Friedrich Hayek Socialism Versus Market

Freiderich Hayek Socialism Versus The Market, Hayek Economics

These objections appear in his arguments against socialist economics (Hayek, 1935) and in a series of important papers on the competitive order (Hayek 1948). It is significant that Hayek should approach the critique of Walrasian economics via the critique of socialism since socialist economists in the 1930s thought that, because the private market economy was charac­terised by imperfections, a centrally-planned economy could improve on capitalism in an efficiency sense. If the central planner had perfect knowledge then the solution to the allocational problem could be predicted mechanically and an economy deliberately adjusted to bring this about. Thus a socialist economy might be designed without a market or decentralised planning by individuals. But it is this objective solution that Hayek denied on the grounds that the requisite knowledge was not given to the central planner. The knowledge of prices and costs required in order to achieve an efficient allocation of resources can only be acquired by the operation of a market process itself. In fact, 'cost', in the Austrian model of 'market process', is subjective: it is not the observable money expenditure required to produce a commodity but the value of foregone output from an alternative use of the same resources. But obviously this alternative can be known only to the actors in the economic process.

Since knowledge is dispersed and fragmented throughout an economy and cannot be objectified central planning will always be less efficient than decentralised planning. The best way of serving the interests of all is to allow each individual to make the best use of decentralised knowledge through competition itself. There is a tendency towards equilibrium in which the plans of individual transactors are harmonised through the price system.

A competitive market order is an information system which transmits knowledge automatically through the signals sent out by prices. The point about high wages and high profits is that they attract labour and capital to their most productive uses, and in so doing produce a greater net output for society than would otherwise be the case. Competition, then, is a discovery procedure in which individuals learn through a process of trial and error to improve their well-being. The crucial advantage of a decentralised competitive market is that in it each individual has only to be aware of the facts that affect him personally; yet out of private actions emerges an 'order' which was no part of any one person's intentions. The market order is the best example of a social order that emerges without being designed. As a self-regulating order the market requires very little central direction or control. Only in this order can entrepreneurial activity be understood. The entrepreneur's role is to respond quickly to market signals and entrepreneurship illustrates well the unpredictability of human affairs. In the 'perfect competition' model, since all adjustment is instantaneous, there is strictly speaking no role for the entrepreneur. Therefore, it is inappropriate to evaluate a com­petitive process in accordance with how close it is to perfect competition. The relevant comparison is between those econ­omies that display some competition and the dirigiste alternatives.

It follows from this that monopoly and the customary market imperfections are interpreted differently from the conventional analysis. Since we can never know in an objective sense whether an economy is 'efficient' or not it is impossible to calculate the 'welfare loss' caused by monopoly. In fact Hayek thinks that the problems of monopoly have been grossly exaggerated. 'Natural' monopolies are extremely rare and as long as free entry into any economic activity is permitted the monopolist operates under some constraint. The existence of monopoly does not mean the absence of entrepreneurial activity: it may be the case that without the possibility of monopoly gains certain goods would not be produced at all. Certainly Hayek is doubtful if much anti­trust legislation is helpful to the consumer. The role of govern­ment should be limited to guaranteeing free entry and it must refrain from creating monopolies itself (for a discussion of Austrian market theory in relation to Britain see Littlechild, 1978). Hayek argues that the only serious monopoly is that of labour unions, and this is entirely a product of governments conferring legal privileges upon them. The effect of labour-union monopoly power is to keep the price of labour above its market-clearing price, thus creating involuntary unemployment. In Britain labour unions have been responsible for creating those rigidities in the labour market which prevent adjustment to changing circumstances and the co-ordination of disparate plans through competition.