## 1. Price Signals and Spontaneous Order


### 1.1 Order Can Be Undesigned



Over hundreds of millions of years, order emerged in the natural
world. How? It is only human to wonder. "Design arguments"
come to mind, but like most philosophers, Hayek considers such
arguments fallacious as arguments that we need to posit a designer to
explain the emergence of order in nature. (See the entry on
 teleological arguments for God's existence.)
 Hayek, however, was frustrated to find the same fallacy in arguments
that we need to posit a designer to explain the emergence of order in
society (Hayek 1960, 59).



Just as no one had to invent natural selection, no one had to invent
the process by which natural languages evolve. A language is a
massively path-dependent process of unending mutual adjustment.
Language evolves spontaneously. It would make no sense to call any
language optimally efficient, but it does make sense to see languages
as highly refined and effective adaptations to the evolving
communication needs of particular populations (Hayek 1945, 528).



> 
> 
> It would be no exaggeration to say that social theory begins
> with--and has an object only because of--the discovery that
> there exist orderly structures which are the product of the action of
> many men but are not the result of human design. In some fields this
> is now universally accepted. Although there was a time when men
> believed that even language and morals had been invented by some
> genius of the past, everybody recognizes now that they are the outcome
> of a process of evolution whose results nobody foresaw or designed
> (Hayek 1973, 37).
> 
> 
> 


### 1.2 Order Can Be Unpredictable



Natural selection operates on mutations, making the path of natural
selection unpredictable, regardless of how well we understand the
underlying principles. To Hayek, social and cultural evolution are
much the same: driven by innovation, fashion, and various shocks that
"mutate" people's plans in unpredictable ways with
unpredictable results. The system may be more or less logical. Most
things seem in retrospect to have happened for a reason. Yet, however
logical the system may be, its logic does not render the system
deterministic. We can make predictions in the broadest sense, such as
when we say that increasing the money supply causes prices to rise,
other things equal, but we have no basis for predicting the fine
details. The system is technically chaotic, to such a degree that even
something as straightforward as next week's stock prices will
always remain a matter of guesswork even for experts. (See the entry
on
 chaos.)


### 1.3 Order Can Embody Essentially Decentralized Information



To Hayek, prices are like languages. How do we know what it will take
to get our product to whomever wants or needs it most? Maybe we take
bids. As we (and our rivals) take bids for *x*, *x*
comes to have a price. As with language, prices enable people to form
mutual expectations. Free-floating prices help people coordinate in
intricate and mutually considerate ways as they individually decide
what to produce or consume. To think that an authority needs to decide
what the price of rice ought to be is like thinking that an authority
needs to decide what sound people should make when they want to refer
to rice.



It is a mundane yet intriguing fact that price signals induce people
to respond to information they do not possess: such as the changing
cost of drilling, or the discovery of a cheap substitute, or that
political unrest has made a key input harder to acquire. Having no
inkling of those variables, buyers nevertheless respond to them in a
rational way, because they know the one thing they need to know:
namely, the price (Hayek 1978a, 4).



> 
> 
> Assume that somewhere in the world a new opportunity for the use of
> some raw material, say, tin, has arisen, or that one of the sources of
> supply of tin has been eliminated. It does not matter for our
> purpose--and it is very significant that it does not
> matter--which of these two causes has made tin more scarce. All
> that the users of tin need to know is that some of the tin they used
> to consume is now more profitably employed elsewhere and that, in
> consequence, they must economize tin (Hayek 1945, 526).
> 
> 
> 


### 1.4 Communities Tend To Be Spontaneous Orders



What emerges from the haggling is not only a deal, but something
larger: a community. There was no central decision about who should
produce tin, or whether anyone should; no central decision about who
should consume tin, or whether anyone should; no central decision
about what should be given in return for tin. All that happened is
that some people guessed that if they were to produce tin and bring it
to market, it would be worth something to customers--enough to
make the venture worthwhile. When some of these guesses prove correct
and trades are consummated, a market in tin emerges and becomes part
of what brings people together as partners in mutually beneficial
ventures.



Price signals thus *economize* on information. In the process,
they induce patterns of cooperation that involve multitudes.
Cooperation evolves among people who need not share a language, need
not be aware of each other's existence, and need not be aware of
their mutual dependence. They are only vaguely aware of the thousands
of jobs that need doing so as to supply inputs that enable them to
have a finished product to sell. Particular agents seldom if ever have
more than a glimpse of the big picture, yet they manage to come
together to form a community, and almost all are vastly better off as
a result.


## 2. Progress



Technological progress extends the frontiers of the possible. To
Hayek, it is the freedom of the few to do something novel that matters
most, not the freedom of the many to do something familiar.
Accordingly, the freedom I exercise myself often is not the freedom
that has the most bearing on my future (Hayek 1960, 32). Consider that
early adopters finance research that brings down production costs and
thus finances a dispersion of products and services at falling prices
that eventually bring late adopters like me to the market. I may never
trade with early adopters, yet even so I depend on them, for they help
to finance the invention and ongoing re-invention of products whose
marginal cost eventually falls to a point where I can afford them.



