Dr. Peter Boettke joins us to discuss the enduring lessons of Nobel Prize-winning economist F.A. Hayek. Sharing insights from his recent book, “F. A. Hayek: Economics, Political Economy and Social Philosophy,” Dr. Boettke contemplates how Hayek would approach some of the modern issues of today such as the popularity of democratic socialism and the COVID-19 pandemic. As a college professor of economics, including many years as a TFAS professor in our Prague program, Dr. Boettke shares how he reaches young people with Hayek’s lessons and helps them to understand that these principles hold true today.
Dr. Boettke is a University Professor of Economics and Philosophy at George Mason University, as well as the Director of the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and the BB&T Professor for the Study of Capitalism at the Mercatus Center.
This episode was released this week on the TFAS “Liberty + Leadership” Podcast. To never miss an episode, subscribe on Apple, Spotify, Stitcher, Google or your favorite podcasting app.
This episode was recorded on Friday, May 22. The transcript below is lightly edited for clarity.
Your academic work is associated with the Austrian School of Economics and perhaps the most prominent of the Austrian school economists is F.A. Hayek, who was the winner of the Nobel Prize in Economics in 1974 and a Presidential Medal of Freedom winner in 1991. He was an intellectual influence on a lot of great leaders like Margaret Thatcher, Ronald Reagan, Estonian Prime Minister Mart Laar and many other world leaders. What would you say are a few of the key intellectual breakthroughs credited to Hayek that make him so influential?
Dr. Boettke: That’s a great question. Hayek basically lived through the 20th century. In many ways, the Hayaken era is the entire scope of the 20th century, which means that you have the end of an old civilization, the breakout of World War I, which he participated in as a soldier. Then you have the Great Depression which he analyzed as an economist. Then you have World War II when he was too old to serve. He tried to volunteer, to be involved and he actually wrote “The Road to Serfdom” while being an air raid marshal that stood on top of a building to see if people were coming in to bomb London. And then you had the Cold War and he died in the 1990s after communism had collapsed.
During that whole century, Hayek’s scientific contributions are being played out against this historical and policy context of the rise of big government and then the fall of big government, or in the PBS series they call it “The Commanding Heights” – the battle of ideas, kind of idea. And in the context of doing that, Hayek made several fundamental contributions to the philosophy of science, as well as the technical apparatus and economic science, and then, the broader discipline of political economy. What most people would focus on are three issues of his, one of them being more, a technical issue in economics. The second one being a slightly broader issue about economic perspective and then a third one being a broader social philosophy. So I’ll summarize them very quickly as the first one is focusing on the role of prices in a market economy and focusing on prices as guides to exchange and production behavior, rather than the idea that prices are summaries of past costs.
By Hayek focusing on this guiding role that prices are signals, they’re an incentive wrapped in a signal that is going to end up by steering the production and adaptations and exchange behavior of individuals. That’s how we realize mutual gains from trade and generate wealth. And when we distort those signals, that’s going to cause all kinds of negative consequences in the system. And so part of the rise of big government that Hayek was challenging was the rise of taking over control of this free adjustment of the price system. The second point is that competition is not a model on a blackboard, but that in the real world competition is rivalrous behavior. And it’s through this rivalrous behavior that workers compete with other workers and bosses compete with other bosses, different industries compete with different industries that you end up by having competition that becomes a discovery process, which we learn how to best satisfy the wants and desires of others in our society.
And so competition is not a state of affairs, but it’s an ongoing process in which we’re constantly forced to adapt and adjust our behavior to coordinate our affairs with others. And again, if we stop that competitive process short, we end up by not being able to make the necessary adaptations and adjustments. And so the two of those, the price system and the competitive order, are critical to Hayek’s contributions in economics. And then from those contributions, he provided a new foundation for an older idea, which goes all the way back to Adam Smith, which is the notion of the invisible hand or spontaneous order. And what Hayek tried to do was to look not only at the spontaneous activities of individuals within a given set of rules of social order, that is the political, legal, and social and cultural norms that we exist within, but also how that very infrastructure of law, politics and society evolve themselves. And in that sense, his program pushes forward this agenda of studying how it is that rules evolve over time, rather than that they’re orchestrated by a central director.
