaker is our dear friend, Chuck Baird, who as I mentioned before, is a Professor of Economics and Co-Chairman of the Economics Department at California State University and Director of the Smith Center for Private Enterprise. He received his Ph.D. in Economics from the University of California, Berkeley. He has been a Woodrow Wilson Fellow and a Danforth Fellow. He’s taught at UCLA, Stanford, and the University of the Witwatersrand.

Professor Baird is a member of the Board of Directors also of the Mont Pelerin Society, which was founded by F. A. Hayek in 1947. He’s a quarterly columnist for the magazine Ideas on Liberty. He serves on the editorial boards of three academic journals, and is a consultant on labor economics to the New Zealand Business Roundtable. He’s the author of four textbooks, including Prices and Markets, Macroeconomics, Elements of Macroeconomics, and Elements of Microeconomics, as well as numerous monographs including ones in advertising, unionism, rent control and other areas. His articles have appeared in some of the journals and magazines, I couldn’t count them all. Anyway it’s a great pleasure to introduce Chuck Baird. [Applause.]

Charles Baird

Thank you, David. Before I begin my remarks, I want to do one little commercial. Upstairs at the Smith Center table up there, there is this brochure that describes a program that we’re doing in June. This actually supplements and complements what David’s doing here at The Independent Institute. We have a program for teachers, including home teachers, on how to use Socratic seminars as an education tool, and this is free to teachers, and it is from June 25th to June 29th, and you can pick up these brochures upstairs, and if you are teachers, please look at them, and if you know teachers, please pass them on. Now to my remarks here.

Remembering Hayek

I’d like to begin with a little anecdote from my own experience with Hayek. I met Hayek in 1977, when the Institute for Humane Studies, which now is in—at George Mason University, but then was in Menlo Park—put on a two-week conference on Austrian economics at Mills College here in Oakland.

Now I was the director of that program, which overstates my significance, because in effect, that just meant that I was the “go-fer.” I was the one who was supposed to make all of the pieces fit together, and one of the pieces that I was responsible for, was to pick up Hayek from Berkeley, which I find astonishing. I don’t know what they would do with Hayek at Berkeley. Remember, I got my Ph.D. from Berkeley, and it’s not Hayek-friendly up there. [Laughter.]

But anyway, I picked him up from Berkeley and drove him down to Mills College in my 1972 Volkswagen Beetle. I washed it that afternoon before I picked him up. Now I was very nervous about this because, first of all, a Volkswagen Beetle didn’t seem appropriate for such an august person, but also because I didn’t want to go down in history as the one who was responsible for the accident in which Nobel Laureate F. A. Hayek died.

Well, in any case, I picked him up. I introduced myself to him, gave him my card, and we started the short journey down to Mills College. He was a charming man—he quickly put me at ease, and he asked me about what sort of work I was doing in economics, and he actually seemed interested in my answers. Not all people are. [Laughter.] Except my students, of course. [Laughter.]

Now we arrived safely at Mills College, and I escorted him to where he was to give his presentation, and the presentation went very well.

Now the next morning, I reintroduced myself to him and offered him another card. Now that was a huge mistake. See, my thinking was that, well, I’m just kind of a background person. I’m just kind of a “go-fer,” and I’m not sure he would remember me. But, of course, when I offered him my card for the second time, he misinterpreted that to say that I was suggesting that probably he didn’t have a good memory, and he bristled, and he said, “Young man, I remember who you are.” Then he paused, tried to look severe, and then he smiled, and he said, “I am surprised that one as young as you has trouble remembering what he did on the day before.” [Laughter.] That’s the Hayek that I knew. I was at ease from that moment on.

And there’s a little tail—a little ending to this story. In 1982, there was a general meeting of the Mont Pelerin Society in Berlin, which I attended actually under the auspices of David Theroux here, who at that time was President of the Pacific Research Institute in San Francisco. And I came across Hayek in the course of the evening of the opening banquet. Every Mont Pelerin Society meeting has an opening banquet, and of course, everybody has nametags on. So I approached him and before I said anything, he said to me—now mind you, the Mills College experience was 1977—this is 1982. He looked at my name tag, gave an expression of recognition, and he said, “Mr. Baird, I hope your memory has improved since our days together at Mills College.” [Laughter.] So he was a great guy. Just a great guy.

Now there’s another anecdote that I’d like to tell. This is not about my experience with Hayek, and actually I found out tonight from Alan that this is in the biography. I didn’t think it was in the biography. It’s in the biography in a footnote, and I must confess I read the biography, but I didn’t read the footnotes. This book is put together very well. The footnotes are all at the end, so you don’t have to be bothered with them, and I confess that I wasn’t. [Laughter.]