Often, technological progress consists of innovations that lower
transaction cost: steam boat, railroad, air travel, telegraph,
telephone, internet, bar code reader, "apps" that make
possible such businesses as Uber and AirBnB, along with innovative
organizational structures and business models such as Federal Express
or container ships (which, after a ten-year legal battle with trade
unions, reduced from days to minutes the time that a truck's
contents would spend at the dockyard before being transferred to a
ship). In many cases, the cost of transacting concerns the cost of
information. As the frontier of knowledge expands, the slice that a
given individual can grasp inevitably becomes a smaller fraction of
the whole. Prices become an increasingly indispensable window to a
world of tacit knowledge.



In summary, technological innovation shocks economies. Formerly
profitable investments become relics of a bygone age and must be
liquidated. Workers get laid off until they find some other way to
produce goods wanted by today's customers. Transitions are
tough, miscalculations abound, but the upshot is that we grope toward
heights made possible by a given innovation. Innovative ways of
lowering transaction cost spread throughout a community, and failures
(including once-useful but now obsolete innovations) are discarded.
More precisely, failures are discarded if and when decision makers are
innovators on the ground, learning to avoid losing their own money on
ideas that fail to bear fruit in a given time and place.



Hayek denies that resources will ever be used at theoretical peak
efficiency (1945, 527). Humans being what they are, waste is
ubiquitous. Mistakes are ubiquitous. The "marvel" of
markets is that people make mistakes, get burnt, learn fast, and make
corrections. By contrast, if decision makers are bureaucrats in large
organizations, their focus is not on avoiding mistakes but on avoiding
budget cuts. If bureaucrats acknowledge that their plan is failing,
the consequences is not that they retrench and divert their own
resources to better purposes but that their supervisors cut their
budgets. Note: what cuts their budget is not the mistake so much as
someone learning from the mistake. Bureaucratic structure makes new
information a threat that needs to be suppressed, or smothered in
propaganda (1944, 126ff, 153ff).



Bureaucrats and their expert advisors experience mistakes not as
events from which they need to learn but rather as events that they
need to cover up. Their mistakes are with other people's money,
so bureaucrats learn to say with a straight face, when confronted,
that their budget was not large enough, or that things would have been
worse without their
 policies.[1]
 They may even believe what they are saying, but they do not know and
have every incentive to avoid learning.


## 3. Planned Orders Are Inferior



If we understand the principles that drive the logic of the system, we
may be able to predict that a population of insects will evolve
resistance to a pesticide. We may be able to predict that a society
that declares war on drugs will lose. Beyond the question of what we
can predict, then, Hayek has a further and more precise target:
however much we can predict, there is a drastic limit to what we can
simply
 *decide*.[2]
 No one can decide that people won't respond in predictable ways
to perverse incentives unintentionally created by a central plan, in
the same way that no one can decide that insects will not become
resistant to an insecticide.



This point, as Adam Smith observed, is not obvious. There is a class
of technocrats who will not appreciate the difficulty. As Smith
famously observed, and as Hayek quotes approvingly, the "man of
system" 



> 
> 
> seems to imagine that he can arrange the different members of a great
> society with as much ease as the hand arranges the different pieces
> upon a chess-board. He does not consider that the pieces upon the
> chess-board have no other principle of motion besides that which the
> hand impresses upon them; but that, in the great chess-board of human
> society, every single piece has a principle of motion of its own,
> altogether different from that which the legislature might choose to
> impress upon it. If those two principles coincide and act in the same
> direction, the game of human society will go on easily and
> harmoniously, and is very likely to be happy and successful. If they
> are opposite or different, the game will go on miserably, and the
> society must be at all times in the highest degree of disorder (Smith
> 1790, 234).
> 
> 
> 



The system has a logic. Planners cannot change that logic. Their main
decision is whether to work with that logic or against it (which Smith
regards as a choice between harmony and misery). Smith holds that
planners who disregard economic logic are deciding in effect to
sacrifice their "pawns," something that a person of true
benevolence would not do.



When Hayek explains the obstacle to effective central planning, his
claim is not merely the Smithian point that information is widely
dispersed and therefore hard to acquire. Rather, it is impossible to
acquire (Hayek 1973, 51). When prices are set periodically by a
central planner, rather than instantaneously by consumers and
producers who are the first and typically the only people to have that
information in reliable and timely form, prices inevitably carry less
reliable, less timely information. As Hayek notes,



> 
> 
> If we possess all the relevant information, if we can start out from a
> given system of preferences, and if we command complete knowledge of
> available means, the problem which remains is purely one of logic.
> That is, the answer to the question of what is the best use of our
> available means is implicit in our assumptions. This, however, is
> emphatically not the economic problem which society faces. And the
> economic calculus which we have developed to solve this logical
> problem, though an important step toward the solution of the economic
> problem of society, does not yet provide an answer to it. The reason
> for this is that the "data" from which the economic
> calculus starts are never for the whole society "given" to
> a single mind which could work out the implications and can never be
> so given (Hayek 1945, 519).
> 
> 
> 



Soviet central planners made decisions by checking prices on
international markets, but suppose there were no information about
supply and demand to be had anywhere. Suppose you are a planner, but
all you know is that demands are coming in for wire and for jewelry.
How do you decide whether to direct factories to make wire out of
copper or platinum, or whether smiths should make jewelry out of gold
or silver? How do you decide who should get silver jewelry and who
should get gold? How do you decide whether anyone at all should get
jewelry, as opposed to reserving all such metals for use as wire?