I know you talk about in your book that there are some misconceptions also about Hayek. What are some of the most common misconceptions about him and his thought?
Dr. Boettke: I’ll be shorter now in this one. So I’ll just pick three. The first one is that Hayek’s ideas are antisocial that he only focuses on the individual and not on the society. The second one is that his thought is anti-democratic and he cares less about democratic values and whatnot than other social scientists of his time. And that he ultimately is a conservative thinker and Hayek is explicitly critical of all three of those things. His whole thing about society is he’s trying to figure out the best way to understand society. It’s not about denying society at all. And his whole theory in spontaneous order is really one, which says that the whole is greater than the sum of the parts. So he actually is a big believer in the power of the social order and the society. He just thinks that by studying the decision making of individuals and the institutions that change their decision matrix is going to end up by helping us understand society better.
Another thing about democracy that you have to understand is that he’s a deeply committed person to the proposition, that we are one another’s dignified equals that we’re trying to find a political structure that exhibits neither discrimination nor domination over any other citizen within it. That’s what the whole point of “The Constitution of Liberty” is for and everything like that. In fact, he defines liberalism as the absence of privileges. That’s why he contrasts law and legislation. Law is the absence of privilege. Legislation is oftentimes the tool for granting privileges to a few at the expense of others. But again, what Hayek is willing to explore is the fragilities of certain conceptions of democracy to find more robust versions of a democratic or a liberal democratic order to his criticisms of democracy as such are not against the democratic ideal, they’re against instead manifestations of democracy, which are very fragile as opposed to more robust.
And so that’s why he insists on the priority of liberalism, which is this doctrine of non-discrimination and non-dominion as part of a parcel of what it means to have a democratic self-governing society. And the final thing is the charge that he’s a conservative. And as you mentioned early on, if you think about Ronald Reagan or Margaret Thatcher or Mart Laar, a lot of times they get associated with being conservative politicians that were very influenced by Hayek, but Hayek himself was very adamant that he wasn’t a conservative. He argues that the intellectual, the social scientists should have the right to question all of society’s values, but they just can’t question them all at once. So when you read his essay, “Why I’m Not a Conservative,” it should always be paired with another essay of his called “The Errors of Constructivism.” It’s in between the two of those errors, the error of conservatism, which is blind faith in the institutions and the error of constructivism, which is that I can uproot all the institutions in society at once and Hayek finds his epistemological position between those two. And so I think that for your listeners and the TFAS audience, this is actually a very interesting position that Hayek is unique in the social sciences in line between both conservatism and constructivism. And I’ll come back to this as we end, but he has a particular position there, which was built on epistemic humility and what the role of the economist as a student of civilization and never taking the position as a savior of society.
I’m really curious to hear what you think that Hayak would say about the popularity of democratic socialism in American today, and this idea that it’s different or an improved kind of socialism that can spread wealth without some of the other totalitarian issues that have been created throughout history.
Dr. Boettke: So I think that there’s a lot of misunderstanding about history and rhetoric and everything that goes into that, which we could talk about for not 20 minutes, but for a year or more. In fact, I began my career working on these issues and still am doing that. And that’s 30 years in. I think the first thing to realize is that this rise of popularity of democratic socialism must actually be there for a reason, right? So we have to take seriously what the disgruntlement is with the existing social order. My own view is that we have three fundamental problems in American society that we’re not having serious enough conversation about – this is independent of the current [COVID] situation – and that is that we have not taken care of the end game for the monetary policies that were followed, following the extraordinary measures taken in 2008.
In combination with that, we haven’t seriously talked about the issue having to do with the fiscal gap. That is the promises that the government has made to citizens and the ability of the government to be able to live up to those promises. And the third one is structural inequality that has been caused simultaneously by gumming up our labor markets with a lot of different regulations and whatnot that have made it difficult for people to be as mobile as they once were, and also giving more and more special privileges to various people, which means that we’ve created rents, which in technical economics, it’s called rent seeking. We’ve become a much more rent seeking economy than we were years ago. And as a result of that, we end up by having certain groups get ossified with privileges and other people on the outs not being able to get there.