So anyway, I heard this anecdote from Mike Walker, who is the President of the Fraser Institute in Canada. As Alan says in his biography, in 1984 Hayek was made a Companion of Honor by Queen Elizabeth, and in his audience with Queen Elizabeth—now we’ve got to put this in historical context, because at that time, the IRA, the Irish Republican Army, and various offshoot organizations were very much involved in making London a hazardous place to be. So, the Queen in this audience asked Hayek how to pronounce his name. Was it “hay-ek” or was it “hy-ek,” and he said, it’s Hayek, like high explosives. [Laughter.] Right?

Hayek’s Economics and the Future of Freedom

Well, I’ve been asked to comment on the significance of the economics of Hayek in the present and future struggle to preserve liberty, and I have two newspaper articles that are very recent, which illustrates that a lot of people in this world could benefit from a reading of Hayek.

First from the ANG newspapers, the Alameda Newspaper Group newspapers on Sunday, May 6th this year. There was a story that said—its headline, “National Labs Disagree with Bush on Energy,” and it says, “scientists at the country’s national laboratories have projected enormous energy savings if the government takes aggressive steps to encourage energy conservation in homes, factories, offices, appliances, cars, and power plants.” Imagine that.

Now one of the most important messages that people get from reading Hayek is that prices do things like that. Higher prices are precisely those things which get us to conserve voluntarily in the ways that are best for us and given our own circumstances of time and place, but the scientists in the country’s national laboratories have not read Hayek. And then the same article, “a lengthy and detailed report based on three years of work by five national laboratories said that a government-led efficiency program emphasizing research and incentives to adopt new technologies could reduce the growth in electricity demand by between 20% and 47%.” [Laughter.]

Well, now again, imagine that. That’s another role of prices. A central theme of Hayek’s economics is that prices convey information. Prices tell us what the relative scarcities are. Prices tell users to use less, tell suppliers to try to supply more, tell entrepreneurs to get into markets where prices are high relative to cost, and entrepreneurs to get out of markets where prices are low relative to cost, but this lengthy and detailed report, based on three years of work, by five national laboratories, didn’t understand that.

Now the second article—well, actually it’s the same paper, it’s a second article, but it’s the same paper on the date, May 6th—this is a story about a man named Severin Bornstein, who is Director of the University of California Energy Institute in Berkeley. And he’s generally portrayed as a genius in this area, but in this article it says that he sees the need for federal regulators to ensure that the market system treats consumers fairly. Now it gets better.

“We didn’t just say, ‘oh, the market will take care of everything and walk away.’” He’s talking here of course about the California energy crisis. You know, in this third-world state that we live in. Similarly, Bornstein now believes that there is a need for more stringent federal regulation of the electricity industry. He believes that power generators have been taking advantage of California’s electricity shortage and boosting prices to astronomical levels. Still. he doesn’t vilify the companies that own power plants, and here’s the interesting thing. Listen to this. This is a quote from him, Mr. Bornstein.

“Generators are out there to make as much money as they can,” he says. “That’s how markets work. Our job is to design markets so that when they try to make as much money as they can, they end up doing things that are good for consumers.”

Now anybody who has read Milton Friedman, F. A. Hayek, von Mises, or Gary Becker or even my books, would understand that that’s precisely what markets do. [Laughter.] When people make money in free markets, they can only make it if they end up doing things that are good for their customers. Now this is a statement by a person who’s supposed to be a genius, the Director—he’s the Director of the University of California Energy Institute in Berkeley.

You know, I often say that I have the best of both worlds. I have a Berkeley degree, but I have a UCLA education. [Laughter.] My first job was an assistant professor at UCLA, and I came under the very wholesome influence of Armen Alchian and the crowd down there. Great people. They’re the ones that introduced me to the free market. It was at UCLA that I first got introduced to Hayek. And, unfortunately now, UCLA, because Armen Alchian has retired, Harold Demsetz has retired, several other good free market people have retired there, the UCLA economics department has become but a mere shadow imitation of the Berkeley economics department, and that’s really, in my opinion, a very sad, sad occasion. But anyway, lack of understanding reigns supreme at Berkeley even as it was true when I was there.