When consumers are not paying for what they receive, their demand is
effectively infinite. Inevitably, a central planner's task
becomes one of cost containment. Worse yet, a planner with no measure
of cost has only a limited basis for deciding what to count as
containing cost. If a given ton of steel can make one car or ten
refrigerators, which way of using steel is economical? How does a
planner decide whether to invest in upgrading water supplies or
nuclear reactors? If all you know as a producer is that people are
asking for infinitely more than you can give, then eventually you turn
a deaf ear, deliver your quota, and pay no attention to whether
demands from below (from customers) are being met. The only demands
that have consequences are demands from above (that is, those which
come to you through your supervisors).



Suppose that prices are set by planners. Hayek says with a thought
more characteristic of neoclassical economists: "Only prices
determined on the free market will bring it about that demand equals
supply" (Hayek 1960, 63). Price controls--floors and
ceilings--make buyers and sellers less able to respond to the
signals they would send each other if they could raise their offer or
lower their asking price. If price cannot rise, then buyers cannot
signal producers that demand has increased and that producers would
sell more if they were to increase supply. And if producers do not
increase supply, rising demand results in shortages rather than
economic growth. (See especially Zwolinski 2008 for further
 elaboration.)[3]



A central planner could have the world's most powerful computer,
beyond anything imagined when Hayek published "Use of
Knowledge" in 1945. No computer, however, could solve the
problem that Hayek was trying to articulate. The problem is not lack
of processing power so much as a lack of access to the information in
the first place. That much seems clear enough, but the problem has a
deeper level. Hayek may not have said this in so many words, yet it
seems the most charitable way of reconstructing his more fundamental
point. That is, the problem is not merely lack of *access* to
information; rather the information does not exist. There is no truth
about what prices should be, accessible or otherwise, except to the
extent that prices represent what customers are paying for a given
service. This is the precise way in which prices are of service to a
community (1944, 51-52).



For example, suppose that a manufacturer figures out how to make an
"epipen" that can save the lives of consumers otherwise at
risk of fatal allergic reaction to bee stings. Suppose the
manufacturer can produce a limited supply of epipens for a little less
than a hundred dollars each, and proceeds to offer them for sale for a
hundred dollars. Suppose that the manufacturer finds that buyers line
up by the thousands wanting to buy the pens, and suppose that there
emerges a group of "scalpers" willing to stand in line for
weeks, who buy all the pens for a hundred dollars each, then resell
the pens for two hundred dollars, then three hundred, then four, and
demand remains strong. Hayek would predict that if we let the price
signals be the marvels that they are, then other producers will jump
in and begin to manufacture pens for one or two hundred dollars each.
Eventually the demand is met, and the scalpers go away. Meanwhile, new
producers drawn by the spike in profitability invent a new process
that enables them to produce the pens for ninety dollars, then eighty,
and again the price will fall, as competition leads the price signal
to track the falling cost of production. Of course, if we issue a
patent or a licensing scheme or some other way of preventing rival
producers from entering the market, then this will not occur. By the
same token, if we impose a price ceiling of a hundred dollars, then no
signal is sent to prospective rivals, unless scalpers send the signal
to rivals willing to produce for the black market. Or if there is some
other reason why it is impossible to increase the supply, then prices
may drift up toward the limits of a customer's willingness to
pay. Barring this, there are many ways for kings, legislators, or
other planners to interfere, but price signals, if left alone, are an
inimitably rapid and incomprehensibly vast generator of information:
supply and demand tend to equilibrate, and to converge on a price in
the neighborhood of the cost of production. To a uniquely reliable
degree, a product will tend to end up in a consumer's hands just
in case that particular consumer wants the product enough to pay what
it cost to produce it. 



Although computers cannot solve the problem, Hayek thought radically
dispersed decision making by buyers and sellers can and does solve the
problem, so far as it can be solved. Sellers who charge too much end
up without customers; they learn to be more efficient or else find
some other line of work.
 [4]
 Buyers who want *x* but consider it overpriced stay home for a
while, waiting for the price to fall, but when they see *x*
flying off the shelves, some of them learn something about themselves:
that they would rather have the product at that price than not have it
at all. To Hayek, only a price mechanism can process changing
information almost instantaneously. Ironically, the *most*
efficient thing a central planner could possibly do would be to set a
price right where it would have been without the planner's
intervention.


### 3.1 Trucking, Bartering, Community, Esteem



Insofar as society is a cooperative venture for mutual advantage,
learning to survive--not just physically but as full members of a
community--will involve learning to cooperate. Learning to
cooperate involves learning to become a trading partner. In other
words, cooperation begins with having something to offer: a way of
making people better off.



Clearly in Smith, who inspired Hayek, but also in Hayek himself, one
infers that the driving motivation is not greed or even well-being so
much as a propensity to truck and barter, where this deal-making is
not only a means to an end but somehow also something we do for its
own sake, because making deals is what our kind of social animal was
born to do. Neither, Hayek thought, is the objective for buyers and
sellers to coordinate on a price that a central planner *might*
stumble on, but to coordinate, period. Mutually satisfying
coordination, the ongoing equilibration of supply and demand,
constantly evolving in response to changing conditions, is itself the
achievement. There is no need for that coordination to be tracking
anything beyond itself. To Hayek, the value that we hope to see
realized in a marketplace is not so much that the correct volume of
goods gets exchanged at the correct price. Rather, the genesis and
point of the division of labor is not only a prospect of realizing
gains from trade but trade per se. The valued result is buyers and
sellers responding to each other, becoming more attuned to what people
around them want, and helping to create a community in which their
role in an important one.