And so that creates a kind of a resentment, gambling with other people’s money, let’s say, in the investment banks or whatever. And this has given rise to a criticism of the system, which could be called the system of political capitalism, which has led to this view of democratic socialism. The issue for the economist is not whether or not political capitalism is good or bad, or democratic socialism is good or bad in some normative judgment – that’s not at all the economics argument. The economic argument is whether or not the means of a democratic socialist will be able to achieve the ends of a democratic socialist, and Hayek’s argument in “The Road to Serfdom” was that the socialists of his generation were choosing means, which would not be able to achieve the ends that they sought, but would instead result in consequences, which they themselves would view as horrific.
That’s why “The Road to Serfdom” is a tragic book. And I think actually that a similar thing could be argued today with regard to democratic socialists. If you listen to someone like Bernie Sanders or AOC, or any of the other popular presenters of the democratic socialist ideal, they have policies that are their means that they’re choosing to pursue, and they have a vision of an end that they sell to people about what’s going on. And what the cool-headed analysis of economics must do is analyze the efficacy of those means that they’re advocating with respect to those ends that they’re seeking. And I think you would find that they would be very wanting. On another issue, I think it’s important to always remember that, for example, people in Sweden are not doing democratic socialism according to those means nor are the Nordic countries at all, doing those kinds of things.
Bernie Sanders and AOC are on record for holding very strong positions with respect to the way they’re going to constrain markets, the way they’re going to constrain private property rights and do things like that. That’s not what the Nordic countries are doing. So there’s a total disjoint between the rhetoric of saying “Oh, we just want to be like the Nordic countries” and then the policies that they’re advocating. So I think your listeners should look at two books by Geoffrey Hodgson, he taught at Cambridge for many years and is the editor of the Journal of Institutional Economics. The first one is called “Wrong Turnings: How the Left Got Lost.” It’s published by The University of Chicago Press. And the other one is called “Is Socialism Feasible” published by Edward Elgar Publishing. Both of them walked through the various different positions that people like Bernie Sanders or Jeremy Corbin over in the UK have in fact followed and how it is that those means that they’re adopting are going to lead to tragic ends. And so I think that’s what Hayek would wrestle with. He would admit that there are serious problems that need to be addressed. So therefore it’s not like he’s dismissing the concerns, but he just thinks it’s tragic to adopt certain means, which will lead to consequences, which even those who are advocating for them would view as tragic. That’s why “The Road to Serfdom” is a tragedy. It’s not bad people got in charge and bad people did bad things and therefore bad consequences happened. It’s that we have high lofty ideals. Those lofty ideals are then going to try to be pursued by very concrete policies. Those concrete policies do not service those lofty ideals. Therefore the dream of the lofty ideals is lost.
We also want to get your perspective today on what Hayek would think about our current situation in the middle of the COVID-19 pandemic.
Dr. Boettke: Keep in mind what I said before about Hayek’s life. This is a man who was born in Vienna at the turn of the century, grew up as a young child in the glory days. And then the decline of the Habsburg Empire, you have World War I, then you have the twenties and the depression, and then you have World War II. Then you have a Cold War. So this is a man who saw a lot.
In fact, in my book, I try to draw on a phraseology from an Austrian mathematician, Karl Sigmund. And he wrote a book called “Exact Thinking in Demented Times.” He was trying to explain some philosophical movements in the 1920s and 1930s. And I argue that Hayek was doing the same thing. He just had a different answer than the people that Sigmund focuses on. So what you have here is a situation where Hayek himself was used to these seismic social events. The collapse of the old order, the war, the collapse of the economic order, war again. So he was no stranger to emergency situations, but yet in “Law, Legislation and Liberty,” he has two passages, which are important for today. One of them he uses emergency and scare quotes, and he warns about giving over so much excessive power to central authorities in “the emergency” because once you give it to them, they very rarely give it back.
And this is Hayek’s sort of anticipating something that the economist Bob Higgs developed in his book called “Crisis in Leviathan,” where what he does is explain how various different crises served as a catalyst for different growths of government, which we never reverse back after the crisis was over. Hayak warns about that. And I think we should be very cognizant of that. At the same time, Hayek does recognize that there are moments of emergency without any scare quotes. And in those moments, we need collective action to be able to address them. And so finding that balance between engaging in the correct collective action, let’s say to take on a public health crisis at the same time as finding a way to prevent from the increasing concentrations of power in the hands of a few, that they’ll never give up, that’s the constitutional struggle in these kinds of situations.