Now I agree with Alan that the most important contribution of Hayek to economics is this principle of the division of knowledge, and also the related idea of competition as a discovery procedure. I want to differentiate—I want to take a little exception—to what Alan had to say about Mises and Hayek on the socialist calculation debate. I think that the two contributions there were really quite different, and that Mises started out the socialist calculation debate by pointing out that if you don’t have markets, you can’t have prices, and in particular, if you don’t have markets for capital goods, you can’t have prices, because prices are things that emerge in markets, and without prices, of course, the planners cannot calculate. They don’t know whether to build a building of cement or wood or steel or whatever, as Alan said, that was Mises’s view.

Hayek’s contribution was to pay very careful attention to the process by which prices do coordinate economic activities. He came to understand, as Alan suggests, that price formation is inescapably caught up in the subjectivity of costs and benefits.

So that when Abba Lerner, who by the way, who was on my dissertation committee at Berkeley—and Oscar Lange came up with market socialism—isn’t that a contradiction in terms?—that is, the market socialist solution to the challenge that Mises put out in 1921, where there would be trying to find prices by trial and error. That is, they appreciated—that’s why Mises was supposed to get this statue in the great hall of socialist heroes, because they came to understand that prices are important, while Lange and Lerner came up with this model by which the planners would solve that problem very easily. They would simply cry out prices at random, right? That’s actually going to Walras, that language—cry out prices at random and then see, all right, is the price too low? We’ll know if the price is too low, because the amount wanted will be greater than the amount that’s available. Then we’ll raise prices, and if the price that we cry out is too high, we’ll know that too, because the amount available will be greater than the amount that people want, and so we’ll lower prices.

The only trouble is, of course, that in the market, as it actually functions, nobody is setting prices. Well, there are price setters, but in the market, there are all kinds of people trying all kinds of prices, but these prices are based upon individual bits of knowledge. Here we go with the division of knowledge again. Individual bits of knowledge and understanding of circumstances of time and place. And the other point to be made here—I’m going too fast, but that’s OK—is that the question of incentives, the role of—what prices do in a free market is because prices affect what is in the best interest of the individual decision makers. Within a socialist setting, that incentive effect is absent. So Hayek, I think, went beyond Mises. He complemented Mises. He developed the role of prices more deeply than Mises did in the socialist calculation debate.

The division of knowledge idea began as an argument against central economic planning. It developed into a description of how prices and profits coordinate economic activities in free markets, and it gave rise to Hayek’s understanding of the spontaneous order. Now we realize that the idea of the division of knowledge and spontaneous order has a lot to say about the regulatory practices of the mixed economy today.

The watermelon crowd. Do you know what I mean by that? Well, it’s an expression that was actually coined, as far as I know, by the late Warren Brookes. Watermelon people. Green on the outside, pink on the inside, you know?

Well, there is a watermelon crowd, and actually as I look at the political landscape in the United States today, it is environmentalism. Environmentalism, that is the biggest threat to our individual economic liberties. It is the environmental excuse that is used more often than any other excuse to justify planning, not for the whole economy, but planning in particular sectors of the economy, which is just as deadly; just as deadly. That is a contemporary use of the notion of the division of knowledge and the impossibility of central economic planning.

It’s not just central economic planning like they had with the Soviet five-year plans, but it’s actually central economic planning of even parts of the economy, because the planners simply cannot know, not because they’re dumb, and not because they’re bad people. They could be very good people. They can be very intelligent people, but the fact is that the necessary knowledge, the knowledge that people have to have in order to make plans that work, in order to make plans that are consistent with reality, doesn’t exist anywhere in its entirety. It’s scattered out in bits and pieces. This is almost a direct quote from Hayek’s 1945 piece, “The Use of Knowledge in Society.” It’s scattered out there, and the only way that all of that relevant knowledge can be used is if everybody can play a part, and the only way that everybody can play a part is if we have a free economy.

Now Israel Kirzner, who is another hero of mine—I also met Israel Kirzner at that 1977 Mills College seminar for the first time—Israel is best known for his work on entrepreneurship. And he claims—in excessive modesty—he claims that everything that he has written is actually in Mises. Well, it isn’t. I mean, a lot that Israel has done is original Israel Kirzner, but a lot of what Kirzner has done is also in Hayek, and it’s not in Mises.

One of the best pieces that Kirzner has ever written and by the way, I’m very sad to say, that Israel Kirzner has announced that on January of 2002, he’s retiring from the economics profession. Israel is an orthodox rabbi and he has decided he’s going to leave economics – going to retire from his professorship at the University—at New York University, and devote his full attention to his religious pursuits. I wish him well, but it’s going to be a great loss to lovers of freedom.