Such sensitivity is good, but there is little that central planners
can do to encourage it. Central planners replace what could be a
complex, decentralized network of interdependence and mutual
responsibility with something more like a society of spokes tethered
to a central distributor at the hub but otherwise dangling. It is no
substitute for real community.


### 3.2 Law As An Ecological Niche



In nature, for biological adaptation to culminate in better-adapted
populations over time, the niche to which a population is adapting
must be relatively stable. Likewise, under a rule of law, the aim of
government is not to win but to provide a stable ecological niche that
enables the game's true players to evolve strategies apt for
success within that niche. An elaborate crystal structure cannot form
unless the medium in which crystals form is left undisturbed.
Hayek's ideal is a legal "medium" of society,
*liberal* enough to permit creativity, *stable* enough
to reward creativity, and *constraining* enough (in the right
ways) to steer creativity away from zero-sum and negative-sum games
and toward positive-sum games: that is, wealth creation, not wealth
capture.



Here, then, in a few sentences, is one way of understanding
Hayek's point. Not everything that happens in an evolving
community is foreseen or intended. Actions have more than one
consequence, and more than the intended consequence. This is
especially so when there is more than one decision maker. No one
follows a planner's plan simply because the planner intends that
they do so. People adjust to the planner's plan in service of
their own plans rather than those of the planner, and the result is
too chaotic to be safely predictable. Further, the rule of law itself
is an evolving product of ongoing decision making, so it likewise
takes a shape not intended by any legislator. Does this mean that
every order is tautologically a spontaneous order? The answer: it is a
universally true empirical generalization, not a tautology, that every
social organization, even a dictatorship, is *partly* an
ongoing product of ordering processes that are to some degree
spontaneous. However, while the degree to which outcomes are
unintended is a continuum, there remains a point in categorizing
communities as centrally planned versus spontaneous. A central plan is
designed to yield an end-state. The plan aims to bring about
particular outcomes--what roles people will play, what they will
achieve in those roles, and what they will win by so achieving. By
contrast, in what we should call spontaneous order, government
provides a stable and known framework of rules, aiming not to realize
a particular outcome so much as to realize a particular process (Hayek
1944, 113). Although this ideal can never be fully achieved in
practice, a government under rule of law acts as referee and provider
of the rule book (Hayek 1960, 114) and operates as much as possible by
an ideal of "letting the players play."



Is letting the players play good? Necessarily good? Adam Smith might
have said no, as might Hayek. A praiseworthy rule of law--a
praiseworthy market *process*-- facilitates mutually
beneficial trade by internalizing externalities, by minimizing
transaction cost (especially when it comes to acquiring information),
by minimizing opportunities to acquire people's goods without
their consent (thereby encouraging people to trade on
agreeable--thus typically beneficial--terms), and by being
extremely cautious about trying to do more than that. When a
government succeeds in doing that much, and further succeeds in
restraining itself from trying to do more, progress is the likely
result, which is not to say progress is guaranteed. 



Hayek had no particular complaint about providing public education or
the minimal elements of a welfare state, but not because such
institutions are essential. Hayek would simply have said that such
institutions need not devolve into central planning and thus need not
be antithetical to a free society. Issuing vouchers, for example, to
subsidize the purchase of epipens or education would to some extent
distort markets in the subsidized products (having an inflationary
impact on prices for those products) but it would not distort to the
extent that price controls would.


## 4. Justice as Impartiality, Politics As Entrepreneurship Without Restraint



Hayek was a consequentialist of sorts, as was Adam Smith, and yet
Hayek's defense of economic freedom, like Smith's, hints
at a contractarian or deontological moral sensibility that regards the
separateness of persons as morally fundamental. Thus, for example,
Hayek says, "the test of the justice of a rule is usually (since
Kant) described as that of its universalizability" (Hayek 1969,
168). As John Gray sees it, Hayek commended the laws of justice
"as being the indispensable condition for the promotion of the
general welfare" but Hayek held, at the same time, that
"an impartial concern for the general welfare is itself one of
the demands of universalizability" (Gray 1984, 65).



In service of the overall project of fostering the general welfare,
the point of law and legislation is to craft a framework such that a
market order is a history of pareto-improving
 trades.[5]
 A primary role of law and (when necessary) legislation is to narrow
people's options so as to limit opportunities to get rich at
other people's
 expense.[6]
 So long as the rule of law can internalize external cost and thereby
steer innovation in mutually beneficial rather than parasitic
directions, an evolving order will be an order of rising
prosperity.



By contrast, in a planned order, even astute and conscientious
decisions by men of system are damaging in a particular way. Namely,
to the extent that men of system become micro-managers, they are
players rather than umpires. If bureaucrats start playing the
game--responding to ephemeral events with centralized fine
tuning--then even if they play as cleverly as bureaucrats could
possibly play, the fact remains that in consequence, the dispersed and
tacit knowledge of ordinary buyers and sellers ends up on the
sidelines watching. People who would have been job creators become
mere spectators, hamstrung by uncertainty, waiting to see what the
plan is going to be. Until they know the plan, they have no way to
know, or even intelligently guess, something as simple as whether
their staff is too small or too large.



