On this day in 1899, Friedrich Hayek was born. He went on to become a Nobel Laureate in Economics, and indeed he did groundbreaking early work on the economics of business cycles. He showed that it is governments that start business cycles. Thinking the economy (and no doubt their opinion polls) could use a boost, they create cheap credit. That makes it cheaper for producers to invest in productive processes that, in normal circumstances, would be unviable. Production expands, and more is produced and consumed. But it's a fake boom, and credit can't be kept artificially cheap and plentiful for ever. When it becomes scarce again, all those investments on marginal production processes are shown to be a mistake, and people suffer real losses as factories are closed and the economy re-adjusts back to reality. Prescient, you might think, of the fake boom that Gordon Brown and his colleagues created, and the pain of re-adjustment that we are now suffering.
But Hayek's main contribution was in political science rather than economics, with his development of the idea of the unplanned or spontaneous order. Human – and animal – societies demonstrate an amazing degree of order, without anyone necessarily ordering them. Flocks of geese fly in formation, but not because some head goose tells them which positions to take up. Human society has language with the most intricate grammar, but it evolved naturally – it was never planned out by some government or committee. The order comes, not because it is imposed from the top, but through the individuals following common rules. The geese fly at a sensible distance from one another, we use words in ways we can all understand, and in doing so, patterns or orders of social organization simply emerge.
Through this analysis, Hayek gave the world an intellectual understanding of the free society. Just because a society is not planned by politicians and officials does not mean that it is chaotic or inefficient. Indeed, the interactions of millions of individuals, responding to their local circumstances on the basis of general rules of action, employ far more information than the minds of planning officials could ever conceive. That is why the market responds far more quickly, and more rationally, than government planners; and why the free society is also a humane society.
Happy birthday, Hayek.
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