One of the best pieces that Kirzner wrote was a piece called, The Perils of Regulation: A Market-Process Approach, and I can’t take the time to go over the arguments there, but all of the points that he made—essentially there were four sections to that paper. One is what he called “undiscovered discovery.” That’s based upon Hayek’s competition as a discovery procedure, on simulated discovery, stifled discovery, superfluous discovery. All of that is Hayek. That’s all Hayek. So Kirzner owes a great debt to Hayek, which he acknowledges, notwithstanding that he insists that everything that he has written is really in Mises.

Now at a bare minimum I think that every politician of both parties—because the Republicans are not any better than the Democrats on this—it may be just a question of degree, and sometimes the Republicans are worse than the Democrats. But every politician of any political party, I believe, should have to prove that they have read and understand the following pieces, “Economics and Knowledge” (these are Hayek’s pieces), in 1937. This is where the idea of the vision of knowledge was first introduced, followed up by, “The Use of Knowledge in Society,” which was in 1945, and that was published in The American Economic Review, actually, and I think it was the September issue in 1945.

Here’s one that Alan doesn’t mention but I think is very important, and that’s “The Confusion of Language in Political Thought,” which was written or published in 1967, and then “Competition as a Discovery Procedure” in 1968. “The Pretense of Knowledge” in 1974 that was his Nobel lecture. That—when people get the Nobel prize, they get to talk, and some people make more sense than others, and Hayek made a lot of sense in this piece which has been published—well, it’s been published in many places. It’s in one of his collection of papers called, I think, New Studies in Philosophy

David Theroux

. . . , Politics, Economics and

Charles Baird

What is it?

David Theroux

New Studies in Philosophy, Politics, Economics and the History of Ideas.

Charles Baird

New Studies in Philosophy, Politics, Economics and the History of Ideas. Thank you. And after “The Pretense of Knowledge,” they should read his last book, The Fatal Conceit. I think all of these people should have to read these and demonstrate that they understand them. They don’t have to agree with it, just demonstrate that they understand what is said in there before they can take their oath of office. Imagine. Boy, that would be fun.

Now I would recommend that these same pieces—this is just an indication of how important I think Hayek is—I think these same pieces should be required reading in every school of journalism and every school of law. [Laughter.] At the very least, with respect to journalism, an understanding of Hayek would permit these journalists to understand perhaps the right questions to ask of those “madmen in authority,” who know nothing of economics and seem to be proud of their ignorance.

The Fatal Conceit, I think, which is more about—rather than economics and how markets work—it’s more about the evolution of societies. I think that gives great pause to all of those who would seek to redesign society in their own image.

Now David just gave me a note here to tell me to shut up. [Laughter.] No, he told me—he told I have one more minute, and so I’m going to skip one section of what I had here, actually two sections. I want to come to the last thing that I wanted to say.

I enjoyed Alan’s book immensely. I learned a lot of things about Hayek that I simply didn’t know. A fascinating life. If you read that book, you will enjoy it. You will learn a lot. You will learn a lot that’s valuable, and I agree with almost all that Alan says. I have a little problem with the role of money, as he said I might talk about, but I’m going to skip over that because I don’t have time, but I want to get to something that I think is really substantial, a disagreement I have with Alan.

On page 199, Alan tells us that Jefferson’s statement in the Declaration of Independence that “all men are created equal” is inconsistent with Hayek’s case for inequality, the case for inequality that Hayek makes in The Constitution of Liberty. I think that’s just wrong. I think that’s a misreading of the situation, and I think the best way to see that is to go to page 87 of The Constitution of Liberty. And let me close by just making this quote from Hayek: “From the fact that people are very different, it follows that if we treat them equally, the result must be inequality in their actual position, and that the only way to place them in an equal position would be to treat them differently.” Equality before the law, which was what Jefferson was talking about in the Declaration of Independence, equality before the law and material equality are therefore not only different but they are in conflict with each other, and I agree with Hayek on that, and I cordially disagree with Alan on that. Thank you very much. [Applause.]

Alan Ebenstein

We have some time for some questions, and Carl has the microphone, and if you’d wait. How about this gentleman right over here. And if you’d make it a short question and indicate who it’s addressed to.

Audience Member #1

This question is for both the panelists. Can you hear me all right? I have here in my hand a little write-up from Brand X—that would be the Hoover Institute, and—

Alan Ebenstein

We have lots of friends at the Hoover Institution.

Charles Baird

We do.