Government provides the framework for interaction. Ideally, as
mentioned, government operates only within a stable and known
framework of rules (Hayek 1944, 113). This is Hayek's ideal of
good government. Is it realistic? Could any government be expected to
act as an impartial umpire? Hayek saw the rule of law as the
market's exogenous ecological niche, and thought that this
niche, the rule of law, must be properly constructed if the process of
spontaneous order is be a good thing. However, Hayek seemingly came to
doubt there could be any such thing as properly constructed rule of
law, for the following reason. Law-making is a process driven by
processes more or less indistinguishable from market process except
that benefits to legislators of their law-making are concentrated
while costs are widely dispersed, that is to say, external, and at
best only dimly understood even after the
 fact.[7]
 This is not only a moral hazard but an information problem. A piece
of legislation may be thousands of pages. No one *intends* the
bill as a whole. Indeed, there is no overall point to the bill, known
or otherwise, because, prior to passage, literally no one has even
read more than a few pages of it, not even the hundreds of legislators
who each added a few pages of earmarks as the price of securing their
vote.



Common law, by contrast, is a body of practice and tradition that
sometimes needs to be supplemented by legislation. Crucially, however,
by virtue of passing the test of time as a device for settling
disputes, common law cannot be seen as mere prejudice or superstition.
On the contrary, it will have a decided advantage over ongoing
legislation, given that legislation is driven by untested ideas about
how to respond to the crises of the day, needing to be passed without
anyone knowing the larger and lasting consequences. Hayek never
doubted the need for legislation but lamented our propensity to be
oblivious to its inevitably unintended consequences and to radically
discount its inevitably unseen cost (Hayek 1973, 86). 


## 5. Hayek Against Justice



To Hayek, it matters far more that the law be a framework for
coordination than exactly what the coordination points are (Hayek
1960, 118). Hayek realizes that many coordination points have
distributive implications, which leads Hayek to lament our tendency to
evaluate distributions by asking whether they are just. (Yet, Hayek
concedes, at least in principle, the legitimacy of a minimum income or
welfare safety net of some sort. See Tebble 2015 for a sympathetic yet
acute argument that this concession on Hayek's part is a
"fatal ambivalence." In fact, Tebble argues, Hayek's
repudiation of social justice leaves him with no room to make any such
concession.) 



Hayek says, "one of my chief preoccupations for more than 10
years" has been coming to terms with the idea that social
justice is a mirage (Hayek 1978b,
 57).[8]
 By *social* justice, Hayek seems to mean distributive justice,
and more specifically what Nozick called end-state principles of
distributive justice, which treat justice as a feature of outcomes
rather than of procedures.



Why would justice so conceived be a mirage? Hayek says, "there
can be no distributive justice where no one distributes" (Hayek
1978b, 58 or 1976, 68-69). In Hayek's words,
"considerations of justice provide no justification for
'correcting' the results of the market" (1969, 175).
So long as traders are voluntarily making pareto-superior moves, there
is nothing else that can be said or needs to be said by way of
justification.



Why resist applying conceptions of justice and injustice to situations
where no one distributes? What is haunting Hayek here is not the idea
that one person might be more deserving than another, but that a
"merit czar" might presume to intervene so as to correct
markets that fail to give people what the czar thinks people deserve.
Fearing the potential for tyranny, Hayek argues not that markets are
just but that they are not the kind of thing that can be just or
unjust. Where no one distributes, there may be something lamentable
about the result, but the result will not be an injustice in the way
that *engineering* such a result would be. Outcomes that would
have been unjust  *if deliberately imposed* (such as being born
with a cleft palate) sometimes simply happen. As Rawls says,
"The natural distribution is neither just nor unjust; nor is it
unjust that persons are born into society at some particular position.
These are simply natural facts." Hayek would agree.



Rawls, however, immediately adds what Hayek would call a non sequitur:
"What is just and unjust is the way that institutions deal with
these facts" (Rawls, 1971, 102), where resigning ourselves to
the facts is the paradigmatically unjust way of dealing with them
(ibid). If Rawls is right to deem the natural distribution neither
just nor unjust, then when institutions "deal with natural
facts," they are, to Hayek, not undoing wrongs. Hayek would
never deny that cleft palates are bad or that fixing them is good, but
would insist that fixing what is not unjust cannot count as rectifying
injustice. If we feel called upon to help children with cleft palates,
it will be because having a cleft palate is bad, not because having it
is unjust. When we help, we are not fixing an improper distribution of
cleft plates. We are simply fixing cleft palates. When we respond to
the problem, we take a stand not against injustice but against
suffering (Hayek 1976, 87). As Hayek knew, he was profoundly at odds
with much thinking about social justice. He expected to be vilified
(1944, vii), and he was. Although he was as responsive to misfortune
as anyone, and seemed to embrace the same package of duties to
children as any social justice theorist would, he also saw the free
world at a crossroads between a defeasible presumption that normal
adults have agreed to share each other's fate (Rawls, 1971, 102) and a
defeasible presumption that normal adults have the right and the
responsibility to play the cards that nature has dealt. 