And so again, Hayek’s timeless principles about the necessity of rules versus discretion, and also decentralized decision making. So part of the reason for handling emergencies in not a concentration of collective action at the federal level, but instead trying to make it be more localized and at the state level or even municipality level is to actually push the decision nodes down to the local information back to that original idea of mobilizing knowledge, but also increasing the competition of experimentation. So that one of the things that’s interesting in our current situation is how much policy variation in the experiments can we learn from. So we have a little bit in the variation with Sweden versus everyone else. And we have a little bit of variation in some of our states, like Florida, who opened up a little earlier than others and stuff. And we could look at the variation of that.
How we learn is through the variation in the experiments so that we can see what policies might actually be the ones that balance the costs and benefits that are going on. I do think that a crucial Hayekan insight into the current situation is that we adopted very early on, the decision makers, a one size fits all program. They did not have the kind of epistemic humility that’s necessary to be able to have Kant-tested expert opinions, being interacted with each other. And I think that’s been a real problem. We’re going to learn a lot about that in the next 20 years of our life, as we reflect back on our episode with COVID.
You’re a professor of economics and you have taught and lectured for TFAS academic programs for our college students – so you’re very well aware of who TFAS is and that our mission is to teach free-market principles and limited government to the next generation of leaders. As an educator, how do you make young people connect with these ideas, with Hayek’s ideas, and help them to understand that these principles do apply to situations that are going on today?
Dr. Boettke: First of all, I loved my time teaching with TFAS over in the Czech Republic. I did that for many years and I loved doing it, and it was a great experience for me. And I love the students and many of those students I’ve stayed in contact with over the years. I think that as an educator, we don’t teach people you have to read Hayek because he’s Hayek or something. What you do is you try to tap into the natural curiosity of your students to try to understand the world around them. So you’re not teaching economics or the principle of a market economy off of a blackboard, but by asking them to gaze out the window and look at the reality of the world and what they find puzzling about that world, and then trying to explain to them first an understanding of what is going on.
And so that is really a question of learning the principles of property, contract and consent. David Hume raised this centuries ago that in order for us to understand how it is that human societies are able to cooperate and engage in mutual beneficial interaction with one another, we adopted policies of property, contract and consent. The security of property, the keeping of promises and the transference of that property by consent. And when those norms are embodied in the law, individuals are able to pursue their own self-interest and coordinate their activities with others and generate a desirable outcome. And teaching that principle, that number one principle about how it is that individuals striving to do the best that they can come into contact with other individuals, striving to do the best that they can.
And under a certain institutional environment that will generate an outcome that’s more desirable for the collective than any one of those individuals had in mind. That is the principle of the invisible hand. And that’s the core idea. And the reason why we talk about Hayek, just like we talk about Adam Smith, is that Hayek is in the 20th century. The person most identified with articulating that program that comes from Adam Smith and David Hume. And then in the 19th century with people like Bentham and Basitat and John Stuart Mill, and J.B. Say, and then in the 20th century leading up to Hayek people like Nietzsche and Frank Knight, and then after Hayek, people like James Buchanan. And so it’s that mainline of economics that I think TFAS should be communicating as much as they can to get these principles across to students about property, contract and consent, which gives us a system of property prices and profit loss, which gives us our incentives, our information and innovation that generates the wealth of nations.
And the other thing that I would mention is that the kind of economics that Adam Smith taught, all the way up to F.A. Hayek, really does focus on epistemic humility. The economist is not in any privileged position to be a philosopher king. The economist is a student of society, not a savior of society. And, economics is a tool of social understanding, not a tool of social control. And a lot of economics is taught as a tool of social control and economists are supposed to be the saviors of society, you come in and fix the machine when the machine has gone wrong. And so, I think contrasting those positions, the scientist versus the social engineer kind of position is a valuable thing to think about.
Do you have any final thoughts for our listeners today?
Dr. Boettke: Yeah, just be safe, be smart and make the most of your situation for learning all you can this summer in the TFAS programs, you have great teachers and great materials that are there. And so I hope you just take advantage of it, even in these unusual times, just keep reading, keep asking questions.