Audience Member #2

I was very surprised. I’m a total free marketeer, like most people here, but I was very surprised to read, according to John Cassidy right in The New Yorker, that Hayek supported—the idea was when the market—in general, the market is the most efficient method of providing goods and services. When the market fails, however, the government should step in, and therefore Hayek believed in the guaranteed minimum income, and I’m just curious if that squares with the speakers’ understanding, and then the second question, and I run the risk of being a watermelon guy for this, and that is—and in the same idea, when the market fails, government steps in. Just referring to the remarks of the professor on conservation, what does he think about the commons—what would Hayek think about the commons problem, external cost, the need for government to, say, impose gasoline taxes, that sort of thing? Thank you very much.

Alan Ebenstein

I think that Hayek certainly said throughout his works that in an advanced industrial society, government should provide a social minimum, and that’s why, as I indicated, it’s not so much his practical policy advice that’s often valued by conservative economic and libertarian-oriented writers, but his philosophical thought. Now he would say that he’d like to see less government rather than more, more market provision of welfare services, but nonetheless, he did sanction that role of government.

In regard to the environment as well, these are difficult areas in which it’s hard to enunciate principles in terms of whether it’s air pollution or whatever the situation might be, and I don’t think that Hayek’s contributions in these areas were as significant as his contributions in more philosophical areas.

Charles Baird

Right. Let me follow up on that. As Alan points out in his book, the early Hayek had a larger list of things that he thought that was appropriate for government to do than the older Hayek.

David Theroux

Well, he was originally a socialist.

Charles Baird

Well, even after The Road to Serfdom. Adam Smith—by the way, the Smith Center doesn’t refer to Adam Smith, although I’d be happy with that association, it refers to Owen and Irma Smith from Castro Valley, who were the ones that endowed the center at the university. But Adam Smith himself had a rather extensive list of what he thought would be appropriate government functions, and the early Hayek, I think, would have seemed to agree with practically all of that list.

Well, as technology evolves, the things that are necessary for government to do, especially with regard to the environment, get less and less and less, because the problem with the externality problem, the environment problems, the problems of the commons, to use the questioner’s language, have to do with the ability to define and enforce exchangeable property rights, and technology is evolving now which is greatly shrinking that set of things where it is difficult, i.e., very costly, to enforce exchangeable private property rights. For example, there’s a tagging technology now that you can use to keep track of migrating animals, even in the sea. Of course you can do that on the land very easily.

So Hayek did subscribe to a rather substantial list, a list that’s longer than my list, of legitimate government—I’m not an anarchist, by the way. Murray Rothbard, whom many of you know about, referred to himself as an anarcho-capitalist. He was a great friend of mine. I broke bread with him and his wife Joey many times, and he always very laughingly called me a min-archist. Well, I’m not an anarchist. I’m a min-archist, because I believe there are some legitimate things for government to do, so I didn’t agree with Murray on that. Hayek didn’t, and even Mises didn’t.

Rothbard called himself a Misesian. As a matter of fact, he was—there’s an organization at Auburn University called the Mises Institute, and Rothbard was very closely associated with that before his untimely death. And Murray sometimes came across as saying that whatever is in Mises is okay, and whatever isn’t in Mises is not okay, and as a matter of fact, a couple of times Murray even went to attack Hayek because Hayek wasn’t sufficiently Misesian. So I’m more with Hayek than I am with Rothbard on this issue. There are legitimate things for government to do. For example, enforce the rules of voluntary exchange.

Hayek referred to, as Alan says in his book, the universal rules of just conduct. Well, if you look at what he meant by the universal rules of just conduct, those are just the rules of voluntary exchange. When we talk about the role of government in enforcing—having any role at all in interpersonal interaction, it is merely, according to Hayek, at least the later Hayek, to enforce those rules of voluntary exchange. So Hayek grew, improved, I think, with age on this topic.

David Theroux

One other thing I might mention in reference to the two-part question he had, is that, as Chuck is suggesting, over time Hayek did begin to see the implications of his thinking as you’d apply it to more and more specific things, and where he didn’t, and where there might have been—in other words, his views on certain government programs were in many respects not driven from his views. But many other scholars have now applied his analysis, and one of those areas is the environment. In fact, you might even say that where you have a commons problem, it’s because property rights are not being recognized and enforced and hence you have the free rider effects and externality. How about right here in front? Just wait for the microphone.