Hayek seems to worry that our sense of justice can make it harder for
us to live together, and make progress together. To Hayek, if people
cannot claim that a starting point is unjust, then whatever we do must
be justified as an *improvement*, not as rectification. If
there is no injustice needing rectification, then the improvement we
have a right to strive for is pareto-improvement, or in any case,
improvement by mutually acceptable means. By contrast, if (contra
Rawls) the natural distribution were unjust, that would open the field
to all of the zero-sum and negative-sum moves that people feel
warranted in imposing on each other under the guise of being fair. The
right to make such moves with other people's money becomes an
overwhelmingly lucrative political football, luring a society's
entrepreneurial talent into politics, where instead of creating new
social capital, entrepreneurs spend their time inventing clever new
ways of dividing it. (Rawls could note that money being in the
possession of others does not entail that the money is rightfully
theirs, but Hayek is doing social science here. Hayek would not deny
the plain fact that people can and often do treat other people's
possessions as a political football, and sometimes even invent
theories according to which they have a right to do so. Hayek is
talking about the actual empirical cost of treating other
people's possessions as a political football, not the
theoretical possibility.) 



In Hayek's mind, we should want a system of justice to be a
framework that helps us to coordinate on a set of mutual expectations
that we each find useful in helping us stay out of each other's
way as we each set a course for our individually chosen destinations.
No principle of justice would pick our destination for us. Neither
would it require us to justify our destination to others. Indeed, the
premium would be on people not needing to justify themselves. If we
operated by end-state principles of justice (Nozick 1974), we would
need to justify every move that bore on how goods would be distributed
in the evolving end-state, which is to say we would need to justify
virtually every trade we contemplate, which would gridlock us rather
than facilitate our inventing new ways of making ourselves more
valuable to the people around us.



Perhaps Hayek is overreacting here. In any case, some philosophical
interpretation is unavoidable, but this, arguably, accounts for
Hayek's seemingly dogmatic dismissal of end-state principles of
justice. For reasons reminiscent of Nozick's, Hayek finds such
principles unaffordable, and incompatible with autonomous agents
minding their own business in a free society. Indeed such principles
make it impossible to say what could count as minding one's own
business. In that respect, in trying to carve out a coherent realm of
individual autonomy, Hayek is, as he often claimed, paradigmatically a
liberal, not conservative.


### 5.1 Input, Output, and What It Means To Economize



Merit, as Hayek understands it, concerns the character of the action
as opposed to the nature of the achievement (Hayek 1960, 94). In other
words, to Hayek, claims of merit concern the inputs one brings to a
process, not the output. In Hayek's mind, nothing good can come
of that. In a free society, to Hayek, we are rewarded for our output,
not our input (Hayek 1960, 98).



Hayek has an important point. Among his core concerns is the
"mirage" of thinking that justice requires rewarding
people for supplying inputs rather than for supplying outputs.
Admittedly, if we leave customers to their own devices, output is what
they will reward, which is what Hayek wants. By the same token, when
people left to their own devices choose to reward us for our output,
their behavior will not be utterly insensitive to merit. The tendency
of market rewards to track merit will be merely a tendency, but
meritocracy being merely a tendency is not the same as meritocracy
being a mirage. A key element of the success of a system in promoting
prosperity will be that in rewarding excellent output, it will be
rewarding the hard work, courage, alertness, and commitment that makes
for excellence. It will be rewarding luck too, to be sure, but
typically not sheer random
 fluke.[9]
 Hayek speaks as if merit has everything to do with trying hard, and
nothing to do with achieving excellence.



Hayek says we want to economize on merit (Hayek 1960, 96). If merit
were tied exclusively to supplying inputs, then Hayek would be right.
But even so, saying we economize on hard work is another way of saying
hard work is important. It is not evidence that we are in the grip of
a mirage when we imagine that we have reason to reward hard work that
culminates in excellent output.



In sum, a merit theorist might concede to Hayek that rewards ought to
track actual performance, not inner merit. Customers can judge your
product's merits without needing to know whether you were lucky.
The crucial point is that wherever it is more rewarding to work hard
than not, more rewarding to do excellent work than not, more rewarding
to be alert to customer needs than not, a system is tending to reward
the right things. In that system, output will tend to be increasingly
excellent over time. Products will tend to work. People will tend to
prosper, and will tend to aim at being meritorious to boot.


### 5.2 The Right To Distribute



As noted, Hayek's critique of social justice is more
specifically a critique of centrally planned distribution according to
merit. He thinks a merit czar would be intolerable. However, what
Hayek found nightmarish about this vision clearly had more to do with
an abhorrence of central planning than of the idea that it would be
good to have a way of rewarding merit. If Hayek is right that there is
no place for centralized decisions about meritoriousness in a good
society, then, contra Hayek, the implication is not that merit does
not matter but precisely that it does (Hayek 1976, 64). The problem
with merit czars in the world we know, Hayek seems to assume, is that,
in a merit-based system, if you cannot prove you deserve *G*,
that licenses merit czars to redistribute from the less to the more
deserving. The point is crucial not because it refutes Hayek but
because it reveals the exact nature of Hayek's real concern.
Hayek's core concern is not the mirage ofthinking merit
*does* matter, but the mirage of thinking entitlement
 *doesn't*.[10]


### 5.3 Fair Practices



Note the similarity between Hayek's view and the view expressed
by John Rawls in "Two Concepts of Rules" (1955). Hayek and
Rawls both understood what is involved in a *practice* having
utility. To use Rawls's example, the practice of baseball is
defined by procedural rules rather than by end-state principles of
distributive justice. To have a practice at all, we must be dogmatic
(Hayek would say) about how many strikes a batter should get.