Audience Member #3

The Austrian school of economics has sort of competed with the Chicago school of economics for the better part of a half century, and certainly the Chicago school, under the auspices of Milton Friedman, have enjoyed greater success, at least in terms of how they’re received by the general public. Most people have never heard of an Austrian. And it seems to me that one of the biggest problems Austrians face is articulating a policy difference from what the Chicago school does. There are some antitrust issues, and I think that they—there is also a money—a federal reserve question out there, but for some reason, those—certainly the federal reserve has never caught on, and I’m wondering, is there something that Austrians need to do to better express that, and whether or not there are other policy areas that the Austrians need to pursue further?

Charles Baird

Alan has asked me to reply first. I don’t think there are very many differences between the Chicago school and the Austrian school when it comes to policy. The one exception that I know of has to do with money. Hayek and Friedman were both cofounders of the Mont Pelerin Society, and for many, many years, at every meeting of the Mont Pelerin Society, one of the main questions up for debate was who’s right? Mises and Hayek or Friedman—the monetarists. And they have substantial disagreements on that point. They have substantial disagreements on the question of methodology of economics, Friedman being a positivist. He wrote that famous essay—I think it was in 1952— “The Methodology of Positive Economics,” [later published in the book—]

Alan Ebenstein

Essays on Positive Economics.

Charles Baird

Essays on Positive Economics, and Friedman has said, in fact, as Alan quotes in his book, Friedman has said that the—that he likes the work of Hayek much better when it comes to philosophy and social questions than he does in economics. But when it comes to policy, except for the Fed, except for monetary policy, they agree on antitrust. I mean, you take the great book that The Independent Institute did on the Microsoft case [Winners, Losers & Mircosoft: Competition and Antitrust in High Technology] by Stephen Margolis and—

Alan Ebenstein

Stan Leibowitz.

Charles Baird

—and Stan Leibowitz. The arguments that they’re making in there could have been made by Hayek or Friedman. Hayek and Friedman both would have agreed with them, all of them.

Alan Ebenstein

Friedman’s used it a lot.

Charles Baird

Yeah. So I don’t think there’s any policy disagreement except for this quirky thing on money, and to put that into context, as Alan says in his book, Hayek became the Tooke Professor of Economics—or Political Economy, I guess it was—at the London School of Economics in 1931, on the basis of some lectures that he gave as a visitor there, which were published as Prices and Production, wherein he talked about what he called the structure of production, and he talked about what now is known as the Austrian monetary theory of the trade cycle.

Hayek never—as Alan says in the book—Hayek never gave up on that. Hayek always insisted on that, sometimes contrary to what seemed to be obvious empirical contradictions of it, and Friedman never—Friedman always differentiated himself from Hayek on that, always said that was wrong, but Friedman has said that the Federal Reserve should be replaced by a Pentium chip. Right? Because he said—because discretionary monetary policy makes a mess of things. He would agree with Hayek on that. Right? Discretionary policy makes a mess of things, and so that ought to be a rule that increases the money supply at some given level consistent with the level of real economic growth.

Hayek toward the end of his life wrote this book—actually it was a monograph for The Institute of Economic Affairs—called The Denationalization of Money. So he too would like to see the Fed replaced, in Hayek’s case with private money, and with Friedman’s case, a Pentium chip. So there’s not all that much disagreement.

David Theroux

Actually Friedman later endorsed Hayek’s—not specifically the proposal in The Denationalization of Money book, but the idea of non-state monetary systems.

Audience Member #4

My question is for Alan. Concerning the infinite fragmentation of ideas throughout the human race, in the last generation, the electron has come in millions of instances to the possession of individuals, and the communications that are available today, and becoming more and more available, will have a great deal of considerable effect on this fragmentation. Would you care to speculate on what you think will come of this?

Alan Ebenstein

Sure. Well, what do they say? Fools rush in where angels fear to tread, or something like that. So that’s always been my experience.

I think that the ability for information to be communicated increases possibilities for centralization. You saw this in the late 19th century. When the telegraph, and other means of communication like that came into existence, suddenly it was possible to create large corporations, and to those who were first into these new systems of knowledge, or new systems of information communication, were able to take advantage of greater resource manipulation that had not previously happened. And I think that we’re experiencing a period somewhat like that now as a result of the Internet revolution. It’s not that someone like Bill Gates is so much more effective, if he’d come along in 1950s, that he’s be worth $70 billion in those equivalent terms. I think it’s that it’s a unique situation, that when technologies for greater information communication are developed, that that, for a time, is going to, whoever—whatever new opportunities exist, there are going to be leaders in that field who take advantage of those opportunities. That leads to larger units of organization for a time, potentially decades, but then I think that after a period of time, those advantages have a tendency to even out, and there isn’t quite the same degree of hierarchical patterns. That’s relatively inarticulate, but for speculation, I guess that’s as good as I can do.

Charles Baird

Can I comment on that?

David Theroux

Yes. Sure.

Charles Baird

Just a couple of points. Lowering the cost of communication, I think, was very important in bringing down the Iron Curtain. When there was an attempt to have a military coup to reinstall a Stalinist type government in the Soviet Union, it didn’t work. And why didn’t it work is because the information was coming over fax machines to all over the world what was going on.

Secondly, I would say, consider the phenomenon of home schooling. The low cost of information and communication now has made possible this fantastic phenomenon. There’s an article in the May issue of Ideas on Liberty, which is an excellent article. I commend it to you, on a renaissance in education, and the author, who is one of the vice-presidents of, points out that everything that the public school establishment has, in terms of activities for students, orchestras, plays, field trips, everything—everything is available to home schoolers now because of the Internet. It has greatly reduced the costs of people coming together.

As a matter of fact, home schooling, I think, is a great example, a great contemporary example of Hayek’s spontaneous order. I mean, who would have thought five years ago even, that that home schooling would become so significant now, so large as it is. And it’s growing. It’s growing fast, and it’s working. It’s working very well, so just as a little counterbalance, I think that the lowering of information costs is a boon to liberty. It’s not a problem.

David Theroux

One thing also, for those of you who were not at our event last month [with David Friedman] that was on high technology and privacy and encryption, this was a major part of the discussion. That program will be on our website I think within a few days. So if you’re interested in exploring that issue, it’s discussed in more detail. We have time for maybe two more questions. How about back here? You and then Peter.

Audience Member #5

Hayek and the other liberals have taught us great lessons about essentially two results, or two polar opposites, if you will, statist and liberal societies, which we prefer and why. And I think it’s a great thing that we can celebrate that Hayek lived long enough to see the decline of the Evil Empire and I agree that information did a lot on that.

But at the same time, Mancur Olsen taught us another lesson, which is that within a free society, within a mixed economy, there is this accumulation of social, political, economic barnacles on the hull of society, and it seems to be a one-way process. And I guess I’m interested in your reaction to that as an underlying countertrend and whether there’s anything that Hayek and the liberals have to say about how we avoid—how we counter that erosion, not just choosing between statism and liberalism, but how do we combat, how do we react to the accumulation of statist tendencies?

Alan Ebenstein

Right. This goes to some extent to questions of epistemology, which means the theory of knowledge, and I think Hayek thought a lot about this. I’ve seen in some of his unpublished work at the Hoover Institution archives, and it’s to some extent in some of his published articles as well, on the idea that not all knowledge can be articulated, and that there is a difference between verbal rules, and for example, just the practices that people have, and that words like liberalism and statism, to some extent, aren’t, oh, material, tangible absolutes in the same sense that matter is.

So what we’re really talking about is ways of looking at the world in terms of whether it is better to have societies in which decisions are made by everybody – statism – or to have societies in which decision are made by individuals. And I think that it’s something that I agree entirely with Chuck.

I think that the direction that things are moving is that there is more individual freedom and autonomy now, that technology allows that, and it’s something that, regardless of the terminology, I think that the—Hayek used to say that in the ‘60s and ‘70s that if the politicians didn’t blow everything up in 20 years, that he thought things would be okay. By the ‘80s, he started to say, well, if they haven’t blown it up in another 10 years, it’ll be okay, and let’s face it, the Soviet Union has collapsed. The idea that government runs an economy better is dead around the world, and to be sure, it always resurfaces in other modes, environmentalism and local planning controls and so forth, but I think that is the overall direction at this point in time for the forseeable future.

I mean, if you read the literature from the ‘40s and ‘50s, just the periodical literature of the day, it’s astonishing. People will talk about, if people are businessmen—I’m not overexaggerating—if people are businessmen, perhaps they have a psychological disorder because they want to make a profit or something like that, or have a need to domineer and this was the sort of stuff. Now some of that’s still in academia, but the point is that there has been just—

Charles Baird

Especially in academia.

Alan Ebenstein

Especially. [Laughter.] There’s been a revolution, and it’s something that I don’t think the revolution has consolidated, and it’s always got to be fought for, but I think that notwithstanding the issues that government will always be inefficient, the most interesting statistic is that under the current administration in Washington’s budgets, if all came to pass, in another 10 years the federal spending share of GNP would be down to 15.6%, so I mean, the point is, I think that whether that goal is met is another question, but it’s something that I’m optimistic about.