Imagine changing the concept of the game so that the umpire's
job is to make sure the good guys win. What would that do to the
players? What would become of their striving? The result of the change
would not be baseball. If we end up with a game where the umpire is
making sure the favored side wins, then the players are sitting on the
sidelines watching, hoping to be favored. Hayek's insight (and
Rawls's insight at that stage of his career) is that genuine
fairness is not about making sure prizes are properly
 distributed.[11]
 It is not even about making sure outcomes are not unduly influenced
by morally arbitrary factors such as how well the players played or
how hard they worked to develop their talent. True fairness is about
being impartial, nonpartisan--proverbially, "letting the
players play."



One of Hayek's problems with the kind of justice that amounts to
making sure the good guys win is that it tends to turn society's
basic structure into a political football, which tends to squander
gains from trade. To Hayek, again, true justice is about letting the
players play, in the same way as pareto-improving economic
coordination is about letting the players
 play.[12]


### 5.4 Just Price



Whether we realize gains requires only that we trade, not that we
trade at any particular price. Thus, we don't want to focus on
price when the wealth of nations has everything to do with gains from
trade and nothing to do with price.



Indeed, Hayek observes, being obsessed with just price would make
trading less likely, which would tend to squander some of the
cooperative surplus. Much of Hayek's aversion to justice stems
from a sense that (for thousands of years) talk of justice has had a
way of turning into talk of just *price* (Hayek 1976, 73). This
makes prices appear morally important, which to Hayek is a
 mirage.[13]
 Of Adam Smith's butchers and bakers, Hayek says,



> 
> 
> Precisely because they were interested only in who would offer the
> best price for their products, they reached persons wholly unknown to
> them, whose standard of life they thereby enhanced much more than they
> could have that of their neighbors... (Hayek 1978b, 60).
> 
> 
> 



Hayek's dismissal of social justice as a *mirage* is a
gratuitously tendentious way of packaging his actual view. However,
the motive for his dismissal is understandable: namely his dread of
the prospect of licensing a justice czar to intervene to make sure
prices are fair, thus derailing the wealth-creating spontaneous
trading of a free society within the rule of law. Paraphrasing Michael
Munger (2013), the closest thing we have to an omniscient social
planner are the twin forces of supply and demand, but those forces
speak to people through prices. When the state makes it a crime to
charge what the market will bear, it can thereby become illegal for
insulin users to respond to a power failure by outbidding beer
drinkers for insulin-preserving ice as supply runs short. In a case
like that, the law has struck dumb the only voice that could give
people reliable, timely advice on how resources need to be allocated
right now. This is Hayek's ultimate concern throughout his writings,
and it also underlies his otherwise ill-fitting polemic against social
justice. To Hayek, it is simply a mirage to think fairness has
anything to do with stopping the price mechanism from telling us where
our services are most in need.



Hayek never doubts that we sometimes need legislation, but he thinks
the aim of legislation should be to make things better, not fairer; to
make things more productive, not more level; to channel innovative
thinking in the direction of wealth creation, not wealth capture.
Hayek in fact endorses norms of pure procedural justice, and would
agree that there is such a thing, after all, as fairness. True
fairness, he would say, is about letting players play on a more or
less level playing field, but he would insist that this is not about
making sure everyone wins their share. Hayek saw a free society as one
where people stand or fall on the basis of how well they perform, not
how hard they try--what they produce, not what they intend. 


## 6. The Austrian School



Hayek's economic education at the University of Vienna was
within the law faculty. Hayek's degrees were in political
science, jurisprudence, and economics. His dissertation work was on
the technical topic of the imputation of value in a capital-using
economy, and his early professional work focused on monetary theory
and business cycle statistics. As with other scholars of the Austrian
School of Economics, the institutional framework within which economic
activity takes place was never far from the foreground of even the
most technical economic analysis. Law, politics, and social mores all
are critical to the way Austrian economists see economic forces
playing out in the real world. 



Critical to the Austrian examination of the operation of the
competitive market process is the primacy placed on property rights,
relative prices, and profit-and-loss accounting. The emphasis on
institutional infrastructure informed Austrian perspectives on price
theory and the market system, on monetary and capital theory, and on
obstacles to socialist economic planning in particular and to
interventionism more generally. To Hayek, the idea of prices without
property is a grand illusion, and efforts to control economic activity
through prohibitions and regulations are plagued by unintended
consequences and unforeseen costs.



Hayek's growing frustration with the conversation among elite
economists during the 1930s and 1940s was born out his utter surprise
that the institutional wisdom passed down from classical political
economists to the early neoclassical economists was being lost. He saw
wanted to know why. He explored the rise of formalism and an emerging
shift toward macro-theory emphasizing relationships between aggregate
variables unconnected to the choices of individuals. To Hayek, these
shifts were technical in part, but the technicality was masking (and
partly driven by) a deeper philosophical shift from seeing the human
condition as complex as a relatively simple machine that a good
mechanic could tinker with and perfect. The whole idea of studying the
human condition as a complex spontaneous order came to seem
unscientific. Thus, in "The Use of Knowledge in Society",
Hayek says the maximizing and equilibrium thinking of mathematical
economics "habitually disregards" essential parts of the
phenomena to be explained, and in so doing "misleads some of our
leading thinkers" (1944, 91). 