Charles Baird

Just two points on that question. First of all, I firmly believe that there is no legitimate “third way,” that the choice is between socialism or liberalism, classical liberalism, freedom, and there is no third way.

With regard to Mancur Olsen: James Buchanan credits Mancur Olsen as being one of the inspirations for the development of public choice theory, and so he’s a very important person.

Now his notion of barnacles and all of that had to do with the formation of special interest groups, and he talked about how, when there’s a war, a lot of those special interest groups just get smashed up, and so that right after the war, there’s a chance to really make some progress.

Now a lot of people accused him of advocating war because of that. [Laughter.] I don’t think he’s guilty of that, but my view about special interest groups is probably Utopian.

Why did dairy interests give lots of money to Richard Nixon in his reelection campaign? Very simple. If Richard Nixon, or any other president, had nothing to do with dairy prices, had no power over anything in the dairy industry, nobody would have given him a dime. The problem was not Nixon, and the problem was not the people that tried to bribe Nixon. The problem was the fact that in this political economy, Nixon had power, and wherever there’s power, there’s going to be a special interest groups coming together to try to exploit the power.

So the only cure to special interest groups short of war is to reduce the power that the politicians have to sell. [Laughter and applause.]

Audience Member #6

In your book, you talk about how The Road to Serfdom was published to wide acclaim, and yet for at least 40 years after it was published in England at least, collectivism was the order of the day, and when I was doctored in the 1960s, I had never even heard the name Hayek. He wasn’t even in the curriculum. And my question is, did Hayek himself have any explanation for why his ideas took so long to be noticed, in the sense of being incorporated in public policy?

Alan Ebenstein

That’s a really good question, Peter. In 1970, Arthur Seldon visited Hayek in Salzburg, and Hayek was so depressed at that point in time that he thought his career had been a waste, no one had listened to what he had said, that his writings at that point in time, were completely unread, and that he had had no influence whatsoever. So that’s what the circumstance was.

I think that what happened was that—and this would be, to some extent, Hayek’s answer—as a result of inflation and problems perceived of an increasing government role, that his ideas suddenly became relevant in a way that had not been relevant before. So it was more the larger circumstances that led to the relevance of his ideas rather than his ideas themselves sparking the change that he had hoped for. So I think that’s fair.

Audience Member #7

Didn’t Margaret Thatcher espouse his ideas?

Alan Ebenstein

And then in the ‘80s, Margaret Thatcher truly embraced him and would invite him to events and all that sort of thing.

David Theroux

There’s another theory that, actually. Seldon also talked to Hayek about this—and other people have asked Hayek about this. When Keynes wrote his book The General Theory, Hayek had just refuted Keynes’s previous book in a review, and so when The General Theory came up, Hayek assumed it was basically just rehashing the previous work, and he just didn’t even pay attention to it, and didn’t want to be bothered by it.

Of course, there was political pressure for state planning to be used by different groups for their own purposes, but a lot of people assumed that if Hayek didn’t think it was important, that well, maybe it was okay. Maybe there was something wrong with it. And so there’s a theory that if Hayek looked at The General Theory and refuted it, because of his very powerful position at the London School of Economics, it might have stopped Keynes in his tracks and changed the course of economic thought.

One other thing I might mention is that—and Alan mentions this in his book—the Friedmans talk about a so-called Hayek tide. It’s sometimes called the Hayek wave also, and the Hayek tide was the idea that at the point of the publication of The Road to Serfdom, which again was dedicated to the socialists of all parties, it was sort of a nodal point in intellectual history, and it created this new wave for people to reconsider fundamental views, and the wave has been washing on shore after shore, decade after decade, in different circumstances, creating other waves in the same way. So there are these paradigms that exist that will continue unchallenged in many respects unless circumstances change, as Alan is saying, and also there’s an intellectual basis for an alternative.

So I think we’re all over time, but I want to thank everyone for joining with us. [Applause.] I want to particularly thank Alan for his excellent work. It took many years for him to produce his book [Friedrich Hayek: A Biography], and it’s serving as a great catalyst for other people to become interested in Hayek. I want to thank Chuck for not just his great talk but for Chuck’s work for years and years in a similar vein, and all that the Smith Center is doing, and thank you for joining with us.

There are copies of the book, for those of you who don’t have copies. Alan would be delighted to autograph copies up until the point he has to run to the airport, so thank you for coming. [Applause.]


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