The issue Hayek concerns himself with in The Counter-Revolution of
Science was the wrong turn in the philosophy and history of ideas that
confused the current generation about the nature of the social
sciences and the institutions of liberalism and the principles of
justice. His sustained explorations of legal philosophy and political
theory sought to counter excessive formalism, excessive aggregation,
and a naive empiricism that in his mind conspired to produce the
intellectual dead-end of scientism: that is, an inappropriate and
uncritical application of the methods of the natural sciences to the
problems of social science. In articulating his critique, Hayek would
stress over the next several decades the case for methodological
dualism, and the method and approach for the sciences of complex
phenomena.


### 6.1 Subjectivism



As a student of the Austrian School of Economics, Hayek was a
subjectivist as well as a marginalist in his approach to studying
human decision making. The value of goods and services resides in the
judgment of the individual chooser, and is not inherent in the goods
and services themselves. Neither are prices posted in the market
merely a summation of costs of production. Value, costs and the
expectations of individuals choosers are driven individual buyers and
sellers assessing tradeoffs. (To give a concrete example, owners of
gas stations may hike the retail price of gasoline in response to
breaking news of a supply problem in the middle east. The news does
not affect the price of gas already in their storage tanks, but it
does affect their assessment of what the wholesale price of gasoline
will be next time they are buying new supplies so that they can stay
in business. Retail customers see the hike as gouging because they
don't understand that profit from current sales is what has to
pay for new supplies.) Thus, Hayek's point in calling the valuation
process subjective is not to say it is a matter of opinion. Rather, it
is a process of perceiving reality as needing one response rather than
another. 



Economic science begins with purposeful human action. And, as social
scientists we can interpret human action in terms of beliefs, desires
and intentions. "To employ a useful metaphor," Hayek
argued, "while in the world of nature we look from the outside,
we look at society from the inside; while, as far as nature is
concerned, our concepts are about the facts and have to be adapted to
the facts, in the world of society at least some of the most familiar
concepts are the stuff from which the world is made" (1948,
76).



Hayek's mentor, Ludwig Mises, stated the argument as follows in
his treatise of economics, *Human Action* (1949, 92):
"Economics is not about things and tangible material objects; it
is about men, their meanings and actions. Goods, commodities, and
wealth are all the other notions of conduct are not elements of
nature; they are elements of human meaning and conduct. He who wants
to deal with them must not look at the external world; he must search
for them in the meaning of acting man."



A favorite example among Austrian School economists was to imagine a
scientist from Mars studying patterns in the New York subway Our
scientific Martian will observe that at 8:00am that there will be
bodies and boxes, and the boxes will pick up the bodies and move.
Then, at 5:00pm, those boxes will come back to the same places and
bodies will leave the boxes. This observer could develop a study of
moving boxes and bodies and offer predictions. But can our observer
truly understand the phenomena under investigation without reference
to the purposes and plans of the actors involved, and thus rather than
seeing boxes and bodies, we come to understand the pattern of action
associated with commuting to work. Fritz Machlup tried to capture this
idea when he penned an essay under the title: "What if Matter
Could Talk?" The social sciences are indeed engaged in
scientific inquiry, but the subject of study was radically different
because we are what we study.


### 6.2 Complexity



In addition to the uniqueness of the human sciences, the Austrian
School of Economics emphasized the passage of time, the uncertainty
inherent in human decision making, and the complexity of the economic
order. The complexity aspect is not new to the Viennese economists,
but can be seen in Adam Smith's discussion at the beginning of
*The Wealth of Nations* of the division of labor and the
spontaneous far-flung patterns of cooperation required to such mundane
things as a worker's woolen coat. The number of exchanges, Smith
states, exceeds all computation. The Austrian School added to this
computational complexity the idea of ceaseless change that requires
constant adaptation and adjustment to the shift in circumstances,
including changes in tastes, technology and resource availability. The
understanding of the price theory and the market system from the early
development by Menger and Bohm-Bawerk, and the more mature formulation
in Mises and Hayek argued that a proper understanding of the market
economy did not strive to depict the efficiency properties of the
end-state, but the adaptive and learning aspects of the system. 



Hayek's intellectual adversaries shifted in the second half of
his career, though of course there are common themes. But the German
Historicist and the Collectivist Positivist were no longer the
animating force they were in the first half of the 20th century.
Logical positivism was also transformed. One of the remnants from the
influence of Scientism, however, was in Hayek's mind a failure
to address the essential complexity of the social world. As a
consequence, his methodological writings in the 1960s and 1970s tend
to stress not subjectivism and the human sciences, but the differences
between the sciences of simple phenomena and the sciences of essential
complexity.


### 6.3 Toward a Science of the Open Society



Again, Hayek was born in 1899, and born in Vienna. That is to say,
Hayek grew up in a glorious age of Viennese culture only to see it
evaporate before his eyes with WWI, the Great Depression, the rise of
socialism and fascism, WWII, and the Cold War. Hayek fought in WWI. He
was among those who left Vienna in the early 1930s never to return. He
experienced WWII in his adopted home of Great Britain. Like others of
his generation, these experiences were pivotal. He saw totalitarianism
distorting science and scholarship, as did two of his philosophical
friends: Michael Polanyi and Karl Popper. Despite their differences,
Hayek drew inspiration from and helped promote the work of Polanyi and
Popper. Totalitarian systems inevitably end up being hostile to the
critical attitude at the heart of scientific inquiry. Hayek, Polanyi
and Popper all saw this in the 1930s and 1940s, and in their separate
ways sought to describe and defend the science of a free society.